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Zara Owner's Margin Shrinks to Eight-Year Low on Currencies

Zara Owner's Margin Shrinks to Lowest Level in Eight Years

(Bloomberg) -- Inditex SA’s profitability shrank to an eight-year low as the world’s largest clothing retailer was confronted with adverse currency swings, higher garment costs and increasing competition.

The gross margin narrowed to 57 percent from 57.8 percent in the 12 months through January due to unfavorable currency shifts, Arteixo, Spain-based Inditex said Wednesday. That was short of the retailer’s goal of keeping the measure within 0.5 percentage points of the previous year. The shares erased part of a 2.7 percent decline after Chief Executive Officer Pablo Isla said at current exchange rates, the gross margin won’t fall this year.

Lower prices helped fuel demand and led to same-store sales growth of 10 percent, the fastest rate in 14 years. That outshone rival Hennes & Mauritz AB, which on Wednesday reported February sales growth that missed analysts’ estimates. The downside of the Spanish retailer’s cheaper clothes has been a slide in profitability each year since fiscal 2013.

Zara Owner's Margin Shrinks to Eight-Year Low on Currencies

Foreign exchange stripped 3 percentage points off sales growth. Weaker currencies in Russia, China and Mexico reduce the value of sales in those markets when translated into euros. Inditex said excluding currency shifts, the gross margin didn’t decline.

Inditex put greater emphasis on online expansion last year, cutting its target for new brick-and-mortar stores. The retailer is also making changes to some of its brands to gain market share, with the most recent example being February’s foray into men’s clothing by the Stradivarius brand, which has focused on women.

After starting online sales in Singapore and Malaysia this month, the company plans to add such services in Thailand and Vietnam in the next few weeks and also in India this year.

“India is a very attractive market for us,” Isla said on a conference call with analysts. This year Zara will open a 5,000 square-meter flagship store in Mumbai, which will be its largest store in the country. Inditex has 21 stores in that market.

Operating profit rose 9.4 percent to 4 billion euros ($4.3 billion). Analysts expected 4.1 billion euros. 

Other highlights included:

  • Full-year revenue rose 12 percent to 23.3 billion euros, matching average analyst estimate
  • Inditex to raise dividend 13 percent to 68 cents a share
  • Sales in local currencies and adjusted for calendar effects rose 13 percent in opening weeks of first quarter
  • Retailer plans 450-500 openings this year and will absorb 150-200 small shops into neighboring stores
  • Capex budget about 1.5 billion euros this year
  • Portion of sales from Spain declined to 16.9 percent from 17.7 percent as Inditex isn’t increasing retail space in that market
  • Spanish sales have increased 20 percent over three years, Isla said
  • Retailer ended fiscal year with 7,292 stores in 93 markets

To contact the reporter on this story: Rodrigo Orihuela in Madrid at rorihuela@bloomberg.net.

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Thomas Mulier