Inditex SA’s profitability shrank to an eight-year low as the world’s largest clothing retailer was confronted with higher garment costs and lowered prices to fend off increasing competition.
The gross margin narrowed to 57 per cent from 57.8 per cent in the 12 months through January, Arteixo, Spain-based Inditex said on Wednesday. That was short of the retailer’s goal of keeping the measure within 0.5 percentage points of the previous year. The shares erased part of a 2.7 per cent intraday decline after Chief Executive Officer Pablo Isla said at current exchange rates, the gross margin won’t fall this year.
Price cuts helped fuel demand and led to same-store sales growth of 10 per cent, the fastest rate in 14 years. That outshone rival Hennes & Mauritz AB, which on Wednesday reported February sales growth that missed analysts’ estimates. The downside of the Spanish retailer’s cheaper clothes has been a slide in profitability each year since fiscal 2013.
Inditex said the decline in last year’s gross margin was due to currency swings. Foreign exchange stripped 3 percentage points off sales growth. Weaker currencies in Russia, China and Mexico reduce the value of sales in those markets when translated into euros.
Inditex put greater emphasis on online expansion last year, cutting its target for new brick-and-mortar stores. The retailer is also making changes to some of its brands to gain market share, with the most recent example being February’s foray into men’s clothing by the Stradivarius brand, which has focused on women.
After starting online sales in Singapore and Malaysia this month, the company plans to add such services in Thailand and Vietnam in the next few weeks and also in India this year.
“India is a very attractive market for us,” Isla said on a conference call with analysts. This year Zara will open a 5,000 square-metre flagship store in Mumbai, which will be its largest store in the country. Inditex has 21 stores in that market.
Operating profit rose 9.4 per cent to 4 billion euros ($4.3 billion, Dh15 billion). Analysts expected 4.1 billion euros.