Inditex Earnings Beat Estimates on Store-Efficiency Drive

Clara Hernanz Lizarraga, Bloomberg News

Shoppers pass a Zara clothing store, operated by Inditex SA, in Vigo, Spain, on Wednesday, April 26, 2023. Spain reports GDP figures on Friday. , Bloomberg

(Bloomberg) -- Inditex SA’s first-quarter earnings beat analysts’ expectations, thanks to bigger Zara stores that are encouraging shoppers to buy more of the Spanish company’s fashions.

Operating income jumped 43% in the three months through April, the Arteixo, Spain-based textile maker said Wednesday. Inditex had a record first-quarter gross margin, and sales growth is maintaining its momentum at the start of the second quarter.

The stock rose as much as 5.7%, boosting the company’s market value above €100 billion ($107 billion).

Inditex keeps increasing revenue with fewer brick-and-mortar stores by focusing on bigger locations and making those shops more efficient. New technology is boosting productivity, with the Zara chain replacing hard tags on clothes this year with a new security system that speeds up checkout times at cashiers.

The group has trimmed less profitable boutiques, with the total falling by over 17% since 2019, not including 515 stores it shut in Russia last year.

Inditex has been trying to make larger, more attractive stores, and it’s paying off. Last year, the company enlarged 94 shops, and there are plans for more, including London’s Zara in Westfield Stratford and Paris’s Zara in Rue de Rivoli, which is set to double in size. The group expects gross selling space to increase by 3%.

Read more: Zara Owner Inditex Considers Fund to Back Environmental Startups

As cut-rate online retailer Shein gains market share, Inditex has also been going more upmarket. A survey conducted by Credit Suisse’s analyst Simon Irwin in autumn found that entry prices at Zara have risen 20% year-on-year while the price of more expensive items remained flat. Irwin estimates that the overall market was up by high single digits during the spring-summer season.

The stock has gained more than 30% this year, erasing a decline in the shares after Oscar Garcia Maceiras was unexpectedly named chief executive officer in late 2021.

Garcia Maceiras has kept costs in line despite intense salary pressure. Inditex this year gave store workers in Spain a 20% average wage increase.

Inditex’s cash pile rose to more than €10 billion. That has allowed it to boost its dividends and announce a €1.6 billion investment plan for this year. About 30 openings and renovations are planned for major cities in the US, its second-largest market, by 2025.

(Updates with shares in third paragraph)