Industria De Diseno Textil SA (ITX) EUR0.03

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Zara's parent company, Inditex, saw its sales grow 14.9% to €25.6bn in the first nine months of the year, ignoring exchange rate impacts. This reflects growth across all brands and all geographies.

Operating profit rose 24.3% to €5.2bn, as sales growth has continued to outpace rising operating costs. These costs are showing early signs of slowing, but have continued to move higher at double-digit rates.

The net cash position, including lease liabilities, increased from €4.4bn to €6.0bn, helped by a lowering of inventory levels

Between 1 November and 11 December, sales were up 14.0% on the same period last year. The optimisation of stores is ongoing, with gross space expected to grow by around 3% this year, despite around 600 fewer open stores.

The shares were broadly flat following the announcement.

Our view

Zara parent, Inditex, continued its hot streak with third-quarter profits coming in ahead of market expectations.

Inditex also owns other fashion favourites like Pull&Bear, Bershka, and Stradivarius - all of which have seen an uptick in sales as consumers scooped up the latest Autumn/Winter collections.

Sales growth continues to outpace higher operating costs, helping profits to jump. It's a testament to the success of the group's optimisation strategy, which prioritises closing smaller stores and focusing on bigger ones in prime locations. The tactic's continued throughout the year, with floor space expected to increase by 3% despite around 600 fewer open stores. It's bold moves like this which are helping Inditex to maintain its impressive margins.

Self-checkout areas are being installed across the group's brands to enhance the customer experience, which should also help ease pressures on queue times and staffing costs.

The group continues to focus on digital investment too. Fully integrating its online and physical store inventory is helping to improve supply chain visibility, and allows the group to react quickly to changing fashion trends. This has enabled Inditex to reduce its inventory levels, freeing up cash to deploy elsewhere in the business.

Being able to offer the flavour of the month faster than peers means Zara - which accounts for the majority of sales - has become a go-to shop. That in turn helps support more premium price tags. We should also note the group has a net cash position of EUR6.0bn including leases, which is likely the envy of many competitors.

We're supportive of Inditex's strategy, but there are some headwinds to consider.

Operating expenses are also rising at double-digit rates, meaning any missteps will quickly hurt the bottom line. We're pleased to see that the dispute over workers' pay is now resolved, but as part of the agreement, wages in Spain are planned to rise in line with inflation over the coming years. Given that a third of the group's employees work in Spain, that will likely have a material impact on the group's costs if inflation remains elevated moving forward.

Looking longer-term, we think the group is in a great position thanks to its scale and formidable business model. That slick model also underpins a healthy 4.1% prospective yield - although no dividend is ever guaranteed.

While we think Inditex is one of the better-placed clothing retailers, the group's shares are currently changing hands for 21.1 times future profits. That's at the top end compared to peers, and means there's plenty of pressure to continue delivering growth.

The Share Research team is ceasing covering of Inditex. This is the last update and house view HL will produce on this stock. You can still find out more about our thoughts on the Financials industry by signing up to our Share Insight email.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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