Analysts say Inditex, the company that owns Zara, is in a good financial position as falling demand for apparel puts pressure on the industry to drop prices. Inditex was among the first fashion retailers to boost prices in reaction to increasing inflation.

As the largest clothes retailer in the world successfully passed cost increases through to customers and recorded record profit margins, Inditex shares have increased by about 64% over the past year.

However, concerns about a slowdown in the economy have returned when a number of American retailers, including Macy’s and Foot Locker, issued advisories about sluggish consumer spending. When Inditex releases its first-half earnings on Wednesday, investors will be looking for any indications of weakening.

“I think companies will be more disciplined and will reduce pricing where they think they can gain volumes,” said Fabio Di Giansante, portfolio manager at Amundi, which holds shares in Inditex.

Geoffroy De Mendez, an analyst at Bank of America, predicted that Inditex might lower prices by 2% in its 2024 fiscal year, which runs from January 31 to December 31, following price increases of an estimated 5% in 2022 and 2% this year. A fitted women’s coat from Zara sells for roughly $129 on the American website, while a pair of its relaxed-fit men’s trousers costs $70.

“The reason why they can do it is because they have the highest margin on the street. If there’s one company that can afford lower pricing, it’s this one,” said De Mendez.

Analysts anticipate Inditex to post a 12% gain in sales and a 33% increase in profit for the first half of the year compared to the same period last year. In the six months leading up to July of last year, Inditex had a 25% increase in sales and a 41% increase in profits, but this was in contrast to a time when COVID-19 lockdowns were occurring all over the world.

While consumers are cutting their spending, retailers like Inditex, whose brands also include Bershka and Massimo Dutti, may try to win market share by lowering prices.

H&M, a significant competitor of Inditex that will announce third-quarter sales on Friday, has reportedly forced through more price rises than its competitors in the last year, according to Bernstein analysts.

According to Amundi’s Di Giansante, clothing stores might adjust to a more challenging economic environment by concentrating more on wardrobe essentials and must-haves.

“Even in apparel retail you have the opportunity to be less discretionary, and more focused on what people need to buy.”

(Adapted from Reuters.com)