Inditex Earnings: Steady Double-Digit Sales Growth and Margin Improvement; Shares Fairly Valued

We are maintaining our EUR 35 fair value estimate for narrow-moat Inditex ITX 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.

Profitability improved in the first half with the gross margin expanding by 27 basis points (34 basis points in the first quarter). The operating margin reached 18.8% versus 16.4% a year ago or 17.8% if the EUR 216 million provision for Russia/Ukraine operations in 2022 were to be excluded. Cash generation remained strong, leading to a cash position increase to EUR 10.5 billion. Inventory management, in particular, remained solid with a 7% reduction in inventory from 2022 levels, which were affected by some extra stocking due to supply chain shortages.