Inditex SA, the world’s largest clothing retailer, reported first-quarter profit that topped analysts’ estimates as the Zara owner kept a rein on expansion costs by relying more heavily on e-commerce for growth.
Net income fell 7.3 percent to 406 million euros ($550 million) in the three months through April, the Arteixo, Spain-based owner of Zara stores said today in a statement. The average estimate of 19 analysts was 391.2 million euros.
Internet sales are helping boost Inditex’s margins because online expansion is a cheaper way to add revenue, according to Jamie Merriman, an analyst at Sanford C. Bernstein. The owner of Massimo Dutti now has Web sales in 25 markets to help offset sluggish growth at home, and it’s planning to add operations in China, Mexico and South Korea this year. Sales advanced 11 percent in local currencies so far this fiscal year.
“Cost control was strong,” Merriman wrote in a note to investors. “E-commerce is under-appreciated and may cause sales growth to accelerate in the near-term.”
The shares rose 1.3 percent to 111.65 euros at 11:10 a.m. in Madrid. Inditex stock has dropped about 6 percent so far this year, on track for what would be the first annual decline since 2008.
Hennes & Mauritz AB, the owner of the H&M chain, said today revenue rose 19 percent in May at local currency rates, the strongest monthly sales growth since November.
Inditex plans to keep the growth rate of capital expenditure below that of retail space in coming years to keep costs under control, Chief Executive Officer Pablo Isla said on a conference call with analysts.
Isla forecast a “stable” gross margin for the rest of the year as the e-commerce business is “very scalable” and it’s “very easy” to add online stores. The company doesn’t break out those sales.
Zara will begin sales via the Internet in Mexico and South Korea in September, Inditex said. In China, where it already has online stores, Inditex will expand its Web business through the Tmall e-commerce platform in the autumn-winter season.
“It’s just like having a store in a shopping mall,” CEO Isla said.
Inditex, which has increased profit every year since its 2001 initial public offering, said in March that it planned to open as many as 500 new stores this year and merge up to 100 small stores into nearby ones.
The retailer said it plans a five-for-one share split at the close of business on July 25, with the new stock starting to trade on July 28.
The weakness of currencies against the euro has been damping sales and stripped 6 percentage points off first-quarter revenue growth, Inditex said. That impact will probably slow during the rest of the year and disappear in the fourth quarter, UBS AG analysts Andrew Hughes and Adam Cochrane said in a note to clients.
The company is controlled by billionaire founder Amancio Ortega, whose $64 billion net worth makes him the world’s fourth-richest person, according to the Bloomberg Billionaires Index.
(An earlier version of this story was corrected to fix the timing of the opening of a store in Milan.)