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INDITEX: FY2019 RESULTS (ANÁLISIS BANCO SABADELL)

4Q'19 vs. 4Q'18 Results
Sales: € 8.466 Bn (+9.8% vs. +8.5% BS(e) and +8.3% consensus);
EBIT: € 1.224 Bn (-5.0% vs. +13.8% BS(e) and +10.6% consensus);
Net Profit: € 919.0 M (-8.7% vs. +12.0% BS(e) and +9.9% consensus);
FY2019 vs. FY2018 Results
Sales: € 28.286 Bn (+8.2% vs. +7.8% BS(e) and +7.7% consensus);
EBIT: € 4.772 Bn (+9.5% vs. +15.1% BS(e) and +14.1% consensus);
Net Profit: € 3.639 Bn (+5.7% vs. +11.7% BS(e) and +11.1% consensus);

Excluding the impact from a € 287 M provision linked to stock deterioration due to COVID-19, the 4Q’19 results have beaten expectations in all business lines. We especially highlight the strong growth in LfL sales (+7.5% in 2H’19, vs. +5% BS(e) and +5% consensus).
The gross margin fell -305bp in the 4Q’19 but due to the provision outlined, and adjusted for this effect, it would have risen +34bps (vs. +18bps BS(e)). Operating costs came in slightly below expectations at +9% (+10% BS(e)), and thus EBIT adjusted for the provision grew +17% (vs. +14% BS(e)).
2019 Net Profit grew +6% up to € 3.639 Bn. Excluding the provision, Net Profit would have grown +12%.
COVID-19 has had a strong impact on the beginning of the 1Q, as the company has been forced to close stores in many countries. Thus, sales at constant exchange rate over the period from 1 February to 16 March would have dropped -4.9% (-24% in March alone).
The management team did not give a guidance for 2020 in the conference call. However, it pointed out that the variable component of the cost base is significant and expects the impact from COVID-19 to be temporary. In this regard, the company stressed that most of its shops in China have already reopened. The company has reiterated its long-term LfL sales target of +4%/+6% in the long-term. BUY. T.P. € 32.71/sh. (upside +55.32%).
After shedding -33% in the past month (vs. H&M -47%, IBEX -35%) and if we were to assume that the coronavirus has a temporary impact (limited to six months in 2020) the share price would be a good buying opportunity at current levels. However, visibility is very low and we will still see negative weeks for some weeks, and thus we believe it is too soon to adopt a more positive stance on the stock at this moment. Assuming that countries representing >40% of sales (Southern Europe, including France and China) keep their shops closed for 3 months, the impact on sales’20 might be -10%, which could have an impact on our T.P. of between -15% and -20%. We reiterate our BUY recommendation.