(March 15): Inditex SA’s profitability shrank to an eight-year low as the world’s largest clothing retailer was confronted with higher garment costs and lowered prices to fend off increasing competition.

The gross margin narrowed to 57%, from 57.8% in the 12 months through January, Arteixo, Spain-based Inditex said Wednesday. That missed the retailer’s goal to keep the measure within 0.5 percentage points of the previous year. The shares fell as much as 2.7% in Madrid.

Price cuts helped fuel demand and led to same-store sales growth of 10%, the fastest rate in 14 years. That outshone rival Hennes & Mauritz AB, which on Wednesday reported February sales growth that missed analysts’ estimates. The downside of the Spanish retailer’s cheaper clothes has been a slide in profitability each year since fiscal 2013.

Inditex put greater emphasis on online expansion last year, cutting its target for new brick-and-mortar stores. The retailer is also making changes to some of its brands to gain market share, with the most recent example being February’s foray into men’s clothing by the Stradivarius brand.

After starting online sales in Singapore and Malaysia this month, the company plans to add such services in Thailand and Vietnam in the next few weeks and also in India this year.

Operating profit rose 9.4% to 4 billion euros (US$4.3 billion). Analysts expected 4.1 billion euros. 

Other highlights included:

* Full-year revenue rose 12% to 23.3 billion euros, matching average analyst estimate.
* Inditex to raise dividend 13% to 68 cents a share
* Sales in local currencies and adjusted for calendar effects rose 13% in opening weeks of first quarter
* Retailer plans 450-500 openings this year and will absorb 150-200 small shops into neighbouring stores
* Capex budget about 1.5 billion euros this year
* Portion of sales from Spain declined to 16.9%, from 17.7%, amid expansion in Asia
* Americas Retailer ended fiscal year with 7,292 stores in 93 markets