Competition and strong euro reduce earnings at Inditex

Zara owner Inditex, the world’s biggest clothing retailer, reported annual earnings slightly below analysts’ expectations yesterday, hurt by a strong euro. The result sent its shares lower.

The retailer lifted its dividend by 17 per cent and said its sales in shops and online rose 7 per cent from February 1 to March 9, the start of its new financial year, as shoppers bought items from the spring/summer collections.

Even though Inditex’s quick-reaction business model gives it an edge over rivals in adapting to changes in consumer demand or economic trends, the retailer still came under pressure from increased competition. Its sales were hit during the Christmas season when H&M dropped prices to as little as $9.99 for sweaters in an attempt to clear inventory. That kept chief executive Pablo Isla from reaching his goal of second-half like-for-like sales growth of 4 per cent to 6 per cent, according to Bloomberg.

The results are “evidence that the group’s growth profile is slowing sharply,” wrote Geoff Ruddell, an analyst at Morgan Stanley.

Inditex shares tumbled more than 5 per cent in early trade, as investors digested the disappointing full-year results.

A strong euro can drag on profits as the group generates more than half of its sales in other currencies and then books those sales in euros when reporting results, Reuters said.

Inditex, controlled by founder Amancio Ortega, reported profits of €3.44 billion (Dh14.26bn) for the financial year ended January 31, up 2 per cent on the previous year, on sales of €26.15bn. The figure missed a consensus estimate for net profit of €3.49bn and sales of €26.45bns, Refinitiv I/B/E/S data shows.

Fourth-quarteroperatingprofit of €1.29bn was a 3 per cent miss on its expectations, said investment bank UBS.

The retailer, which also owns upmarket chain Massimo Dutti and underwear store Oysho, said its overall online sales grew by more than a quarter in the year ended January to generate 12 per cent of total sales.

That is in line with competitors like Sweden’s H&M but lags average online penetration rates in developed countries like the United States, for example, where online sales make up 27 per cent of total apparel sales. Inditex estimated total like-for-like sales would grow by 4 per cent to 6 per cent in the current financial year, ending January 31, 2020, after rising 4 per cent in the financial year just ended.

The cash-rich company proposed a total dividend of €0.88 for the year that ended, up 17 per cent from a year earlier.

The jump in dividend means Inditex is paying out 80 per cent of its earnings, versus 69 per cent last year, said Anne Critchlow, an analyst at Societe Generale. “That’s a big step-up in payout ratio,” she said.

Inditex had a net cash position of €6.7bn as of January 19.

Inditex launched Zara online sales in 106 new markets in November.