Summary

  • Industria de Diseno Textil (Inditex) is one of the largest fashion retailers in the world with eight distinct brands and 8.5 K factories worldwide.
  • Dividend yield of 2.37% in not high, dividend is safe.
  • Inditex’s sales have been resilient in very challenging environment, down only 28%. The company managed to stay profitable despite store closures due to lockdowns and restrictions. In 2021 both revenue and profits are improving fast.
  • The company is almost debt – free and has large cash reserves making it financially very strong.
  • According to our estimates long – term investors could expect almost 10% per year average annual return at the current stock price.
Dividend    Revenue    Profitability    Financial Strength    Investment Case

Inditex (ITX) offers customers latest fashion trends – apparel, footwear, accessories and home textiles – at attractive prices. It has almost 7K stores in 96 markets. 4.6 K stores out of them are in Europe and 1K – franchises. The company divides business into the following geographies: Spain,  Europe (ex Spain), Americas, Asia & Rest of World. The majority of sales is generated in Europe.

ITX3

Inditex implements research, development and innovation activities in all areas of business, including designing clothing, accessories and household items.

The company’s brands are as follows:

  • Zara – sales of EUR 14 B in 2020. In 2020 Zara launched new product categories, including The Female Gaze, Archive, Zara Wo(man). Zara Home collections cover everyday household needs. New categories for the kitchen, painting and music were introduced over the year.
  • Pull & Bear – EUR 1.4 B in sales. It has strengthened its links to world of art, music and entertainment.
  • Massimo Dutti – EUR 1.2 B in sales. In 2020 promoted ‘Capsule Collection’ and ‘Joint Life’ collections for daily wear.
  • Bershka – EUR 1.8 B in sales. It has alliances with global artists and NBA through its collections ‘Stay Unite’, Hack Denim and others.
  • Stradivarius – EUR 1.3 B in sales. In 2020 launched Music to Stay Home and Dress To Go Nowhere campaigns and live stream shopping channel Stradishoppers TV.
  • Oysho – EUR 0.5 B in sales. Focuses on the world of sport through its collections and ‘Train With Us’ training program.

The company develops Inditex Open Platform (close to 90% complete) – a digital platform enabling virtual management of various business activities. It will integrate all the brands and will improve inventory turnover.

  Dividend

Dividend Dividend Yield 5Y Growth PayOut Ratio Ex-Dividend Date
EUR 0.7 per share 2.37% 3% per year 194% 2021 Oct 29

Inditex splits total dividend in ordinary (60% of EPS) and extraordinary. The dividend for 2020 consists of ordinary dividend of EUR 0.22 and extraordinary one of EUR 0.48 per share. It is paid in two equal payments of EUR 0.35 in May and November. Those payments will amount to EUR 2.923 B. EPS (EUR 0.355) is lower than dividend, so dividend is not covered by earnings in challenging 2020. However average payout ratio over the last 5 pre – covid years is 62%. So dividend is historically well covered. The company generates strong cash flow making dividend payments safe. It could be expected that dividend in the coming years will be gradually increased at the same pace as in the past, about 3% per year.

   Revenue

Revenue 5Y Growth Revenue growth over 2020 Company Outlook 2021
EUR 20.4 B

 

 

 

 

 

 

 

-0.5% p. a.

 

 

 

 

 

 

Total sales                    -28%

By divisions:

Zara                               -28%

Pull & Bear                   -28%

Massimo Dutti             -37%

Bershka                         -26%

Stradivarius                  -27%

Oysho                            -14%

No specific outlook provided.

 

 

 

 

 

 

 

In the pre – pandemic years Inditex’s sales have been growing in smooth and consistent way. In 2020 revenue is down from EUR 28.3 B in 2019 to EUR 20.4 B. In Q1 2020 as many as 90% of stores were closed due to the pandemic related restrictions. 100% of stores were reopened at the end of Q3. In the last two months of the year restrictions again were imposed in certain markets. So at the end of the financial year, January 31, 3% of stores were in full lockdown and 52% had restrictions.

IT infrastructure and digitalization initiatives allowed online sales growth. In 2020 online sales were up 70% to EUR 6.6 B, amounting to almost one third of total sales. Online customer visits reached 5.3 M, 50% increase over the year. The Group implements the unified model of store and online sales based on digitalization, integration of store and digital world and sustainability. It intends to spend around EUR 1 B on digitalization over the next three years.

In Q1 2021 online sales improved further increasing 67%. Total sales (both store and online) also show strong recovery – up 50% over year. As the pandemic fades the company should be able to return to pre – Covid revenue level in relatively short term and continue its upward trend.

  Profitability

Profit 5Y Growth Net Profit Margin ROE
EPS 0.355 EUR

Net Profit EUR 1.1 B

-17% p. a.

 

5.4% in 2020

13% in 2019

8% in 2020

 

Inditex managed to stay profitable despite the disruptions caused by the pandemic. Net profit is down 70% from EUR 3.6 B in 2019 to EUR 1.1 B. EPS is down from EUR 1.168 to EUR 0.355. The company implements cost management across all departments and business areas. In 2020 it closed 751 unprofitable stores during store optimization process. Operating expenses were 17% lower over the year. In Q1 2021 it turned profitable, earning EUR 0.4 B in net profit. Gross margin in 2020 was stable at 55.8% (almost the same as in 2019) and is improving in 2021. The company puts efforts to grow sales and effectively manage costs. It produces and sells products in a fast way thus creating high inventory turnover.

In the future we expect EPS to return to 2019 level and grow further at least at the same rate as in the pre – crisis years, about 8% p.a.

  Financial Strength

Company Capital Structure

In EUR B

Year 2019 2020  
Equity 14.91 14.52  
Cash 4.78 7.4  
Debt, incl. lease 6.85 6.165  
Net Debt 2.07 -1.235  
Debt/Equity 46% 42%  

Inditex grows without using debt financing. The debt of the company mainly consists of lease debt as it holds most store premises under lease agreements. Interest on lease liability was EUR 0.12 B, very easily coverable by operating profit of EUR 4.552 B. Financial debt was only EUR 14 M at the end of the year. Operating cash flow is 49% of the total debt. So the company has very strong balance sheet.

  Investment Case

The estimate of future stock price and investment returns based on P/E ratio

Assumptions of dividend and EPS growth over the next 5 years
Dividend would grow at 3% per year rate over the next 5 years. So the total dividend income over the next 5 years would amount to EUR 3.83 per share.

We could assume EPS is back to EUR 1.17 next year and grows 8% p.a. thereafter. Then EPS in 5 years will be EUR 1.59 per share.

Projected stock price
Average P/E over the last 5 years (27.28) multiplied by EPS in 5 years = 27.28x EUR 1.59= EUR 43.38
Future Returns Based on the Assumptions
Stock price upside potential                                     47%    from the current price of EUR 29.57.

Overall return on investment*                                   60%

Compound Annual Return on Investment               9.8%

*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.

Inditex operates in very competitive environment with constantly evolving customer profile. The company faces competition from other online retailers, including pure online ones. That puts pressure on profit margins and could make it more difficult to improve profitability. Also the pandemic still causes disruptions to a business as movement restrictions are re – imposed in various markets. In the period of the pandemic related challenges the business demonstrated strong resilience. It moved forward with digital transformation, improved cost efficiency, protected profit margins and generated strong cash. Its online sales growth is impressive and should be substantially higher in the future. This pandemic – tested company has great times ahead.

Disclosure:

I have no position in the stocks mentioned in this article and do not intend to initiate any positions within the next 72 hours.

Notes

Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.

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