Europe: Zara and Next beat forecasts but cautious outlook remains

TIGHT MANAGEMENT of costs and stocks and better-than-expected summer sales helped two of Europe’s top fashion retailers beat first-half profit forecasts yesterday, though there was some caution on the outlook.

Inditex, owner of the Zara chain and Europe’s biggest clothing retailer, reported a shallower-than-expected 7.6 per cent fall in net profit and also announced long-awaited plans to launch Zara online next year.

Next, Britain’s second-largest fashion chain, posted a 6.9 per cent rise in first-half pretax profit and raised its full-year guidance, though it remained cautious on prospects for consumer spending as unemployment climbs.

Europe’s clothing retailers have mostly had a tough time in the economic downturn, and while there are signs the recession is over in some countries, there are fears that consumers will hold back from discretionary spending to rebuild savings.

Retail sales in the European Union rose just 0.2 per cent month-on-month in July and were down 0.9 per cent year-on-year.

Inditex, with more than 4,400 stores in 73 countries, said it made net profit of €375 million in the six months to July 31st, topping analysts’ forecasts.

Sales were in line with estimates at €4.86 billion, up 9 per cent in local currencies, and had continued at the same rate in the period from August 1st to September 14th. Like-for-like sales in the first half were down 2 per cent.

“We estimate like-for-like sales fell 3 per cent in the first quarter so that means a drop of 1 per cent in the second . . . This trend is encouraging,” said SocGen analyst Anne Critchlow.

That would beat recent declines in underlying sales from HM and US rival Gap. Inditex said it was targeting an improvement in second-half like-for-like sales.

It plans to launch Zara online in autumn/winter 2010, initially in Spain, France, Germany, Britain, Italy and Portugal.

Online sales account for only about 3 to 5 per cent of Europe’s €300 billion a year clothing market, but consultancy Forrester believes they will grow by more than 50 per cent in Britain and Germany by 2014.

Next said yesterday it had started to trade online in the US and planned to launch a German-language website.

Next, which also runs more than 460 shops in the UK and Ireland, said it made an overall pretax profit of £185.5 million in the six months ended July, beating analysts’ forecasts. Full-price like-for-like sales fell 1.2 per cent.

The firm said it expected full-year profits to be close to last year’s £429 million, above analysts’ consensus forecast of £407 million.

But the improvement was due mainly to profit margins and Next kept its forecast for second-half like-for-like sales at its shops to fall by 3.5 to 6.5 per cent. It also said it was budgeting for a fall in underlying sales in spring/summer 2010.

“We may technically be in or out of recession but either way the vast majority of consumers haven’t got more to spend this year than they had last year,” said chief executive Simon Wolfson.