Inditex Sales Miss Estimates as Zara Resists Discounts

(Bloomberg) -- Spanish Zara owner Inditex SA disappointed investors expecting a strong sales run-up into Christmas as it resisted industry-wide pressure to cut prices.

The shares fell 4.4 percent as of 10:53 a.m. in Madrid, heading toward their first consecutive two-year decline. Like-for-like growth was 3 percent in the start of the second half, below Inditex’s target range, as a freakishly warm September snarled the start of the autumn season.

Inditex’s decision to avoid price cuts helped profitability rebound from last year’s decade-low level. However, now the top end of the Spanish clothing retailer’s sales guidance may be out of reach. The seller of Massimo Dutti officewear and Oysho lingerie faces heightened competition from Hennes & Mauritz AB, which has been selling sweaters for as little as $9.99 to reduce its record glut of unsold garments.

The world’s largest clothing chain operator said it’s still feasible to reach its goal for second-half revenue growth of 4 percent to 6 percent, but that will require much brisker sales during the Christmas season, according to Anne Critchlow, an analyst at Societe Generale.

Zara World

A new source of revenue may come from Zara’s recent doubling of its e-commerce reach to 202 markets last month. The chain is the first to have online sales in almost every market in the world. Inditex has been pioneering new digital sales strategies, such as a new service at Bershka that allows shoppers to request garments to be brought to fitting rooms via their mobile phones.

Chief Executive Officer Pablo Isla said the decision to stay firm on prices is based in confidence about upcoming collections.

In November, the company’s Pull & Bear brand launched a collection with the
Spanish singer Rosalia, who was recently awarded a Latin Grammy for her fusion of flamenco and so-called trap music. Oysho has been selling skiwear with Recco detectors, which help locate missing skiers. Zara has dabbled in a military aesthetic, and Bershka offered a tweaked version of Converse sneakers.

Algeria, Switzerland

Inditex has kept adding stores as well, opening its 100th Zara in the U.S. last month with a Denver opening. Pull & Bear entered Algeria and opened a shop in Bern. The company has more than 7,400 boutiques.

Operating profit rose 3 percent to 3.1 billion euros ($3.5 billion) in the nine months, matching the analyst estimate. The company is on track for the weakest full-year earnings growth in at least four years, according to analysts, though next year should show a return to double-digit growth.

Gross margin widened half a percentage point to 58 percent, which was cheered by analysts as it’s improving for the first time in six years.

--With assistance from Lisa Pham and Macarena Munoz.

To contact the reporters on this story: Thomas Mulier in Geneva at tmulier@bloomberg.net;Rodrigo Orihuela in Madrid at rorihuela@bloomberg.net

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

©2018 Bloomberg L.P.