Inditex beats nine-month forecasts

Clothing retailer Inditex beat nine-month net profit forecasts, helped by growth in Asia, and said sales had picked up heading…

Clothing retailer Inditex beat nine-month net profit forecasts, helped by growth in Asia, and said sales had picked up heading into the key Christmas period.

The Spanish firm, which owns the Zara chain, said sales at constant exchange rates climbed 9 per cent from August 1st to December 6th, compared with a 5.5 per cent rise in total sales in the nine months to October 31st.

"Inditex is clearly taking share from independents in Spain and performing well in Asia," said BofA-Merill Lynch analyst Richard Chamberlain, adding that strong recent trading gave a "slight upward bias" to full-year earnings forecasts.

The retailer, which invented a business model where designers quickly produced affordable models of catwalk trends, also underscored a "firm commitment" to expand in China, where it currently has 60 stores.

Group sales totalled €7.76 billion boosted by Inditex's ongoing aggressive expansion programme which saw it open a further 266 stores in the nine-month period, bringing its total to 4,530, including 90 in Asia.

Chamberlain, however, kept an "underperform" rating on the shares, noting its high valuation against Swedish rival Hennes & Mauritz as well as other retailers.

At 1220 GMT, Inditex's shares were up 2.3 per cent at €42.23 near the top of Spain's Ibex leading shares index and also outperforming the DJ Stoxx European retail index which was 1.3 per cent higher.

Inditex, which runs brands in 73 countries from teen label Bershka to upmarket label Massimo Dutti, said nine-month net profit fell 1 per cent to €831 million, compared to a Reuters poll forecast of €815 million.

However, analysts estimate like-for-like sales - which strip out the boost to turnover from new stores - fell during the third quarter more than they expected as cost controls failed to compensate for falling consumption, particularly in its home market Spain.

"I think you'll find they have missed the consensus for like-for-like," said Tony Shiret, analyst at Credit Suisse, estimating a drop of between 4 and 5 per cent in the quarter.

Inditex, had said it hoped to improve its like-for-like sales in the second half after they fell 2 per cent in the first half, but gave no details on progress for the nine-month period.

During a conference call with analysts, the firm said it maintained its goal to improve like-for-like sales in the second half.

Societe Generale's Anne Critchlow said the like-for-like sales drop was still better than H&M which had an average drop of 7 per cent. The Swedish retailer reports its November sales figures on December 15th.

Clothing retailers have had a tough time in the economic downturn, and have been forced to cut costs and manage stocks tightly as shoppers have reined in discretionary spending.

Inditex has had the added burden of making about a third of its sales in Spain, which has suffered a particularly deep recession, with unemployment rising to about 18 per cent and a revised credit outlook from Standard & Poor's yesterday adding to the gloom.

But Inditex's focus on low prices and its geographic spread has helped it cope better than some rivals.

It has also reassured investors by tightening costs controls and said it expects to maintain its cost growth in 2010 in line with its space growth.

Asked how business in Spain had held up during the third quarter, Inditex told analysts it had seen no further deterioration and remained "comfortable" with its home market.

Spanish retail sales fell 3.9 per cent year-on-year in inflation-adjusted terms in October, while a poll by consumer group FUCI yesterday forecast Spaniards would spend 10.5 per cent less this Christmas than last year.

H&M has reported a string of weaker than expected monthly sales figures, while Gap relied on cost cuts to boost third-quarter profits, with revenues up just 1 per cent.

Inditex shares have performed in line with the DJ Stoxx European retail index this year. They trade at 18.5 times earnings forecasts for next year, just above H&M on 18.2 and an index average of 15, according to Reuters data.