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Inditex Shares Are Overvalued, Deutsche Bank Analysts Say

A woman and a child carry Zara shopping bags along Brompton Road in Knightsbridge, London.
Deutsche Bank AG analyst Adam Cochrane downgraded the fast-fashion merchant to sell from hold as part of a gloomy assessment of the wider European retailing scene. (Mike Kemp/In Pictures via Getty Images)

Zara owner Inditex SA got a rare sell rating on Wednesday. From a not unfamiliar source.

Deutsche Bank AG analyst Adam Cochrane downgraded the fast-fashion merchant to sell from hold as part of a gloomy assessment of the wider European retailing scene.

Inditex is something of a favourite among analysts, with a majority having a buy or equivalent recommendation on a stock that has clearly outperformed peers and the broader market in recent years. Cochrane has long been absent from that camp, starting coverage with a sell rating in August 2021, before moving to hold in February.

“In addition to our cautious view on global clothing, we see the competitive position of Inditex being eroded,” Cochrane wrote in a note. Expectations for high single-digit sales growth and Ebit margin expansion over the next few years are “too ambitious,” he said.

Shares in Inditex dropped 1.3 percent to €38.01 ($41.04) in Madrid, trimming their year-to-date gain to 52 percent. The stock has only one other sell or equivalent rating, in addition to 21 buy recommendations and 11 holds, among analysts tracked by Bloomberg.

According to Cochrane, Inditex has much to do if it is to maintain sales growth at “elevated levels.” The retailer will need to increase marketing spend, embrace more collaborations with celebrities and influencers, and invest more in its stores to improve service levels, he said.

Bloomberg has reached out to Inditex for comment.

More broadly, the analyst believes European retailers will suffer an intensifying squeeze next year from higher wage costs and weaker demand from shoppers, predicting 2024 to be a “time of shade” for the sector.

“The spending bubble we have seen despite inflationary pressures and interest rate hikes is set to burst,” Cochrane and his colleague Talia Slater wrote. “What does that leave to look forward to in 2024? Not a lot in our view.”

Inditex, Hennes & Mauritz AB, Primark owner Associated British Foods Plc and Kingfisher Plc were named as Deutsche Bank’s “least preferred” stocks in the sector, with Cochrane seeing all these as either exposed to a weakening clothing market or with a margin recovery fully priced in. He also downgraded H&M to sell.

Cochrane does see some bright spots for 2024. Adidas AG, Zalando AG, B&M European Value Retail SA and Marks & Spencer Group Plc have delivered strategic changes which are yet to be fully recognized by the market, he wrote, naming them as top picks.

By Joel Leon

Learn more:

Inditex Strives to Make Fashion Faster With More Zara Deliveries

More frequent deliveries allow companies such as Zara to cut the number of so-called lost sales due to unavailable stock, as it allows to make more products available to clients.

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