Inditex: Back to normal

What were the last results of Inditex ($ITX)?

On June 8th, Inditex released its first-quarter results, where basically, they disclosed a significant rebound due to the increase in traffic in its stores.

In the report, first of all, they remind us of the three main strategic pillars that guide their operations:

• Store & online integration
• Digitalization
• Sustainability

Even being quite schematic at this point, I like that they refer to them. It helps clarify and emphasize the culture the management wants to impress in the organization.

During this quarter (from February 1st to April 30th), the revenue has grown by 36%, reaching €6.7 billion. The online business decreased by 6% year over year due to the high watermark achieved last year when it grew by 67%). They expect online revenue to increase further and surpass 30% of total sales by 2024.

In terms of geography, they highlight that the strong growth continues in the US (which is good news due to the size of this market) and that apart from the close of stores in Russia in Ukraine, 67 stores were locked down in China during this period. By the date of this release, only four remain closed.

 

What is the outlook for Inditex ($ITX)?

About the outlook, they now expect to come back to pre-pandemic growth. Currently, 90% of the 6,423 stores they own are open.

Concerning the next quarter, Spring/summer collections were well received during May and June with a growth of 17%.

 

The capex for 2022 is expected to be around €1.1 billion.

 

What is the Capital Allocation of Inditex ($ITX)?

The approval of a regular dividend of €0.93 for this must be added to the €0.40 to be paid with charge to 2021 results.

Both types of dividends make a total of €1.33, which at the current market price of €22.8 would give us a return of 5.8%.

 

What is the Intrinsic Value of Inditex ($ITX)?

Given the financial history of Inditex, we cannot argue that we are talking about quality. Currently, according to TIKR, it has a Return of Capital of around 20%, but historically it was more frequently above 30%.

The big question is if they will be able to maintain their level of growth. They have increased their revenue at a compound annual average rate of around 10% from 2005.

Given the geographical spread that they currently have, it doesn’t seem easy to grow in that dimension. But we must consider the current growth in the online business and the possibility of widening their offer. Recently they introduced cosmetics and sports apparel in some of their shops, and these are only a couple of examples of the different products they could add to their successful model.

The role of the new CEO, Óscar García, is also a concern. Although after working in the company for years, we can expect similar direction and hopefully similar outcomes.

 

Looking at the organic traffic for zara.com estimated by Ahrefs, we can see that the number of searches that finish in the online store grows, not spectacularly but steadily.

 

 

 

 

Considering these points, I am confident in using a multiple of 20 with this company. If we multiply this figure by the estimated FCF by the analysts in 2024 (€4,886), remove the Net Debt expected by this year (€-10,707), and divide by the current number of shares (3,112,430), we get a target price of €34.8, which would give us a potential of more than 50% in two years.

 

 

 

 

 

What is Inditex ($ITX) doing in digitalization and sustainability?

 

Apart from the first strategic pillar, which is self-explanatory, building a platform that integrates physical stores with the online business, what is doing Inditex in the other two ones: digitalization and sustainability?

 

 

 

They don’t talk explicitly about digitalization, but on my last visit to the newest flagship shop in Madrid, I was able to see it in real life.

 

For example, below is a picture of some customers paying themselves directly for their purchased items and removing the safety tokens.

 

 

 

Apart from this feature, they could buy them online in advance and come to the shop to collect them on their own.

 

There were also QR labels where you could read with your cellular to see online the shop map and some additional info.

 

Finally, about sustainability, in the last results press release, they disclosed that apart from working on this subject with different start-ups, they have already committed to purchasing 30% of the production volume of Infinna, which recycles their fibers from used clothes.

 

There were also bins for dropping down used clothes in the new shop.

 Zara.com Organic Online Traffic according to Ahrefs