Morning Note: Market news and updates from adidas and retailer Inditex.

Market News

US inflation for February came in slightly higher than forecast, reducing the prospect of rate cuts. CPI (all items) was 3.2% versus 3.1% expected, Core CPI (ex-food and energy) came in at 3.8% versus 3.7% expected. The dollar strengthened and gold fell to $2,160 an ounce. US equity markets rose: S&P 500 (+1.1%), Nasdaq (+1.5%). The 10-year Treasury currently yields 4.15%. Hedge funds are unwinding short Treasury futures bets at a rapid clip, a sign that basis-trade positions are diminishing. This is probably due to asset managers pivoting into investment-grade credit, BofA strategists said.

Meanwhile in Europe, the ECB is in broad agreement to begin lowering rates in the spring as the battle against inflation is being won, Francois Villeroy said. Robert Holzmann cautioned that easing ahead of the Fed may cause an investor reaction. “Europe is not the 13th district of the Fed, but what the Fed does matters.”

This morning in Asia, the yen jumped and JGB futures fell after Toyota, Nippon Steel, and others agreed to hike wages. A top government economist said recent price data shows Japan is at an “important moment” after 25 years of malaise. Equity markets drifted lower: Nikkei 225 (-0.3); Hang Seng (flat); Shanghai Composite (-0.4%). Cathay generated a record operating profit driven by a strong recovery on higher ticket prices.

The UK economy grew by 0.2% month on month in January, in line with expectations, while industrial production grew by 0.2%, better than the flat forecast. Andrew Bailey said the UK is near or at full employment but signalled he’s less concerned about a wage price spiral developing. There’s “very limited evidence” that an increase in unemployment is needed to curb inflation.  Sterling currently trades at $1.2793 and €1.1705. The FTSE 100 is currently little changed at 7,756.

Global dividends hit a record $1.66tn last year, according to Janus Henderson. Payouts were up 5%, with almost half the growth coming from the banking sector. It’s the third annual record for dividends and the fund manager expects another all-time high this year.

Source: Bloomberg

Company News

This morning, adidas released results for 2023 with further detail than that provided with the February trading update. Guidance for 2024 was reiterated with growth expected to be second-half weighted. In response the shares have been marked down 3% in early trading.

adidas is a multi-brand sporting goods company. Its products have traditionally had a broad global appeal from serious athletes, casual athletes to sports fashion, and from mid-price to high-price points. As a result, the group should be well placed to benefit from the continued focus on health and fitness, the rising middle class in emerging markets, and fashion trends in sportswear.

However, in 2023 trading was impacted by initiatives to reduce high inventory levels. In addition, the termination of the highly profitable adidas Yeezy partnership with rapper and fashion designer Kanye West had a negative effect on the top-line, representing a drag of around €500m.

Revenue was flat in currency-neutral terms at €21.4bn. Excluding the impact of the Yeezy revenue, growth was 2% driven by the accelerating momentum in the company’s underlying business as the group focused on full-price sales. In the final quarter, sales were down 2% in currency-neutral terms.

By region, the results were weak in North America (-16%) as this market was particularly affected by the negative Yeezy impact as well as the company’s conservative sell-in strategy to reduce high inventory levels. Elsewhere, sales were flat in the EMEA region, while growth was achieved in Latin America (+22%), Asia-Pacific (+7%), and Greater China (+8%).

By channel, wholesale fell by 4% despite double-digit growth in Latin America and Greater China. The direct-to-consumer (DTC) business grew by 3%, with e-commerce falling by 5% and own retail up 12%.

By category, footwear grew by 4%, while apparel fell by 6%, and accessories grew by 3%. The group launched and scaled some of the most popular footwear models in the market including Samba, Gazelle, Spezial, and Campus. 2024 should be a great year to showcase the brand with the Olympics, Paralympics, EURO 24, and Copa America 2024.

The company’s gross margin grew by 20 basis points in the year to 47.5% as a better business mix and lower freight costs were largely offset by currency effects, higher product costs, and higher discounting.

Operating profit fell by 60% to €268m, although this was much better than the group’s original forecast provided at the beginning of 2023 for a loss of €700m. The performance was driven by better-than-expected operational business in Q4 (€377m) and the company’s decision not to write off the vast majority of its existing Yeezy inventory. Instead, the company plans to sell the remaining product at least at cost in 2024. The operating margin fell from 3.0% to 1.3%.

The group’s balance sheet remains stable, with net debt falling from €6.0bn to €4.5bn (3.3x EBITDA). Inventories were down by 22% on a currency neutral basis to €4.5bn due to the company’s successful initiatives around inventory management, including significantly reducing buying volumes and tactically repurposing existing inventory. With the exception of the US, the group now has healthy inventories everywhere.

The board has proposed a stable dividend of €0.70 per share, equal to a yield of only 0.4%. Going forward, the company plans to return to its dividend policy of paying an annual dividend to shareholders in the range of 30% to 50% of net income from continuing operations.

The group reiterated its financial guidance for 2024. Currency-neutral revenue is expected to grow at a mid-single-digit rate, with the second half growing faster than the first. This assumes adidas will sell the remaining Yeezy inventory at cost, which would result in sales of around €250m in 2024. Excluding this impact, growth at a high-single-digit rate is expected in the underlying adidas business. The company is also expecting to generate an operating profit of around €500m.

Source: Bloomberg

Inditex has today released its results for its financial year to 31 January 2024 (known as FY2023). The figures were strong and current trading remains very robust. In response, the shares have been marked up 4% in early trading.

Inditex is the world’s leading apparel retailer, with annual sales of almost €36bn. Through brands such as Zara, Pull & Bear, and Massimo Dutti, the group has around 5,700 managed and franchised stores and a strong online presence.

The company’s strategy based on fast fashion at attractive prices has met with headwinds on environmental grounds and, in response, the group is transforming towards a fully integrated, digital, and sustainable business model. With a low share of a highly fragmented market, the company sees strong growth opportunities, with sales productivity in its stores increasing. The group is undertaking an ongoing store optimisation plan – in 2023, there were openings in 41 markets. Online sales are expected to exceed 30% of total sales by 2024.

In FY2023, sales grew by 14.1% in constant currency to €35.9bn, with growth in all geographic areas and in all concepts. Store sales grew by 7.9%, reflecting incremental footfall in increased store productivity, while online sales grew by 16%.

Gross profit increased by 11.9% to €20.8bn and the gross margin rose by 77 basis points to 57.8%, slightly better than guidance. The group has continued to ‘rigorously’ manage its operating expenses, which grew by 10.0%, below the rate of sales growth. Net income increased by 30.3% to €5.4bn, slightly better than the market forecast.

Due to the strong operating performance and normalisation of supply chain conditions, inventory was 7% lower at 31 January 2024 than last year. Free cash flow generation was strong, and the group ended the period with net cash of €11.4bn, up 13%. The board is proposing a dividend of €1.54 (3.6% yield), up 28% on last year, and made up of an ordinary dividend of €1.04 and a bonus dividend of €0.50.

The company has continued to trade well in the current quarter – between 1 February and 11 March, store and online sales rose by 11% year on year and Spring/Summer collections “very well received” by customers. The growth of annual gross space in the period 2024-2026 is expected to be around 5%. The group expects a stable gross margin this year.

Source: Bloomberg