Industria de Diseno Textil SA

MAD:ITX

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the presentation of Inditex results for the interim 3 months 2018. The presentation will be chaired by Mr. Pablo Isla, Chairman and CEO. This presentation will be followed by a Q&A session comprising 2 parts, the first part will be dedicated to questions received on the telephone and the second part to the questions received through the webcast platform. Mr. Isla, you have the floor. Thank you.

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Thank you. Good morning to all the participants in this webcast conference call regarding Inditex results for the interim 3 months 2018. I am Pablo Isla, and here with me today are Ignacio Fernández, our CFO; and Marcos López, Capital Markets Director. The first 3 months of 2018 have been a period of strong execution for Inditex globally. We operate a global sales platform that fully integrates stores and online and offers huge growth potential. Our business model combines stores and digital seamlessly, and we are ready for the opportunities that this brings. We have a worldwide presence and have further diversified our business. We continue to see significant growth opportunities for Inditex globally. Inditex' performance in the period has been satisfactory. Our operations have also shown high efficiency and tight control. The year, so far, has been marked by very strong activity on many fronts. I would like to cover a number of recent initiatives carried out by Inditex.We have concluded the extension of Inditex headquarters in Arteixo, with new premises comprising 80,000 square meters of additional space to accommodate our growth plans. We have reinforced significantly the differentiation of our key global flagships with very visible openings and enlargements. I would like to highlight the reopening of Zara's flagship store at Stratford in London, enlarged now to 4,500 square meters. The store includes the latest technological features, including automated click and collect silos and self-checkout units. Bershka has enlarged its flagship store at Madero in Mexico City. Massimo Dutti has introduced a new image in its new flagships. Pull&Bear has also opened a flagship in Madrid at Preciados. Stradivarius is now operating from a new headquarters in Cerdanyola. Oysho has opened a flagship with a new image in Milan at Piazza San Babila. Zara Home has recently enlarged its flagship in Palma de Mallorca at Paseo del Borne. And finally, Uterqüe's new store look in its recent flagship at Claudio Coello in Madrid.Let me now hand over to Ignacio, who will present some of the key aspects of our financial performance, and I will join you later for the outlook section.

[Ignacio Izuzquiza Fernández, Chief Financial Officer]

Thank you. In the first quarter of 2018, Inditex has had a strong operating performance. Particular lines on the profit and loss account showed significant growth against very demanding comparables. Net sales reached EUR 5.7 billion; EBITDA, EUR 1.1 billion; and net income, EUR 668 million.Starting with sales, I want to tell you that Inditex performance in the period has been satisfactory, with local currency sales growth of 7%. Sales grew satisfactorily against very demanding comparables. Like-for-like sales growth has been positive in all key geographies in which we operate and with 2 significant external factors in the period: an early Easter versus last year and extreme weather conditions in some markets.Gross profit has increased 3% to EUR 3.3 billion, resulting in a 58.9% gross margin on sales. We have sustained our commercial policies over the period. Operating expenses are tightly under control, growing in by just 3%. These lines should be read in the context of the growth in sales, the start-up cost for new space, the refurbishments and the rollout of online sales. Operating working capital remains negative as a result of the business model. The working capital evolution is in line with the performance of the business. I will now hand over to Marcos, who'll elaborate on the performance of the concepts.

[Marcos López García, Capital Markets Director]

Continuing with our global expansion, we have opened stores in 36 markets. Global online launches have continued at a very rapid pace. Regarding the performance by concept in the interim 3 months 2018, Zara accounted for approximately 2/3 of group sales, while the younger concepts accounted for around 1/3 of sales. The younger concepts, grouped together, have performed satisfactorily. I would like to highlight that Pull&Bear and Oysho have performed strongly. I will now hand over to Pablo for the outlook section.

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Let me highlight that ordinary capital expenditures for 2018 will be around EUR 1.5 billion. We continue to invest in logistics and head office functions to ensure future growth, while we expect a lower capital intensity going forward. Regarding the outlook for the first half of 2018, I would like to add that the store and online sales in local currencies from the 1st of May to the 11th of June grew 9%. Just as a reminder, we made our interim 2017 dividend payment of EUR 1.2 billion on the 2nd of May 2018. We will continue to invest in the expansion of our business across a number of markets, all of which offer attractive long-term returns through our platform that fully integrates stores and online. Inditex online operations have seen very rapid growth in recent years. Our business model allows a strong development of our online sales with same-day delivery in Metropolis sales and next day as global standard. The latest step was the online launch of Zara in Australia and New Zealand on the 14th of March. We continue developing new initiatives in a fully integrated way as our recent launches of the Studio Collection, the Behind the Desert collection, the Atlantic Beach collection and the Colour Canyon collection. Before closing, I would like to highlight some selected Zara store openings in prime locations and enlargements from recent months. We continue to reinforce significantly the differentiation of our key global flagships with very visible stores. I would like to highlight the pop-up store at Roppongi Hills in Tokyo, dedicated to online orders while we complete the enlargement of the Zara store to be reopened in the second half of the year. We have recently opened the Zara store at the emblematic development of Upper Hills in Shenzhen. We have also opened a Zara flagship at Beverly Center in Los Angeles. And I would like to close the presentation by mentioning our new flagship of 4,000 square meters in Bilbao which has become a landmark destination. And this is all from us. We will be pleased to answer any questions you may have.

[Operator]

[Operator Instructions] The first question comes from Richard Chamberlain from RBC.

[Richard B. Chamberlain, Managing Director of Consumer Retail]

It's Richard Chamberlain here from RBC. I've got a question on the gross margin, please. I know it's a relatively quiet quarter, and you don't normally like to touch on gross margin too much on a quarterly basis, but it does look like the dollar buying gains here more than offset any negative currency mix impact in Q1. I guess the question I had though was did Inditex get a material benefit from any timing of its launch of the online spring collection this year? And also post the Q1, what is your expectation now for the full year in terms of gross margin range?

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Well, thank you. As you were saying in your question that we do not like to elaborate very much on the gross margin leverage for you at this time, we anticipated to you in March that this year, for the full year, we were not expecting any currency impact on the gross margin in the sense that the dollar-positive impact would compensate the negative currency impact on sales, and that we were expecting a stable gross margin for the full year. Of course, we continue with the same guidance. And you know that, for us, stable means plus/minus 50 basis points, because the gross margin is a combination of many different things. It has to do with like-for-likes, it has to do with fashion trends, with product mix. It has to do, of course, with currencies. But globally, what we can say is that we are happy, we are satisfied with the evolution of the gross margin at the beginning of the year. And we don't change our guidance for the full year in the sense of a stable gross margin for the full year.

[Richard B. Chamberlain, Managing Director of Consumer Retail]

Okay. I mean, I guess the Q1 margin change, though, is outside that range. It's close to 70 bps up year-on-year. So I wonder if there's any other factors, like timing -- collection timing that may have impacted that. And does that give you sort of more confidence now in that stable range for the full year, the fact that you're already running ahead of that or at the top end of that range?

[Marcos López García, Capital Markets Director]

Richard, as you know, the gross margin is a combination of many, many factors. It's true also that, as I note, we mentioned to you last year that Inditex took the commercial decision in spring 2017 to flow into a quick transition between seasons, and this was reflected in the gross margin performance in the second and fourth quarter last year. There was a slight positive impact from this in the first quarter '18 as they were the same in the third quarter. But again, this does not change our view for the year.

[Operator]

The next question comes from Adam Cochrane from Citi.

[Adam Gareth Cochrane, Director]

A question on space. In the quarter, you could see that you're still shutting some of the stores as you started at the tail end of last year. Does this change anything with regard to your view on space contributions for the full year given that how much you've done in the first quarter? Or is it a timing issue and you'd expect it just to be recovered throughout the remainder of the year, please?

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Yes, well, first of all, what I would say is that the space growth guidance that we were giving to you in March doesn't change. So we're expecting space growth to be around 6% this year and between 4% to 6% in the coming years. And of course, as you were mentioning, there is always this issue about the calendar. It is much better to think about the space growth than to talk about the number of stores because this is not showing the real picture in that sense. For example, we were finishing the presentation with this flagship store in Bilbao. When we opened this store, we were closing 3 small Zara stores that we used to have in Bilbao. So in terms of number of stores, it's minus 2. In terms of space, we have now more space than what we used to have with 3 Zara stores. So this is the case that is happening more and more. So for us, the relevant figure is space growth. And yes, of course, always, the openings of the year tend to be always a more significant number in the second half than in the first half. And in terms of absorptions, there is always -- there are always more absorptions at the beginning of the year than during the following quarters. But what I would say is that the relevant metric for us, as you know, is space growth, and we can confirm to you the guidance regarding 6% space growth for the year.

[Adam Gareth Cochrane, Director]

Just to clarify, is that 6% gross or net?

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Net, net.

[Operator]

The next question comes from Andreas Inderst from Macquarie.

[Andreas Inderst, Senior Equity Analyst]

Following up on that, how much was actually your space contribution in the first quarter? So space growth -- sales growth contribution for the first quarter? That's my first question.

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Well, as you know, we don't like to elaborate very much on our first quarter results. What we were saying about total sales growth in the first quarter during the presentation is that we have had positive like-for-likes in all the geographies in a quarter that has been marked by -- first of all, we had very, very demanding comparables, and second, we have had the early Easter and then extreme weather conditions in some different markets. So even with that, we have achieved a positive like-for-like sales growth in all the geographies. And as you can see with the trading update, sales growth in the first 6 weeks of the second half comes back to this 9% figure. So that is the relevant for us, and you know that we don't like to elaborate very much on a specific quarter about this or that element.

[Andreas Inderst, Senior Equity Analyst]

Okay, that's fair enough. In terms of online versus physical stores, in March, you nicely highlighted the sales growth contribution of online. Is that something you can also share with us on a quarterly basis? So how much was sales growth -- online sales growth?

[Marcos López García, Capital Markets Director]

On that, we will update you on a yearly basis. We prefer not to enter into this type of detail over the quarter.

[Operator]

The next question comes from Rebecca McClellan from Santander.

[Rebecca Anne McClellan, Equity Analyst]

A couple of questions from me, please. Firstly, are you managing to sort of get any increases in ASPs to sort of recover some of the past currency impacts in this market?

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Well, globally, our prices are stable in the different geographies. You know that this is our approach to the pricing policy. What we offer to our customers is the latest fashions at high-quality and affordable prices. We always think about the medium and the long term. Of course, when there is a big devaluation in any particular market, we're aggressively and smoothly we could think about transferring part of that devaluation into prices. But globally, our pricing policy remains stable.

[Rebecca Anne McClellan, Equity Analyst]

Okay. And secondly, could you just make a comment on Spain, how that's performing?

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Well, you know that we don't like to elaborate very much on a quarter about specific geographies. What we were saying is that we have achieved a positive like-for-like sales growth in all the geographies. And when we talk about geographies, we always talk about Spain, Europe ex Spain, the Americas and Asia. So we have achieved a positive like-for-like sales growth in all the geographies in the first quarter.

[Operator]

The next question comes from Cedric Lecasble from Raymond James.

[Cedric Lecasble, Financial Analyst]

Cedric Lecasble from Raymond James. I have a question on the phasing of the top line. Intuitively, and given some markets data for April, which looked strongest in March and February, how do you explain this kind of deceleration in April of your sales versus the start of the quarter, whereas market conditions seemed a little better in the later part of your quarter? And the follow-up question on this is on the transitioning of collections, you had a negative impact last year in Q2 on your gross margin. We are -- annualizing this effect, should we expect a more neutral impact from this, this year?

[Ignacio Izuzquiza Fernández, Chief Financial Officer]

Starting with the second one, your assumption is right. Regarding sales in terms of the quarter, what we can tell you is that we're very satisfied with sales, 7% in local currencies. You've seen the comparable in the presentation, which is extremely demanding. And with 2 very -- again, positive like-for-like in all geographies and 2 unusual factors, in the sense, an early Easter and some, I would say, extreme weather conditions in some markets. In any case, [indiscernible] also in the very healthy trading update that we have provided from the 1st of May of 9% sales growth in local currencies and think that you should read everything in conjunction.

[Cedric Lecasble, Financial Analyst]

Okay. So no a specific explaining the difference between April and February/March [indiscernible] impact?

[Ignacio Izuzquiza Fernández, Chief Financial Officer]

I think everything -- I think what we can tell you is that we are satisfied with the performance of the sales.

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

And we always say the same. It doesn't -- we think -- and this is our global answer, but we think it doesn't make a lot of sense to monitor, to focus on the sales in 2 weeks in this or that particular market. We always talk about the season. We always talk about like-for-like sales growth for the season. So there are many, many elements. Even the calendar of holidays, even that could have an impact on a week in one particular market here or there. What for us is relevant is the season globally. And that is what we are focused on, like-for-like sales growth in each of the seasons. This is the relevant metric for us and to -- we are present in 96 markets, so then this would be an endless conversation saying what has been the performance in the third week of April in this or that market. Well, it -- I think what -- as a company, we focus on the season. We focus on, of course, of having the best product and then of like-for-like sales growth evolution during the season.

[Operator]

The next question comes from Simon Irwin from Crédit Suisse.

[Simon William George Irwin, Director]

Could you just talk a little bit about OpEx developments in the quarter? And particularly the impact during the quarter of the EUR 114 million of amortization you brought forward, and how much impact that had on your D&A charge in the quarter?

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Well, regarding OpEx, what we can tell you is that we are, I would say, quite satisfied with the evolution during the year. You must have in mind that OpEx growth has been 3%, and this includes everything now, all the OpEx involved in the management of the company, all the OpEx that has to do with the space growth, all the OpEx that has to do with online. So I think it shows how tightly we are able to manage OpEx. As we always say, for us, this is something permanent. We are gaining efficiencies. So our way to manage OpEx has not to do with cutting costs, it has to do with running our operations in a more efficient way. Technology is helping us a lot from every point of view. It's helping us, of course, in the logistics, but it is also helping us in the way we operate our stores. We have mentioned before RFID. RFID is increasing a lot the efficiency in the way we operate the stores or many other initiatives. So what we can tell you is that we are satisfied with the evolution of OpEx during the quarter. And about the second part of your question, Marcos?

[Marcos López García, Capital Markets Director]

Well, you know that depreciation relates to capital expenditure, the calendar of that capital expenditure, the depreciation of the asset base and the reversal of impairments. There have been no changes in the policies, as you can imagine, in terms of the average useful life of the assets. And in the long run, it just could grow roughly in line with space growth. And in the fourth quarter '17, remember that Inditex made a decision to provision all costs associated with 2018 start-up stores which were included in net impairments. So this explains the lack of growth in depreciation for the first quarter of this year.

[Simon William George Irwin, Director]

And will that continue through the next 3 quarters? Or is that very much kind of first half weighted?

[Marcos López García, Capital Markets Director]

I mean, this is quarter-by-quarter. And where you have to make an adjustment is in the fourth quarter, because as you remember, in the fourth quarter, we made that decision to provision all costs associated with [ additional stores ] this year. So the basis is slightly different. But I -- this is what I cannot anticipate to you. In any case, in the long run, depreciation should grow roughly in line with the space growth.

[Operator]

The next question comes from Andrew Hughes from UBS.

[Andrew Hughes, Managing Director and Head of the Pan]

I've got a question on your trial to fulfill online orders from store stock. I think you had 70-or-so stores in that trial. Have you got any information on just the costs to deliver those parcels? Is it cheaper to actually fulfill from store as opposed to fulfill from your central distribution centers? I'm thinking that just your -- obviously, you have some very expensive real estate, and presumably you're using part of that in-store for picking and packing. So just wondered if you had any thoughts on the relative costs to serve of those channels?

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Well, thank you. Well, as we were mentioning, I think, in the full year results presentation, this is something very, very strategic for us, this idea of full integration between store and online stockrooms, which is enabled by RFID. We were saying to you that during the last year, we were introducing this in Spain and that during this year, we were planning to extend to all the different markets. Currently, we have done this in 20 different markets, this full integration between online and stores' stockroom. And we continue, we expect it to be fully rolled out by the end of the year in all markets where Zara has online presence. This is very, very strategic for us. This is very relevant, this possibility for the -- to offer the product that we have in the stores also to our online customers. And in terms of cost, it is not at all having any relevant impact in the way we operate our costs. So it tends to be neutral. What is very relevant for us is what this can mean in terms of full-price sales during the season. It's much more relevant than the other elements. So what I would tell you is globally, in terms of costs, it is neutral, and we manage things in order to be neutral from the point of view of costs. But it is very helpful sometimes even also in terms of deliveries times. But what is more relevant about this full integration is making available to our online customers also the stocks that -- the stocks that we have in our physical stores. Because sometimes it could be the case that one garment is completely out of stock online, but we continue having this same model in some of our stores. So this is something -- this is the relevant factor for us. And what I can tell you, again, is that from the point of view of costs, it is neutral.

[Andrew Hughes, Managing Director and Head of the Pan]

So that will be in all 2,000-or-so Zara stores by the end of the year? They will of have a small part of the store where product is taken off the shelf and put into plastic bags with the address label of the customer, that all stores will have that ability?

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Well, yes. But it is made in the store stockroom. So it is not -- it is already in the stockrooms that we have in the stores where we are doing this operation. So it is not any additional space in the Zara store. I think the best way to see how it works is -- and of course, we -- through our Capital Markets theme, of course, we offered you the possibility to go and to see in any of the stores how this process works. But the box and everything is made in the store stockroom by the store staff, so it doesn't mean any additional space. So from a physical point of view, you only need a table and a chair, doing a very simple way. Because you already have the stock, and then you pick the garment and you prepare it for the online delivery, so you don't need a huge space.

[Andrew Hughes, Managing Director and Head of the Pan]

Yes. And that -- you say that will be in all Zara stores by the end of the year, that functionality?

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

In all Zara stores in the markets in which we have online presence. Because in the others, if we don't have online presence, it's just...

[Operator]

Ladies and gentlemen, we are now finished with the telephone Q&A session, to address the questions received through the webcast platform. Thank you.

[Unknown Executive]

We had a few webcast questions regarding China. Can you please comment on your performance in China?

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Well, what we can tell you is that we are very pleased with our performance in China. We are present with all our concepts except Uterqüe, but we are planning to launch Uterqüe in the next autumn-winter season, first online and then also with physical stores. So we will be present with all our brands in China. And of course, with all of them, we have online sales and we'll have a physical presence, so we continue seeing huge opportunities to continue growing in China. It's a very attractive market for us. Fashion appetite in this market is growing and growing. Our brands are very, very well received, quite well appreciated by our customers. So thinking about the future, we continue seeing significant growth opportunities for us in the Chinese market.

[Unknown Executive]

The remaining questions centered around the rollout of the integration between store and online, which I think, Pablo, you covered in your answer to Andrew. So I think that concludes the webcast questions for today.

[Pablo Isla Álvarez de Tejera, Executive Chairman & CEO]

Well, thank you very much. And in any case, of course, we are ready to answer any additional questions you may have. And I encourage you once more to organize, through the Capital Markets Department, this visit to the stores to see how this stock integration really works in practice. Thank you very much.