Mar 11, 2013
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Is up the only way for Zara owner Inditex?

Mar 11, 2013

MADRID - As the world's biggest clothing retailer Inditex prepares to report another sparkling set of results on Wednesday, investors are asking how much further its share price can rise.

The owner of global fashion brand Zara has seen its shares triple in value in the past five years and outperform European peers by more than a third over the last 12 months.

It will report net profit up 23 percent for the year ending January 2013, according to a Reuters poll of 11 analysts, as it expands aggressively into Russia and China and ramps up online sales.

While analysts expect growth to have slowed during the fourth quarter and early weeks of the new financial year due to a weak European economy and deep recession in Inditex's home market of Spain, some predict a share price as high as 138 euros from around 107 now, on expectations of long-term sales growth.

"An aggressive multi-concept store expansion across Asia has moved the investment debate from 'risk in Spain' to 'opportunity in Asia'," said Exane BNP Paribas analyst Ben Spruntulis, who rates the stock "outperform".

Not everyone agrees; the lowest analyst price target was 80.

About half were at or above the current level, showing that Inditex, whose brands include teen fashion chain Bershka, Oysho underwear and higher-priced chain Massimo Dutti, remains broadly in favour with the research community.

According to data from research performance firm StarMine, Inditex scores 60 on a weighted scale of analyst sentiment, compared with 18 for rival Hennes & Mauritz.


However, analysts are becoming more demanding of the company, which has never reported a fall in sales on an annual basis since listing in 2001.

Out of 37 analysts listed by Thomson Reuters, less than half have a "buy" or "outperform" rating on the stock.

"This happens with all high-growth companies," said Javier Barrio, Spanish sales agent for Portuguese broker BPI. "They have to surprise significantly on the upside to rise above 115 euros per share," he added.

Inditex is expensive compared with peers, trading at 24.2 times estimated earnings for the year to January 2014, a 10-year high, says Nomura.

It is trading at 28 times estimated earnings for the year to January 2013, according to Thomson Reuters data, compared with H&M at 22 times and Gap at 13.8.

The company, which has made founder Amancio Ortega the world's third richest man, has used its nimble, Spain-based distribution model which rapidly churns out fast-changing ranges to expand aggressively into emerging markets.

Recession-hit Spain now accounts for just a quarter of group sales. Whereas Inditex has 13 percent of the clothing market in Spain, in the majority of its markets it has less than one percent, estimates Societe Generale, underlining the potential for expansion.

Inditex was a latecomer to online sales, but since it launched its first retail website for Zara in September 2010 it has rapidly expanded its online offering which is now available in the United States, Japan and China.

The company does not break out online sales, but Exane BNP estimates expansion in that area could add 1 percent to 2 percent to group like-for-like sales in each of the next five years.

Analysts take further expansion as a given, but for investors used to relentless growth, the ability for the company to surprise on the upside will be the major share price driver.

"There's probably still plenty of scope for them to continue to grow outside Europe. But the Inditex story has been well known for a very long time. The ability to surprise positively from here gets more and more difficult," said Felicity Smith, fund manager at Bedlam Asset Management, which does not hold the stock.

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