The Fashion Retailer Inditex, the Bigger Picture by RBC


A few years ago, in a conference in Barcelona, I described how growing global uncertainties were impacting businesses and, as a consequence, how important was to invest in digitization and become a data-driven company. Examples of uncertainties included social riots (eg Yellow vests riots in France, Peruvian protests), weather extremes due to climate change or rising populism (eg Trump, Brexit). Unfortunately, uncertainties are rising and it seems we are living in a permanent crisis. Coronavirus and Putin’s invasion of Ukraine are the latest unexpected disasters and the social, economic or political consequences are still unkown.

In fashion retail, uncertainties or its consequences include delays in product delivery owing to port congestion and transport disruption, higher freight rate costs, exchange rate risk, raw material price inflation and manufacturing wage inflation. Retail companies that invested in agile and integrated supply chains aligned to their business models are the stronger ones to deal with uncertainties. Pablo Isla, former Inditex president, was a visionary implementing RFID and integrating physical and online channels within the fast-fashion business model. Furthermore, Inditex nearshoring production represents around 60%, meaning its risk of securing inventories are lower compared to competitors like H&M (read Apparel Brands report 2021).

Last week, Inditex published its FY21 report and these are some interesting insights from the analysis made by Royal Bank of Canada (RBC) Capital Markets team. In fact, I will participate in a call with Richard Chamberlain, from RBC, next April to discuss about the fashion retail outlook.

How are we thinking about 2022? Inditex reported a tougher end to its Q4 than we expected today, but also a stronger-than-expected start to FY23. For the coming year we think 2019 is a good place to start for sales and earnings. Inditex has lost a mid-single-digit amount of sales from Russia, Belarus and Ukraine (c.9% of EBIT), but this should be replaced by mid-single-digit price inflation and what looks to be a strong Q1. We don’t expect this to have a material effect on volumes given it’s the first overall price rise for several years, and as we expect ITX to take more share in a tougher consumer environment due to its ability to offer strong fashion and newness. Space contribution and currency on sales should be fairly neutral. Also of interest was the disclosure that the US has become ITX’s second-largest market, reflecting its strong online presence there. Inditex has guided to a stable gross margin outcome for the full year, which seems reasonable, albeit it is likely to be back loaded given the Q4 comp was once again impacted by Covid.

Inventory much higher but matched by sales trajectory. Inventory +31% yoy which might ordinarily raise a red flag but has been matched by strong sales so far. Also the comparable was artificially low last year, given ITX had c.30% of its stores shut, and we think it wanted to buy more in advance given bottlenecks in Asia.

Strong FCF generation and balance sheet enabling higher cash returns. Inditex’s FCF was EUR4bn, pretty much in line with 2019, helped by strong control of working capital and stable capex. As such net funds were EUR9.4bn, slightly ahead of our forecast. This gives ITX a trailing FCF/EV of c.7%, enabling it to pay what looks like will be durable special dividends, with a dividend yield of 4-5%.

Valuation reasonable versus global peers. We have reduced our FY23 estimate by a further 3% partly due to the soft end to Q4, which Inditex estimates cost it EUR400mn in EBIT, with stable gross margin guidance off the lower base. Our DCF-based price target falls in sympathy from EUR28 to EUR27. Inditex is now trading at c.19x CY22e P/E, just under its historical average, or 17x adjusted for its net cash position, with a higher FCF and dividend yield than global peers.

What is the long-term LFL sales outlook for Inditex?

Historically, space has been a strong driver of sales growth but recently Inditex has been driving its top line with strong omnichannel LFL sales growth. For Inditex online penetration has reached 26% and the company expects this to exceed 30% by 2024. Inditex has a strong track record for full-price sales (excluding pandemic effects), and we expect this to continue, helped by its differentiated business model.

What is the outlook for gross margin?

We expect full-price sales to be the main driver of gross margin going forward. Inditex’s full-price sales stance is aided by good inventory control as a result of Inditex’s single inventory position and integrated business model. For Q4 we should see a very strong gross margin uplift due to an easy comparable, and for FY23 we model a stable full-year trend, with currency and cost rises offset by pricing and sourcing benefits.

What is the outlook for opex?

We think that Inditex’s flexible and integrated business model allowed it to manage operating expenses tightly over the course of the pandemic. Operating leverage had been less than we expected, partly due to currency and higher shipping costs, however it started to come through more in H2. The implementation of operating efficiencies over the last year should enable Inditex to emerge from the pandemic with an efficient cost base, albeit there is a risk that ITX needs to spend more on online marketing to drive online sales.

The Bigger Picture – European General Retail, RBC

Taking a step back after Inditex’s FY results, a number of interesting trends emerged. Post Omicron we expect Inditex’s business model to be amongst the most resilient in the sector, with strong FCF and valuation close to historic lows.

Geographic shift from Asia to the Americas. If we look at Inditex’s growth in the 20 years since its IPO in 2001, we can see that the share of its sales from Europe has fallen from just overthree quarters to just over half today. Up until three years ago, Asia was the second biggest growth driver, but this has now fallen back to be replaced by the Americas. Within this the US has become Inditex’s second biggest market after Spain. This is due to its strong online growth, as only 5% of Zara stores are located there.

Non-Zara formats higher margin and ROCE. Inditex’s non-Zara concepts in aggregate generate a higher margin and ROCE than Zara (including Zara Home), with a particularly strong ROCE for Stradivarius (48%) and Pull & Bear (40%) compared to the group average of 28%.

FCF back to 2019 levels. 2021 PBT reached 90% of 2019 (pre pandemic) levels, but Free Cash Flow matched the 2019 level at c.EUR4bn, due to strong control of working capital and lower cash lease payments. This gives a FCF yield of 7%, adjusting for ITX’s net cash, which amounts to 14% of its market cap, and should underpin an enduring dividend yield of 4-5%.

Inditex also continues to make progress online (now 25.5% of sales) with a forecast of >30% by 2024, and on its sustainability initiatives eg energy consumption, sustainable fabrics and more environmentally friendly packaging. Main investor concerns relate to Inditex’s European and emerging market exposure, management transition and risks to margins.

% of Inditex stores and % of Zara stores for top markets – US now Inditex’s second
biggest market

Online penetration – this is currently 25.5% and should be >30% by 2024

Inditex online sales already represent 25% of total sales (€7.500Million). €1.155M from the mentioned €7.500Million (15% of total online sales) are managed through its SINT (Integrated Stock Management System), which enables shipping more than 46 Million orders from stores. This system is allowing e-commerce channel to take profit from stores inventory, enhancing omnichannel model and improving last mile logistics efficiencies.

Inditex said it increased its stock around 31% in 2021, as mentioned by RBC, in order to reduce supply chain risks due to the mentioned uncertainties and market volatility. Nearshoring, which reduces order-to-delivery lead time to stores, and a flexible supply chain are two key success factors to match supply and demand in a lean way. Retail is changing, Zara is already adapted to it.


  • European General Retail – INDITEX (OP) – The Bigger Picture. RBC. March 2022
  • Inditex – Recent volatility but FCF generation encouraging. RBC. March 2022


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