Margins at Zara fashion owner, Inditex, hit by euro

Inditex, the world’s biggest clothes retailer and owner of Zara, reported a 9% rise in first-half profit, but its gross margin, as a percentage of sales, slipped, because of a stronger euro.

Inditex’s profits are sensitive to fluctuations in the currency, as it makes most of its clothes in the eurozone to respond quickly to fashion trends, but generates more than half of its sales in countries outside the currency bloc.

The decline in its gross margin meant Inditex missed forecasts for second-quarter earnings, before interest and tax (EBIT), analysts said, and the Spanish firm’s shares fell as much as 3% after the results, before recovering slightly. Inditex said its gross margin, as a percentage of sales, fell to 56.4%, from 56.8% in the first six months of its financial year, which runs to the end of July.

Its first-half, net profit, of €1.37bn, was slightly short of expectations, while earnings before interest, tax, depreciation and amortisation (EBITDA) came in at €2.29bn, up 9% from a year earlier.

Inditex’s model of responding to catwalk trends with small batches of clothes that are not replaced when they sell out has allowed it to consistently outperform rivals, such as H&M.

The Spanish retailer’s other brands include teen label, Bershka, and underwear chain, Oysho. Figures showed that recent sales in the company’s more than 7,000 stores worldwide were performing well.

Meanwhile, Kingfisher, Europe’s largest home improvement retailer, reported an unexpected rise in first-half profit, while taking a cautious view on the second-half, given the economic and competitive backdrop in Britain and France.

The stronger first-half performance, maintenance of full-year earnings guidance, and the group’s assertion that its five-year restructuring plan was on track sent its shares as much as 8% higher.

Prior to Wednesday’s update, the stock had fallen 15% over the last year, on concerns over the scale of the restructuring and the company’s ability to deliver on it.

Kingfisher, which runs B&Q and Screwfix in Britain and Ireland; and Castorama and Brico Depot in France, and elsewhere, is two years into a plan to boost annual profit by £500m (€564m), from 2021.

Kingfisher also wants to return £600m to shareholders, through share buybacks.

Chief financial officer, Karen Witts, said the company’s second-half caution reflected two different dynamics.

“The caution in the UK is more around the macroeconomic backdrop, and in France it’s more about the progress that we need to make ourselves,” she said.

  • Reuters


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