Zara Q1 Sales Surge, the Secret is Price Increase?

Consumer Staples Author: Yunfeng Zhang Jun 08, 2023 04:02 PM (GMT+8)

On June 7, Zara's parent company, Spanish apparel group Inditex, announced its Q1 earnings report.


On June 7, Zara's parent company, Spanish apparel group Inditex, announced its Q1 earnings report. According to the earnings report published on Inditex's official website, the group's first-quarter sales rose 13% year-on-year to 7.6 billion euros, with a record gross margin of 60.5%. Net income rose 54% to 1.16 billion euros, beating analysts' expectations of 980 million euros.

Following the announcement, Inditex Group shares rose more than 6%, with a cumulative increase of 32% since the beginning of the year and an updated market capitalization of 105.2 billion euros.

Inditex attributed the growth to the impressive sales performance of its Spring/Summer collection, well-controlled labor costs and a new trend toward affordable clothing in the economic downturn.

However, "affordability" is clearly a psychological dimension that is difficult to quantify. Another fast-fashion giant, H&M, posted a 6 percent increase in sales for the entire year last year, but profits plunged 68 percent, below market expectations. In the first quarter of this year, H&M's profits returned to positive growth due to proper inventory absorption, but only 0.4 percentage points higher than a year ago.

It must be said that one of Inditex's secrets is to maintain growth against the trend or price increases. This price increase has at least two levels of meaning.

The first meaning is a literal increase in prices. This trend has accelerated significantly since the new head of Inditex, Marta Ortega, also the founder's daughter, took over.

The latest analysis by the consulting firm Lectra shows that the average selling price of Zara products increased by 23% in the fourth quarter of last year, with the high-end line Zara Origins increasing its share by 17% to 4.8%. This year, Inditex Group brands have continued to increase prices by mid-single digits.

The second meaning of pricing is Inditex's flexible pricing strategy. Typically, FMCG companies don't offer products with large price differences in different regions, unlike luxury goods. But RBC analyst Richard Chamberlain revealed in a report that after analyzing the prices of 40 Zara apparel items, the costs of the same product were at least 60% higher in the United States and Mexico than in Spain, and 71% to 91% higher in the Gulf countries. The report concludes that "Inditex's pricing varies by market and is more flexible than H&M's".

Although the results look good, some analysts have expressed concern about Inditex's ability to maintain high gross margins through different pricing. Especially in the accelerating recovery of the Chinese market, the company is facing not only strong competitors such as Uniqlo but also the strong rise of Chinese domestic apparel brands. Whether Zara can perform as well in China as in overseas markets under double market pressure remains a key point for analysts.