EUR 850.00 For Business Accounts Only

Morningstar | Inditex Decently Weathers Weather Condition Challenges in 3Q. Shares Attractive. See Updated Analyst Note from 12 Dec 2018

We maintain our fair value of EUR 31 per share, as Inditex delivered third-quarter results, negatively affected by late start of the season. We now forecast somewhat weaker full-year sales but better margins, which has offsetting impact on our fair value estimate. We view shares as attractive at current levels.

Like for like in the period from August to end of November grew by 3%, which was lighter than 4% growth in first-half 2018 and 4%-6% like-for-like guidance for the second half of the year (which was maintained). Following weak September with unseasonably warm weather across major markets, like-for-like improved to 5% in October and November. Inditex opted not to participate in promotional environment, which spread wide in the industry in the quarter. This decision resulted in strong gross margin development--gross margin improved to 58% in the first nine months of 2018 versus 57.4% a year ago with notably strong 110 basis points improvement in the third quarter. Operating leverage was positive, but operating margin improvement was dampened by negative currency impact.

Although like-for-like development was slightly below the lower bound of management's guidance so far, we don’t see higher risk of discounting into the fourth quarter as inventory situation remained healthy (inventories grew 3% year on year, in line with revenue development in the first nine months). We believe Inditex remains strongly positioned among its peers to adjust quickly to the changes in demand and weather patterns through its fast supply chain and should continue gaining market share. We don’t change our long-term forecasts for largely flat gross margin, as we believe that in a highly competitive apparel space, Inditex would have to reinvest in its quality/value proposition to remain ahead of the competition.