Full year sales, ignoring the effect of exchange rates, rose 37% to €27.7bn, as covid restrictions eased. Compared to 2019, sales were 3% higher. More efficient stores and improving online sales means year-on-year growth was achieved with 5% fewer stores.
Operating profits nearly tripled to €4.3bn, as sales growth outpaced a 26% increase in operating expenses.
The group announced a dividend of €0.93 per share, an increase of 33%.
A €0.40 special dividend has also been proposed for 2022.
Sales between 1 February and 13 March were 33% and 21% ahead of 2021 and 2019 respectively. The group intends to raise prices to combat inflation, which isn't expected to have a material impact on volumes. Sales in Russia and Ukraine were responsible for around 5 percentage points of this period's sales growth, but trading at stores in the region has been halted. Overall the group expects Spring/Summer sales growth in the mid-single digits.
The shares were broadly flat following the announcement.
Zara parent Inditex is doing everything right. The group's managed to ramp up operations beyond pre-pandemic levels without costs coming along for the ride. It's a testament to the success of the group's nearly complete optimisation strategy. And we think it makes Industria de Diseno Textil (as it's formally known) one of the better placed bricks-and-mortar retailers.
The group's now fully integrated its online and physical store inventory. That should further improve what is already a key strength: excellent supply chain control. By keeping inventory to a minimum Inditex doesn't have to tie up lots of money in excess stock, and can react quickly to changes in fashion trends.
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 in turn helps support more premium price tags.
Efficiency is also being boosted by the group's optimisation plan. As well as digital investment, the project includes closing smaller stores and focusing on bigger ones in prime locations. This is nearly complete, and is already paying off with margins at 6-year highs. We should also note the group has a net cash position of over €9bn, which is likely the envy of many competitors.
We're supportive of Inditex's strategy, but there are some things to be mindful of.
The crisis in Ukraine will hold back sales growth. Ukraine and Russia contributed about 5 percentage points to sales growth in the current period. The group should be able to take this knock to sales in its stride as growth in other markets together with improved profitability will paper over the hole for now. But prolonged closures or more widespread disruption could become a bigger issue.
Inflation's also threatening to upset the apple cart. Inditex's fashion has a relatively high price point, which is a concern given the rising demands on customers' cash right now. This is of particular note in the US, which has been identified as a key area of growth. With 4+ interest rate hikes expected through 2022 and 2023, and a near 8% increase in living costs squeezing discretionary income, appetite for fashion could be depressed.
These concerns have brought the valuation down to significantly. But with shares changing hands for roughly 18 times future profits, this is still relatively high for the sector.
Longer-term we think the group is in a great position thanks to its scale and formidable business model. In the near-term, the focus will be on whether the group can remain on course in an increasingly uncertain environment.
Inditex key facts
- Price/Earnings ratio: 17.8
- 10-Year Average Price/Earnings ratio: 25.0
- Prospective dividend yield (next 12 months): 4.7%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Full Year Results
The US became Inditex's second largest market, after Spain. All of the group's brands reported double-digit sales growth with Zara (71% of group sales) and Stradivarius the strongest performers.
Online sales rose 14% and now make up 25.5% of total sales. This is expected to exceed 30% of total sales by 2024.
Store optimisation, which aims to increase profits per square foot, is nearly complete. The shift to the Inditex Open Platform (IOP) to manage inventory is now complete. This contributed to gross margins of 57.1%, a 6-year high. The group expects margins to remain at a similar level in 2022.
The group's inventory rose 31%. This reflects unusually low stock at the end of 2020 due to the pandemic. Inditex has also accelerated inventory purchasing to mitigate the effect of supply chain problems.
Free cashflow rose from €631m to €4.0bn thanks to improved profits. This fed into a 24% increase in net cash to €9.4bn.
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