March 14, 2018 / 8:36 AM / 3 months ago

Strong euro takes toll on Zara owner Inditex

LA CORUNA, Spain (Reuters) - A stronger euro took its toll on Spanish retailer Inditex in its latest quarter, leading to lower profit margins at the owner of clothing chain Zara, while a cold snap dragged on sales of spring fashions at the start of its financial year.

But its shares bounced back from early losses on Wednesday, as investors cheered strong online sales growth and Chief Executive Pablo Isla said margins should hold up this year.

“Looking to the year ahead, we should not see a negative impact on margin at current exchange rates,” Isla told a news conference in the company’s headquarters in northern Spain.

The shares closed up 4 percent at 25.24 euros.

Inditex, the world’s biggest fashion retailer by market value, is more affected by the strengthening euro than many European rivals because it sources a higher proportion of garments closer to home - rather than from, for example, Asian markets - allowing it to respond quickly to new trends.

Societe Generale analyst Anne Critchlow said Inditex aimed to offset currency moves by the timing of some of its spending.

“As we don’t know the precise volumes and timing of purchases, we will have to take the company’s view of the gross margin for the current year,” she said.

Inditex’s proportion of online sales jumped 41 percent to reach 10 percent of net sales across the group in 2017, though that still lags some rivals. Sweden’s H&M, for example, makes around 12 percent of sales online.

The Spanish company has invested in technology to merge online and store experiences. Radio-frequency identification tags on clothing keep a tight control on inventory, allowing mobile phone apps to notify customers if certain items are available at nearby stores.

The Zara app constantly refreshes its magazine-like appearance with new designs photographed on models at the company’s Galicia headquarters at a rate of 120 campaigns per season. Click and collect options also allow customers to bulk order, try on in the shop and return on the spot if desired.

MARGIN PRESSURE

Inditex, whose brands include upmarket label Massimo Dutti and homewares chain Zara Home, said gross margin dropped to 53.5 percent in the quarter to the end of January from 59.4 percent in the previous quarter and 54.8 percent a year earlier.

“We think this is mainly due to currency mix, a delay in the start of the spring collection to the first quarter and lower full price sales than expected in the second half of the fourth quarter,” said Richard Chamberlain of RBC Capital Markets.

Inditex reported net profit of 3.4 billion euros ($4.2 billion) for the year to Jan. 31, up 7 percent and in line with analysts’ expectations. The cash-rich company proposed a 10.3 percent increase in the dividend to 0.75 euros per share.

Sales at constant exchange rates rose 10 percent to 23.5 billion euros in 2017.

On the same basis, sales grew 9 percent in the first five weeks of the new financial year as new spring collections hit shop floors with items like printed maxi dresses, linen separates and pastel blazers at Zara.

This was slower growth than expected by some analysts, but rivals are also likely to have suffered from cold weather in early March which brought snow to many European cities, analysts said. H&M will report December to February sales on Thursday.

($1 = 0.8066 euros)

People are seen outside of an Inditex owned Zara store in Milan, Italy, March 30, 2017. REUTERS/Alessandro Garofalo/Files

Reporting by Sonya Dowsett; Editing by Keith Weir, Georgina Prodhan and Mark Potter

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