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Inditex - weak Q1, but better start to Q2

George Salmon | 12 June 2019 | A A A
Inditex - weak Q1, but better start to Q2

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Industria De Diseno Textil SA EUR0.03

Sell: 24.86 | Buy: 25.19 | Change -0.11 (-0.44%)
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Inditex's first quarter sales have risen 5% to EUR5.9bn, with adverse weather holding back growth. However, the second quarter has started well, with sales rising 9.5% from 1 May to 7 June.

Like-for-like sales are still expected to rise 4-6% this year.

The shares rose slightly on the news.

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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First quarter results

With sales rising and a 'tight control of operating expenses' limiting underlying cost growth to 5%, operating profit rose 7% to EUR980m.

This helped feed through to a rise in the group's net cash position, which rose 9.2% to EUR6.7bn.

During the quarter, Inditex launched online sales for Zara in nine new markets, including Brazil, Saudi Arabia, Morocco, Indonesia, and Serbia. The group expects a further nine markets to open up for the Autumn/winter season.

Carlos Crespo will be appointed CEO at the AGM to lead the digital transformation.

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.

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