Analysts say that Inditex, the owner of Zara, and one of the first fashion retailers to begin raising prices in response to inflation has strengthened its financial position now as demand for clothing weakens, and the sector begins to fall under pressure to lower prices.
Over the past 12 months, Inditex shares have surged 64%, as the company reported record profit margins due to a series of price increases the company has used to pass increasing costs on to shoppers.
However fears of an economic slowdown are once again taking hold after several US retailers, such as Macy’s and Foot Locker warned of weak consumer spending of late. Now when Inditex reports its first-half results on Wednesday, investors will surely be looking for any signs of weakness.
Fabio Di Giansante, portfolio manager at Amundi, which holds shares in Inditex, said, “I think companies will be more disciplined and will reduce pricing where they think they can gain volumes.”
Geoffroy De Mendez, a Bank of America analyst, said Inditex was now in a position to cut prices by 2% for the 2024 financial year, which will run to January 31st 2025, following an estimate 5% hike in prices in 2022, and a 2% increase in 2023.
De Mendez said, “The reason why they can do it is because they have the highest margin on the street. If there’s one company that can afford lower pricing, it’s this one.”
Analysts are predicting that Inditex will post a 12% increase in sales, and roughly a 33% increase in profit for the first half, compared to one year prior. Inditex has posted a 25% increase in sales over the six months to July of last year, and a 41% increase in profits over that period, however that performance was in relation to a period in which there were Covid lockdowns being imposed around the world.
Amundi’s Di Giansante said it was also possible that clothing retailers could respond to a tougher economic environment simply by focusing on basic items, and must-haves, saying, “Even in apparel retail you have the opportunity to be less discretionary, and more focused on what people need to buy.”
