On Thursday, RBC Capital downgraded the stock of global fashion retailer Inditex (BME:ITX), which is known for brands like Zara and Massimo Dutti, from "Sector Perform" to "Underperform." The firm also adjusted the price target for Inditex shares from €52.00 to €50.00. This change in the stock's outlook comes as RBC Capital expresses concerns about the company's future revenue growth and potential headwinds.
The analyst from RBC Capital highlighted that expectations for Inditex's top-line growth exceeding 8% for the next year might be overly optimistic. This skepticism is based on the company's already large sales base and the prior strong performance of its key markets, particularly in southern Europe. The analyst's statement points out that these markets may not sustain the same level of growth moving forward.
Another factor influencing the downgrade is the anticipated challenge of currency headwinds due to a stronger U.S. dollar. Like its peers in the fashion retail sector, Inditex is expected to face difficulties related to U.S. dollar sourcing, which could impact the company's gross margin percentage. The analyst indicated a reluctance to forecast an increase in gross margins for the upcoming year.
Operational expenditures (opex) leverage for Inditex may also be limited. This is attributed to a combination of factors: a more moderate like-for-like (LFL) sales growth, the company's ongoing store expansion strategy, and an increase in depreciation and amortization expenses due to significant capital expenditures on logistics investments. These elements collectively suggest a tightening of financial performance.
In light of these considerations, RBC Capital is projecting a 7% growth in earnings per share (EPS) for Inditex next year, which is a deceleration from this year's 9% growth. The firm's revised stance and price target reflect a cautious outlook on Inditex's ability to maintain its growth trajectory amid the outlined challenges.
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