Zara owner Inditex posts better-than-expected 40% profit jump as price rises slow

The company posted a net profit of €2.5bn for the six months to July 31. Pic:Gareth Chaney/Collins

Zara owner Inditex beat expectations with a 40% jump in half-year profit despite the world's biggest fashion company slowing the pace of its price increases.

The company posted a net profit of €2.5bn for the six months to July 31.

Inditex has widened its lead over Swedish rival H&M this year by delivering fashion trends faster from nearby suppliers at prices that allow it to cope with inflationary pressures.

But analysts expect Inditex's strong financial position will allow it to keep prices stable or even lower them in the face of weakening demand and lower inflation.

"The beat versus consensus expectations is significant," said Anne Critchlow, an analyst at Societe Generale.

"The FX [foreign exchange] impact coming from the stronger euro compared to last year is unhelpful for both total sales growth and Inditex’s margins but underlying performance has been offsetting these impacts quite impressively so far."

Zara plans further store expansion in the US, a market that two years ago became Inditex's biggest after Spain.

Its sales rose 13.5% to €16.9bn as Inditex reported a gross margin of over 58.2%.

Inditex, which also owns Bershka, Pull & Bear and other brands, said sales at constant currencies between August 1 and September 11 were 14% higher than a year earlier, showing that the pace of summer sales continues as autumn collections start to arrive.

"I expect pricing increases to moderate now through the course of the next year," said RBC analyst Richard Chamberlain, adding that the results beat his expectations.

With a big share of its costs in euros, Inditex said it expects currency to have a -3.5% impact on sales this year, worse than the -2.5% impact it expected previously.

The company kept its outlook unchanged, saying it "continues to see strong growth opportunities" as it currently has low market share in the 213 countries where it has a presence.

Inditex was among the first fashion retailers to raise prices in response to surging inflation early last year. Its higher and more diverse pricing strategy outside its home market of Spain helped it post record margins.

With inflation easing, analysts at Bank of America and the Royal Bank of Canada are betting that Inditex is better placed than its peers to compete by offering stable prices and even lowering them next year to continue growing globally.

Worldwide Inditex reduced its stores to 5,745 from 5,801 in the second quarter, showing how the retailer has managed to increase sales while reducing space.

Inditex's flagship brand Zara has sought to attract more aspirational shoppers by associating its brand with luxury, as opposed to fast fashion.

Last week it launched a collection with celebrated fashion photographer Steven Meisel, with a campaign featuring supermodels including Linda Evangelista.

Since July, Inditex has been renewing anti-shoplifting devices at its stores, replacing tags with chips sewn into garments in the autumn and winter collections, the company told Reuters.

The switch to a soft-alarm system aims to reduce checkout times by up to 50%, though only a small number of items have them for now.

- Reuters