March 18, 2015 / 6:26 AM / 5 years ago

Zara-owner Inditex to trim investment after strong sales

LA CORUNA, Spain (Reuters) - Spanish group Inditex (ITX.MC), owner of the Zara fashion chain, expects to trim investment in 2015 after a recovery in its biggest European markets alongside a store and online expansion boosted profit by five percent.

The world’s biggest fashion retailer, based just outside La Coruna at Spain’s northwestern tip, said it expected capital expenditure to fall to about 1.35 billion euros (977 million pounds) this year, from 1.396 billion last year.

Chairman and Chief Executive Pablo Isla told a conference call for analysts he expected capital expenditure to remain below the rate of space growth in 2015 and 2016.

Inditex has been one of Europe’s more robust retailers during the economic downturn because of its “fast fashion” business model, meaning it can quickly adapt styles to meet changing demand.

It has made major investments in logistics and online platforms since it launched ecommerce in 2010. At the same time, it has slowed store openings, closing smaller shops in favour of big flagship sites such as a 4,400 square metre SoHo site in New York’s Manhattan acquired earlier this year.

It has extended its headquarters to give more room for online teams at Zara and fast-growing Zara Home as well as more space for pilot stores to test every aspect of its new looks, from the shop window display to the layout of the store.

It will start Zara online in Taiwan, Hong Kong and Macao in 2015 and said it would open 420-480 new shops in 2015, absorbing 80-100 smaller units into neighbouring stores.

“(This) is consistent with our expectation that the capital intensity of the business is declining, leading to a more cash generative business,” said Bernstein analyst Jamie Merriman, who rates Inditex “market-perform.”

The company’s 2014 net profit rose 5 percent to 2.5 billion euros and like-for-like sales rose 5 percent, while overall sales rose 8 percent to 18.12 billion euros, meeting market expectations.

The group, which has lured shoppers this winter with skirts and tunics in leather, said sales in the six weeks to March 14 rose 13 percent in constant currencies in the 88 markets in which it currently operates. That compares with a better-than-expected 15 percent sales rise at rival fashion retailer H&M (HMb.ST) in February.

Societe Generale analyst Anne Critchlow estimated a 6 percent rise in like-for-like sales in the six week period.

“This is a beat versus existing consensus forecasts at around 4 percent, suggesting good support to date for full-year estimates,” she said.

Inditex shares, up almost 23 percent in the last three months, rose 2.9 percent by 0914 GMT, outperforming a 0.7 percent rise in the European retail index .SXRP.

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Inditex now trades on 30 times forward earnings compared with almost 25 times for H&M, prompting some brokers to cut recommendations on the stock earlier this month.

“We remain concerned around continued growth in competition, the rising cost of premium space and brand maturity,” analysts at Credit Suisse said.

Inditex, founded and controlled by the world’s fourth-richest man Amancio Ortega, also announced a profit-sharing scheme with employees. It will reward staff with up to 2 percent of profit, in line with a similar plan at H&M.

Additional reporting By Elisabeth O'Leary and Robert Hetz; Editing by Emma Thomasson and Jane Merriman

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