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07 Jun 2023
Q1 results: record margins, accelerating growth
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Q1 results: record margins, accelerating growth
- Published:
07 Jun 2023 -
Author:
Okines Warwick WO -
Pages:
11
A big Q1 earnings beat
Q1 EPS was 14% ahead of consensus expectations. The bigger surprise was that sales growth had accelerated even further compared with the start of the quarter. This strong exit rate has continued into Q2, making mid-single-digit full year consensus EPS upgrades likely. We raise our EPS by c.8% and our target price to EUR 36. In our view this remains a stock to own within the sector. Outperform.
Strong trends in current trading
Back in March, Inditex had disclosed February/March sales trends which were well ahead of expectations. Today, it reported sales growth which accelerated in March/April and also accelerated into Q2 during May and early June. This contrasted with market expectations which allowed for fading growth. The result was the highest Q1 profit margins the group has ever achieved. This strengthens our conviction that Inditex has moved to a new, higher level of profitability and return on capital.
Prospects looking as good as ever
Management''s strategy remains to increase the differentiation of its customer proposition compared with the competition. It continues to upgrade the quality and size of its store estate, more than a decade after it began the journey. Zara will begin to remove security tags by Autumn/Winter, replaced by RFID embedded in garment fibres, speeding up customer transactions and improving the experience. Meanwhile store growth is back on the agenda, with selective net openings in future years signalled by management.
Still the stock to own in the sector
After a record Q1 we raise our full year earnings estimates by c.8% and lift our price target to EUR 36 (from EUR 33). Our forecasts assume a fade in the stellar growth rate and also assumes that profit margins fade throughout the rest of the year, although history would tell us that full year margins are almost always higher than Q1 margins. In our view it remains a key stock to own in the sector, and we maintain our Outperform rating.