Inditex plans share-split to battle currency issues

Thursday, 12 June 2014
The world’s biggest clothing retailer by sales and owner of Zara, Inditex, beat market expectations on Wednesday as its profit were higher than expected. Revenues during the first quarter of the company´s fiscal year improved by 4 percent. The Spanish fashion giant noted a 7.3 percent decline in its net income over the first financial quarter that ended April, from 438 million euros to 406 million euros. However, these figures beat consensus estimate net income of 391.2 million euros.

The company’s revenue increased by 4.3 percent from 3.59 billion euros posted for the same period a year earlier to 3.75 billion euros. On a separate note, Inditex’ gross margin declined to 58.9 percent.

The market agrees that the positive results were mainly due to the company´s strong control on its expansion costs by betting on e-commerce when it comes to increasing its growth.

“Cost control was strong,” Merriman wrote in a note to investors. “E-commerce is under-appreciated and may cause sales growth to accelerate in the near-term.”

Likewise, Jamie Merriman at Bernstein Research said commenting the news for the ‘Wall Street Journal’ that he expects “the market to react positively to today’s earnings announcement as Inditex continues to deliver strong operational performance and as investors look ahead to a lower impact from currencies in the quarters to come.”

Share split to fights against currency strains

Inditex SA highlighted that its financial results benefited from the strong underlying growth at its Zara brand.

After decades of fast growth, the company has faced deceleration in both earnings and revenue growth for the past twelve months. Part of this decline lies in the currencies’ weakness when compared against euro. This difference gets more acute in emerging markets such as Russia, Turkey, Mexico and China, which have become the main expansion goal for Inditex flagship brand.

In order to battle the weakness of currencies against the euro, Inditex announced its plans for a five-for-one share split at the close of business on July 25, with the new stock starting to trade on July 28.

It´s noteworthy that these currency strains have wiped off a 6 percent of the company´s first-quarter revenue growth. However, UBS AG analysts Andrew Hughes and Adam Cochrane think that impact will probably slow during the rest of the year and disappear in the fourth quarter.

Inditex was trading in the region of 111.90 euros per share on Wednesday after the first-quarter results were made public, marking a one year add of 14.37 percent.

Angela González Rodríguez

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