Morningstar | Inditex 1Q Revenues Hit by Weather But Gross Margin Expands. Shares Attractive
We are reducing our fair value estimate for narrow-moat Inditex to EUR 29 per share as the firm reported first-quarter results, with weaker growth than our full-year expectations but a margin improvement. The reduction in fair value is largely because of our more cautious stance over the long-term growth rate (we are reducing our stage II growth rate to 6% from 8%) because growth from such a significant size would become more difficult, while the high rate of competitiveness in the apparel segment would limit pricing power. We still view shares as attractive at current levels.The store count in the first quarter was flat, while sales increased by 5%, affected by adverse weather at the end of the quarter. The firm remained comfortable with 5%-6% gross space growth and 4%-6% like-for-like guidance (we forecast 4% net space contribution, 1% in-store like-for-like growth, 27% growth in online sales and a slightly positive currency impact). The beginning of the second quarter was strong, with 9.5% sales increase in local currencies. Inventories were only up 1% in the first quarter, showing flexibility of the business model despite challenging weather conditions.
The gross margin expanded 61 basis points year on year while EBIT, excluding the IFRS 16 impact, improved 7% (an operating margin improvement of 31 basis points). Including the IFRS 16 impact, the EBIT margin increased to 16.5% from 15.1% a year ago because part of the operating lease payments are reflected as interest expenses. Management provided little background about a gross margin improvement. Over the the long term, we are comfortable with flat gross margin projections, given the additional benefits of increasing scale are likely to be reinvested in a better customer price/quality offer, and considering competitiveness in the apparel industry. However, full oversight and integration of stock between stores and online may increase full-price sell-through, contributing positively to the gross margin.
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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