Industria de Diseno Textil SA

MAD:ITX

Earnings Call Analysis

Strong Q1 2024 Performance Driven by Integrated Model

In Q1 2024, Inditex reported robust sales growth of 7.1%, reaching €8.2 billion, and a 10.8% increase in net income to €1.3 billion. The company's gross margin stood at 60.6%, and EBITDA grew by 8% to €2.4 billion. Inditex's fully integrated business model and expansion strategies, including new openings in 28 markets and logistics investments of €900 million per year for 2024 and 2025, underpin this performance. The company expects a stable gross margin for the year and plans a 28% dividend increase to €1.54 per share【7:0†source】【7:3†source】【7:4†source】【7:8†source】.

Introduction and Overview

In the first three months of 2024, Inditex continued its robust operating performance, driven by the creativity of its teams and the strong execution of its fully integrated business model. The company relies on four key strategic pillars: unique fashion propositions, optimized customer experiences, a focus on sustainability, and the talent and commitment of its people. These factors have propelled the company to a competitive differentiation.

Sales Performance

Inditex's Spring/Summer collections were well received by customers, resulting in a satisfactory sales growth of 7.1%. Sales in constant currency increased by 10.6%. From May 1st to June 3rd, store and online sales in constant currency grew 12%. Sales were reported to reach EUR 8.2 billion, reflecting a 7.1% increase.

Financial Performance

The company saw a 10.8% increase in net income, reaching EUR 1.3 billion, while EBITDA grew by 8% to EUR 2.4 billion. This indicates strong performance from Inditex, meeting and exceeding previous expectations.

Gross Margin and Operating Expenses

Gross profit rose by 7.3% to EUR 4.9 billion, maintaining a healthy gross margin of 60.6%. Operating expenses were managed efficiently, increasing at a rate below sales growth, specifically growing 110 basis points below sales.

Inventory Management

Inventory as of April 30th was reported to be 3% lower than the same period last year, indicating efficient supply chain and inventory management. The company is confident in the high quality of its inventory.

Expansion and Optimization

Inditex opened new stores in 28 markets and continued optimization activities. The company is investing heavily in logistics expansion, with EUR 900 million allocated for each of the years 2024 and 2025. New projects are expected to be operational by the end of 2025.

Customer Experience Enhancement

The focus on customer experience includes upgrading stores with enhanced architectural features and curated spaces. The company aims to improve both physical store and online platforms to provide what customers need when and where they want it.

Global Presence and Opportunities

Inditex operates in 214 markets with low penetration, offering significant growth opportunities. The company expects a 5% increase in annual gross space from 2024 to 2026. Investments of approximately EUR 1.8 billion are planned for 2024, focusing mainly on commercial space optimization, technological integration, and online platform improvements.

Dividend and Future Guidance

The Board of Directors proposed a 28% increase in dividends to EUR 1.54 per share. The dividend is to be paid in two equal installments: one on May 2nd, 2024, and the other on November 4th, 2024. The company remains confident in its unique model and its ability to drive differentiation and growth.

Conclusion and Outlook

Spring/Summer collections continue to perform well. Inditex is leveraging its integrated store and online model to tap into growth opportunities. The company's strategy, guided by creativity and operational excellence, positions it well for sustained growth.

Earnings Call Transcript 2025-Q1

[Marcos García, executive]

[Foreign Language] Good morning to everybody. A warm welcome to all of those attending the presentation of Inditex's results for the interim 3 months 2024. I am Marcos López, Capital Markets Director.

The presentation will be chaired by Inditex's CEO, Oscar Garcia Maceiras. Also with us is our CFO, Ignacio Fernández. 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. Please, Oscar.

[Oscar Maceiras, executive]

Good morning, and welcome to our results presentation. It's our pleasure to join you today.

In the first 3 months of 2024, Inditex has continued its very robust operating performance, driven very much by the creativity of our teams and the strong execution of our fully integrated business model. This performance relies on the 4 key strategic pillars you are all familiar with: our unique fashion proposition, an optimized customer experience, our focus on sustainability, and the talent and commitment of our people. These factors have propelled our competitive differentiation.

Our Spring/Summer collections have been very well received by our customers. We have had a very satisfactory sales growth of 7.1%. Sales in constant currency increased by 10.6%. The execution of the business model has also been very robust with a healthy gross margin and disciplined cost management.

On the bottom line, net income increased 10.8% to EUR 1.3 billion. This performance has continued going into the second quarter. Store and online sales in constant currency between the 1st of May and the 3rd of June grew 12%.

Our diversified presence in 214 markets with low market penetration allows us to enjoy significant global growth opportunities. We have complete confidence in our ability to grow this business, mainly because the unique model we operate continues to drive an ever-increasing level of differentiation.

I'm going to hand you over to Ignacio now to go into the headline numbers.

[Ignacio Izuzquiza Fernández, executive]

Thank you, Oscar.

As you can see in our release, Inditex executed strongly in the interim 3 months of 2024. Sales have progressed well at plus 7.1%. We have managed the supply chain actively, and this has driven a very healthy gross margin. Operating expenses have, of course, been well managed, resulting in operating leverage. As a result, EBITDA grew 8% to EUR 2.4 billion.

In any case, we have also seen very strong progress in the net income line with an increase of 10.8% to EUR 1.3 billion versus EUR 1.2 billion in the first quarter 2023. Let me reiterate that sales have progressed very nicely at plus 7.1%, reaching EUR 8.2 billion. That's 10.6% in constant currency. Based on current exchange rates, we expect a minus 2% currency impact on sales for the full year 2024.

In the first quarter of 2024, gross profit increased 7.3% to reach EUR 4.9 billion and clearly illustrated a healthy execution of the business model. The gross margin reached 60.6%. Based on current information, we expect a stable gross margin of plus/minus 50 basis points this financial year.

There has been very tight control of operating expenses across all departments and business areas. Operating expenses increased below sales growth over the first quarter of 2024. Including all these charges, operating expenses grew 110 basis points below sales growth.

Over the first quarter of the year, we experienced a robust operating performance. Due to these factors, Inditex's inventory as of the 30th of April was 3% lower. As a side note, the end of the period inventory is considered to be of high quality.

And now over to you, Marcos.

[Marcos García, executive]

Thank you.

On the back of the comments made by Ignacio, I would like to reiterate that the performance over the first quarter of 2024 has been remarkable. We are very content with execution over the period. We have continued with expansion and have opened stores in 28 different markets and have progressed with optimization activities. The store and online sales continued to be robust. The performance has been very strong at all levels. Our key priority remains to continue increasing our differentiation. In the strategy section, we will cover an extensive number of initiatives carried out in the period.

Back to you, Oscar.

[Oscar Maceiras, executive]

Thank you, Marcos.

We keep on strengthening the strategic pillars of our fully integrated business model. Firstly, our priority remains to continually increase the appeal of our fashion proposition. Creativity, innovation, design and quality are the defining features of our collections and our key focus across all our teams. Our meticulous design process impacts every tiny detail of our garments and collections while striving to provide quality fashion to customers around the world.

The focus on an evermore enhanced customer experience comes as a result of the continuous process of upgrading stores with strong architectural features and with highly curated internal spaces. Thanks to our unique integrated store and online model, our teams have been able to take advantage of the remarkable growth opportunities we see across all channels, concepts and markets.

Underpinning this growth are new openings, enlargements and refurbishments of stores in the best locations, expanding our concepts to new cities and new territories and the launch of new services that enhance the customer shopping experience. The full implementation of the new security technology at Zara by the end of 2024 is going to plan.

We operate in 214 markets with low share in what continues to be a highly fragmented sector, and we see strong growth opportunities. To meet the current strong demand, which builds on the significant growth of the business in 2022 and 2023, we are undertaking a number of initiatives. We are planning investments that will scale our capabilities, obtain efficiencies and increase our competitive differentiation to the next level.

The growth of annual gross space in the period 2024 to 2026 is expected to be around 5%. Over this same time period, Inditex expects a space contribution to sales to be positive in conjunction with a strong evolution of online sales. For 2024, we estimate ordinary capital expenditure of approximately EUR 1.8 billion. This investment will be principally directed at optimization of commercial space, [ technological ] integration and the improvement of our online platforms.

As you already know, and in view of strong future growth opportunities, Inditex has designed a logistic expansion plan for 2024 and 2025. This 2-year extraordinary investment program, focused on the expansion of the business, allocates EUR 900 million per year to increase logistic capacities in each of the 2024 and 2025 financial years.

As already announced for the financial year 2023, the Board of Directors will propose at the Annual General Meeting a dividend increase of 28% to EUR 1.54 per share. The dividend will be made up of 2 equal payments. On the 2nd of May 2024, Inditex made a payment of EUR 0.77 per share. The remainder EUR 0.77 per share will be payable on the 4th of November 2024.

I would like to finish with a comment on our current performance. Spring/Summer collections continue to be very well received by our customers. Store and online sales in constant currency increased 12% between the 1st of May and the 3rd of June 2024 versus the same period in 2023.

Thank you all for attending this results presentation. That concludes our presentation for today. We will be happy to answer any questions you may have.

[James O'Shaughnessy, executive]

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

[Richard Chamberlain, analyst]

I wondered if I could ask a question on the net space contribution to Q1 sales, maybe you can comment on that. Is that -- if you can give us the number and is that in line with your expectations? And how is that sort of panning out in terms of sort of store openings versus further store absorptions?

[Marcos García, executive]

Thank you for your question, Richard. Very much so, we -- our target for the next 3 years is to grow space by 5% gross. And obviously, optimization activities, as we have described in the presentation, are ongoing: enlargements, refurbishments and relocations. So this -- it remains a key feature. So you should assume that, yes, that the net contribution is very similar to our long-term target. We have mentioned that for the next 3 years, we expect positive space contribution. And we are very much -- we're very satisfied with the way we are executing on this.

[James O'Shaughnessy, executive]

The next question goes to Geoff Lowery from Redburn.

[Geoff Lowery, analyst]

Could you talk a little bit more about inventory, please? I appreciate the balance sheet position is just a snapshot in time and doesn't indicate commitment, but you've done an amazing job of managing inventory growth below sales growth. And I wondered if that journey was done now or whether your logistics investments and the operation of the model could yield even bigger benefits.

[Marcos García, executive]

Thank you very much, Geoff. As you have mentioned, inventory at the end of the period is 3% lower than in the same period last year. In the presentation, we have mentioned that we've had a very strong execution over last year. There was a normalization in the supply chain conditions. And despite this year, there have been some issues, as you know, with the Red Sea, we continue managing the inventory on the supply chain in a very, very efficient way.

Execution has been very, very strong. This is reflected not only in the inventories, also in the gross margin, in the sales performance of the first quarter on the trading update. So I would say that execution is one of the key focus of our business. And clearly, we have a very strong advantage there, it's our business model, right, and the fact that proximity sourcing is a key element. And this is what I would like to add on this.

[James O'Shaughnessy, executive]

The next question goes to Sreedhar Mahamkali from UBS.

[Sreedhar Mahamkali, analyst]

Really just wanted to check if you were able to call out anything either in Q1 or current trading in terms of regional color, U.S., Europe, online stores? Anything you can help will be super helpful.

[Marcos García, executive]

Not really. As you have seen, execution has been very, very strong, 10.6% sales growth over the first quarter. Our trading update remains very strong at 12%. Obviously, we have more demand in comp for the rest of the period, but we continue executing according to what we say. And in quarters, we prefer not to make any regional comments, but I would say a very strong execution across the board.

[James O'Shaughnessy, executive]

The next question comes from James Grzinic from Jefferies.

[James Grzinic, analyst]

Just a quick one. Would you be able to add more color on how live streaming is helping in China? And I've been reading about plans for you to extend live streaming into Western markets. Any more color you could give on that front would be very helpful.

[Oscar Maceiras, executive]

Thanks for the question. Well, we are very happy with the performance of live streaming in China. We started that service before the year-end. And we are working to expand that service through our own platforms to different markets, including the U.S. and the U.K., and the expectation is to start with this new service in the coming weeks.

[James O'Shaughnessy, executive]

The next question comes from Warwick Okines from Exane.

[Alexander Richard Okines, analyst]

So I was just wondering whether or not you could comment on whether online is outperforming stores at the moment, if that mix is changing during the quarter and whether you expect that to happen during the year.

[Oscar Maceiras, executive]

Thank you for the question. Well, we -- the performance of the company is -- the company is performing very well in both channels. Bear in mind that we have a fully integrated business model. It's not possible to understand the strength of the evolution of our physical store sales without taking in consideration the potential in terms of prescription coming from the online platforms. And at the same time, it's not possible to explain the strength of our online sales without taking into consideration the operational support coming from the physical store. Both channels are performing very well in a very positive trend, and we are very happy with the execution of the fully integrated model. Thank you.

[James O'Shaughnessy, executive]

The next question comes from Nicolas Champ from Barclays.

[Nicolas Champ, analyst]

There is currently high inflation in some countries such as Argentina and Turkey. Would it be possible to provide the sales growth at constant currency, stripping out this market where inflation is particularly high? And a follow-up question also regarding the high inflation, cost inflation in Turkey. How has it impacted your sourcing strategy? I mean did you change, did you reduce your sourcing in Turkey because of the significant inflation and increase in operating costs, for instance, in this country?

[Oscar Maceiras, executive]

Well, what I can say is that we have continued to execute according to our business model, and we have not made any short-term changes to the model based on the inflation we have seen. Our growth is mainly volume-driven, as you know. And clearly, we keep on executing according to our expectations. So I don't think I should highlight any market or any part of the operations that are massively impacted by that factor.

[James O'Shaughnessy, executive]

The next question comes from Georgina Johanan from JPMorgan.

[Georgina Johanan, analyst]

Just a follow-up on the previous one, actually, where you talk about growth -- hello? can you hear me?

[Oscar Maceiras, executive]

Yes, we can. Yes. Can you repeat, please? Can you repeat your question?

[Georgina Johanan, analyst]

Sorry. Sorry about that. Yes, sure. Just a follow-up to the previous question. Where you talk about growth being mainly volume-driven, has there been any change at all in the pricing or ASP contribution into the new year versus last year, please, i.e., is any of that sort of acceleration that we're seeing in current trading driven by higher prices in any markets, please?

[Oscar Maceiras, executive]

It's very, very stable. Nothing significant there, Georgina. No, nothing significant.

[James O'Shaughnessy, executive]

That concludes the questions. We'll move on to webcast now. We've had a couple of questions. The first of which is, can you update us on the EUR 1.8 billion logistics investment plan, please?

[Ignacio Izuzquiza Fernández, executive]

Thanks for the question. Well, to put some context and just to remind, we have had a very strong growth these last 2 years, as we referred during the presentation. And we keep on seeing growth opportunities going forward. And for our business model, it's key to keep on enhancing the experience of our customers. That relates, of course, to having the best stores and the best online platforms. But at the same time, the best customer experience also requires to have the capabilities needed to provide them what they are looking for, where, when and how they want.

We are executing within this context, our logistics expansion plan for '24 and '25, this EUR 900 million each of these 2 years. And the different projects of the plan are on track. And as announced in March, most of them will be gradually operational by the end of 2025.

[James O'Shaughnessy, executive]

The next question on the webcast platform relates to Spain. Can you provide any comment on your growth in Spain, your largest market, please?

[Marcos García, executive]

Well, we are very happy with our performance in Spain. As a remainder, in 2023, sales in Spain grew 13%, the fastest-growing region for the group alongside Europe ex Spain, remain being active with our store optimization program. One example of this has been Seville where, in 2023, we closed a few smaller stores at the city center to open a larger store at Plaza del Duque. Our newest store not only allows us to better showcase Zara full collection, but also has improved customer experience with sales accounts, automated online pickup and return points, et cetera, et cetera. We continue to find opportunities for our profitable growth in Spain with all our concepts.

[James O'Shaughnessy, executive]

That concludes the webcast questions for today. Thank you.

[Marcos García, executive]

Thank you to all of those participating in the presentation today. For any additional questions you may have, please get in touch with our Capital Markets Department, and we will welcome you back in September for the first half 2024 results.