Spread of omicron weighs on Inditex’s earnings

Spanish company has difficult fourth quarter as earnings from Zara and Massimo Dutti clothing chains are hit

Inditex SA had a difficult fourth quarter as the spread of omicron weighed on earnings from its Zara and Massimo Dutti clothing chains. Increased markdowns and higher operating costs related to the pandemic stripped €400 million from profit in the three months through January, the Spanish company said on Wednesday.

The shares were little changed in early trading, having lost a quarter of their value in the past year. These are the last set of results under chairman Pablo Isla's supervision as Marta Ortega, the 38-year-old daughter of Inditex's founder, is set to replace him at the start of next month.

One of her first challenges will be rejuvenating sales growth even after the retailer temporarily closed its more than 500 stores in Russia in response to the country’s invasion of Ukraine. Inditex normally gets about 8.5 per cent of its operating profit from Russia, where it has more stores than any other country besides Spain.

Operating profit rose to €4.28 billion in the year through January. Analysts expected €4.77 billion.

Sales rose 33 per cent in local currencies in the start of the first quarter, slowing slightly from the full-year pace of 37 per cent.

Inditex said it plans to raise prices in countries with high inflation or currencies that depreciate. The company forecast that will contribute a mid-single digit percentage to sales growth in the spring-summer season, without weighing on volume.

The company said it expects its gross margin to remain stable this year. Inditex also said it is holding more inventory than in the past so it can better deal with any supply chain constraints.

Competitor

Russia isn’t the only threat facing Inditex. Online clothing retailer SheIn Group is becoming a bigger competitor, while a resurgence of Covid infections in China is raising concern that business at Inditex’s 300 stores in that market could slow down.

Inditex said the US became its second largest market last year, helped by online expansion as the company has only about 100 Zara stores there.

Mr Isla said that the US was a key market for future growth, and he was confident in Ms Ortega leading the company.

E-commerce should keep driving sales growth as the company expects to get more than 30 per cent of its revenue from its online business by 2024. Inditex also forecast a stable gross margin after it reached a six-year high.

Mr Isla has been finishing a plan to reduce the total number of stores Inditex runs worldwide, having cut about 1,000 shops since the start of 2019. The retailer now has about 6,500.

– Bloomberg