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Zara stock Inditex (ITX) is bucking the retail trend with sales boom

By David Burrows

09:32, 9 June 2022

Zara store in Hong Kong. Photo: Shutterstock
Can Zara continue increasing sales as consumers tighten their belts? Photo: Shutterstock

This week, Inditex (ITX) reported an 80% jump in first-quarter profit on the back of soaring sales.

Commenting on the buoyant sales in what is a challenging environment for retailers with supply cost pressures, Inditex CEO Garcia Maceiras said he expects pricing to contribute to 2022 Spring/ Summer sales in a mid-single digit with no impact on volume.

The Madrid-based group reported net profit of €760m ($812m) for the quarter to end April. Sales rose 36% to €6.7bn, which exceeded pre-pandemic levels, while its gross margin hit a 10-year high.

A pretty solid performance at any time, but even more impressive given an economic climate of inflation, interest rate rises and pressure on consumers generally.

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Inditex (ITX) share price

The legend of Zara

Fellow high street retailers like JD Sports (JD) and Ted Baker (TED) have struggled for different reasons and seen their stock price fall (reported recently by Capital.com). But Zara (owned by Inditex) has seen stellar sales and a higher share price. In early April the stock was priced at around €19.5 and now is around the €23.4 level.

Inditex’s CEOs clearly believes sales will hold up, even if further cost increases are passed on to the consumer.

Rising commodity and transport costs, along with a tight labour market and higher energy bills, are forcing retailers to increase prices – and Inditex is no different.

The question is: if the post-pandemic spending bubble has burst, how far can Inditex continue to hike prices without demand falling?

JD Sports Fashion (JD) share price

Supply and demand equation

The group is banking on demand holding up – and has made no secret of the fact that it is building up its inventory to ensure supply chain pressures do not result in stock shortages.

Some market watchers see this as a gamble if consumer spending slows further and even those in the ‘affordable fashion’ bracket like Zara begin to suffer.  

The worst-case scenario would be over-stocking as sales at the till or online decelerate.  

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Time will tell if Inditex got its call right.

 

Inditex hitting a sweet spot

Danni Hewson, financial analyst at AJ Bell, is largely impressed by Inditex but does not rule out tougher times ahead.

“Retail’s a funny old game: one day you’re in, the next you’re out of fashion. Zara owner Inditex has happened upon a sweet spot and it’s milking it for all its worth.

“To be fair it’s had an incredibly tricky few years over the pandemic but as restrictions fade into memory and occasions are back on the agenda it’s grabbing market share with its affordable fashion that hits all the right notes”.

She stresses that Inditex won’t be immune to the inflationary cycle but is doing the right thing at the right time in the right way which is affording it some pricing power. “Push that too far, or if the budget squeeze goes on for too long, and people will start to cut back on those affordable treats, but for now it’s on trend and very clear about how to keep its momentum going.”

Whilst the cost-of-living crisis is nibbling into consumer discretionary spend some shoppers are trading down, prioritising value but also wanting something a bit special.

“Zara manages to deliver luxury on a budget, something brands like Ted Baker can’t quite achieve", Hewson explains. “Whilst Ted will still be desirable for those big events, the price tag will make some shoppers think again, because even after Inditex has put up prices their clothing is still more affordable”.

Last month, analysis by GraniteShares revealed that retailers were the most shorted UK companies. They were targeted by short sellers as inflation and the cost-of-living crisis continues to dampen consumer demand.

Markets in this article

ITX
Inditex
45.20 USD
-0.2 -0.440%
ITX
Inditex
45.20 USD
-0.2 -0.440%
JD.
JD Sports Fashion
1.177 USD
-0.041 -3.460%
JD.
JD Sports Fashion
1.177 USD
-0.041 -3.460%

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