Inditex First-Half Profit Beats Estimates as Sales Rise

Inditex SA, the Spanish owner of the Zara and Massimo Dutti chains, reported an unexpected rise in first-half profit and said sales growth has accelerated since July after the retailer opened stores at a faster rate.

Net income climbed 0.7 percent to 951 million euros ($1.3 billion) in the six months through July, the company said today, beating the 934 million-euro average of seven estimates compiled by Bloomberg. That was still weaker than the first-quarter’s 1.6 percent growth, the slowest in about four years.

Inditex, based in Arteixo, Spain, is finding profit growth tough to come by this year as the strength of the euro weighs on earnings and a recovery in its domestic economy remains at an early stage. Net income at the world’s largest clothing retailer has risen at least 10 percent in each of the last three years and analysts expect profit to strengthen in the second half of this one as the company adds stores from Germany to Japan.

“The battle is not over for Inditex, but the company is now approaching the end of a tough year in good shape,” Anne Critchlow, a London-based analyst at Societe Generale, said by phone. “We are seeing a gradual improvement from the first quarter, and the current trading update is very reassuring.”

Inditex rose as much as 2.2 percent in Madrid trading and was up 0.7 percent at 111 euros at 12:26 p.m.

‘Less Challenging’

Constant-currency sales growth at the retailer’s stores was 10 percent from Aug. 1 to Sept. 14, Inditex said today. First-half revenue gained 5.7 percent to 7.7 billion euros.

Earlier this week, Hennes & Mauritz AB, Europe’s second-biggest retailer, reported monthly sales that beat analysts’ estimates, sending its shares to a record high.

Some indicators are showing an improvement of the Spanish economy, Inditex Chief Executive Officer Pablo Isla said on a webcast conference call today.

“The retail sales environment in Europe, especially in Spain, has become less challenging in the last few weeks, while the weather overall has also been more stable,” Critchlow said.

For the year through January, net income at Inditex may climb about 10 percent to 2.6 billion euros, according to the average of 18 analyst estimates compiled by Bloomberg.

The Spanish retailer opened 95 stores in 40 markets during the first half, which it said was in line with forecasts. Those included the first Pull & Bear store in Germany and the first Zara Home stores in Japan. Inditex had 6,104 outlets in 86 markets as of the end of July.

Online Expansion

Inditex isn’t preparing to introduce a new brand in the short term, CEO Isla said on the call. Instead, the company is boosting growth of existing brands such as Massimo Dutti, for which it sees “very significant growth opportunities in all the different geographies,” Isla said.

Inditex is also expanding online. In August, it started Internet sales of Zara in Russia, while Massimo Dutti and Zara Home made their online debuts in Canada. Web sales have reached 24 markets, the company said in a separate press statement.

Positive foreign-exchange fluctuations last year have reversed due to shifts in some currencies, mainly the Japanese yen, Marcos Lopez, Inditex capital markets director, said during the call. “This is something that we are still seeing at the start of the third quarter.”

The gross margin, a measure of profitability, shrank to 58.6 percent from 59.6 percent, the company said. Isla said he’s satisfied with first-half gross margin and predicted it will be “stable” in the second half.

“The gross margin was weaker than expected probably due to the impact of higher costs of raw materials,” Ivan San Felix, an analyst at Renta 4 Banco SA in Madrid, said by phone. “However, the drop isn’t a big concern as the company should be able to stabilize it in the coming quarters.”

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