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Sep 16, 2009
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Inditex and Next beat first half forecasts

By
Reuters
Published
Sep 16, 2009

By James Davey and Judy MacInnes

LONDON/MADRID (Reuters) - Tight management of costs and stocks and better than expected summer sales helped two of Europe's top fashion retailers beat first-half profit forecasts on Wednesday 16 September, although there was some caution about the trading outlook.



Inditex (ITX.MC), owner of the Zara chain and Europe's biggest clothing retailer, reported a shallower than expected 7.6 percent fall in net profit and also announced long-awaited plans to launch Zara online next year.

Next (NXT.L), Britain's second-largest fashion chain, posted a 6.9 percent rise in first-half pretax profit and raised its full-year guidance, though it remained cautious on the outlook for consumer spending as unemployment climbs.

Bernstein analyst Luca Solca said both results showed the benefits of careful cost control and stock management, as well as favourable weather, and expected full-year consensus profit forecasts for both companies to rise.

He was particularly encouraged by Spanish group Inditex's plans to take Zara onto the Internet, saying a similar move by rival Hennes & Mauritz (HMb.ST) had given a big boost to sales.

"This is going to make consensus more positive about prospects for Inditex," he said, keeping an "outperform" rating on Inditex shares and a "market perform" on Next.

At 8:25 a.m. Inditex shares were up 2.9 percent at 39.73 euros and Next was up 2.2 percent at 1,736 pence, both beating a 0.3 percent rise on the DJ Stoxx European retail index .SXRP.

Europe's clothing retailers have mostly had a tough time in the economic downturn, and while there are signs the recession is over in some countries, there are fears that consumers will hold back from discretionary spending to rebuild savings.

Retail sales in the European Union rose just 0.2 percent month-on-month in July and were down 0.9 percent year-on-year.

Mid-market retailers like Next and larger British rival Marks & Spencer (MKS.L) have been particularly hard hit, while more budget-focussed groups like Inditex, Sweden's H&M and Britain's Primark (ABF.L) have fared better.

UNDERLYING SALES STILL DOWN

Inditex, which runs over 4,400 stores in 73 countries, said it made net profit of 375 million euros ($549 million) in the six months to July 31, topping analysts' forecasts of 330 million to 368 million according to a Reuters poll.

Sales were in line with forecasts at 4.86 billion euros, up 9 percent in local currencies and had continued at the same rate in the period from Aug 1 to September 14.

Like-for-like sales in the first-half were down 2 percent.

"We estimate like-for-like sales fell 3 percent in the first quarter so that means a drop of 1 percent in the second, and we reckon they are running at flat to down 1 percent currently. This trend is encouraging," said Societe Generale analyst Anne Critchlow.

Next, which runs over 460 shops in the UK and Ireland as well as a home shopping business, said it made a pretax profit of 185.5 million pounds in the six months ended July.

Analysts' forecasts ranged from 177 million to 185 million pounds, according to a company poll.

The firm said it expected full-year profits to be close to last year's 429 million pounds, above analysts' consensus forecast of 407 million, according to Reuters Estimates.

But the improvement was due mainly to profit margins and Next kept its forecast for second-half like-for-like sales at its shops to fall by 3.5 to 6.5 percent. It also said it was budgeting for a fall in underlying sales in Spring/Summer 2010.

Full-price like-for-like sales fell 1.2 percent in the first half.

"We may technically be in or out of recession but either way the vast majority of consumers haven't got more to spend this year than they had last year," Chief Executive Simon Wolfson told Reuters.

Inditex shares have lagged the DJ Stoxx European retail index by 3 percent this year while Next, hit hard as the recession took hold last year, has outperformed by 38 percent.

Inditex shares trade at 20.3 times forecast earnings, just below H&M on 20.6 times, but well above Next on 11.5 times,.

(Writing and additional reporting by Mark Potter; Editing by Greg Mahlich)

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