As you may have heard us mention on previous occasions, we invest in quality companies. To follow, we look at Inditex’s recent earnings report and share why we consider it a good investment for our clients.
Inditex is the main holding in EDM Inversión, the equity fund listed on Spanish markets, and is also a part of EDM Strategy, the European equity fund.
What we like about Inditex?
Inditex is a leading fashion distribution company, present in 210 countries. Its growth is much more stable than that of other firms in the textile sector and its portfolio is highly diversified by both brand and geography. It has an excellent management team focused on operational efficiency, purchasing experience, and ongoing product innovation.
The company published very good quarterly results in mid-September, managing to keep the share price at record levels. Sales saw double-digit increases in Q2, once again beating market consensus estimates.
In its first financial semester, the company boosted profits by 40% to EUR 2.531 billion, with gross margin up 14.1% to nearly EUR 10 billion. The focus, however, is on sales, which rose to EUR 16.581 billion, an increase of 13.5% relative to the previous year.
Inditex, which has opened in 20 markets, currently operates 5,745 stores compared to 6,370 at the close of Q2 2022, and 5,801 at the close of Q1 2023. Still, this reduction in stores does not imply a reduction in space, and the company hopes to close the year with a slight increase in total space.
Inditex’s main market is Spain, which represents 14.4% of total sales. Its second largest market is the United States, with a consolidated figure that we assume is roughly 10% of the group’s income. The company’s growth strategy involves leveraging the massive amount of customer data accumulated from its online channel to optimise the opening of new stores based on the demand observed on heat maps of online purchases. This approach will improve the success rate of new openings, especially in the US, where the online channel has been very prosperous, but where there are only 98 physical stores. With US market share at less than 0.5%, the growth potential is enormous.
The group appears very healthy, with the ability to generate large amounts of cash; current net cash totals EUR 10.546 billion, up 14.1% from the previous year. Its elevated cash position, coupled with the new interest-rate environment, generates financial income of EUR 131 million (-1M in H1’22 and 60M in Q1’23).
The company reiterated its guidances for the year, focusing on i) growth capacity in all geographical regions where market share is low, ii) improving productivity at physical stores, iii) boosting online sales, and iv) stabilising gross margin.
The share trades at a 2023 P/E ratio of 22x, (20x ex-cash) with a dividend yield of 4%.
The strength of the business is reflected in the share price, which has appreciated nearly 40% in 2023, and still, by valuation, Inditex remains below its historical average.
