Inditex also suffers: profit shrinks in fourth quarter for the first time since 2014

Last November, December and January are undoubtedly among the worst months in the recent history of fashion industry. The combination of changes in consumer habits, high temperatures and discount campaigns led small, medium and large companies to a collapse in sales and margins. Inditex was no exception: in its fourth quarter, the Spanish group shrank its results for the first time since the first quarter of 2014.

After the weak evolution of the first three months of the fiscal year, Inditex had difficulties to keep pace with the past results, as it has finally been demonstrated. The company closed 2018 with an increase of 3.19% in sales, far from 8.69% and 11.54% recorded in the previous years. On the other hand, the net profit rose by 2.26%, compared to an increase of 6.68% in 2017 and 9.81% in 2016.

In the fourth quarter, however, Inditex achieved a recovery in its sales performance, reaching a total of 7.7 billion euros. This percentage is higher than that registered in the first quarter (1.53%) and third (1.91%) and equal to that of the second quarter (4.41%)

Thus, Inditex has taken the opposite direction to the sector as a whole. The last months have been weak in sales in the largest markets for fashion. In Spain, for instance, sales in the sector decreased by 1.9% in January, a fall that followed the 3% recorded in December.

Likewise, the main European markets have started the year with a drop in fashion sales. Regarding January, Germany had a fall of 4.2%, while Italy had a decline of 0.2%.

Inditex achieved in the fourth quarter a recovery in its sales performance

The net result of Inditex showed a poor performance. In the fourth quarter of 2018 (which includes November, December and January), Inditex earned 2.04% less, while in the three previous quarters it had been positive, whit rises of 2.14%, 4.07% and 5.54% in the first, second and third quarters, respectively.

Thereby, Inditex registered the first quarterly fall in its profit since the first quarter of 2014. In the first three months of that year, the group achieved a net profit of 406 million euros, which represented a decrease of 7.3% compared to the same period of the previous year. The decline was a consequence of the currency effect, according to the company.

In this scenario, where is the margin? The company managed to boost its sales but shrank its result, and that is why the group’s profitability fell. The gross margin stood at 53.6% in the fourth quarter of fiscal year 2018, below 60.5%, 54.7% and 58.9% from the previous quarters. Nevertheless, the fourth quarter is the one with the lowest margin every year.

Discounts and promotions

During the presentation of results presentation, Pablo Isla, president of Inditex, once again emphasized the strategy of the group to move away from the “promotional environment”, as it already announced in the presentation of results for the first nine months of the year.

“This winter, particularly due to weather conditions, we found ourselves in a widespread promotional environment, and we did not want to be carried away by it,” said the executive. “Promotions take place when you have so much stock that it becomes scary, but we are very confident in the management of our product,” added Isla.

The president of the Spanish company stressed that, at the closure of the fiscal year, the stock of the group grew by 1% up to 2.71 billion euros according to data from January 31, 2019, while comparable sales between February 1 and March 9 have increased by 7%.

 “This is the main idea of our business model,” explained Isla, “rather than having a lot of stock and thinking about the best way to sell it to customers, we detect what they want and try to offer it to them.”

The impact of e-commerce

Experts in the industry insist that the increase in online sales has a direct impact on the margin of large fashion distribution groups. Inditex, however, claims that it is a non-dilutive contribution.

Isla insisted again about the fact that e-commerce has no impact on the margin. “Our margins do not fall because, in terms of costs, the online does not generate a negative impact, it is simply a different cost structure,” affirmed the executive.

“We have been able to generate very solid results, with growth in all lines,” said Isla, who pointed out that “the results have been affected by the currency effect, which in sales was of 3.5 points, as a consequence of the depreciation of many currencies with respect to the euro.”