Zara owner to Close 1200 Stores as It Outlines Post-Coronavirus Future

Inditex, which also owns Massimo Dutti and Pull&Bear, to close as many as 1,200 stores in strategic shift after Covid-19

By guest author Saabira Chaudhuri from Wall Street Journal

Caption courtesy by Wall Street Journal

Zara-owner Inditex SA ITX -1.53 % said it is permanently closing as many as 1200 stores—16 % of its global outlets—and will pivot more aggressively toward selling online, as the fast-fashion giant maps out its post-pandemic future.

As many of the world’s major economies start to reopen, global retailers like Inditex are throwing open the doors to their stores again, hoping demand and foot traffic will return. But for many big players, including department-store chains and fast-fashion retailers, the pandemic only punctuated a years-long reckoning brought about by a boom in online shopping.

Asian and European outlets will take the biggest hit. Inditex said it would target small stores and ones where sales can be shifted to nearby stores, or to online. It expects to eventually recoup lost profit from the closed stores.

The company, based in North Western Spain, said it would also spend EUR 1 billion (USD 1.13 billion) on digital investments over the next three years. That is part of a broader, ongoing strategy to buoy sales online and through a network of fewer, high-performing stores.

Inditex blamed the pandemic for sharply falling sales in the first quarter. But even before Covid-19 closed retail outlets around the world, Inditex and others had faced heightened challenges maintaining sales growth momentum and competing with online-only apparel retailers.

But the company has continued to set itself apart from rivals with its quick design and sourcing process, which happens close to its Spanish headquarters, allowing it to stay on top of fast-changing fashion trends and avoid markdowns.

First-quarter sales dropped 44 % to EUR 3.3 billion from a year earlier, steeper than analysts expected. The company swung to a loss of EUR 409 million from a year-earlier profit of EUR 736 million. That included a EUR 308 million charge to close and refurbish stores.

Still, shares edged up in morning trading in Europe after Inditex said it would generate long-term, annual same-store sales growth of 4 %-6 % and pay its ordinary dividend. The company also said sales in recent weeks were improving steadily as stores closed by the pandemic reopen.

Inditex, a family-controlled chain that many analysts and investors see as having entered the crisis on a stronger footing, is one of the first big retailers to outline how it sees the industry’s future amid a tentative reopening. The answer: fewer stores and a more concerted push online.

The closures will take place this year and next and affect as many as 100 of Inditex’s Zara, Massimo Dutti, Pull&Bear and other stores in the Americas. The affected outlets currently account for between 5 % and 6 % in sales.

The company’s store and online sales in May dropped by 51 % from a year earlier, but sales over the past week were down just 34 %. As of Monday, 78 % of its stores were open. Inditex said it expects its stores in most major markets to reopen by the end of June. Other global retailers have said they have been surprised by early, buoyant demand.

Inditex said its online sales grew 50 % in the quarter and over 95 % in April, amid a near lockdown in many of its biggest markets.

Inditex estimates online revenue will account for more than 25 % of total sales by 2022, up from 14 % last year. On the other hand, gross space growth is expected to be 2.5 % annually, half the rate it logged last year. Research firm Bernstein estimates net store closures will accelerate to 400 a year over the next two years, compared with net closure of just 21 stores last year. The company had 7412 stores at the end of the quarter.

UBS estimates that across the U.S. retail industry, roughly 100000 stores could close over the next five years—more than triple the number that shut during the 2007-09 recession. E-commerce is expected to jump to a quarter of U.S. retail sales over the same period, from 15 % last year, UBS estimates.

The pandemic has already pushed department-store chain giant J.C. Penney Co., luxury retailer Neiman Marcus Group Inc. and apparel seller J.Crew Group Inc. into bankruptcy in recent weeks.

Inditex has described the need for well-located stores as part of its strategy to drive digital sales. Stores give shoppers the option to order online and collect in store, and they give the company the ability to make quick deliveries to people living nearby.

Over the past few years, the company has focused on integrating its stores and online operations as well as rolling out radio frequency identification chips across its inventory to keep better track of its stock and replenish its clothing racks more quickly.

Many analysts say that can give Inditex a big advantage over rivals, helping support profit margins, reduce the need to mark down clothes and allow it to ship online orders straight from its stores. “In a tough sector, we think Inditex is relatively well-positioned due to its relatively flexible business model and strong balance sheet,” said RBC analyst Richard Chamberlain.