Zara's parent company, Inditex, saw its full year sales rise 18% to €32.6bn, ignoring the impact of exchange rates. In-store revenues accelerated considerably faster than online sales. Inditex enjoyed double-digit growth in all geographies.
Operating income jumped 29% to €5.5bn. This was thanks to sales growth outpacing a 15% increase in operating expenses.
Free cash flow fell from €3.5bn to €3.2bn as the group continues to invest in its store space. The group's net cash position grew 8% to €10bn.
Inditex sees "strong growth opportunities in a highly fragmented market". As such, it will continue expanding with gross store space set to grow 3% in 2023, while gross margin should also remain stable.
The group has announced dividends of €1.20 per share for 2022, representing an increase of 29%.
The shares fell 2.9% following the announcement.
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Our View
Zara parent, Inditex, is doing everything right.
Sales and profits have continued to move in the right direction as sales growth's outpaced significantly higher operating costs. It's a testament to the success of the group's optimisation strategy, which prioritises closing smaller stores and focusing on bigger ones in prime locations. The tactic looks to be working. In 2022, store sales grew 23% despite the number of stores falling by 10% - which has helped the group maintain its impressive margins.
The group continues to focus on digital investment too. Fully integrating its online and physical store inventory is helping to improve supply chain visibility. This helps keep inventory to a minimum. As such, 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. We should also note the group has a net cash position of €10bn, which is likely the envy of many competitors.
We're supportive of Inditex's strategy, but there are some headwinds to consider.
The dispute over workers' pay has now been resolved. On the one hand this is good news as it should smooth out everyday business operations. But on the flipside, it sees the average salary in its Spanish stores rise by around 20%, with further increases planned over the next three years in line with inflation. Given that a third of the group's employees work in Spain, this will have a material impact on the group's costs moving forward. If key brands like Zara, Pull & Bear or Bershka end up falling out of fashion, we could see margins coming under pressure.
It's also worth noting Inditex's fashion has a relatively high price point, which is a concern given the rising demands on customers' cash right now. Demand for the latest fashion could take a back seat this year as cost-of-living challenges mount.
Looking longer-term, we think the group is in a great position thanks to its scale and formidable business model. That slick model also underpins a healthy 4.3% prospective yield - although no dividend is ever guaranteed.
While we think Inditex is one of the better placed clothing retailers, the group's shares are currently changing hands for roughly 20.7 times future profits, which is relatively high for the sector. That means there's plenty of pressure to continue delivering growth.
Inditex key facts
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.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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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