When investors and analysts disagree: the curious case of Inditex
Investors fell out of love with Spanish fast-fashion titan Inditex around 18 months ago (although it had a pretty strong 3 months from March to June). Over the last year, they’ve conspired to send its share price down by 21% - a reversal of sentiment given that the share price has tripled since 2006. However, despite investors’ obvious concerns, analysts have yet to abandon the stock – and if you want to see why, you only need to look at the continued strength its business model displays.
Inditex’s share price reversed a trend of declines last week and edged up by 1%
Source: Yahoo Finance
Inditex was a leader in fast fashion, figuring out before competitors that the traditional fashion pipeline – which relied on waiting for designers and manufacturers, and included a 3-month or so wait from inception, through catwalk, to store – was ripe for disruption. There are plenty of rewards given to successful first movers, and Inditex was no exception. The result today is a massive company that can leverage economies of scale and buying power to its advantage.
Take, for example, Inditex’s operating margin (profit left over after things like materials and expenses are taken into account). The company boasted an operating margin of 17% last year - that’s double some of its competitors. Over the same period, H&M managed 10.3%; Gap in the US laid claim to 9.3%; Japanese company Fast Retailing commanded a still-respectable 7.1%; and Asos fell behind with just 4%.
This combination of size and margin strength makes Inditex cash rich, if it chooses to be. Wisely, it does not, spending its money on digital transformation and innovation. That investment has paid off. While other fast fashion players have fallen prey to even-faster fashion from online players (think of agile giants like Amazon and the aforementioned Asos), Inditex has shown a “demonstrable resilience to the onslaught,” according to analysts at Jeffries.
Societe Generale agrees, with analyst Anne Critchlow saying “Inditex looks future-proofed to us, with the ability to grow online without damaging its margin.”
Inditex was a relative latecomer to the online retail parade. But it’s catching up fast. In 2017, digital sales jumped by 41%, meaning that they now make up 10% of all group sales. If you believe the company’s CEO, Pablo Isla, Inditex will work hard to push that percentage up. Analysts clearly have faith in his ability to deliver. If they’re right, then investors (and the company’s share price) will eventually catch up.
Dominion holds Inditex in its Global Trends Luxury Fund.
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