By Corina Pons and Helen Reid

MADRID/LONDON (Reuters) -Zara owner Inditex said on Wednesday sales of its spring-summer collection gathered pace to jump 16% in May, as the retailer mitigates higher wage costs and keeps customers onside during a cost of living crisis.

The world’s biggest fast fashion company reported a better-than-expected 54% rise in net profit of 1.2 billion euros ($1.24 billion) for the first quarter that ended in April, exceeding analysts’ average expectations of 980 million euros in a Refinitiv poll.

In-store and online sales rose 13% to 7.6 billion euros in the first quarter, in line with the 13.5% seen in the first six weeks of the financial year.

The results show Inditex, whose market capitalization exceeded 100 billion euros ($107 billion) for the first time last week, has managed to stay competitive while raising prices, mitigating cost pressures, including a 20% rise in average wages for shop workers in its home market of Spain.

The company said it plans to invest 1.6 billion euros to increase gross store space in 2023 by about 3%.

“We expect increased sales productivity in our stores going forward,” the company said in a statement.

Inditex, which also owns Pull&Bear and Massimo Dutti, outperformed other retailers in 2022 with main rival H&M struggling to compete for shoppers impacted by a cost of living crisis. H&M will next update the market on March-May sales on June 15.

“We recall from the global financial crisis that when consumers feel under pressure, as they do at present, it is ‘newness’ in fashion that sells best, as people prioritise spending on ‘must have’ items that will make the greatest difference to their wardrobes,” said Anne Critchlow, an analyst at Societe Generale.

Inditex shares were up 5.85% at 0947 GMT at their highest since August 2017.

Part of Inditex’s strategy is to maintain higher prices outside the Eurozone. In countries such as the United States, Mexico or Saudi Arabia some clothes are up to 91% more expensive than in its home market.

Lower demand in the U.S. caused by a tougher macro environment was offset by less weather-affected sales in southern Europe.

Inditex’s income in the first quarter was impacted by the closure of its over 500 profitable stores in Russia in March 2022 following Moscow’s invasion of Ukraine and subsequent Western sanctions. It agreed to sell the unit to UAE-based Daher Group in October.

STEADY MARGINS

Inditex’s gross margin reached a record 60.5%, showing it has been able to pass on higher prices to shoppers while rivals have seen their margins squeezed. The company expects its gross margin to remain stable in 2023.

The retailer could sustain its high profitability, but major gross margin increases will be tough, Morningstar analyst Jelena Sokolova said. “It’s still the apparel industry, it’s very competitive,” she said.

Inditex has begun to charge for online returns in more countries with no impact on sales, the company said.

It plans to open 30 more stores in the U.S. in two years. Analysts believe only the strongest global fashion retailers will gain market share in an environment where consumers are becoming more discerning.

“In the U.S. we see significant opportunities for selective growth in the coming years …and in the case of China we consider that fashion appetite continues,” Chief Executive Officer Oscar Garcia Maceiras said in an investor call.

Inditex was able to deliver strong sales last month despite colder than usual weather in northern Europe thanks to its short lead times and global diversification, said Alistair Wittet, portfolio manager at Comgest in Paris, whose fund holds Inditex shares. “What we like about it is there’s no single market that massively moves the needle,” said Wittet.

Inditex has also invested in more self-scanning checkouts and is replacing hard anti-theft tags with chips sewn into garments to avoid checkout queues.

As fast-fashion companies come under greater scrutiny for encouraging a throwaway clothing culture, Inditex said Zara’s resale service, “Zara Pre-Owned”, currently available only in the UK, will launch in France, Germany, and Spain in the second half.

($1 = 0.9359 euros)

(Reporting by Corina Pons and Helen Reid; writing by Charlie Devereux; editing by Matt Scuffham, Josephine Mason, Elaine Hardcastle)

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