June 10, 2013 10:41 pm

Inditex figures may show that the ‘miracle’ is over

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Zara factory

Investors in Spain’s Inditex could be forgiven for having forgotten what bad news sounds like. While many of the Zara clothes brand owner’s competitors have suffered amid Europe’s economic woes, the Galicia-based company’s expansion has continued uninterrupted – growing at a mind-boggling rate of more than a store a day for the last two years.

Yet on Wednesday, Inditex’s first-quarter earnings could provide a sharp reminder that an operation described as “a miracle” by analysts is not invincible.

A combination of bad weather across Europe, unfavourable currency movements, and particularly demanding comparisons with a 2012 financial year that exceeded all expectations, is expected to show Inditex suffered a sharp slowdown in growth in the first three months.

“It has been a really tough quarter in a tough year,” said Anne Critchlow, an analyst at Société Générale. “Inditex had a wonderful year last year, which means that 2013 was always going to be difficult due to very tough comparatives”.

A consensus of analysts covering the company expects pre-tax profit in the first quarter to fall marginally, by 0.2 per cent to €577m year-on-year, with sales growth falling by 58.4 per cent.

While other retailers such as H&M and Debenhams , have already shown signs of suffering a fall in sales because of bad weather in Europe, Inditex has made a habit of outpacing its rivals that analysts are waiting to see how the market might react to any sign, no matter how slight, that growth at the company is slowing.

The sharp devaluation of the yen, the collapse in value of the Venezuelan bolivar, and other unfavourable movements in the Russian rouble and Brazilian real are also likely to shave off profit from the company’s bottom line.

Most importantly, Inditex has long been at risk of becoming a victim of its own success. With earnings before interest and taxation growing by 24 per cent in the first quarter last year, the barrier has been set so high that few expect a repeat performance to be possible.

Gonzalo Sanz Martín of Mirabaud in Spain has long argued that while Inditex benefits from an unique business model, which allows it to see a freshly drafted design arrive in shops across the world in a fortnight, expectations have become so high that its shares are almost priced for perfection.

“Although we do not have any doubts regarding Inditex’s ability to shrug off macro uncertainties, we think that many of these advantages are already known and discounted in the price,” he said in a recent report.

As such, and with the company’s shares rated at a multiple of 26 times forward price to earnings, any sharper-than-expected slowdown could result in a uncomfortable re-examining of Inditex’s lofty premium.

“In a growth company no one likes to see any numbers going down,” says Ms Critchlow. “But Inditex has had slowdowns in the past, so I don’t expect this to shake people’s belief too much.”

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