Can Zara owner Inditex hold the line on pricing?

Investors will be closely watching Zara owner Inditex’s profit margins for any sign of weakness after a stellar run of results cemented its lead over smaller Swedish rival H&M.

Inditex, the world’s largest fashion retailer, reports results for February-April on Wednesday. On June 15, H&M will provide an update on March-May sales.

Shares of both companies have performed well this year, gaining 30 percent and 27 percent, respectively, benefiting from shoppers looking for trendy clothes that are still affordable.

“The consumer remains a bit more resilient than we expected last year,” said Ciaran Callaghan, head of European equity research at Amundi.

Analysts and investors say Inditex’s high prices have taken its toll on its home market, but it also leaves the retailer vulnerable to a possible strengthening of the euro against other currencies.

An analysis of 40 Zara clothing items by RBC found that prices were at least 60 percent higher in the US and Mexico versus Spain.

“Inditex’s prices vary significantly by market, more so than for H&M,” RBC chief Richard Chamberlain said in a note to clients on Monday.

That could affect which regions bring in the most profit, given that Inditex has most of its costs in euros.

In Saudi Arabia, Inditex’s ninth largest market by number of stores, a Zara high-waisted trouser costs 199 Saudi riyals, or €49.63, while a shopper in Spain or Portugal will pay €25.95 for the same garment.

Zara’s trousers are 71-91 percent more expensive in the Gulf than Inditex’s domestic market. Inditex doesn’t share revenue or profit for each country, so it’s unclear how much higher prices are driving profitability.

Overall, the Middle East is likely to be more important to Inditex now, Chamberlain told Reuters after the company exited Russia, which contributed 8.5 percent of group profits last year.

Inditex will open 23 new stores in six Gulf countries in 2022, its annual report showed.

“Prices vary by country, but they are [Inditex] we’re going for that universal offering of high fashion at affordable prices,” said Adam Gofton, portfolio manager at Mackenzie Investments in Toronto, which owns shares in Inditex.

Inditex sells Zara clothing at higher prices in the Gulf because it believes these markets will tolerate higher prices, said Alex Romanenko, head of retail at Pearson Ham Group, which specializes in pricing.

“As long as the economies of the Persian Gulf countries are doing well, the wealth of this sector will be quite high, and therefore this strategy will develop,” Romanenko said.

Zara clothes also sell at higher prices in the United States, where Inditex announced a major expansion earlier this year.

The US provides an opportunity for expansion, Gofton said. In the US, there is one Zara store for every 3.4 million people, compared to one for every 600,000 in France and 150,000 in Spain.

According to Inditex’s annual report, Zara had 98 stores in the U.S. by Jan. 31, 2023, while H&M has about five times as many stores.

by Corina Pons and Helen Reid; Edited by Barbara Lewis

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