Analysts believe Inditex (ITX.MC), the owner of Zara, is in a healthy financial position despite the industry-wide push to decrease garment prices due to a decline in demand. Inditex was among the first fashion retailers to boost prices due to increasing inflation.
The world’s largest clothes retailer, Inditex, has effectively passed price hikes onto consumers and claimed record profit margins, driving up the company’s stock price by over 64% over the previous 12 months.
Fears of an economic downturn have been brought back into the spotlight when several U.S. businesses, including Macy’s and Foot Locker, issued statements about lackluster consumer spending. On Wednesday, Inditex will release its first-half financial results, and investors will look for any weakening indications.
To increase sales, “I think companies will be more disciplined and will reduce pricing where they think they can gain volumes,” predicted Fabio Di Giansante, portfolio manager at Amundi, which owns shares in Inditex.
After increasing prices by an expected 5% in 2022 and 2% in the current year, Bank of America analyst Geoffroy De Mendez said that Inditex will reduce prices by 2% in its 2024 financial year, which ends on January 31, 2025. Zara’s U.S. website offers fitted blazers for ladies for $129 and casual jeans for men for $70.
They can do this since their profit margin is the greatest on the block. To quote De Mendez: “If there’s any company that can afford to offer discounts, it’s this one.”
Overall, Inditex’s first-half sales are anticipated to rise by 12% year-over-year, while profits will rise by roughly 33%. Inditex saw a 25% rise in sales and a 41% increase in earnings in the six months leading up to July of last year, but this was measured against a time when countries all over the globe were on high alert for the spread of the COVID-19 virus.
One strategy for companies like Inditex, which owns the Bershka and Massimo Dutti brands, to increase market share even as consumers tighten their purse strings is to reduce their pricing.
As Bernstein analysts note, Inditex’s main competitor, H&M (HMb.ST), which will report sales for the third quarter on Friday, has implemented greater price hikes than competitors over the last year.
Amundi’s Di Giansante said that in a more challenging economic environment, clothing stores may respond by placing more emphasis on essentials and fundamentals.
Even in the clothing business, there is room to cater to customers’ necessities rather than their wants.
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