Investors forecast a 40% drop in sales between February and April and a negative operating result from the Covid-19 crisis.
Inditex could present next week the first quarterly losses in its history since it went public in 2001. The company, which has already reopened most of its stores in the world, faces a potential drop in revenue of around 40 % between February and April due to the closing of trade in the world, according to the consensus of analysts from Bloomberg. The decrease would mean losing 2,500 million in sales, going from the 5,927 million that was invoiced in the first quarter of 2019 to 3,500 million.
On March 18, Inditex reported a sales drop of 5% between February and the first half of March. In addition, he noted that at that time he had half of his stores closed and the figure was expected to grow in April. If we add to this that, where it has been able to open, it has most likely lost sales due to the sharp drop in consumption, and that the online channel is not compensating for the drops, the market estimates an 80% decrease in revenue in the second half of the year. quarter, which would give the average of a fall of around 42% in the period.
Estimates regarding Inditex are usually fine, although the coronavirus crisis, by depth and speed, is a hitherto unknown terrain. Analysts usually calculate sales by adding the expected comparable growth, the increase in area and the impact of currencies, but this time it will not be so easy, so it is more likely that there will be a certain mismatch between forecasts and reality, as they acknowledge. .
If there is a drop in revenue of this depth, as the market believes is going to happen, it will be difficult for the company to avoid losses. “Inditex is a company with considerable operating leverage, since many of its costs are fixed. And in those that are variable, such as the case of personnel, Inditex has shown a commitment to its staff in some markets, such as Spain, and not ERTE has done “, they explain from a Spanish bank.
Losing 2.5 billion in revenue would force Inditex to cut its operating expenses by 1.5 billion compared to the first quarter of 2019 if the company does not want to lose, since then its operating profit (ebit) was 980 million. It is foreseeable that the company has reduced inventory purchases and renegotiated rents, to which must be added that part of what it pays for them is referenced to sales. In addition, personnel savings are foreseeable because in some markets it has activated temporary employment records. Despite this, “cutting 1.5 billion costs in a quarter is very complicated. It remains to be seen how flexible the company is in this regard, but it would certainly have great merit in achieving it,” says one of the analysts consulted.
The consensus foresees a two-point drop in gross margin, from 59.5% to 57.7%, while estimating a negative operating result, compared to 980 million positive a year earlier. Some analysts believe that if the losses are small it would demonstrate “a great adaptation to an unprecedented market situation”. The sources consulted say that it is more difficult to give an estimate of the net result, but the consensus also predicts that it will be negative.
“It is a never-before-seen situation that will generate very negative results and the second quarter of the year could be the same or worse,” explains Iván San Félix, of Renta4. Now, “if there is a company prepared to face this situation, it is Inditex. It has no debt and has more than 8,000 million in cash”, explains this analyst.
The market also downplays any quarterly losses, as it is an extraordinary situation. The de-escalation in its main markets has already begun and it is expected that it will be able to cushion the blow in the third and fourth quarters, the ones that weigh the most on its sales and margins.
The impact affects the entire sector
There are still few textile companies that have shown the true impact of the Covid crisis since those whose exercise coincides with the calendar year will do so in the second quarter. However, there are already clues to predict a deep impact. H&M cut its sales by 46% in March and ended the month with 75% of stores closed, a situation that has continued in April and much of May. For his part, Ralph Lauren had a drop in sales of 15% and losses of $ 249 million until March, while Hugo Boss left 16% of sales and lost 18 million euros. In both cases, the second quarter will be worse. Yesterday, American Eagle announced losses of $ 257 million between February and April. Uniqlo is one of the few major groups that will have the most content impact, as its business is focused in Asia, where store closings have lasted less. It expects to close the quarter with a 60% decrease in profit, although positive. Read