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Zara owner Inditex shakes off chill with strong second quarter start

By Sonya Dowsett
FILE PHOTO: People shop at a Zara store during the grand opening of The Hudson Yards development in New York

By Sonya Dowsett

MADRID (Reuters) - Zara owner Inditex bounced back from a weak start to 2019, when unseasonably cold weather in southern Europe stifled sales for the Spanish fashion group, with a strong performance in the first weeks of the second quarter.

This contrasts with how others in the struggling apparel sector are faring, with mid-market clothing retailer Ted Baker posting a profit warning on Tuesday after Britain had its biggest fall in retail sales on record in May.

"This is particularly impressive in our view, notably in context of industry data we have so far for May," JP Morgan said in a research note following Inditex's results on Wednesday.

Shares in the Spanish group rose 1.1% to trade at 25.57 euros ($28.96), whereas Boohoo's fell, despite the online British fashion retailer reporting robust sales, as lower margins disappointed investors.

Inditex, the world's biggest clothing retailer and owner of Massimo Dutti, Bershka and Oysho reported net profit of 734 million euros for the three months from Feb. 1 to April. 30, on sales up 5% at 5.93 billion euros.

The apparel sector has been hit by out-of-season sales as savvy shoppers expect discounts and hunt for online bargains.

Sales at constant exchange rates for the first six weeks of the second quarter were up 9.5% as shoppers snapped up items like jewel-toned blazers and long printed dresses from Zara's spring collections.

Inditex maintained its full-year guidance of 4-6% growth for like-for-like sales. RBC Capital Markets estimated it had booked like-for-like sales of around 6.5% during the first weeks of the second quarter, against around 2% in the first quarter.

Gross margin grew 6% year-on-year to 59.5% in the quarter, as foreign currency effects moved back into favour after two years of nibbling away at profitability.

Inditex generates more than half of its sales in other currencies that have to be converted back into euros when it reports. Those currencies have strengthened slightly against the euro compared to a year ago, on average, helping reported sales.

Societe Generale and Credit Suisse estimated sales at Inditex were reduced 3.5% last year by this effect, moving to a positive effect this quarter.

With the adverse foreign exchange effects removed, Inditex is under pressure to show it can deliver strong like-for-like sales without the margin dilution that has affected others.

"With less impact from foreign exchange, this will be an important year to prove the concept," UBS said in a note.

($1 = 0.8830 euros)

(Reporting by Sonya Dowsett; Editing by Paul Day, Jan Harvey and Alexander Smith)