UPDATE 3-Strong sales, store openings show Inditex back on form

Wed Mar 19, 2014 8:40am EDT

* 2013 core profit flat, weakest growth since listing

* Sales accelerate in Feb/March

* Capex, store openings set to increase in 2014

* Shares up 3.9 pct, top retail performer (Adds details, quotes, background)

By Sarah Morris

MADRID, March 19 (Reuters) - Strong sales so far this year and a planned pick up in store openings suggest Inditex , the world's biggest fashion retailer, is returning to form after profit growth stalled last year for the first time since its 2001 listing.

Shares in the Spanish group rose as much as 4.3 percent on Wednesday after it predicted an improved performance at flagship brand Zara, which is completing a revamp of top stores, and proposed a 10 percent dividend increase to 2.42 euros per share.

The group also expects to benefit from recovery in its home base Spain, which has gone through two recessions in six years, and the further roll-out of its fast-growing online business.

Inditex, controlled by the world's third wealthiest man Amancio Ortega, has enjoyed years of rapid growth thanks to its fast-changing fashions and expansion into emerging markets.

But its stock has slipped back this year due to concerns of an economic slowdown in developing countries and fewer new store openings as the group focused on revamping flagship outlets.

Inditex, with 6,340 stores in 87 countries, said on Wednesday sales in local currencies jumped 12 percent from Feb. 1 to March 15, after climbing 8 percent to 16.7 billion euros ($23.2 billion) in the 12 months to Jan. 31.

It also said it would lift capital spending in 2014 to 1.35 billion euros, with plans for 450-500 gross store openings, compared with the 1.24 billion euros it spent in 2013 when it opened a net 331 new stores.

"We are encouraged by both the sales performance in the start of 2014 ... and management's guidance that space contribution will return to its long-run average," Bernstein analysts said in a research note.

Weak currencies in many markets outside the euro zone, as well as dozens of Zara stores closed last year for up to four months for refurbishing, hit Inditex's 2013 earnings.

Net profit rose just 1 percent to 2.4 billion euros while core annual profit was flat at 3.9 billion euros, albeit both were in line with analyst expectations.

The firm, which also runs brands such as mid-market Massimo Dutti and teen label Bershka, forecast weaker currencies would have about the same impact on earnings in 2014 as last year, with the effect more marked in the first half than the second.

But it also predicted a benefit from refurbishments at Zara, which accounts for almost two-thirds of the group sales but which saw an increase of only 2 percent last financial year.

"We have big expectations for Zara in 2014," Chief Executive Pablo Isla told analysts on a conference call, adding that the store revamp programme had been largely completed and pointing to flagship openings in Madrid, Hong Kong, Miami and Zurich.

Inditex began expanding and introducing a new look, including long corridors and cubes for individual collections, into some of its Zara flagship stores from 2012 at places like New York's Fifth Avenue and Paris' Champs Elysee. It introduced the new look into about 100 Zara flagships last year.

SPAIN, ONLINE

Rival clothing retailers have also been benefiting from a pick up in sales growth as European economies recover and the United States emerges from a bitterly cold winter.

Sweden's Hennes & Mauritz, the world's No. 2 fashion retailer, said on Monday its sales rose 11 percent in February, although that missed forecasts.

"We are seeing recovery in southern Europe and Inditex is quite highly exposed to southern Europe. Spain, Portugal, Greece and Italy - all those countries are bouncing back," said Anne Critchlow, retail analyst with Societe Generale.

Isla said sales in Spain, which account for a fifth of the group total, rose 3 percent in the second half of last year and he expected the positive trend to continue in 2014.

The group's Spanish sales have fallen an average 2.7 percent on a like-for-like basis for the last five years, compared with a 5.5 percent rise in global sales, estimate Bernstein Research. Plummeting domestic spending in Spain has prompted the company to quietly expand its budget Lefties brand.

The company said it had started online sales in Greece in March and would launch in Romania in April, followed by South Korea and Mexico later in the year, taking the total number of e-commerce markets to 27, compared with a planned 13 for H&M.

"Online came very, very naturally to us... we believe the growth opportunity is huge," Isla said.

Inditex and H&M were late starters online, where sales are forecast by some analysts to eventually account for a quarter of the fashion market. Inditex is seen as more likely to benefit because of its higher-margin garments and centralised logistics.

Inditex said a new 130,000-square-metre distribution centre in Guadalajara, outside Madrid, would begin operating in two months, bringing the total number of centres to 10.

At 1205 GMT, Inditex shares were up 3.9 percent at 107.1 euros, the second-biggest rise by a European blue-chip company. The stock trades at 24.6 times expected 2014 earnings compared with 22.8 times for H&M and 13 times for U.S. rival Gap.

($1 = 0.7188 Euros) (Writing by Fiona Ortiz and Emma Thomassen; Editing by Mark Potter)