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Zara owner eyes Asia expansion after profit jump

Zara owner eyes Asia expansion after profit jump
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First Published: Wed, Mar 23 2011. 05 02 PM IST
Updated: Wed, Mar 23 2011. 05 02 PM IST
Madrid: Inditex SA, the world’s largest clothing retailer, reported strong trading so far this year, driven by aggressive expansion into developing markets such as China and India and boosting its shares.
Full-year net profit at the owner of the Zara chain jumped 32%, in line with expectations, and the Spanish group said on Wednesday store sales in local currencies had climbed by 10% between the start of its new financial year and 14 March.
Like other top retailers, Inditex is being squeezed by rising costs, putting pressure on its margins, but the company eased concerns on that score by saying it expected to keep half of the margin gains it made last year during 2011.
Thus the gross margin could fall by up to 110 basis points this year, but analysts said this was positive relative to expectations.
“The results are reassuring on like-for-like sales, gross margin and current trading,” said Anne Critchlow, analyst at SocGen.
Inditex shares were 4.1% higher at 1020 GMT, hitting a six-week high of €56.4 in high volume against a 1.8% rise in Swedish rival H&M and a flat European sector.
The stock had been trading at 17.9% times earnings forecasts for the year ending January 2012, below H&M on 19.2 times for the year through November 2011, according to Reuters data, on fears of sliding gross margin.
Retailers have been experiencing increased costs due to higher cotton prices and wage inflation in supplier countries such as China. But Inditex said its business model allowed it flexibility in the management of costs.
Inditex’s “fast-fashion” model keeps designers close to manufacturers, allowing it to speed catwalk designs to stores and respond quickly to macroeconomic trends. It has one of the shortest inventory cycles in European clothing retail.
Net profit of €1.73 billion ($2.5 billion) was in line with a Reuters polled forecast of 1.70 billion euros for the year through February 2011. “It’s testimony to how well managed this business is and how it can continue to grow in a slower environment,” said Rebecca McClellan, analyst at Santander.
Spain sales stable
Inditex said it would open between 460 and 500 stores this year, at the top end of its targeted store space growth rate of 8 to 10%, dispelling fears of a slowdown in its vigorous growth.
Sales were stable in home market Spain, the company said, which has suffered its worst recession in half a century and has the highest unemployment in the euro zone.
The company has expanded from the first Zara shop opened in northern Spain in 1975 to more than 5,000 stores in 77 countries including brands like preppie label Massimo Dutti and youth fashion chain Bershka.
Asia saw one of the most rapid rates of expansion last year with the group’s retail presence there growing to 645 stores, accounting for 15% of sales, up from 12% last year. Inditex will open around 120 stores in China this year.
“2010 has been a year of strong expansion in China,” said chief executive Pablo Isla on a conference call. “2011 will be a year of strong acceleration in China.”
Inditex started selling Zara clothing online in 2010, where the offer this week included trench coats for 69.95 euros and striped bikinis for €12.95.
All Inditex brands including Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho and Uterque will be trading online by the end of the 2011, the company said.
The cash-rich retailer said it would pay a dividend of €1.6 per share, up 33% and in line with expectations
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First Published: Wed, Mar 23 2011. 05 02 PM IST