Inditex Projects Stable Margins as It Broadens Reach
The company will add home products to the Zara web site in a number of markets starting in the fall.
Zara owner Inditex projected stable margins and ongoing international expansion in the coming year, following the release of earnings that missed expectations as the company doubled down on weeding out smaller stores in its network.
“We decided to accelerate the number of ‘absorptions’ because we believe that the competitive environment requires that, a strong combination of very important flagships and online,” said Inditex chairman and chief executive officer Pablo Isla, speaking about the past year in a conference call with analysts on Wednesday.
The company embarked on a refurbishment of its store networks six years ago, focusing on roomier flagships, better suited for a digital era, with added services like click-and- collect and returns in store. Revisiting its network of 7,490 stores, Inditex is expanding space in prime locations. With the rise of online commerce, which has made it harder to draw customers into malls, many brands are trimming their retail footprint, culling out underperforming locations and investing in others to make them more attractive.
This year, the Zara owner eliminated 1,401 stores while pursuing more than 1,000 enlargements, and opening more than 3,000 locations. Upcoming openings include a Zara flagship in New York’s Hudson Yards on Friday and online launches in Brazil and the Middle East in the coming weeks.
“Both the quality of our network and the sheer level of integration between our stores and the online platform provide us with the right model for the competitive environment in fashion,” said Isla.
Earnings before interest and taxes over the fourth quarter stood at 1.29 billion euros, missing UBS estimates by 3 percent, analysts said. RBC Capital Markets pointed to a weaker-than-expected gross margin for the quarter as the reason for lowering earnings per share forecasts by between 2 and 3 percent.
Investors sent shares down by as much as 5.4 percent in early morning trading, but Inditex shares closed 4.5 percent lower at 25.10 euros at share.
Looking past the quarterly performance, analysts flagged a healthy outlook, including the company’s expectations for sales growth of between 4 and 6 percent for 2019, without a drag from exchange rates. The company increased its dividend significantly, by 17 percent to 0.88 euro cents.
“We still think Inditex is on course to return to double-digit [EPS] growth in [2020] and strong cash flow is enabling higher dividend payouts to be paid,” said Richard Chamberlain, analyst with RBC Capital markets. Chamberlain has applauded the company’s investments in RFID systems, noting store fulfillment of online orders should help improve full-price sales.
Net income for the year ended Jan. 31 was 2 percent higher at 3.4 billion euros, while sales grew 3 percent, to 26.1 billion euros, as a strong euro weighed on growth posted in all regions, in stores and online. In local currencies, the annual sales growth was 7 percent.
The Spanish fast fashion company has been sprinting past rivals in the digital sphere, rolling out state-of-art logistics systems and taking its online services to more and more international markets, with the view to having an Internet presence almost everywhere in the world by next year. It is also seeking to offer same day delivery in major urban centers and nextday delivery elsewhere.
Inditex’ bet on technology has enabled it to focus on margins and keep a tight rein on inventories, and the company opted out of the price-slashing frenzy that swept rivals during the holiday season last year — perhaps losing some business in the near term.
In addition to Zara, which accounts for 70 percent of group sales, Inditex labels include Pull&Bear, introduced to the U.S. market in February, and Massimo Dutti.
The company has been rolling out its online platforms around the world, bringing Zara to 106 new markets in November. Online sales grew 27 percent over the year, accounting for 12 percent overall, but 14 percent in markets where it has digital services.
Online sales growth from the freshly added markets likely did not contribute significantly to sales, executives noted.
“These new markets that we launched in the final part of the year is something that has more to do with offering our product to our customers in those markets than… something meaningful in terms of sales,” said financial director Ignacio Fernández.
In a new “lifestyle” approach, Inditex said it intends to integrate Zara Home with the Zara apparel activity, noting increasing synergies between the businesses, and will bring products into the Zara web site in a number of markets starting in the fall. A source with knowledge of the matter said the company plans to introduce furniture to its Zara Home line, including hulking wooden kitchen tables. The company did not respond to a request for comment.