Inditex, Owner of Zara, Puts Pricing at the Center of Strategy to Stay Ahead of Competitors
Inditex, the parent company of Zara, which was one of the first fashion retailers to raise prices due to surging inflation, is currently in a strong financial position. Analysts suggest this is essential as declining demand for clothing puts pressure on the industry to lower prices.
Inditex's shares have surged by approximately 64% in the past year, making it the world's largest clothing retailer. The company successfully passed on cost increases to customers, resulting in record profit margins.
However, concerns about an economic slowdown have resurfaced following warnings from several U.S. retailers, such as Macy's and Foot Locker, about weak consumer spending. Investors are keenly anticipating any signs of weakness in Inditex's first-half results, set to be released on Wednesday.
Fabio Di Giansante, a portfolio manager at Amundi, which holds Inditex shares, noted, "I think companies will be more disciplined and will reduce pricing where they think they can gain volumes." Bank of America analyst Geoffroy De Mendez suggested that Inditex might decrease prices by 2% in its 2024 financial year, ending on January 31, 2025, following price increases of approximately 5% in 2022 and 2% this year. For example, on the U.S. website, a Zara tailored women's blazer is priced at around $129, while a pair of relaxed-fit men's pants costs about $70.
De Mendez added, "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." Overall, analysts are anticipating that Inditex will report a 12% increase in sales and roughly a 33% rise in profit for the first half compared to the same period the previous year. However, it's important to note that these figures are in comparison to a period marked by COVID-19 lockdowns worldwide.
Lowering prices may be one strategy for retailers like Inditex, which also owns brands like Bershka and Massimo Dutti, to gain market share amidst reduced consumer spending.
According to Bernstein analysts, H&M, a key rival of Inditex, has implemented more price increases than its peers over the past year. H&M is set to report its third-quarter sales on Friday.
Retailers in the clothing industry could also adapt to a more challenging economic environment by focusing on essential wardrobe basics and must-have items, suggested Amundi's Di Giansante. "Even in apparel retail, you have the opportunity to be less discretionary and more focused on what people need to buy."