Morningstar | Inditex's Revenue in Line With Expectations, but Profit Lower; Maintaining FVE
We are maintaining our fair value estimate of EUR 31 per share for narrow-moat Inditex as the company delivered lower-than-expected profits for 2018. Revenue was in line with our expectations while operating profit was 5% lower than we anticipated, largely driven by higher depreciation and amortization charges than we expected. Operating expenses, which include rental, employee, and other (related to online), increased 4%, in line with our expectations. Out of these, personnel expenses grew 4%, and rental expenses grew only 1% despite net space growth of 4.7%, showing good cost control and lease term renegotiation. Other expenses, which include costs associated with online operations, grew 7%.Negative currency impact shaved 3.6% off top-line growth. Excluding currencies, revenue grew 7% versus our expectation of 7.8%. Online business grew 27%, in line with our forecasts, and in-store sales growth was marginally weaker than we expected.
We note that despite a like-for-like sales slowdown in the second half of the year (to 3% from 4% in the first half), the inventory position remained healthy, with a 1% increase year on year versus 3% sales growth for the year.
As its growth is becoming less capital-intensive (capital expenditures/sales has declined from 6.5% on average over the past five years to 5%-5.5% currently), and the financial situation remains healthy with a growing net cash position (1.23 times EBITDA in 2018), the company is increasing its dividend payout to 60% from 50%. For 2019, the board proposes an ordinary dividend of EUR 0.66 per share and a EUR 0.22 per share bonus dividend. This implies a 3.5% dividend yield based on the current price. We are incorporating the increasing dividend payout in our models as the company matures. We continue to view the shares as attractive.
For 2019, Inditex expects to add around 4% in net space for the group and have like-for-like sales of 4%-6%. This is broadly in line with our expectations. We also continue to expect strong online growth, as the company continues to roll out its online presence globally and customers shift to online buying. Capital expenditures are expected to be EUR 1.4 billion, in line with our estimates.
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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