Emerging markets like Vietnam help Zara-owner Inditex outpace H&M
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Indite has consistently outperformed H&M in the past few years as a result of online growth and its push into new markets. Fashion retailer H&M’s sales fell unexpectedly in February while Inditex, which owns Zara, pulled further ahead of its Swedish rival, helped by its expansion online and a bigger emerging market presence.
Inditex, the world’s biggest clothing retailer, has consistently outperformed H&M in the past few years as a result of online growth and its push into new markets. The Spanish company has also diversified more quickly into higher-priced brands, reducing exposure to the rise of discount chains like Primark.
H&M has embarked on plans to roll out ecommerce in more markets this year and speed up expansion of newer brands such as the mid-market COS and & Other Stories.
But on Wednesday H&M revealed that local-currency sales fell in February for the first time in four years, slipping 1 percent year-on-year, against a forecast in poll of analysts for a 6 percent rise. H&M’s shares fell 5 percent.
In contrast, Inditex’s local currency sales rose 13 percent from February 1 to March 12, as customers snapped up items from spring collections like double-breasted jackets, palazzo trousers and embroidered tulle tops.
This was adjusted for an extra trading day in February 2016. H&M sales were up 3 percent in February, taking that calendar effect into account.
Inditex results highlight the success of its strategy, with like-for-like sales up 10 percent in the year to end-January, helped by a shift towards opening bigger stores in prime locations that are then integrated with online operations.
Inditex’s gross profit margin missed analyst expectations, falling to 57.0 percent in its 2016 financial year from 57.8 percent in 2015. This weighed on the company’s shares which were down 1.4 percent by 1014 GMT.
Inditex, known for speeding the latest trends from runway to stores in a matter of days, reports in euros but makes more than half its sales in other currencies, exposing it to falls in the likes of the Mexican peso and the Russian rouble.
“Inditex’s gross profit margin missed analyst expectations, falling to 57.0 percent in its 2016 financial year from 57.8 percent in 2015.”
Chairman and Chief Executive Pablo Isla said this margin metric would have increased on the year had it not been for the negative currency effects.
Analysts expect this effect to swing in Inditex’s favor over the next 12 months with a consequent boost to profit margins.
“We are very keen buyers of Inditex for 2017,” Anne Critchlow, analyst at Societe Generale, said. She said Inditex trades on 26 times forward earnings, compared to H&M on 21 times.
Inditex opened stores in 56 countries during the year, including first openings in New Zealand, Vietnam and Paraguay, bringing its total store count to over 7,200. It launched online sales across its stable of brands in Turkey and said on Wednesday it would start online sales in India in 2017.
H&M is more reliant on Europe than Inditex. In Germany, for example, which is H&M’s biggest market, apparel sales fell 9 percent in February, according to trade journal Textilwirtschaft.
“Market conditions are the main driver of the weak February number,” UBS analyst Adam Cochrane said. “There’s a fear that they are losing market share on a like-for-like basis.” UBS has a “buy” recommendation on H&M.
H&M reported that sales in local currencies rose 4 percent in its fiscal first quarter to February 28. That compares with a new target for annual sales growth of 10-15 percent. H&M is due to publish its full fiscal first-quarter report on March 30.
Questions & Answers
Q.What factors have helped Inditex consistently outperform H&M in recent years?
What factors have helped Inditex consistently outperform H&M in recent years?
Inditex has consistently outperformed H&M due to its online growth, expansion into new markets, and diversification into higher-priced brands. This strategy has helped reduce its exposure to discount chains and increase sales, particularly in emerging markets like Vietnam.
Q.How do currency effects impact Inditex's gross profit margin?
How do currency effects impact Inditex's gross profit margin?
Negative currency effects, such as falls in the Mexican peso and Russian rouble, caused Inditex's gross profit margin to miss analyst expectations. The chairman stated the margin would have increased if not for these effects, and analysts expect this to swing in Inditex's favour soon.
Q.What is Inditex's strategy for its physical stores and online operations?
What is Inditex's strategy for its physical stores and online operations?
Inditex's strategy involves opening bigger stores in prime locations, which are then integrated with online operations. This approach contributed to a 10 percent rise in like-for-like sales in the year to end-January.
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