Inditex SA, the retailer behind the Zara fast-fashion chain, said Wednesday that a combination of more-efficient stores and its continued push into online sales lifted profit in the first half of the year, setting itself further apart from struggling competitors.
The world's largest fashion retailer by revenue reported a 7.7% rise in net profit to ?1.26 billion ($1.40 billion) in the six months to end-July from ?1.17 billion in the same period last year on an 11% rise in sales to ?10.47 billion. Based on Inditex's first-quarter report, that means an 8.8% rise in second-quarter profit to ?702 million on an 11% rise in sales to ?5.59 billion.
The rise in sales, which has continued in the first weeks of the third quarter, came despite currency devaluations in some markets, including the U.K.
Inditex said its efforts to integrate physical and online stores, without hurting either business, are working. For instance, around one-third of online deliveries are made in Zara stores, generating savings on shipping. Many customers use stores to return online purchases.
"Both our online and bricks-and-mortar stores are seamlessly connected, driven by platforms such as mobile payment, and other technological initiatives that we will continue to develop," Chief Executive Pablo Isla said.
Analysts also point out that investments made by the company to expand and refurbish its existing stores are paying off, with like-for-like sales rising 11% in the first half. As those changes kick in, however, revenue growth is expected to slow. SociÚ tÚ GÚ nÚ rale analyst Anne Critchlow estimated a normalized like-for-like sales growth for Inditex is between 5% to 6%, which she said is still above peers.
The clothing supplier's robust growth, ahead of the average of analysts' second-quarter forecasts, contrasts with many of its rivals' recent performances.
Gap Inc. reported falling second-quarter sales as retailers in the U.S. continued to struggle with shrinking foot traffic and growing competition among companies seeking to deliver quicker and cheaper fashion. Inditex's closest competitor, Swedish fast-fashion giant Hennes & Mauritz AB, said last week that its August sales were lower because of unusually hot late-summer weather.
Overall, H&M's sales growth has lagged behind that of Inditex, which has more physical stores.
Analysts say Inditex has an edge over rivals because of its centralized operations in Spain and close-by production centers.
While 65% of its products are sourced in Spain, Portugal, Turkey and North Africa, most other retailers source about 80% of their products from East Asia.
The proximity allows Inditex to respond quickly to customer demand, new tastes and even the weather, which in turn gives it a pricing power rivals such as H&M don't have.
"We continue to believe Inditex is a structural winner with its strong brand and well adapted business model," Berenberg analysts said in a note.
Inditex's pricing power means it can offer customer-friendly services, including free online delivery and returns, without hurting margins, Ms. Critchlow said. Its centralized operations, meanwhile, make the cost of adapting its business to cope with growth in online shopping lower than at H&M, which has several warehouses spread around the globe.
Ms. Critchlow estimated that online sales should account for roughly 6% of Inditex's overall sales this year, leaving the company with room to grow.
While online offers expand, the company has vowed to slow down the pace of retail space growth over the years and focus on the more profitable flagship stores. In the first half of the year, Inditex opened 83 stores, bringing the total to 7,096 world-wide. Of the 92 markets where it is present, it has online stores in 39.
Analysts polled by Thomson had expected second-quarter net profit of ?691 million on sales of ?5.57 billion.
Corrections & Amplifications: Inditex's second-quarter profit was ?702 million. An earlier version of this article incorrectly stated the amount.
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