21 March 2017

Europe/Spain
Equity Research
Apparel

Inditex (ITX.MC)
Rating UNDERPERFORM
Price (20 Mar 17, €) 32.04 RESULTS
Target price (€) 25.00
Market Cap (€ m)
Enterprise value (€ m)
99,841.9
93,364.9
Deconstructing the data
Target price is for 12 months.
Research Analysts
■ While Inditex's reports and conference calls tend to be short, with little
Simon Irwin
colour on many key drivers, FY results do give a reasonable degree of
44 20 7888 0320 data on a geographical and format basis. As the world's largest and most
simon.irwin@credit-suisse.com influential apparel retailer, this data does reward some considered analysis.
Pradeep Pratti, CFA
44 207 888 5043 ■ While the picture for space growth is obscured by accelerating
pradeep.pratti@credit-suisse.com absorptions (165 last year), average space growth is slowing at c60bp pa,
and new space conversion is not improving sustainably, despite the focus on
higher quality flagship space in developed markets, which may help explain
the lack of cost leverage.
■ We have broken down the contributors of LFL sales, to exclude space
maturity and online, since it doesn’t appear to leverage costs. This measure
was flat for 7 years, and has spiked to c5% over the past 2 years, driven we
assume by RFID adoption, great collections and significant price reductions.
In our view there is a real risk that as price cuts start to moderate, LFL sales
growth will also start to moderate, especially as peers respond with price cuts
of their own, which appears to have been the case in S/S 17 in particular.
■ We are leaving current year forecasts unchanged and reducing 18/19 by
c2%. The key is that, after two very good years of execution, we see no
reason why margins and EPS growth are now suddenly about to accelerate,
as is currently implied by consensus forecasts. We forecast 9.1% avg EPS
growth over the next 4Y, and on 28x 12m FWD PER the shares trade at 2.4x
PE/TSR vs 1.5x over the past decade. As with all high margin retailers we
see risks to margins firmly on the downside particularly as they mature,
however our DCF of €23.3x has cashflow/sales averaging 12% into
perpetuity which is higher than it has averaged in its history. Given its size
and maturity, its current rating discounts sales growth, margins and cash
generation accelerating in perpetuity which seems very demanding.
Share price performance Financial and valuation metrics
35 Year 1/16A 1/17A 1/18E 1/19E
30
Revenue (€ m) 20,900.0 23,311.0 25,971.3 28,435.4
EBITDA (€ m) 4,698.7 5,083.0 5,653.7 6,129.9
25
Adjusted net income (€ m) 2,874.60 3,157.00 3,521.33 3,818.95
20 CS EPS (adj.) (€) 0.92 1.01 1.13 1.23
15 Prev. EPS (€) - 1.02 - 1.25
Ju l - 1 5 Jan - 1 6 Ju l - 1 6 Jan - 1 7 P/E (adj.) (x) 34.7 31.6 28.3 26.1
P/E rel. (%) 162.0 191.3 194.6
IT X.M C M A D RID SE IN D EX
EV/EBITDA (x) 20.1 18.4 16.5 15.2
The price relative chart measures performance against the Dividend (01/18E, €) 0.58 Net debt/equity (01/18E,%) -49.3
MADRID SE INDEX which closed at 1030.7 on 20/03/17 Dividend yield (01/18E,%) 1.8 Net debt (01/18E, € m) -6,477.0
On 20/03/17 the spot exchange rate was €1/Eu 1.- BV/share (01/18E, €) 3.1 IC (01/18E, € m) 6,650.9
Eu.93/US$1
Free float (%) 33.0 EV/IC (01/18E, (x) 14.0
Performance 1M 3M 12M Source: Company data, Thomson Reuters, Credit Suisse estimates
Absolute (%) 3.3 -0.2 7.7
Relative (%) -4.1 -8.9 -5.0

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit
Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision.
 21 March 2017

Inditex (ITX.MC)
Price (20 Mar 2017): €32.035; Rating: UNDERPERFORM; Target Price: €25.00; Analyst: Simon Irwin
Income statement (€ m) 1/16A 1/17A 1/18E 1/19E Company Background
Revenue 20,900 23,311 25,971 28,435 Inditex is the largest apparel retailer in the world through its Zara
EBITDA 4,699 5,083 5,654 6,130 format and other brands which include Bershka, Pull & Bear. It is
Depr. & amort. (1,022) (1,063) (1,168) (1,262) based in Spain (25% of sales) however it is present in 82 markets as
EBIT 3,677 4,020 4,486 4,868 it expands overseas and via e-commerce.
Net interest exp. 10 10 30 32
Associates 56 48 51 53 Blue/Grey Sky Scenario
PBT 3,743 4,078 4,567 4,953
Income taxes (861) (917) (1,041) (1,129)
Profit after tax 2,882 3,161 3,526 3,824
Minorities (8) (4) (4) (5)
Preferred dividends - - - -
Associates & other 0 0 0 0
Net profit 2,875 3,157 3,521 3,819
Other NPAT adjustments 0 0 0 0
Reported net income 2,875 3,157 3,521 3,819
Cash flow (€ m) 1/16A 1/17A 1/18E 1/19E
EBIT 3,677 4,020 4,486 4,868
Net interest 10 10 30 32
Cash taxes paid (977) (798) (1,041) (1,129)
Change in working capital 602 (275) 175 217
Other cash and non-cash items 1,122 1,116 1,139 1,232
Cash flow from operations 4,434 4,073 4,789 5,220
CAPEX (1,552) (1,445) (1,528) (1,607)
Free cashflow to the firm 3,616 3,223 3,855 4,210
Acquisitions - - - -
Divestments - - - -
Other investment/(outflows) 0 0 0 0
Cash flow from investments (1,552) (1,445) (1,528) (1,607)
Net share issue/(repurchase) 0 (35) 0 1
Dividends paid (1,626) (1,871) (2,119) (2,431)
Issuance (retirement) of debt - - - - Our Blue Sky Scenario (€) 27.50
Cashflow from financing (2,488) (2,804) (3,017) (3,328) Our blue sky scenario involves increasing 2017 EPS by 5%,
Changes in net cash/debt 1,291 790 386 368 increasing the terminal EBIT margin by 100bp and increasing TGR
by 100bp. We then apply higher valuations than our core ie 1.75x
Net debt at start (4,010) (5,301) (6,091) (6,477) PE/TSR and 25x PER. This gives a valuation of €27.5.
Change in net debt (1,291) (790) (386) (368)
Net debt at end (5,301) (6,091) (6,477) (6,846) Our Grey Sky Scenario (€) 21.00
Balance sheet (€ m) 1/16A 1/17A 1/18E 1/19E Our grey sky scenario involves decreasing 2017 EPS by 5%,
Assets reducing the terminal EBIT margin by 100bp and decreasing TGR
Total current assets 8,450 9,899 10,592 11,339 by 100bp. We then apply lower valuations than our core ie 1.25x
Total assets 17,358 19,622 20,558 21,751 PE/TSR and 20x PER. This gives a valuation of €21.0.
Liabilities
Total current liabilities 4,601 5,387 5,860 6,446 Share price performance
Total liabilities 5,906 6,870 7,370 7,984
Total equity and liabilities 17,358 19,622 20,498 21,692
35
Per share 1/16A 1/17A 1/18E 1/19E
No. of shares (wtd avg.) (mn) 3,116 3,116 3,116 3,116 30
CS EPS (adj.) (€) 0.92 1.01 1.13 1.23
Dividend (€) 0.47 0.50 0.58 0.63 25
Free cash flow per share (€) 1.16 1.03 1.24 1.35
20
Key ratios and valuation 1/16A 1/17A 1/18E 1/19E
Growth/Margin (%) 15
Sales growth (%) 15.4 11.5 11.4 9.5
May- 15 Sep- 15 Jan- 16 May- 16 Sep- 16 Jan- 17
EBIT growth (%) 15.0 9.3 11.6 8.5
Net income growth (%) 15.0 9.8 11.5 8.5
ITX.MC MADRID SE INDEX
EPS growth (%) 15.0 9.8 11.5 8.5
EBITDA margin (%) 22.5 21.8 21.8 21.6
EBIT margin (%) 17.6 17.2 17.3 17.1 The price relative chart measures performance against the MADRID SE INDEX
Pretax profit margin (%) 17.9 17.5 17.6 17.4 which closed at 1030.7 on 20/03/17
Net income margin (%) 13.8 13.5 13.6 13.4 On 20/03/17 the spot exchange rate was €1/Eu 1.- Eu.93/US$1
Valuation 1/16A 1/17A 1/18E 1/19E
EV/Sales (x) 4.5 4.0 3.6 3.3
EV/EBITDA (x) 20.1 18.4 16.5 15.2
EV/EBIT (x) 25.7 23.3 20.8 19.1
Dividend yield (%) 1.47 1.56 1.80 1.95
P/E (x) 34.7 31.6 28.3 26.1
Credit ratios (%) 1/16A 1/17A 1/18E 1/19E
Net debt/equity (%) (46.3) (47.8) (49.3) (49.9)
Net debt to EBITDA (x) (1.1) (1.2) (1.1) (1.1)
Interest coverage ratio (x) (367.7) (402.0) (147.3) (151.7)
Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates

Inditex (ITX.MC) 2
 21 March 2017

Key Charts
Figure 1: Price momentum – the shares are still
oversold vs the market Figure 2: Earning momentum remains flat
40% 10% 1.4 35
Overbought 9%
30% 1.2 30
8%

20% 7% 1.0 25

Inditex Share Price (€)

EPS (EUR)
6%
10% 0.8 20
5%
0.6 15
0% 4%

3% 0.4 10
-10%
2%
Oversold 0.2 5
-20% 1% Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
FY12 FY13 FY14 FY15 FY16
ITX % dev from 6m ave, lhs Average (+/-1SD) ITX rel to Eurostoxx FY17E FY18E FY19E Share Price

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

Figure 3: 12M Fwd PE – the shares have started to Figure 4: …the de-rating is notable particularly
de-rate relative to the local market
34 2.6

2.4
29
2.2

24 2.0

1.8
19
1.6
14
1.4

9 1.2
Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17
ITX Fwd PE average +1 SD -1 SD 1.0
Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

Figure 5: Almost all components of growth are Figure 6: However the valuation of that growth is
slowing vs its history considerably higher
-10y Avg +4Y Avg -10y Avg +4Y Avg
Space Growth (% chg pa) 11.1% 6.7% 65% P/O
Space Contbn (% chg pa) 9.7% 5.2% EPS Growth 12.6% 9.1%
LFL Sales (avg) 4.7% 5.0% Avg Yield 2.24% 2.3%
Gross margin (bp) 27 -70 TSR 14.8% 11.4%
Opex as % sales 145 47 12m FWD PE 21.9 27.9
Tax rate change (bp) -358 0 PE/TSR 1.48 2.44
EPS growth 12.6% 9.1%

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Inditex (ITX.MC) 3
 21 March 2017

Breaking down sales, LFL and space contribution is

becoming quite complex
If nothing else 4Q was notable as being the first quarter when the number of Zara stores
actually fell (-8 Q/Q) while net store openings (+46) were near record lows:

Figure 7: Net store openings are falling rapidly

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1Q Zara* 53 45 51 22 27 22 28 12 19 15 17
Group 114 114 145 95 98 110 91 49 53 63 72
2Q Zara* 28 25 21 27 22 17 12 7 17 9 2
Group 94 91 104 71 75 67 75 46 67 31 11
1H Group 208 205 249 166 173 177 166 95 120 94 83
3Q Zara* 52 70 60 31 39 46 50 38 32 36 40
Group 118 206 207 100 127 181 194 145 110 136 150
4Q Zara* 41 46 27 23 35 28 30 19 28 17 -8
Group 113 149 117 77 137 125 122 91 113 100 46
2H Group 231 355 324 177 264 306 316 236 223 236 196
FY Zara * 174 186 159 103 123 113 120 76 96 77 51
Group 439 560 573 343 437 483 482 331 343 330 279
Source: Company data, Credit Suisse estimates

Gross openings are slowly falling (444 in 16/17 vs an average of 507 in the prior 4Y), but
another major feature is the amount of churn in the store estate as it increasingly focuses
on Flagships. There were 165 absorptions in 16/17 vs an average of 135 in the prior 3Y,
and guidance for the current year is another 150-200, giving net store openings of c300:

Figure 8: Store park churn is accelerating

Stores 2013/16 13/16 Avg FY 16/17 2013/17
Gross Openings 2026 507 444 2470
Refurbs 1458 365 424 1882
Enlargements 572 143 191 763
Absorptions -540 -135 -165 -705
Net Openings 1486 372 279 1765
Source: Company data, Credit Suisse estimates

With fewer larger openings, and more closures, net new stores averaged 1,161sm in
16/17, double the chain average:

Figure 9: Net new stores of 1,161sm were double the chain average – however average space growth is
slowing at c60bp pa and conversion isn’t increasing sustainably
Stores, space & sales 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E
Net new stores 343 437 483 482 331 343 330 279 306 322 340 356
Year end stores 4,607 5,044 5,527 6,009 6,340 6,683 7,013 7,292 7,598 7,920 8,260 8,616
% chg 8.0% 9.5% 9.6% 8.7% 5.5% 5.4% 4.9% 4.0% 4.2% 4.2% 4.3% 4.3%
Increase in selling space (sm) 167,819 238,939 251,333 322,468 280,521 344,130 300,805 323,992 315,890 306,945 298,335 307,720
YE selling space 2,348,708 2,587,647 2,838,980 3,161,448 3,441,969 3,786,099 4,086,904 4,410,896 4,726,786 5,033,731 5,332,066 5,639,786
% chg 7.7% 10.2% 9.7% 11.4% 8.9% 10.0% 7.9% 7.9% 7.2% 6.5% 5.9% 5.8%
Growth in average selling space 10.0% 10.0% 10.0% 10.6% 10.1% 9.6% 8.9% 8.4% 7.2% 6.9% 6.3% 5.9%
New space contbn 8.5% 7.5% 7.7% 8.0% 6.4% 7.0% 6.5% 6.5% 5.6% 5.4% 5.0% 4.7%
conversion 85.1% 75.3% 77.2% 75.1% 64.0% 73.2% 72.9% 77.8% 78.0% 79.0% 80.0% 80.0%
Average store size (sqm) 511 518 520 527 537 558 577 598 616 632 644 653
Avg size of net new stores 489 547 520 669 847 1,003 912 1,161 1,032 953 877 864
As % chain avg -5% 7% 0% 29% 61% 87% 63% 101% 73% 55% 39% 34%
Source: Company data, Credit Suisse estimates

Inditex (ITX.MC) 4
 21 March 2017

This is particularly true of Zara, where net new stores were 3,569sm (37,500sf)

Figure 10: Zara stores are getting large, but sales densities haven’t changed much in the past 5 years
Zara stores, space & sales 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E
Net sales 7077.0 8088.0 8938.0 10541.0 10804.0 11594.0 13628.0 15394.0 17232.0 19189.3 21262.5 23487.4
Growth (%) 3.7% 14.3% 10.5% 17.9% 2.5% 7.3% 17.5% 13.0% 11.9% 11.4% 10.8% 10.5%
New stores 88 123 107 95 66 94 77 51 55 59 63 67
Year end stores 1608 1723 1830 1925 1991 2085 2162 2213 2268 2327 2390 2457
Increase in selling space 93,978 146,658 136,804 184,964 140,800 202,309 170,562 182,029 167,750 162,250 157,500 167,500
YE selling space 1,541,291 1,687,949 1,824,753 2,009,717 2,150,517 2,352,826 2,523,388 2,705,417 2,873,167 3,035,417 3,192,917 3,360,417
Space growth (%) 6.5% 9.5% 8.1% 10.1% 7.0% 9.4% 7.2% 7.2% 6.2% 5.6% 5.2% 5.2%
Avg size of net new stores 1,068 1,192 1,279 1,947 2,133 2,152 2,215 3,569 3,050 2,750 2,500 2,500
Average store size (sqm) 959 980 997 1,044 1,080 1,128 1,167 1,223 1,267 1,304 1,336 1,368
Sales/m2 (EUR) 4,812 5,126 5,190 5,634 5,283 5,267 5,689 5,974 6,272 6,586 6,915 7,261
% chg -3.2% 2.8% 0.1% 4.5% -4.7% -1.1% 5.9% 2.9% 3.0% 2.4% 1.9% 2.1%
Source: Company data, Credit Suisse estimates

Given the number of extensions, absorptions and closures, net store openings by region
or country no longer give quite the real picture of space change, nevertheless the
breakdown of top countries for net new openings shows a familiar picture, with the Top 5
countries making up 60% of net new openings, and Russia, China and Mexico making up
the top 3 as usual:

Figure 11: Store growth remains concentrated - Top five markets for net new openings remain 60% of total,
but the absolute numbers are much lower
2013 2014 2015 2016 2017
Country Stores % Total Country Stores % Total Country Stores % Total Country Stores % Total Country Stores % Total
China 121 25% China 61 18% Russia 69 20% China 65 20% Russia 56 20%
Russia 75 16% Russia 55 17% China 44 13% Mexico 34 10% China 54 19%
Poland 38 8% Poland 37 11% Mexico 32 9% Russia 30 9% Mexico 22 8%
Mexico 17 4% Mexico 26 8% Turkey 26 8% Italy 18 5% Italy 22 8%
Romania 16 3% Turkey 21 6% Japan 25 7% Poland/France 17 5% Romania 14 5%
Total openings 482 55% 331 60% 343 57% 330 50% 279 60%
Source: Company data, Credit Suisse estimates

While store numbers in Spain continue to shrink (1,787 vs 1,826) it represents the highest
number of absorptions, particularly of smaller formats so we assume that overall space
remains broadly flat, given openings of some very significant flagships (ie Zara Barcelona
in 2016 and Madrid in 2017).

Figure 12: Sales split by region suggests 24bp positive mix in gross margin
FY 15/16 €m % chg 1H 16/17 €m % chg 2H 15/16 €m % chg FY 16/17 €m % chg
Europe ex Spain 44.0% 9,196 10.3% 43% 4,500 11.9% 44.6% 5,734 10.8% 43.9% 10,234 11.3%
Spain 17.7% 3,699 7.5% 17% 1,779 8.5% 16.8% 2,161 4.9% 16.9% 3,940 6.5%
Asia/ROW 23.5% 4,912 28.5% 25% 2,616 10.2% 23.0% 2,955 16.5% 23.9% 5,571 13.4%
Americas 14.7% 3,072 22.0% 15% 1,570 13.3% 15.5% 1,997 18.3% 15.3% 3,567 16.1%
Total 20,900 15.4% 10,465 11.1% 12,846 11.9% 23,311 11.5%
Source: Company data, Credit Suisse estimates

In the US, store numbers grew by 10 to 81, which is roughly in line with the past three
years. We still think that Inditex's US and Canadian exposure (and suitability for mass
market rollout) tend to be over-estimated by the market – we assume they represent 6.7%
of sales, while exposure to Latam (est 8.7% of sales) is often ignored.

Inditex (ITX.MC) 5
 21 March 2017

Figure 13: Updated geographical breakdown

% sales Stores % total of which % total Staff (15/16) % total Staff per Sales per Sales per
Zara* store store (€m) Zara (€m)
Americas 15.3% 743 10.2% 309 14.9% 18,060 11.8% 24 4.3 10.3
Mexico 4.2% 360 4.9% 79 3.8% 6,108 4.0% 17 2.4 11.1
US 5.2% 81 1.1% 78 3.8% 5,397 3.5% 67 13.4 13.9
Brazil 1.5% 71 1.0% 56 2.7% 3,035 2.0% 43 4.4 5.6
Canada 1.5% 38 0.5% 28 1.4% 1,779 1.2% 47 8.3 11.2
Rest 2.9% 193 2.6% 68 3.3% 1,741 1.1% 9 3.1 8.9

Asia & Africa 23.9% 1,534 21.0% 549 26.6% 19,129 12.5% 12 3.3 9.1
China/HK 8.0% 620 8.5% 193 9.3% 9,888 6.5% 16 2.7 8.7
Japan 5.0% 152 2.1% 100 4.8% 4,438 2.9% 29 6.9 10.5
S. Korea 2.0% 70 1.0% 43 2.1% 1,273 0.8% 18 6.0 9.7
Rest 8.9% 692 9.5% 213 10.3% 3,530 2.3% 5 2.7 8.7

E. Europe 16.0% 1,479 20.3% 284 13.7% 26,146 17.1% 18 2.3 11.8
Russia 6.0% 541 7.4% 95 4.6% 10,223 6.7% 19 2.3 13.2
Poland 3.0% 263 3.6% 47 2.3% 4,620 3.0% 18 2.4 13.3
Turkey 2.2% 188 2.6% 36 1.7% 4,069 2.7% 22 2.4 12.8
Romania 1.5% 122 1.7% 24 1.2% 2,192 1.4% 18 2.6 13.1
Rest 3.3% 365 5.0% 82 4.0% 5,042 3.3% 14 1.9 8.4

Other Europe 27.9% 1,749 24.0% 612 29.6% 43,410 28.4% 25 3.3 9.5
Portugal 3.2% 337 4.6% 67 3.2% 6078 4.0% 18 2.0 10.0
Italy 5.5% 377 5.2% 100 4.8% 6306 4.1% 17 3.0 11.5
France 6.4% 296 4.1% 128 6.2% 7945 5.2% 27 4.5 10.5
UK 4.4% 110 1.5% 66 3.2% 5227 3.4% 48 8.4 13.9
Germany 4.4% 137 1.9% 77 3.7% 5271 3.4% 38 6.7 11.9
Greece 2.0% 158 2.2% 39 1.9% 3471 2.3% 22 2.6 10.7
Rest 2.0% 334 4.6% 135 6.5% 9,112 6.0% 27 1.3 3.1

Spain 16.9% 1,787 24.5% 313 15.1% 46,109 30.2% 26 2.0 11.3
Group 100% 7,292 2,067 152,854 21 2.9 10.1
Source: Company data, Credit Suisse estimates

New space contribution remains surprisingly low: We continue to be surprised by the

relatively low contribution from net new space. The 6.5% contribution over the past 2 years
looks to be c73% and 78% of average net increase in space. This is broadly in line with
historic levels, when growth was more focused on less productive, but cheaper EM space.
However given the closure of smaller unproductive space, and the focus on prominent,
and expensive, flagships then we would have expected the NSC to be nearer 100%, which
may explain the ongoing lack of cost leverage.
With stores not going into the LFL pool for two years after opening or being
modified, c20% of space falls outside the LFL calculation. This makes a material
difference to several lines, if we assume that stores open at 70% of mature sales densities
and ramp up at c10% pa for the next 3 years.
- The NSC also includes the c10% ramp up in immature space in Year 2 ie c1%
benefit.
- The LFL calculation includes the benefit of ramp up in Years 3 and 4, which
should give 1.5-2.0% benefit.
- The reported LFL (10% last year) only contributes to 80% of space, so its
contribution to group sales last year would have been 8%.

Inditex (ITX.MC) 6
 21 March 2017

Figure 14: Space conversion is lower than we would expect

Year end January 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E
LFL - reported 5.0% 0.0% 0.0% 3.1% 4.3% 6.5% 3.0% 5.0% 8.5% 10.0% 6.0% 5.0% 4.0% 4.0%
LFL contribution to sales 3.3% 0.0% 0.0% 2.5% 3.4% 5.0% 2.2% 3.9% 6.6% 8.0% 4.8% 4.1% 3.3% 3.4%
inc LFL from space ramp up 2.4% 2.2% 2.4% 2.0% 1.8% 2.1% 2.3% 2.2% 2.1% 2.0% 1.7% 1.6% 1.4%
inc Online contbn - gross 0.5% 1.2% 1.3% 1.0% 1.7% 1.8% 1.9% 2.0% 2.0% 1.8% 1.5%
Online contbn - net 0.5% 0.8% 1.0% 0.8% 1.3% 1.3% 1.5% 1.5% 1.5% 1.4% 1.1%
LFL ex online & ramp up -2.4% -2.2% 0.2% 1.1% 3.4% -0.2% 1.1% 4.5% 5.9% 1.9% 1.3% 0.6% 1.1%
Avg space growth 14.4% 14.3% 10.0% 10.0% 10.0% 10.6% 10.1% 9.6% 8.9% 8.4% 7.2% 6.9% 6.3% 5.9%
Conversion 83.6% 75% 85% 75% 77% 75% 64% 73% 73% 78% 78% 79% 80% 80%
Sales contbn from new space 984 1013 885 831 965 1103 1027 1171 1178 1359 1308 1400 1411 1432
% Contbn from new space 12.0% 10.7% 8.5% 7.5% 7.7% 8.0% 6.4% 7.0% 6.5% 6.5% 5.6% 5.4% 5.0% 4.7%
Currency -2.0% -1.4% -2.0% 2.5% -1.0% 1.6% -3.0% -2.1% 0.6% -3.0% 1.0% 0.0% 0.0% 0.0%
Net sales 9435 10407 11084 12527 13793 15946 16724 18117 20900 23311 25971 28435 30803 33295
% change 15.1% 10.3% 6.5% 13.0% 10.1% 15.6% 4.9% 8.3% 15.4% 11.5% 11.4% 9.5% 8.3% 8.1%
Source: Company data, Credit Suisse estimates

Should online be in LFL?

Finally we have added the online contribution to our LFL model. Inditex, and most peers
include online within LFL which we believe is incorrect.
- The point of LFL is that it is supposed to leverage fixed store costs through having
minimal incremental opex.
- Online sales largely do the opposite by having lower fixed costs but a high degree of
marginal costs. One third of deliveries are apparently collected through store and two
thirds returned to store, however orders still need to be picked in 1 of the 15 online
stockrooms, and then distributed individually to the store of home. We also assume that
Inditex has higher than average return rates due to its global sizing model and "fitted
aesthetic". Online is the main cause of "Other operating expenses" increasing from 9.3%
of sales to 9.9% over two years, and largely offsetting staff and rent leverage.
- Online cannibalizes stores. We assume that 25% of online sales are cannibalized from
stores, and this could be conservative.

Figure 15: Online Model

Year to Jan 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E
Total Sales 12,527 13,793 15,946 16,724 18,117 20,900 23,311 25,971 28,435 30,803 33,295
% chg 13.0% 10.1% 15.6% 4.9% 8.3% 15.4% 11.5% 11.4% 9.5% 8.3% 8.1%
LFL 3.1% 4.3% 6.5% 3.0% 5.0% 8.0% 10.0% 6.0% 5.0% 4.0% 4.0%
Fashion Retail SA (Spain) 15 40 82 227 607 840
ITX Fashion* 43 143 307 325 226 318
Total Online 58 208 389 553 832 1158 1563 2032 2540 3048 3505
% chg 259% 87% 42% 51% 39% 35% 30% 25% 20% 15%
Gross contbn from online 1.2% 1.3% 1.0% 1.7% 1.8% 1.9% 2.0% 2.0% 1.8% 1.5%
Cannibalisation 52 97 138 208 289 391 508 635 762 876
as % online 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%
Net contbn to LFL 0.5% 0.8% 1.0% 0.8% 1.3% 1.3% 1.5% 1.5% 1.5% 1.3% 1.1%
as % total sales 0.5% 1.5% 2.4% 3.3% 4.6% 5.5% 6.7% 7.8% 8.9% 9.9% 10.5%
Source: Company data, Companies Registration House, Credit Suisse estimates

We also calculate LFL ex ramp up and (gross) online contribution. It is notable that
this was largely flat, or negative, for 7 years, until the past two years, when it spiked.
So the good news is there is a higher degree of "sustainable LFL" from ramp up and
online in future years than we had expected, which starts and 4% pa and declines to 3%.
Half of this is online and (in our view) doesn’t lever costs.

Inditex (ITX.MC) 7
 21 March 2017

On the other hand, the sudden acceleration of the past two years requires some
explanation. We believe there are three principal causes:
- RFID adoption should have improved availability and service, but this is now
largely complete
- Zara can be quite contra-cyclical. The past couple of years have seen a dearth
of strong fashion trends. When fashion trends are big and sustainable, all retailers
jump on them and with widespread availability of the same trends, there is more
competition. Zara's shorter time to market and better read of trends means that it
has less competition when times get tough.
- Price cuts. Our apparel pricing surveys over the past two years have consistently
shown Zara to be lowering the prices of its upper end ranges, and consequently
narrowing its range architecture. Even for S/S 17 (when we had expected price
cuts to moderate) top end prices declined –c10% in the UK and >-20% in Europe.
See: European Apparel Pricing: No let-up in spring deflation

Figure 16: Upper price basket shows ongoing price investment, despite £ weakness, especially M&S & H&M
120

100

80

60

40

20

0
Apr-14 Sep-14 Nov-14 Mar-15 Jun-15 Sep-15 Nov-15 Mar-16 Jun-16 Sep-16 Nov-16 March-17
H&M Zara New Look
Mango Gap Next
River Island Primark M&S

Source: Company data,

In our view this process had led to significant improvements in Zara LFL sales over the
past two years, however little cost leverage due to the significant increase in volumes.
The key is what happens to LFL when this process stops? In our view there is a real
risk that as price cuts start to moderate, Inditex's LFL sales growth will start to moderate,
especially as peers respond with price cuts of their own, which appears to have the case
in S/S 17 in particular.

What does this mean for gross margins?

Given its consistent regional pricing differentials, Inditex's gross margins should
theoretically be mixing up by c25bp pa, as the share of sales in Spain and Continental
Europe declines.

Figure 17: Regional price differences should imply gross margins mixing up
Spain UK France Russia Japan USA China Mexico
Upper basket relative pricing 100 136 115 182 170 208 149 104
Lower basket relative pricing 100 119 103 177 184 174 143 108
Indicative GM 46% 60% 53% 70% 68% 74% 64% 48%
Source: Company data, Credit Suisse estimates

Inditex (ITX.MC) 8
 21 March 2017

However 2012/13 was the last time reported gross margins increased.
The company has blamed FX for GM declines in recent years, and while it has historically
guided to "stable gross margins +/-100bp", for the current year it is guiding to gross
margins between 0-+100bp.

Figure 18: Gross margins by half year – it's not just about FX
Y/E Jan 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
1H 54.2% 56.1% 55.0% 55.7% 56.5% 55.4% 59.4% 58.4% 59.6% 58.6% 57.6% 58.1% 56.8%
Chg (bp) 188 -110 76 75 -111 399 -97 120 -98 -99 46 -127
$/EUR lagged -11.7% 2.6% 3.8% -18.2% 1.7%
2H 56.4% 56.3% 57.2% 57.6% 57.1% 58.4% 59.2% 60.1% 59.9% 60.0% 58.9% 57.7% 57.1%
Chg (bp) -5 92 32 -42 131 72 90 -15 5 -103 -127 -56
$/EUR lagged -1.5% 3.8% -11.8% -8.4% -1.8%
FY 55.4% 56.2% 56.2% 56.7% 56.8% 57.1% 59.2% 59.3% 59.8% 59.3% 58.3% 57.8% 57.0%
Source: Company data, Credit Suisse estimates

Looking at some of the GM components may support some stability:

- FX has been quite negative and should be flat this year,
- Geographical mix should remain positive
- We believe that there is less US$ cost mitigation for buying apparel due to higher
raw materials prices and significantly higher transport costs.
- The company never discusses markdown, but inventory looked quite high through
much of last year, and S/S clearance looked quite substantial, so the company's
confidence may relate to lower markdown.

Figure 19: Inventory looked high last year - is there an opportunity in reducing markdown?
Inventory (Y/E Jan) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1Q 738 986 1140 1000 1240 1279 1627 1807 2019 2570
2Q 955 1141 1209 1172 1471 1452 1672 2016 2171 2650
3Q 1027 1157 1168 1296 1622 1811 1945 2329 2621 3086
4Q 1007 1055 993 1215 1277 1581 1677 1860 2195 2549
% chg Y/Y
1Q 21% 34% 16% -12% 24% 3% 27% 11% 12% 27%
2Q 12% 19% 6% -3% 26% -1% 15% 21% 8% 22%
3Q 17% 13% 1% 11% 25% 12% 7% 20% 13% 18%
4Q 22% 5% -6% 22% 5% 24% 6% 11% 18% 16%
Days sales
1Q 76 96 103 85 93 86 102 107 103 114
2Q 96 99 95 91 98 84 89 97 91 97
3Q 92 93 92 90 110 106 110 118 112 117
4Q 90 86 76 87 83 90 90 73 73 74
Source: Company data, Credit Suisse estimates

However the industry is likely to remain deflationary with pressure on margins:

- Our recent apparel survey noted a surprising degree of deflation for S/S in UK
and Europe, despite adverse exchange rates.
- Demand is likely to remain weak, given the lack of strong fashion trends, growth
in discount channels, and a much reduced participation by millennials.
- The industry continues to add capacity both online and offline.
- The need to offer a seamless multi-channel experience implies that retailers need
to continue investing development spend and opex in the channel.

Inditex (ITX.MC) 9
 21 March 2017

So in most respects, we believe it is largely irrelevant if margins are +/-50bp in any given
year when the longer term trends are so well established.
The margin impact of online is very clear in Inditex's P&L. While it has levered
Personnel and Rental expenses, this has been largely offset by Other expenses (+60bp)
in 2Y, which includes the cost of online development and fulfilment.

Figure 20: Margin drivers – virtually no opex leverage despite high LFL's because of online costs
Year end January 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Contbn from new space 7.5% 7.7% 8.0% 6.4% 7.0% 6.5% 6.5% 5.6% 5.4% 5.0%
LFL 3.1% 4.3% 6.5% 3.0% 5.0% 8.5% 10.0% 6.0% 5.0% 4.0%
Gross margin (%) 59.2% 59.3% 59.8% 59.3% 58.3% 57.8% 57.0% 57.0% 56.7% 56.5%
Personnel expenses 16.0% 16.2% 16.0% 16.1% 16.2% 16.0% 15.6% 15.6% 15.5% 15.6%
Rental expenses 10.2% 10.1% 9.6% 9.9% 10.2% 10.0% 9.5% 9.5% 9.4% 9.4%
Other operating expenses 9.3% 9.3% 9.6% 9.8% 9.3% 9.4% 9.9% 10.0% 10.1% 10.2%
Opex as % sales 35.5% 35.7% 35.1% 35.9% 35.6% 35.4% 35.2% 35.2% 35.1% 35.2%
Opex growth 12.6% 10.5% 13.9% 7.0% 7.7% 14.4% 10.9% 11.5% 9.2% 8.6%
Opex growth (cc) 10.1% 11.5% 12.3% 10.0% 9.8% 13.8% 13.9% 10.5% 9.2% 8.6%
Depn as % sales 5.4% 5.3% 5.0% 5.1% 5.0% 4.9% 4.6% 4.5% 4.4% 4.4%
EBIT margins (%) 18.3% 18.3% 19.5% 18.4% 17.7% 17.6% 17.2% 17.3% 17.1% 16.9%
Source: Company data, Credit Suisse estimates

The biggest source of cost leverage has been depreciation, however this now looks as if it
moderate as capex and depreciation gradually align.

Figure 21: Depreciation has been the biggest source of cost leverage (120bp over 7Y), however this will
now lessen as Capex and Depreciation slowly align
Year to January 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E
Net TA 3192 3451 3307 3414 4083 4745 5220 6122 6619 7305 7813 8317 8817 9312
NTA psm 1667 1582 1408 1319 1438 1501 1517 1617 1620 1656 1653 1652 1654 1651
Capex (ex F/H) -942 -937 -510 -728 -864 -1123 -1250 -1347 -1518 -1445 -1528 -1607 -1683 -1761
Capex as % sales 10.0% 9.0% 4.6% 5.8% 6.3% 7.0% 7.5% 7.4% 7.3% 6.2% 5.9% 5.7% 5.5% 5.3%
D&A 497 578 646 676 736 796 855 905 1022 1063 1168 1262 1355 1449
Depn as % GTA 9.8% 10.1% 10.6% 10.2% 9.4% 9.1% 9.0% 8.4% 8.7% 7.9% 7.7% 7.5% 7.2% 7.0%
Depn as % NTA 15.6% 16.7% 19.5% 19.8% 18.0% 16.8% 16.4% 14.8% 15.4% 14.6% 14.9% 15.2% 15.4% 15.6%
DD&A as % sales 5.3% 5.6% 5.8% 5.4% 5.3% 5.0% 5.1% 5.0% 4.9% 4.6% 4.5% 4.4% 4.4% 4.4%
Capex as % depn 190% 162% 79% 108% 117% 141% 146% 149% 149% 136% 131% 127% 124% 122%
Source: Company data, Credit Suisse estimates

Likewise, after 15/16's exceptional cash inflow, it moderated in 16/17 as WC normalized:

Figure 22: Working capital trends have normalized after 15/16's unusual inflow
2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E
Inventories 993 1215 1277 1581 1677 1860 2195 2549 2829 3112 3424 3732
Days of COGS 76.2 86.9 83.0 89.9 90.0 89.9 90.9 92.7 92.4 92.2 93.2 93.5
Accounts receivable 422 482 531 848 815 862 669 861 947 1042 1146 1261
Trade accounts payable -2270 -2672 -2702 -3483 -3459 -3741 -4591 -5325 -5858 -6443 -6959 -7515
Days COGS 174 191 176 198 186 181 190 194 191 191 189 188
Total WC -855 -975 -894 -1054 -967 -1019 -1727 -1915 -2081 -2289 -2389 -2523
Days COGS -65.6 -69.7 -58.1 -60.0 -51.9 -49.3 -71.5 -69.7 -68.0 -67.8 -65.0 -63.2
WC Change 338 120 -81 160 -87 52 708 188 166 208 100 134
Source: Company data, Credit Suisse estimates

Cash conversion therefore moderated to a relatively normal 85%, and as the dividend
payout gradually increases, the net cash build starts to moderate quite materially.

Inditex (ITX.MC) 10
 21 March 2017

Figure 23: The net cash build is moderating

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
EPS 0.4 0.4 0.4 0.6 0.6 0.8 0.8 0.8 0.9 1.0 1.1 1.2 1.3
% chg 24.9% 0.4% 4.6% 31.4% 11.6% 22.1% 0.7% 5.1% 15.0% 9.8% 11.5% 8.5% 6.7%
DPS - ordinary 0.21 0.21 0.22 0.28 0.32 0.38 0.38 0.41 0.47 0.50 0.58 0.63 0.67
DPS - special 0.00 0.00 0.02 0.04 0.04 0.06 0.10 0.11 0.13 0.18 0.20 0.23 0.27
DPS - total 0.21 0.21 0.24 0.32 0.36 0.44 0.48 0.52 0.60 0.68 0.78 0.86 0.93
% change 25% 0% 14% 33% 13% 22% 10% 7% 14% 14% 15% 10% 9%
Ordinary payout ratio 52% 52% 52% 50% 52% 50% 50% 51% 51% 49% 51% 51% 51%
Total payout ratio 52% 52% 57% 58% 58% 58% 63% 65% 64% 67% 69% 70% 71%
Cash conversion 70% 67% 138% 104% 72% 84% 60% 56% 103% 85% 95% 97% 95%
Net Cash -1283 -1219 -2380 -3426 -3464 -4098 -4055 -4010 -5301 -6091 -6417 -6787 -7075
Net cash less prop div -631 -567 -1635 -2429 -2342 -2727 -2547 -2390 -3447 -3972 -3986 -4110 -4168
Dividend Yield 0.8% 0.8% 0.9% 1.1% 1.3% 1.6% 1.7% 1.9% 2.1% 2.4% 2.8% 3.1% 3.3%
Y/E net cash/share 0.4 0.4 0.8 1.1 1.1 1.3 1.3 1.3 1.7 2.0 2.1 2.2 2.3
Net cash post dividend 0.2 0.2 0.5 0.8 0.8 0.9 0.8 0.8 1.1 1.3 1.3 1.3 1.3
Net cash generated -569 64 -1161 -1046 -38 -634 43 45 -1291 -790 -326 -369 -289
Source: Company data, Credit Suisse estimates

We are making minimal changes to current year forecasts, and cut subsequent years by
c2%, due to slightly lower space contribution and margins.

Figure 24: Old & New forecasts – we are making modest changes to forecasts –
but see little reason to expect margins or growth rates to accelerate
Old 2016 2017E 2018E 2019E 2020E
Revenue 2,321 26,014 28,712 31,550
LFL Sales 7.5% 5.0% 4.0% 4.0%
GM mvt bp -85 -30 0 -20
EBIT 4,057 4,498 4,984 5,466
% sales 17.4% 17.3% 17.4% 17.3%
Net Profit 3,171 3,529 3,910 4,287
EPS 1.02 1.13 1.25 1.38
New 2016 2017 2018E 2019E 2020E
Revenue 20,900 23,311 25,971 28,435 31,039
LFL Sales 8.5% 10.0% 6.0% 5.0% 5.0%
GM mvt bp -50 -88 0 -30 -20
EBIT 3,677 4,021 4,486 4,868 5,329
% sales 17.6% 17.2% 17.3% 17.1% 17.2%
Net Profit 2,875 3,157 3,521 3,819 4,178
EPS 0.92 1.01 1.13 1.23 1.34
EPS growth 15.0% 9.8% 11.5% 8.5% 9.4%
% chg forecast -0.7% 0.0% -1.9% -2.5%
Consensus EPS 1.17 1.32 1.48
CS vs cons -3.4% -7.1% -9.4%
Cons sales 26,133 28,836 31,702
Cons EBIT 4,682 5,288 5,906
% sales 17.9% 18.3% 18.6%
Source: Company data, Credit Suisse estimates, consensus Thomson Reuters

The key is that, after two very good years of execution, we see no reason why margins
and EPS growth are now suddenly about to accelerate, as is currently implied by
consensus forecasts.
We are making no change to our valuation matrix, which gives a 12m FWD target price of
€25/share.

Inditex (ITX.MC) 11
 21 March 2017

Figure 25: Target price matrix

Metric Current TP 12m FWD Grey Sky 12m FWD Blue Sky 12m FWD
1.5x PE/TSR 19.7 21.4 1.25x TSR 16.9 1.75x TSR 20.9
DCF 21.7 23.3 Margin -100bp 21.2 Margin +200bp 25.4
22.5x PER 25.8 28.0 20x PER 23.7 25x PER 33.4
Average 22.4 25.0 21.0 27.5
Source: Company data, Credit Suisse estimates

Figure 26: The key element of our DCF (WACC 7.5%, TGR 2%) is that C/F as a % of sales stays flat at near
peak levels into perpetuity- that seems quite optimistic
Year end Jan 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E
Revenues 15946 16724 18117 20900 23311 25971 28435 31039 33550 35563 36986 37725
% growth 15.6% 4.9% 8.3% 15.4% 11.5% 11.4% 9.5% 9.2% 8.1% 6.0% 4.0% 2.0%
Gross profit 9529 9923 10569 12089 13279 14794 16113 17526 18877 19832 20440 20660
Margin 59.8% 59.3% 58.3% 57.8% 57.0% 57.0% 56.7% 56.5% 56.3% 55.8% 55.3% 54.8%
Operating costs -6413 -6852 -7371 -8412 -9259 -10309 -11245 -12198 -13169 -13960 -14518 -14808
% chg 13.3% 6.9% 7.6% 14.1% 10.1% 11.3% 9.1% 8.5% 8.0% 6.0% 4.0% 2.0%
% sales 40.2% 41.0% 40.7% 40.3% 39.7% 39.7% 39.5% 39.3% 39.3% 39.3% 39.3% 39.3%
Operating profit 3117 3071 3198 3677 4020 4486 4868 5329 5707 5872 5922 5852
Margin 19.5% 18.4% 17.7% 17.6% 17.2% 17.3% 17.1% 17.2% 17.0% 16.5% 16.0% 15.5%
EBITDA margin 24.5% 23.5% 22.6% 22.5% 21.8% 21.8% 21.6% 21.5% 21.3% 20.8% 20.2% 19.7%
Tax -761 -675 -725 -846 -917 -1023 -1110 -1215 -1301 -1339 -1350 -1334
Tax rate (%) 24% 22% 23% 23% 23% 23% 23% 23% 23% 23% 23% 23%
NOPAT 2356 2396 2473 2831 3103 3463 3758 4114 4406 4533 4572 4517
Depreciation 796 855 905 1022 1063 1168 1262 1355 1449 1518 1561 1573
% sales 5.0% 5.1% 5.0% 4.9% 4.6% 4.5% 4.4% 4.4% 4.3% 4.3% 4.2% 4.2%
Capex -1339 -1398 -1850 -1552 -1445 -1528 -1607 -1683 -1761 -1956 -1849 -1573
% sales 8.4% 8.4% 10.2% 7.4% 6.2% 5.9% 5.7% 5.4% 5.2% 5.5% 5.0% 4.2%
Change in working capital 160.0 -87.0 52.0 708.0 188.0 166.0 208.1 100.0 134.0 106.7 74.0 45.3
% sales 1.0% -0.5% 0.3% 3.4% 0.8% 0.6% 0.7% 0.3% 0.4% 0.3% 0.2% 0.1%
Cash flow 1973 1766 1580 3009 2909 3269 3621 3885 4228 4202 4357 4563
C/F as % sales 12.4% 10.6% 8.7% 14.4% 12.5% 12.6% 12.7% 12.5% 12.6% 11.8% 11.8% 12.1%
PV of cashflow 3269 2979 2973 3010 2783 2684 2614
Perpetual growth % 2%
Terminal multiple 16.7
PV of cashflows 17,697
PV of terminal multiple 43,574
Total firm value 61,271
Net cash (ex dividend) 6091
Equity Value 67,361
Value per share (EUR) 21.7
12m FWD DCF 23.3
Source: Company data, Credit Suisse estimates

Inditex (ITX.MC) 12
 21 March 2017

Figure 27: P&L

Year end January 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
LFL - reported 5.0% 0.0% 0.0% 3.1% 4.3% 6.5% 3.0% 5.0% 8.5% 10.0% 6.0% 5.0% 5.0%
LFL contribution to sales 3.3% 0.0% 0.0% 2.5% 3.4% 5.0% 2.2% 3.9% 6.6% 8.0% 4.8% 4.1% 4.2%
inc LFL from space ramp up 2.4% 2.2% 2.4% 2.0% 1.8% 2.1% 2.3% 2.2% 2.1% 2.0% 1.7% 1.6%
inc Online contbn - gross 0.5% 1.2% 1.3% 1.0% 1.7% 1.8% 1.9% 2.0% 2.0% 1.8%
Online contbn - net 0.5% 0.8% 1.0% 0.8% 1.3% 1.3% 1.5% 1.5% 1.5% 1.3%
LFL ex online & ramp -2.4% -2.2% 0.2% 1.1% 3.4% -0.2% 1.1% 4.5% 5.9% 1.9% 1.3% 1.7%
Avg space growth 14.4% 14.3% 10.0% 10.0% 10.0% 10.6% 10.1% 9.6% 8.9% 8.4% 7.2% 6.9% 6.3%
Conversion 83.6% 75% 85% 75% 77% 75% 64% 73% 73% 78% 78% 79% 80%
Sales contbn from new space 984 1013 885 831 965 1103 1027 1171 1178 1359 1308 1412 1424
% Contbn from new space 12.0% 10.7% 8.5% 7.5% 7.7% 8.0% 6.4% 7.0% 6.5% 6.5% 5.6% 5.4% 5.0%
Currency -2.0% -1.4% -2.0% 2.5% -1.0% 1.6% -3.0% -2.1% 0.6% -3.0% 1.0% 0.0% 0.0%
Net sales 9435 10407 11084 12527 13793 15946 16724 18117 20900 23311 25971 28435 31039
% change 15.1% 10.3% 6.5% 13.0% 10.1% 15.6% 4.9% 8.3% 15.4% 11.5% 11.4% 9.5% 9.2%
Gross profit 5349 5914 6328 7422 8180 9529 9923 10569 12089 13279 14794 16113 17526
Gross margin (%) 56.7% 56.8% 57.1% 59.2% 59.3% 59.76% 59.33% 58.34% 57.84% 56.96% 57.0% 56.7% 56.5%
Personnel expenses 1473 1703 1792 2009 2234 2548 2698 2932 3335 3643 4041 4410 4793
% chg 17.7% 15.6% 5.2% 12.1% 11.2% 14.1% 5.9% 8.7% 13.7% 9.2% 10.9% 9.1% 8.7%
as % of sales 15.6% 16.4% 16.2% 16.0% 16.2% 16.0% 16.1% 16.2% 16.0% 15.6% 15.6% 15.5% 15.4%
Rental expenses 855 1028 1134 1272 1399 1530 1656 1850 2087 2221 2464 2676 2894
% chg 19.1% 20.2% 10.3% 12.2% 10.0% 9.4% 8.2% 11.7% 12.8% 6.4% 10.9% 8.6% 8.2%
as % of sales 9.1% 9.9% 10.2% 10.2% 10.1% 9.6% 9.9% 10.2% 10.0% 9.5% 9.5% 9.4% 9.3%
Other operating expenses 898 976 1027 1171 1286 1527 1644 1676 1969 2312 2589 2867 3131
% chg 7.9% 8.7% 5.2% 14.0% 9.8% 18.7% 7.7% 1.9% 17.5% 17.4% 12.0% 10.7% 9.2%
as % of sales 9.5% 9.4% 9.3% 9.3% 9.3% 9.6% 9.8% 9.3% 9.4% 9.9% 10.0% 10.1% 10.1%
Total operating expenses 3226 3707 3953 4452 4919 5605 5998 6458 7390 8196 9141 9983 10843
as % of sales 34.2% 35.6% 35.7% 35.5% 35.7% 35.1% 35.9% 35.6% 35.4% 35.2% 35.2% 35.1% 34.9%
Yoy growth 15.2% 14.9% 6.6% 12.6% 10.5% 13.9% 7.0% 7.7% 14.4% 10.9% 11.5% 9.2% 8.6%
Depreciation & Amortisation 497 578 646 676 736 796 855 905 1022 1063 1168 1262 1355
as % of sales 5.3% 5.6% 5.8% 5.4% 5.3% 5.0% 5.1% 5.0% 4.9% 4.6% 4.5% 4.4% 4.4%
Total operating costs 3696 4304 4600 5132 5658 6413 6852 7371 8412 9259 10309 11245 12198
as % of sales 39.2% 41.4% 41.5% 41.0% 41.0% 40.2% 41.0% 40.7% 40.3% 39.7% 39.7% 39.5% 39.3%
EBIT 1653 1610 1728 2290 2522 3117 3071 3198 3677 4021 4486 4868 5329
EBIT margin (%) 17.5% 15.5% 15.6% 18.3% 18.3% 19.5% 18.4% 17.7% 17.6% 17.2% 17.3% 17.1% 17.2%
Yoy growth 21.9% -2.6% 7.3% 32.5% 10.1% 23.6% -1.5% 4.1% 15.0% 9.4% 11.6% 8.5% 9.5%
EBITDA 2150 2188 2374 2966 3258 3913 3926 4103 4699 5083 5654 6130 6683
EBITDA margin (%) 22.8% 21.0% 21.4% 23.7% 23.6% 24.5% 23.5% 22.6% 22.5% 21.8% 21.8% 21.6% 21.5%
Net financial 1 -22 4 31 37 14 -18 14 10 10 30 32 34
Pre tax 1646 1588 1732 2322 2559 3131 3053 3244 3743 4078 4567 4953 5419
Pre tax margin (%) 17.4% 15.3% 15.6% 18.5% 18.6% 19.6% 18.3% 17.9% 17.9% 17.5% 17.6% 17.4% 17.5%
% chg Y/Y 22.9% -3.5% 9.0% 34.1% 10.2% 22.3% -2.5% 6.3% 15.4% 8.9% 12.0% 8.5% 9.4%
Tax 388 325 410 580 613 764 671 735 861 917 1041 1129 1236
Tax rate (%) 23.6% 20.5% 23.7% 25.0% 24.0% 24.4% 22.0% 22.7% 23.0% 22.8% 22.8% 22.8% 22.8%
Minorities -8 -8 -8 -9 -13 -6 -4 -10 -8 -4 -4 -5 -5
Attributable profit 1250 1255 1314 1732 1933 2361 2378 2499 2875 3157 3521 3819 4178
EPS (EUR) 0.40 0.40 0.42 0.56 0.62 0.76 0.76 0.80 0.92 1.01 1.13 1.23 1.34
growth (%) 25% 0% 5% 31.4% 11.6% 22.1% 0.7% 5.1% 15.0% 9.8% 11.5% 8.5% 9.4%
DPS - ordinary 0.21 0.21 0.22 0.28 0.32 0.38 0.38 0.41 0.47 0.50 0.58 0.63 0.68
DPS - special 0.00 0.00 0.02 0.04 0.04 0.06 0.10 0.11 0.13 0.18 0.20 0.23 0.27
DPS - total 0.21 0.21 0.24 0.32 0.36 0.44 0.48 0.52 0.60 0.68 0.78 0.86 0.95
% chg 25% 0% 14% 33% 13% 22% 10% 7% 14% 14% 15% 10% 11%
Total payout ratio 52% 52% 57% 58% 58% 58% 63% 65% 64% 67% 69% 70% 71%
Source: Company data, Credit Suisse estimates

Inditex (ITX.MC) 13
 21 March 2017

Companies Mentioned (Price as of 20-Mar-2017)

Hennes & Mauritz (HMb.ST, Skr228.5)
Inditex (ITX.MC, €32.04, UNDERPERFORM, TP €25.0)
Marks & Spencer (MKS.L, 327.9p)
Next (NXT.L, 3854.0p)
The Gap, Inc. (GPS.N, $23.4)

Disclosure Appendix
Analyst Certification
Simon Irwin and Pradeep Pratti, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views
expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Hennes & Mauritz (HMb.ST)

HMb.ST Closing Price Target Price Target Price Closing Price HMb.ST
Date (Skr) (Skr) Rating 400
14-Apr-14 271.10 320.00 O
26-Sep-14 295.60 340.00 350
03-Dec-14 318.10 350.00
29-Jan-15 336.40 370.00 300
20-Mar-15 350.00 360.00 N
250
16-Dec-15 302.60 345.00
17-Mar-16 278.00 305.00
200
17-Jun-16 244.60 275.00 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017
11-Jul-16 258.80 267.00
19-Sep-16 247.60 251.00 O U T PERFO RM
N EU T RA L
20-Dec-16 256.00 224.00 U U N D ERPERFO RM

01-Feb-17 245.90 230.00

* Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Inditex (ITX.MC)

ITX.MC Closing Price Target Price Target Price Closing Price ITX.MC
Date (€) (€) Rating 35
20-Mar-14 21.42 18.60 U
13-Mar-15 28.16 20.00 30
16-Sep-15 30.29 23.00
17-Mar-16 29.79 25.00 25
19-Sep-16 32.39 26.20
20
22-Sep-16 33.37 27.20
06-Mar-17 30.60 25.00
15
* Asterisk signifies initiation or assumption of coverage. 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017

U N D ERPERFO RM

Inditex (ITX.MC) 14
 21 March 2017

3-Year Price and Rating History for Marks & Spencer (MKS.L)

MKS.L Closing Price Target Price Target Price Closing Price MKS.L
Date (p) (p) Rating 600
11-Apr-14 430.10 419.73 U
17-Oct-14 402.84 355.54 500
30-Mar-15 531.33 444.42
20-May-15 576.26 543.18 400
20-Jul-15 527.38 493.80
300
22-Dec-15 437.41 469.11
08-Jan-16 425.36 444.42
200
25-Apr-16 427.53 399.98 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017
27-May-16 381.81 370.00
24-Jun-16 326.40 340.00 U N D ERPERFO RM
N EU T RA L
07-Jul-16 298.90 320.00 N
25-Jan-17 342.40 370.00 *
* Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Next (NXT.L)

NXT.L Closing Price Target Price Target Price Closing Price NXT.L
Date (p) (p) Rating 8,500
30-Jun-14 6169.45 6529.39 N
31-Dec-14 6548.60 6780.06 7,500

25-Mar-15 6988.01 7325.98 6,500

28-Aug-15 7812.74 7325.98 U
5,500
14-Sep-15 7517.74 7135.57
22-Dec-15 7130.61 6937.36 4,500
06-Jan-16 6803.57 6600.00
3,500
29-Mar-16 5635.00 5600.00 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017
04-May-16 5150.00 5200.00 N
24-Jun-16 4848.00 4950.00 N EU T RA L
U N D ERPERFO RM
03-Nov-16 5090.00 4600.00 U
05-Jan-17 4089.00 4100.00 N
* Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for The Gap, Inc. (GPS.N)

GPS.N Closing Price Target Price Target Price Closing Price GPS.N
Date (US$) (US$) Rating 50
11-Aug-14 42.29 44.00 N*
22-Aug-14 45.43 45.00 40
07-Nov-14 38.83 40.00
13-Feb-15 41.20 37.00 U 30
27-Feb-15 41.60 35.00
20
11-May-15 39.87 34.00
16-Jun-15 38.75 35.00
10
20-Nov-15 26.98 30.00 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017
26-Feb-16 27.23 27.00
10-May-16 19.30 21.00 N EU T RA L
U N D ERPERFO RM
19-Aug-16 26.89 22.00
23-Feb-17 23.97 23.00
* Asterisk signifies initiation or assumption of coverage.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

Inditex (ITX.MC) 15
 21 March 2017

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which
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Restricted 2%
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Target Price and Rating

Valuation Methodology and Risks: (12 months) for Inditex (ITX.MC)

Method: We use a weighted basket including 22.5x 12m FWD PER, a DCF of €23.7 with a WACC of 7.5%, and 5Y PE/TSR of 1.5x, giving a target
price of €25. The stock trades at a c30% premium to its long term average, and as the world's largest apparel retailer we believe that its
medium term growth prospects are inevitably slowing while margin are already high. Our target price implies significant downside over the
next 12 months so we rate the share Underperform relative to the European General Retail sector.
Risk: On the upside, the main risk to our €25 target price and Underperform rating is that earnings continue to beat market expectations and
that either LFL sales or gross margins are stronger than we currently forecast. On the downside, Inditex can only maintain such elevated
valuations for as long as earnings meet or exceed expectations. Given the weakness in consumer demand in key markets and increasing
competition, and deterioration in demand, or any weakness in execution would impact forecasts and valuation.

Inditex (ITX.MC) 16
 21 March 2017

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations
typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (MKS.L) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit
Suisse.
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (GPS.N, MKS.L) within the
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This research report is authored by:
Credit Suisse International...................................................................................................................................Simon Irwin ; Pradeep Pratti, CFA
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Credit Suisse International...................................................................................................................................Simon Irwin ; Pradeep Pratti, CFA
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Inditex (ITX.MC) 17
 21 March 2017

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municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial
Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its
affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not
constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or
consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
Copyright © 2017 CREDIT SUISSE AG and/or its affiliates. All rights reserved.
Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can
be eroded due to changes in redemption amounts. Care is required when investing in such instruments.
When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to
pay the purchase price only.

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