Online shopping and currency moves take a toll on fashion retailer; Profit margins rose
By Jeannette Neumann
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (June 14, 2018).
MADRID -- Zara's parent company said same-store sales growth slowed in the latest quarter, though profit margins improved, as the world's largest fashion retailer attempts to navigate an industrywide shakeout driven by competition from online retail.
Inditex SA said on Wednesday that sales in stores that have been open for at least one year rose in all its markets in its fiscal first quarter. Analysts estimated that what are known as like-for-like sale rose around 5% in the three months ending April 30 compared with a year earlier. That is a slight slowdown from the company's previous fiscal quarter, when like-for-like sales rose around 6% year-over-year.
It is also significantly lower than recent years, when Zara was notching up to 10% year-over-year growth.
After years of blistering growth, Zara sales growth has flagged more recently. Currency fluctuations have taken a toll recently. Analysts also cite heightened competition, including from online retailers, which has pressured prices. Zara's has embraced online shopping, too, but that can chip away at profitability, some analysts say, because it can be more expensive to ship internet orders.
Shares were down in morning trading in Madrid, extending a long slide, but then reversed and were up slightly. Inditex shares are down about 20% during the past year. Investors have punished it and rivals for what's been seen as a slow response to the onslaught of online shopping. Hardest hit have been retailers with large brick and mortar footprints, like Gap Inc. and Hennes Mauritz AB. Inditex, too, has been caught up in the storm, but has so far managed to avoid the industry's sales declines.
Competitors have been unable to fully replicate Inditex's unique business model, which relies on sourcing its material close to its Spanish home. That allows it to move new outfits from design to rack around the world within weeks. But it has had to adjust, too. It has been shuttering smaller outlets and concentrating on its biggest, marquee stores in busy city centers around the world.
Inditex closed its fiscal first quarter with 7,448 stores in 96 markets, a slight decline from the 7,475 stores the company had in the previous quarter. Those closures appeared to play a role in the weaker-than-expected sales momentum at the beginning of Inditex's fiscal second quarter, said Macquarie Group analyst Andreas Inderst. Sales growth in local currencies was 9% so far this quarter.
Inditex Chairman and Chief Executive Pablo Isla stuck to guidance to analysts that total floor space is expected to increase this year by around 6% and then slow somewhat to growth of between 4% to 6% in the coming years. "For us, the relevant figure is space growth," Mr. Isla told analysts. The Spanish city of Bilbao, he said, was a case in point: Inditex shut three Zara stores there but opened a flagship store in May that has more floor space than those closed stores combined.
Inditex reported a stronger-than-expected gross profit margin in its fiscal first quarter on Wednesday -- 58.9% versus 58.2% a year earlier, bolstering bullish analysts' case. Mr. Isla told analysts on Wednesday that Inditex maintains its guidance for a stable gross profit margin this year versus the previous year, which the company defines as an increase or decrease of 0.5 percentage points.
Write to Jeannette Neumann at [email protected]