Shares of Inditex, the parent company of Zara, declined more than 2% on Wednesday after the fashion giant reported second-quarter earnings that fell short of analyst forecasts, despite delivering stronger-than-expected sales growth and positive comments about recent trading conditions.
The world’s largest fashion retailer by revenue posted second-quarter operating profit of €2.09 billion, representing an operating margin of approximately 19%. That came below forecasts from analysts at Citi and UBS, who had expected margins of roughly 19.7% to 20.3%.
Earnings per share reached €0.51, around 3% to 8% below analysts’ expectations.
The weaker-than-expected profit performance was largely attributed to higher operating expenses. Analysts also pointed to a €23 million loss recorded under other income and losses, which was viewed as potentially non-operational in nature.
Sales Growth Beats Expectations
Despite the earnings disappointment, Inditex delivered solid revenue growth during the quarter covering May through July.
Net sales increased 9.1% year over year to €11.01 billion, approximately 1% ahead of consensus forecasts. Like-for-like sales rose 6.1%, while revenue growth at constant exchange rates reached 9.5%, exceeding analyst expectations of around 8.5% to 9%.
The company’s gross margin also improved slightly, rising 22 basis points from a year earlier to 56.7%, broadly matching market expectations.
Strong Start to the Autumn Trading Period
Inditex also highlighted encouraging momentum following the end of the second quarter.
Between August 1 and September 7, sales increased around 9% at constant exchange rates, comfortably exceeding analyst forecasts of approximately 7% to 7.5%.
The performance was particularly notable given tougher year-over-year comparisons. Management said the company’s new Autumn/Winter collections had received a positive response from customers.
However, the stronger sales update was not enough to offset investor concerns surrounding the company’s weaker profitability.
Full-Year Guidance Remains Largely Unchanged
Inditex maintained most of its existing guidance for the full financial year.
The company continues to expect its annual gross margin to remain broadly stable, within a range of plus or minus 50 basis points, while gross retail space is expected to grow by around 5%.
The retailer also announced nearly €200 million in additional extraordinary capital expenditure, which will be used to improve and upgrade corporate facilities.
This spending comes on top of its previously announced €2.3 billion ordinary capital expenditure plan.
Analysts Remain Positive on Inditex
Despite the quarterly earnings miss, major investment banks maintained bullish views on the company.
Citi retained its Buy rating on Inditex with a €61 price target, while UBS also maintained a Buy recommendation and a target of €62 per share.
UBS noted that Inditex shares had been broadly unchanged since the start of the year and were approximately 4% lower during the month leading into the earnings announcement, suggesting investor positioning had already become more cautious ahead of the results.
Supply-Chain Disruptions Push Costs Higher
During the company’s analyst call, management said rising transportation and input costs linked to supply-chain disruptions in the Middle East had contributed to the pressure on profitability.
These additional expenses affected both operating costs and gross margins during the quarter.
However, Inditex executives emphasized that underlying expenses remained tightly managed.
CEO Óscar García Maceiras explained that there is typically a delay between increases in transportation expenses and when those costs appear in the company’s financial statements.
As a result, some of the pressure is expected to continue during the second half of the financial year.
Nevertheless, management said the expected impact remains consistent with Inditex’s existing full-year gross-margin outlook.
Middle East Operations Continue Despite Geopolitical Risks
Inditex said approximately 480 franchised stores across the Middle East remain operational.
Sales in the region have improved compared with the first quarter, although management acknowledged that trading conditions remain sensitive to geopolitical developments.
The company also addressed potential tariff-related refunds, saying any financial impact would likely remain limited because Inditex operates a highly diversified sourcing network spanning approximately 50 countries.
Inditex Confirms Final Dividend
The company’s board also confirmed a final dividend of €0.875 per share for fiscal 2025.
The dividend is scheduled to be paid on November 2.
While Inditex’s latest results demonstrated continued strength in consumer demand and sales momentum, investors appeared more focused on the weaker-than-expected profit performance and signs of continued cost pressure.
The key question for the coming quarters will be whether strong revenue growth can offset elevated transportation and input costs as the retailer moves through the crucial Autumn/Winter season.
