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

Good morning. Welcome to everyone taking part in our half year 2026 results presentation today. My name is James O'Shaughnessy, Investor Relations. This presentation will be hosted by Inditex's Chief Executive, Oscar Garcia Maceiras; our CFO, Andres Sanchez; and the Director of Investor Relations, Gorka Garcia-Tapia. As per usual, after the presentation, we will commence a Q&A session, starting with the questions received over the phone, followed by those questions received on the webcast platform. We'll take the disclaimer as read. Oscar, please?

Good morning, and welcome to our first half 2026 results presentation. Thank you for joining us today. I am pleased to announce that during this last semester, we have generated a solid financial and operating performance with strong sales, all the while maintaining a strong level of profitability. The strength and resilience of our unique business model was evident. And despite a period with geopolitical uncertainty, our teams came together to deliver broad-based performance across geographies, concepts and channels. Our spring summer collections have been very well received by customers. Sales grew 7.6%. Sales in constant currency increased by 9.2%. It's evident that the execution of the business model over the first half period has been very good despite some of the headwinds we highlighted in the first quarter. This has flowed through to the bottom line, with net income increasing 6.8% to EUR 3 billion. This strong performance has filled into the second half, as you can see from the trading update we have provided you. Store and online sales in Gaston currency between the 1st of August and the 7th of September grew 9%. Today, I would like to refer to the framework we used to think about what makes Inditex distinctive and the opportunities that our model continues to create. At the heart of our model is product and behind the product are our people and their ability to offer our customers what they are looking for. We identify trends through our feedback loop, channel crucial data to our commercial teams. Amongst these teams, today, we post more than 700 fashion designers, whose aim is to generate products that adhere to the very latest fashion trends. To give you an idea of the scale of the business, we operate a global platform across 8 concepts with stores in 98 different markets all around the world, 99 from tomorrow with our first opening in Curacao, as well as 25 markets online. These channels are fully integrated and mutually reinforcing. For example, around 60% of online returns are made through our stores and around 20% of online orders are collected in store 2. This integration is not only about convenience. It gives our teams a more complete view of demand and inventory and helps us provide a consistent customer experience across channels. Of course, none of these would be possible without a broad and flexible global supply chain. The ability to diversify production across more than 50 markets has never been more relevant in recent times. A further distinctive capability is what we call operational proximity. By this, we mean the way we work with our supplier network, focusing on agility, flexibility and responsiveness and integrating these long-term relationships into our operating model rather than simply where production is located. The partnership in detects us with its suppliers extends more than 8 years in over 70% of production, making in the Texas relationship with suppliers, quite unique. This way of working is underpinned by our logistics and inventory network. It's supported by multimodal transport and our 16 primary logistics centers, which operate as part of a single inventory position. This allows us to allocate product efficiently across different markets to support product availability and to maximize full price sales, whether in stores or online. Of great relevance over the years has been the financial strength enjoyed by Inditex, particularly during volatile times. Indeed, the net cap position of over EUR 10 billion on the balance sheet underwrites the financial stability of the business and secures the future investment pipeline needed to generate strong future growth across the cycle. Over the last decade, we have reinvested on average, anywhere around or 6% of sales in the business while maintaining a strong financial discipline and attractive total shareholder returns. People also talk about the different elements that come together to produce the competitive advantage enjoyed by Inditex. But there is one aspect that tends to be overlooked by the wider market, our strong corporate culture, our unique P&A posters are drive to always do better in the face of a constantly changing environment and to always search for new ways to do things. Ambition and innovation are at the center of everything we do. The many factors that I mentioned just now in combination, making detects the company that we see today, taken as a whole, this is a very powerful combination, making the model distinctive, resilient and difficult to replicate. And of course, all this enables multiple avenues for long-term growth. Despite the very respectable and consistent rates of growth we have achieved over the years, both in terms of sales and our presence in ever more markets at a global level we command a mere 2% market share, offering plenty of space for growth well off into the future. Let's not forget that this market share is across all 8 concepts at Inditex.] [Vitara ] remains very much an engine for growth for the overall business, we have seen a remarkable level of growth coming from the younger concepts in recent years. Despite currently having at group level, a physical store presence in a total of 98 markets the non-Zara concepts have limited commercial presence in 59 markets in which at least 1 of non-Zara concept has less than EUR 50 million in annual sales. That should give you an idea of where within going. The common spread through all these years of growth, as many of you will be familiar with is our overall strategy of retail optimization. This strategy is to continually enhance the customer experience at every level. Over the last 3 years, we have delivered 5% compound annual growth in [indiscernible] space. Once again, as I mentioned earlier, the physical store experience and the online experience go very much hand-in-hand which explains how on average our online sales since 2019 have grown by more than 80% per year. Our confidence in the future experience not only from what we see as business model, but also comes from the ability of our teams to constantly innovate and challenge the state to school. This ability to see things differently is best illustrated in recent customer experience project both in store and online, such as Foramen stand-alone stores, our footwear showrooms in Zara Massimo duty, Bershka members, official community or the launch of Zara Trion amongst many others. All this drives the very significant long-term growth opportunities we see today. And now I will pass you over to Andres, who will go over numbers.

Thanks, Oscar. As you can see from the table in front of you, Inditex's results in the first half of 2026 have been solid. The strong execution is clear when we look at the P&L. The sales performance demonstrates that despite the disruptions we've seen in headlines since the end of February, our teams have been successfully reacting to the fashion trends. This has resulted in a very respectable gross margin performance with EBITDA growing strongly, whilst maintaining a broadly stable margin flowing nicely down into PBT and the net income line. At the top line, we can see that sales grew 7.6% to reach EUR 19.8 billion. in constant currency that translates to 9.2%. This strong performance was very much across concepts, store and online channels. At current exchange rates, we continue to expect a minus 1% top line currency impact for the full year 2026. We are now up to 25 markets in terms of our global online presence. Given the ongoing fragmented nature of the market as a whole, and our low market share, we can confidently say that our strong long-term growth opportunities remain in place. One factor that I think is worth bringing out at this point is the level of global geographical diversification. This, of course, helps drive stability at the group level, particularly during times of regional uncertainty. In constant currency, all geographical areas have a positive sales evolution. In the first half of 2026, gross profit increased 8.3% to reach EUR 11.6 billion. The gross margin reached 58.7%. This gross margin serves as a demonstration of the good execution of the business model over the period. Our teams have done really well. Despite the headwind of elevated transport and input costs, we highlighted back in the first quarter resulting from disruptions in the Middle East. Based on available data currently for the full year 2026, we continue to expect a stable gross margin of plus/minus 50 basis points. Operating expenses increased 8.3% in the first 6 months of 2026. The mine deleverage, we are seeing was also driven by the increased costs just mentioned in the gross margin slide as flat back in June. Despite this impact, both EBITDA and EBIT margins remained broadly stable over the first half. So now going down the P&L, we naturally come to EBITDA, which in this case, increased 7.8% to EUR 5.5 billion, of course, very much consistent with the healthy performance of the top line. This slowdown into profit so tax, which grew 6.8% to EUR 3.8 billion with a PBT margin of 19.5%. The Net income grew 6.8% to EUR 3 billion. This all points to another season of strong commercial execution. Operating working capital remains negative as a result of the business model. The evolution of operating working capital is very much in alignment with the performance of the business over the period. Inditex's inventory as of the 31st of July was 9% higher in line with the sales evolution. As you can see from this slide, we continue to generate very strong levels of cash flow. Funds from operations increased 11% to EUR 4.1 billion. Capital expenditure reached EUR 1.3 billion, reflecting investments in 2026, aimed at underpinning future growth. We continue to expect ordinary capital expenditure for 2026 to be around EUR 2.3 billion. In addition, close to EUR 200 million of extraordinary CapEx will be invested in upgrading and enhancing our corporate facilities across the company, further strengthening Inditex's position as an employer of choice. I pass it over to Gorka now.

Thanks, Andres, and good morning once again to everyone. The numbers we've released to the market this morning point to a continuation of the strong performance we all saw back in June. It's pleasing to see that our execution has remained consistent throughout despite wider market volatility, geopolitical or otherwise. The performance of our teams here at Inditex has really been excellent. And with the global rollout of the optimization program still very much in place, it's worth highlighting some of the younger concepts. We can confidently say that 3 of the younger concepts at the half year mark have generated sales well in excess of EUR 1 billion, so sizable companies in their own right. If we take a look at Bershka, for example, it's CAGR in sales over 4 years from 2022 to the first half of 2026 has been 12%. For the likes of Stradivarius, that rate is 15%. So we're seeing very healthy and sustainable levels of sales growth across the board. On the theme of diversification at Inditex as well as growth, we have seen retail optimization activities in 51 different markets all around the world. Each one of the concepts is clearly pushing ahead with their own growth plans. As you can see from the numbers of new markets they've been opening in recent years. And there's certainly more to come on that front. With that, I'll pass you back to Oscar.

Thank you, Gorka. Our fashion proposition shows our strong commitment to creativity thanks to our talented teams that focus every day on innovation and the adaptation to what our customers are looking for. Zara today occupies a more relevant place than ever in the world of fashion with a global cultural impact, having the opportunity to launch important collaborations with prominent artists in the space of fashion and music. Regarding our stores, Zara has launched in new locations, for example, in Mexico, Los Cabos. Additionally, we have made some important enlargements, refurbishments and relocations, in some of our most emblematic stores such as London Bogard, Sulan and Belgium Osten. As our core engine Zara's widespread presence serves as a powerful launch at for our younger concepts to scale rapidly worldwide. To give you some examples, last month, August, Bershka opened its first store in the U.S. in Aventura, Miami. This is 1 of the 2 planned openings for the concept in the Miami area in the immediate future. Also in August, Bershka launched its second store in Brazil or after the opening in Morumbi Sao Paulo in March. Stradivarius, another of the younger concepts, which have been doing particularly well, has recently launched its first story in Munich, reenacting Massimo Dutti has also opened its first street level store in Korea in Seoul Gangnam, bringing together fashion architecture and local culture within our restored buildings. Finally, in August, we opened our first leftist store in the U.K. in Liverpool [indiscernible], continuing our expansion into new markets after successfully launching our first story in France Walbert back in May. The news of tag technology has now being implemented in all of our stores. This program adds to the existing in-store technology ecosystem with click and collect silos as seated checkouts and drop of points and sorters. As you can see in video, one of the technologies we are rolling out across our stores in sorters. These automated sorting systems help to improve the experience for both our customers and our team members connecting stock rooms, fitting areas and commercial space. We are using all these technology as a extreme Board for the further integration of the online platforms our increasingly digitalized stores for the years to come. Our online platforms continue implementing improvements in order to offer a unique experience to our customers. Personalization and the development of communities are 2 key focus areas. In the half year, Inditex has actively engaged in a number of initiatives on the sustainability front that include new agreements that strengthened our partnerships with Conservation International and with the United Nations High Commissioner for refugees, supporting projects for the protection and restoration of the Amazon forest and for improving the conditions of Rogina refugees in the [indiscernible] we have been supporting Red Cross in the recent earthquakes in Venezuela and Colombia. And now over to the outlook for this year. In the Texas potential for long-term growth is clearly still very much in place. We continue investing with the aim of enhancing our competitive differentiation while making sure we are in a position to take advantage of the extensive growth opportunities ahead. The growth of annual gross space in 2026 is expected to be around 5%. We also expect net space contribution to continue to be positive, along with ongoing strong online growth. For 2026, we estimate ordinary capital expenditure of approximately EUR 2.3 billion. We continue to focus the ordinary capital expenditure on our global store base, the online platform and the rollout of technology programs that will enhance the level of integration. A brief reminder on the dividend. Final dividend payment for 2025 of EUR 0.875 per share will be made on the 2nd of November 2026. I'm going to end now with a comment on our current performance. Autumn/winter collections are being very well received by our customers. Store and online sales in constant currency increased between [indiscernible] the first of August and the seventh of September 2026 versus the same period of 2025. Many thanks for attending this results presentation today. That concludes our presentation. We are happy to answer any questions you may have.

[Operator Instructions] The first question goes from Sreedhar Mahamkali from UBS.

I guess a key 1 that we are all battling a little bit with OpEx growth faster than sales, as you mentioned in the release. It would be great to hear your thoughts talk a little bit more about what's changing in the model? And is this a trend we should expect for the second half of the year as well?

Thank you, Sreedar. Thank you for your question. As we mentioned during the call, the main driver of our performance continues to be the ability of the spot trends offering our customers what when and where they are looking for maximizing our full price as -- as we mentioned in Q1, disruptions in the Middle East resulted in higher transport costs and input costs during the first half of the year. And as you saw, it's the transport component that affected both gross margin and OpEx line. In OpEx, just to be more precise, we have costs related to online fulfillment and distribution to franchisees. While in COGS, we have the larger component of transport costs. I'd like to take the opportunity also to highlight a few key points when thinking about the gross margin for this year. Considering the current situation and there is a timing lag between the transportation and your impact on cost of goods sold. We expect this to impact gross margin in H2 as well. And the second, FX sourcing benefits from the weaker U.S. dollar was a slight tailwind in H1 as we commented. But this impact, while with current available data, is neutral in H2. In any case, the current environment is included within our gross margin guidance of plus/minus 50 basis points for the full year. And a final remark regarding OpEx. I'd like to comment that we are very pleased with the execution of the business model. In this sense, let me point out that the underlying business expenses were tightly controlled. And as always, we continue to be focused on the long-term profitable growth of the group with a focus on broadly steady margins. Thank you, Sreedhar.

The next question comes from Richard Chamberlain from RBC.

I just got a question on space impact on sales, please, impact on sales from new space. How has that been trending through the first half? And what are your expectations on space contribution to sales for the second half and into next year, please?

Great. Thanks, Richard. I think with regards to space, a couple of points I can highlight. The first is you know we have we provided 3-year guidance of gross base growth, which ends in 2026. So with regards to the second part of your question, going forward, you'll have to wait until March for us to mention something with regards to that. And with regards space contribution, you have to consider that we're still very much on target for the 5% growth space. We'll have to see how that converts, but I don't think you should expect anything different to what you've been seeing in recent years.

The next question comes from Georgina Johanan from JPMorgan.

I just wondered if you could give an update on sales performance in the Middle East, please? And just some color on what you're seeing there given the backdrop.

Absolutely, Georgina. I think the first point I'd mention is we have around 80 stores in the Middle East, and they're operating under a franchise model as all of you know. And today, all of these stores are currently open. The geopolitical conditions are having an impact in sales in the Middle East region. Although we have seen an improvement since the first quarter in that regard. I think it's important to mention that this is a very diverse region with different countries having different impacts. And as you've seen in the presentation, in any case, we've presented positive growth in constant currency in all regions. Thank you.

The next question comes from Matthew Clements from Barclays.

Significant investment into the new campus. How can you provide confidence to investors that it's an efficient use of capital? And can you provide confidence as well that investment costs for that program won't run into 2027. Thank you.