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[Foreign Language] Good morning, everybody. A warm welcome to all of those attending this presentation of Inditex's results for the Interim 3 Months 2022. I am Marcos López, Capital Markets Director. The presentation will be chaired by Inditex's CEO, Oscar Garcia Maceiras; also with us is our CFO, Ignacio Fernández.
As usual, the presentation will be followed by a Q&A session, starting with the questions received on the telephone and then those received through the webcast platform. Before we start, we will take the disclaimer as read.
And now over to Oscar.
Good morning to everybody, and welcome to Inditex results presentation. In the first quarter of 2022, our fully integrated model has accelerated its differentiation. Let me cover some of the details. We have had a very strong operating performance as the initial Spring/Summer collections were very well received by our customers. This performance has been strong across all geographies with the exception being those markets subject to restrictions. The robust growth in the U.S. market continues to take place.
The period has been marked by a significant rebound in traffic to stores. Over the first quarter of 2022, our store sales increased markedly and to date continue to do so with store differentiation being key to this. The execution of the business model was very strong.
Our operating performance places us in a robust financial position. We have generated significant free cash flow, which takes our net cash position to EUR 9.2 billion. Based on the expansion of our fully integrated platform, we continue to see lower capital intensity going into the future. All this in conjunction with a predictable, attractive dividend policy.
Our diversified presence in 215 markets with low market penetration allows us to enjoy significant global growth opportunities. I have complete confidence in our unique business model.
Let me highlight some key figures for the year thus far. Sales reached EUR 6.7 billion, 36% higher versus the first quarter of 2021. As mentioned, traffic to our stores increased markedly.
To put the strength of the operating performance over the first quarter into context, we have generated the strongest gross margin in many years. We had made the decision to provision all expected expenses corresponding to the Russian Federation and Ukraine for 2022 with an extraordinary charge of EUR 216 million. Operating expenses were tightly managed and grew well below sales growth.
On the bottom line, net income increased 80% to EUR 760 million. The net income, excluding the provision, would have been EUR 940 million. Our operations continued to generate strong cash flows.
I would like to comment on some initiatives of this season, which are driving the increasing levels of commercial differentiation we are seeing. We continue providing the latest fashion in a fully integrated way. A good example of this is the seamless store and online execution that can be seen in the Zara Studio collection; or the Zara Man Studio; the Zara Kids Summer camp collection; Zara Home I am awake, a collection for newborns. Massimo Dutti's Limited edition editorial; Bershka Festival season; the Pull&Bear Dresses editorial; Stradivarius Ø waste denim collection, made 100% from recycled fibers; and finally, Oysho's on the beach collections.
I would like to highlight a key project of this season, the Zara store in Madrid's Plaza de España. The store is the largest Zara in the world, showcasing the ladies fashion with the most up-to-date image. It also includes all the features of our digital store mode, allowing a complete digital experience. For example, customers can use applications to geolocate products; to reserve fitting rooms; to use self-checkout through Pay & Go; to employ Click&Collect points for online orders; to use silos for online returns to the store; and finally, customers are able to use clothing recycling points, helping us to push forward in terms of circularity. All these factors combined to offer customers one of the most advanced store experiences anywhere today and serves to further demonstrate the clear advantages of our fully integrated approach.
I will hand you over to Ignacio now for the financial summary.
Thank you, Oscar. As you have seen in our release, Inditex had a very strong operating performance in the first quarter of 2022. We have executed well in what has been a challenging operating environment. We have managed the supply chain very actively, and this has driven a healthy performance in the gross margin.
Operating expenses have, of course, been tightly managed. As already mentioned, we have taken extraordinary charge of EUR 216 million in order to provision all expected expenses in the Russian Federation and Ukraine for 2022.
Net income increased 80% to EUR 760 million. Excluding the provision, the net income would have been EUR 940 million.
Sales have progressed very nicely at plus 36%, within EUR 6.7 billion.
It is important to note the strong rebound in traffic to Inditex stores during the quarter, which continues to date. As we've already commented, we have had a very strong performance across all regions with the exception of those markets subject to restrictions.
The strong progress made in the United States continues. The gross margin reached 60.1%, 20 basis points higher than in the same period in 2021 and shows a healthy execution of the business model. As a side note, this is the highest first quarter gross margin achieved in 10 years.
There has been very efficient management of operating expenses across all departments and business areas. This has demonstrated our ability to react and adapt to the changing and trading environment. As you can see, operating expenses increased below sales growth over the first quarter of 2022.
The strong execution over this period can be clearly seen in the evolution of working capital. As you can see in this table, the working capital has around 57% to EUR 3.3 billion.
The closing inventory grew by 27% and reflects the strong sales performance going into the second quarter. The inventory itself is of high quality.
We have decided to accelerate inventory inflows with our altering commitment levels in order to increase product availability in the face of possible supply chain tensions. We feel comfortable with the current inventory levels. This assumes in conjunction with the strong cash flow, took the net cash position to EUR 9.2 billion.
And now over to Marcos.
Thank you. Over the first 3 months, we have continued with our expansion and half opened stores in 16 different markets. We have progressed with optimization activities across all concepts. The store sales across all the concepts have been robust. Zara has generated an exceptional performance over the period. All the formats have progressed strongly, especially Stradivarius, Pull&Bear, and Bershka.
In May 2022, Inditex and Infinited Fiber Company, announced a partnership agreement that reflects the share goal of promoting innovative technologies that move the industry to a textile circularity. Inditex has committed to buying 30% of the future production volume of Infinna, a textile fiber produced by Infinited Fiber Company and created entirely from recycled clothes. The total commitment is for more than EUR 100 million over a 3-year period started in 2024.
As part of this partnership, Zara has launched a capsule collection that incorporates this innovative high-quality fiber. The project is another product of Inditex's sustainability innovation hub, our open innovation platform. We work with start-ups, academic institutions and tech centers to promote and scale up innovation in materials, technologies and processes that reduce the environmental footprint of fashion products and help move the industry to a sustainable and circular solutions.
Back to you, Oscar.
Thank you. We continue to deliver upon our long-term goals. The group enjoys a unique business model that fully integrates stores and online. This feature continues to be at the core of everything we do. We remain at an earliest stage in the development of all of these exciting potential. The talent of our teams here at Inditex is only matched by the level of commitment. It will be always be the case that these teams are our main competitive advantage.
Sustainability and digitalization also remain at the core of our strategy. I would like to reiterate that our main priority is always to invest in the future profitable growth of the business. Additionally, we will, of course, continue with our predictable and attractive dividend policy.
The strength of the fully integrated business model has been clear in recent times. We plan to continue developing these key long-term priorities in order to maximize organic growth. The goal is to increase our differentiation in order to provide a unique customer experience. A key focus is on high-quality stores with the aim that they be fully integrated, digital and eco-efficient.
As part of the strategy, we expect online sales to exceed 30% of group sales by 2024. Stable gross margins have always been a key focus for us. As we continue to invest in the business, we expect to deliver higher returns and lower capital intensity. We expect capital expenditure of EUR 1.1 billion for 2022, which will drive differentiation, digitalization and sustainability.
The interim dividend for the full year 2021 of EUR 0.465 per share was paid on the 2nd of May 2022. The final dividend for full year 2021 of EUR 0.465 will be paid on the 2nd of November. Inditex dividend policy of 60% ordinary payout and bonus dividends remains in place. As a reminder, in March, the Board of Directors also proposed a total bonus dividend of EUR 0.40 per share to be paid in relation to the fiscal 2022 results.
Spring/Summer collections have been very well received by our customers. Store and online sales in custom currency between 1st of May and 5th of June 2022, increased 17% versus the record period in 2021 plus 13% in the last 2 weeks versus the same period of 2021. Currently, 90% of our stores are open.
Thank you for attending. That concludes our presentation for today. We will be happy to answer any questions you may have.
[Operator Instructions] The first question comes from Richard Chamberlain at RBC.
Yes. Can I ask a question on the U.S., please? I see you calling out again as a particularly strong market. You're obviously seeing strong sales in the U.S. Is that sort of -- how are you seeing sort of profitability in that market now? Is it sort of broadly in line with the group average? Or is it kind of catching up with the group average?
Thank you, Richard. Well, the performance is due to the strong execution of our business model and our ability to offer collections with high fashion component. As we mentioned to you, at the end of 2021, the U.S.A. is now the second largest market for Inditex after Spain. This provision in the first quarter was very positive from a global basis. We are very happy, up 36%. And geographically, sales have been remarkable in all markets with the only exception of those subject to restrictions. The strong growth in the U.S. continues, and the most important factor in the quarter is the strong rebound in store traffics at Inditex's stores.
The next question comes from Anne Critchlow at Societe Generale.
My question is about footfall. You mentioned that footfall was up very strongly year-on-year. I'm just wondering how much it is up compared to the same period in 2019, say, versus pre-pandemic level in the stores that are open?
I think the answer to that question is very clear and is one of the key topics of these results. We have seen a very, very significant sales growth, 36%. And the main driver of that was wish of customers to try to return to the normalized. Clearly, the impact we have seen in store traffic has been across the board. I cannot just signal one market. It's very much a global trend. As in the same way, you've seen that we have kept with a very healthy progression of -- in our online sales because given the strong comparable, the adjustment you have seen in this quarter is not very noticeable.
So what I would say is that the fully integrated operation of Inditex is -- provides very strong advantages. It's the business model. So clearly, we are very much in positive terms over 2019 as we have shown in our results. And this continues into the second quarter, and we think this is the most important message.
The next question comes from Rebecca McClellan from Santander.
Can you hear me?
Yes.
yes. My question is about inventory. Of the 27% inventory growth year-on-year at the end of 1Q, how much of that reflects average unit cost inflation versus actual volume growth, please?
Well, what we have said in the note is that inventory is of very, very high quality. The main driver there is the decision of the company to bring forward some shipments to make sure that we had the right inventory in case there were tensions in the supply chain. And obviously in the inventory, there's always a mix effect and also the price adjustment that we mentioned over the first quarter.
However, we have -- inventory remains very, very healthy. We're selling very well, as you can see in the first quarter, 36%. And we are not -- we are very, very confident in the inventory we have right now. So all this is reflected in inventory levels that are very much in line with the strong trading update that we have provided.
The next question comes from Warwick Okines at Exane BNP.
I've got a question about the EUR 216 million Russian provision, please. Could you say how much is cash and how much is continuing to pay rent and staff versus asset impairments or inventory write-downs?
Well, to be precise, what the provision reflects is all expected expenses up to the end of this year, right? So right now, it's a noncash provision.
The next question comes from Nick Coulter at Citi.
Sorry. Can I ask if you're seeing any volume response in any of your markets as you push pricing through, please? And if you're seeing resilience, whether you think that's unique to Inditex?
Thank you, Nick. Well, you know that we have a stable pricing policy. And only in those markets with temporary material inflation or currency depreciation, we make the necessary adjustments by commercial format, by product to protect our margins. Giving these selected actions, we continue to expect pricing to contribute to 2022 Spring/Summer sales in mid-single digits with no impact on volumes as we announced in March. And we remain focused on the season, and we -- you should not expect significant changes in our pricing policy going forward.
The next question comes from James Grzinic at Jefferies.
Congratulations on a set of numbers. I was just going to ask, can you perhaps talk us through the experience of trying to insert a little bit more discipline on returns in the industry? I think you started charging in a growing number of markets for consumers to return their online orders and not at store, be interesting to understand how that has developed and what the results you've seen on the returns experience.
Yes. Thank you very much, James. Well, at the end of last year, we started with this exercise to introduce some charges for returning in a number of markets, started in South Korea. We now have this policy in 38 markets. What we can tell you is that the reason behind these are two. First one is to obtain more efficiency in the management of these returns. And second is for sustainability reasons as well. There is a real point in trying to make this more efficient and more sustainable. The impact so far has been positive in the sense that there is no impact on sales. We have increased the return of the stores. And clearly following customer satisfaction, there are no real in terms of the level of sales that we have achieved. So clearly, we believe that this is a process that may continue over time to make our industry more efficient and more sustainable.
Thank you very much. We're now going to address the questions received through the webcast platform. You're doing some interesting things regarding your Innovation Hub. Can you please tell us a little bit more about Lanzatech and Infinited Fiber?
Thanks for the question. Well, at Inditex, sustainability is not merely something objective. It's at the core of our way of doing things, embedded in every single decision we take. And our approach to sustainability is decidedly linked to innovation. In this regard, we have our sustainability Innovation Hub. In March, we announced our agreement with Lanzatech. And now we are announcing our agreement with Infinited Fiber Company. And we are launching our capsule collection in Zara using this innovative fiber. I guess that you should expect new exciting projects and initiatives around sustainability to come in the near future.
Thank you very much. That concludes the Q&A session today. Now let me hand you over to Oscar for the closing remarks.
Well, thank you to all of those participating in the presentation today. For any additional questions you may have, please get in touch with our Capital Markets Department, and we will welcome you back in September for the 2022 first half results. Goodbye.