Inditex shares dropped 5 per cent on the Madrid Stock Exchange on Wednesday, after the owner of Zara revealed slower growth in FY18 than in previous years, due to a stronger euro, flat margins, less frequent discounting and a store optimisation strategy prioritising larger stores in prime locations and online growth at the expense of smaller stores.
While the retail giant reported a 7 per cent sales increase at constant currency rates year on year to €26.1 billion (A$41.8 billion), this was less than half the rate of growth the company reported a few years ago, Morgan Stanley said in a note, according to Reuters.
“[W]e believe it is evidence that the group’s growth profile is slowing sharply,” Morgan Stanley said.
Like-for-like sales grew 4 per cent in FY18, compared to 5 per cent in FY17, and online sales grew 27 per cent to €3.2 billion (A$5.1 billion). Online accounted for 12 per cent of net sales, which is on the low end for an apparel company, where online penetration tends to be higher than retail as a whole.
Inditex opened 370 stores in the year to 31 January 2019, and closed 355 stores, which was nearly twice as many as the 200 stores it said it was planning to close last year. This may have had an impact on sales growth in FY18, an investor told Reuters, but could prove to be the right strategy long term.
Inditex increased gross new space in prime locations by 8 per cent and continued to roll out its omnichannel store format, which integrates bricks-and-mortar and online channels through services such as click-and-collect. The group said it sees strong opportunities for growth in this space going forward.
The company said global online sales are “on track”, with Zara now selling online in 202 markets around the world. The fashion chain launched online in Australia and New Zealand last March and entered an additional 106 markets online in November.
The company reported profits of €3.44 billion (A$5.5 billion) in FY18, up 2 per cent on the previous year, and sales of 26.15 million euros, missing a consensus estimate for net profit of €3.49 billion (A$5.6 billion) and sales of €26.45 billion (A$42.3 billion), according to Refinitiv I/B/E/S data reported by Reuters.
In its first five weeks of FY19, the group lifted store and online sales 7 per cent at constant currency rates. The company said it expects like-for-like sales to grow between 4 and 6 per cent this fiscal year and gross space in prime locations to grow between 5 and 6 per cent.
The fashion giant expects to open around 300 stores and close around 250 in FY19. As at 31 January 2019, Inditex had 7490 stores worldwide across its Zara, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho and Uterque brands.