Zara owner posts 10% increase in net profit

LA CORUNA, SPAIN: The world’s biggest clothing retailer, Zara-owner Inditex SA, reported a 10% jump in annual net profit yesterday as strong growth in emerging markets and increased online presence outweighed negative currency effects.

Sales in the first six weeks of the new financial year tapered off slightly after a period of exceptional growth during which the Galicia-based company moved brands to bigger stores in prime retail locations. They beat expectations, however.

Sales at constant exchange rates rose 13% in the first six weeks of the new financial year as customers snapped up items from spring collections like double-breasted jackets, palazzo trousers and embroidered tulle tops from flagship brand Zara.

By contrast, rival fashion retailer Hennes & Mauritz AB (H&M) yesterday reported a 1% drop in local-currency February sales, substantially lagging analysts’ expectations for a 6% increase.

It was the first time since March 2013 that H&M saw local-currency sales shrink.

H&M said a negative calendar effect due to the leap year of four percentage points weighed on sales.

February is the final month of the group’s fiscal first quarter. Net quarterly sales were 47.0 billion crowns ($5.25 billion), up from a year-ago 43.7 billion but below a 48.1 billion mean forecast in Reuters’ poll of analysts.

Inditex, known for speeding the latest trends from runway to stores in a matter of days, reported net profit of €3.16 billion ($3.36 billion) in the year to end-January, in line with analysts’ expectations.

Negative currency effects stripped three percentage points from annual sales growth, the company said.

Inditex reports in euros but makes more than half of its sales in other currencies, meaning falls in value of currencies like the Mexican peso and the Russian rouble against the euro affect earnings and profit margin.

Gross profit margin was 57.0% in the 2016 financial year, down from 57.8% in 2015.

Concerns on lagging profit growth relative to aggressive sales growth at the retail behemoth whose stable of brands includes homewares chain Zara Home and teen label Pull and Bear have weighed on Inditex shares.

They have underperformed European stocks by around 3% over the past year. Shares were 1.6% lower in early trading yesterday.

However, analysts expect currency effects to swing in Inditex’s favour over the next 12 months with a consequent boost to profit margins.

“We are very keen buyers of Inditex for 2017,” said Anne Critchlow, analyst at Societe Generale.

The company opened stores in 56 countries during the year, including first openings in New Zealand, Vietnam and Paraguay, bringing its total store count to over 7,200.

It launched online sales across its stable of brands in Turkey and said yesterday it would start online sales in India in 2017.

Cash-rich Inditex proposed yesterday a 13% increase in dividend to €0.68 per share.