Zara: currency swings and warm weather dent profit, but business model looks strong in third quarter
Inditex, a fast fashion giant that counts popular brand Zara amongst its many labels, reported third quarter earnings this week, joining a cluster of companies that said an unseasonably warm September disrupted their sales. Taken together with wild currency swings, and Inditex’s profit suffered. Investors were not understanding, and despite the company’s business model showing considerable strength in light of the challenges, the share price went down.
A turbulent three months on the market sees Inditex’s share price decline by 1%
Source: Yahoo Finance
Inditex is particularly sensitive to currency swings, as the company has centralised sourcing and distribution facilities in Europe, but sells all over the world – from China to Russia to Australia to India. Its thousands of stores take it across multiple financial borders, and about half of its sales are made in currencies other than the euro – most of its costs, however, remain in domestic currency.
Inditex reported earnings of 3.07 billion euros for the nine months just gone. That’s a 3% increase, year on year, but nothing like it would have been without currency fluctuations. Stripping those out, Inditex said growth would have come in at 14%. Negative currency impact on sales was 3.2% for the third quarter, it added.
One area where Inditex saw great success was in online. That’s an important metric, as the company has previously promised to have all its brands selling online worldwide in the near future. The company saw moves towards that goal, with online sales rising 41% in 2017 to make up 10% of the company’s total. Inditex is planning to break these figures out for us properly in March, when it reports full-year earnings.
The company’s CEO Pablo Isla said margins maintained their strength despite the issues with currency spoke to the company’s health. He said: “We are able - with a significant negative currency impact -to maintain our margins. We consider (this) is something that shows the healthy execution of our business model.”
Dominion holds Inditex in its Global Trends Luxury Fund.
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