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Zara parent Inditex risks falling out of fashion

Zara’s parent company Inditex has made a fortune staying one step ahead in the world of fashion. Staying ahead of investor expectations is proving to be more difficult.

The world’s biggest clothing retailer said full-year net profit rose 22% to 2.4 billion euros ($3.1 billion), with expansion-driven growth in Asia easily offsetting weakness in its home market of Spain. But quarterly results fell short of mean analyst estimates—the second consecutive miss after five years of outperformance, a period in which the Inditex shares have tripled. The company’s gross margin (the ratio of profit to sales) fell to 57.9% from 62.1% in the previous quarter, possibly due to negative currency effects and deeper discounting.

“Quarterly earnings were a little bit disappointing,” Societe Generale analyst Anne Critchlow told Bloomberg. “The prior-year comparative had become tough for the first time, and a slowdown had to happen.” The company’s stock was down more than 3% in midday trading.

Inditex’s growth has been fueled by speed, in the form of its “fast-fashion” supply chain that can design new apparel and get it to stores in little more than two weeks, along with rapid international expansion that has led to more than 6,000 stores worldwide. It will open 440 to 480 stores this year, slightly less than the 482 stores in the past year.

Many analysts doubt that the growth orchestrated by owner Amancio Ortega, the world’s third-richest man, can continue at its torrid pace. Fewer than half of those polled by Thomson Reuters have a “buy” or “outperform” rating on the stock, which is trading at a much higher earnings multiple than rivals like H&M and Gap. As other high-flying companies like Apple have discovered, outsized success produces inevitable questions about whether they can outrun the law of large numbers.

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