Industria De Diseno Textil SA ADR IDEXY
Q1 2013 Earnings Call Transcript
Transcript Call Date 06/12/2013

Operator: Good morning, ladies and gentlemen. Welcome to the Presentation of Inditex Results for the Interim Three Months of 2013.

The presentation will be chaired by Mr. Pablo Isla, Chairman and CEO. This presentation will be followed by a Q&A session comprising two 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.

Pablo Isla Alvarez de Tejera - Chairman and CEO: Good morning to all the participants in this webcast conference call regarding Inditex results for the interim three months of 2013. I am Pablo Isla and here with me today are Ignacio Fernandez, our CFO and Marcos Lopez, Capital Markets Director.

The results for the first quarter 2013 show that Inditex continues its global multi-concept, multichannel growth. Inditex sales performance in the quarter has been satisfactory. Our operations have also shown high-efficiency and tight operating control over the period.

Let me also tell you that in terms of expansion, our space growth for the year is on track. We have opened the stores in 30 different markets over the period, demonstrating the global reach of Inditex business model. Over the first quarter 2013, we have enlarged or introduced the new image in 25 of our top flagship stores around the world, in line with what we mentioned to you in March.

We have continued our global online rollout during the quarter. The next step will be the launch online sales in the Russian Federation at the start of the Autumn/Winter season. We continue to see significant growth opportunities for Inditex globally.

Let me now hand over to Ignacio Fernandez, who will provide you with some detail behind the headline numbers and I will join you later for the outlook section.

Ignacio Fernandez - CFO: Thank you. The first quarter 2013 Inditex has achieved net sales of EUR3.6 billion, EBITDA of EUR749 million, and net income of EUR438 million.

I would like to highlight that all the lines of the profit and loss account saw double-digit growth rates on a two-year compound basis.

Starting with sales, I want to tell you that Inditex sales performance in the quarter has been satisfactory. We have achieved positive like-for-like sales. Reported sales have grown 5%. The level of sales growth should be seen in the context of a very demanding comparable in the first quarter 2012, plus 15%. Additionally, there has been one less trading day in February 2013 due to the leap year in 2012.

The positive currency effect for the first quarter 2012 reversed during the first quarter 2013.

Gross profit has increased 4% to EUR2.1 billion, resulting in a 59.6% gross margin on sales. We have sustained our commercial policies over the period.

Operating expenses are tightly under control. They have grown 7%, reflecting mainly the growth in space and include all the start-up costs for new openings.

Operating working capital remains negative as a consequence of the business model. The working capital evolution is in line with the performance of the business.

I will now hand over to Marcos Lopez, who will update on the performance of Inditex concepts.

Marcos Lopez Garcia - Stock Market Director: In terms of space addition and store openings, we are on track. Continuing with our global expansion, we have opened stores in 30 markets over the period.

Regarding the performance by format in the first quarter of 2013, Zara and the younger concepts grouped together have performed broadly in line with each other with some minor differences. Regarding the younger concepts, Zara Home, Massimo Dutti, and Pull and Bear have performed above the average, and Oysho and Stradivarius below the average. The changes versus last year relate mainly to the comparable base.

I will now hand over to Pablo for the outlook section.

Pablo Isla Alvarez de Tejera - Chairman and CEO: With respect to our expansion in 2013, let me highlight that our space growth and online launches are on track. Regarding the outlook for the first half of 2013, I would like to add that the store sales in local currencies from the 1st of May to the 7th of June have grown by 8%. For the rest of 2013, we will continue to invest profitably, expanding our business in a number of markets with attractive long-term returns through our multi-concept and multichannel strategy.

We also continue to optimize our retail base. Inditex is present in five continents and in all the key markets showing our global reach. We manage a diversified sales platform in 86 markets. The current base offers huge growth potential for the coming years.

Zara has an established online presence in Europe, the United States, China, Japan and Canada, the world's main economies. We plan to roll out Zara online sales progressively in other selected markets to enhance our global presence. To this end, we will launch Zara online sales in the Russian Federation at the start of the autumn/winter season.

Before closing, I would like to cover a number of initiatives carried out by Inditex concepts and some selected store openings and refurbishments of recent months. Pull and Bear has opened its first store in Germany last Friday, a flagship of 700 square meters of retail space in Berlin. The opening showcases the latest Pull and Bear image that will be rolled out in all new stores.

Massimo Dutti has recently moved its operations to new central facilities at Palafolls required by its growth plans. The new headquarter covers 30,000 square meters, plus a distribution center for 100,000 square meters. Massimo Dutti has launched in Taiwan, opening a flagship store at 101 Mall in Taipei.

Bershka has opened a 700 square meter store in Bologna.

Stradivarius has developed a new beachwear collection that has been launched in all new stores.

Oysho has developed a new yoga collection and sponsored free yoga sessions in Madrid and Barcelona.

Zara Home continues its expansion launching in Japan with a very strong reception. Two flagship stores at Osaka's Grand Fort and Yokohama Lalaport have opened last April.

Uterque has launched a new store at Brussels Airport.

Zara Brompton Road in London is a global flagship that has been enlarged to 3,600 square meters with a new store image. It opened on 31st May and (indiscernible). Zara has relocated its main store in Champs Elysees to a 2,000 square meter flagship. We have enlarged two main flagships in Moscow; at Europeisky and Atrium.

We have also enlarged our main store in South Korea at M Plaza in Seoul, which reopened on the 31st of May. Zara has refurbished its Vienna flagship at Haas Haus, opening on the 2nd of May. Zara has refurbished its Main St. store in Moscow at Tverskaya.

We have refurbished our key store in Madrid's Gran Via opening on the 4th of May. We have just opened a store in Metro City Plaza II in Hong Kong. This is our store number 406 in China. And finally, we would like to close this presentation with the Zara store openings in India at the World Trade Park in Jaipur and Elante Mall in Chandigarh.

This is all from us. We will be pleased to answer any questions you may have.

Transcript Call Date 06/12/2013

Operator: Richard Chamberlain, Merrill Lynch.

Richard Chamberlain - Bank of America Merrill Lynch: Just a question on inventory please, if I may, to start off with. Inventories looked pretty high at the closing date, albeit against what was a low level last year. But I wondered if you could give us a sense of your overall inventory commitment going forward and how that compares with last year please?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Well, first of all, what I would like to say as – because we have talked in previous conference calls about inventories in one sense or another. We always say the same that the inventories – just a snapshot – about our position in one particular day that we pay much more attention to what we call the level of commitment at any point in time during the season. From this point of view, there is nothing relevant different from other dealers. If you analyze the inventory position at the end of the first quarter in the last four or five years you will see very different figures year-after-year. So, from the point of view of commitment, which is what is really relevant for our Company, very much in line with other seasons. Also, you always must think when – in any type of analysis of this first quarter results and we were saying that during the presentation, you must have in mind always the two-year compound basis. And if you analyze sales growth, EBIT growth, inventory growth on a two-year compound basis, you will see that everything is very much in line with the evolution of the business.

Richard Chamberlain - Bank of America Merrill Lynch: So, inventory commitment, we should assume, is broadly in line with budgeted sales going forward, is that a fair comment?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Yes, it's broadly in line with previous seasons, so nothing particularly relevant from this point of view.

Operator: Anne Critchlow, SocGen.

Anne Critchlow - SocGen: Please could you tell me the total same currency sales growth in Q1?

Marcos Lopez Garcia - Stock Market Director: Regarding the first quarter, you see, we've reported 5% sales growth and obviously, in this quarter there are a number of impacts and one of them is the leap year, obviously it's one day (in 30) over this quarter and it will fade over the first half. Regarding currency, at current exchange rates what you must expect is that the impact for the first half will be around 200 basis points, very similar to Q1.

Operator: Warwick Okines, Deutsche Bank.

Warwick Okines - Deutsche Bank: Actually similar sort of question. Could you tell us the weighted average space growth in Q1? It's increasingly, I think, difficult to assess the space growth from your store number growth because of the enlargements.

Pablo Isla Alvarez de Tejera - Chairman and CEO: It's very much in line with our target for the first half, for full year, or not only for the full year, but what we always say for the next three or four years we're seeing space growth between 8% to 10%, and this is very much in line what has been going on during the first quarter. In any particular quarter when you consider the number of openings of the quarter alone, it has a lot to do with the calendar of openings during the year, it has a lot to do with the – what we were saying in the full year results presentation. But in general terms, everything is very much in line with what we have anticipated to you as the space growth assumption for the coming three years.

Warwick Okines - Deutsche Bank: So, it wasn't below that range in Q1?

Pablo Isla Alvarez de Tejera - Chairman and CEO: It was not below that; no.

Warwick Okines - Deutsche Bank: No, okay. And could you just comment on the depreciation charge please; only grew by 2%. Is that something we should expect for the rest of the year?

Marcos Lopez Garcia - Stock Market Director: Basically, for the depreciation what you have to take into account is also the comparable, the first quarter previous year. I think that to take a two-year view is very relevant regarding the profit and loss account and the balance sheet in this quarter. And secondly, bear in mind that depreciation also takes into account the level of impairment. So, basically is very much stable if you take a two-year view.

Operator: Ben Spruntulis, Exane.

Ben Spruntulis - Exane BNP Paribas: My question is on markdown. Given the exceptional revenue growth you delivered in both Q1 and Q2 last year, is it fair to say the markdown had a negative impact on your gross margins in Q1, and should we expect something similar across Q2 this year?

Pablo Isla Alvarez de Tejera - Chairman and CEO: You know that we don't like to elaborate very much on any aspect of the gross margin regarding one particular quarter. In terms of the gross margin for the full year, at the beginning of the year in the 2012 full year results presentation we were talking about the stable gross margin for the year. Considering stable, as we always say, plus or minus 50 basis points, because as far as you know and there are many, many elements that have a lot to do with the gross margin. Of course, it has to do with markups, it has to do with mark-downs, but it also has to do with product mix, with fashion trends, with like-for-like sales growth. It has to do with currencies. It has to do with many different things. But having everything in mind, we were saying at the beginning of the year that we were expecting a broadly stable gross margin during the year. Of course, in the year 2012, we had a very good evolution of the gross margin, particularly in the spring/summer season, but globally for the year it was also a positive evolution of the gross margin. But at this stage, we prefer to continue talking about our guidance for the full year, which is, a stable gross margin for the year.

Operator: Fraser Ramzan, Nomura.

Fraser Ramzan - Nomura: Just a question about market share. Given your like-for-like performance to-date, when you look at your performance across the different markets you trade in, obviously, nobody has used or mentioned the word weather yet. But do you think that you are gaining like-for-like market share in your key markets right now?

Pablo Isla Alvarez de Tejera - Chairman and CEO: You know, it's very difficult to measure market share on a quarterly basis. Also, you must have in mind that our market share in most of the market is very low, because the fashion retail business is very fragmented or very diversified in the different markets. For us, what is relevant is what we were saying during the presentation, having in mind the comparables, having in mind the leap year, having in mind other impacts that have taken place in this first three or four months here that you have all covered in your reports. We are achieving positive like-for-like sales with this very, very strong comparable from the first half last year. We are not so much focused on markets here in one particular month or one particular quarter. We are much more focused on the evolution of our business, and as I was saying to you, it is very difficult to measure market share in our sector in a so short period of time.

Operator: Andrew Hughes, UBS.

Andrew Hughes - UBS: I just had a couple of questions on the first quarter sales. Firstly, was there any impact from the refit program from the rollout of the new image? Secondly, were there any store closures in the first quarter?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Yes, Andy, regarding first quarter sales, as we have discussed, we are satisfied with the level of sales. First of all, I guess, very demanding comparables. We have positive like-for-like, which we believe is very remarkable. As you know, there are a number of impacts, talking about leap year, talking about currency. It's true that we have refurbished 25 of our top flagships that most of them have been reopening along May, is one of the many factors. But for us, it's very important to keep our image on the store look up-to-date and is part of our strategic positioning. So, it is good for the customer and this is something we're going to do. And what we mentioned, if you look at the trading averages, it's clearly that the like-for-like in the second quarter since we reported has been building up over the first quarter numbers. So, I think this is what is relevant. Obviously, in the coming quarters there will be refurbishments as well, but not at the same rate as in Q1, which show very strong activity. Your second question was referring – stock closures. Well, what we can mention is that about space growth and store openings, we are totally on track for the range we provided; 440 to 480. We have a lot of relocations as you see as well. So, the activity in terms of the space growth, which is a relevant number, 8% to 10% space growth for the next three years is our guidance, has been very much the case over Q1 as well.

Andrew Hughes - UBS: You mentioned also over 400 stores in China now. Are the stores that you opened very early on in China – are they still growing on a like-for-like basis?

Marcos Lopez Garcia - Stock Market Director: Yes, as the case in China, we are operating 406 stores and just 275 will be in the like-for-like this year. So, obviously, we have a very interesting operation in China and we plan to keep opening 80 to 100 stores per year. So, clearly, very much on track with our expansion and our growth plans for China.

Operator: Chris Chaviaras, Barclays.

Chris Chaviaras - Barclays: Two questions for me; the first one on the current rating that you've put there. Can you give us a little bit more color on how the timing of the store openings is expected to span out in the second quarter? I mean, would you expect more store openings in the second half of the second quarter in which case we should expect potentially growth to accelerate? That's the first question. And then the second one, I've seen your new store openings. I see that you haven't opened any store of Massimo Dutti and that could well be again timing. But is any of the banners that you have other than Zara lessening in importance for you or you still keep the same growth that you had in the past?

Marcos Lopez Garcia - Stock Market Director: Well, first of all, to reiterate what we have mentioned before that in terms of space growth and store openings for the year, we are on track, 8% to 10% space growth for the year and for the coming years. It's true that this first quarter due to a number of a calendar of the openings and some relocations and refurbishments and enlargement of stores, you're seeing a little bit less than in the first quarter last year, but nothing material. And it's true that over the coming quarters you will see a higher number of openings. But everything is according to plan. So, no change there. And regarding Massimo Dutti, well, if you look at the brief description we've given over the performance of the concepts over the quarter, this is one of the best performing concepts this year. So, the calendar of openings is more biased towards the second part of the year as you have mentioned. However, we believe that there are very strong openings that we have done in recent months, like for example, launch of Massimo Dutti in Taiwan at 101 Mall, one of the most relevant retail spaces in Asia.

Operator: Simon Irwin, Credit Suisse.

Simon Irwin - Credit Suisse: Firstly, just on the tax rate which has come through at 23% in 1Q, so obviously (mostly) lower than last year, and a bit lower then where you were guiding us to. Can you just confirm that do you now expect this to be the full year rate and also why we've seen this reduction?

Ignacio Fernandez - CFO: As you know, the tax rate of the interim result is our best estimate for the full year at this stage. Being in so many countries our full year tax rate will depend very much on the final geographical mix of our business. The first quarter 2013 tax rate is our best expectation for the full year 2013 at this stage.

Simon Irwin - Credit Suisse: Could you just give us a bit of flavor for geographical growth in the quarter any way, to kind of which regions have done well and which are less strong?

Pablo Isla Alvarez de Tejera - Chairman and CEO: You know that we prefer not to elaborate very much on regional basis in one particular quarter. But you could assume similar trends to what you were seeing in the full year 2012.

Simon Irwin - Credit Suisse: Is it fair to say that the regions which have been most impacted by the weather would have seen more of a slowdown than others?

Pablo Isla Alvarez de Tejera - Chairman and CEO: You know that we prefer not to enter into the analysis of every specific factor in a short period of time. We manage the business globally. We manage the business, of course, thinking about not only the short term, but also the medium and the long term and this is what drives our expansion plan. This is what drives the evolution of the business. So, from the point of view of the big trends in the evolution of the business, nothing very different from what we were talking about in the full year results presentation.

Operator: Isabel Carballo, BBVA.

Isabel Carballo - BBVA: Just one question about the online operations; if you can provide please any color on the evolution of the online sales, especially in the U.S. market?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Well, what we can say about the online operations is that as we were saying during the presentation, we are quite satisfied with the evolution of our online operations from every point of view; from the point of view of the evolution of online sales, also from the point of view of something that we always talk about. So, it is a multi-channel approach; a lot of people visiting our webpage but buying in the stores, a lot of people asking for the deliveries to be in-store deliveries. Most of the returns are in-store returns. So, we are very satisfied with this multichannel approach, with the evolution in the different markets. Online sales are growing in all the markets, of course. In the U.S., you were asking about, we continue growing in a very significant way. Zara webpage is becoming more and more popular in the U.S. In China, which is one of our recent launches, the evolution is also been satisfactory. We have very recently launched in Canada with a good reception. We are planning to launch in Russia. You know that Russia is a very relevant market for us. We have a strong presence with all our different brands; not only with Zara – of course, with Zara, but also with the other brands. And we think that in Russia it will happen something similar to the other markets that we will have, of course, online sales, but at the same time, that online will also contribute to store sales as we are seeing in the different markets. From the point of view of the execution, as we always have said, our online business is very scalable because of the way we operate online, because of disintegration, because of the flexibility of our business model, the flexibility of our systems which allow us to manage online totally integrated with the stores. So, this is what we can say that our online is a relevant part of our business, but not a separate part because we consider ourselves a multi-channel company and online is completely integrated into the management of the business.

Operator: Richard Edwards, Citigroup.

Richard Edwards - Citigroup: I will just return into the space theme. You've made it clear I think that the physical space growth is up between 8% and 10% in the year-to-date, in line with previous guidance. Could you give us some sense of what the space contribution to revenue growth has been which I assume is somewhat less than that.

Marcos Lopez Garcia - Stock Market Director: Well, Rich, as you know that this is too precise for a quarter. What you can mention in this quarter is that space growth is in line. Stores openings are on line as well. Obviously, the first quarter has seen significant activity in terms of enlargement of stores, introduction of the new image in 25 of our top flagships. So, to talk about the different factors operating on space growth or space comparison over a short period of time is not relevant. What we can tell you is that we have our full confidence in the space growth plan for the year and store openings. Everything remains on track. You see that we have also, linked to that, delivered positive like-for-like in the quarter against very demanding comparables which we believe is very relevant and that like-for-like is also building on the second quarter over the first quarter numbers. So, clearly, it's just the start for the year and the year remains absolutely on plan.

Operator: We are now finishing the telephone Q&A session. To address the questions received through the webcast platform please go ahead.

Unidentified Company Speaker: Thank you. Good morning, everyone. We received many questions this morning over the webcast platform. A number have been covered already during the telephone Q&A session which is space growth, new store openings and gross margin. We have had some questions regarding the different geographies. We've also covered them to some extent. But the first question I would ask is can you comment in general on your performance in China? Are there any other additional remarks that you would like to make?

Pablo Isla Alvarez de Tejera - Chairman and CEO: What I would say is something similar to what we were saying before that we prefer not to elaborate very much in one particular quarter about the evolution of our business in any particular geography. As Marcos was saying answering our previous question, China is a very relevant part of our strategy. I was mentioning before also that we now have not only stores but we also have online presence in China. We continue with our store opening plan and we continue with what we consider a satisfactory evolution of the business. But I wouldn't like to elaborate much more in one quarter about the evolution in one particular market.

Unidentified Company Speaker: Linked to that question, do you have any plans to open a distribution center in Asia?

Pablo Isla Alvarez de Tejera - Chairman and CEO: We have talked before in previous conference calls or meetings about this point. At this stage, we are not considering anything in that direction. You know that having in mind our business model we prefer to manage the store on a centralized way. So we are not thinking about building a significant logistic platform in Asia.

Unidentified Company Speaker: We have another question on geographical region which is Africa. What do you think in the medium-term is the potential of that region?

Pablo Isla Alvarez de Tejera - Chairman and CEO: Well, you know that we are present in Morocco, we are present in South Africa, and we will see depending on the evolution of the different countries, depending on the evolution of shopping malls in the different countries, of course, it's an area in the – of the world that we would consider in the future, of course. In South Africa, we are quite happy with the evolution of our business. The reception, of course, South Africa is quite developed market and country from every point of view and we have been very well received since the first opening in a similar way as we were very well received in Australia. As you know, that we began our operations there the same year as in Australia in the year 2011, and now we are more and more consolidated in the market and very appreciated by our customers. And this is what we are trying to do in all the different geographies. So, now before closing, I would like as far as I was saying during the presentation, but as far as many of you are based in London, I would like to again to invite you to visit our store in Brompton Road, just in front of Harrods. As you know, this store has been completely refurbished. It was opened – opened up for the refurbishment 10 days ago, and if you have time I'm sure you will like to visit the store and to see what is the new store image and what we are trying to do in Zara. So, thank you very much, and in any case, of course, we continue being ready to answer any questions you may have through our Capital Markets team. Thank you very much.