Europe's warm autumn slows Zara's Q3 sales

London

INDITEX, the world's biggest clothes retailer and owner of Zara stores, reported a slowdown in sales growth in its third quarter on Wednesday as Europe's warm autumn kept shoppers away, although analysts pointed to a brighter end of the year.

Fashion retailers such as Next and John Lewis have already reported a hit from warmer-than-usual weather as shoppers passed on new winter ranges. Inditex's biggest rival, Sweden's H&M, will report results on Friday.

Inditex's sales between August and October rose six per cent to 6.3 billion euros (S$10.01 billion), in line with analysts' forecasts, against 10 per cent growth in February-October.

Third-quarter net profit rose 2.7 per cent to 975 million euros.

"The top line is showing a big deceleration versus previous quarters," analysts from Kepler Cheuvreux wrote in a note.

They said most of the lower growth was already priced into the shares. Inditex shares have fallen about 5 per cent so far this year, while H&M's have fallen almost 20 per cent.

The arrival of chilly weather in November should boost Inditex's sales again, analysts said, and its shares opened up 4per cent.

Inditex said sales at its more than 7,500 stores and online increased 13 perc ent at constant exchange rates between Nov 1 and Dec 11, as shoppers snapped up items such as oversized sweaters and puffer parkas from new collections.

Analysts said the lower sales growth and a strong euro helped push Inditex's gross sales margin for the third quarter to 58.4 per cent, down 33 basis points from the year before.

Inditex's profits are sensitive to fluctuations in the euro as it makes most of its clothes in the euro zone to respond quickly to fashion trends but generates more than half of its sales in countries outside the currency bloc. Inditex's business model has kept it consistently ahead of rivals such as H&M. By keeping its manufacturing bases close to its distribution centre in the northern Spanish region of Galicia, it can shift new fashion trends from the catwalk to the shop window within weeks.

The Spanish retailer's other brands include teen label Bershka and underwear chain Oysho.

lInditex, owned and founded by Amancio Ortega, the world's fourth-richest man, is seeking 400 million euros (S$635.7 million) for the stores in a 20-year sale-and-leaseback agreement that would give the buyer the right to vacate the properties after five years, according to a person with knowledge of the matter. Fourteen of the units are in Spain and two in Portugal, the person said, asking not to be identified because the deal is private.

An Inditex official confirmed the potential sale and said it's part of a strategy to homogenise its leasing strategy. Almost all its stores are operated through leases, the official added. The representative did not confirm the offer price.

Inditex, whose 11.7 billion euros in first-half revenue was boosted by an increase in internet sales, is betting Spain will catch up with the rest of Europe in online purchasing. Last year, 3 per cent of Spanish retail sales were done via the internet, compared with 8 per cent across Europe and 15 per cent in the UK, according to Aberdeen Standard Investments.

"While Spain has the lowest absorption of internet sales now, it's expected to have the highest growth rate" in coming years "as cultural attitudes toward online shopping change," said Andrew Allen, global head of real estate investment research at Aberdeen Standard Investments.

"We estimate annual growth in internet purchases of 18 per cent per year to 2021 for Spain, versus an average of 12 per cent for Europe as a whole."

The sites up for sale include the Zara women's fashion store in Calle Preciados, Madrid's most expensive high street in terms of retail rents. REUTERS, BLOOMBERG