Industria de Diseno Textil SA

MAD:ITX

Earnings Call Transcript 2022-Q1

[Marcos López García, Capital Markets Director]

Good morning, ladies and gentlemen. A warm welcome to the presentation of Inditex's results for the interim 3 months 2021. I am Marcos López, Capital Markets Director. The presentation will be chaired by Inditex's Executive Chairman, Pablo Isla. Here today with us are also our CEO, Carlos Crespo; and CFO, Ignacio Fernández. As usual, the presentation will be followed by a Q&A session, starting with the questions received on the telephone and then those received through the webcast platform. Before we start, we will take the disclaimer as read. And now over to Pablo.

[Pablo Isla Álvarez de Tejera, Executive Chairman]

Thank you, Marcos. Good morning to everybody, and welcome to Inditex results presentation. In 2021, Inditex differentiation and strategic transformation towards a fully integrated digital and sustainable business model continues to deliver. Let me highlight some key factors. The spring/summer collections were very well received by our customers. Almost all of our stores are now open. Online sales continued their high rate of growth. Our operating performance continues to generate strong cash flow and leaves us in a robust financial position. Regarding digitalization, the implementation of Inditex Open Platform is now 90% complete. We also continue to make progress with respect to the sustainable development of our business model and have moved beyond the initial objectives presented. All this has been made possible by the strong individual commitment of all of our people and our unique corporate culture. As you have seen in our financial release, store and online sales in constant currency between the 1st of May and the 6th of June 2021 increased by 102% versus the same period in 2020 and 5% versus the same period in 2019. 10% of trading hours were unavailable in this period due to lockdowns and restrictions. This demonstrates that the impact of the store absorption program announced in June 2020 has been fully recovered in the store and online sales in May 2021. We have total confidence in our unique business model. Let me add some details on the performance so far in 2021. Inditex results show a progressive recovery in operations. The results for the first quarter 2021 have been affected by the ongoing health crisis with temporary store closures and restrictions to operations in key markets such as the U.K., France, Germany, Italy, Portugal and Brazil. To minimize the impact, we have actively managed our supply chain inventory and operating expenses in the period. Most stores reopened in May but with some capacity and opening restrictions. As of today, 98% of the stores are open. This graph shows the number of stores with sales during the period on a weekly basis. To put the strength of the operating performance in the first quarter into context, restrictions in place reduced trading hours by 24%. This percentage does not take into account additional restrictions on floor space, maximum capacity and peak trading times that were present across some markets. Bear in mind that at the end of the first quarter, 16% of stores were still in full lockdown. The strong trajectory of online sales that we saw last year has, of course, continued growing into 2021. In the first quarter, online sales in constant currency made outstanding progress at plus 67%. This remarkable performance is greatly helped by our fully integrated business model, our single inventory position and the attractiveness of the product offer. It is because of these features that our online operations enjoy sector-leading growth rates and profitability. Inditex online business is nondilutive to margins and requires lower capital intensity going forward. Let me tell you that we have total confidence in our unique business model that fully integrates stores and online. A good example of seamless store and online execution can be seen in the Zara Woman spring/summer collection. On 12 May, Zara launched a new cosmetics line, Zara Beauty. I can certainly tell you that the reception has been very strong. Zara Beauty offers a wide range of beauty products for eyes, lips, face and nails with a selection of more than 130 shades. These ranges employ top-quality formulas, adhere to the highest measures of sustainability and involve no animal testing at all. Bottles and containers make extensive use of recycled glass and are designed to be refillable in order to foster reuse. Zara Beauty is available online and in specific markets in selected stores. A very significant project due before the end of the year will be the opening of stores for Zara, Zara Home and Stradivarius in an 8,000-square-meter location at Madrid's iconic Plaza de España. Zara Home has launched a new store image marked by sustainable interiors; Massimo Dutti Cahier de Voyage editorial; Bershka, that has also launched a new image that can be seen in its store in Paris Les Halles; the Pulls&Bear's On my way to Summer editorial; the Stradivarius Summer collection; Oysho's weekend vibes collection; and the Uterqüe Summer collection. I will hand now over to Carlos to talk about sustainability, both in our stores and headquarters.

[Carlos Crespo González, CEO & Director]

Thank you, Pablo. Inditex's lead in sustainability is further enhanced by the completion of our space optimization program and the new buildings at headquarters. All of our stores meet efficiency and sustainability requirements and always with the most demanding commercial standards, bigger, better, more beautiful and in the best locations globally. In most cases, they adhere to the most advanced LEED standard. Additionally, we centrally control energy consumption for each store through our energy platform. Another key project is the new Zara online studios. Spanning 67,000 square meters and with a height of 28 meters, the building visually stands out due to the 720 high-energy efficiency glass modules that clad the entire facade. The modules allow the interior to be flooded with natural light. The building uses 100% renewable power. A further distinguishing factor is the use of 3,380 solar panels at headquarters that supply 50% of its energy needs. All rain water is reused, and high-performance heating and cooling systems are in place. And now back to you, Pablo.

[Pablo Isla Álvarez de Tejera, Executive Chairman]

Thank you. The new Zara online studios at headquarters represent the best visual example of Inditex's strategic transformation, store and online integration, technology and advanced sustainability. I'll hand you over to Ignacio now for the financial section.

[Ignacio Izuzquiza Fernández, Chief Financial Officer]

Thank you, Pablo. As you have seen in our release, Inditex's operations showed a strong recovery in the first quarter of 2021. We have executed remarkably what has been a challenging operating environment. We have managed the supply chain very closely, and this has driven a good performance in the gross margin. Operating expenses are, of course, being tightly managed. As already mentioned, sales are recovering strongly as stores are reopening. Online sales growth in constant currency has been very strong at plus 67%. The gross margin reached 59.9%. It was 152 basis points higher than the same period in 2020 and 47 basis points higher than in the same period in 2019. The gross margin evolution over the period is strongly linked to the high levels of flexibility enjoyed by our unique supply chain. This is clearly illustrated in the inventory levels, which were just 5% higher than the closing balance in the first quarter 2020 and down 5% versus the first quarter 2019. There has been very efficient management of operating expenses across all departments and business areas. This has demonstrated our ability to react and adapt to the changing trading environment. Efficiency gains have allowed us to exercise a high level of control over operating expenses in the period. As you can see, operating expenses increased 19% over the first quarter of 2020 with a low sales growth. Operating expenses are 7% below the same period in 2019. The main components of operating expenses have shown a very good performance. Depreciation and amortization came to EUR 666 million, 33% lower. The difference reflects the EUR 308 million provision corresponding to the store optimization program for 2020 and 2021, charged to the first quarter of 2020 accounts. Excluding the provision, this line will have decreased 3%. The flexibility of the business model we run can be clearly seen in the evolution of working capital over this period. As you can see in this table, the working capital has returned to the more normal levels seen prior to the pandemic. Despite the material impact of lockdowns on sales, we have been able to use the flexibility for our supply chain to adjust balance. The single inventory position was pivotal to achieving this performance. As a result, inventory increased just 5% at the end of the first quarter with a low sales growth. The closing inventory is considered to be of high quality. These actions in conjunction with the strong cash flow, took the net cash position to EUR 7.2 billion. And now over to Marcos.

[Marcos López García, Capital Markets Director]

Thank you. Over the first 3 months, we have continued with our expansion and have opened stores across 21 different markets. The weight of the different concepts on group sales remains largely unchanged. We are seeing a progressive recovery across all concepts going into the Spring/Summer season. The differences relate to each individual concepts, geographic presence, location of stores and fashion profile. Store sales are improving, and online sales continue to grow. Oysho and Stradivarius had a strong performance in the first quarter of 2021. We continue with optimization activities across all concepts. And now back to Pablo.

[Pablo Isla Álvarez de Tejera, Executive Chairman]

The strategic initiatives to strengthen our global, fully integrated store and online model continue to deliver. We plan to continue developing these key long-term priorities in order to maximize organic growth. The goal is to increase the differentiation of our business model so as to provide a unique customer experience. We will have invested EUR 1 billion in digital capital expenditure between 2020 and 2022. A key focus is on high-quality stores with the aim that they be fully integrated digital and eco-efficient. Total capital expenditure over this same period will be around EUR 900 million annually, helping to drive lower capital intensity and increasing profitability. Let us not forget that we aim to achieve all of this with sustainability remaining very much a central part of this strategy. We expect to deliver higher returns and lower capital intensity. As a reminder, the interim dividend for full year 2020 of EUR 0.35 per share was paid on the 3rd of May 2021. The final dividend for full year 2020 of EUR 0.35 will be paid on the 2nd of November. Thank you for attending. That concludes our presentation for today. And now we'd be happy to answer any questions you may have.

[Marcos López García, Capital Markets Director]

Please go ahead, operator.

[Operator]

[Operator Instructions] The first question today comes from Anne Critchlow of Societe Generale.

[Anne Critchlow, Equity Analyst]

It's about the gross margin because FX must have had a really strong negative impact on it. So I wonder if you could just explain the strength a little bit more of the gross margin. I mean was it mainly inventory efficiency? Or was it mainly releverage, thanks to like-for-like sales recovery? If you could give us an idea of the magnitude, that would be great.

[Pablo Isla Álvarez de Tejera, Executive Chairman]

Thank you, Anne. Well, the first thing I would like to say is that as you perfectly know, we don't like to talk about the short -- or to evaluate the gross margin over a short period of time. We always prefer at least to think about a 6-month period and even better to think about the full year. But what I can tell you, of course, is that we are very satisfied with the evolution of the gross margin during the first quarter. Answering your question about currencies, we were saying at the beginning of the year, in the month of March, that from the point of view of currencies, we were not going to have -- it was going to be neutral because we have a negative currency impact on sales, but at the same time, we have a positive currency impact coming from the dollar. So we were saying at the beginning of the year that currencies were going to be neutral regarding the gross margin. So the evolution is 100% related with the execution of the business model, the flexibility of the business model, the lower level of inventories, the centralized inventory position. Of course, it has a lot to do with the incredible work that our commercial teams are doing, both from the point of view of the collections; and second, from the point of view of the way they are managing the inventories, they are managing the purchases. And of course, it has also a lot to do with the incredible work that our online teams and our teams in the different countries are doing when we reopened the stores, the way we are managing the stores. So it's the combination of the business model, the execution of this business model and a very, very efficient work of everybody across the company in the different areas of the business.

[Operator]

The next question comes from Richard Chamberlain of RBC.

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

So just to follow on from Anne's question then. What are your expectations now for gross margin for the full year? Because I guess, looking at the currency situation today, particularly with the translation side probably going to become more neutral, you'll still have a favorable dollar sourcing impact. Do you expect gross margin to exceed the top end of the traditional sort of stable range, minus 50 to plus 50 basis points?

[Pablo Isla Álvarez de Tejera, Executive Chairman]

As I was saying before, we prefer -- well, first of all, regarding what you are saying about currencies, it is totally the case. For the full year, we are expecting, at current exchange rates, around 200 basis points of negative currency impact on sales for the full year. But regarding the gross margin, I come back to what I was saying before. We prefer to wait until the full season to talk more about the gross margin. At this stage, we just prefer to say that, of course, we are satisfied with the evolution of the gross margin. But we think it is too early to talk about any significant change in the gross margin forecast for the full year.

[Operator]

The next question comes from Rebecca McClellan of Santander.

[Rebecca Anne McClellan, Equity Analyst]

Yes. What percentage of the online sales in the first quarter were done through the SINT? I think it was 18% for the full year 2020. Has that grown? And where would you expect that to sort of trend as the stores reopen and trading sort of normalizes?

[Pablo Isla Álvarez de Tejera, Executive Chairman]

Thank you, Rebecca. Well, there are some aspects of the business that is better to have a longer perspective in order to analyze them. But of course, the SINT remains a very relevant part of our online sales, and it will continue being the case. But I think that to analyze this on a quarterly basis and particularly in a quarter in which we have had so many stores closed and so many restrictions, I think it's better when we will see the good full year, we will have a much clearer picture in a much more normalized situation about SINT. But of course, this is a key, key, key element in our strategy, and it has a lot to do with the evolution of the gross margin. It has a lot to do with the nearly, I can tell you, nearly 0 level of promotions during the months of March, April, May. So this is something very, very relevant for us. The way we are running our business, full price sales, very low level of inventories, integrated stock, central inventory position, having new garments permanently that are in line with our customers' requests. I think this is what we are totally focused. And as I was saying to you, the SINT, of course, is playing a relevant role in this idea of a centralized inventory position and single stock and single inventory management all across the company, which allows us to run the business even with a lower level of inventory. If you see the inventory level at the end of the quarter, well, it is below 2019 levels when sales are growing. And if you compare with 2020, it is 5% above when sales are growing in the month of May and the beginning of June, more than 100%. So you see how healthy this inventory is from any point of view.

[Operator]

The next question comes from Georgina Johanan of JPMorgan.

[Georgina Sarah Johanan, Analyst]

Just really if you could give any more color on how online performance has trended in markets where stores are now materially open, please, what you're seeing there.

[Pablo Isla Álvarez de Tejera, Executive Chairman]

Well, online sales evolution continues very healthy. Of course, you cannot expect, for the full year, these rates of growth for online. That is for sure. First of all, because we are comparing 1.5 months, that is February and the first half of March in which last year, the situation was very normal before the pandemic and then, of course, because this is a quarter in which we have continued having a significant number of stores closed. But globally, very healthy evolution of online sales. And for us, what is more relevant is the fully integrated approach. And what I would like to mention is that store traffic is increasing week-after-week. This is something that we were beginning to see. If you remember, in the month of September, October of the last year, we were talking about this before the second wave with so many lockdowns. And what I can tell you is that week-after-week, we are seeing store traffic recovering. So we believe very much in this fully integrated approach between stores and online much more than focusing on the specific rate of growth of any of the 2 areas. Also, I would like to mention, we were mentioning during the presentation that it is also very relevant to have in mind, and we anticipated that in the month of June, that this culmination of the store optimization plan is being totally absorbed in the remaining stores and online. So we believe that this strategy that we are following is the right strategy. And of course, it relies on our commercial teams. It relies on our country teams, online teams. And of course, technology is playing a very, very relevant role. That is what makes us possible -- what makes possible to go ahead with all this strategy. And then the third element, sustainability, which is now involved in all the decisions that we take regarding the evolution of the company from every perspective.

[Operator]

The next question comes from Warwick Okines of Exane.

[Alexander Richard Edward Okines, Research Analyst]

Yes. I wanted to ask about operating costs. In Q1, these were 7% below 2019 levels but still with quite a large proportion of trading hours down on that period, down 24%. So how should we think about costs for the rest of the year with all store -- assuming all stores are open? Do you think costs will be similar to 2019 levels?

[Ignacio Izuzquiza Fernández, Chief Financial Officer]

Well, Warwick, I think that the -- again, on all the different lines of the P&L, we would prefer to talk probably in September, but what you must expect is as usual, that OpEx will be massively controlled. As you mentioned, as you have seen, OpEx has grown well below sales growth in the current period. This is something that is very much ingrained into the philosophy of the company. We have been able to switch from stores to online and from online to stores without very significant impact there. And as Pablo mentioned, I think that the job of our commercial teams has been absolutely amazing in the way we have navigated, for example, lockdowns in countries as important as the U.K., Italy, France, Germany, Brazil, Portugal and with very strong cost discipline. Regarding more specific guidance, I prefer to wait for September. But again, highly, highly disciplined execution in terms of operating expenses.

[Operator]

The next question comes from Nicolas Champ of Barclays.

[Nicolas Champ, Director]

I have actually a follow-up question regarding OpEx. Could you please quantify the impact of the government support measures during the quarter and the impact on the evolution of your OpEx in Q1, please?

[Ignacio Izuzquiza Fernández, Chief Financial Officer]

You're asking about extra measures due to COVID, sorry?

[Alexander Richard Edward Okines, Research Analyst]

Yes. Regarding like the furloughs -- I mean...

[Ignacio Izuzquiza Fernández, Chief Financial Officer]

The -- very -- we have not relied on furlough schemes of any -- in a significant way in any country. No.

[Operator]

We are now finished with the telephone Q&A session. To address the questions received through the webcast platform.

[Unknown Executive]

We've had a few questions on the webcast platform today, the first of which is, "Pablo, can you give us an update on your sustainability targets, please?"

[Pablo Isla Álvarez de Tejera, Executive Chairman]

Carlos, you can go ahead.

[Carlos Crespo González, CEO & Director]

Yes, of course. Well, as you know, as Pablo has said, so sustainability is in every aspect of the company right now and that has also always been a key part of our strategy for many years. And we're happy to tell you that we have achieved all the sustainability targets that we set for 2020. But I would also want to highlight that we have significantly exceeded our targets in 2 topics, for Join Life as well as the use of renewable energy at our own facilities. So if we're talking about specifically of Join Life, that 35% of all garments that were sold last year were Join Life. As you know, this is our seal of quality regarding sustainability of product and sustainable products. So -- and this was well above our goal of 25%. And furthermore, 80% of our energy usage that we use in our own facilities last year came from renewable energy sources. And this is, again, above our target that we have of 65%. And we're looking ahead for 2023, we also have set ambitious targets. And this includes 0 waste from our facilities, use of 100% sustainable cellulosic fibers, 100% removal of single-use plastics as well as having 100% of all packaging materials collected for reuse or recycle in all of our supply chain. And now we are on track on these new targets.

[Unknown Executive]

Another question relates to inventory. "With these levels of growth that we've been seeing, is the -- are the lower levels of inventory sustainable?" Pablo?

[Pablo Isla Álvarez de Tejera, Executive Chairman]

Well, I was mentioning before, I think this -- as you know, this is a key part of our strategy. It has a lot to do with everything that we have been doing during the last few years in terms of the store optimization plan, in terms of RFID, central inventory positions, SINT, online, full integration between online and stores. And this is a key part of our strategy. I was mentioning before that I think it is very, very remarkable, the level of growth that we are achieving with the low level of inventories. And for sure, if we think about the future, we continue thinking that inventories as a percentage of sales will continue coming down. And we think this is very, very relevant. It helps a lot also the management of the stores, the idea of running the stores also with less inventory. And we are totally focused on the new collections for our customers, low level of inventories, full price sales, as I was mentioning, helping in a very significant way the gross margin because our customers, what they want is to see the high-quality, sustainable products and the latest fashions that we are offering them. Now if you analyze our collections, if you look to our webs of the different brands at any point in time during the season, you see all these very, very attractive garments. And this is what we think we need to continue doing and for us is a key part of our strategy.

[Unknown Executive]

The final webcast question relates to the trading update. "To what do you attribute the strong trading update, please?"

[Pablo Isla Álvarez de Tejera, Executive Chairman]

Well, I think, first of all, that for sure, the trading update is strong. Also, the first quarter sales are very strong. If you have in mind that 24% of our space has been closed during the quarter and in the remaining 76% in many markets, there have been many restrictions, and you see that our sales have been coming down only 11.5% in constant currencies. It is also very remarkable, the performance. And then when you think about from May 1 to June 6, with 10% of our space remaining closed on average during the period and our sales being 5% above 2019 levels, I think it is very remarkable. And as I was saying before, it has totally to do with the strong quality and commitment of our teams all across the company and with this strategy that we are developing of a fully integrated approach between stores and online, centralized inventory position and offering to our customers the latest fashions.

[Unknown Executive]

Thank you. That concludes the webcast Q&A session.

[Pablo Isla Álvarez de Tejera, Executive Chairman]

Thank you to all of you for joining today, and we hope, in September, we will have the opportunity to see you in person. Thank you very much.