Inditex 1Q20 sales drop limited to 44% despite up to 88% of stores closed

• Online sales up 50% in 1Q20 and up 95% in April alone
• Group’s Executive Chairman Pablo Isla has unveiled the Group’s plan for 2020-2022, providing a glimpse into the future at Inditex, shaped by capital expenditure of €1bn to boost online and an additional €1.7bn to further integrate the store platform
• Inditex unveils its proprietary digital platform, which will be completed during the period. It is a tailor-made IT architecture for the integrated store and online business model
• By 2022, online sales are expected to account for over 25% of the total, compared with 14% in FY19
• Inditex will broaden and complete its store technology upgrade plan, which will continue the policy of opening larger stores and absorbing smaller units
• Each store, whether online or physical, will become a sustainability hub: they will use less and renewable energy, eliminate single-use plastic, recycle all materials and foster the reuse of all garments
• At the upcoming Annual General Meeting, the Board of Directors will propose to distribute an ordinary dividend of €0.35 per share, payable on 2 November 2020

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Inditex’s Executive Chairman, Pablo Isla, sought, first and foremost, to transmit a message of solidarity with all of the people whose lives or families were touched by Covid-19. He also expressed his gratitude to Inditex professionals worldwide for their engagement and sense of responsibility.

“Our priority through the crisis”, said Pablo Isla, “has been and continues to be the health and safety of our people and our customers. I would like to publicly thank all of our people for their tremendous commitment throughout the global health crisis and during the gradual return to our stores and operating facilities. I would like to highlight how they have consistently followed the appropriate protocols, which has delivered a consistent message of responsibility. As we have always said, people is what really matters for Inditex, beyond any other consideration, and I believe that the current situation we are living, prove it so“

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1Q20 SALES

The year-on-year contraction in sales at Inditex was limited to a 44% decline to €3.3bn during the first quarter of 2020 – between 1 February and 30 April – despite as many as 88% of the Group’s stores being closed at some point during the period due to the Covid-19 pandemic.

Online sales recorded strong growth of 50% during the period, specifically increasing by 95% year-on-year in April.

The gross margin remained constant at 58.4% of sales, evidencing the flexibility embedded into the business model and its ability to react to actual demand. At the April 2020 close, inventories were 10% lower than in April 2019.

Operating expenses decreased by 21%, thanks to active cost control during the period, and notwithstanding the company’s role in supporting the health emergency by earmarking funds and all of its logistics capabilities to transporting over 120 million items of medical and health equipment, donated by private and public entities including Inditex, from China to Europe.

The company’s net cash position remains robust, at €5.8 billion, compared to €6.7 billion as of April 2019, underpinned by the longstanding positive momentum in the business coupled with the Group’s robust financial management.

Combined, the above factors mitigated the impact on Inditex’s first-quarter, which amounted to an EBIT of €-200 million and net loss of €-175 million.

The company has decided to make a provision of €308 million related to the execution of the Plan to boost online and further integrate the store platform. Taking the provision into account, the reported EBIT and net profit stood at €-508 million and €-409 million, respectively.

€2.7 BILLION FOR THE 2020-2022 PLAN

Inditex’s Executive Chairman, Pablo Isla, today unveiled the Group’s plan for the next two years, providing insight into the future strategy of Inditex.

Under that plan, the company will accelerate and broaden its forward-looking digital transformation strategy. Isla today committed that the Group will invest €1 billion in bolstering the online business and a further €1.7 billion in upgrading the integrated store platform, deploying advanced technology solutions.

In the words of Pablo Isla, “this strategy is a culmination of the project the company has been investing in steadily and significantly since 2012, a project that will transform its profile notably. The overriding goal between now and 2022 is to speed up full implementation of our integrated store concept, driven by the notion of being able to offer our customers uninterrupted service no matter where they find themselves, on any device and at any time of the day”. Proprietary Digital Platform An important aspect of the plan is Inditex’s Open Platform (IOP) project, which has involved creating the proprietary IT architecture over which all of the company’s digital operations run; it has been designed with a configuration to provide the quality, accuracy and immediacy the company’s business model requires.

Starting from the e-commerce platform, it layers in all the associated processes, including inventories, purchasing, distribution and orders, injecting flexibility and, vitally, scalability.

Scalability is crucial in the ability to maintain excellent service during periods of peak traffic such as sales seasons and is key to readying the company for the anticipated ramp-up in online sales.

The platform, the configuration of which dates back to 2018, has proved its efficiency in a staggered implementation. It is currently 60% operational and will be fully deployed between 2020 and 2022. It is one of the most technologically advanced platforms in its field and it is implemented through microservices to help the specific needs of every department or area involved volved in the process without changing the whole system.

Online, over 25% of total sales

Inditex expects online sales to account for over 25% of the total by 2022, compared with 14% in FY19, underpinned by an integrated online-store network that is structurally nimble, sustainable and smart. It will have larger, higher quality stores, higher leves of profitability, and helping generate 4-6% like-for-like growth annually.

Each store will act as a fashion distribution hub in the heart of the most strategic shopping districts of the world’s leading cities, forging an interconnected global distribution network that is responsive to emerging shopping habits.

To that end, Inditex plans to reinforce all of its brands’ e-commerce capabilities. One example is the new www. zara.com studios in Arteixo which will span 64,000 square metres. It will also increase the online customer service teams and the dedicated packaging both from the specific online stockrooms and from the stores. Also, the implementation of the RFID system, which enables garment tracking and integrated inventory management, will be fully deployed across all the brands by the end of 2020.

In parallel, Inditex plans to continue with the store upgrade plan underway since 2012 under which it has opened a gross 3,671 stores that are larger, in more high-profile locations and already integrated with online. From that date, the Group, enlarged a further 1,106 stores, refurbished 2,556 with the latest technology and absorbed 1,729 units, 1,024 of which during the last three years.

Ultimately, Inditex plans to to have a total network of between 6,700 and 6,900 stores, from 7,412 today, which will involve opening 450 new stores fitted with all the latest sales integration technology and absorbing between 1,000 and 1,200 smaller-sized stores, which account for 5% to 6% of total sales and are less well positioned to offer the new customer experiences. Most of these smaller stores are older stores belonging to brands other than Zara.

By region, the plan envisages giving a definitive boost to certain brands’ online sales platforms, specifically those of Bershka, Pull&Bear and Stradivarius in China and Japan; in Spain, the Group will continue the process underway for the last three years of opening larger stores while absorbing smaller ones, as observed in cities such as Bilbao and Pamplona; in the Americas and the rest of Europe, the priority will be to consolidate the strategy driving full integration of the physical and digital worlds.

Headcount will remain stable. As it has been doing since 2012, the Group will offer all staff members in any of the absorbed stores positions to cover the needs generated by online integration such as dispatching online customer items from store.

This capillary network will be capable of complementing the website ranges in real time by coordinating with the online warehouses. This significantly enhances the experience of customers who are increasingly informed and demanding.

This unified vision of the integrated stock needs real-time processing and it has been implemented through the above mentioned proprietary IT platform Inditex Open Platform (IOP).

Thanks to this platform, using the data generated by the RFID system, Inditex can seamlessly bring up all of the latest fashion creations on any device in real time; track demand with no time lags; manage stocks with the utmost efficiency; and accurately fine-tune production, all of which is in line with the Group’s sustainability objectives by ensuring no excess.

One of the initiatives that best sums up the advantages of this proprietary digital platform is the Sint project, which is enabling stores inventory to help meet online demand.

In addition to handling direct customer sales, the stores are preparing e-commerce orders from their stockrooms, which are fully integrated with the online platform; that is translating into more effective stock management as well as faster deliveries.

This project is underpinned by a series of innovative technology developments increasing the precision of logistics operations and added synergies into online-store operations. For example, high-capacity RFID readers have been designed to count inventories in warehouses with high traffic volumes; the XWMS system, similarly developed in-house, manages the warehouses so as to select the ideal location for sourcing each order for delivery purposes; and new analytical systems are optimising transport flows and garment availability information.

The ‘Store Mode’

From the customer standpoint, an important develop ment in the pipeline is the ‘Store mode’ concept thanks to which the brands’ mobile apps and websites will provide customers with new services such as the ability to consult store stocks in real time for online purchase and immediate collection, and pinpoint the precise location of a specific item within a given store.

In parallel with all these technology developments, the company remains strongly committed to its environmental sustainability strategy: all of its stores will be equipped with the proprietary Inergy environmental control platform, use renewable sources of energy only, apply the ticketless e-receipt system as the norm; and recycle or reuse all surplus incoming materials such as cardboard, plastic and packaging.

Inditex will have eliminated all single-use plastic from its in-store customer interfaces and emphasise and facilitate clothing circularity by collecting clothing after its initial use. The idea is to reuse or recycle all of the garments collected through the channels Inditex has been rolling out globally alongside organisations such as Caritas and the Red Cross while financing research into new recycling techniques, such as the project being coordinated by MIT in Boston.

Those measures will be accompanied by the strategic raw material initiatives committed to at the 2019 AGM: the majority of fabrics used to make clothing sold by any of Inditex’s eight brands will be sustainable, organic or recycled by 2025; that target will be delivered sooner for fibres such as viscose, which will be 100% sustainable in 2023.

The investments already made in technological innovation, in fostering sustainability across the board, in the Group’s exclusive RFID-enabled garment tracking system, coupled with its unique approach to stock management, position Inditex for the online-store model of the future.

GROWTH OF THE INTEGRATED STORES AND ONLINE PLATFORM

The Group continued to forge ahead with its store integration strategy throughout the first quarter: at the close of the period, its online-store platforms were integrated in 72 of the 96 markets in which it has physical stores. Zara launched online sales in Albania and Bosnia and, after the start of the second quarter, in Argentina, Paraguay, Uruguay and Peru, markets in which the Group’s flagship brand can now offer its customers a fully integrated shopping experience.

The Group also continued to make progress on the target announced by Pablo Isla of having all of the products of all of its brands available for purchase online anywhere in the world by the end of 2020. In parallel, the Group’s brands opened 19 new stores during the quarter, as well as expanding and refurbishing some of their flagship stores in markets including Spain, China, Portugal, Morocco, Lithuania, Croatia, Korea and Saudi Arabia.

Particular highlights were the new Zara stores in I-Park in Seoul (Korea), in the Arribat Center in Rabat (Morocco) and in the Saudi Arabian cities of Riad and Dammam. In Dammam, Massimo Dutti, Bershka, Stradivarius and Oysho also opened stores in the Nakheel Plaza shopping centre. In May, Zara opened its doors in the Bahrain City Center in the city of Manama (Bahrain). In Spain, Uterqüe launched a new store on calle Larios in Malaga and Stradivarius opened in Espacio León (León).

An upcoming highlight is the opening of Zara’s new store in WangFujing (Beijing, China). Not only will this be the largest flagship store in Asia, it will also be the most advanced Zara store in the world, featuring the latest technology and services to offer a seamlessly integrated shopping experience. Also scheduled to open are the Zara Place Vendome in Doha (Qatar) as well as newly extended and refurbished Zara stores on Paseo de Gracia in Barcelona, Spain, and the Calle 82 store in Bogota, Colombia.

The rest of the Group’s brands are also already working on openings and expansions in a way which is consistent with the group’s strategy: Massimo Dutti has openings planned in Amoeiras (Portugal), Shanghai (China) and Barranquilla and Medellín (Colombia); Bershka is working on openings in Brasov (Romania) and Belgrade (Serbia); Stradivarius is focused on Rotterdam (Netherlands); Oysho is targeting Moscow (Russia) and the Chaoyang district in Beijing (China); lastly, Uterqüe is planning its reopening in Almaty (Kazakhstan).

BARCELONA PASEO DE GRACIA, THE GLOBAL STORE

Next autumn, Zara will open a three-storey, 800 square-metre space exclusively devoted to Zara Man in an emblematic building adjacent to the brand’s existing store in Paseo de Gracia (Barcelona, Spain), which was reopened last November following refurbishment and the addition of the latest fashion experience-driven technology solutions.

Once it adds the three-storey smart space devoted to Zara Man in the Casa Rocamora building, Zara will occupy 5,500 square metres of one of the world’s leading shopping locations.

This store is one of the best examples of opening and expanding spacious, sustainable and diaphanous stores with more room to showcase the breadth of the brand’s collections, all of which seamlessly integrate with the online side of the business.

SUSTAINABILITY

In keeping with the Group’s unwavering commitment to sustainability, the brands made further progress on their commitment to using more sustainable and recycled raw materials, many under the Join Life label which distinguishes those garments made using more sustainable processes in terms of water and energy consumption.

The Group’s stores also continued to roll out the usedclothing collection programme: customers can now find collection containers in 2,299 of its stores in 46 markets; the scheme is run in conjunction with 45 organisations which receive the clothing and sort it for reuse or recycling.

As part of the evolution of the eco-efficient store plan, the Group continues to increase the number of stores connected to its centralised energy and water control and management system. Thanks to the technology already fitted and the high rate of connectivity with the centralised platform, a total of 3,587 stores are now operating under this Inergy platform.

Inditex has worked closely with suppliers to ensure they are following official guidance to protect the health of workers in factories during the pandemic. The Group has also ensured that all orders produced or in production during this period were completely paid for according to the original payment terms.

In addition, Inditex publicly endorsed the call for action under the International Labour Organization in collaboration with The International Organisation of Employers (IOE), the International Trade Union Confederation (ITUC), IndustriALL Global Union and other brands to mobilise support for manufacturers and workers through the economic disruption caused by Covid-19.

SECOND QUARTER

The start of the second quarter has been marked by the gradual reopening of stores in a number of markets and growth in online sales. Since the start of May, the Group has been reopening its stores, at all times prioritising customer and staff safety. As of 8 June, 5,743 stores of Inditex’s 7,412 were open, in 72 markets.

Sales have been recovering gradually as the stores have reopened, with certain markets such as China and South Korea and, in Europe, Germany, standing out.

With 52% of its stores open in May with capacity restrictions in most markets, store and online sales in local currencies were -51% compared to last year’s revenues.

In the period between 2 and 8 of June, stores and online sales in local currencies were -34%. In the markets that were fully open (54% of total stores) sales were -16%.

DIVIDENDS

Inditex will hold its Annual General Meeting, at which it will prioritise remote attendance, on 14 July 2020. The Board of Directors will propose the company’s shareholders to approve the payment of an ordinary dividend of €0.35 per share, payable on 2 November 2020.

The company’s dividend policy, namely a payout of 60%, remains in place and also the bonus dividend totalling €0.78 per share. This was originally to be paid in 2020 and 2021 and now will be distributed in 2021 and 2022.