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Can Inditex’s Growth Continue?

Despite a slight slowdown in sales in the first quarter, Inditex, owner of Massimo Duty, Zara and Pull and Bear, has seen its sales in the last six months increase by 6 percent and its net profit rise by 1 percent.

Analysts expected a more sluggish performance but Inditex defied their predictions, opening another ninety-five stores in forty different markets, including an aggressive expansion in China, intended to offset weaker growth in other markets, including its native Spain. Currently, the company maintains 6,104 stores overall in eighty-six markets.

The news of Inditex’s second quarter results buoyed its stock prices, rising to an all-time high of $152.30. Many analysts were particularly impressed by a strong like-for-like gross profit growth of 17 percent and a 10 percent leap in store sales in local currency terms. The retailer also increased its already impressive net cash position to $4.87 billion, including the payment of $927.8 million in dividends.

However, some industry experts remained skeptical that Inditex could continue to support its growth indefinitely. “Although these results could erode some concerns originated in the previous quarter . . . we think that they do not totally clarify if the deceleration persists or even if record margins are sustainable,” said an analyst at Mirabaud.

Sofia Rubuelta, an analyst at Interdin Bolsa, a Madrid based consulting firm, said, “Even as Inditex should continue to report solid growth in the coming quarters, it will be very difficult for the company to beat last year’s extraordinary good earnings growth.”

Rubuelta continued to raise questions about Inditex’s prospects for future growth. “A positive trading update since August could boost the stock, following the strong performance of H&M reported this week. However, Inditex shares are already expensive and the current share price is discounting growth forecasts that are almost unsustainable in the medium term.”

Some expressed concern particularly over Inditex’s slipping gross margin, which dipped to 58.6% from 59.6%. Richard Chamberlain, an analyst for Bank of America, Merrill Lynch, attributed the decline to a strategic emphasis on promotions which translated into fewer full price sales and currency fluctuations in Asia.