RBC latest views on Inditex

Once again, some interesting insights from RBC Capital Markets on Inditex’s situation — a true indicator or barometer of a sector that’s learning to react at hyper-speed. Not only in terms of how it produces and spots fashion trends, but also in how it responds to unexpected events and updates increasingly fluid strategic plans. RBC latest views on Inditex Pattern of trading in 2025: ITX saw sales in cc +4% in Q1, +6% yoy in Q2 and +9% yoy in its most recent trading period. We attribute this to weather and calendar factors in Q1, but also its ability to respond to trends in season. By geography Spain outperformed the market with H1 sales +7% yoy in cc, Europe ex Spain would have been close to that in cc, and the Americas sales were down yoy, but up in cc. Mexico, Brazil and the US contributed to a negative fx effect in H1. Competitive environment broadly stable. We see Shein as catering to a younger demographic, it is also more US exposed and big on China sourcing, so more risky as a business model. We have seen US domestic chains raising prices outside the US (for political reasons) to offset tariff impacts, and non US corporates eg Shein raising prices in the US. Tariffs/de minimis exposure. ITX has never used the de minimis route for product into the US and has experience of lots of different tariff regimes. It is relatively diverse in terms of sales and sourcing and the US is <10% of group revenue.  Focus on quality of space. ITX has moved in recent years from a focus on number of stores to space contribution and now more to quality of space. Its absorption programme has been successful in our view, with store numbers down c.-30% and sales +30%. Non-Zara stores are an opportunity with openings in 35 countries in H1. Eg Stradivarius will open 7 stores in Germany this year.  US a focus for expansion, Bershka may be coming in 2026. Outside of Spain and Portugal ITX’s market shares are generally low. In the US it only has 0.5% market share. Based on recent trends we believe Bershka may be introduced to the US market in 2026 with a handful of stores, although we believe this has not yet been finalised. In the US ITX competes with the likes of Apple, Sephora and Cheesecake Factory for space. We see more real estate opportunities for it eg from Forever 21 in the US and Hudson Bay in Canada. It is becoming more of an anchor tenant in the US  with 2-3 year break clauses. It will open soon in its 26th state in North Carolina (Charlotte). In the US we estimate Zara Home generates >3% of its sales but it doesn’t have a single store there. Massimo Dutti is opening a second store in the Miami area. ITX prefers to go project by project in the US. In LA it has upgraded its flagship store from a 1k sq m store at Farmers Market to a 2.5k sq. m store at The Grove. This features all the latest in store tech initiatives.  Sports/athleisure exposure. The US market features more sportswear and also off-price. ITX prefers to develop collections for existing concepts to cater for new trends. Eg Oysho has moved its offer from lingerie, pyjamas and home to athleisure in recent years.  China more local and digital. ITX has reduced its store count down from 600 stores and its store optimisation work is now largely done there.  Lefties expansion. Lefties has been around since the 1990s, originally as an outlet store for Zara excess inventory, then from 2010 it has had its own collections as Zara became more efficient on inventory control. It now has 210 stores in 18 markets, including online, but 85% of sales come from Iberia. Newer markets include France and Italy, with the UK to come soon. We believe margins for Lefties are close to the group average.  Second phase of RFID benefits. These feature soft tags embedded in garments which enable assisted checkouts – these are now in ½ of Zara stores, and are being introduced to Pull & Bear and Bershka this year, and other concepts next year. ITX has also introduced click and collect and dropoff points in its larger stores and has been using SINT since 2019, to fulfil online orders using in store inventory. It also now has dedicated areas for shoes and accessories in 200 stores which improve size availability and free up time for shop assistants to serve customers.  Opex efficiencies aided by new technology. ITX saw opex rise a bit above sales growth in H1 but it is good at adjusting opex over time, and we expect a stable opex to sales ratio going forward. The old rule of thumb still holds in our view that opex growth should equal broadly net space growth + ½ LFL + ½ fx impact.  Warehousing capacity. ITX now has capacity eg in Zaragoza for several years more growth. Capex should fall next year (RBCe EUR2.3bn) which along with normalising working capital should contribute to a sharp improvement in FCF. ITX can thus continue with its dividend payments and is already paying out a healthy 90% of net income as dividends.  H1 working capital outflow reflects phasing of supplier payments i.e ITX paid its suppliers later last year and payment terms have reverted to normal this year. The phasing mainly occurred in Q1, hence we estimate the Q1 cash was down -7% yoy.  Our view: Sector Perform. The Inditex share price is down -4% ytd vs a +20% rise in the MSCI Europe Retailing index. We attribute this to a lack of sales and EPS momentum since late last year, plus concerns over ITX’s FCF profile and growth potential. However, ITX has made a good start to the new Autumn/Winter season, its FCF should inflect positively next year, as capex reduces, and valuation now looks more reasonable versus peers. Hence, we upgrade our rating to Sector Perform. A link to RBC most recent note on it is here: Earnings and FCF profile improving; upgrade to Sector Perform

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