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Inditex - sales and profits climb

Zara's parent company, Inditex, saw its half-year sales grow 16.6% to €16.9bn.

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Zara's parent company, Inditex, saw its half-year sales grow 16.6% to €16.9bn, ignoring the impact of exchange rates. This reflects growth across all geographies and brands.

Operating profit rose 30.2% to €3.2bn, as sales growth outpaced rising operating costs, which are also climbing at double-digit rates.

Free cash flow rose from €1.3bn to €2.4bn due to better operating performance and a lowering of inventory levels. The net cash position, including lease liabilities, improved from €3.6bn to €5.1bn.

The optimisation of stores is ongoing, with gross space expected to grow by around 3% this year despite fewer open stores. Gross margins are expected to remain stable at around 58%.

The remaining €0.60 of the 2022 final dividend will be paid on 2 November 2023, taking the total to €1.20.

The shares fell 1.3% following the announcement.

View the latest Inditex share price and how to deal

Our view

Zara parent, Inditex, continued its hot streak in the first half of the year.

Inditex also owns other fashion favourites like Pull&Bear, Bershka, and Stradivarius - all of which have seen an uptick in sales as consumers flocked to scoop up the latest Autumn/Winter collections.

Sales growth continues to outpace higher operating costs, helping profits to jump. 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's set to continue this year, with floor space expected to increase by 3% this year despite a much lower number of open stores. It's bold moves like this which are helping the group maintain its impressive margins.

Self-checkout areas are being installed across the group's brands to enhance the customer experience, which should also help ease pressures on queue times and staffing costs.

The group continues to focus on digital investment too. Fully integrating its online and physical store inventory is helping to improve supply chain visibility, and allows the group to react quickly to changing fashion trends. This has enabled Inditex to reduce its inventory levels, freeing up cash to deploy elsewhere in the business.

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 €5.1bn including leases, which is likely the envy of many competitors.

We're supportive of Inditex's strategy, but there are some headwinds to consider.

Operating expenses are also rising at double-digit rates, meaning any missteps will quickly hurt the bottom line. We're pleased to see that the dispute over workers' pay is now resolved, but as part of the agreement, wages in Spain are planned to rise in line with inflation over the coming years. Given that a third of the group's employees work in Spain, that will likely have a material impact on the group's costs if inflation remains elevated moving forward.

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 4.1% 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 20.9 times future profits. That's at the top end compared to peers, and 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.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 13th September 2023