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Inditex - cost savings boost profits

Nicholas Hyett | 11 December 2019 | A A A
Inditex - cost savings boost profits

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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: 24.04 | Buy: 24.06 | Change -0.14 (-0.58%)
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Inditex's third quarter sales came in at €7bn, up 9.2% compared to the same time last year, and the group expects like-for-like sales growth of 4-6% for the full year.

The shares rose 1.1% following the announcement.

View the latest Inditex share price and how to deal

Our view

Industria de Diseño Textil is a Spanish 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, and margins are still growing.

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's 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 22.4 times expected earnings. While lower than it has been in the recent past, that's still higher than many competitors. That means there could be room for the shares to fall if growth disappoints.

A policy of paying out 60% of profits as ordinary dividends, means investors should get paid while they wait to see if the growth continues. The prospective yield next year is 3.9%. An already healthy net cash position is growing which helps underpin those dividend plans, although there are no guarantees.

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 will 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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Third quarter results

Tightly controlled costs meant operating profit rose 17.3% compared to last year, reaching €1.5bn.

Further improvements to the already efficient business model meant the group finished the quarter with net cash of €1bn 17.1% ahead of the same time last year.

Global online sales launches are said to be on track, with 7,486 stores open at the end of the quarter, including 2,139 Zara shops. During the quarter, Inditex launched Zara online in South Africa, Colombia, the Philippines and Ukraine.

Capital expenditure for the full year will be around €1.4bn, reflecting the opening of new stores. Free cash flow is also expected to be strong for the year as whole.

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.