Inditex Profit Tops Estimates as Zara Owner Expands in Asia

Inditex SA Chief Executive Officer Pablo Isla
Inditex SA Chief Executive Officer Pablo Isla. Photographer: Denis Doyle/Bloomberg

Inditex SA, the world’s largest clothing retailer, reported profit that beat analysts’ estimates and said it will accelerate expansion in stores and online.

Fourth-quarter net income gained 14 percent to 553 million euros ($784 million), according to calculations based on full-year results from the Arteixo, Spain-based owner of the Zara chain. The average estimate of 10 analysts surveyed by Bloomberg was 523 million euros. The shares rose as much as 6.1 percent, the steepest advance since June 9.

Inditex plans to add as many as 500 outlets this year, up from 437 last year, boosting investment even as consumer spending slows in Europe and the U.S. At least half of the Zara stores it opens will be in Asia, where rising incomes are boosting spending. The clothing retailer plans to start online sales for brands other than Zara in the second half of 2011.

“The openings pipeline has picked up at Inditex,” said Anne Critchlow, an analyst at SG Securities in London who has a “hold” recommendation on the retailer’s shares. The planned store expansion “bodes well for the future.”

Inditex stock was up 2.68 euros, or 5 percent, at 56.68 euros as of 1:06 p.m. in Madrid.

The Spanish retailer, whose Zara stores offer women’s trench coats for less than 80 euros, said full-year net sales rose 13 percent to 12.5 billion euros. That kept Inditex ahead of its nearest rival, Hennes & Mauritz AB, which reported 11.2 billion euros in sales for the year ended November.

Store Expansion

Inditex’s profit for the year through January climbed to 1.73 billion euros from 1.31 billion euros a year earlier.

The retailer said it will introduce online shopping for its Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho and Uterque brands during the fall/winter season.

“This is a key piece of strategic new news in these results, suggesting e-commerce at Zara is going well,” Critchlow said. The brand is available online in 16 countries and Inditex plans to expand coverage to the U.S. and Japan.

The company plans capital expenditure of about 800 million euros this year, up from 754 million euros a year earlier.

Inditex opened 160 stores in Asia last year, of which 75 were in China’s main and smaller cities. A further 120 Chinese stores are planned to open across its eight brands in 2011.

Inditex introduced its Zara chain in India last year and said it plans additional openings in cities including Delhi and Mumbai this year. The retailer said it will also open stores in Australia in April and in South Africa in the second half.

Wider Margin

The gross margin last year was 59.3 percent, compared with 57.1 percent a year earlier. The company’s best estimate for 2011 is that it will be able to retain a minimum of 50 percent of the gross margin gains achieved in 2010, Chief Executive Officer Pablo Isla said on a conference call with analysts.

The margin was “reassuring,” Critchlow said. Inditex has a “relatively low” exposure to Chinese sourcing at 17 percent of the product it buys and is less affected than some retailers to rising cotton prices and Chinese labor costs, she said. China’s government is targeting an increase in minimum wages of 13 percent a year through 2015, while the price of cotton has more than doubled in the past year.

Inditex’s domestic market in Spain accounted for 28 percent of sales last year, down from 32 percent a year before, while the portion from Asia rose to 15 percent from 12 percent. The retailer has accelerated openings in Asia to reduce its reliance on Spain, where about 30 percent of its stores are located.

“The relative weighting of Spain on sales will fall, while Asian markets will gain weight,” Isla told reporters at a press conference in Madrid today. Sales in Spain will remain stable, he said, adding that the company isn’t going to raise prices.

Sales in local currencies increased 10 percent between Feb. 1 and March 14, the company also said today.

The retailer plans to pay a dividend of 1.60 euros per share, 33 percent more than the previous year.

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