Inditex shows further signs of a slowdown in Spain

Has fashion giant Inditex reached its full growth potential? After seeing revenues grow 3% to a record high of €26.14 billion in the last financial year, the company seems well placed for further growth. But a cloud of doubt hangs over the retailer, as revenues grew just 3% to €4.55 billion in Spain, marking four consecutive years of slowing revenue growth in its home market.


Pablo Isla talks with journalists at the group's headquarters in Arteixo - Inditex

“We still have growth potential,” Pablo Isla, group CEO, said during the presentation of the firm’s annual results at its head office in Arteixo La Coruña in March. “The company is more alive than ever from a business point of view.” But his upbeat tone masked the reality of the company’s performance. In 2018, the company founded by Amancio Ortega delivered the slowest sales growth in its history. Gross profit grew by 4% to €14.8 billion, while the gross margin was up by 39 basis points to 56.7%. Additionally, like-for-like sales experienced growth across both online and physical retail channels, and across all regions and brands, representing a 4% increase.

The latest results, filed with Spain’s National Securities Market Commission (CNMV), confirm Inditex’s slowdown in its domestic market. There, growth has been lagging since 2015. In fact, sales grew by just 3% to €4.55 billion in Spain in 2018, which shows a further sign of weakness when compared with the group’s 4% increase in 2017 and 6.2% in 2016. The results came after the group reported record results in financial year 2015, when group sales grew 8% in Spain and hit the €4 billion mark. And as underlined by Isla at the press conference, the company now makes €1 billion more than in 2014.

On a global scale, Inditex said revenue growth remained stable at 3.1% to  €21.58 billion. The European Union accounted for €9.94 billion, while other international markets generated the remaining €11.64 billion. Currently, the Spanish company makes the bulk of its sales in the European Union (accounting for 45.1% of total sales), followed by Asia (23.2% of sales), Spain (16.2% of sales) and the Americas (15.5% of sales).


The group's sales have continued to grow since 2013 - Inditex

ANALYSTS INCREASINGLY PESSIMISTIC DESPITE TURNOVER GROWTH

“2018 has been a key year in the transformation of all aspects of the company,” the chief executive said. “[And despite undertaking] these efforts, we have managed to post a good set of results,” he added. But the company, hit by currency effects, saw its share price fall 4.5% on the stock market on the day of the presentation. And whilst its share price quickly recovered during the same week, and its market capitalisation rose to €82.871 billion, financial analysts remain cautious about the company’s prospects. Yet Inditex continues to be Spain’s most valuable listed company.

Stocks analysts at most brokerage firms shared a negative stance in a context where high dividends and strong growth forecasts rule. The most categorical was Morgan Stanley, saying that Inditex’s capacity for growth has reached its point of maturity and that it should no longer be considered a high-growth business. Meanwhile, Credit Suisse warned over a lack of margin progress and Berenberg forecasted a slowdown in sales growth on a global scale. The Spanish company reassured investors by offered a more generous dividend policy given the “strength of the results and the resulting liquidity.” The new policy will see the company increase ordinary payout to 60% from 50%, while a total bonus dividend of €1 per share will be paid out in relation to fiscal years 2018, 2019 and 2020, representing a 17% increase in 2018 dividend.

Translated by Barbara Santamaria

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