Zara owner Inditex disappoints on profit margin despite strong sales

MADRID (Reuters) - The world's biggest fashion retailer, Inditex ITX.MC, on Wednesday reported weaker-than-expected growth in profit margins in the first half of the year, knocking its shares lower.

FILE PHOTO: A woman looks clothes in a Zara store, an Inditex brand, in central Barcelona, Spain, December 13, 2016. REUTERS/Albert Gea/File Photo

The disappointing margin growth overshadowed strong growth in sales in the first half, buoyed by good summer weather in Europe. Shares of the company, which had risen 28% year-to-date, were trading 1.6% lower at 0747 GMT.

First-half gross margin, a measure of profitability, was up 12 basis points, prompting some analysts to estimate margins actually fell in the second quarter. Inditex, owner of Zara, does not break out second quarter profit margins.

Inditex said the first-half gross margin was stable, in line with the company’s forecasts.

“The season has been positive in terms of the gross margin evolution with this 12-basis-point gross margin increase ... in line with our guidance,” Chairman Pablo Isla told a conference call.

The dampened margin growth could be due to foreign currency effects and a “less strong trend in full price sales”, said RBC Capital Markets analyst Richard Chamberlain, who estimated a 22 basis point fall in gross margin in the second quarter.

A stronger euro can drag on profits as the group generates more than half of its sales in other currencies and then books those sales in euros when reporting results.

Inditex has been one of the few bright spots in a struggling clothing market, with sales growth outpacing those of rivals such as Sweden's H&M HMb.ST as it adapts to consumers' changing shopping habits by combining large stores with online sales.

Sales - in stores and online - increased 8% in the first five weeks of the latest financial period. Inditex, which also owns brands Massimo Dutti and Bershka, reiterated its full-year sales growth forecast of 4% to 6%.

The Spanish retailer reported net profit of 1.55 billion euros ($1.66 billion) for the six months from Feb. 1 to July 31, on sales up 7% at 12.82 billion euros, broadly in line with analysts’ expectations.

Reporting by Sonya Dowsett; Editing by Deepa Babington