Industria De Diseno Textil SA (ITX) EUR0.03
HL comment (9 June 2021)
Sales in the first quarter were €4.9bn, up 56% from last year, excluding the impact of currency changes. However, that remains 11.5% lower than 2019. The group reported net income of €421m, compared to a €409m loss in 2020 and €734m profit in 2019.
As at 6 June, 98% of stores were open and sales in the first month of the new quarter came in 102% ahead of 2020 and 5% ahead of 2019.
The group plans to pay the remaining €0.35 dividend payment on 2 November 2021, bringing the total to €0.70.
The shares were up 1.2% following the announcement.
The pandemic blew a hole in Inditex's sales and profits, but first quarter results suggest the group is firmly on the road to recovery. Uncertainty persists, but we still think Industria de Diseno Textil (as it's formally known) is one of the better placed bricks-and-mortar retailers.
Despite the last year's challenges, the world's largest retail fashion chain can take some positives from the last year. In particular, the huge boost to online shopping is probably here to stay and Inditex was ahead of the curve on that front.
Last year the group 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.
The new inventory model digitally tracks items, and means local stores can be used to fulfil online orders. This reduces processing time and costs. 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 focussing on bigger ones in prime locations. We should also note the group has a net cash position of over €7bn, which is likely the envy of many competitors.
We're supportive of Inditex's strategy, but there are some things to be mindful of.
Inditex's fashion has a relatively high price point, which could become an issue if the economy doesn't bounce back as readily as anticipated.
With 98% of its stores now open, it's crucial negative sales trends reverse in the coming months and sales are sustained in face of wider problems on the high street. That's especially true because at the time of writing, the shares change hands on a PE ratio some way above the ten-year average. That puts pressure on trading to keep moving in a positive direction.
Longer-term we think the group is in a great position thanks to its scale and formidable business model. In the nearer-term though the priority is how quickly the group can claw its way back to pre-pandemic levels.
Inditex key facts
- Price/earnings ratio: 29.4
- 10 year average Price/earnings ratio: 24.6
- Prospective dividend yield (next 12 months): 3.0%
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.
First Quarter Results
84% of stores were open at the end of the period and 24% of trading hours were unavailable due to lockdowns. Despite this store sales improved progressively throughout the quarter and online sales rose 67% at constant currency. Operating expenses were up 19%, reflecting increased activity, but that was more than offset by the year-on-year increase in sales.
Zara remained the group's largest store concept, making up 38.7% of the group's portfolio. In May, Zara Beauty was launched and so far reception has been "very good."
The group's net cash position increased by 25% to €7.2bn, the result of a increased sales and efficient inventory management. Inventory at the end of the quarter is considered "high quality" and was up 5% from 2020 levels, but down 5% from 2019.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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