Inditex Posts Solid Results; Boosts Dividend and Capital Expenditure; Shares Attractive

We maintain our fair value estimate of EUR 32 for narrow-moat Inditex as the company reported very solid full-year results despite headwinds from inflation and discontinued operations in Russia and Ukraine. Inditex ITX remains our preferred pick in European apparel, trading in 4-star territory with around 10% upside to our fair value, even despite 30% price appreciation over the last year and significantly exceeding STOXX Europe 600 Index’s low-single-digit performance.

Revenue and margins exceeded our expectations with revenue up 17.5%, or 18% at constant currencies versus 16.4% in our forecasts. Operating margin was also stronger at 16.5%, after the write-down of Russian operations, versus 15.3% in our estimates, even despite lower-than-expected gross margin (57% versus 57.5% in our models and essentially flat from the previous year). In-store sales were up 23% despite the 10% store count and 6% space reduction from 2021 and achieving 16% sales per-square-meter improvement since 2019, suggesting continuing strong execution at a retail level and proactive retail space management, especially crucial given the structural shift to online channels, in our view. Online sales were up 4%, faring well in the context of a general deceleration of online channels. The start of the year has been strong with a 13.5% increase in constant currency from Feb. 1 to March 13 (17.5% if Russia and Ukraine operations are excluded). We believe Inditex should be able to grow sales by a high-single-digit percent in the midterm through market share gains; however, despite strong execution and real estate management, we don’t expect significant margin expansion given the competitiveness of the industry.

The dividend was increased by 29%, reaching an attractive 4% yield through a mix of ordinary and special dividends. The company is also stepping up growth investments with EUR 1.6 billion capital expenditure in 2023 from EUR 1.4 billion in 2022.