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Inditex - Dressing Up The World Is Priced In


Inditex is undoubtedly a stellar company. Many scholar case studies have been written on it as it has consistently beaten expectations thanks to the flawless execution of its fast-retail business model.

Without spending a single euro in advertising, Inditex has been able to expand from Spain to the rest of the world without any setback. This short note will not praise the story of the company, but rather will focus on what the market is thinking now that it is about to cross the EUR100/share hurdle (IPOed in 2001 at EUR14.70). Returns on equity on the rise, Zara leading an army of franchises appealing to diverse customers, purely organic and self- funded profitable growth and the company has just started selling online in China… many positives that are granting the firm its most expensive valuation ever: as I type these lines, ITX:SM has signed its highest closing price ever, after rallying 55% this year.

Although ITX might well perform as market discounts now, especially given the very low penetration Inditex has in Asia (around 1% as per my estimates) or Europe ex-Spain and America (around 2-3%), there is still a non-zero execution risk that, in my view, is not priced in. Zara's European appeal seem to be struggling in some geographies (NYSE:USA), and although the Chinese market looks sexy, ITX might still need to decentralize from Spain and strengthen its operations in these growing markets. But, it is not the same to manage from Spain a EUR15bn sales company with more than 50% in sales in Europe now than a EUR40bn sales conglomerate with over 50% of its revenues flowing from Asia at the end of the decade: there is corporate structure risk, too.

I would say the recent rally from EUR80 to EUR100 on average trading volume might well be close to an end. One year down the line, I expect the share price to stabilize around EUR95 to yield a more conservative but still attractive valuation. Please find more here.

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Disclosure: I am short OTCPK:IDEXF.

Stocks: IDEXF