Zara owner Inditex reports profit miss despite strong August sales

LONDON, Sept 9 — Zara owner Inditex reported weaker than expected second-quarter profit on Wednesday as costs increased due to the Middle East conflict, ​driving its shares down 3% despite a strong start to autumn trading.

The fast-fashion group reported currency-adjusted sales up 9% in August, in a sign that extreme heat across Europe had not deterred shoppers.

Inditex made €11 billion ($12.8 billion) in ‌sales in its May to July second quarter, a resilient performance in the face of high energy prices and weak consumer sentiment during the intensifying Iran war.

But ⁠its second-quarter gross profit margin was 56.7%, slightly below ​analysts' expectations, as the conflict increased costs.

"Disruptions in the Middle ⁠East resulted in higher transport costs and input costs during the first half of the year," Inditex Chief Financial Officer Andres ‌Sanchez Iglesias told analysts on ‌a call.

The war is impacting Inditex's sales in the Middle East, though this has improved since the ⁠first quarter, said investor relations head Gorka Garcia-Tapia Yturriaga. Inditex has around 480 ⁠stores in the region operated by franchisees.

Inditex shares have had a strong run recently and hit a record of €59.1 last month, helping its market value surpass that of luxury group Hermes.

Meanwhile, Hong Kong IPO filings of ultra-cheap fashion platform Shein showed a sales slowdown, suggesting that competitive pressure on European fast-fashion retailers may be easing.

The €176 billion Spanish company is expanding its cheapest brand Lefties into Britain and plans to open in Germany next year as it seeks ‌to attract lower-income shoppers, some of whom have been put off by Zara's move ​upmarket.

Alongside Zara and Zara Home, Inditex also owns Massimo Dutti, Bershka, Stradivarius, Pull & Bear, and Oysho. It highlighted on Wednesday that Bershka, Stradivarius, and Pull & Bear had each made well over €1 billion in sales at the half-year mark, as its smaller, younger brands grow at a faster pace than Zara.

HOTTER, LONGER SUMMERS

Despite extreme temperatures in its biggest markets, Inditex said its autumn/winter collections had been "very well received", with sales from August 1 to September 7 up 9% from a year ago.

"Current trading looks very good despite a toughening prior year comparison, hot weather and U.S. consumer slowdown reported ​by peers," said Anne Critchlow, analyst at Berenberg.

Retailers globally are adjusting their sourcing schedules as hot weather increasingly stretches into the back-to-school season, when ‌stores usually start ‌selling jackets and coats.

Western ⁠Europe had its hottest June and July on record as climate change drives up temperatures and fuels wildfires.

Inditex also announced an additional €200 million of capital expenditure to upgrade its corporate offices, on top of €2.3 billion of spending already earmarked for this year as it revamps stores and improves its logistics.

RBC analysts estimate its annual capital expenditure is around three times that of its Swedish rival ‌H&M.

As it focuses on bigger flagship ​stores and closes peripheral locations, Inditex's total store count has declined significantly ‌since before the COVID-19 pandemic. The ⁠group had 5,444 stores ​at the end of July, down from a peak of 7,490 in January 2019.

($1 = 0.8595 euros)

(Reporting by Helen Reid; Editing by Jan Harvey ​and Louise Heavens)

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