Zara owner cuts store expansion goal in favor of online growth

Inditex SA, the world’s largest clothing retailer, reined back its store expansion plans as the Zara owner delves deeper into e-commerce as a cheaper way to boost sales growth.
The Spanish retailer, which has more than 7,000 outlets, aims to increase retail space 6 percent to 8 percent in coming years, below a previous target of 8 percent to 10 percent, Inditex said yesterday. The operator of the Bershka chain also reported its fastest annual profit growth in three years and maintained revenue growth of 15 percent in the early part of 2016.
“While this may cause some raised eyebrows among investors, given the strong sales performance, we believe that Inditex is clearly able to grow market share with the less capital intensive e-commerce approach,” wrote Jamie Merriman, an analyst at Sanford C. Bernstein.
Since Inditex’s 2001 initial public offering, the retailer has boosted its sales more than sixfold through aggressive expansion of its eight chains. Two-thirds of its stores have been opened or revamped in the last three years. Inditex is now pulling back on the throttle in brick-and-mortar shops. Online expansion will compensate for less space growth, Chief Executive Officer Pablo Isla said on a conference call.
All eight brands will have e-commerce throughout the European Union and Turkey by the end of this year. Inditex ended 2015 with online operations in 27 markets and plans to add Taiwan, Hong Kong and Macau in 2016.
Online purchasers go to the stores for two-thirds of their returns, which fuels further purchasing, Isla said. Most product returns are due to size, he said.
The operator of the Massimo Dutti and Bershka chains also reported its fastest annual profit growth in three years, with net income of 2.88 billion euros (USD3.2 billion) near analysts’ estimates. Revenue gained 15 percent in the start of this quarter on an adjusted basis, maintaining last year’s growth rate.
“Current trading is good news,’ said Anne Critchlow, an analyst at Societe Generale in London, who estimates that second-half same-store sales rose 10 percent in a period when warm winter in Europe eroded growth at Hennes & Mauritz AB. “Even under benign conditions, that would be a huge achievement. There’s a stark contrast between Inditex and many of the other retailers we cover.”
The stock’s 10-fold increase since founder Amancio Ortega sold part of his stake 15 years ago has made him richer than Warren Buffett, with a net worth of $69.4 billion, according to the Bloomberg Billionaires Index.
Inditex has been cutting prices on products to help drives sales. In the U.K., Zara reduced prices on higher-end products by 17 percent and less expensive ones by 36 percent in the 18 months through November, according to Credit Suisse. Bloomberg