December 6, 2023
Zara owner Inditex SA earned a rare sell rating on Wednesday. From an unknown source. Deutsche Bank AG analyst Adam Cochrane downgraded the fast fashion retailer to sell from hold as part of a gloomy assessment of the broader European retail landscape.
Inditex is something of a favorite among analysts, with most having a buy recommendation or equivalent on a stock that has clearly outperformed its peers and the broader market in recent years. Cochrane has long been absent from that field, beginning coverage with a sell rating in August 2021, before moving to hold it in February.
“In addition to our cautious view on global apparel, we see Inditex’s competitive position eroding,” Cochrane wrote in a note. Expectations of single-digit sales growth and Ebit margin expansion in the coming years are “overly ambitious,” she said.
Inditex shares fell 1.3% to 38.01 euros in Madrid, cutting its year-to-date gain to 52%. The stock has only one other sell or equivalent rating, along with 21 buy and 11 hold recommendations, among analysts tracked by Bloomberg.
According to Cochrane, Inditex has a lot to do if it wants to maintain sales growth at “high 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 contacted Inditex for comment.
More broadly, the analyst believes European retailers will come under increasing pressure next year due to higher wage costs and lower shopper demand, and predicts 2024 will be a “dark time” for the sector.
“The spending bubble we have seen despite inflationary pressures and interest rate increases is about to burst,” wrote Cochrane and his colleague Talia Slater. “What lies ahead for us in 2024? In our opinion, not much.”
Inditex, Hennes & Mauritz AB, Associated British Foods Plc, which owns Primark, and Kingfisher Plc were named Deutsche Bank’s “least preferred” stocks in the sector, and Cochrane believes they are all exposed to a weakened or with a fully discounted margin recovery. It 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 made strategic changes that have not yet been fully recognized by the market, he wrote, naming them as top picks.