Europe Preview: Don't Count Out Inditex
The consumer across the world is under considerable pressure. Record oil prices, the credit crunch and inflationary pressures all appear to be taking their toll on people’s willingness to spend. We got some better data from the UK on Tuesday, but the trend across Europe has been weak since the turn of the year, and many of the big players are beginning to become very worried.
On Wednesday we get first-quarter earnings from the owner of the Zara brand, Inditex. The Spanish clothes retailer with operations across Europe competes with the likes of H&M, Gap and Marks & Spencer . The merchant has seen its shares fall by 26 percent since the beginning of the year.
The fear among investors is that a weakening Spanish economy will force Inditex to slash prices in order to clear stock. Others fret that stores across Europe have had a difficult time due to Easter falling early this year and unseasonably bad weather. Adding to the problems is inflationary pressures from suppliers in India and China.
All these factors play a role in determining the fortunes of any retailer, but what you shouldn't forget when looking at Inditex is that it has a very strong record of attracting people into its stores and selling clothes. On March 31, the group announced earnings that rose 25 percent, while sales rose 17 percent between February and the end of March. On Wednesday, profits are expected to be up by over 7 percent, but I would not be surprised if they beat.
Management knew they where facing a slowdown, and immediately implemented new cost controls to offset the weaker sales. At the same time, money is being invested in new markets in Asia like China, Japan and Korea. A new accessories concept called Uterque is due to launch next year, and those who have seen "Sex in the City" will know it's all about the handbag.
Traders are reported to be taking up short positions ahead of Wednesday’s numbers. Forty-one percent of the stock's free float is thought to be out on loan as I write, so one way or another the stock is likely to be a big mover when the Madrid market opens.
But those going short should remember they're going up against a very strong management team with a solid track record who can probably deal with the weather and a tough economic situation. Whether some of their less competent rivals can do the same is another matter.