Retail

2020-09-17

Inditex returns to profitability and generates €734 million net cash in the second quarter

© 2020 Inditex
Inditex Group sales continued to recover during the first half of 2020 (between 1 February and 31 July) to reach €8 billion: the decline for the half was -37%, helped by an improved second quarter (from 1 May to 31 July) when the fall in sales slowed to -31%, from a decline of -44% in the first quarter.

Strong online sales growth of 74% in first half

  • Inditex Group net profit reached €214 million in its second quarter (1st May to 31st July) compared with the €409 million loss recorded in the first quarter, due to the Covid-19 pandemic
  • As a result, the Group reported a net loss of €195 million in the first-half; it would have reported a first-half net profit of €39 million when excluding the previously announced €308 million provision for the advanced store digitalisation programme.
  • The company increases by €734 million its net cash position in the second quarter, leaving its net financial position at €6.5 billion.
  • Second-quarter EBITDA topped the one billion mark to put first-half consolidated EBITDA at €1.5 billion.
  • Sales recovered from -44% in the first quarter to -31% in the second quarter, despite as many as 87% of the Group’s stores still being closed in May. Today, 98% of Inditex’s stores are open, with restrictions still in place in some specific markets.
  • Growth in online sales remained very high, averaging 74% year on year in the first half. One million orders received in a day for the first time.
  • The sharply improving trend is also evident in sales in local-currencies between 1 August and 6 September, which were 11% below the same period of 2019 and against a tough comparable (+8%). Online sales continue growing at a remarkable pace and store sales are recovering progessively.
  • Two important social projects have been fostered: the donation of clothing through UNHCR to refugees in Rwanda as part of the humanitarian relief effort there; and the donation of machines for the mass manufacture of masks to Galicia’s association for the disabled, COGAMI.
  • Inditex’s Executive Chairman, Pablo Isla, stressed that ”the recovery and strong performance are due to the hard work, engagement and creativity of everyone in Inditex. I am particularly pleased with our online sales growth, which demonstrates the critical importance of our strategy to integrate store and online. This is a cornerstone of our unique business model”.

I. 1H20 Highlights

As many as 87% of the Group’s stores were closed during the month of May, with business gradually returning to normal since. Inditex has currently managed to open 98% of its stores around the world, albeit with limits on capacity and restricted opening hours in specific markets.

Online sales grew sharply. Total sales were boosted by very strong online growth, which reached 74% year on year in the first six months of the fiscal year.

Gross margin remained very robust at 56.2% of sales, compared to 56.8% in 1H19, thanks to the management of a business model able to adapt to demand. This management is also evident in inventory levels, which were down 19% compared with close of 1H19. Active cost control helped reduce operating expenses by 21%.

Net cash generation of €734 million. The strong performance sustained in the second quarter was also evident in the evolution in EBITDA and the net cash position. Inditex generated over €1 billion of EBITDA and increased its net cash position by €734 million during the second quarter. EBITDA for the first half of the year hit €1.5 billion and net financial position at the end of the first half amounted to €6.5 billion, despite the adverse impact from the Covid-19 pandemic.

Back to profitability in the 2Q. The above factors combined to drive a return to net profit in the second quarter to €214 million leaving behind the 1Q net loss.

First half net loss was €195 million. Stripping out the €308 million provision recognised in the first quarter to accelerate the integration of the store and online platforms, the Group would have recorded a net profit of €39 million in the first half.

Quote from the Executive Chairman. In light of these results, Inditex’s Executive Chairman, Pablo Isla, underlined the relevance of the achievements under the current circumstances and stressed that “the recovery and strong performance are due to the hard work, engagement and creativity of everyone in Inditex. I am particularly pleased with our online sales growth, which demonstrates the critical importance of our integrated store and online platform strategy. This is a cornerstone of our unique business model with three key pillars flexibility, digital integration and sustainability. Day by day this combination is proving its solidness”.

Trading update. The third quarter continues to see a progresive return to normality, with online sales growing sharply and store sales recovering gradually. Store and online sales in local currencies between 1 August and 6 September 2020 were down 11% against a tough comparable of 8% growth during the same period of 2019.

II. Strategic outlook and digital transformation

Throughout the first half but particularly during the second quarter, the company deepened its digital transformation and store and online platform integration strategy initiated in 2012. This has been built on with the capex plan unveiled by Inditex’s Executive Chairman at the Annual General Meeting on 14 July, which envisages that the digital transformation strategy will drive online sales to more than 25% of the total by 2022, compared with 14% in 2019.

1 million online orders in one day. The strengthening of the integrated shopping experience and of the online sales capacity, helped online receive 1 million orders in one day for the first time during the second quarter. Over the first seven months (February to August) Inditex’s brands received close to 3 billion online visits and their social networks reached a record of 190 million followers.

In order to meet this sharp growth in demand while offering the highest standards of service, the ongoing development of a proprietary IT platform, Inditex Open Platform (IOP), is crucial. In this same line, the implementation of the integrated stock management system (SINT), thanks to which customers can access the Group’s entire stock at all time, is also key.

With regard to this, several stores have already implemented the ‘Store Mode’ (cf. page 8), a tool that reflects how useful the implementation of the storeonline integration is for customer service.

Digital upgrade of the stores. Against this backdrop, Inditex opened large-format stores in 14 markets during 1H, and refurbished 72 stores, 35 of which were store expansions. This is in line with the company’s strategic commitment to larger units, whereby it continues to absorb smaller stores which do not lend themselves as effectively to the fully integrated store model.

Some of the most prominent store openings and expansions in the first half took place in world-leading shopping destinations such as Moscow, Paris, Madrid, Berlin, New Delhi, Lisbon and Amsterdam (Appendix I). By end of 1H, the Group had 7,337 stores in 96 markets. During the second half of the year Inditex will open highprofile stores in Monaco, Beijing, Paris, London and Doha, among other places.

New integrated platforms. Zara’s online platform reached Argentina, Uruguay, Paraguay, Peru and Algeria for the first time in the second quarter. The Group’s eight brands’ fashions are available in over 200 markets. Also in 3Q, Zara added online sales to now-integrated local platforms in Chile, North Macedonia, Montenegro, Tunisia and Andorra, and also new platforms in Nicaragua, Honduras, Costa Rica and Guatemala will be launched today Wednesday 16 September. Stradivarius opened its integrated online platform in Saudi Arabia and Israel.

Commercial initiatives (Appendix II). In parallel with the rollout and transformation of the integrated store and online platform, all of the Group’s brands stepped up their commercial initiatives, duly adapted for trends in customer preferences.

Zara launched a new SRPLS capsule collection inspired by a nautical theme. Zara also continued to collaborate with the world’s most prestigious design schools under its View.s programme, this time designing a Zara Woman collection together with the Pratt Institute in New York. Later, marking the start of the autumn-winter collections, Zara Man launched a collection in collaboration with the The Josef and Anni Albers Foundation, part of the Bauhaus School.


‘Store Mode’ project launch

The ongoing implementation of the latest technology tailored for the integrated store model enabled the company to activate, just this week, a Store Mode project encompassing 25 Zara stores across Spain, in Madrid, Barcelona, Bilbao, A Coruña, Seville, Pamplona, Malaga and Badajoz, among other cities.

‘Store Mode’ is a new feature which allows customers to access the store of their choice from the palm of their hands. It has three main features:

Click & Go. Customers can activate this function from the Zara app to navigate through the store of their choice. At that point they can look at the collections available for purchase in that store, purchase a specific item online and, if they wish, collect it in-store within just 30 minutes, the time needed for the staff to prepare the order to Zara’s quality standards.

Click & Find. This feature is possible thanks to the radio frequency identification technology (RFID) system in place in all stores, which in turn underpins the integrated stock management system (SINT). RFID and SINT allows the fulfilment of online orders from the stores, providing customers with an enhanced service while keeping all stock available to purchase at all times, regardless of where it is physically located, be it on the sales floor, in the store stockrooms or in one of the online stockrooms. Once inside the stores, customers can use the Zara app from their handsets to pinpoint the garments of their choice using a store layout map.

Click & Try. The ‘Store Mode’ function has other features that represent a further evolution of the integrated shopping experience. Shoppers can book a fitting room from the app, avoiding having to wait and improving the overall experience.

The app, also compatible with mobile payments, offers the choice of an e-ticket, eradicating paper receipts while storing purchase records and the corresponding e-tickets on the app.

Madrid: Calle Serrano, 23, Paseo Castellana, 79, C.C. ParqueSur, C. C. Gran Plaza 2, Calle Fuencarral, 126-128 y Calle Preciados, 18; Barcelona: Calle Pelai 58, Centro Comercial L’ILLA, Paseo de Gracia, 16, Avd. del Portal de L’Angel, 11-13 y Plaza de Catalunya, 5; A Coruña: C. C. Cuatro Caminos, C. C. Marineda City y Calle Compostela 3-5; Málaga: Centro Comercial Larios Centro y Centro comercial Plaza Mayor Shopping; Alicante: Avenida Maisonnave, 42-44; Badajoz: C.C. El Faro del Guadiana; Bilbao: Calle Gran Vía 23; Mallorca: Paseo del Born, 25; Marbella: C.C. La Cañada; Pamplona: Avenida San Ignacio, 7; San Sebastián: Centro Comercial Gabera; Sevilla: C.C. Lagoh; Zaragoza: Paseo de las Damas, 3.

III. Sustainability

During the second quarter, Inditex continued to deliver on its sustainability commitments and targets, making progress on the elimination of plastic and increasing the proportion of more sustainable raw materials and processes in its collections. As a Group, it continues to prioritise its ambitious sustainability targets as well as the ecoefficient management of all its offices, facilities and stores. As per the many social investment projects, two stand out during the period due to its relevance and impact: the first is part of the corporate refugee aid policy and the second is framed by the effort to help with the health emergency by supporting third-sector entities that assist groups at risk of social exclusion:

Inditex donates 750,000 items of clothing to refugees through UNHCR

The retail value of the items is €13.5 million

Inditex is set to donate 750,000 pieces of clothing from its various brands to the Spanish Committee of the Agency of the United Nations High Commision for Refugees (UNHCR) for distribution at seven refugee camps in Rwanda. These camps are sheltering around 149,000 displaced individuals, mainly from the Democratic Republic of the Congo and Burundi.

Thanks to this initiative, which the company is executing with a number of suppliers, 139,571 items were already dispatched in August; another 111,048 will be sent at the end of September and the remainder will be shipped by 31 January 2021, with Inditex assuming the cost of transporting the goods to Africa in full. The retail value of the items donated is €13.5 million.

Rwanda is one of the main recipients of the people displaced by the waves of instability experienced in recent years in the Democratic Republic of Congo, and also from Burundi. The former has displaced an estimated 5 million people between 2017 and 2019. The tension in Burundi has prompted hundreds and thousands of its people to flee to neighbouring countries. UNHCR is providing those people with assistance in Rwanda’s refugee camps. The most urgent needs are for shelter, drinking and sanitation water, medical attention, clothing and food.

Inditex’s Executive Chairman, Pablo Isla, alluded to the company’s long-standing commitment to refugee aid, a cornerstone of the Group’s community investment model: “Over the last 20 years, we have been collaborating consistently with leading third-sector organisations on their programmes for refugees in many parts of Africa, Asia, Latin America and Europe. All of us here at Inditex are tremendously motivated to continue this targeted effort going forward”.

Inditex donates four mask-making machines to Galicia’s association for the disabled, COGAMI

This project, valued at €2.3 million, will provide the association with the ability to make 11 million masks a month and generate 25 jobs for people with disabilities

Inditex is donating four machines to COGAMI for the mass manufacture of surgical face masks to protect against Covid-19. The masks will be sold by the organisation to raise money for its community work.

It is estimated that the machines, which arrived at Inditex’s facilities in Laracha (Coruña) in June, will begin production this winter, once the installation works, being carried out together with Mondragón Assembly, are complete.

The machines are going to be installed at a COGAMI site located in the Bergondo industrial park (Coruña), where as many as 25 jobs will be created. The facilities are being equipped entirely by Inditex to meet the standards set by the Spanish drug agency for health product manufacturing facilities.

COGAMI is going to set up a non-profit job centre whose main purpose will be to offer work related to the production of the masks to people with disabilities - in order to facilitate integration into the regular job market.

The facilities will comprise four automated production lines. The machines, valued at over €1 million, will have the capacity to produce around 11 million face masks a month. The project as a whole is worth €2.3 million.

The production lines were designed and assembled by the cooperative Mondragon Assembly, part of Mondragon Corporation, which boasts 40 years experience in the manufacting and automatization prroduction lines, developes high-tech solutions to a number of industries, including the healthcare.

IV. Annual General Meeting

The company held its Annual General Meeting on 14 July 2020, at which its Executive Chairman, Pablo Isla, gave an account of Inditex’s strong 2019 performance and an overview of the start of 2020, heavily affected by the Covid-19 pandemic.

He also updated the company’s shareholders about key aspects of the 2022 Horizon strategy, under which Inditex will invest €2.7 billion to accelerate a new phase of the digital, integrated and sustainable transformation, having already invested over €10 billion in those strategic initiatives over the last seven years.

As approved by the shareholders during the Annual General Meeting, as propossed by the Board, on 2 November 2020 the company will pay an ordinary dividend of €0.35 per share from 2019 profits.


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