Inditex share price up, reports better-than-expected results

Zara store owner Industria de Diseño Textil SA, the worlds biggest clothing retailer, reported on Thursday profit and sales above expectations for the first nine months of the year.

The Arteixo, Spain-based retailer said that net income increased to €1.69 billion during the period between February 1 and October 31, slightly up from the €1.67 billion reported last year. Meanwhile sales jumped 7% to €12.71 billion. However, operating expenses grew to €4.66 billion versus €4.37 billion a year earlier.

However, sales in Europe fell on warmer than usual temperatures, which reduced demand for higher margin items like winter coats and boots. To counter similar effects Inditex has adopted a different ordering technique. The Spanish group makes small orders from suppliers close to home with delivery time up to a couple of weeks opposed to big orders from Asia with estimated arrival of around six months.

Additionally, Inditex, founded by Amancio Ortega in 1985, is arming its production with microprocessor-based tag in order to better react on the constantly shifting demand for fashion clothes. The improvement is expected to be fully implemented and operational in 1 000 Zara stores by 2014 and in all of the brands stores by 2016.

The company said that its gross margin dropped to 58.9% compared to the year-ago level of 59.9%, although Inditex explained that 40 basis points of the decrease are due to a change in the accounting method used, in line with the new IFRS rules. A similar effect is to be expected when Inditex reports full-year results.

Inditex opened 230 stores for the period reported, including 68 of its best Zara brands, reaching a total of 6 570 stores in 88 markets on five continents. In September the company made its Zara products available for online purchases in Mexico and South Korea, expanding the list to 27 countries to which Inditex delivers. However, the company remains mainly focused on Europe, with around 72% of all stores and Spain as its biggest market.

“This is genuine growth on growth,” Anne Critchlow, an analyst at Societe Generale, wrote in a note to clients. “After two years of underperformance we see the market waking up to the underlying strength of Inditex over the coming months.”

Industria de Diseno Textil SA lost 1.24% on Wednesday and closed at €22.35 in Madrid. On Thursday the company climbed 2.93% to trade at €23.00 at 13:07 GMT. The company is valued at €69.66 billion. According to the Financial Times, the 32 analysts offering 12-month price targets for Inditex have a median target of €24.25, with a high estimate of €31.00 and a low estimate of €18.00. The median estimate represents a 8.50% increase from the last close price of €22.35.