Zara Owner's Margin Shrinks to Lowest Level in Eight Years

MADRID, Spain — Inditex SA's profitability declined to an eight-year low as the world's largest clothing retailer was confronted with higher garment costs and lowered prices amid increasing competition.

The gross margin narrowed to 57 percent from 57.8 percent in the 12 months through January, Arteixo, Spain-based Inditex said in a regulatory filing Wednesday. That missed the retailer’s goal to keep the measure within 0.5 percentage points of the previous year’s. Operating profit rose 9.4 percent to 4 billion euros ($4.3 billion). Analysts expected 4.1 billion euros.

To maintain its constant growth of like-of-life sales, Zara has been relying strongly on cutting prices of clothes over the past two years, according to Credit Suisse analyst Simon Irwin. That helped Inditex achieve same-store sales of 10 percent, the fastest rate in 14 years. The downside of the move has been the decline in profitability, which peaked four years ago.

Inditex’s sales growth outshines that of rivals such as Hennes & Mauritz AB, which said Wednesday that sales rose 3 percent in February. Analysts surveyed by SME Direkt had expected an increase of 5.1 percent.

Inditex put greater emphasis on online expansion last year, cutting its target for new brick-and-mortar stores. The retailer is also making changes to some of its brands to gain market share, with the most recent example being the Stradivarius brand’s foray into men’s clothing in February.

After starting online sales in Singapore and Malaysia this month, the company plans to add such services in Thailand and Vietnam in the next few weeks and also in India this year.

Other highlights included:

• Full-year revenue rose 12 percent to €23.3 billion, matching average analyst estimate
• Inditex to raise total dividend payment 13 percent to 68 cents a share
• Sales in local currencies and adjusted for calendar effects rose 13 percent in first weeks of first quarter
• Retailer plans 450-500 openings this year and will absorb 150-200 small shops into neighboring stores
• Capex budget about €1.5 billion this year
• Portion of sales from Spain declined to 16.9 percent from 17.7 percent amid expansion in Asia, Americas
• Retailer ended fiscal year with 7,292 stores in 93 markets

By Rodrigo Orihuela; editors: Eric Pfanner, Thomas Mulier and Phil Serafino.