Zara parent beats expectations on 12% sales rise

Dive Brief:

Spanish retailer Inditex Group Wednesday reported a 6% increase in first quarter net profit to €554 million and a 12% increase in Q1 net sales to €4.9 billion.
The results edged out expectations, with analysts polled by FactSet expecting net profit of €547 million on sales of €4.84 billion.
The company, which includes fast-fashion retailer Zara in its eight brands, opened stores in 31 different markets during the quarter, bringing its worldwide network to 7,085 stores.

Dive Insight:

Inditex has been able to escape the woes of many of its apparel retail rivals due to a number of factors. It has until recently been able to escape the effects of the strong dollar, due to the fact that it sources its merchandise mostly in Europe rather than in Asia as many of its rivals do. But its expansion into non-Euro areas dinged five percentage points from its first quarter sales, according to MarketWatch.

Complaints about the weather’s role in slowing sales, common these days in many retail earnings reports, were notably absent in Inditex’s results. There are several reasons Zara so often escapes dire reports, and above all is its supply chain. The retailer, which invented fast fashion and continues to master it, runs most of its own factories and controls most of the supply chain. This helps Zara order up small batches of inventory on the fly and get them into stores in record time. That approach—small batches, record time—helps it adjust more quickly to phenomena like warm weather at the holidays or cool weather in the spring, which have tripped up many apparel retailers and left them with bloated inventories that force promotions.

"In a market environment where most retailers are bemoaning the weather, Inditex’s results demonstrate the strength of the business model,” Sanford C. Bernstein analyst Jamie Merriman, wrote in a note, according to Bloomberg.

But Inditex’s growth trajectory may not be sustainable for much longer.

‘‘Inditex has been running at an exceptionally high sales-growth rate for precisely one year now,” Société Générale analyst Anne Critchlow wrote, according to Bloomberg. ‘‘We argue that this cannot last forever. As the prior year sales comparatives toughen from here, we would expect a normalization.”

Inditex doesn't disclose its percentage of web sales online, but Société Générale estimates it was 10% or 11% percent in the quarter and could reach almost 6% of total sales this year, according to Bloomberg and Marketwatch.

CEO Pablo Isla has said that its e-commerce sales, which in apparel often means a lot of returns, have also helped boost store sales as shoppers buy more items when they return items to stores.