Inditex Offers Investors Resilience Amidst Retail Stock Volatility (IDEXF)

Inditex Offers Investors Resilience Amidst Retail Stock Volatility (IDEXF)

Kong Ding Chek

The global fashion conglomerate Inditex (Industria de Diseño Textil, S.A) (OTCPK:IDEXF) is strongly gaining traction, seeing improvements in profits and revenue growth over the last couple of months as the Spanish-based multinational fashion company rebounds amidst tumultuous economic conditions.

Amid inflationary concerns, supply chain issues, mass store closures in Russia and Ukraine, and growing labor shortages, the biggest global fashion company that own brands like Oysho, Bershka, Pull&Bear, and Zara have been able to navigate these challenges relatively smoothly, considering the slowdown in consumer spending as recession looms on the horizon.

In June, the company reported considerably positive profits and revenue growth, which helped share prices jump by 4.8% in post-earnings trading. The positive results come after the fashion giant raised prices for its leading brand Zara to help offset inflationary conditions and pandemic-driven costs.

The results in their latest report mark a strong rebound from the last few years of slowing consumer spending and lowered investor confidence. A question does come to mind over whether Inditex will be able to pull off this trend in the long term as a way to instill investor confidence and help share prices gain more traction on the market.

Retail stocks are generally a tough call to make, especially in the backdrop of current economic conditions. With economists still unsure over the possibility of a recession, what will the call for Inditex be, and can you hold for the long rather than near term? Let’s take a look.

A Thriving Business Model

Inditex has a strong business model that works, and it shows in their earnings. The global fashion powerhouse operates eight different brands, including Oysho, Bershka, Pull&Bear, Stradivarius, Massimo Dutti, Uterqüe, and Zara, including Zara Home.

Of all these names, the latter – Zara – currently makes up more than 70% of the company’s total sales. The fashion label started as a small clothing store in Spain in 1975, and today it’s a global fashion brand that currently has more than 2,000 retail stores and 500 Zara Home stores around the world.

What separates Zara from domestic clothing brands is that parent company Inditex has the upper hand when it comes to sourcing high-end and affordable on-trend garments. For consumers, this means they have constant access to affordable, on-demand, and on-trend garments year-round.

Today, Zara is a household name in the fast-fashion industry, operating a five-week ‘design-to-retail’ business model and introducing more than 20 different collections annually, both in its brick-and-mortar stores and online.

The success of their fast-fashion business models keeps consumers engaged and ensures shareholders are aware of the company’s ability to spearhead the fast-fashion strategy. This trend has caught on, and today several well-known brands are finding success using a similar model.

Positive Earnings Despite Economic Slowdown

Inditex has perhaps everything an investor is looking for, if not more, as it operates a solid business model that provides foolproof returns even as economic slowdown persists and inflationary concerns have kept consumers from spending.

For the interim, between February 1, 2022, and April 30, 2022, Inditex posted a 36.4% increase in total Q1 2022 sales, a massive improvement from the same period in 2021. With total sales of $6.7 billion, this marked the biggest first-quarter sales round-up of the past six years, beating estimates of $6.2 billion.

Total gross profit also increased by 37% to $4.1 billion, and the gross margin reached 60.1%, the highest it’s been in more than 10 years, a 20-point jump from Q1 2021. Furthermore, Inditex will propose a dividend of $0.93 per share, against 2021 results, with an extraordinary dividend of $0.40 per share in 2022. IDEXF holds a dividend yield of 2.87%, a comfortable position considering the market average is anywhere between 2% and 6%.

Even as most countries are continuously moving in and out of lockdowns and imposing COVID-related restrictions, around 90% of all Inditex brands’ stores are fully operational.

The in-store experience has also been received well, despite the underlying pandemic, which marked another milestone for the company, as both in-store and online sales grew by 17%, between May 1, and June 5, 2022. This was around 13% higher than recorded figures for the period running between May 23, and June 5, 2021.

The positive and aggressive sales growth meant that the share prices of Inditex were able to jump significantly in post-earnings but have since stabilized in the $25.17 – $25.65 per share range.

Compared to other high-end European retail names, such as JD Sports (OTCPK:JDSPY, OTCPK:JDDSF) (LON: JD) and Ted Baker (OTCPK:TBAKF) (LON: TED), Inditex was among the few that managed to witness both sales and share prices climb amid challenging consumer conditions and higher operational costs.

Forward-Looking Strategies

There are a couple of metrics that have helped Inditex come off stronger than other retailers in its latest earnings. These metrics are also poised to help drive future growth, and the company has been working on implementing innovative strategies to help them navigate the challenging market conditions.

For starters, Inditex has increased inventory by more than 27% as they look to sidestep any potential bottlenecks that may be caused by supply chain issues. Additionally, the company is now buying clothes from suppliers located in Spain, Morocco, and Turkey, rather than looking towards Asian markets for their needs.

Increasing inventory levels at this time of year are not something most retailers tend to do, as Target, Macy’s, and Walmart have all mentioned how they’re trying to burn through an excess of stock before the holiday season, which usually starts around late October.

Increasing inventory levels means that Inditex can bypass any potential supply chain disruptions in case suppliers are unfit to fulfill orders due to COVID-related restrictions or lockdowns, seeing ports being closed for weeks on end.

Then there’s Zara’s strong pricing structure, which many argue is perhaps the biggest cause for the company’s positive earnings. The pricing structure of Inditex means that the company has been able to offset pandemic-driven costs and inflation onto consumers instead of having to carry the burden themselves. Currently, on average, garment prices are at least 10% higher than what they were in January of this year.

Through its flagship store, the company has also mentioned forward-looking initiatives that will see the improvement of its sustainability goals and technological advancements. Through these initiatives, Inditex looks to focus more on online sales rather than in-store experiences, estimating that 30% of total sales by 2024 will be online.

What’s more, Inditex has recently partnered with the Infinitive Fiber Company to help produce and promote newer and more sustainable textiles throughout their inventory.

The partnership will see Inditex purchasing around 30% of future production volumes of Infinitive Fiber textiles which will cost the company around $100 million over three years.

Inditex, more so Zara, has come under media scrutiny in recent years over their environmental impact and fast-fashion business model that’s largely contributing to the huge amount of annual textile waste.

Co-founder and co-owner of luxury refashion marketplace CODOGIRL Yulia Omelich commented on the fact how fast-fashion practices have become an increasing challenge for the garment industry as more brands look to exercise this method of business:

Companies of this size should make more of an effort to support sustainability practices, this shouldn’t only include the materials they use for their garments, but the overall design to retail structure as a whole.

CODOGIRL was founded back in 2010 and focuses on the resale and refashion of high-end luxury garments. In 2021, the company was assigned as a Signatory of the Fashion Industry Charter for Climate Action under the United Nations Climate Change accord.

Rather than trying to reinvent the wheel, Inditex is looking to better its current systems and operational structures to ensure an improved customer experience, increase online visibility and sales, and take more action regarding sustainability goals.

Society is beginning to recognize the impact that our abundant use of clothes is having on the environment, and we’re now being more conscious about our choices when shopping for clothing. Budget is still and will remain a key factor, but our habits are certainly changing.

Younger generations tend to be more in tune with the idea, and as they burgeon and their incomes rise, the industry will have no choice but to pay attention and adopt more environmentally-friendly practices. It is inevitable.

Andrey Omelich, co-owner of CODOGIRL.

Andrey Omelich is the co-founder and co-owner of CODOGIRL, alongside his wife Yulia. Andrey has more than 20 years of experience in investment banking.

This will have a negative impact on gross margins, no doubt, but the companies that will listen to their customers and adopt eco-friendly practices earlier on. This will be rewarded with top-line growth in the mid to long term.

The current business model of Inditex is a way to prepare itself against any sudden changes in the market or perhaps unforeseen constraints that could hurt its bottom line. More so, the company may have overcompensated for the amount of inventory it’s currently stockpiling, but this could help them in the long run, as countries are in limbo when it comes to pandemic-related restriction, and supply chain constraints.

A Hit Or Miss For Future Performance

Although Inditex provides investors with a viable business model, strong market performance, and an even stronger forward-looking strategy, there may be some factors that could see share prices come down slightly in the coming months.

The biggest downgrade of Inditex currently was the announcement earlier in March, stating that it would close its more than 502 stores across Russia and Ukraine. The announcement saw IDEXF drop by more than 12% in single-day trading, only to start recovering a few days later before sliding again.

Despite the store closures and the sudden nosedive in March, share prices have already managed to climb 27.62%.

Additionally, the company has also halted all online sales in Russia, which can cause an even bigger dip in their future guidance, seeing as both Russia and Ukraine account for roughly 5% of the company’s total growth. The worrying news is that Russia currently accounts for 8.5% of the company’s EBIT, with all of its Russian-based stores operating on a rental basis.

Mass store closures due to political instability and ongoing operational costs could take a massive bite out of the company’s full-year sales growth.

Ongoing price increases might make up for the missed guidance in these regions, but this could hurt its overall performance, especially in already uncertain market conditions.

Of course, investors need to take into consideration that Inditex has built these scenarios within their current structure or business model, so there is perhaps a possibility of the company being able to carry the additional costs.

Looking Forward

Retail stocks are a tricky call to make, especially those that operate in volatile consumer markets such as Inditex.

Investors will need to consider their place among other retail stocks in the coming months, as this will help them strategize over whether IDEXF or any other retail-related stocks are worth purchasing.

For the most part, what sets IDEXF aside from other retail and apparel stocks, such as NIKE (NKE), The TJX Companies (TJX), Under Armour (UA), Macy’s (M), and Gap Inc. (GPS), is both its size and the level at which it can operate even under current conditions. Additionally, Inditex is able to fill its stores not just with seasonal options but constantly change its offerings throughout the year.

Other smaller brands and retailers are also more sensitive to sudden economic cycle changes, and we saw this with Gap Inc., which lowered its full-year forecast in May after missing Q1 estimates. Share prices of GPS were down 40% during this period, whereas Inditex is down about half.

IDEXF is also in a position where share prices could experience more growth in the coming months, and the reasons for this are plenty. One is the fact that Inditex has the upper hand in the fast-fashion cycle, and the model has been tried and tested with increasingly positive results.

The second reason is that Inditex is already planning well ahead of current conditions, which does mean that if costs keep rising, the company can sidestep any increases that may affect its bottom line.

The Bottom Line

Inditex is in a strong position at the moment, and its share prices have been constantly moving throughout the last few months. Inditex offers investors resilience, a crucial aspect in a time when the market in terms of retail stocks is heavily volatile.

It’s important to note that IDEXF is a growth purchase rather than a yield. The stocks are backed by a company that’s well ahead of others by planning to sidestep any unforeseen changes in the market.

Amid mass store closures, inflation, and supply chain issues, Inditex was still able to come out on top. Their positive earnings results reveal that Inditex and IDEXF are poised for potential growth and that the current economic conditions have done little to hurt their bottom-line performance.

Even as consumers are tightening their belts and investors recession-proof their portfolios, IDEXF is a suitable purchase for any investor who’s looking to purchase retail stocks that offer performance, growth, and guidance that will ensure future stability and resilience.

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