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Inditex Sales Miss Estimates as Zara Avoids Price Cuts

After sales misses estimates thanks to unfavorable currency impacts, unseasonably warm weather and a resistance to lower prices in the face of stiff fast fashion competition, the Inditex Group saw its shares slide more than 4 percent in early trading Monday, reaching $14.19.

In a Nutshell: The key term for the Inditex’s latest results was “structural growth,” considering sales failed to beat market expectations, according to Bloomberg analysts. However, due to meaningful gains in operating margins, profits were up for the group, though still lower than Wall Street estimates.

Structural investments over the earnings period included the addition of automated online order pick-up points in seven Zara stores in Europe and the continuation of RFID technology integration in its inventory management systems. Zara now uses the technology in all 49 markets with both a digital and physical presence and fellow Inditex brand, Uterqüe, became the second brand to do so this year. The group says it plans on integrating RFID for all of its brands by 2020.

Inditex said it opened stores in 51 markets over the last nine months, including Zara’s 100th U.S. store in Denver this November. Zara is now selling its collections in over 202 markets, thanks to the introduction of its global online platform. The company says it continues to “add the latest technology and enhance eco-efficiency and customer service” for all stores. Further logistical improvements for the quarter featured ongoing construction of a connection hub in the Netherlands and the completion of a fabric supply center in Spain.

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Inditex was also named the most sustainable company in retail by the Dow Jones Sustainability Index, with a total of 68 points out of 100—which it says puts it 45 points above the sector average.

Sales: Inditex reported its highest-ever net sales mark for a nine-month interim period at 18.4 billion euros ($20.91 billion), although this was slightly lower than estimates. Overall, sales grew 3 percent over the same period last year and Inditex’s gross margin expanded by 60 basis points to 58 percent.

Like-for-like sales for the second half of the year finished up 3 percent in November following “an extraordinarily warm September.” Inditex maintains its second half guidance for like-for-like sales of growth of 4 percent to 6 percent and gross margin of +50 basis points for the final three months of its fiscal year.

Inditex resisted a “promotional environment” it observed over the period, which may have had an effect on sales. However, the group says this was a result of sticking to its business model and Inditex maintains that operational efficiency improvements offset losses from this choice, possibly indicating a strategic play.

Earnings: Earnings before interest and tax (EBIT) was 3.1 billion euros ($3.52 billion) for the period, up 4 percent year-over-year. Net profit was also up 4 percent to 2.4 billion euros ($2.73 billion). Inditex maintained an EBIT margin of 16.7 percent despite an unfavorable currency impact on net sales.

A dividend payment of 0.375 euros ($0.43) per share was distributed on Nov. 2 to shareholders.

CEO’s Take: Inditex CEO and Harvard Business Review’s best-performing CEO two years in a row, Pablo Isla, said the company had remained true to its business model and stuck to the plan despite encountering adverse conditions over the last nine months.

He praised “the group’s strong business model, which continues to deliver solid structural growth in all markets, along with our constant focus on developing the integrated store and online platform through continued enhancement of technology and systems.”