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Inditex - positive sales growth in all regions

George Salmon | 11 September 2019 | A A A
Inditex - positive sales growth in all regions

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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: 26.62 | Buy: 26.63 | Change -0.29 (-1.08%)
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In the first half of the year net sales increased 7%, to EUR12.8bn, and operating profit improved 14.8% to reach EUR2bn - although second quarter performance was slightly behind analyst expectations.

The shares fell 1.4% following the announcement.

EUR0.44 per share will be paid to shareholders on 4 November 2019.

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Our view

Industria de Diseño Textil is a Spanish retail powerhouse. It's the largest retail fashion chain in the world, and while it may be listed abroad - it's famous for something we all recognise at home. 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 online expansion has been cost effective too, and margins are still growing.

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. That helps support more premium price tags - the average Zara online order is EUR60.

But there are some clouds on the horizon. Retail is a tough place to be, especially for slightly more expensive names. If consumer spending continues to slow, Inditex could be hurt by people opting for cheaper 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 why the shares trade on 22.7 times expected earnings, while lower than it has been in the recent past, that's still higher than some competitors. That means there could be room for the shares to fall if growth disappoints.

A policy of paying out 60% of profits - which analysts expect to grow - as ordinary dividends, means investors should get paid while they wait to see if the growth of the few years continue. An already healthy net cash position is growing too, which means Inditex should be able to come good on those dividend plans, although there are no guarantees. The prospective yield next year is currently 3.8%.

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

Net sales growth reflects a 5% increase in like-for-like (LFL) sales, and positive growth was seen across all geographies, online and in stores. The Zara brand accounted for 69% of overall sales.

Europe, excluding Spain contributed 44.4% to sales, while Asia & Rest of World, Spain and the Americas contributed 24%, 15.6% and 16% respectively.

Tight control of operating expenses helped operating margins increase to 15.9%, from 14.8% last year.

During the period, Inditex opened stores in 31 markets, and now operates a total of 7,420 shops. The group also launched Zara online in 14 markets, including Brazil and Saudi Arabia - in line with expansion plans.

The stronger operational performance helped the net cash position rise 13%, to EUR6.7bn.

Looking ahead, Inditex said ordinary capital expenditure for the full year will be approximately EUR1.4bn, driven mainly by the addition of new space in prime locations during the year. Initial reaction to the Autumn/Winter collections has been positive, and management expects LFL sales growth between 4% - 6% for the full year.

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 disclosure for more information.