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Inditex - strong execution sees profits rise

Sales in the first nine months of the year rose 20% to €23.1bn, ignoring the effects of exchange rates.

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Sales in the first nine months of the year rose 20% to €23.1bn, ignoring the effects of exchange rates. This reflects the Autumn/Winter collection being well received by customers, driving positive sales growth in all geographies.

Inditex saw that online traffic and store sales ''increased markedly'' and the group expects online sales to exceed 30% of total sales by 2024.

Sales growth outpaced higher operating costs, helping operating profits to increase from €3.3bn to €4.2bn.

Gross margins are expected to remain stable for the rest of this financial year. Longer-term, Inditex will focus on improving its product proposition in a bid to drive organic growth.

Cash flow from operations has increased ''significantly''. This has helped the group's net cash position grow 4%, now standing at €10bn.

The shares rose 1.2% 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. Importantly, sales growth's outpacing higher operating costs which is good news for profits. 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, which has helped to improve 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 helping the group to maintain its impressive margins. We should also note the group has a net cash position of almost €10bn, which is likely the envy of many competitors.

We're supportive of Inditex's strategy, but there are some things to be mindful of.

Wider supply chain disruption led the group to build 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. So far, the gamble looks to have paid off, as early signs indicate that the extra inventory is being picked up by consumers. However, whether this continues is something to monitor over the coming months.

There are of course some headwinds to consider.

Around 1,000 shop assistants who work for Inditex's brands went on strike during Black Friday. This is part of a wider campaign by workers demanding higher wages amidst the cost-of-living crisis. The disputes over pay have not yet been settled, suggesting that wage costs could increase for Inditex moving forward - potentially putting downward pressure on margin forecasts.

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. Appetite for fashion could be depressed in the coming year.

These concerns have brought the group's valuation down over the last year. But with shares changing hands for roughly 19 times future profits, this is still relatively high for the sector. That means the pressure's on to deliver in the short term.

But 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 4.8% prospective yield - although no dividend is ever guaranteed.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 14th December 2022