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Inditex - Sales and profits rise, but miss forecasts

George Salmon | 13 March 2019 | A A A
Inditex - Sales and profits rise, but miss forecasts

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Industria De Diseno Textil SA EUR0.03

Sell: 31.07 | Buy: 31.80 | Change -0.26 (-0.82%)
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Underlying full year sales improved 7% to EUR26.1bn, and operating profit rose 9% to EUR4.4bn, but performance came in slightly behind analyst expectations.

The shares fell 5.1% on the news.

The total dividend rises 17% to EUR0.88, including a special dividend of EUR0.22. The board also said it's increasing the ordinary dividend pay-out to 60% from 50% of profits, and intends to pay special dividends totalling EUR1 per share between 2018 and 2020.

View the latest share price and how to deal

Our view

Inditex, or Industria de Diseño Textil as it's formally known, is the largest fashion retail group in the world. Over 70% of profits comes from the vast Zara chain.

Being the biggest fish in the pond gives Inditex scale advantages, and it's adapted to online shopping well. A global distribution network means growth online has been cost effective too, while the average online basket size at Zara is a healthy £60. That's significantly ahead of cheaper rivals.

There's another string to its bow too. Inditex designs and makes its own clothes. A tight supply chain means it doesn't need to tie up lots of money in excess stock, and it can react to changes in fashion trends quickly. Being able to offer the flavour of the month faster than peers means Zara has become a go-to shop.

But there are some clouds on the horizon. Retail is a tough place to be, especially the middle market. If consumer spending continues to slow, Inditex could be hurt by people opting for less expensive fashion.

However, like-for-like sales are growing in physical stores, not just online. That's something other names aren't managing, which goes some way to explaining the shares trading on a lofty 20.5 times expected earnings, compared to an average of around 14-15 for competitors. Still, that rating means there isn't much room for forgiveness if growth disappoints.

The new policy is to pay out 60% of profits as ordinary dividends, and earnings are expected to rise in the coming years. A healthy net cash position means we think Inditex should be well placed to pay out the targeted special dividends too, although there are no guarantees. The prospective yield next year is currently 4.4% but the board hasn't said exactly how the remaining specials due over 2019 and 2020 will be split

Overall, we've been impressed by Inditex's journey from a single 1960s workshop to an international giant. Its unique model gives it the ability to offer fast fashion on the high street, while the online business is delivering the goods too. We think that combination should keep it ahead of the pack, although investors should remember conditions in the sector are far from ideal at the moment.

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Full year results

Sales growth was driven by continued growth in sales space and a 4% rise in like-for-like (LFL) sales. LFLs improved across all geographies, and include a 27% rise in online sales, to EUR3.2bn.

Europe, excluding Spain contributed 45.1% of overall sales. Asia & Rest of World, Spain and the Americas contributed 23.2%, 16.2% and 15.5% respectively.

Operating margins fell from 17% to 16.7%, as tight cost control was offset by foreign exchange movements and a greater depreciation charge.

Zara accounted for 72% of group operating profit, at EUR3.1bn. Of the remaining six brands, Bershka and Pull & Bear were the biggest contributors, accounting for 8% and 7% of profit.

During the year, Inditex opened 15 net new stores, which together with expansions saw sales space rise 5%. During the year, the group launched online sales for Zara in an additional 106 markets.

The expansion led to ordinary capital expenditure of EUR1.5bn in 2018, which is slightly below 2017. Despite this, the net cash position rose 5% to EUR6.07bn on account of higher operating cash flow.

Next year, LFL sales growth is expected to be between 4% - 6%, with capital expenditure around EUR1.4bn.

Find out more about Inditex shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.