Today we review Inditex, the largest Spanish company by market capitalization and a fashion giant, whose stores can be found in all the shopping areas where we go, both in Spain and in the rest of the world. We all know the brands Zara, Bershka, Pull & Bear or Massimo Dutti, and also its founder Amancio Ortega, one of the richest people on the planet.
Inditex was born in 1963 as a company dedicated to the manufacture of women’s clothing. Amancio Ortega, founder and major shareholder of the group, began to develop his own designs together with his first wife, making the clothes at home. In the beginning, he operated under the name Confecciones Goa. And it was not until 1975 when he opened the first store under the name Zara in a central street of La Coruña.
Its expansion throughout the rest of Spain began in 1983. In 1984 it opened its first logistics center, and in 1985 Industria de Diseño Textil S.A. (Inditex) was created. It was in 1988 when Inditex began its international expansion with its first store in Oporto. And a year later, the first Zara store was opened in the United States (1989).
While the 1980s was a decade of expansion for the Zara chain, the 1990s were characterized by the creation and acquisition of new chains. In 1991, the Pull & Bear division was created and Inditex acquired 65% of Massimo Dutti, and completed its acquisition in 1995. The group’s expansion continued with the creation of Bershka (1998) and the acquisition of 90% of the Stradivarius fashion chain (1999).
Since 2000 its expansion strategy has been through new own brands such as: Oysho (2001), Zara Home (2003) and Uterque (2008). Inditex has been listed on the stock exchange since 2001, coinciding with the creation of Oysho, and since then it has stood out for its accelerated growth in both sales and profits.
In 2007 the Group opened its first online store through Zara Home. The last few years have allowed Inditex to continue to grow in many countries, and also to grow at breakneck pace through digitalization: online sales have been strongly boosted after the health crisis of 2020.
It is worth mentioning that during the COVID-19 Inditex was one of the few companies in Spain that did not request ERTE, despite completely closing its activity, and also tried to lay off as few employees as possible. As a preventive measure they cut the Dividend. This speaks very well of the company’s working conditions and ethical culture.
In 2021 Inditex launched a new line of activity with Zara Beauty, dedicated to cosmetics. Finally, as of April 1, 2022, Marta Ortega Pérez (daughter of Amancio Ortega) is the new chairman of Inditex, replacing Pablo Isla, the successful CEO of Inditex since 2005 and chairman of the group since 2011.
Inditex is already a fashion giant, and is by far the company with the largest market capitalization in the IBEX 35. The group currently has more than 5,800 stores around the world. A lower number of stores than in previous years due to the conflict in Ukraine, which has led the group to permanently cease its activity in the 514 stores it had in Russia. Its 82 stores in Ukraine also remain closed.
Inditex’s main activity consists of offering the latest fashion trends (clothing, footwear, accessories and home textiles), offering high quality at attractive prices. This activity is carried out through different commercial formats, such as Zara, Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho and Zara Home. Each of the formats operates both through physical stores and online sales, and each one is focused on a different type of customer according to their age or purchasing power, so they reach all segments of the population.
The Inditex Group is credited with creating the Fast Fashion concept, thanks to its rapid ability to bring out new collections. This is thanks to the fact that Inditex has one of the most advanced logistics systems in the world.
The Group’s supply chain has a worldwide presence, and is organized through 12 supplier clusters that work entirely for Inditex and concentrate 98% of total production. Furthermore, the factories are located in areas close to the design centers. In this way, the Group has the capacity to adapt its commercial offer to any changes in trends that may arise, in order to adjust the number of garments to the real demand. The centers receive daily information on everything that is happening inside the different stores, so the catalogue is personalized and varies greatly according to the culture and tastes of each country. Its structure also allows it to quickly imitate the models presented by other brands on the fashion catwalks and sell them within a few days.
In its Annual Accounts, the Group is optimistic about the coming years, and sees great opportunities for growth in the USA. With Zara alone, it expects to implement at least 30 more stores in this country between 2023 and 2025. Similarly, in continents such as Asia and Africa, its market share is still small and the middle class population in these countries tends to grow. In 2022, the Group’s sales are structured as follows:
The fashion sector has historically grown at rates of 4-6%, an interesting growth, but at the same time it is a very competitive sector due to the lack of differentiation and the continuous change of trends. Inditex’s most direct competitors are H&M and Uniqlo and GAP, although due to the growth of online sales, there are other online competitors such as Asos, Amazon and Alibaba.
Inditex is very well positioned within the sector, and its most important competitive advantage is its vertical integration. As we have said, the Group has a highly organized and well-located supplier cluster that is entirely dedicated to the production and distribution of garments for Inditex. The main competitors, on the contrary, do not have their own factories and carry out the different stages of production in different parts of the world in order to minimize costs. This makes them take longer to produce, and therefore they produce most of their garments at the beginning of the season, while Inditex only produces 15% of its collections in that period. This makes it easier to change the collection if it does not success. Creating short collections also increases the feeling of scarcity, and consumption needs. This leads to not having to discount (good point for not penalizing the margin), as the garments are available for a very limited time.
Inditex’s network of stores is present on 5 continents, and its modern online shopping platform allows it to have a business model that is perfectly adapted to the fashion world. People can buy a garment online and if they are not convinced, go to a store to exchange or return it. This advantage is impossible for a competitor that only operates online. As we will see below, after the online shopping boom, and in the face of recent macroeconomic adversities, Inditex has been able to further increase its Competitive Advantages. Its strategy is difficult for competitors to imitate, since they would have to change their entire logistics structure, their stores, open their own factories… And also for the new ones, which cannot compete on price, since they do not have scale.
The largest shareholder of Inditex is its founder Amancio Ortega, who owns 59.29% of the shares of Inditex, through companies such as Pontegadea Inversiones and Partler Participaciones. His daughter Sandra Ortega also has an important shareholding of 5.05% through the company Rosp Corunna Participaciones Empresariales.
Followed far behind are some well-known wealth management institutions such as Capital Research & Management (1.63%), Norges Bank (1.25%), The Vanguard Group (0.92%) and BlackRock Fund Advisors (0.67%).
Let us now analyze its financial statements in detail.
1) FINANCIAL HEALTH: BALANCE SHEET
At first glance, Inditex’s Balance Sheet looks healthy, with extremely low Intangibles, a very comfortable current ratio, and high Financial Autonomy. Let’s go point by point.
Short-Term Assets and Liabilities
The Liquidity Ratio in 2022 stands at 1.80, a very high value and in line with previous years, as we can see in the report. The Cash Ratio (1.24 in 2022) is also very high, and therefore, its current assets are very liquid. With its cash alone, Inditex is able to meet all its short-term liabilities. This speaks of a very conservative company, which despite recent major shocks such as COVID-19 and the Ukraine war, has an excellent short-term financial position.
The weight of inventories is very low. We have seen in the introduction that Inditex has one of the most advanced logistics systems in the world. The numbers do not deceive: stock represents 10.64% of Inditex’s Total Assets, while at H&M this rises to 22.13%. If we analyze the inventory turnover period, at Inditex in 2022 it is 83 (days it takes the company to convert inventory into sales), and H&M has an inventory turnover period of 141 days, 70% longer.
Long-Term Assets and Liabilities
Fixed Assets represent 48% of Total Assets. A fairly high value that is mostly represented by the stores where it operates: both in rights of use and ownership, since from 2019 the accounting regulations require to recognize as Assets the rental rights of the current period.
Intangibles represent only 4% of Total Assets, a very positive point, as Zara is one of the most valued fashion brands in the world. These Intangibles are mainly composed of computer applications, since Goodwill represents a very small part of its Assets, as Inditex has grown mainly organically through the creation of its own brands.
The Debt/EBITDA ratio (-1.20) is negative, and does not need to be interpreted. While the Financial Autonomy (57%) is high, and the Reserves have always been growing, with the exception of the year 2020 due to the pandemic, where they decreased very little despite the hard hit in the activity.
We can conclude that, despite having recently gone through extraordinarily bad years, Inditex’s financial structure is very healthy.
2) PROFITABILITY: INCOME STATEMENT 2022
Sales are growing at an average annual rate of nearly 7.4%. Despite its already large size, and the recent turbulent macroeconomic situation due to COVID and the conflict in Ukraine, sales growth remains strong (+17.5% in 2022) and is three times the Fashion Sector average.
In 2022, Store Sales increased by +23%, even though the number of physical stores was reduced by – 10%, due to both increased foot traffic after the long confinement and higher productivity and logistical efficiency in the stores. Online sales continue to be very important and represent 24% of total sales, although they grew by only 4% in 2022.
Zara (+21%) was the format that increased turnover the most, while Massimo Dutti (+4%) grew the least. The company justifies this by claiming that Massimo Dutti was the format most affected by the exit from Russia.
In terms of geography, diversification continues to increase. Although Spain remains the most important market for the Group, the USA is already the second most important market, and the Group plans to invest more in the US in the coming years.
Net Margin stood at 13% in 2022, in line with the rest of the years, which is not easy in the current uncertain situation.
The operating margin reached 17%, and the most profitable formats are Zara and Stradivarius, although in general all formats show good margins.
If we compare Inditex with its competitors, there is an evolution of distancing, as in recent years Inditex has been able to further increase its competitive advantage based on logistics.
The results of H&M and Gap have not been positive (H&M reduced its result while GAP made a loss in 2022). In any case, the turnover of these two companies is far behind that of Inditex. It is worth mentioning VFC, which, although not a direct competitor, has had to cut the Dividend in 2023, and its share price has plummeted.
The only company that manages to keep its finger on the pulse is Fast Retailing, the owner of Uniqlo, which closed 2022 with a record profit, although in terms of turnover, it is still far behind Inditex. The following graph shows how Inditex has a larger size, higher sales growth, and is also more profitable than its competitors.
- ROA: 14% (Net Income/Total Assets)
- ROE: 24% (Net Income/Equity)
- ROCE: 79% (EBIT/ (Equity + Net Financial Debt))
If we compare the Balance Sheet with the Income Statement, the Profitability Ratios are excellent. The ROA is very high and shows that despite the fact that the physical assets are very high, the stores are operating efficiently. ROE and ROCE also show very high values and all this with a high Financial Autonomy.
We are talking about a financially healthy company, which is also efficiently managed.
Earnings per Share (EPS)
Average annual EPS growth was 5.77%, a rate that was slowed for two years by the effects of COVID-19, but which seems likely to recover its previous rate (around 7%) in the coming years, in line with the growth in sales.
In general, Inditex is a company given to distribute Increasing Dividends. During the years 2020 and 2021 the Dividend was cut as a precaution during the COVID-19, but in 2022 it increased by 33%, and in 2023 they have already announced that the Dividend will reach 1.20€ per share (+29% compared to 2021), and the annual growth in the last decade has risen to an average of 11.50%.
In our usual exercise, the dividend yields are not impressive, but they are respectable:
- If we had bought Inditex shares in 2017 at €24, the Dividend Yield we would have in 2019 would be 5%.
- If we had bought Inditex shares in 2012 for €21, the Dividend Yield we would have in 2019 would be 5.7%.
It is worth mentioning that back then Inditex’s share price was much more demanding, and the initial Dividend Yield reached 1.72% in 2012 and 2.83% in 2017. At the time of writing this article the DPS stands at over 3.8%. If good expectations are met, dividend yields can be much more attractive in the future.
Payout (Dividends/Net Income)
Inditex’s payout has been increasing and in 2022 stood at around 70%. A somewhat high level that indicates that we are already facing a mature company that offers a generous shareholder remuneration.
In 2020 they decided to lose their Aristocrat status for having reduced the Dividend.Perhaps a growing dividend could have been maintained, but to have cut it also denotes great responsibility and caution in periods of uncertainty.
1) Free Cash Flow considering Maintenance + Investing CAPEX
Inditex has not made any acquisitions in recent years, so let’s include in the Maintenance + Investment Capex in the first graph.
We can see that the Operating Cash Flow line is always well above CAPEX, generating a positive FCF that is more than sufficient for the payment of dividends during practically all periods, even in turbulent years such as 2020.
The OCF was distorted between 2019 and 2020 due to a change in accounting regulations for the recording of rents but the impact was null, and the trend of the FCF is growing and is increasingly comfortable to finance the payment of Dividends. We can conclude that Inditex is a great cash generator.
2) Free Cash Flow taking into account Total CAPEX
If we include financial investments, the Free Cash Flow is distorted due to the purchase and sale of financial investments. In 2020 CAPEX was negative to generate liquidity, for possible adversities during COVID-19.
Historically, the number of shares has remained stable. However, the last two fiscal years Inditex has repurchased shares under a Temporary Repurchase Program. These repurchases were not very large (they have reduced the number of shares outstanding by around 0.1% per year), but we hope that they will serve as the start of a more common practice in other countries such as the US. For the time being, the company has not commented on the matter.
We have seen that Inditex is part of a sector that, although it has expectations of continued growth, is very competitive. But the group has significant barriers to entry, which it has managed to raise in recent years, and its strategy is difficult for competitors to imitate.
The financial situation is excellent. Despite five years marked by various macroeconomic adversities, Inditex maintains a solid Balance Sheet with high Financial Autonomy, few Intangibles, good management of current assets and negative Financial Debt.
If we compare the Balance Sheet with the Income Statement, the Profitability Ratios are excellent. These adversities and the changes in the trend towards online shopping have allowed Inditex to stand out even more from its competitors, and to extend its competitive advantages. The only company that is managing to follow in its wake is Uniqlo, although it is still far behind Inditex in terms of turnover.
Regarding the Dividend the company is very generous, and in 2022 the Payout reached 70%. In general, the business is very profitable and growing, so it is viable to continue distributing increasing dividends. Inditex decided to cut it in 2020 as a precaution, but the financial situation is very solvent and it seems that it will be able to continue increasing it in a sustainable way since Inditex is a great cash generator and the profits show signs of continuing to grow.
Despite losing its Dividend Aristocrat status, we believe Inditex has good fundamentals, an efficient structure and a generous remuneration policy. Moreover, the outlook for the future is very bright, making Inditex a good fit for our strategy.
What is your opinion of Inditex and do you have it in your portfolio?
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Make Money in the Stock Market as a Private Investor, David Blanco Galisteo