Better-than-expected quarterly figures for Zara

Spain’s Inditex, owner of clothing retailer Zara, yesterday reported better-than-expected quarterly profits, as its global fast-fashion business model allowed it to keep pace with local economic and fashion trends.

First quarter profit rose 28% €521m — 3% above forecasts. Consumer confidence in Europe contributed, but so did a weak euro and its own weak performance in the first quarter of 2014.

Its shares fell 1.7% versus a 1.2% gain in the European retail sector; reflecting doubts it could match last year’s 58% gross margin, neck-and-neck with Sweden’s Hennes & Mauritz (H&M) and way beyond most retailers.

Inditex shares have risen by almost a quarter this year to trade at almost 32 times forward earnings, according to Thomson Reuters data, opening up a big premium to H&M’s shares, which are up 1% to trade at almost 24 times expected earnings.

The company’s rapid expansion into 88 markets on five continents is now slowing as Inditex seeks to complement big flagship stores with a broader e-commerce reach.

Longer term challenges for Inditex include how to make its online franchise as powerful as its physical one, and what will happen when its founder and controlling shareholder Amancio Ortega, now 79, withdraws altogether from the group.

The world’s largest fashion retailer makes more of its garments in the eurozone than competitors like H&M, which largely sources from Asia in US Dollar-denominated contracts, meaning Inditex has benefited as the euro has tumbled against the greenback.

The Spanish firm, which runs brands such as teen chain Bershka and up-market chain Massimo Dutti, said sales had picked up further in May and June, rising 13.5% from the beginning of February to June 7 in local currencies.

“Results reflect a very strong operating performance with positive like-for-like sales growth in all geographies,” said Marcos Lopez, Inditex’s capital markets director said.

By tailoring styles and prices to local markets according to demand and sourcing most of its clothing in Europe, Inditex keeps one step ahead of its competitors. Its clothes are priced more cheaply in Spain, where powerhouse Zara is among mid-range brands, than in Japan, where it is considered upmarket.

Its so-called fast-fashion model means it was able to fit in with warmer-than-expected weather in countries such as home market Spain, which accounts for 20% of sales and is emerging from a long crisis, and colder weather in Germany.

Inditex’s sales in the first quarter, dating from February to the end of April, were up a currency neutral 13% to €4.37bn, outpacing forecasts in a Reuters poll. Gross margin rose to 59.4% from 58.9% a year ago.