Inditex Sales Disappoint, Drag Shares Lower

Spain's Inditex, the world's No. 2 clothing retailer, reported lower-than-expected nine-month sales on Wednesday, dragging its shares lower despite net profit coming in above analysts' forecasts.


A weaker U.S. dollar and tight cost control helped the retailer squeeze more profits out of its stable of brands, but sales missed analysts' estimates, raising concerns about future growth at the owner of Zara and Massimo Dutti fashion stores.

"I think there will be some concern about the slowing top line because ultimately profit does depend on top-line growth," said Anne Critchlow, retail analyst at Societe Generale.

Net profit jumped 30 percent to 825 million euros ($1.2 billion) compared with the 800 million euros forecast by a Reuters poll of analysts. Sales rose 17 percent in the nine months to end-November to 6.63 billion euros, just short of the poll forecast of 6.68 billion euros.

Inditex's shares fell as much as 6.4 percent at the open, hitting their lowest level since Oct. 1, before retracing lost ground to trade 5.4 percent lower at 47.03 euros. European retail stocks were down 0.7 percent.

Inditex, whose flagship chain Zara is famous for speeding looks like this season's wool swing coats and slim trousers straight from the catwalk to its rails, said like-for-like sales in the first six weeks of the fourth quarter were in line with its expectations.


Richard Chamberlain at JP Morgan estimated third quarter like-for-like sales grew at about 2 percent, a dramatic drop from their sparkling 7 percent growth in the first half. BPI analysts saw third-quarter growth even lower at 0-1 percent.

The firm's full-year outlook for 2007 same-store sales is for 4 to 5 percent growth.

Inditex Chief Executive Pablo Isla would not break down third quarter same-store sales in a conference call with analysts, beyond saying Spain had performed in line with global markets.

Gross Margin Up

Analysts had feared Inditex could suffer from a slowdown in consumer spending in Spain, which accounts for 38 percent of the group's sales, despite aggressive expansion into fast-growing economies like Russia and China.

However, government retail data for October showed strong growth in clothing, continuing the vigorous trend of the last few months.

"I think the nature of their collection has impacted like-for-like sales because the market was doing better than that," said Chamberlain. "They have underperformed a little bit in Spain from a sales perspective."

Sales at Swedish arch rival H&M are increasing by about 15 percent year-on-year although like-for-like sales are only up around 3 percent. Inditex shares are trading at 24.4 times forecast 2007 earnings, similar to H&M on 24.6 times.

CEO Isla confirmed press speculation that the company was looking to add an accessories brand to its portfolio of stores stretching from underwear line Oysho to children's wear chain Kiddy's Class. A launch was a "clear possibility" for next year, he said.

Inditex's gross margin, a core measure of profitability, rose 83 basis points in the third quarter to 59.5 percent. Over the first nine months, the gross margin was 57.1 percent, in line with the 57 percent it reported a year ago.

Inditex maintained its expectation of full-year gross margin within 50 basis points of last year's 56.2 percent.

SocGen's Critchlow said profitability had been helped by a lower U.S. dollar, which has trimmed Inditex's sourcing costs, reduced operating costs and a lower tax rate.

"You might not have such a double benefit in all quarters going forward," she said.