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Inditex - sales and profit reach record highs

First half sales rose 25% to €14.8bn, ignoring the effect of exchange rates.

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First half sales rose 25% to €14.8bn, ignoring the effect of exchange rates. That reflects positive growth in all geographies. Operating costs increased at a slower rate than sales, helping cash profits (EBITDA) rise 30% to €4bn.

A one-off charge of €216m was recognised in the first quarter, relating to business in Russia and Ukraine.

New ranges have been received well and Inditex expects online sales to exceed 30% of total sales by 2024.

The shares rose 4.5% following the announcement.

View the latest Inditex share price and how to deal

Our View

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 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 impressive margins. 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 underlying performance. A hefty charge has already been put to one side, and provided this has been accurately accounted for, should be the worst of it. This is something to monitor in the coming months.

Wider supply chain disruption means the group has built up its inventory levels for the Autumn/Winter collections ahead of schedule. This is a different tack to the usually slick and reactive inventory method the group uses. It's the right move to make sure there's enough stock to service demand, but if sales growth stalls, being left with excess inventory would dent the group's financial position.

Inditex's fashion has a relatively high price point, which is a concern given the rising demands on customers' cash right now. Appetite for fashion could be depressed.

These concerns have brought the group's valuation down significantly. But with shares changing hands for roughly 17 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. That slick model also underpins a healthy 5.3% prospective yield - although no dividend is ever guaranteed. In the near-term, the focus will be on whether the group can remain on course in an increasingly uncertain environment.

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.

Half Year Results

Zara is still the group's biggest brand, accounting for 1,946 of the 6,370 total stores. Bershka, Stradivarius, and Pull & Bear are the next biggest by store size.

Zara net sales rose 29% to €10.9bn, while Bershka (next largest contributor to net sales) saw sales of €1.1bn, which was a 15% increase. Europe excluding Spain made up 46.3% of total sales, followed by the Americas which account for 20.1%.

Online sales were "positive" in the second quarter.

Inditex has accelerated the intake of its Autumn/Winter inventory because of potential supply chain tensions. That means inventory levels have increased 43% compared to last year. The inventory is considered high quality.

The group's integrated physical/digital business model helped improve cash generated from operations. The net cash position rose 15% to €9.2bn.

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.

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.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 14th September 2022