Inditex exhibits its shield against the crisis but exposes its Achilles heel

Inditex has presented this week some unusual results in the solo debut of Oscar Garcia Maceiras in executive functions and Martha Ortega as president of the company. The company that owns Zara has confirmed its first impact due to the closure of its stores in Russia and Ukraine due to the war and sanctions, but has managed to recover its pre-pandemic rhythm after two years.

The expectations were not optimistic but textiles have far exceeded them and, as a consequence, it received the prize from investors for two consecutive sessions, although this Friday the general collapse of the markets caused it to eliminate a good part of the profits harvested on the stock market. Despite this, Inditex ends the week with an accumulated rise of 3% and recovers the first position of the Ibex 35 by market capitalization with more than 71,000 million euros after surpassing Iberdrola.

Inditex recorded a profit of 760 million euros in its first fiscal quarter (February-April), 80% more than last year. Their sales grew by 36%, to 6,742 million, while its gross result (Ebitda) rose 55%, to 1,917 million. The gross margin on sales reached 60.1%, the highest in the last ten years, with operating expenses 24% higher, below the increase in sales. His pnet financial position rose 28%, to 9,189 million, equivalent to 13% of its market capitalization. “Robust”, “solid” or “strong” were some of the adjectives used by the main investment banks that follow the action to describe them.

But analysts also looked at a metric that breaks with the tradition of the Inditex model to adjust to the maximum the clothing stock with which it operates and that raises some unknowns. Specifically, the inventory shot up 27% from last year, a move motivated, depending on the management, to avoid supply problems. “The inventory itself is of high quality. We have decided to speed up inventory entries without altering engagement levels, in order to increase the availability of the product before potential tensions in the supply chain”, assured García Maceiras in the conference with analysts.

The positive reaction on the stock market on Wednesday and Thursday -with an increase of up to 10%- was tarnished on Friday with a 4% drop. “The pessimists are likely to focus on the 27% year over year increase in inventory, as well as the slowdown in sales growth at the beginning of the second quarter, although that is a demanding basis of comparison. sales in store and online increased 17% between May 1 and June 5 and 13% in the last two weeks”they argue at Barclays in a report that points out two weak points: the risk of unsold stock and the loss of energy from the pace of sales.

Instead, the CEO of the company chaired by Marta Ortega ruled out problems in this way: “We are comfortable with current inventory levels”he told analysts. “The good execution in this period can be clearly seen in the evolution of working capital. As can be seen in this table, working capital has grown by 57% to €3.3 billion. As a side note, this is the highest Q1 gross margin achieved in 10 years,” Maceiras explained.

“While sales growth has slowed in the current period to +17% year-on-year, this is still well above our expectations for negative sales growth in the quarter and likely reflects a 28% sales increase.” since 2019”, point out the analysts of Deutsche Bank in a report. The Swiss of Credit Suisse considers that the group has been “quite aggressive” with the price increase for the spring-summer campaign and points out that the withdrawal of Russia or the weakness of the activity in China will end up being noticed.

For its part, Goldman Sachs is optimistic about Inditex’s accounts but points out some keys to observe throughout this, such as the inflation of input costs, which could have an adverse impact on gross margins in the short term, or the possible price increases to mitigate the above, which could affect the company’s sales volume. However, as in most companies, the investment bank expresses its concern about the impact of the rise in interest rateswhich could lead to adverse currency fluctuations or the risk of a “material fading of global consumer demand.”

In Deutsche Bank value positively the provision of 216 million euros for 2022 for Russia’s activities because it gives visibility and removes uncertainty for the rest of the exercise. Although there has been speculation in the Russian press with a imminent reopening of Zara on Russian territory, company spokesmen have also denied officially to the same media that cited real estate sources. Inditex closed fifty stores in the country, a measure that has affected 9,000 employees. The group’s stores act as a commercial anchor and center of attraction for many commercial venues in which it operates, hence the interest in disseminating that the fashion company will reopen.


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