Tight management of costs and stocks and better than expected summer sales helped two of Europe's top fashion retailers beat first-half profit forecasts today though there was some caution on the outlook.
Inditex, owner of the Zara chain and Europe's biggest clothing retailer, reported a shallower than expected 7.6 per cent fall in net profit and also announced long-awaited plans to launch Zara online next year.
Next, Britain's second-largest fashion chain, posted a 6.9 per cent rise in first-half pretax profit and raised its full-year guidance, though it remained cautious on prospects for consumer spending as unemployment climbs.
Europe's clothing retailers have mostly had a tough time in the economic downturn, and while there are signs the
recession is over in some countries, there are fears that consumers will hold back from discretionary spending to rebuild savings.
Retail sales in the European Union rose just 0.2 per cent month-on-month in July and were down 0.9 per cent
year-on-year.
Germany's HDE retail association said today it expected sales to fall around 2 per cent in nominal terms this
year, down slightly from its previous forecast.
Mid-market retailers like Next and larger British rival Marks & Spencer have been hard hit in the downturn, while
more budget-focused groups like Inditex, Sweden's H&M and Britain's Primark have fared better.
At 1100 GMT Inditex shares were up 4 per cent at €40.18 and Next was up 5 per cent at 1,784 pence, both beating a
0.7 per cent rise in the DJ Stoxx European retail index.
Bernstein analyst Luca Solca said results from both Inditex and Next showed the benefits of careful cost control and
stock management, as well as favourable weather, and expected full-year consensus profit forecasts for both companies to rise.
He was particularly encouraged by Spanish group Inditex's plans to take Zara onto the Internet, saying a similar move by rival Hennes & Mauritz had given a big boost to sales.
"This is going to make consensus more positive about prospects for Inditex," he said.
Inditex, with over 4,400 stores in 73 countries, said it made net profit of €375 million in the six months
to July 31st, topping analysts' forecasts.
Sales were in line with estimates at €4.86 billion, up 9 per cent in local currencies, and had continued at the same
rate in the period from August 1st to September 14th.
Like-for-like sales in the first half were down 2 per cent.
"We estimate like-for-like sales fell 3 per cent in the first quarter so that means a drop of 1 per cent in the second ... This trend is encouraging," said SocGen analyst Anne Critchlow.
That would beat recent declines in underlying sales from H&M and US rival Gap.
Inditex, whose brands include teen brand Bershka and underwear label Oysho, said it would target better second-half like-for-like sales.
It plans to launch Zara online in Autumn/Winter 2010, initially in Spain, France, Germany, UK, Italy and Portugal.
Online sales account for only about 3 to 5 per cent of Europe's 300 billion euros a year clothing market, but consultancy Forrester believes they will grow by more than 50 percent in Britain and Germany by 2014.
Analysts estimate that Next, one of the pioneers of online fashion retailing through its Next Directory home shopping business, makes about 60 per cent of Directory sales over the Internet. Next Directory made a profit of £83.3 million in the first half on sales of £386.2 million.
Next said today it had started to trade online in the United States and planned to launch a German language
website.
Inditex declined to give revenue forecasts for Zara online.
Next, which also runs over 460 shops in Britain and Ireland, said it made an overall pretax profit of £185.5 million
in the six months ended July, beating analysts' forecasts.
Full-price like-for-like sales fell 1.2 per cent.
The firm said it expected full-year profits to be close to last year's £429 million, above analysts' consensus
forecast of £407 million, according to Reuters Estimates.
But the improvement was due mainly to profit margins and Next stuck to its forecast for a 3.5 to 6.5 per cent decline in second-half like-for-like sales at its shops. It said it was budgeting for a fall in underlying sales in Spring/Summer 2010.
"We may technically be in or out of recession but either way the vast majority of consumers haven't got more to spend
this year than they had last year," Chief Executive Simon Wolfson told Reuters.
Inditex shares have lagged the DJ Stoxx European retail index by 3 per cent this year and Next, hit hard as the recession took hold last year, has outperformed it by 38 per cent.
Inditex shares trade at 20.3 times forecast earnings, just below H&M on 20.6 times, but well above Next on 11.5
times.
Reuters