Tight management of costs and stocks and better-than-expected summer sales helped two of Europe's top fashion retailers beat first-half profit forecasts, but they remained cautious on any revival in consumer spending. Inditex, owner of the Zara chain and Europe's biggest clothing retailer, reported a shallower-than-expected 7.6 percent fall in net profit and also announced long-awaited plans to launch Zara online next year.
Next, Britain's second-largest fashion chain, posted a 6.9 percent rise in first-half pretax profit and raised its full-year guidance, but remained cautious on prospects for consumer spending as unemployment climbs.
Europe's clothing retailers have mostly had a tough time in the economic downturn, and while there are signs the recession is over in some countries, there are fears that consumers will hold back from discretionary spending to rebuild savings. Retail sales in the European Union rose just 0.2 percent month-on-month in July and were down 0.9 percent year-on-year.
Germany's HDE retail association said on Wednesday it expected sales to fall around 2 percent in nominal terms this year, down slightly from its previous forecast. Mid-market retailers like Next and larger British rival Marks & Spencer have been hard hit in the downturn, while more budget-focused groups like Inditex, Sweden's H&M and Britain's Primark have fared better.
At 1100 GMT Inditex shares were up 4 percent at 40.18 euros and Next was up 5 percent at 1,784 pence, both beating a 0.7 percent rise in the DJ Stoxx European retail index. Bernstein analyst Luca Solca said results from both Inditex and Next showed the benefits of careful cost control and stock management, as well as favourable weather, and expected full-year consensus profit forecasts for both companies to rise.
He was particularly encouraged by Spanish group Inditex's plans to take Zara onto the Internet, saying a similar move by rival Hennes & Mauritz had given a big boost to sales. "This is going to make consensus more positive about prospects for Inditex," he said. Inditex, with over 4,400 stores in 73 countries, said it made net profit of 375 million euros ($549 million) in the six months to July 31, topping analysts' forecasts.
Sales were in line with estimates at 4.86 billion euros, up 9 percent in local currencies, and had continued at the same rate in the period from August 1 to September 14. Like-for-like sales in the first half were down 2 percent. "We estimate like-for-like sales fell 3 percent in the first quarter so that means a drop of 1 percent in the second ... This trend is encouraging," said SocGen analyst Anne Critchlow.
That would beat recent declines in underlying sales from H&M and US rival Gap. Inditex, whose brands include teen brand Bershka and underwear label Oysho, said it would target better second-half like-for-like sales. It plans to launch Zara online in Autumn/Winter 2010, initially in Spain, France, Germany, UK, Italy and Portugal.
Online sales account for only about 3 to 5 percent of Europe's 300 billion euros a year clothing market, but consultancy Forrester believes they will grow by more than 50 percent in Britain and Germany by 2014. Analysts estimate that Next, one of the pioneers of online fashion retailing through its Next Directory home shopping business, makes about 60 percent of Directory sales over the Internet. Next Directory made a profit of 83.3 million pounds ($137 million) in the first half on sales of 386.2 million.