Inditex sees emerging markets lightening Europe's gloom

By Sarah Morris

MADRID (Reuters) - Zara owner Inditex <ITX.MC>, the world's largest clothing retailer, posted a sharp rise in full-year profit as its aggressive expansion into markets like China offset woes in austerity-hit Europe.

Inditex, famed for its fast-fashion business model that lets it quickly ship affordable versions of catwalk trends to stores, said net profit rose 22 percent to 2.4 billion euros (2.07 billion pounds).

Profit was at the lower end of the range of analysts' expectations, however, due to a sharp fall in the gross margin, a ratio that compares top-line profit to revenue.

The stock fell 3.4 percent to 104.8 euros, paring a 5 percent gain since the beginning of March but still not far from a record 111.8 euros set at the end of 2012.

"The drivers are still there, this model isn't broken, (Inditex is) ... simply slowing down against tougher comparatives," said analyst Anne Critchlow at Societe Generale about the retailer founded and controlled by the world's third-richest man, Amancio Ortega.

Year-on-year quarterly growth in the fourth quarter was the weakest in five quarters, although it came on the heels of four quarters of particularly strong growth. The company faces further tough comparatives over the next few quarters.

Analysts said negative currency effects and a higher proportion of discounted sales may have dragged down the gross margin in the fourth quarter, but the company, whose brands include teen label Bershka and higher-cost offering Massimo Dutti as well as Zara, did not give details.

Chief Executive Pablo Isla said he expected the group's gross margin to remain stable this year. "For us that means a rise or fall of 50 basis points on the current margin," he said on a conference call. "There is a very demanding comparative."

Sales rose 12 percent in the first six weeks of the new financial year on items like Zara's printed palazzo pants, snakeskin-pattern sweatshirts and striped linen frock coats.

Analysts estimated this equated to a vigorous 4 to 6 percent rise in like-for-like sales, stripping out new stores.

"We believe that will be reassuring to investors who have been concerned that like-for-like sales growth would fall sharply in 2013 given the tough comparisons with 2012," said Bernstein Research, which rates the stock "outperform".


By the end of January, Inditex had more than 6,000 stores across 86 countries and said it expected to launch flagship brand Zara online in Russia over the Autumn-Winter season.

Inditex does not break out online sales, but analysts see Internet shopping as a major engine for future growth.

Sales rose 16 percent to 15.9 billion euros, with Asia's share growing to 20 percent from 18 percent and the Americas expanding to 14 percent from 12 percent.

European sales outside Spain continued to account for 45 percent of Inditex's revenue.

The retailer opened new stores in 64 markets, entering Georgia, Bosnia and Ecuador for the first time.

Inditex said sales in its home market Spain dropped to 21 percent of total revenue from 25 percent a year earlier. Spain is in a deep economic recession and retail sales have fallen steadily for 2-1/2 years.

Sales in Spain fell 5 percent last year, including 3 percentage points from the firm's decision not to pass on a sales tax hike to consumers, CEO Isla told reporters.

"Spain is still in a difficult situation from an economic point of view," he said.

Inditex said it would raise its dividend 22 percent to 2.2 euros per share.

The cash-rich retailer said its first priority was to invest in growth and it hoped to open between 440 and 480 more stores this year, in line with its long-term goal to add up to 10 percent extra commercial space annually.

Of the 482 new stores it opened in 2012, 120 were in China and more than 70 in Russia. "The pattern is going to be very similar this year," said Isla.

Inditex's aggressive store expansion has helped it ride out the European downturn better than many competitors.

Hennes & Mauritz <HMb.ST>, which has the bulk of its business in Europe, is expected on Friday to post a fall in comparable sales in February for a fifth straight month.

Esprit <0330.HK>, also Europe-focused, last month reported deeper-than-expected losses for the six months through December as the region's economic gloom hurt sales.

(Writing by Fiona Ortiz; Editing by Helen Massy-Beresford and David Holmes)