Inditex Feels Profit Pressures But Still Skirts Industry Woes -- WSJ
December 14 2017 - 3:02AM
Dow Jones News
By Jeannette Neumann
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (December 14, 2017).
MADRID -- Shrinking profit margins at the parent company of Zara
have exposed a weakness in a fashion behemoth that has largely
avoided the problems battering the industry.
Inditex SA, the Spanish company that owns Zara and brands such
as Massimo Dutti and Bershka, reported Wednesday a net profit of
EUR2.34 billion ($2.75 billion) for the nine months that ended Oct.
31, a 6% increase from a year earlier. Sales at Inditex climbed 10%
to EUR17.96 billion for the period. Like-for-like sales accelerated
in the run-up to the holiday season.
However, Inditex's gross profit margin declined 0.3 percentage
points to 59.4% in the fiscal third quarter from a year earlier.
The full-year gross profit margin at Inditex, whose full name is
Industria de Diseño Textil SA, has continued to fall from its
fiscal year 2013 peak of 59.8%.
While Inditex's profits outstrip those of competitors, such as
Hennes & Mauritz, analysts and investors have questioned
whether the margin's slide at Inditex is due to short-term factors
such as currency movements or reflects long-term challenges to its
model.
The company, which is the world's largest fashion retailer by
sales, sources and produces the bulk of its garments close to home,
which allows it to design and deliver new items to stores in as
little as two weeks. That rapid-fire turnaround has transformed
Zara's parent company into one of the world's most profitable
retailers.
But Zara, and Inditex's seven other brands, including
Pull&Bear and Stradivarius, haven't proved immune to the ills
affecting American clothing companies such as Gap Inc, and J. Crew
Group Inc., which have been hammered by consumers shifting to
online shopping.
Most analysts attribute the shrinking margins to adverse
currency moves that they expect to abate in 2018. Analysts at
Macquarie Group estimate Inditex's gross margin will begin to rise
next fiscal year to 57% and maintain roughly that level thereafter.
Macquarie estimates the company will post a margin of 56.6% for the
current fiscal year ending in January.
"If there is one company which has proven its ability to
outperform even in a hostile market environment, this is Inditex,"
said Macquarie analyst Andreas Inderst.
Exact profitability comparisons between Inditex and rivals are
difficult because companies have different reporting periods, but
Zara's parent company has consistently reported higher gross margin
figures than many.
Inditex's gross margin from Aug. 1 to Oct. 31 was 59.4%, while
Mr. Inderst estimates that H&M will post a figure of 56.1% when
it reports earnings on Friday for the Sept. 1 to Nov. 30
period.
Investor concerns about profitability have pushed Inditex's
shares down 5% year-to-date through Dec. 12. While that decline is
less than many of its peers, "investors appear to mistake FX
dilution with fundamental pressures to the model," analysts at
Jefferies said in a note.
On Wednesday, Inditex shares were up around 3% in Madrid
trading, erasing some of those losses.
Zara's parent company generates more than half its sales in more
than five dozen currencies outside the euro zone, but makes most of
its products in Spain. So the weakening of those currencies in
comparison to the euro has chipped away at reported revenue in
euros.
Inditex executives said Wednesday that without the negative
currency impact, the gross margin would have increased in the
fiscal third quarter, but they didn't say by how much.
Some analysts, however, think price cuts aimed at buoying sales
have hurt Inditex's margin. They also believe sales at stores open
at least a year are no longer offsetting the cost of increasing
online sales. Online sales, they say, are less profitable than
those at brick-and-mortar stores because of the added cost of
delivery.
"While we retain our admiration for Inditex's business model,
our confidence in the sustainability of exceptional revenue growth
is declining as competition mounts," Berenberg Bank analysts wrote
in a research report.
Inditex executives say the company is constantly adjusting
prices but says it doesn't have a strategy of slashing prices of
its cheapest garments. "Our pricing policy is very much stable in
all the different geographies," Inditex Chief Executive Pablo Isla
told analysts Wednesday.
Société Générale conducted an extensive study on Zara's prices
in 10 countries and found the retail giant had in fact cut its
lowest prices in 2017 compared with 2016, but that Inditex was also
raising its top-end prices to widen its appeal and boost sales
numbers.
Write to Jeannette Neumann at jeannette.neumann@wsj.com
(END) Dow Jones Newswires
December 14, 2017 02:47 ET (07:47 GMT)
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