Zara owner Inditex adds to gains as BofA calls it 'best-in-class fashion retailer'

Investing.com -- Inditex (BME:ITX ), the parent company of Zara, one of the world’s largest listed apparel retailers, is gaining recognition for its strong growth potential and business model, which analysts at BofA have recently called "best-in-class." 

Reinstating coverage of Inditex, BofA analysts issued a "buy" rating with a price target of €61 per share ($34.2 for American Depositary Receipts), citing multiple growth drivers and strategic realignments that position the company for continued outperformance.

“We expect Inditex's business model to continue to fuel growth 2-3x above market,” the analysts said.

The retailer’s ability to improve sales density—sales per square meter in its stores—alongside a return to physical space growth will fuel this expansion. 

Additionally, Inditex has consistently increased its full-price sell-through rate over the past decade, a trend that is expected to continue. 

This, along with its operating efficiency, is forecasted to boost the company’s gross margins to 58.1% by FY25, with EBIT margins climbing to 19.7%.

Inditex's shares are trading at a 24x price-to-earnings ratio, in line with the historical average, and are expected to deliver a 12% compound annual growth rate in earnings per share over the next three years, complemented by a solid 4% dividend yield.

Inditex’s decision to rationalize its store base over the past four years, favoring fewer but larger stores, has proven effective. 

This strategy resulted in a 50% growth in sales density, and BofA analysts see further gains as the company continues this approach. 

The U.S. market, which now accounts for about 11% of Inditex's sales, is seen as a major growth avenue, given the company's relatively modest 0.75% market share in the country, compared to its global market share of over 2%.

BofA expects Inditex to achieve a 9% organic revenue CAGR through 2027, driven by 2% growth in physical store space and 7% like-for-like sales growth.

Inditex is set to invest heavily in its infrastructure, with capital expenditures reaching approximately €5.4 billion over FY25-26. 

“Over FY25-26E, Inditex's capex will reach a combined c.€5.4bn as it builds a brand new distribution center in Spain; this is 3x the spending of its closest competitor in the field,” the analysts said. 

This investment underscores Inditex's competitive advantage in the apparel sector and reinforces its potential for market share gains despite growing economic pressures.

With a strong balance sheet of 1.2x net cash-to-EBITDA ratio, Inditex has the financial capacity to sustain its growth ambitions in the coming years. 

BofA analysts forecast a 12% EPS CAGR over the next three years, driven by these investments and the company’s operational efficiency.

Inditex’s dominance in the global fashion industry is reflected in its FY24 performance, with €36 billion in sales and €6.8 billion in operating profit. 

The company operates across seven main retail concepts, including Zara, Zara Home, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho.

 While Spain remains its largest market, the U.S. has quickly become a key growth driver, with both markets posting their highest growth rates in FY24.

BofA notes that Inditex has successfully shifted from a growth strategy centered around increasing store count to one that focuses on enhancing sales density within its existing stores. 

By reducing its overall store count by 24% and replacing smaller outlets with larger, more profitable locations, Inditex has effectively positioned itself for continued growth.

Source: Investing.com