Inditex's profitability hits 10-yr high on Zara price hikes; stock up 4.8%

Inditex SA reported its highest profitability in a decade as the Zara owner offset inflation through tight cost control and kept attracting shoppers even with higher prices. 

Operating income rose 82% in the three months through April, exceeding pre-pandemic levels, the company said Wednesday. The gross margin reached a 10-year record. The stock rose as much as 4.8%.

Inditex is dealing with garment-price inflation better than rivals, helped by its focus on buying more clothes from nearby suppliers in Spain, Morocco and Turkey and less from far-off markets in Asia. Zara also has more pricing power than mass-market rivals because its offerings often imitate the latest high-end fashions.

Last month, Gap Inc. lowered its full-year forecast and reported first-quarter profit that missed estimates due to operational missteps. Shares of the US retailer have dropped 40% this year. Inditex is down about half as much.

Inditex’s first-quarter sales rose 36% to 6.7 billion euros, exceeding analysts’ estimates. Tighter budgets may be leading some consumers to buy more fast-fashion and fewer high-end items. The company has also recently implemented fees for online returns, which is gives an incentive for consumers to bring the goods back themselves to brick-and-mortar stores, where they may be tempted to shop more.

Still, the world’s largest clothing retailer faces pressures on all sides. The company took a 216 million-euro ($231 million) provision for shutting operations in Russia and Ukraine, while many shops are still closed in China due to lockdowns. Inflation is also sapping consumer spending in almost every market.

Marta Ortega, daughter of Inditex founder Amancio Ortega, became chairwoman of the company in April, and Oscar Garcia Maceiras became chief executive officer in November.

Revenue rose 17% in constant currencies in the five weeks of this fiscal quarter, which is less than half the level of growth Inditex had in the full fiscal year through January. In the two weeks through June 5, growth decelerated even further to 13%.

Online sales dropped 6% in the three months through April after the retailer leaned on those operations to get through the pandemic.

Zara’s prices are at least 10% higher than last year’s levels since January, UBS said, based on data from the website in 12 markets. The company doesn’t plan any more signficant changes to pricing, CEO Garcia Maceiras told analysts on a call. He said that the changes haven’t impacted sales volume.

Inditex is taking an unusual strategy shift by allowing inventory to rise 27%, which the company said is in order to protect against supply-chain issues as transportation of cargo is so difficult.

Last year was an exceptionally good one with operating profit almost tripling, which will make for difficult comparisons in coming months.