Inditex In The Doghouse

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What's going on?

Zara owner Inditex, the world’s largest clothing retailer, reported a mixed set of earnings on Wednesday.

What does this mean?

Three months ago, Inditex – along with other garment giants – was bemoaning the impact of unseasonably cold weather on sales of its spring styles. But mercury-topping temperatures last quarter saw shoppers flock to Inditex’s 7,420 Zara and Pull & Bear stores – many in search of that dress.

The strong quarter lifted Zara’s sales growth from 5% in the first quarter (compared to a year before) to 7% in the first half of the year. But while profit had been 10% higher in the first quarter, it was only 7% higher across the first half.

Why should I care?

For markets: No margin for error.
Inditex’s update revealed fast-growing online and international sales – key for any self-respecting retail brand these days – as well as signs of even stronger overall revenue growth so far this quarter. Even so, investors sold its shares on Wednesday, sending their price down 4%. They were likely disappointed that the company failed to convert higher sales into an even higher profit margin (currently 57%). A weak euro in the first quarter meant overseas cash was worth more back home in Spain, but that’s remained the case in subsequent months – and investors may be concerned that profit hasn’t continued to increase in that time.

The bigger picture: A retailer à rebours.
Inditex is unusual among retailers – not just because it’s doing pretty well, but also because it’s opening more (and bigger) physical stores in new markets alongside online expansion. Higher wages (including in Spain) have been just one headache for retail brands, with the weaker British pound another. The international chief of Victoria’s Secret parent L Brands warned on Tuesday that the American lingerie dealer was facing higher costs when bringing goods into the UK. That’s down to the pound’s 5.5% slide in value versus the US dollar over the last six months.

Originally posted as part of the Finimize daily email.

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