PARIS — Zara owner Inditex is running hot into summer, kicking off the second quarter with double-digit sales growth at constant currency and delivering first-quarter results that came in slightly ahead of expectations on both revenue and margins.
The Spanish fast-fashion giant reported sales rose 11.5 percent in constant currency between May 1 and June 1, a strong start to the season that the company said reflected strong demand for its spring and summer collections.
In a call with analysts following the release of the results, chief financial officer Andres Sanchez and director of investor relations Gorka Garcia Tapia were quick to note the trading update covered only four weeks and was affected by calendar shifts, but said the initial numbers show that momentum is in its favor.
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“We do believe it is important to interpret this short trading period with caution,” he said, adding that year-over-year comparables will become tougher as the year progresses, particularly in the second half.
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The update came alongside first-quarter results that were slightly ahead of expectations.
Sales in the three months to April 30 were up 8.8 percent at constant currency, or 5.8 percent on a reported basis, to 8.75 billion euros. That exceeded analyst expectations, which had been expecting growth closer to 8 percent.
The results indicated a “solid start” to the year, said Deutsch Bank Research analyst Adam Cochrane.
The market reacted positively to the numbers, with its share price rising 4.1 percent in midday trading.
Inditex’s continued upward trajectory — while not close to its post-pandemic highs — comes as the fashion industry is struggling to find growth at both ends of the market as consumers grapple with economic headwinds and political instability.
Luxury giant LVMH reported 1 percent organic growth in its latest quarter, while Swedish rival H&M saw first-quarter sales slip 1 percent in local currencies as it tries to reposition its offering and upgrade its stores.
Inditex, which is also undergoing a program of closing underperforming and optimizing existing stores, seems to keep shoppers interested with a string of high-profile attachments including the recently released Bad Bunny collaboration, a capsule with Marisa Berenson and an upcoming John Galliano project.
The bigger surprise, however, was profitability. Gross margin reached 61.2 percent, up 67 basis points year-over-year and well ahead of expectations, highlighting the company’s ability to stick to its full-price model even in a tumultuous demand environment.
“Inditex has generated a strong performance over this first quarter. This is particularly relevant given the wider microeconomic and geopolitical uncertainty,” Sanchez said on the call.
Gross profit rose 6.9 percent to 5.4 billion euros, EBITDA increased 7.3 percent to 2.6 billion euros, and net income rose 5.4 percent to 1.4 billion euros. Operating expenses increased 6.4 percent, while the company repeatedly stressed cost discipline.
“Very broadly, cost growth tracked the evolution of sales,” Sanchez said, adding that the company remained “very vigilant regarding costs across the whole company.”
On the margin performance, the executives pointed to a combination of factors, including currency and timing effects. The weaker U.S. dollar provided a tailwind on sourcing, while higher fuel and freight costs had only a limited impact in the quarter due to what Garcia Tapia described as a “lag effect” in transportation costs.
However, Sanchez noted that some of the currency effects linked to a weak dollar will likely fade over the rest of the year, even as it reiterated its full-year gross margin guidance. He added that some of the margin strength of the first quarter may soften.
Disruptions in transportation due to the Iran conflict and the subsequent increase in shipping costs will also have an impact going forward, added Garcia Tapia.
“We have been able to rapidly adapt our supply chain to ensure an uninterrupted product flow to our store globally using a combination of different means of transport,” he said.
Supply-chain speed and flexibility is one of Inditex’s key strengths, and it came up repeatedly on the call.
“We’re using different combination of modes, and even in certain cases of multimodal solutions where we think it’s appropriate,” Garcia Tapia said, adding that diversification was key to reacting quickly to shifts in demand.
Analysts also questioned the geopolitical situation, particularly in the Middle East, where sales have been affected by broader regional instability, but Garcia Tapia stressed that the impact has been contained after early closures at the start of the Iran war.
“These conditions have had an impact on the sales of the Middle East region. However, the group has continued to deliver overall sales growth at a global level,” he said, adding that the region remains diverse and that all stores, which are operated under a franchise model, are currently open.
“While the conflict in the Middle East has created uncertainty for retailers, Inditex has relatively limited exposure to the region. The bigger risk is higher freight and shipping costs, which could put some pressure on margins rather than materially affecting demand,” said Third Bridge analyst Yanmei Tang.
Elsewhere, Inditex continues to move ahead with its ongoing retail revamp strategy, focusing on refurbishments, relocations and selective new openings. The company said it optimized in 44 markets in the first quarter.
“From a longer-term strategic perspective, our ongoing retail optimization strategy…remains very much the focus of our efforts,” Garcia Tapia said, pointing to continued investment in “the best global location” for stores and the addition of new services aimed at improving the customer experience.
Pricing, meanwhile, remains firmly on point.
Garcia Tapia emphasized that growth across the first quarter and into the month of May was driven by volume rather than price, with no significant increases so far, and none expected for the remainder of the year.
“Growth from the group is coming from volume and not through prices,” Garcia Tapia said, adding that Inditex maintains a “very stable pricing policy” to keep its position in its key markets.
Inventory at the beginning of the second quarter increased just 1 percent from a year earlier, and the company entered the summer season without a major stock excess and little incentive to discount as it continues its full-price strategy.
That discipline extends to input costs as well. While the duo acknowledged some price pressure in raw materials, they noted that textiles are not a dominant part of total costs. Around 57 percent of textiles are biological materials, such as cotton, while 27 percent are polyester, almost all of which is recycled, Garcia Tapia said, limiting exposure to oil price shocks.
At the customer level, he also pointed to increasing adoption of self-checkout systems and soft tags across stores. The rollout is now complete, with usage rising “significantly” as customers react positively to the tech.
Inditex also finished the quarter with a net cash position of 10.8 billion euros, giving it plenty of cash to keep investing in stores, logistics and technology, as it expects to implement a plan to expand and upgrade its retail footprint.
The group operated 5,456 stores at the end of April and said it expects gross selling space to grow by around 5 percent this year.
Overall, the company reduced store numbers at all its concepts, including flagship Zara, expect its newest concept Lefties, which started as an off-price retailer for leftover stock and has since expanded, including adding eight stores in the first quarter.
“Lefties represents one of the most interesting growth opportunities within the Inditex portfolio. The brand is well positioned to attract younger families and more price-conscious shoppers who may find Zara increasingly expensive. Physical store expansion could help Inditex reach customers that its existing brands do not fully serve today,” Tang added.
The company also pointed to growing use of artificial intelligence across its operations, though like many retailers, it offered few details on exactly what that means in practice.