- The strong earnings move post 4Q23 results limits the probability of a big surprise at the 1Q24 results
- 3M ATM IV at 1YPC65 is attractive for adding yield both in absolute terms and relative to market volatility
- A PE of 22.5x is broadly in line with its long-term valuation
Inditex shares reached an all-time high in March, following its 4Q23 results after it reported strong results on the back of ongoing robust demand for its clothing collections and after announcing plans to increase its annual dividend by 28% to EUR1.54 per share. Although 4Q23 EBIT was broadly in line with street estimates, the company guided for an 11% YoY growth in 1Q24 sales ahead of consensus at +8.3%, implying an annual growth of 9%, on par with growth achieved in 2023. Following a strong run YtD of c.10% (SXRP +8%), shares are now in line with the company’s long-term PE of 22.5x.
Overall, the apparel market has seen improving demand so far in 2024 from regions like France and the UK as prices stabilise and inflationary pressures ease, although some weakness appeared in March retail data, for Spain in particular, while sluggish growth remains in the German market. Contrary to the strong retail data coming out of the first half of 2024, growing concerns have emerged about consumer strength in the second half of 2024, amid the prolonged high interest-rate environment potentially capping the sector’s returns in the near term.
Looking at Inditex’s 1Q results on 5 June, options are pricing 4.1% earnings move, which is an 80bp premium to the two-year average of 3.3%. The fact that the most recent earnings saw a sharp move should diminish the risk of an aggressive upside surprise, whilst the fact the valuation is undemanding makes us comfortable monetising the downside. Equally, although woes around consumer strength keep rising, we believe it is too early for any weakness to be reflected in the upcoming print.
In terms of volatility, Inditex 3M ATM IV is attractive for selling to add yield at a 1YPC65, both in absolute terms and relative to the overall depressed volatility currently in the market. We propose selling Aug24 42/46 strangles at a net credit of 5% of underlying (spot ref: 43.5, fut ref 43.9). We choose an August expiry to avoid 2Q24 results in September.