Inditex: Sounder start to Q4 limits earnings cut
ITX’s 2% LfL growth in Q3 was undeniably weak, with the company lagging the QoQ evolution of our clothing retail sales index by close to 4pp on a 2-yr cum basis. We recognize that the decision not to embark on the widespread step up of promotional activity in the industry post the weather-driven slow start to the A/W collection may account for a big chunk of this gap but we fail to understand why the company has preferred to allow its GM to rise 107bp YoY in Q3 instead of using this cushion to boost top-line growth, which was 3% below consensus on a constant FX basis. Overall we have cut sales, EBITDA and earnings by an average of 2% for ‘18e-‘20e, mostly to allow for the weaker LfL in Q3, a slightly lower contribution from space growth due to a higher number of store absorptions and a 50bp stronger FX headwind in ‘18e. Our FV has also dropped by 2% to Eur25.5 (was Eur26.1) as we have not made any changes to our longer-term growth assumptions. 4Q18 results will be key to understand whether Q3 was just a blip or if it reflects a more structural deterioration of the competitive backdrop driven by the relentless growth of online and value retailers. The fact that ITX has managed to post a +5% LfL in November on a very tough comp does lend some support to the blip thesis and should prevent sharper earnings cuts at this stage. We reiterate our Neutral rating.Industria de Diseno Textil Inditex is the parent company of a group engaged in apparel and footwear manufacturing and retailing. The Group is made up of fashion retail chains, textile manufacturing, purchasing and fabric treating companies, logistics and construction companies which are responsible for store refits and manufacturing structure. Products include men's, women's and children's wear collections, footwear, and women's lingerie which are sold through the Group's retail store chains of: Zara, Kiddy's Class, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, and Oysho and Zara Home.
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