Morningstar | Inditex Delivers Solid Results, Plans Global Online Rollout; Shares Attractive
We are maintaining our fair value estimate of EUR 31 per share for Inditex as the company reported first-half results broadly in line with our full-year estimates. We believe that Inditex is well positioned to gain further share in the fragmented global apparel market and see shares as attractive after the recent sell-off.Revenue came in at 8% in constant currency, with a 5% currency headwind, broadly in line with our full-year estimates. We expect currency headwinds to moderate in the second half of the year. Operating margin was only slightly down (14.8% versus 14.9% a year earlier) versus our estimate for a flat margin for 2018. Like-for-like sales were up 4% with solid performance across regions and brands. Management expects 4%-6% LFL sales growth in the second half. Space is expected to add around 6%.
Additionally, management reiterated plans for reaching online availability for all its brands in all markets by 2020. We believe the initiative should broaden the company’s reach at a reasonable cost (markets without a brick-and-mortar presence are expected to be served through existing logistics infrastructure) and potentially lessen the need for store expansions. Capital expenditures are still expected to grow more slowly than selling expenditures. We also regard online order fulfilment from stores as beneficial, through faster product delivery to the end consumer and more efficient inventory management, making the product available to more consumers across touchpoints and further increasing the probability of full-price sell-through.
Finally, despite acknowledging market concerns about increasing competition, trying to replicate Inditex’s business model (notably online players), we believe the company’s narrow moat is intact through the group’s substantial purchasing scale, which hardly any competitor can match, along with its fast supply chain and vast resources to invest in positioning the group strongly in the digital age.
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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