How Zara Is Defying a Broad Retail Slump

By Jeannette Neumann Features Dow Jones Newswires

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Amid a major retrenchment by American companies such as Gap Inc., J. Crew Group Inc. and Nordstrom Inc., one player continues to defy gravity: Zara. And the rapid-fire design-and-production system that has allowed the Spanish giant to outpace rivals is now giving it a powerful platform to succeed online, an outlet that has confounded its lumbering rivals.

On Wednesday, Inditex SA, Zara's parent company, reported EUR654 million (about $733.3 million) in net profit for the first quarter, an 18% jump over the same period last year. Total sales at the world's largest fashion retailer by sales climbed 14% to EUR5.57 billion.

The results are in contrast to the deep pain afflicting many of Zara's rivals amid sea changes in the way consumers shop. Fewer shoppers visiting malls and online retailers squeezing the profits of traditional bricks-and-mortar outlets are upending the sector's longstanding business model.

Chains such as J.C. Penney Co. and Sears Holdings Corp. are closing hundreds of outlets to stanch their losses. Just this week, J. Crew reported its 11th consecutive quarter of same-store sales declines, days after its longtime chief Mickey Drexler announced he will step aside.

Parent company Inditex makes 60% of its garments in Spain and nearby countries. That allows it to respond quickly to feedback from its store managers around the world, who feed daily updates to a 600-strong design team in Spain on what is selling and what isn't. The creative crew whips up fresh ideas that go into production in days. The company's Spain-based logistics centers are then able to constantly refresh the stores with small batches of new designs.

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Inditex is leveraging that model into a winning online strategy, which it launched in 2010.

Zara's quick turnaround time from design to the rack means fresh fashions are readily available -- something that is particularly attractive to shoppers surfing for something new. While other fast-fashion retailers are starting to move their suppliers closer, most still order the bulk of their clothes far from home and order them several months in advance.

"This works online as it works offline," Andreas Inderst, an analyst with Macquarie Group, says. "People are drawn to the homepage of Zara because they offer newness, which most other fashion retailers are not able to offer because of long lead times and the slow reaction to current demand."

Inditex upgraded some of its technology platforms to accommodate online orders, which it processes at its logistics headquarters and then ships out.

"The systems were always used to handling individual orders coming in from store managers, which in principle is similar to handling orders coming in from individual online customers," Société Générale analyst Anne Critchlow said.

Moreover, Zara has tightly integrated its physical stores with its online platform, giving it an edge in a market where free delivery and seamless returns are paramount. About a third of online deliveries are made in Zara stores, and the customers can return online purchases to physical stores.

Zara also hits a sweet spot in pricing that supports its online business. Its prices are higher than fast-fashion rivals like Sweden's Hennes & Mauritz AB. For instance, the most frequently seen price of a dress at Zara in the U.K. is GBP29.99, according to a survey by Société Générale, more than double that found at H&M.

Prices at another rival, Primark, owned by Associated British Foods PLC, are so low that the retailer doesn't have an online business at all. Zara's pricing, along with the efficiency of its design and logistics operations, goes a long way to preserving its margins and helps offset the free delivery and returns that online consumers expect.

Inditex doesn't break down figures for online sales, but Mr. Inderst estimates the company generates about 7% of annual group sales, or around EUR1.7 billion, online. He expects that figure to reach 12% of sales by 2020.

Inditex, which brands also include Massimo Dutti and Bershka, said Wednesday it had launched online platforms for Zara in Malaysia, Thailand, Singapore and Vietnam during its first quarter, which elevates its internet presence to 45 countries. It plans to go live in India in September. It also said Wednesday that it will focus on opening more flagship stores, letting websites do the job of smaller stores.

Write to Jeannette Neumann at jeannette.neumann@wsj.com

(END) Dow Jones Newswires

June 14, 2017 15:30 ET (19:30 GMT)