Company Reports

We are increasing our fair value estimate for narrow-moat Inditex to EUR 37 per share from EUR 35 following continued solid trends in the first quarter and as we adjust our near-term projections slightly upward. At current levels, the shares look expensive. While we expect above-industry revenue growth to continue, we believe there is less room for margin expansion, given Inditex’s best-in-class operational efficiency and the competitiveness of the apparel industry (meaning that some efficiency gains may need to be reinvested in customer offerings.)

Inditex is the number-one apparel company by revenue in Western Europe and globally. It follows a so-called fast-fashion business model, which involves feedback loop-driven design and small batches of supplies at attractive prices. This allowed it to gain market share from not only midprice players but even luxury ones in the apparel segment.

We are maintaining our fair value estimate of EUR 35 per share for narrow-moat Inditex after the company reported another set of strong full-year results. While revenue practically matched our forecasts, its operating profit exceeded our expectations, delivering a margin of 18.9% (we forecast 18%) on the back of a stronger gross margin (57.8% or 80-basis-point improvement from last year). While we believe Inditex should continue growing through market share gains, we think further margin progress could be more limited given the competitiveness of the apparel sector.

We are maintaining our fair value estimate of EUR 35 for narrow-moat Inditex as the company continues to deliver strong revenue growth and operating profit growth in the first 9 months of 2023. At current levels, shares are approximately fairly valued.

We are maintaining our EUR 35 fair value estimate for narrow-moat Inditex as the company reported continued solid growth momentum in the second quarter. Sales in the first half grew by 16.6% at constant currency versus 15% in the first quarter. Sales from Aug. 1 to Sept. 11 were up 14%, continuing on a strong double-digit trajectory that has been observed since 2021. We believe at current levels shares are approximately fairly valued as we expect the company to return to high-single-digit revenue growth (in line with the last 5-year average trend), achieved largely through market share gains as in prior years, but with less of a pricing impact compared with 2022-23. We also don’t expect significant margin expansion as efficiency improvements are likely to be reinvested in customer offerings in a competitive and fragmented apparel industry.

Industria de Diseno Textil, or Inditex,is the number-one apparel company by revenue in Western Europe and globally. It follows a so-called fast-fashion business model, which involves feedback loop-driven design and small batches of supplies at attractive prices. This allowed it to gain market share from not only midprice players but even luxury ones in the apparel segment.

We view shares of Inditex as approximately fairly valued, after they gained more than 50% in value over the past year, significantly outperforming the Stoxx Europe 600 Index. The start to 2023 was better than expected as the company reported continued strong double-digit sales growth and margin improvement in the first quarter.

We maintain our fair value estimate of EUR 32 for narrow-moat Inditex as the company reported very solid full-year results despite headwinds from inflation and discontinued operations in Russia and Ukraine. Inditex remains our preferred pick in European apparel, trading in 4-star territory with around 10% upside to our fair value, even despite 30% price appreciation over the last year and significantly exceeding STOXX Europe 600 Index’s low-single-digit performance.

We maintain our fair value estimate of EUR 32 for narrow-moat Inditex as it reported continued strong sales growth in the third quarter despite inflation, erosion of consumer confidence, and suspension of operations in Russia. The results confirm our thesis that Inditex should gain share in a more difficult macroeconomic environment due to its scale, vast financial resources (EUR 10 billion in net cash at the end of the quarter) to invest countercyclically, and attractive customer value proposition through quick product launches and proximity sourcing. We believe that, so far, Inditex seems to be faring better than peers in terms of customers' acceptance of price increases, by mid-single-digit percentages in 2022. We continue to view Inditex as attractively valued and it remains our top pick among European apparel.

Industria de Diseno Textil, or Inditex,is the number-one apparel company by revenue in Western Europe and globally. It follows a so-called fast-fashion business model, which involves feedback loop-driven design and small batches of supplies at attractive prices. This allowed it to gain market share from not only midprice players but even luxury ones in the apparel segment.

We are maintaining our fair value estimate of EUR 32 for narrow-moat Inditex as the company reported resilient revenue growth and profitability in the first half of the year. We view shares as very attractive at current levels, trading in 5-star territory, presenting long-term investors with a good opportunity to build position in this moaty name.

We maintain our fair value estimate for narrow-moat Inditex after it reported strong growth in sales and profits in first-quarter 2022 as brand momentum and a favorable comparison base in European markets (affected by lockdowns in first-quarter 2021) more than offset the impact of suspending operations in Russia and Ukraine and effects of rising inflation on consumer spending. We continue to believe Inditex is materially undervalued with over 40% upside to our fair value estimate and encourage investors to build a position in this best-in-class European apparel company.

Industria de Diseno Textil, or Inditex,is the number-one apparel company by revenue in Western Europe and globally. It follows a so-called fast-fashion business model, which involves feedback loop-driven design and small batches of supplies at attractive prices. This allowed it to gain market share from not only midprice players but even luxury ones in the apparel segment.

Apparel resale remains the quickest-growing channel in apparel, with the confluence of elevated mobile commerce volume, robust home delivery infrastructure, competitive pricing, and sustainability concerns driving more than 3 times the sales growth of the retail apparel industry, by our estimates. While we forecast resale figures to represent only 10.6% of global apparel purchases by 2031, we expect a $301 billion global addressable market in that year, offering plenty of headroom for publicly traded players like no-moat Poshmark and no-moat The RealReal. We believe that the market is overselling near-term pressure, with a mix shift towards services spending, surge in brick-and-mortar sales, lapping stimulus benefits, and inflationary pressures dragging on short-term results. Longer term, we expect that favorable unit economics, with resale sellers shaving as much as 70%-75% off their effective clothing replacement cost, broader acceptance of the channel, and a viable route to operating profitability (with strong incremental operating margins), will see the market catch up to our $18 and $13.30 fair value estimates for Poshmark and The RealReal, which trade at 40% and 75% discounts to our intrinsic valuations, respectively.

Concerns about the impact of inflation on consumer spending, rising interest rates, Russia-Ukraine conflict and lockdowns in China have put pressure on shares across our luxury and apparel coverage. We see these changes as either manageable (the sector has limited exposure to Russia and Ukraine) or transitory (Chinese demand recovered quickly after previous lockdowns). Historically, the luxury industry grew prices ahead of the consumer price index and while it was not the case for general apparel the strongest firms, such as narrow-moat Inditex, are well placed to take market share under strenuous conditions (as the coronavirus experience has shown).

We expect to lower our fair value estimate for Inditex by a low single digit to factor in the impact of the Russia-Ukraine war: a temporary disruption of operations in the region (Russia accounts for 8.5% of EBIT and Ukraine for 1% of its store count) and a gradual return to normal operations in the region. Assuming these operations are permanently stopped (which is not our base-case scenario) our fair value estimate would be reduced by a high single digit. We believe a share price decline of more than 20% since the start of 2022 more than reflects these risks (shares trade in 5-star territory, 40% discount to our fair value estimate, at a multiple of less than 17 times forward consensus earnings and dividend yield of 4%).

We are not making any changes to our fair value estimates for our luxury and apparel coverage list due to Russia-Ukraine armed conflict. The luxury industry’s exposure to the Russia and Ukraine is small, accounting for a low-single-digit percentage of revenue, by our estimates. We believe that the conflict is unlikely to dampen consumer confidence in China (primary long-term growth driver) or the U.S. (driver of growth in recent years). European consumer sentiment (low-20% of industry’s sales) may be affected, should energy-related inflation accelerate meaningfully as a result of conflict; however, Morningstar's view is that the likelihood of gas delivery disruption to Europe from Russia is low. That said, most luxury names in our coverage look expensive to us, and we would recommend investors await a wider margin of error for investment in the sector.

We are increasing our fair value estimate for Inditex to EUR 32 from EUR 31 as a result of faster than initially expected recovery in sales and profits in 2021. Last month’s pullback left shares trading in an attractive 4-star territory, at over 10% discount to our fair value estimate, and we would recommend investors building a position in this narrow moat apparel stock.

Industria de Diseno Textil, or Inditex,is the number-one apparel company by revenue in Western Europe and globally. It follows a so-called fast-fashion business model, which involves feedback loop-driven design and small batches of supplies at attractive prices. This allowed it to gain market share from not only midprice players but even luxury ones in the apparel segment.

We expect to increase our full-year forecasts for narrow-moat Inditex’s revenue and profits following strong first-half results; however, we don’t expect this to have a material impact on our fair value estimate. We believe the shares are fairly valued at current levels.