Inditex sees pick-up after tough first half

Zara owner Inditex said sales had risen 10 per cent at the start of the third quarter, pointing to a recovery after poor weather and weak foreign currencies weighed on profit in the first half.

First-half net profit at the world's largest clothes retailer, which owns eight brands including upmarket Massimo Dutti and teen label Bershka, rose 1 per cent to €951 million, beating an average analyst forecast of €926 million on the back of strict cost controls and a lower tax rate.

The results from the Spanish company, whose biggest global rival is Sweden’s H&M, were among its weakest after years of stellar performance, but showed an improvement from the second quarter onwards. Its shares were up 0.5 per cent in early trade, hitting a record €112.6.

Unlike rivals, Inditex gives no monthly or quarterly like-for-like sales, which compare sales at stores open more than a year, but analysts said yesterday’s statement showed trading had accelerated.

Same-store sales for the first half ended July 31 grew 2 per cent, implying a 3.3 per cent rise in the second quarter, compared with a 0.5 per cent rise in the first quarter, calculated Societe Generale analyst Anne Critchlow.

They could have accelerated to 4 per cent in the first six weeks of the third quarter, she said.

“This is impressive as the prior year comparative for those weeks was a very strong 9 per cent,” said Ms Critchlow.

Inditex has held up better than some other retailers during the global economic crisis, largely thanks to its “fast fashion” model under which it quickly produces many affordable versions of catwalk trends in small quantities, allowing it to respond quickly to consumer demand.

But this year the company has struggled to match a particularly good 2012, which was boosted by more expensive fashion trends.

The first half was the weakest since net profit declined in 2009. Its gross margin slipped to 58.6 per cent of sales versus 59.6 per cent a year ago, showing the retailer struggled to increase its profit rate.

Highly cash generative and practically debt free, Inditex has expanded aggressively into emerging markets like Russia and China, opening 95 new stores to bring its total to 6,104 across 86 markets.

Inditex’s shares, which have tripled in value since Spain’s economy imploded five years ago to outperform the main blue chip index, have lost some of their lustre this year, up 4.4 per cent versus a 10 per cent gain on the Ibex.

The shares trade at 24.7 times forecast 2013 earnings, above H&M’s 23 times multiple and an average 16 times multiple for the sector, according to Thomson Reuters data.

H&M on Monday said sales at stores open at least a year rose a slightly more-than-expected 4 per cent in August, the biggest rise in 11 months and sending its shares to a record high.(Reuters)