Zara looks sharp, but it’s not the winter trend

So far, the world’s largest fashion retailer has shrugged off high inflation, rising energy prices in Europe and a strong dollar. Its competitors look disheveled even before a chilly winter.

Textile Design Industry, commonly known as Inditex ITX 2.96%

and owner of Zara and other brands, sales grew by a quarter in the six months to July at constant exchange rates compared to the same period last year. The company’s half-year gross profit was the highest in seven years, boosted by price increases on its products and measures to control costs, and is expected to be flat for the full year. Inditex’s shares rose 5% in European morning trading on Wednesday.

Other clothing brands have been busy issuing surplus warnings. Last week, online fashion retailer ASOS said full-year profit would be at the lower end of its guidance and that sales would grow by a low 2%. The company, which sells low-cost clothing to younger shoppers, said consumer demand weakened in August due to inflationary pressures. UK-based Primark, another fast-fashion brand, also warned that profits will be lower in the coming financial year due to high energy costs and the strong dollar. Fashion companies’ purchasing costs are often tied to the dollar.

Apparel companies that make most of their sales in Europe will soon be competing with utility providers as well as each other for consumers’ cash. Inditex and the Swedish competitor Hennes & Mauritz,

or H&M, accounts for around 60% of sales in the region. Energy costs, normally around 5% of household non-discretionary spending, are soaring as the Kremlin chokes off Europe’s gas supply.

The hit from utility bills is expected to be particularly intense in the UK, the home market of ASOS and Primark. Even with significant government support, energy costs for UK households could be 73% higher next year than they were in 2019, Citi estimates. This will eat into discretionary spending, 25% of which usually goes to non-food retail items including clothing.

Zara’s shorter supply chain will be an advantage, as it was during the pandemic. The brand sources a third of its goods in Asia and the rest close to home, HSBC estimates. In comparison, Primark, ASOS and H&M buy around 80% of their goods in Asia. This leaves them more vulnerable to the strong dollar. Clothes bought in the Far East are paid for in dollars, while these brands’ sales are generally in euros or British pounds. A long supply chain also makes it difficult to close supply quickly if consumer demand suddenly dries up.

Fashion chains buy from factories in Vietnam and Bangladesh, as low-cost labor helps them keep prices down for shoppers. Having a reputation for cheap clothes is becoming a problem now. H&M and Primark have said they would try to avoid raising prices for shoppers to hold on to market share. Unless the inflation in their own costs can be offset by internal savings, margins will fall.

Inditex’s shares now trade at 18 times expected earnings. The 8% premium to H&M’s multiple is less than half its 10-year average. The Spanish company lives up to its reputation for quality among investors, but a harsh winter can easily cut other fashion brands down to size.

Write to Carol Ryan at carol.ryan@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Leave a Reply

Your email address will not be published. Required fields are marked *