Zara owner Inditex says global growth plans on track

MADRID Wed Dec 11, 2013 9:23am EST

People enter a Zara store in Barcelona, November 5, 2013. REUTERS/Albert Gea

People enter a Zara store in Barcelona, November 5, 2013.

Credit: Reuters/Albert Gea

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MADRID (Reuters) - Zara owner Inditex (ITX.MC), the world's largest clothing retailer, showed signs of leaving behind months of tepid sales growth as a budding European recovery boosted pre-Christmas trading and it said global expansion plans remained on track.

Inditex, which also operates brands including teen label Bershka and upmarket Massimo Dutti, has struggled this year to match a sparkling 2012, when its ability to push out small collections using a slick supply chain proved particularly successful.

The company said on Wednesday net profit in the nine months through October was flat, but sales growth had accelerated to 10 percent in the first six weeks of the fourth quarter, the run-up to Christmas, from 8 percent in the first nine months.

The final quarter is the most important of the year for retailers and Inditex made 29 percent of its sales in the final three months of 2012. Retailers as a whole are hoping for a better Christmas this year as Europe and especially home country Spain shows signs of recovery.

The operator of 6,249 stores globally, Inditex said it would add between 8 percent and 10 percent of net new selling space in 2013, despite a strategy to shut smaller stores while opening or refurbishing larger outlets in the world's busiest streets like Fifth Avenue in New York.

It said it would open a net 325 stores this year, down from earlier guidance of between 440 and 480, but said its expansion efforts were going as planned.

"Globally space growth is on track, this is a year of strong activity ... Most of the sales of these small stores will be absorbed in these larger flagship stores," Inditex Chairman Pablo Isla told analysts on a conference call.

Closest global rival Hennes & Mauritz (HMb.ST), which opened its 3,000th store in Chengdu, China, in September, plans about 350 openings in 2013.

Shares in Inditex were up 0.0 percent by 1145 GMT (6:45 A.M. EST). The stock is one of the lower performers on Spain's blue-chip index Ibex .IBEX this year, but has almost doubled since early 2012, meaning it vies with bank Santander (SAN.MC) to be the country's largest traded company.

ONLINE EXPANSION

Inditex shares trade at 25 times forward earnings compared with 23 times for H&M and almost double that of Gap (GPS.N), according to Thomson Reuters data, reflecting expectations that the Spanish company's greater exposure to emerging markets should help it grow faster.

Some analysts also see the expansion of Inditex's online offer as boosting sales rather than cannibalizing those made in stores, as the online service helps sell to customers who live too far from a physical outlet while also helping publicize a brand which has mostly shunned traditional advertising.

Inditex, which has moved faster to embrace e-commerce than H&M, has opened online stores in 24 markets compared with nine for H&M, most recently in Russia. It said it will expand to South Korea and Mexico in 2014.

"We continue to regard the business model as best in class at generating high-cash margins and paybacks globally owing primarily to its flexibility. We think online trading enhances this," said Nomura analyst Fraser Ramzan in a note to clients.

"With over 30 percent of sales generated from Spain, Portugal, Italy and Greece, and underlying apparel retail trends improving in these markets in recent months, we continue to be constructive on the shares."

However, in the short run, the company has seen sales growth crimped due to currencies in some of its 86 markets losing value against a strong euro.

Nine-month net profit to the end of October was 1.67 billion euros ($2.3 billion), flat from last year and in line with a forecast for 1.67 billion in a Reuters poll of analysts.

Earnings before taxes, interest, depreciation and amortization (EBITDA) reached 2.78 billion euros on sales of 11.93 billion, also in line.

Inditex said its gross margin slipped to 59.9 percent for the nine months from 60.5 percent for the same period last year, but was up from 58.6 percent in the first half.

H&M, which makes the bulk of its sales in Europe, in September posted forecast-beating results for its third quarter, recording its first quarterly increase in gross profit margin in more than three years to 58.8 percent.

($1 = 0.7261 euros)

(Additional reporting by Emma Thomasson in Berlin; Editing by Julien Toyer and David Holmes)

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