Zara owner Inditex reports slowdown in sales, weaker margin

Geneva

INDITEX SA, the world's largest clothing retailer, reported a slowdown in sales and its weakest profitability in a decade, showing that the Zara operator isn't immune to the troubles ailing Swedish rival Hennes & Mauritz AB (H&M).

The gross margin narrowed to 56.3 per cent in the year through January amid adverse currency effects, Spain-based Inditex said on Wednesday in a statement. Like-for-like revenue gained 5 per cent in the second half, the slowest pace in three years.

For its online sales, the retailer which owns a stable of brands from upmarket label Massimo Dutti to home wares chain Zara Home, said that it did better than expected with a 7 per cent jump in annual net profit on Wednesday, dodging the negative headwinds plaguing its brick-and-mortar stores with double-digit growth in online sales.

The group reported net profit of 3.37 billion euros (S$5.5 billion), in line with analyst expectations, on revenue of 25.34 billion euros, also in line with analyst expectations for the financial year which runs from February to January.

This is the first time Inditex has broken out online sales.

Unlike many fashion retailers struggling with competition from online vendors like Amazon, Inditex is holding up well as brands like Zara merge their high street presence with a slick online offering.

Large stores in prime shopping areas act as a showcase for clothing which can be bought there or ordered later online via the app or website. Online purchases can be picked up or returned in store.

Inditex's profitability is vulnerable to erosion from a strong European currency as the bulk of its costs are in euros and most of its revenue comes from non-euro countries, according to Societe Generale SA.

Inditex has also been spending more on remodelling stores and expanding its online business to head off competition from Amazon.com Inc. Poor weather conditions in Europe are also weighing on retail.

"The colder weather compared to the previous year across Europe had a negative impact, and Inditex will not be the only clothing retailer to have suffered," said Anne Critchlow, an analyst at Societe Generale.

The company is raising its dividend by 10 per cent, which increases its payout ratio to 69 per cent, according to Ms Critchlow.

Inditex's 81-year-old founder, Amancio Ortega, has dropped down to become the world's sixth-richest person as his fortune has declined, according to data compiled by Bloomberg. He was as high as second in August.

Inditex trades at around 22 times estimated 2018 earnings compared to around 15 times earnings for Swedish rival H&M and around 20 times earnings for Associated British Foods, owner of budget fashion brand Primark. REUTERS