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Inditex - sales continue to rise

Zara's parent company, Inditex, saw its first-quarter sales grow 15% to €7.6bn, ignoring the impact of exchange rates.

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Zara's parent company, Inditex saw its first-quarter sales grow 15% to €7.6bn, ignoring the impact of exchange rates. This represents growth across all geographies and brands.

Operating profit rose 43% to €1.5bn as sales growth outpaced rising operating costs.

The net cash position, including lease liabilities, improved from €3.4bn to €5.0bn due to better operating performance.

In the first month of Q2, sales were up 16% on the same period last year. Full-year gross margin is expected to remain stable at around 60%. The optimisation of stores is ongoing, with gross space expected to grow 3% during the year despite fewer open stores.

The group plans to pay the remaining €0.60 of the full-year dividend on 2 November 2023, bringing the total to €1.20.

The shares rose 3.9% following the announcement.

View the latest Inditex share price and how to deal

Our View

Zara parent, Inditex, is doing everything right.

Inditex owns other fashion favourites like Pull&Bear, Bershka, and Stradivarius too - all of which have seen an uptick in sales as consumers flocked to pick up the group's Spring/Summer collections.

Double-digit sales growth outpaced higher operating costs in the first quarter, 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%. 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. 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 €5bn including leases, which is likely the envy of many competitors.

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

A dispute over workers' pay has recently been resolved. On the one hand this is good news as it smooths out everyday business operations. But on the flipside, it saw the average salary in its Spanish stores rise by around 20%, with further increases planned over the coming years in line with inflation. Given that a third of the group's employees work in Spain, this will likely 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 some downward pressure on margins.

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 4.2% 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. 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: 7th June 2023