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Ladies and gentlemen, welcome to the Inditex 2019 First Quarter Results Presentation. The presentation will be chaired by Mr. Pablo Isla, Inditex Chairman and CEO. This presentation will be followed by a Q&A session comprising 2 parts. The first part will be dedicated to questions received on the phone and the second part to the questions received through the webcast platform.Mr. Isla, you have the floor. Thank you.
Thank you. Thank you. Very good morning to you all. I would like to welcome you all to Inditex First Quarter 2019 Results Presentation. Joining me here today are Ignacio Fernández, our CFO; and Marcos López, Capital Markets Director.Let me open by pointing to the fact that not only does Inditex operate a unique business model, but also that the level of differentiation is becoming clearer and clearer as time passes. We enjoy an unparalleled level of integration between the online site of the business and the physical site. So what underpins this uniqueness? Managing inventory from a central position allows us to offer our customers a unique experience in terms of quality of service. We can now offer customers same or next-day online delivery across the globe. When our customers visit any of our stores, they are invariably visiting a store that has been recently optimized to offer a better experience. By 2020, all stores will be fully digital and sustainable.The first quarter saw a strong execution of the business model. This increasingly differentiated model of ours remains firmly at the forefront of fashion trends. Our global fully integrated store and online model, combined with close management of inventory over the quarter, has resulted in very strong cash generation. We continue to see very significant growth opportunities well into the future.To give you updates of the sorts of exceptional occasions we are opening, you only have to look as far as the Zara store just refurbished in Cannes, France or even our new store at the very large development in Hudson Yards, New York. Just look at this powerful new location for Zara store in Time World Mall in Daejeon, South Korea. Many of you will have noted the launch of Zara online in Brazil earlier this year, in March, to a very strong reception.Zara Man has designed a capsule collection to celebrate the 200th anniversary of the Prado Museum.Zara Home has also been very busy with the launch of the Zara Home Business collection. Likewise, Bershka recently launched the Festivalism collection, and Massimo Dutti has released its Campaign collection. While, of course, Pull&Bear have been working on a partnership with the Primavera Sound Festival and continuing with the younger concepts, Stradivarius recently entered the Belgium market for the first time.Oysho, on the other hand, recently launched their very nice Watersports collection. And last, but not least, Uterqüe recently launched the Ünseen collection.I am going to pass you over to Ignacio now for a review of the financial performance of the group.
As I am sure everyone on this call is aware, at the start of 2019, financial reporting requires the adoption of IFRS 16. As highlighted back in March of this year, the changes do not affect the cash flow or the business. This new reporting standard result in estimated increase of 2% to 4% in net income in fiscal year 2019 versus the former IAS 17.In the first quarter 2019, net sales increased 5% to EUR 5.9 billion, while gross profit grew 6% to EUR 3.5 billion. Profit before taxes rose 10% to EUR 952 million. And finally, net income over the first quarter 2019 increased 10% to EUR 734 million. Let me highlight to you that the impact on net income for leases under the new IFRS 16 rules in the quarter was EUR 21 million.The sales growth over the quarter was satisfactory. Sales in local currencies grew 5%. Sales in the second half of the quarter were affected by adverse weather pattern. Upon the return to normal trading conditions, sales recovered accordingly. Store and online sales in local currency from the 1st of May to the 7th of June grew 9.5%. Store and online sales in local currency from the 1st of February to the 7th of June grew 6.5%.Execution of the business model over the period has been good. This is clearly reflected in the gross profit performance. The gross margin increased 61 basis points to 59.5%. Gross profit increased 6% to EUR 3.5 billion. We have sustained our commercial policies.As you can see, we have maintained tight control of our operating expenses in the first quarter of this year. Operating expense growth without the impact of leases under IFRS 16 rules in the quarter would have been plus 5%.The financial results line of the P&L include an impact of leases under IFRS 16 rules of EUR 39 million.The flexibility of the business model is illustrated in the working capital performance with inventory growing only 1%, helping to drive the healthy growth in operating working capital of 18% and a growth in the cash position of 9%.Keeping in mind our principles of providing an attractive and predictable remuneration to our shareholders, relating to fiscal 2018, the Board of Directors is proposing a dividend increase of 17% to EUR 0.88. EUR 0.44 was paid on the 2nd of May and EUR 0.44 is due to be paid on the 4th of November 2019.Let me hand you over to Marcos now who will provide you with a brief review of their concepts.
Over 2019, we have continued with our global expansion. We opened stores in 23 markets over the year. Global online launches have continued rapidly as you can see.Zara represents approximately 70% of group sales, the younger concepts around 30%. The younger concepts grouped together continue developing their operations satisfactorily. In the year, Stradivarius and Massimo Dutti have performed strongly.I'll hand you over to Pablo now who will provide a few comments on the outlook.
Thank you, Marcos. Inditex operates a global fully integrated store and online sales platform. The strong organic growth we have seen is driven largely by the ongoing efforts to differentiate the business. Store and online sales in local currencies from the 1st of May to the 7th of June grew 9.5%. Store and online sales in local currencies from the 1st of February to the 7th of June grew 6.5%.To this end, I would like to reiterate the guidance we provided back in March of this year. Like-for-like sales are expected to increase by between 4% and 6% in full year 2019. We also expect to see a strong cash generation this year. Many of you will have seen our recent announcement on the proposed appointment of Carlos Crespo as Chief Executive Officer. Carlos will lead the digital transformation of the business and will also push forward the area of sustainability. He will be responsible for technology, IT security, logistics and transportation, constructions and works, legal, procurement and sustainability. Subject to approval at this year AGM, the appointment will take effect in July.We have proceeded with the seamless integration of stores and online as evidenced over the period with the launching of Click&Collect at our Zara store in Corso Vittorio Emanuele Milano.All key markets now offer same and/or next-day delivery as a standard, and we expect inventory integration to be fully rolled out globally by 2020.In May, Zara launched online for the first time in Saudi Arabia, United Arab Emirates and Lebanon, and also in Egypt, Morocco, Indonesia, Serbia and Israel. Later in the year in time for the autumn/winter campaign, you will see Zara launch online in South Africa, Kuwait, Qatar, Colombia, Philippines and Ukraine.Emblematic collections that you can see right now both in store and online include the Getting Ready collection, the Campaign 19 collection, the Tie-dye collection, the Essentials collection, and of course, the Join Life collection, which incorporates the latest sustainability initiatives.By way of important store openings, Zara recently opened in Lille, on Rue de la Bourse. As you can see, very beautiful store, as well as a great store location in Gran Roma Mall in Rome. Zara also recently enlarged its store at Istinye Park in Istanbul and in the One Mall in Nanjing. And finally, it is certainly worth highlighting and finishing on the excellent location of the new Zara store in Jewel City in Singapore.
[Operator Instructions] The first question comes from Chiara Battistini from JPMorgan.
Can I just ask on the -- maybe on the gross margin and the very strong performance you've achieved in Q1? Could you perhaps comment on the drivers behind that strong performance? How much was FX? How much was diligent approach to promotional activity? And as a follow-up to that, any comment you could also share with us on your promotional approach in the current trading during the period of May that might have also supported your top line during the period.
Well, thank you. As you know, we don't like to elaborate very much on the gross margin regarding short period of time. What we can say is that the gross margin evolution during the first quarter is 100% related with the global execution of the business model with the idea of quality, with the idea, of course, of full price sales, our ability to react during the season, very low level of inventories. You are seeing that at the end of the period our inventory was growing only 1%. So it was flat, we can say. So it's always the same. It's the execution of the business model. And what we can tell you is that we are happy with the evolution of the gross margin during the first quarter, but we always prefer to look for a longer period.And then you were asking specifically about the month of May. And what I can tell you is that there is nothing relevant or significant in terms of promotional activity. We'll continue with the execution of our business model and always thinking in the medium- and the long-term evolution of the company. Very recently, whenever we talk, we always talk about, in the last few years, about quality, about quality of our product, about the quality of our inventory, of our business model, about the quality of our stores, the fully integrated approach between stores and online, the quality of our online offer. We believe very much in this approach in all the different markets and this is what we are focused. At the same time, as you can see, we are extremely active with a lot of initiatives regarding openings, regarding collections, regarding different areas of the business, Zara Home, professional, different sports, in Oysho, a lot of initiatives, of course, in Zara, in Massimo Dutti, Pull&Bear, Bershka, Stradivarius. So being very, very active, very focused, fully integrated approach between stores and online and always thinking about our customers, always thinking about quality from every point of view. And this -- then finally, it translates into numbers, into the figures. We always say we work for the stability of the gross margin. And this is our approach, and we always prefer to analyze in a -- not in a very short period of time, but in a longer period, at least on a season-by-season basis.
Maybe just if I can follow up on this acceleration that you saw in the current trading. Any region you would call out where that drove this acceleration, please?
Well, I'll come back to what I was saying before. For us, it's much more relevant the fact that from 1st of February to the 7th of June, store and online sales growth in local currencies is 6.5%. That is why we reiterate our 4% to 6% like-for-like sales growth guidance for the year, much more than to focus -- whenever you look at a very short period of time, there could be many different reasons in one direction, in the other direction. So that is why we prefer not to focus very much in the short period and thinking much more about the longer period and about the global season and this 4% to 6% like-for-like sales growth guidance that we were providing to you in the month of March for the full year.
The next question comes from Andreas Inderst from Macquarie.
I have a question on your dedicated online area in the store. How is the feedback on that from customers? And maybe related to that, how much was your online sales growth in the period?
So you are mentioning the automated Click&Collect that we have in several stores?
Yes.
I think you referred to this. Well, the feedback is unbelievable because for the customers, it's like magic. I would say that in a few seconds, they have their package. I would say it's much more the global approach. It is this fully integrated approach, it is the stock integration, it is the service we provide to our customers. They could ask for in-store delivery, for home delivery, same-day, next-day delivery, full integrated -- full integration of the store. We believe very much in this approach, but particularly about your question, will this be in stores which we have the automated Click&Collect, the experience, of course, from the point of view of the customers is very, very good. But we always say the same, we prefer to have the global approach than to analyze what is coming from this and from that particular initiative. Because due to that, you could lose the global perspective of the company and the global perspective on the way we operate our business.What we were saying in the presentation is that we really consider that our approach is fully integrated approach, and the way we are implementing it all across the world is very unique. Very unique and very characteristic of our company, this global experience that we are offering to our customers.
Okay. And just quickly, store expansion was flat in Q1. What was actually the space growth in Q1? And any change to your full year expectations of around 4%?
As you know, Andreas, we prefer to focus on -- specially on space growth on at least 1 year, and I think the relevant metric here is clearly space, not stores. And we have reiterated our guidance for the year also in terms of 5% to 6% gross space growth for the year.
We have very relevant openings during the period. We were mentioning some of them in the call openings, enlargements, refurbishments. We also have very relevant ones for the second half of the year. So it's -- the approach we have always been mentioning about quality, about the store optimization plan. You can see, for example, one of the stores we are mentioning is Istinye in Istanbul. This is the best shopping mall in Turkey, and now we have a huge flagship, completely refurbished, the store in Lille or Hudson Yards in New York. So very, very -- Daejeon in South Korea. So very relevant activity, very relevant openings with Zara, with the other brands, and always with this focus in terms of the quality of the openings. And everything in line with our global strategy, this fully integrated approach between stores and online, central inventory position, flexibility, ability to react during the seasonal offering to our customers, the latest fashions with very high quality. This is how we have global approach, and we are more and more -- we have always been, but more and more focused in bringing to our customers, however they want to buy, the stores, online, the best product and in the best environment.
The next question comes from Richard Chamberlain from RBC.
Can I just ask, Pablo, what your latest view on FX is in terms of impacts on sales and I guess, gross margin given the dollar for the full year? What's your view on that as things stand?
Yes, Richard, for the year, we are not changing our views in any significant way. Obviously over a short period of time, there may be changes, but in terms of the year, we just had slightly positive effect on the top line. And regarding the gross margin, it's stable because the rollout is just one of the factors. But what I would like to highlight is, in terms of the gross margin and execution, is how strong this first quarter has been in the sense that you clearly see that the gross margin has expanded 61 basis points. And this is reflected very clearly in the working capital, with inventory growing just 1%; the healthy inflow into the working capital, plus 18%; and cash growing by 9%. So what we try to focus is very much on the fundamentals of the business. So I would sustain what we mentioned in March about mildly positive effects in top line and stable gross margin.
Okay. Great. And just while I've got the line, the improvement that you've seen in Q2, it is quite a strong improvement versus Q1. Is that something that you've seen generally across all regions? Or is that something being driven by the weather in Southern Europe being, I guess, warmer than last year? I know it was quite tough in -- it was good in Northern Europe last year, but it was obviously quite soft in Southern Europe. So is that a comment specific to 1 region? Or are you actually seeing a general improvement across the board in -- so far in Q2?
Well, you know that we don't like to elaborate very much over a short period of time as it is the start of the second quarter. But globally, what you -- what we can tell you is that we analyze the season globally, and this 6.5% sales growth that we have during the season is very well spread all across the world. So it is not specific about any particular region, it's very consistent performance with positive like-for-like seeing all the -- in all the different geographical areas.
The next question comes from Rebecca McClellan from Santander.
Just one question, please. Pablo, how do you manage inventory according to the volatility in the business? And with that 1% growth being similar, had there not been a slowdown in the second part of the third quarter? And is 1% growth enough to sort of meet, obviously, the demands as it picked up in the second quarter?
Well, we always say the same that for us, the most relevant metric even more than the inventory position is what we call the level of commitment at any point in time during the season. Because for us, what is key is to reinforce the flexibility of our business model, the ability to react during the season. And then, of course, this flexibility, this low level of commitment at any point in time translates into inventory position at the end of the season -- sorry, at the end of any particular quarter.Well, what we can tell you is that it's the execution of the business model. Of course, the level of inventory at the end of any particular month or quarter, it could be different in one way or another depending on the evolution of sales during that period of time. But what is key for us is this idea of executing the business model, the flexibility, the ability to react. And this is something that we have totally in mind, that our business model is based much more on the idea that when we know what our customers want because of this flexibility and this ability to react and this integration between our suppliers and this very efficient logistics that we have, when we know that what our customers want we try to deliver what they want in a very short period of time. This is the essence of our business model, this flexibility, this ability to react and then this translates into an inventory position. We think now we are in mid-June and we think about the autumn/winter season that we have in front of us, we continue having huge room to take decisions during the season as always. And this is something that we are reinforcing more and more, managing very carefully the level of commitment at any point in time during the season. So I can say that, well, that this level of inventory at the end of the first quarter is very remarkable and it shows this flexibility that we have in our business model.
And so was the level of commitment similar in terms of expressed to the level of actual inventory? Or is there a slight gap in that?
Sorry, I didn't hear. What was your question?
The question commitment similar to the question inventory? Or is there such a difference...
Well, you cannot make an exact equation so -- because there are many things involved. But the way to translate the level of commitment in figures has a lot to do with the inventory position at the end of any particular moment, but at the same time we always say that this is a picture, a photo that it's -- that takes place in one particular day, but it's very -- I mean, it's the working capital evolution, the negative working capital position what shows how healthy is the evolution of the business globally.
The next question comes from Anne Critchlow from Societe Generale.
My question is on FX. In the quarter, was the currency translation impact absolutely flat? Or was it something like plus 0.4%?
If you want -- I think, that your question is really, really precise. As we have mentioned in the -- in our note, we mentioned that sales growth was 5% and local currency sales growth was 5%. To enter over decimals in such a short period of time I don't think it really -- it's really the way we manage the business. For the year, we still expect a slightly positive effect, but obviously we are not going to comment other quarters.
The next question comes from James Grzinic from Jefferies.
I just had a couple of questions on gross margin dynamics, I guess. Should I assume that the impact of stronger U.S. dollar on your Asian sourcing, would that accelerate in coming quarters relative to what you've seen in Q1? And should I assume that with the spring/summer season, most of the catch-up on ASPs in emerging markets would have happened in terms of recovering that currency -- that historic currency devaluation?
I think what Marcos was answering before related with your question. In terms of -- for the full year at current exchange rates, because, what, we are in June and things could change between now and the end of the year, but at current exchange rates, what we are expecting for the full year is slightly positive impact from sales. And in terms of the gross margin combining all the different currency impacts, we are not expecting any significant currency impact on the gross margin. This is what we can say at this stage.
The next question comes from Andrew Hughes from UBS.
Just had another question referring to the gross margin. Two of the areas you mentioned that were advantageous from your integrated model was the ability to fulfill online orders from store and so increase your full price sales proportion and also the problem of broken ranges being able to hold full price for longer there as well. Are those really happening now? And is it a real driver of the gross margin in Q1? And what I'm trying to get out of this is if that is the case, then are you more confident about the gross margin progression for the full year?
As you know, this has a lot to do with the RFID and with the stock integration. Now it's fully implemented for this year, it's fully implemented in Zara, it's in Massimo Dutti and Uterqüe, and of course, this is something which is quite relevant in terms of service to our customers and in terms of full price sales during the season. So this is one of the elements of this fully integrated approach that is driving the whole execution of our business model right now. But as I was saying before, we don't like to isolate this impact or that other's impact, but for us, is very relevant is the global fully integrated approach. But inside this global fully integrated approach, the stock integration and the ability to fulfill online orders from the stores, of course, is something which is relevant in terms of, as I was saying to you before, service to our online customers and full price sales during the season. And this will become more and more relevant as far as online becomes more and more relevant as a percentage over total sales.
Yes. Did you have a figure for what proportion of online sales are picked up in store?
No. No, we prefer analyzing quarter. No, we prefer not to focus on the specific figure of each part of the business, but much more in the global figures.
Yes. And -- but you are also delivering to home from store stock? Is that right...
It is, for sure, for sure. Yes, for sure, we have the 2 possibilities. We have the possibility of in-store delivery. Well, the customer doesn't know if it's going to be delivered from the online stockroom or from the store stockroom. The customer orders online and he can ask for in-store delivery or home delivery. Because if the product has been made available for the online customers, it could be in our online stockroom or in a store stockroom. So the customer doesn't know where it is located, the product. That is why we are able to offer our customers a product that in other case would not be offered to them. That is why this stock integration is so relevant.
Yes. And you haven't had to add any extra costs in-store to help with online fulfillment...
No. It's managed with the store because as you can imagine, we take advantage of the less-busy hours of the store to prepare these packages for in-store online fulfillment. So because during the store -- the store is not exactly as busy during the whole day. It's different, the mornings than the afternoons. It's different, the Monday-Tuesdays than the Saturday-Sundays. So the store is not always as busy during the weeks. So of course, we take advantage of the moments in which the store is less busy to prepare all these packages.
The next question comes from Warwick Okines from Exane.
I had a question that follows on actually from the last one, and that's about picking from store. Am I right in thinking that all the stores that are now RFID-enabled have the functionality of picking online orders from those stores? And if so, does that have any implication on the number of online stockrooms you need across the world? I think last -- you spoke about the number about a year ago. You said, I think, there were 18 stockrooms. Does the pick-from-store have an implication on the numbers you'll need long term?
No, not really. But the number of online stockrooms for us is something very easy to manage. We have always mentioned to you, it's like opening a store without the store, only with the stockroom. So it doesn't change at all the business model. And these online stockrooms are receiving 2x per weeks -- 2x per week from our logistic platform that's in the other store. So even if there could be 30, 35 online stockrooms, it would be like 30 or 35 additional stores in terms of the way we operate our business. So not really. This is something always because we prefer to keep this approach, to keep the approach of having the online stockrooms, and then thanks to this stock integration, the ability to fulfill online orders from the stores. But it is very efficient. The whole system, not only from the point of view, of course, but also what is even more relevant than, of course, from the point of view of the distribution of the way we've managed the stock. So it's very, very efficient way of operating our business.
And that -- so that stock integration is across all of Zara, Massimo Dutti and Uterqüe, but not across the other brands at the moment, is that correct?
No. We are implementing progressively and then next year, it will be fully implemented all across the brands in all the different markets.
Right. And what's the typical size of an online stockroom?
Well, it depends very much because it's completely different depending on the -- of the size of the online market we are talking about. So it depends very much. There is not any -- it has nothing to do the size of one we could have in China with the size of one we could have in other different markets. So it depends very much. And in any case, it's very efficient, the operations.
We are now finished with the telephone Q&A session to address the questions received through the webcast platform.
We've had a couple of webcast questions today. The first of which, I know you've already covered a little bit, Pablo, on gross margin. Is there any other color you can provide on the key drivers of gross margin performance?
Well, I think we have covered, we believe, during the call. I would say the same, it has to do with the execution of our business model, with the consistency of our commercial policies, our inventory position, the success of our collections. So it has to do globally with the execution of our business model, with the flexibility of this business model.
The second one was Inditex continues to generate strong cash flows. What's the reason for the strong growth in cash of 9% over the period?
Well, I think this is something that we have already anticipated to you. We have always been delivering strong cash flows as a company, and we are, because of this strategy, because of this fully integrated approach between stores and online, we are becoming less capital-intensive. So cash flow generation is accelerating. It's becoming stronger and stronger. And we see in the first quarter the net cash position increasing 9%, having in mind that at the same time we are increasing dividend. So on a comparable basis, the net cash position would have increased more than 9% because during the last 12 months, we have paid more dividends than the 12 previous months. So -- but this has to do with the execution of the business model. And as we have anticipated to you, this is the trend in the business now because we are becoming less capital-intensive, so cash flow generation is becoming stronger and stronger.
That now concludes the webcast questions.
Well, thank you. And always, of course, our Capital Markets Department would be ready to answer any additional questions you may have. Thank you for joining us during the call.