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Euro woes, weather dampen Inditex sales

Source: Reuters - Wed 14th Dec 2011

Sales at Spain's Inditex, the world's largest clothing retailer and owner of the popular Zara label, eased in the third quarter as the euro zone debt crisis rattled shoppers and unseasonably good autumn weather altered spending patterns.

But the company, founded by Spain's richest man Amancio Ortega, still cheered the market with evidence it remains capable of outperforming rivals. The group reported a surprise 100 basis point increase in its profit margin and said sales in the fourth quarter had recovered.

At 1103 GMT Inditex's shares were up 4.0 percent at 64.17 euros compare to the European retail sector, which was flat .

Inditex, whose brands include upmarket Massimo Dutti, teen clothes label Bershka and underwear stores Oysho, posted a 9.5% rise in sales for the third quarter ended October 31, compared with a more robust 12% rise in the first half.

"Q3 results were a very mixed bag," said Liberum Capital in a note to clients. "Profits were slightly above consensus...Sales were notably weaker than we had expected."

Rising prices, muted wage growth and swingeing austerity measures have squeezed disposable incomes in Europe, where Inditex makes almost 3/4 of sales. Consumer confidence in the 27-nation EU sunk to its lowest level this year in October.

Inditex said the first six weeks of the fourth quarter had seen a return to its normal growth, with local currency sales up 11%, after unseasonably good weather in autumn altered normal sales patterns.

"As weather patterns have returned to normal so have sales," Marcos Lopez, Inditex's Director of Capital Markets told Reuters in a telephone interview, saying the firm had also been affected by exchange rate factors.

Analysts took reassurance from the company's surprising gross margin performance. It rose 100 basis points, bucking the market's expectations it would fall. "In this environment that's astonishing," said Societe Generale analyst Anne Critchlow.

Inditex shares have outperformed European stocks as a whole finance by some 14% though the last 6 months.

During a conference call, Inditex declined to give much detail on why the gross margin had risen, saying it would give more information when it reported its full-year results.

So far in the crisis, Inditex has held up better than rivals at home in Spain and abroad. It has taken market share in its domestic market, expanded aggressively into new markets like Asia and controlled costs through an adaptable production model.

Its "fast fashion" model enables it to get affordable versions of catwalk fashion into stores within two weeks.


Retailers have discounted heavily during the Christmas period. Spain's largest department store El Corte Ingles on Wednesday advertised a 30% sale on some clothes until December 22.

Inditex has played down fears of price wars and said it expected a stable performance in home market Spain this year, but some analysts fear cutting prices could be inevitable.

"Their inventory position is up 25% year on year and in local currency terms sales are only up 11% in the quarter to date so the inventory is running ahead of the sales growth and that might suggest they need to do a bit of markdown in Q4," said Societe Generale's Critchlow.

Inditex posted nine-month sales of 9.71 billion euros, just below the 9.8 billion euro average in a Reuters poll of 10 banks and brokerages. Net profit of 1.30 billion euros compared with a 1.28 billion euro forecast.

Inditex's Lopez said the company's dividend policy was stable. "As long as net income increases and as you see we keep on increasing our net income, this (dividend rate) is more or less guaranteed," he said.

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