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 9 months 2023. I am Marcos López, 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 interim 9 months of 2023, Inditex saw 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 we have been talking about throughout the year: our unique fashion proposition, an optimized customer experience, our focus on sustainability, and the talent and commitment of our people. These are the principal factors driving our differentiation. We have experienced there is satisfactory sales growth of 11.1%. 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 32.5% to EUR 4.1 billion. The operating performance of the group further underpins our sound financial position. We have generated significant free cash flow over the period. You will note this strong performance has continued into the fourth quarter. Store and online sales in constant currency between the 1st of November and the 11th of December grew 14%. Let me highlight some key features of this performance for the year so far, which has been marked by strong execution. Our Autumn/Winter collections remain very well received by customers. Sales in constant currency increased 15%, with strong growth seen in both stores and online. Sales were positive across all geographical areas and as well as across all of the concepts. Our diversified presence in 213 markets with low market penetration offers us significant global growth opportunities. We have complete confidence in our ability to grow this business, mainly because the model we operate is entirely unique. This, in turn, drives the increasing differentiation we have all been seeing. 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 9 months of 2023. Sales have progressed well, plus 11.1%. We have actively managed the supply chain. This has driven a very healthy gross margin performance. Operating expenses have overall been tightly managed, and this has generated operating leverage. Consequently, EBITDA grew 13.9% to EUR 7.4 billion. Below this line and for comparability reasons, it is worth noting the provision charge in the 9 months 2022 relative to operations in the Russian Federation and Ukraine for EUR 231 million in that year. We have also seen very strong progress on the net income line, with an increase of 32.5% to EUR 4.1 billion. The group continues to generate significant free cash flow, and this has taken our net cash position to EUR 11.5 billion. I would like to reiterate that sales have progressed very well at plus 11.1% and have reached EUR 25.6 billion. That's 15% in constant currency. Sales growth was strong both in stores and online. Additionally, sales have been positive across all regions and across all concepts. Based on current exchange rates, we expect a minus 4% currency impact on sales for the full year 2023. In the interim 9 months of 2023, the execution of the business model was very strong. Additionally, the Autumn/Winter 2023 season has experienced a normalization in supply chain conditions, and a more favorable euro/U.S. dollar exchange rate compared to the 2022 Autumn/Winter season. In the interim 9 months of 2023, the gross profit grew 12.3% to EUR 15.2 billion. The gross margin increased 67 basis points to 59.4%. In the latter part of 2023, the strong execution of the business model and the operating conditions mentioned previously have continued. For these reasons and based on current information, Inditex expects gross margin in fiscal year 2023 of around 75 basis points higher than fiscal year 2022. There has been very tight control of operating expenses across all departments and business areas. Operating expenses increased below sales growth over the 9 months of 2023. Including all lease charges, operating expenses grew 130 basis points below sales growth. Over the period, we have seen a robust operating performance. As mentioned, we have also seen a normalization in supply chain conditions. Inventory at Inditex as of the 31st of October 2023 was 5% lower than on 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 15% to EUR 11.5 billion. And now over to you, Marcos.

Thank you. Over the interim 9 months of 2023, the performance of the group has been very good. Notably, this performance was across all the concepts. We are very happy with execution over the period. Inditex has continued with expansion and has opened stores in 36 different markets. We have also continued the rollout of concepts in new markets such as the first Stradivarius stores in Germany at Stuttgart and Dresden. Store and online sales across all concepts have been robust. The performance has been strong at all levels. We are pleased with the execution of the concepts. And now back to you, Oscar.

Thank you, Marcos. I'm going to cover some of the recent initiatives which have been driving the increasing levels of differentiation. First and foremost, our priority remains to always 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 for all of our teams and departments. A good example of this is Zara Woman Studio. The Zara Man Knitwear range; the Zara Kids Autumn/Winter collection; the new launches of Zara Fragrances; Zara Home Editions for the festive season; Pull&Bear's Partywear; Massimo Dutti's Manhattan Collection; Bershka's Teddy coats collection; Stradivarius Night; and finally, Oysho's Recco Ski collection. The new store design for Zara created by our architectural studio is now being rolled out across the store base. The design integrates attractiveness and functionality into sections like digital, the fitting rooms, self-checkout areas, click and collect points, in store silos and stock rooms. These new Zara store design is featured in openings, enlargements and relocations. A key project of the year has been the enlargement of the Zara store at Dubai Mall of the Emirates. Just like all the other important flagship stores recently opened. It includes dedicated spaces for lingerie, shoes and handbags, the Origins Collection, and newborns. It also includes all the features that allow a complete digital experience. The opening on the 17th of November of the Zara store at Coolsingel in Rotterdam incorporates Zara Home and has attracted very strong traffic. The recent enlargement of the Zara store at Miami Dadeland also illustrates well what we are trying to achieve. Also, we have recently opened our new store at Sevilla Plaza del Duque. All the concepts have been optimizing their stores. Let me highlight 4 very relevant store projects. First of all, the Massimo Dutti store opened in London Battersea in a unique architectural setting. Bershka has enlarged its flagship at Milan's Corso Vittorio Emanuele. Stradivarius has opened its first physical stores in Germany at Stuttgart and Dresden, building upon its existing online presence in the market. And to finish off, Oysho has opened a flagship store in an emblematic building in Madrid, Gran Via. The hardware to implement the new security technology which eliminates the need for hard tags is now in operation in Zara stores globally. Test operations started this Autumn/Winter season and are proceeding according to plan, with full implementation by fiscal year end 2024 expected. We have recently launched a new weekly live stream experience on Douyin in China. The live stream runs for 5 hours and includes catwalks, walkthroughs of the fitting rooms and makeup area and behind-the-scenes views of the camera equipment and staff. The live stream reflects our continual efforts to offer the best customer experience and will be available soon in other markets. In terms of circularity, we continue the deployment of the Zara pre-owned platform. On the 12th of December, the platform was launched in 14 European markets including Spain, expanding the service already offered in the United Kingdom and France. Through this platform, we will continue helping our customers to extend the life cycle of their Zara garments through donation, repair and resale and will contribute to the reduction of waste. Our culture and values are a fundamental part of how we do things at Inditex. To this end, we have more than 165,000 people who on a daily basis give life to our culture. With our teams in mind and in line with our commitment to people, we continue to develop initiatives that reinforce our values in all the markets in which we operate. In October, we celebrated the fourth edition of Impact Week, reinforcing our commitment to people with disabilities. 20,000 people from all our markets participated in different initiatives. Our target is to recruit people with disabilities in order to reach a minimum of 2% in the global workforce by the end of 2024, in line with our commitment to the ILO Global Business and Disability Network announced in January of this year. 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 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 fully 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 also 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. 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 was 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 November and the 11th of December 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.

[Operator Instructions] The first question goes to Geoff Lowery from Redburn.

My question, your inventory turn has improved markedly relative to pre-COVID, pre-virus. Is there further opportunity for you to increase turn, or do you think you've reached an optimal level?

Thank you, Geoff. As you see, we're always trying to improve things. Obviously we also have to look at market conditions. If you remember last year, due to the possible risks in the supply chain, we decided to anticipate the dates in which we receive the product without changing the commitment. And this year, we're reversing that. And this is why our inventory is 5% lower. We continue trying to do things better all the time. There are a number of measures always in place that we believe can improve things. For example, obviously, having a fully integrated inventory for the stores, for online, helps the way we improve our turns. Always trying to do things, however, the way we look at the inventory is very much through the commitment, right? The fact that we have open to buy at the beginning of each season, a very substantial part of what we're going to sell, means that the risk that is involved in our inventory is much lower than that in the industry in general. Why? Because we're adapting our collections continuously to demand and it's something that you have seen this quarter. On the other hand, there is a very clear comment that we can make is that due to the things we're implementing into the business model, the cash conversion of the company is also increasing, as you have seen over recent months.

The next question comes from Georgina Johanan from JPMorgan.

Just regarding next year, please. Just mindful that obviously you're facing a very successful year in 2023. I'm just wondering if you can give any early indications about the sort of level of growth that you would anticipate, and then in that vein, whether it will be possible to see margin progress further next year or rather we would need to see sort of growth in double-digit territory for margins to move further on?

Thank you for your question, Georgina. You know that we remain very focused on the current season. The trading update we have provided, 14% sales growth in local currencies, the company remains totally committed on the current season. We have also upgraded the gross margin guidance for the year based on the operating conditions and also the U.S. dollar exchange rate, and this is why we now expect the gross margin to be around 75 basis points higher this year over the previous year. In general, you know that our model provides very strong stability in margins. And if we want to add something, we will do it in March next year.

The next question comes from Sreedhar from UBS.

So just really one in terms of online participation. In the statement, you talked about an increase in participation. Can you give us an idea where we are now this year so far, maybe up to 9 months?

Well, in the statement, we have mentioned that sales have been positive in stores and online. They have been positive in all the concepts and they have been positive in all the key geographies. Obviously, you should expect a secular growth in the online participation, but we think a very, very healthy performance as we have been mentioning over this presentation.

The next question comes from Anne Critchlow at Societe Generale.

We might have expected the gross margin to be up more strongly in Q4 compared to Q3, and that's not implied by the guidance. So I'm just wondering if this reflects some price investment in Q4 and also perhaps explains the reacceleration in sales trends.

Well, as we have mentioned in the presentation, again, the gross margin performance over these 9 months, plus 67 basis points, is very much the result of execution, some normalization in the supply chain conditions and a more favorable euro/U.S. dollar exchange rate. As these 2 factors remain over the fourth quarter, we have updated the gross margin guidance for the full year, set it to around plus 75 basis points for the year. So this is -- these are the results of the execution and then the operating circumstances we're finding right now in the market.

The next question comes from Richard Chamberlain at RBC.

Just a quick question on the financial results line, please. I see you've got another negative noncash FX impact going through that line. I wonder do you expect that to continue -- presumably you do in the fourth quarter -- but also for the first half of next year?

Thank you, Richard. As you know, in the financials, there are 3 main lines. First one is the net financial income and losses where we get the results of our treasury. We also have the lease financial expenses, which is noncash according to IFRS. And then we have the foreign exchange gains and losses, which is very much the -- as you know very well, this arises from the noncash translation of working capital in subsidiaries. You will have to wait for the end of the quarter exchange rates to be able to mention that. Of these 3 components, obviously the return on our treasury is cash and then the lease financial expenses and the FX income and losses are noncash. So again, it's something that we cannot provide you guidance with. But clearly, again, in the treasury, we are obtaining more cash, and then it will be very much on the leases and on the FX income and losses. One point that I would like to comment and I think is quite relevant is that the -- linked to the leases in the D&A line, you see it just grew by 1%. This is due to a renegotiation of rents and the flexibilization of contracts. And as a result, the right of use has fallen 2% in the 9 months to EUR 4.9 billion versus EUR 5.1 billion in the 9 months 2022, just to cover all the lease expenses. And this is what we can tell at this moment.

The next question comes from Nick Coulter at Citi.

Please, can I ask about your performance in the Americas, and if there's anything to call out there, just mindful of a softer consumer environment in the U.S.?

Well, like in previous quarter, we remain very satisfied with our performance in the different markets. Marcos has already referred the positive trend in the different geographical areas and for all of the concepts, both off-line and physical store channels. In the case of U.S., that remains our second most important market. The business is working well, and we are happy, and we continue to see significant opportunities for our selective growth there. Well, this -- during this third quarter, some of the projects that we announced during our annual results presentation has become a reality, such as the relocation of our store Dadeland in Miami, or the opening of our store in Baton Rouge in Louisiana or our new store in San Antonio, Texas. And additional exciting projects will come in the -- during the next weeks, including for instance the reopening of our stores in Roosevelt Field mall at the New York State. So the business is performing well, and we are happy with that.

The next question comes from Nicolas Champ from Barclays.

Quick one on your input cost. I mean following the wage increase in Bangladesh and also the increase in custom duty rates in Turkey, I mean, would you anticipate an increase in input cost over the coming years -- upcoming months, sorry? And if so, do you plan to pass on this additional cost increase to your customers by raising prices?

Well, thank you very much for your question, Nicolas. As you know, in the gross margin, there are many factors. It's markups, markdowns, currency, very especially the fashions prevailing. So clearly, we have provided a very clear guidance in terms of gross margin for the year in the sense that based on the execution we're seeing in our business on the U.S. dollar/euro exchange rate that we're facing at the moment, what we see is an increased -- estimated increase of the gross margin for the year of around 75 basis points. So when looking at the gross margin, you cannot just extrapolate 1 single factor. You have to put everything together. So our model provides stronger, I would say, stability in terms of the margins, and this is what we keep [ on ] focus on.

We're going to move over now to the webcast platform and a couple of questions. The first of which is: perhaps you can give us some comment on the success of the existing preowned platform in the U.K. and France. What are your targets for the preowned platform, please?

Thanks for the question. Well, we see this project one of the key initiatives for our strategy in terms of circularity. As you know, through this platform, we will continue helping our customers to extend the life cycle of their Zara garments through donation, repair and resale. Our journey began in the U.K. on the [ 3rd ] of November of 2022, and France was the second market since September 2023 and are performing very well. And this week, we are very excited with the arrival at new 14 European markets, including Spain. As a reminder, we announced during our last AGM in July that we have the commitment of launching preowned or alternative circularity projects in all of our core markets by 2025.

Thank you. Perhaps also you could provide some comment on the live stream initiative in China, please?

Well, adapting to our customers, trying to offer them the best experience everywhere, every time is one of the key pillars of our strategy. And in China, it's obvious that digital is integrated into people's everyday life. And that's why we decided to launch, some weeks ago, this new weekly live stream experience there through Douyin. Every week, we offer 1 live stream that runs for 5 hours, with our highest standards in terms of quality and image from asset located in Shanghai and with a team of more than 75 members, including 2 ambassadors. Feedback received from our customers there in China has been very positive, and this type of live stream initiatives as a way of improving our -- the experience of our customers will be available soon in other markets.

Thank you. That concludes the webcast questions for today.

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 March for the full year 2023 results.