MADRID--Spain's Inditex SA (ITX.MC) said Wednesday it has temporarily slowed the pace of store openings while it gives its flagship Zara stores a face-lift, a process that checked the company's sales and profit growth in the first half.
Management said it expects store openings to be at the low end of its targeted range of between 440 and 480 for this year, after the company had refurbished a total of 50 flagship stores to give them a cleaner look. But since the new stores are on average larger than older ones, the retailer's overall store space will keep growing at roughly the same pace.
Chief Executive Pablo Isla said the new setup of the stores--organized around long corridors that lead into smaller boutique-like cubes on each side--has been well received by customers.
In the six months ended July 31, Inditex said net profit rose 0.74% to 951 million euros ($1.27 billion) from EUR944 million, while sales grew 5.7% to EUR7.66 billion from EUR7.24 billion. Profit was slightly higher than market expectations, while sales were broadly in line. Like-for-like sales, which account for sales at 80% of the company's stores, grew 2% on the year, down from 7% a year earlier.
The results mark a slowdown from years of breakneck growth, during which the world's No. 1 fashion retailer by revenue has doubled its store count to 6,104 since 2007. A year earlier, net profit jumped 32% and sales increased 17%. During the first half of the current year, sales were hurt by miserable weather in parts of Europe that kept shoppers away from stores, analysts said.
In Spain, which remains the company's largest market with almost a third of the company's stores, profit margins were lower than a year earlier, when the company absorbed an increase in value-added tax without raising prices. Margins were also squeezed by the weakening of some currencies compared with the euro, particularly the yen, management said.
Analysts were expecting a lackluster first-half performance but said growth seems to have picked up over the summer, helped by a recent improvement in consumer spending in Spain and elsewhere in Europe. Sales in the first six weeks of the company's fiscal third quarter outpaced that of the first half, growing at an annual pace of 10% in local currencies, compared with 8%.
"There's a saying in retail that sales and cash don't lie, so the improved sales growth is a reliable measure, and it's a bit above what we were expecting," said Anne Critchlow, a retail analyst with Societe Generale.
Swedish rival H&M Hennes & Mauritz AB said earlier this week that its sales grew 14% in local currencies in August.
The bulk of Inditex's new stores planned for this year will be opened in the second half, having opened 95 in the first.
Some of Inditex's smaller brands grew faster than Zara during the first half, partly because stores under its flagship banner were closed temporarily for refurbishment. Sales at Massimo Dutti, a more conservative store concept than Zara with higher average prices, increased at an annual pace of 17%, while Zara Home rose 30%.
Other concepts are doing less well. Its accessories brand Uterque closed some stores over the past year and reported no growth, while sales at Stradivarius, which is geared towards younger women, rose 2%.
Write to Christopher Bjork at [email protected]