- ITX has rebounded 20%+ from the YtD lows (+17% from our last entry), outperforming the broader retail & luxury sectors over the last three months (+15% vs. 9%).
- Rich relative valuation vs. itself, its peers and analyst target prices leave limited room for rerating.
- Attractive downside volatility at 3YPc7 justifies adding negative delta on the name
Revisiting our September note on Inditex – Long 2x Dec25 46 call financed by 1x Dec25 43 call the stock has now rebounded 20%+ from the YtD lows (17% from our last entry, Fig,2), outperforming the broader retail & luxury sectors (Fig 4) over the last three months (+15% vs. 9%) after pointing to +9% sales growth in local currency in the first five weeks of 3Q, which was ahead of Bloomberg consensus expectations for 7% growth in the full quarter.
With the stock now appearing over extended in terms of price movement, and at a rich relative valuation to its peers and versus analyst target prices (Fig 6), we now see a more attractive risk/return playing the downside. Although the rapid advance and rich valuation would justify selling upside to finance downside, we are cognisant of the ongoing broader market advance amid a bullish backdrop for equities for the remainder of the year. However, for current holders of the stock selling upside is attractive as it is currently trading c.17% premium (Fig 3) to its long-term rating, and near peak relative valuation vs its peers (Fig 5) leaving limited room for significant rerating from current levels.
Looking at volatility, the 6M 90% IV is attractive at 3YPc10 (Fig.7), swaying our preference to add negative delta to the name via limited loss structures and propose Long Mar 26 46 puts costing 3.1% of underlying (Spot ref: 49.4, Fut. ref 49.6).