INDITEX

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:

Sector

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.

Shareholders

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.

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.

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.

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.

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.

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.

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.

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

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.

CONCLUSION

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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Sources consulted:

https://www.inditex.com/es/inversores/relacion-con-inversores/

Annual Reports 2010-2020

Make Money in the Stock Market as a Private Investor, David Blanco Galisteo