Pablo Isla signs the second largest value creation in the history of the stock market at Inditex

Pablo Isla bids farewell with the discretion he has shown for the last 17 years at the helm of the largest textile empire in the world. With a shy profile and contained manners, he contrasts with the stridency of the sector he represents, that of fashion. Born in Madrid, he has made his own that of responding to the Galician, apparently without much effort after almost two decades at the helm of Inditex, which he would definitively inherit in 2011 with the departure of its creator, Amancio Ortega, and having known how to outperform to his predecessor, José María Castellanos, who seemed difficult. Isla leaves with the satisfaction of a job well done, having positioned the brand in the world and before international investors, although in the last two years he has had to face two unprecedented crises: a global pandemic and the closure of 600 stores between Russia and Ukraine as a result of a war.

When the executive talent consultancy firm Korn Ferry chose him to take the reins of the Galician textile company in 2005, Inditex had a market capitalization of around 14,000 million euros, which it multiplied eight times in the company’s highs on the stock market in 2017 , at which time it touched 115,000 million euros. At that time, Inditex had nearly 3,000 stores, was present in 64 countries and was on the verge (in 2006) of reaching its first 1,000 million euros in net profit, with another 8,000 million in sales. In this journey, Isla has increased the stock market valuation of Inditex by more than 52,000 million euros -although it became 80,000 million at the time his departure was announced last November-. Since then, the shares have lost 28% in the market, although this chapter will now have to be faced by the new management team led in the executive part by Óscar García Maceiras, his CEO, and by the new president, Marta Ortega.

Sánchez Galán is the third executive who has created the most value during his tenure, with 48,000 million

The latest crisis that has had a major impact on Inditex’s share price, taking into account that Russia is its second largest market in number of stores (with 515) only behind Spain, has prevented Pablo Isla from retiring with the award granted by having He has been the executive who has generated the most value for the shareholder at the head of a large Spanish listed company. That position continues in the hands of the late Emilio Botín, who during his years at the helm of Banco Santander -from 1986 to September 2014- added more than 73,000 million euros of capitalization to his entity, thanks largely to the several dozen of capital increases that he carried out during his presidency -the vast majority for payment in scrip of the dividend -.

Ignacio Sánchez Galán has taken Iberdrola’s share to all-time highs. It is not surprising to find the president of the largest Spanish electricity company -and the most weighted firm on the Ibex- in third place in gross value creation during his presidency, which officially began in June 2001. Since then, Iberdrola’s capitalization has increased at 48,000 million euros, up to the 64,000 at which it is listed today, only 2,000 below Inditex, who has lost 10,000 million since the outbreak of the conflict in Ukraine.

Tobías Martínez, at the head of Cellnex Telecom, is in fourth place. He adds 26,000 million to the European telecommunications tower giant since 2015. And fifth place, even despite the Covid, goes to Luis Maroto, president of Amadeus. Since 2006, when he became executive, he has managed to increase the capitalization of a firm by 21,000 million that is still trading 23% below the pre-Covid maximums -including yesterday’s strong rebound of 7.3% due to the advance of talks between Russia and Ukraine.

Value creation

Pablo Isla is, of the executives currently active, the manager who has contributed the most value to his shareholders during his time at the helm of Inditex. If the calculation includes the dividends distributed since June 2005 -the moment in which he accepted the position-, whoever bought shares then has managed to increase its value by 572%. The share with dividends reaches a value today of more than 31 euros -10 above its stock price.

In these 17 years, Isla has multiplied the group’s profit by more than three times, to 3,243 million euros with which it closed 2021; and for more than 3.5 times sales. In 2006, the first full year with Isla at the helm, income through this channel they reached 8,196 million euros. In the exercise that closed the textile in January -when its fiscal year ends- sales reached 27,716 million euros. It has left the company on track enough to exceed, according to analyst forecasts, 30,000 million for the first time in history in 2023, the date on which Inditex aspires to beat the 4,000 million mark. Today, the Galician fashion giant is advancing at a slower, albeit firm, pace towards its future.

Since the year of its appointment, the stock increases its value by 572% if dividends are included

In almost two decades it has gone from being a pure growth company to a hybrid between single-digit rising sales (the target is 4% to 6%) and shareholder return that hits all-time highs. With a historical dividend announced for this year of 0.93 euros, the firm sets the pace for next year by having announced twelve months in advance the payment of a extraordinary dividend of 40 cents -more than 30 this year- which will be added to the group’s ordinary remuneration and which is expected to exceed one euro per share for the first time in history. This implies that buying Inditex securities today, over 21 euros, will report for the shareholder next year a return for its two annual payments of more than 5%.

Inditex’s financial situation is solid enough to guarantee this. At the end of 2006, the group’s net cash position was 703 million. In 2021 this reached 9,359 million euroswhich is equivalent to 14% of its current capitalization.

The future without Island

Marta Ortega will assume, after 15 years in the group, the non-executive presidency from April 1. Together with her, her right-hand man, García Maceiras, will have to face the future challenges of a company present in more than 200 countries, between physical stores and the online channel, which is what the company has dared to define in the last presentation of annual results as a transition that is accelerating. Where? That’s the big question. “How much more travel does Inditex have taking into account its presence in almost all the countries of the world?”, they ask at Barclays. Or “have they considered investing in prices to compete with firms like Uniqlo, H&M or Shein with cheaper baskets [y una estrategia basada en precios y no tanto en diseño, hacia donde está virando el nuevo modelo de Zara]?”.

Internet sales have become Inditex’s best kept secret. Few are the data that transcend, beyond the exponential growth that they maintain, even once the closure of stores due to confinements due to Covid has passed into history. The same sales that shot up 76% in the year of the pandemic, grew at a rate of 14% in 2021, to 7.5 billion euros, a quarter of the total. The objective? That they beat the 30% barrier in 2023, which, according to forecasts, would mean exceeding a value of 9,000 million euros. It is 40% of the total income that expected for H&M that year, with 22,000 millionaccording to analysts.

If achieved, this means multiplying Internet revenue by more than 3.5 times since the company published the first data in the year 2017. By then, these reached 2,534 million, 10% of the total.

However, Internet sales represent a major logistical challenge for the sector, given the increase in transport and storage costs and also the investment in technology that this new era represents. Despite this, Pablo Isla wanted to make it clear that Inditex’s online model is not comparable to other firms, thanks to the tremendous logistical support provided by its physical stores. “It is a fully integrated sale between the physical and the digital world, with 60% of returns in physical store. Inditex’s online sales cannot be compared with the sales of a 100% online operator”, such as Asos or Zalando, he clarified during the last results presentation this March in Arteixo.

JP Morgan analysts speak of “a scenario of absolute opacity” regarding the cost of online in the sector, not only in Inditex, but also in all its comparables with the “only exception of [la británica] Asos “. They calculate that for every 5% growth of “the penetration of online sales with a 0% growth in sales in physical stores can have an impact of 50 basis points on the margin” for both H&M and Inditex.

The challenge for Marta Ortega’s future is, ultimately, to recover previous margins of 17%-18% with a model radically different from that of five or ten years ago. For the moment, in 2021 -when they were expected to achieve it- the ebit margin was 15.5%. One of the last brushstrokes that Isla wanted to leave given in his last press conference was to mention the US as the second market for sales for Inditex. In part, to distance himself from the storm of Russia; and partly also to demonstrate the strength of online sales. The US ranks 15th for number of stores, with only 99 at the end of last year.