Zara-owner shares fall as profit growth slows

Inditex fell the most in 2019, after the Spanish owner of the Zara clothes chain reported the weakest earnings growth in five years. It’s not immune to the retail malaise that has burdened rival, Hennes & Mauritz (H&M), and many others. Even a more generous dividend policy failed to stem the decline, as the shares fell as much as 6%, cutting the gain this year to 12%.

Even though Inditex’s quick-reaction business model gives it an edge over rivals, in adapting to changes in consumer demand or economic trends, the Zara owner still came under pressure from increased competition. Its sales were hit during Christmas, when H&M dropped prices for sweaters to clear inventory.

That kept chief executive, Pablo Isla, from reaching his goal of second-half, like-for-like sales growth of 4% to 6%. The results are “evidence that the group’s growth profile is slowing sharply,” wrote Geoff Ruddell, an analyst at Morgan Stanley. Operating profit rose 1% to €4.36bn in the 12 months through January; analysts had expected €4.41bn.

Last year, the group, which also owns upmarket chain, Massimo Dutti, and underwear store, Oysho, had said it planned to open 300 to 400 stores in the 2018 financial year and close 200, but it ended up opening 370 and closing 355, almost double its initial plan. The company is cutting capital expenditure to €1.4bn this year, from €1.5bn last year. Inditex’s new policy is to pay out 60% of profit in ordinary dividends, up from 50% previously. Investors will also get bonus payments through 2021.

The biggest beneficiary of the retailer’s new dividend policy will be founder, Amancio Ortega, who owns a controlling stake in the company. Mr Ortega is the world’s sixth-richest man, with a fortune estimated at $66.9bn (€59.3bn), according to the Bloomberg Billionaires Index. One of Inditex’s main bets is the expansion of online sales to all global markets by next year. E-commerce revenue rose 27% to €3.2bn last year. Zara will launch an online platform in Brazil this month. The fact that Inditex missed its guidance for the second-half may lead investors to question its forecast that sales will rise within the same range this year on a like-for-like basis, wrote Michelle Wilson, an analyst at Berenberg.

Bloomberg and Reuters

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