Inditex Reports Slowest Profit Advance in Five Quarters

Inditex SA (ITX), the world’s biggest clothing retailer, reported profit increased at the slowest pace in five quarters, missing analysts’ estimates as a weak Spanish economy damped consumption in its home market.

Net income rose 12 percent to 705 million euros ($919.3 million) in the three months through January, the Arteixo, Spain-based owner of the Zara chain said today. The average of 20 estimates compiled by Bloomberg was 716 million euros. That’s the second consecutive time Inditex failed to surpass analysts’ expectations after three years of beating them. The stock fell as much as 4.8 percent.

“Quarterly earnings were a little bit disappointing,” said Anne Critchlow, a London-based analyst at Societe Generale. “The prior-year comparative had become tough for the first time, and a slowdown had to happen.”

Inditex’s sales in Spain, a market accounting for a fifth of the total, fell 5 percent in the full year as the unemployment rate reached 26 percent in December and the retailer absorbed a 3 percentage point increase in value-added tax from September. Inditex said its Spanish market share is about 12 percent and it doesn’t plan to increase its store total in that market this year.

‘Difficult Situation’

“Spain remains in a difficult situation,” Chief Executive Officer Pablo Isla told reporters in Madrid today. Still, Isla predicted this will be a year of “strong growth.”

Inditex, controlled by billionaire Amancio Ortega, today forecast a slower pace of store openings this year as it focuses on growth abroad, having added Chinese Zara online sales in September, and bringing the Massimo Dutti label to the U.S. The company doesn’t have plans to enter new markets this year as it sees growth from the 86 countries where it already has stores, according to Isla.

Inditex shares traded 3.8 percent lower at 104.35 euros as of 3:03 p.m. in Madrid, having gained 58 percent in the year through yesterday.

“Inditex’s share price means that high earnings growth has become a must in order to satisfy investors,” Francisco Salvador, a Madrid-based strategist at FGA/MG Valores, said by phone today.

Fourth-quarter sales rose 12 percent to 4.58 billion euros. That matched the average analysts’ estimate. Store revenue at constant exchange rates climbed 12 percent from Feb. 1 to March 11, it said.

Margin Shrinks

The gross margin, a measure of profitability, dropped to a two-year low of 57.9 percent in the fourth quarter from 62.1 percent in the third quarter. That missed analyst estimates of 58.6 percent, according to data compiled by Bloomberg. Inditex expects the full-year margin to change no more than 0.5 percentage point from last year’s 59.8 percent, Isla said on a conference call with analysts.

“Gross margin was the weakest point in these results but the company did a good job in cost control, which rescued the quarter,” Critchlow said.

Fourth-quarter operating expenses rose 12 percent, in line with sales, while the cost of goods sold rose 14 percent.

Massimo Dutti’s full-year operating profit declined 18 percent to 197 million euros as Inditex expanded the chain. Sales rose 12 percent to 1.13 billion euros.

New York

The company in October opened its first New York Massimo Dutti store, aiming to reach a more mature audience of customers willing to shell out for silk skirts and leather briefcases. The chain was Inditex’s most profitable in 2011, with a higher operating margin than Zara’s.

Inditex said it plans 440 to 480 new stores this fiscal year. The company boosted its total by 482 stores in the past fiscal year. Inditex said it expects to invest about 1.25 billion euros this year.

Isla’s base pay rose 50 percent in 2012 to 6.48 million euros.

The company, whose brands also include Bershka and Pull & Bear, has jumped past rivals including Hennes & Mauritz AB (HMB) with ability to get stock like $59.90 mini skirts from its design table to more than 6,000 stores worldwide within weeks.

To contact the reporter on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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