Industria de Diseño Textil S A : Inditex delivers €866 million net profit in the third quarter, and reaches historic net cash position

15 December 2020

Inditex delivers €866 million net profit in the third quarter, and reaches historic net cash position

• The company has managed to turn around the impact caused by the Covid-19 pandemic, generating a net profit of €671million in the nine months of FY20, €866 million in the third quarter. Despite 5% of the stores closed in 3Q and ongoing trading restrictions affecting 88% of the store network, the sales trend has continued to improve: sales declined by 14% (10% in cunstant currencies) in 3Q20, compared to reductions of 31% in 2Q20 and 44% in 1Q20.
• Continuing this steady improvement, sales in local currencies between 1 and 18 October rebounded to match the record levels recorded a year earlier.
• Growth in online sales remains strong, with 75% growth in constant currencies in the first nine months of the year, and 76% in the third quarter.
• Operating expenses fell 17% year-on-year in 9M20.
• The strong cash generation during the 3Q drove growth of 7% in the Group's net cash position, to €8.3 billion, a historic high.
• Inditex's Executive Chairman, Pablo Isla, noted that 'these results are the direct consequence of effective management in every area of the Company, with a seamless coordination between each link in the business model: design, product, manufacturing, logistics, stores and online. They are also evidence of the Group's ability to react and adapt continuously in an unpredictable environment and its unwavering commitment to offering unbeatable product, quality and service'.
• In November, with 21% of the Group's stores closed with new restrictions on store opening capacity and trading hours, sales in local currencies were equivalent to 81% of the year-earlier volume, a figure that has risen to 87% from December 1st to 10th. As of today, 8% of the Group's stores remain closed, with an additional 10% having to close during the weekends.
• The Group has been forging ahead with its differentiated retail space and product offer, with high-profile openings in 25 markets during the nine-month period, including in China, Mexico, Russia, Germany, The Netherlands, Spain and Saudi Arabia. Zara online sales are already integrated with the local store network in 85 markets, complemented by online sales in 106 additional markets through Zara.com/ww. On 3 December, Zara.com launched in Panama and Puerto Rico, following launches in 12 new markets,including Chile, Costa Rica, Honduras and Tunisia, during 3Q. Lefties, meanwhile, launched online in Spain and Portugal.

I.9M20 highlights

Inditex Group reported sales of €14.1 billion in the first nine months of its fiscal 2020 (1 February to 31 October), compared to €19.8 billion the same period in fiscal year 19. The third quarter (1 August to 31 October) registered the evident sales improvement shown since March, with sales of €6.1 billion, compared to €7 billion in 3Q19, a year-on-year decline of 14% (10% in constant currencies) after reductions of 31% in 2Q20 and 44% in 1Q20.

During the third quarter, 5% of the Group's stores remained closed and 88% continued to face significant limitations in terms of space, trading hours or capacity. Against that backdrop, sales in local currencies between 1 and 18 October reached the record levels recorded in the same period of 2019.

In November, as second waves of Covid-19 hit many countries, 21% of the Group's stores were forced to close; as of today, 8% remain temporarily closed, with another 10% required to close at the weekend. A significant number of stores continue to face meaningful restrictions on capacity, space usage and trading hours.

Despite these limitations, sales in local currencies in November 2020 amounted to 81% of November 2019 levels, a figure that has risen to 87% from December 1st to 10th.

Online sales have remained very strong throughout, registering a growth of 75% in constant currencies in 9M20 and 76% in 3Q20.

During the first nine months, gross margin remained at 58.0% of sales in 9M20, compared to 58.2% in 9M19 due to the execution of the business model. In local currencies, the gross margin expanded by 110 basis points to 59.3%.

The Group's strong performance at the gross margin level also comes from the efficient inventory management. Inventory position declined by 11% year-on-year. Elsewhere, active management of operating expenses drove a year-on-year decline of 17%.

EBITDA amounted to €3.3 billion in 9M20, while EBIT stood at €946 million - following the fact the Group recognised a provision for the digital store integration programme in the first quarter.

Net profit for 9M20 amounted to €671 million. Note that this figure similarly includes the first-quarter provision. In the third quarter alone, the Group recorded a net profit of €866 million.

The strong cash generation during the third quarter had a direct positive impact on the net cash position, which was bolstered by 7% to reach a historic level of €8.3 billion at the October close.

In light of these figures, Inditex's Executive Chairman, Pablo Isla, noted that these 'are the direct consequence of an effective management in every area of the Company, with a seamless coordination between each link in the business model: design, product, manufacturing, logistics, stores and online. They are also evidence of the Group's ability to react and adapt continuously in an unpredictable environment and its unwavering commitment to offer unbeatable product quality and service offer'.

II. Progress on the digital transformation strategy

The recovery in store sales and the strong momentum in online sales are the results of the Group's strategic commitment to quality across all stages: design, product, store space and service standards.

The collections created by the design team were met with an enthusiastic response from customers in the third quarter, which marks the start of the autumnwinter season. This engagement with customers was bolstered by the new technology tools being enabled by Inditex's unique integrated store-online platform.

The Group continued to make progress on this strategy throughout the nine-month reporting period, developing its proprietary software, the Inditex Open Platform, expanding its integrated stock management system, which is now operational in 6,000 stores, and offering the 'Store Mode', a digital feature currently offered to customers by Zara and Massimo Dutti which enhances the ability to engage with fashion in stores.

As part of this transformation, the Group's brands continue to open larger stores equipped with next-generation technology, absorbing smaller units in the process. As of the October close, the Group had 7,197 stores located in prime shopping areas all over the world.

During the nine-month reporting period, the Group opened stores in 25 markets, of note was the launch in October of the iconic Zara store on Wangfujing (Beijing), one of the Chinese capital's most important shopping streets. With over 3,500 square metres spread over four storeys, this new flagship store is now our largest in Asia.

The store, which meets all of the Group's latest eco-efficiency standards, showcases the strategic integration of store and online sales with a dedicated area for the fulfilment of online orders.

Other highlights for Zara included store opening in the Kingdom Center in Riyadh (Saudi Arabia) and the reopening in the Bahía Sur shopping centre in Cadiz (Spain). Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe meanwhile launched new stores in China, Russia, Romania, Colombia, Mexico, the Philippines, Indonesia and Kazakhstan, among other places, and reopened existing stores in countries such as The Netherlands, Germany and France during the reporting period.

In parallel, all the Inditex brands continued to extend the reach of their online sales platforms, to the extent that their various collections are now available online in more than 200 markets.

Zara's online sales are already integrated into its local store networks in some 85 markets, complemented by online sales in 106 additional markets through Zara.com/ww. Zara.com launched in 12 new markets, including Chile, Georgia, Kazakhstan, Montenegro, Costa Rica, Honduras, Guatemala, Nicaragua, El Salvador and Tunisia during the quarter. Subsequently, during the fourth quarter, the integrated platform has been introduced in Iceland, Puerto Rico, Panama and Cyprus, having been rolled out in Argentina, Peru, Uruguay, Paraguay, Bosnia-Herzegovina, Albania or Algeria during the first two quarters of the year.

The rest of the brands having been following suit, deploying their integrated online offerings in a host of markets, including Serbia, Ukraine, Israel, Colombia, Saudi Arabia, Kuwait, Qatar, United Arab Emirates, Egypt, South Africa and Morocco, while Lefties launched its online platform in Spain and Portugal.

III. Continued progress on our sustainability journey

Throughout the reporting period, the Group continued to make progress towards its sustainability targets, moving steadily towards the implementation of more sustainable processes and raw materials.

A number of initiatives are on track for completion this year. These include the full deployment of the eco-efficient store programme, the placing of take-back containers in every store, the use of fibres of cellulosic origin sourced from certified and sustainably-managed forests and the elimination of all plastic bags. Moreover, the Group is set to exceed its target for the volume of garments on sale under the 'Join Life' label distinguishing particularly sustainable processes, which will account for over 30% of the total, well above the originally-targeted 25%.

The Group has taken another leap by receiving validation of its greenhouse gas emission reduction targets from SBTi, who has defined them as ambitous. These reductions to be achieved are more ambitious than those marked by the most advanced emission reduction pathways currently available.

As evidence of the Group's transparent reporting pledge, in November the Dow Jones Sustainability Index ranked Inditex as the sector leader in terms of its environmental performance, while the CDP Climate Change Report awarded the Group a score of A-.

In September, Pablo Isla was one of the top executives to endorse and promote the Statement from Business Leaders for Renewed Global Cooperation, an initiative which has garnered the support of 1,000 CEOs from some of the world's biggest companies.

The Group's approach to sustainability also featured in Pablo Isla's presentation at the China International Imports Expo (CIIE), which took place in Shanghai in early November. Inditex's Executive Chairman participated in the event remotely along with the VicePresident of Tsinghua University, Yang Bin.

In tandem with the Group's effort to continually raise the bar for its ESG targets, the Group's comprehensive supplier engagement policies have become even more important during the COVID-19 pandemic,.Throughout which it has demanded and facilitated compliance with health safety measures across its supply chain, while honouring the terms of payment on all its orders, thereby contributing to the financial sustainability of manufacturers and suppliers in key markets.

IV. Evolving commercial initiatives

The global environment in recent months, shaped so significantly by the COVID-19 pandemic, has led to new ways of working, living and socialising. Inditex's business model, which has long focused on responding rapidly to shifting customer preferences, has reacted to these trends by designing more practical pieces infused with creativity and fashion so as to allow consumers to continue to project their personal style.

The various brands are adapting by offering new types of products, always still framed by the standards of creativity and sustainability that are the hallmarks of the Inditex Group.

All of the brands have launched 'Comfy' collections in recent weeks, loungewear made from simple patterns in warm cotton knits.

The brands responded to this demand by launching collections such as Osyho, with its Perfect Weekend and Wear Anywhere lines, Pull&Bear with Intimates, Zara with The Female Gaze, Uterqüe with IN/OUT and Massimo Dutti with the Soft capsule and New Comfort collections.

Elsewhere, brands keep expanding their offer of garment personalisation: Massimo Dutti Initials and Pull&You have joined the existing personalisation offerings, Edited by Zara, and Zara Home, which have expanded the number of items which can be personalised.

In parallel, the brands continue to focus on more fashion-heavy collections, including the newest edition of Zara SRPLS, which has similarly shifted towards a more functional and contemporary wardrobe that is both sophisticated and refined and replete with thoughtful details. Zara revisited some of its classics with The Archive Collection, bringing back new iterations of some of its most iconic pieces, framed by an unwavering commitment to the emotional durability of the brand's designs and creations.

All the Group's brands participated in noteworthy new initiatives: Pull&Bear collaborated with London's Tate Gallery on Because Art is for Everyone; Massimo Dutti surprised its followers with its Movement Study, a unique event which turned the runway into a microcosm of creativity and innovation; and Bershka teamed up with international stars of the calibre of Billy Eilish and Conan Gray.

Bershka.com also revamped its website to make it more user-friendly and bolster its brand image. The new site is more visual and really shines the spotlight on the image and product. Stradivarius wrote a new page with one of the most popular duos on the social media, @twin_melody x Stradivarius, and launched its Stradishoppers TV channel, which transforms the online shopping experience into an 'onlive' experience, in sync with the general thrust towards an integrated shopping experience.

Uterqüe launched a minimalist collection for autumnwinter 2020 focused on accessories and the finer details. Our homes have clearly been at the heart of some of the consumer trends to emerge from this time of retreat and Zara Home responded with its Spa Collection and Interiors with a Soul, the latter embodying timeless interior designs with roots in antiquity in which the past and present move in perfect harmony. Lastly, after the close, in November, Zara Home released a collection created in collaboration with Fabien Baron.