Inditex: The new normal
We expect ITX’s Q2 results (June 12) to again be weak, hampered by softer growth in clothing markets, a small deterioration of the expense ratio and a material increase in D&A. We forecast a 3.5% LfL, a 3% space input and a 0.5% FX tailwind, leading to sales growth of 7%. The weak LfL, namely for physical stores, should drive a 15bp YoY drop in the EBITDA margin despite a largely stable gross margin. The latter coupled with the higher D&A should lead to net income growth of just 4% YoY in Q1, which is well below the 11% growth forecast by BBG consensus. We would thus expect Q1 results to drive a further reduction of consensus expectations and help reduce the 5% gap to our FY19 Eur1.15 EPS. The negative earnings momentum should trigger a de-rating of the shares from the 19.8x P/E ex-cash 19e, which we see as too high in light of ITX’s slower growth profile (5% EPS CAGR 18-21e, vs. 8% for consensus). We reiterate our Sell rating with an unchanged FV of Eur22.2.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.
Haitong is the first international Chinese investment bank and our goal is to be the primary channel for capital flows into and out of China. During 2015 the Senior Management Team in London was expanded significantly to focus on this objective and to provide a full-service cross-asset markets business coupled with sector-focused investment banking. We work closely with our world-wide network of offices to bring a true depth of understanding to all client situations.
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