Inditex SA reported a slight slowdown in revenue growth at the start of this quarter, taking the luster off an earnings report that came in just ahead of analysts’ estimates.
Sales gained 14% excluding foreign-exchange movements in the first weeks of the third quarter, decelerating from the first half. The stock has had a strong run this year as the retailer outperforms rivals.
The shares dropped as much as 3% Wednesday even after Inditex reported strong operating profit growth, helped by online promotions and fewer but more efficient stores.
“The trading update was weaker than anticipated,” wrote Bestinver Securities analyst Patricia Cifuentes. The retailer also warned that currency shifts will reduce revenue by 3.5%.
European fashion brands have reported mostly positive results for the second quarter. In August, Hugo Boss AG and Next Plc raised their forecasts, and many rivals posted earnings that topped estimates.
Meanwhile, thousands of smaller retailers and mom-and-pop stores have struggled to keep up with high inflation, with at least 24 brands filing for bankruptcy or under restructuring since June last year, according to Bank of America analyst Geoffroy de Mendez.
Big Boutiques
As shoppers frequent malls less often, Inditex has been revamping its physical store network. The retailer has reduced its store count by one quarter to focus on bigger locations that are more efficient. New additions include Paris’s Hotel de Ville and Rotterdam’s Coolsingel. Last year, Zara opened its largest boutique ever in Madrid.
Inditex is coming up with more online deals, such as a $89.90 leather trenchcoat that can only be purchased on the Pull&Bear website and not in stores. In the US, where the Massimo Dutti chain has no physical presence, consumers can buy the clothes on Zara’s site. Inditex’s largest chain has also been offering a $89.90 Barbie-themed pink gingham dress.
Chief Executive Officer Oscar García Maceiras has stepped up efforts to grow in the US with a plan to open 10 new stores and refurbish or enlarge another 13. The US is Inditex’s second-largest market by sales, largely through e-commerce.
Though the plan isn’t expected to be completed until 2025, Barclays analyst Nicolas Champ has raised concerns around the consumer environment in the US, where retailers have reported disappointing performances and cautious outlooks recently.
Bloomberg News reported Tuesday that the company missed its deadline to get the necessary hardware for a new security system to all shops throughout the Zara chain by July, citing people close to the situation.
Read more: Zara Finds Shoplifters Outsmarted Its New Security System
The retailer said Wednesday it installed equipment for its new security system across the Zara chain globally by July. An executive said on a call with analysts that the implementation has been going “perfectly” in line with expectations, with no major incidents.
The retailer has had to iron out bugs in the technology as the original setup made it easy for shoplifters to find the security tags and cut them off, Bloomberg reported Tuesday. One alternative is sewing garments with a special thread that contains the tiny RFID chips that allow Inditex to keep live tracking of inventory.
Inditex said testing will occur during the autumn-winter season, as originally planned, and the system will be fully implemented in its next fiscal year.
(Updates with executive comments starting in 12th paragraph)