Exane - Inditex
Target price EUR45 (+16%). Sector rating: Neutral
► Solid set of H1 resultsGroup net profit came in c.4% above our forecasts and c.7% above consensus forecasts. Organic sales growth was slightly higher than expected (+9% vs +8%e), stemming from a higher number of store openings (in-line l-f-l at -2%). Gross margin was hit harder than anticipated by currency (-110bp vs -50bp e) but opex growthproved better controlled than in our forecasts (+8% vs +9%e) and was much lower than space growth at 11.5% (boosted by H2 08 openings). As a result, EBITDA came in 2% above our forecasts, which was further amplified by a full neutralization of Q1 forex losses in net financial charges.
► Reassuring comments on FY outlook, Zara online next yearSince Q3 began, the group has continued to enjoy organic sales growth of c.9%. Management maintained all its FY targets, including space growth of 10% and EUR75m of cost savings (c.50% achieved in H1). As a result, it expects opex growth to be slightly below space growth this year. Spanish l-f-l sales growth is still lacklustre but the gap with group average is no longer widening. Management does not expect FY gross margin to deteriorate by more than 50bp, which points to a probable stabilisation in H2. Finally, Zara should expand online as from A/W 2010, at first in key western European countries to be followed by a progressive rollout in all Zara markets. Start-up costs and cannibalization of store sales should remain limited.
► OP rating reiteratedThe strong share price reaction this morning should curb the short-term rerating potential, but we remain convinced that while top-line prospects are similar for Inditex and H&M, the opex leverage (40% variable according to management) is higher at Inditex, which is why we prefer it. We expect the current 10% valuation premium of H&M vs Inditex to gradually fade away.
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