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Inditex - full year profits up but COVID-19 weighs

Sophie Lund-Yates, Equity Analyst | 18 March 2020 | A A A
Inditex - full year profits up but COVID-19 weighs

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Industria De Diseno Textil SA EUR0.03

Sell: 28.16 | Buy: 28.17 | Change 0.31 (1.11%)
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Full year net sales increased 8% to €28.3bn. On a like-for-like basis sales were up 6.5%, with a stronger result in the second half. Combined with improved margins, operating profit rose 9.5% to €4.8bn.

However, the group said "the Covid-19 pandemic is having a very significant impact". Store and Online sales in local currencies decreased 24.1% from 1 March to 16 March 2020.

Inditex decided now is not the right time to make a decision on the full year dividend. A decision will be made at a board meeting prior to July's AGM.

The shares fell 3.1% following the announcement.

View the latest Inditex share price and how to deal

Our view

The global retail sector faces unprecedented challenges. The COVID-19 outbreak means around half of Inditex's stores are closed at the moment. That inevitably creates problems, but it's too soon to say what the overall impact will be.

It's also worth remembering that if the pandemic results in a prolonged period of economic uncertainty, it wouldn't be ideal for the Zara owner.

Retail is already a tough place to be, especially for slightly more expensive names like the ones Inditex has in its portfolio. If consumer spending slows further, it could be hurt by people opting for cheaper fashion.

But there are reasons for optimism. Industria de Diseño Textil (as it's formally known) is a Spanish powerhouse and the largest retail fashion chain in the world. 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 traditionally hasn't had 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 - which accounts for the majority of sales - has become a go-to shop. That helps support more premium price tags - the average Zara online order is usually around €60.

Coronavirus has the potential to upend the status quo though - stores could be forced to bring out the sale stickers to shift stock, which would hurt margins. But as it stands - it's too soon to tell how things could turn out. Given this, we think the decision to hold off on a dividend decision was the right thing to do, it's sensible to preserve cash until there's a clearer idea of what the damage is.

The group has a sizeable net cash position, which means it's in a better position to weather a downturn than some.

Longer-term we think the group is well positioned compared to peers thanks to its scale and unique business model. But we can't rule out further ups and downs from here. The retail market is already tough, and the ongoing pandemic has the potential to seriously disrupt progress in the near term.

At the time of writing the shares change hands for 16.2 times expected earnings, significantly below the ten year average.

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Full year results

Sales growth was helped by a (net) 2.5% increase in selling space, with stores opening in 43 markets. Online sales grew 23% to €3.9bn, and represented 14% of total sales. Europe, excluding Spain, contributed 46% of overall sales. Asia & Rest of World, Spain and the Americas contributed 22.5%, 15.7%, 15.8% respectively.

Operating margins increased slightly to 16.9%.

The group recorded an inventory provision of €287m. That's to account for the impact the Covid-19 pandemic might have on the value of the Spring/Summer stock. Excluding this provision, operating profit would have risen 16.1%, rather than 9.5%.

Ordinary capital expenditure was €1.1bn, 26% lower than last year. The group's net cash position rose 20% and now stands at €8.1bn. Cash generation in the year was helped by a tighter underlying inventory position on sales.

Looking ahead, Inditex said it's too soon to know the full impact of the outbreak. As at 18 March 3,785 stores are temporarily closed in 39 markets. The group is working on managing operating costs to help offset these challenges.

Find out more about Inditex shares including how to invest

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