Zara Owner’s Profit Jumps as Price Increases Outpace Costs

Inditex SA is increasing prices by more than surging inflation rates, making the owner of the Zara fashion chain a standout among retailers getting hit by higher costs and shaky consumer demand.

Higher prices helped earnings before interest and taxes rise to 2.43 billion euros ($2.43 billion) in the six months through July, the Arteixo, Spain-based company said Sept. 14. That compares with the 2.36-billion-euro average estimate of analysts surveyed by Bloomberg.

The shares rose as much as 6.1% early Sept. 14 in Madrid.

By keeping customers shopping while countering higher costs through price increases, the world’s biggest clothing retailer is pulling further ahead of rivals. Data compiled by UBS from thousands of websites across 20 regions show that the average price of a Zara clothing item was up 12.2% in July — above inflation in many global markets — compared with last year.

That compares with a 5.6% increase at rival Hennes & Mauritz AB. Associated British Foods Plc, owner of the Primark budget apparel chain, warned last week that profit will decline in the next fiscal year as rising energy costs squeeze consumers and the strengthening of the dollar weighs on its costs. In the U.S., Macy’s cut its forecast for full-year profit and revenue last month, citing tighter consumer budgets and an inventory glut.

“It is clear that Inditex is successfully feeding through input price inflation in a selective way and is not taking significant pain through the gross margin,” said Anne Critchlow, an analyst at Societe Generale.

That measure of profitability hit a seven-year high in the first half and the company predicts it will be roughly stable on a full-year basis.  

Supply Chain

The textile giant has a different cost and supply chain structure from competitors, with about half its products sourced from what it calls proximity markets — notably Spain, Morocco, Portugal and Turkey. It has also seen an increase in dollar-denominated revenue with the growth of sales in the U.S., which became its second-largest market last year. The dollar this month strengthened to an almost two-decade high against the euro.

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First-half sales reached 14.8 billion euros, up 25% from a year before and ahead of analysts’ estimates. In the first six weeks of the third quarter, sales climbed 11% relative to the same period a year earlier.

The retailer said currency swings will increase sales by 0.5% this fiscal year and reaffirmed that online purchases will account for more than 30% of total sales by 2024.

Marta Ortega, the daughter of Inditex’s founder and controlling shareholder, replaced Pablo Isla as executive chairman in April. Isla had already handed over the chief executive officer position to Oscar Garcia Maceiras in November.