Zara most successful on the high street

Spanish fashion group Inditex, the owner of Zara stores, has overtaken Sweden's Hennes & Mauritz as Europe's largest clothes retailer, thanks to its aggressive pace of store openings. Inditex on Wednesday reported net sales of €6.74bnfor the financial year ending January 31, 2006, compared with H&M's net sales of SKr61.2bn for the year ending November 30, 2005.

The Spanish group's net profit rose 26 per cent to €803m, thanks to a 22 per cent increase in selling space after it opened 448 new stores, and a 5 per cent increase in like-for-like sales.

H&M's full-year profit was higher than that of Inditex at SKr9.2bn, reflecting the Swedish retailer's more mature business.

Inditex shares climbed more than 3 per cent to an all-time high as investors welcomed the announcement of a 40 per cent increase in the dividend a share. By contrast, H&M's share fell 2.3 per cent as the company reported disappointing first-quarter results and poor sales in March due to cold weather.

Nils Vinge, H&M's head of investor relations, said the Swedish group was untroubled by Inditex's faster sales growth. "For us, it's not a goal in itself to be the biggest in terms of turnover. Our mission is always to give our customer value for money by giving them fashion and quality at the best price."

But analysts said the contrasting share movements reflected the more promising business momentum at Inditex, which opens a new store every day of the year and has a target of 4,000 stores by the end of 2009, compared with 2,700 stores at present.

The different business models followed by the two rivals are also affecting their financial results.

H&M, which outsources its clothes manufacturing, on Wednesday blamed falling margins on the reimposition of textile quotas on Chinese goods in Europe and the US. H&M sources about 30 per cent of its clothes from China.

Chief executive Rolf Eriksen said quotas on imports from China would have a negative effect in the second and third quarters of this year, although gross margins would remain unchanged.

Inditex, by contrast, still manufactures most of its fashion collections in-house, and is therefore less affected by import quotas.

Analysts also said the two retailers targeted different markets. H&M aims its fashion collection at the younger, cheaper end of the market, and has therefore been more vulnerable to competition from discount retailers.

Inditex, by contrast, runs eight different store formats aimed at different segments of the fashion market.