Zara Owner Inditex Sees Gains as BofA Declares It ‘Best-in-Class Fashion Retailer’

Inditex, the parent company of Zara and one of the largest listed apparel retailers in the world, is gaining attention for its impressive growth potential and robust business model, which analysts at BofA have defined as “best-in-class.”

In a recent report, BofA analysts reinstated coverage of Inditex with a “buy” rating and a price target of €61 per share (approximately $34.2 for American Depositary Receipts). They highlighted several growth drivers and strategic realignments that they believe will enable the company to maintain strong performance.

The analysts project that Inditex’s business model will likely sustain growth rates two to three times above the market average. This expansion is anticipated to be fueled by the retailer’s efforts to enhance sales density—sales per square meter in its stores—while also returning to physical store growth.

Over the past decade, Inditex has successfully increased its full-price sell-through rate, a trend expected to keep progressing. This improvement, combined with operational efficiency, is forecasted to elevate the company’s gross margins to 58.1% by fiscal year 2025, with EBIT margins rising to 19.7%.

Inditex’s shares currently trade at a 24x price-to-earnings ratio, aligning with the historical average, and are projected to achieve a 12% compound annual growth rate in earnings per share over the next three years, supported by a solid 4% dividend yield.

The company has effectively rationalized its store base over the last four years by prioritizing fewer but larger locations. This strategy has led to a remarkable 50% increase in sales density, with analysts anticipating further growth as the company continues down this path.

The U.S. market represents a significant growth opportunity for Inditex, accounting for around 11% of its sales yet holding a relatively small 0.75% market share compared to over 2% globally. BofA predicts a 9% organic revenue compound annual growth rate through 2027, driven by 2% growth in physical store space and 7% increase in like-for-like sales.

Inditex plans to make substantial investments in its infrastructure, with capital expenditures expected to reach about €5.4 billion over the fiscal years 2025-2026. This includes the construction of a new distribution center in Spain, which analysts note is triple the capital spending of its nearest competitor.

The firm’s strong balance sheet, with a net cash-to-EBITDA ratio of 1.2x, provides the financial foundation necessary to support its growth objectives in the years ahead. BofA expects a 12% compound annual growth rate in earnings per share over the next three years fueled by these investments and operational efficiencies.

Inditex’s leadership in the global fashion industry is evident in its fiscal year 2024 results, reporting €36 billion in sales and €6.8 billion in operating profit. The company operates seven main retail brands: Zara, Zara Home, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho.

While Spain remains its largest market, the U.S. is rapidly becoming a significant contributor to its growth, with both markets achieving their highest growth rates in fiscal year 2024. BofA notes that Inditex has effectively transitioned from a strategy focused on increasing store count to one emphasizing enhanced sales density in existing locations. By reducing its overall store count by 24% and replacing smaller stores with larger, more profitable ones, Inditex is well-positioned for future growth.