Inditex Gains as Zara Owner Signals End to Profit Slowdown

Inditex SA rose the most in almost two months in Madrid trading after the world’s biggest clothing retailer signalled an end to slowing profit growth.

Store revenue rose at a faster pace in the first five weeks of the second quarter at constant exchange rates than total sales did in the opening three months of the financial year, Arteixo, Spain-based Inditex said today, after reporting the weakest quarterly profit growth in four years. Profit margins, which narrowed in the first quarter, should stabilize for the rest of the year, the Zara owner said.

The stock rose as much as 4.9 percent on optimism that the retailer will continue reporting higher profit as it deals with challenges including a 27 percent unemployment rate in Spain. Net income rose 1.6 percent in the first quarter, the weakest growth since the first quarter of fiscal 2010, as cold weather in Europe delayed sales of spring fashions and Spain imposed the toughest austerity measures in its democratic history.

The earnings “show the company is able to keep growing during challenging economic times,” said Daniel Lacalle, a senior fund manager at Ecofin Ltd. in London. “It’s managed to post profit growth and solid margins, which is remarkable.”

Inditex traded up 4.2 percent at 101.95 euros as of 2:10 p.m. in Madrid, reversing an earlier decline.

“It’s very surprising to see today’s stock reaction,” Ivan San Felix, an analyst at Renta 4 Banco SA in Madrid, said by telephone. “Inditex managed to report solid quarterly earnings even if it only opened a few stores, so investors may think that sales growth could accelerate in coming quarters as the company speeds up openings.”

Stable Margins

The retailer said store sales rose 8 percent at constant exchange rates from May 1 to June 7, the first weeks of the second quarter. Group revenue increased 5.2 percent to 3.59 billion euros ($4.76 billion) in the first quarter.

The gross margin, a measure of profitability, should remain “stable” the rest of the year, Chief Executive Officer Pablo Isla said, after it shrank 0.6 percentage points to 59.6 percent in the first quarter.

Analysts estimate Inditex’s profit will rise 12 percent this fiscal year, beating forecasts for 4 percent growth in Hennes & Mauritz AB’s net income and 11 percent for Gap Inc., according to data compiled by Bloomberg.

Inditex, which added stores in 30 markets during the first quarter, said openings for the year are in line with its plans. Russia, Japan and China gained the highest number of new outlets. Total store numbers reached 6,058 in 86 countries.

‘Tough Quarter’

Inditex said it plans to start online sales in Russia at the beginning of the fall-winter season. Online sales are growing in all markets where they are offered, including “very significant” growth in the U.S. and a “satisfactory” performance in China, Isla said.

First-quarter net income rose to 438 million euros from 432 million euros in the same period a year earlier.

Sales growth in the period was affected by the retailer’s decision to absorb an increase in value-added tax in Spain, as well as the timing of Easter, Ecofin’s Lacalle said.

“This was definitely a tough quarter, and the rest of the year, especially the next two quarters, is going to remain very difficult,” Anne Critchlow, a London-based analyst at Societe Generale, said by phone.

Inditex faced headwinds besides weather including the strength of the euro against other currencies and one fewer trading day after the leap year in 2012, wrote Richard Chamberlain, an analyst at Bank of America Merrill Lynch.

H&M said today sales in the three months through May fell 4 percent on a basis that includes revenue from stores, Internet and catalog activities in operation for at least a year.