Industria de Diseño Textil, S.A. (ITX) Earnings Call Transcript & Summary

Good morning to everybody. A warm welcome to all of those attending the presentation of Inditex's results for the interim first half 2023. I am Marcos Lopez, Capital Markets Director. The presentation will be chaired by Inditex's CEO, Oscar Garcia Maceiras. Also with us today is our CFO, Ignacio Fernández. The presentation will be followed by a Q&A session, starting with the questions received on the telephone and then those received through the webcast platform. Before we start, we will take the disclaimer as read. Over to you, Oscar.

Good morning, and welcome to our results presentation. It is my pleasure to join you today. In the first half of 2023, Inditex has continued to see a very robust operating performance driven very much by the creativity of our teams and the strong execution of our fully integrated business model. This performance relies on the 4 key pillars of our strategy you are very all familiar with: our unique fashion proposition, an optimized customer experience, our focus on sustainability and the talent and commitment of our people. These factors have propelled our competitive differentiation. We have experienced very satisfactory sales growth of 13.5%. The execution of the business model has also been very robust with a healthy gross margin and controlled cost management. On the bottom line, net income increased 40% to EUR 2.5 billion. Our operating performance underpins the sound financial position in which we find ourselves. We have generated significant free cash flow. This has continued into the second half. Store and online sales in constant currency between the 1st of August and the 11th of September grew 14%. Let me highlight some key features of this performance for the year so far, which has been marked by a strong execution. Our spring/summer collections have been very well received by customers. Sales in constant currency increased 16.6% with strong growth seen in both stores and online. Sales were positive across all geographical areas as well as in all the concepts. Our diversified presence in 213 markets with low market penetration allows us to enjoy significant global growth opportunities. We have complete confidence in our ability to grow this business, mainly because the model we operate is completely unique. This, in turn, drives the increasing differentiation we have all been seen. I will hand you over to Ignacio to go into some of the headline numbers.

Thanks, Oscar. As you have seen in our financial release, Inditex performed strongly in the first half of 2023. [indiscernible] plus 15.5%. We have managed the supply chain actively, and this has driven a very healthy gross margin. Operating expenses have, of course, been tightly managed, resulting in operating leverage. As a result, EBITDA grew 16% to EUR 4.7 billion. Below this line and for comparability reasons, it is worth noting the provision charge in the first quarter 2022. Relating to operations in the Russian Federation and Ukraine for EUR 216 million in that year. We have also seen very strong progress in net income with an increase of 40% to EUR 2.5 billion. We continue generating significant free cash flow, and this has taken our net composition to EUR 10.5 billion. I would like to reiterate that sales have progressed very well at plus 15.5%, reaching EUR 16.8 billion. That's 16.5% in constant currency. Sales growth was strong both in stores and online. Furthermore, sales have been positive across all regions and across all concepts. Based on current exchange rates, we expect a minus 3.5% currency impact on sales for the full year 2023. We enjoy a global presence with operations in 215 markets, and with a low market share with [indiscernible] remains highly from in the sector. Growth has been strong across the board. We have previously mentioned that the United States is our second largest market. In the first semester of 2023, gross profit increased 14% to EUR 9.8 billion, and this demonstrated a healthy execution with the business model. The gross margin was 58.2%. Based on current information, we expect a stable gross margin of plus/minus 50 basis points this fiscal year. There has been very tight control of operating expenses across all the partners and business areas. Operating expenses increased below sales growth over the first half of 2022. Including all these charges, operating expenses grew 220 basis points below sales growth. Over the first half of the year, we have experienced a robust operating performance. We have also seen a normalization in supply chain conditions. Inventory in details as of the July 31, 2023 was 7%, lower than at the same date in 2022. Let me highlight that the end of the period inventory is considered to be of high quality. Due to the strong cash flow generation, the net cash position has grown to EUR 10.5 billion. As you can see from this slide, we continue to generate very strong levels of cash flow with fund from operation increasing 35% when compared to the same period last year and cash from operation increasing 57%. And now over to Marcos.

Thank you. Over the first half of 2023, the group has had a robust performance across the board. We are satisfied with execution over the period. We have continued with expansion and have opened stores in 20 different markets. Store and online sales across all concepts have been satisfactory, the performance has been strong at all levels. We are pleased with the execution of the concepts of the first half, as you can see in this chart. And now back to you, Oscar.

Thank you, Marcos. I would like to comment on some of the initiatives this season which have been driving the increasing levels of differentiation we are seeing today. First and foremost, our priority remains to work on maximizing the appeal of our fashion proposition. Creativity, innovation, design and quality are the defining features of our collections and a key focus across all of our teams and the partners. A good example of this is Zara's The Steven Meisel New York Collection, The Zara Men's Origins Collection, Zara Kids Autumn Collection, Zara Home Stripes&Overtones, Pull&Bear's Pacific Republic, Massimo Dutti's Studio, Bershka's Denim, Stradivarius AW23; and finally, Oysho's Training. The newest store design for Zara created by our architectural studio is now being rolled out progressively. The design integrates organically the most sophisticated interiors with the functional and digital sections, like fitting rooms, self-checkout areas, click and collect points, in-store silos and stock rooms. This new Zara store design is featured in openings, enlargements and relocations. Two key projects of the year will be doubling the size of the Zara stores at Paris Hotel de Ville and at Dadeland in Miami. Just like all the other important flagship stores recently opened, they will include dedicated spaces for lingerie, shoes and handbags, the origins collection, the athletics collection and newborns. That will also include all the features that allow a complete digital experience. Another important project is the opening in November of the largest Zara store in the world at Coolsingel in Rotterdam with 9,000 square meters, including a Zara Home. The enlargement of the Zara at Dubai Mall of Emirates also illustrates what we are trying to achieve. And 2 recent openings, the important store in Sao Paulo, Patio Higienopolis; and the new Zara store in Shenyang Joy City. All the concepts keep optimizing their stores. Bershka has enlarged its flagship at Milan's Vittorio Emanuele with the reopening taking place on Friday. While Stradivarius relocated to a beautiful new store of 1,000 square meters in Barcelona's Paseo de Gracia in August. In terms of customer experience, it's important to highlight that the hardware to implement the new security technology, which eliminates the need for hard tax, was installed in Zara stores globally by July. Test operations have started already with full implementation by fiscal year-end 2024. At our most recent AGM in July of this year, we announced a new set of ambitious sustainability targets. We aim to have rollout circular IT services like therapy owned in our key markets by 2025. That same year, we hope to see 3 million people in the supply chain included in the Worker at the Center strategy, promoting advances in social dialogue, living wages, health, resilience and respect. By 2030, not only are we looking to reduce our overall emissions by more than 50%, but we are also committed to only using lower impact textile raw materials. Further commitment has been made regarding 5 million hectares of land to be protected, restored, already generated for the improvement of biodiversity. And finally, I remind you of our 0 net emissions target by 2040. In terms of circularity, the Zara Preowned platform currently available in the United Kingdom was launched in France on the 7th of September. Germany and Spain will follow over the second half of 2023. Through this platform, we will continue helping our customers to extend the life cycle of the Zara garments through donation, repair or resale and will contribute to the reduction of waste. We are promoting the talent and commitment of our teams in order to reinforce our attractiveness as a benchmark employer. The sustainable fashion school is a space dedicated to training and innovation in sustainability. Inditex has established an academic program in textile processing exclusively for our employees developed in conjunction with the University of Leeds. Our objective is to be an engine of transformation in the textile industry. The aim is to keep on providing our design and purchasing teams with a solid base of technical knowledge covering the entire product life cycle. In this first year, the course has now been attended by more than 1,500 employees across the group, exceeding 75,000 hours of training. Let me now move to the outlook for 2023. We remain on track to deliver upon all of our long-term goals. The talent, commitment and passion of our teams all around the globe will always be to key to our competitive edge. We offer a unique fashion proposition defined by creativity, innovation, design and quality. The continuous optimization of the customer experience is central to our approach. The strength of the full integrated business model that is operating at full pace has been clear in recent times. Inditex operates in 213 markets with a low share in a highly fragmented sector, and we see plenty of opportunities for both organic growth and expansion. We see increased sales productivity in our stores going forward and also expect the gross space growth in 2023 to be around 3%. Optimization of stores is ongoing. We expect space contribution to sales to be positive in 2023. Stable gross margins have always been a key focus for us. We are making investments that are scaling our capabilities generating efficiencies and increasing our competitive differentiation to the next level. For 2023, we estimate ordinary capital expenditure of around EUR 1.6 billion. A brief reminder on the dividend. The final dividend payment for 2022 of EUR 0.6 per share will be made on the 2nd of November. I would like to finish with a brief comment on our current performance. Autumn/Winter collections continue to be very well received by our customers. store and online sales in constant currency between the 1st of August and the 11th of September 2023 increased 14%. Thank you all for attending this results presentation. That concludes our presentation for today. We would be happy to answer any questions you may have.

The telephone Q&A session starts now. [Operator Instructions]. The first question goes to Richard Chamberlain from RBC.

Good morning, everybody. I got the [indiscernible] of soft tags for garments and elimination of tax installed to improve the customers experience. Just wondering if you can confirm that this role is on track and there's no [indiscernible].

Your line is not very clear. Would you be able to repeat the question from a clearer line? I understand that you're referring to the soft tag. What we can tell you, and we have mentioned during the presentation is that the soft tag hardware has been implemented in Zara stores globally. We have already started test operations for the full implementation of this stack by the end of next year. And right now, what we can tell you is that the implementation is going perfectly in line with our expectations with no major incidents. Thank you.

The next question is for William Woods from Bernstein.

Please, could you comment on any performance in the U.S. in terms of sales and also maybe in terms of strength, particularly with the new technology that you've introduced?

Good morning, and thank you. Well, we are very satisfied with our performance in all of our markets, both online and physical store channels. They are growing in a very natural way. In the case of the U.S., that remains our second largest market. The business is working very well. We continue to see very significant opportunities for our selective growth there. During our annual results presentation in March, we referred to 30 projects for the next 3 years. And some of them will become a reality this quarter, the relocation, doubling the size of Zara Dadeland Mall in Miami, refurbishment of our store in [ Brunsville Mall ] at the New York State or the opening of our store in Baton Rouge in Louisiana. So we are very happy with our performance in the U.S. Thank you.

The next question goes to James Grzinic from Jefferies.

Yes, I just had a very quick question on your thinking around gross margin. You had great sell-out sell-through for spring/summer. You're going to -- into the second half of the year with an extremely tight inventory. I presume you will still be seeing supply chain cost deflation. Your peers are talking about wanting to bank COGS deflation. Do you think there's a risk that you might not be too pessimistic by the time we get to the end of the year, vis-a-vis, the flat gross margin guidance?

Thank you, James. Regarding the gross margin, there are many, many components. In the first half, our gross margin increased 27 basis points to 58.2%. So that shows an extremely healthy execution in the business model. We've also mentioned that the inventory number should be read in conjunction with the normalization of supply chain conditions after a bit unusual 2022. So all in all, I'm looking at the different components. And you know very well, markups, markdowns, currency mix, et cetera, et cetera, we continue to see a stable gross margin as our best estimate for this year. It is also true that in the first half, we still have some negative impact coming from the U.S. dollar into the sourcing, which will reverse into the second half. This is in part compensated by the fact that our U.S. sales are growing as well. So let's say that the impact is quite balanced at the moment. So nothing really new to report on that field. We still keep on seeing best estimate as a stable gross margin for the second half. But I think that the trading update of 14% that we have also put in conjunction with these results shows that, well, operations are moving very normal.

The next question goes to Anne Critchlow from Societe Generale.

So my question is about the percentage of full-price sales in the first half. Was it very significantly higher year-on-year? And are you worried at all that you have too little inventory to go into the second half? .

Starting with the second question, I think I have answered that to James in the sense that this minus 7% inventory position is just a fact of the comparable in the previous year. Remember that last year, we had to anticipate a little bit the inventory inflows due to some logistic constraints. This year is very, very normal. If you just read it over 2 years, you see that the position is extremely, extremely natural. And again, you've seen the trading update of 14%. So things are going very, very healthily. Regarding the full price sales of the first half, well, I think we have reported pretty solid number of 13.5%, 16.6% in local currencies. And again, the most important thing is that the creativity of our teams, the design, the innovation that our teams are bringing to the table in conjunction with the business model are delivering very, very strong top line sales, given the attractiveness of the fashion proposition we offer to customers, both in stores and online.

The next question goes to Georgina Johanan from JPMorgan.

Just a quick one, please. You talked a while back about increasing some of the investment in your warehouses to drive and for automation there. Can you just give us an update on that, please? And any planned timings of where we should see that going in?

The plan is very much in line if you have seen CapEx numbers that we have released EUR 808 million investment. But obviously, what the company is always focused given what the business needs. And we're experiencing very strong growth. You cannot do that without the right assets. And to keep on investing for the future and to deliver on that type of need is something that we would always be going to do. But the projects we refer in [ Zara in Lelystad ] in Stradivarius are very much on target, okay? But again, you also see that we're generating very significant free cash flow. So I would say that the execution of the plans for the year are very much in line.

The next question goes to Nicolas Champ from Barclays.

Could you please comment on your space contribution in H1, please, because you reiterate your guidance to have a positive space contribution for the full year. But on the other hand, your store count has this time fails there compared with last year and since the beginning of the year. So any update on the space contribution in H1 and also, your -- any guidance regarding the evolution of your store count for the full year? Do you expect to close down further stores in the second half of this year, please?

Thank you, Nicolas. Very much what I can tell is that most of the growth comes from comparable sales. but we have positive space contribution, small but positive over the first half, and this is what we expected. If you remember, our guidance for the year is for a 3% gross space growth with some small absorptions, which will result in positive contribution. But the main -- what we're seeing in our business is the strong sales conversion we're obtaining in our existing stores and online. So that's very much the message. We're not changing our view for the year.

The next question comes from Grace Smalley from Morgan Stanley.

Just on the growth, as you say, you've achieved strong double-digit constant currency growth and continue to on your current trading update as well. I guess as you look out to Inditex's multiyear growth plan, do you aim to continue to drive double-digit revenue, organic revenue growth over the medium term supported by all these investments and initiatives you have in place? Or what do you see as a reasonable sustainable long-term top line organic growth rate for the company?

Thank you for your question, Grace. I think that what is extremely relevant is to keep on focus on operations today. right? We have provided guidance for the year. We believe that our model is extremely differentiated. Our strategy is quite different to the market in the sense that we started optimizing stores at a very early stage and developing this in conjunction with online. Clearly, you see the numbers we are releasing, 13.5% sales growth over this first half. Trading update, 14%. We continue having a very, very differentiated model and to increase this differentiation is our key long-term goal, right? At the time, we're completely focused on our operations for the autumn/winter, and we will update you in December with what is we believe is relevant. But I think the importance is the long-term strategy of the company, which makes it a very, very different model compared to that prevailing in our sector. Thank you.

We're now going to pass over to the webcast questions. We've had a few questions today, the first of which is, can you talk a little bit more about your new sustainability objectives, please?

Well, first, let me point out that we have a strong track record in sustainability that has been an early priority for us and continues to be a top priority in our agenda. Sustainability is a crucial part of our strategy and is fully embedded in every decision that we have to take. We have a solid culture of sustainability and many internal initiatives and external partnerships. We are on the right track to achieve all sustainability commitments previously announced, and we have increased the level of our ambition with the announcement at our last AGM in mid-July and have set new goals related to raw materials, reduction of emissions, supply chain, circularity, biodiversity and corporate community investment. Our aim is to transform ourselves and to lead the transformation of the whole industry.

Thank you. The next question relates to collaborations. Can you comment on one of the most recent collaborations, please?

Well, thanks for the question. Well, our fashion proposition, 1 of the 4 key pillars of our business model, relies on creativity, innovation, design and quality. We are always seeking to work closely with the most cutting-edge talent in our industry. As an example, Zara has just released a collaboration with one of the most prominent photographers in the world, Steven Meisel. Our Steven Meisel New York Collection will be available in stores and online next week after visiting New York and London. The key part is the combination of external talent with our talented teams is leading us to continually improve our fashion proposition to our customers.

The next question relates to online. Can you provide us with an update on how your online operations are performing, please?

Our online sales continue to grow strongly. This reflects the importance and the strength of having a fully integrated store and online model that allows us to provide our latest fashion to customers in whatever way they want. Our customer journey goes smoothly from online to stores and vice versa. And likewise, our model with a single inventory serves customers in both channels. As we have already mentioned previously, it's impossible today to explain the online sales without the strength of the physical presence of our network of stores that provide key logistic capabilities for online and at the same time, the strength of our online platforms reinforces our physical stores. As online penetration globally continues to grow, we expect that online continue to grow, and this is a very nice situation to be in, given the very strong growth in traffic to our stores that we have been seeing in recent times.

Thank you very much for that. That concludes the Q&A session for today. I'll pass you over to Oscar for the closing remarks. Thank you.

Thank you to all of those participating in the presentation today. For any additional questions you may have, please get in touch with our capital markets department. And we will welcome you back in December from the interim 9 months 2023 results.