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Inditex: Adjusting for slower growth potential

We expect ITX to post weak Q4 results on March 14 due to a soft sales performance in the back half of the quarter, which may have forced it to offer higher discounts to clear excess inventory after a volatile A/W campaign. We forecast sales to rise 6%, with LfL and space adding 5pp each while FX should have shaved off 4pp. EBITDA should fall 1% YoY mostly on the back of a 120bp GM drop, with the booking of capital gains of Eur115m associated with Eur400m in property sales boosting net income growth to 6% YoY. We have also updated our model with the spot FX rates, and more importantly we have lowered annual space growth from 7% in ’18e-‘26e to 6% in ‘18e and 5% in ’19e-‘26e due to the growing competition from online. The latter coupled with the softer finish to FY17e have led us to cut sales/EBITDA/EPS for ‘18e-‘20e by an avg of 3%/7%/7%. Our EPS 18e is 7% below consensus and we expect earnings momentum to remain negative. As for valuation, despite rolling it over 1-yr to Jan/19, our FV dropped from Eur29.5 to Eur27.3 on the slower growth. We reiterate our Neutral rating.