Russia clouds prospects for Inditex after sales surge

[March 16, 2022]    By Corina Pons

MADRID (Reuters) -Sales at Zara owner Inditex surged well above pre-COVID levels at the start of its new financial year, though the world's No.1 fashion retailer faces a challenge in the months ahead after it stopped trading in Russia, a major market.

Inditex Chairman and Chief Executive Pablo Isla attends a news conference at a Zara factory, the headquarters of Inditex group, in Arteixo, near A Coruna, Spain, March 16, 2022. REUTERS/Miguel Vidal

Inditex shares tumbled on March 5 after the company closed its 502 shops and stopped online sales in Russia following its invasion of Ukraine and the imposition of Western sanctions. Russia and Ukraine accounted for 5% of its sales growth in February-March.

The Spanish group, whose brands also include Massimo Dutti and Pull&Bear, said on Wednesday its store and online sales leapt 33% between Feb. 1 and March 13 from the same period a year earlier, and were up 21% on pre-COVID levels in 2019.

Its net profit more than doubled in the year ended Jan. 31, to 3.2 billion euros ($3.51 billion) as it bounced back from the worst effects of the pandemic the year before. The results mirrored the recovery at rivals such as Sweden's H&M.

However, fourth quarter sales were hit hard by temporary store closures in countries such as Germany and China as the Omicron coronavirus variant spread. Those restrictions knocked an estimated 400 million euros off quarterly sales.

"Inditex results are softer than consensus expectations, mainly due to Omicron effects in the second half of Q4. However it has made a very strong start" to its new fiscal year, RBC analyst Richard Chamberlain wrote in a note to clients.

Shares in Inditex, which has 6,477 stores worldwide, were up 0.5% in early trade.

The group weathered the pandemic in part through being able to produce more than half of its goods near Spain and deliver them to consumers quickly, while also raising the share of online sales to about a quarter of its overall revenues in 2021.

Next month, Marta Ortega, the daughter of Inditex founder Amancio, will take over as chairwoman of the group in the last step of a generational handover started a decade ago.

Marta will replace veteran executive chairman Pablo Isla in April along with new chief executive Oscar Garcia Maceiras, who was promoted in November, and an experienced team of managers.

The new team will face challenges amid inflationary pressures and the uncertainties caused by the war in Ukraine.

"Apparel demand had already been weak in Europe so far this year and any further softness in demand environment will make it even harder to pass through higher input costs in a deflationary industry," Credit Suisse said in a recent note to clients.

Inditex said the United States became its largest market in 2021, after Spain.

($1 = 0.9113 euros)

(Reporting by Corina Pons Editing by Inti Landauro and Mark Potter)

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