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Morgan Stanley condemns Inditex and store sales: "it is the beginning of the end"



"It is the beginning of the end". That's how clear the analysts of Morgan Stanley with the evolution of Inditex's business and the textile retail sector as a whole. "We believe Covid-19 will change the European retail industry forever"they affirm from the American bank.

Contrary to other analysts, they do not share the idea that the relaxation of the containment measures represent the end of the negative impact for companies like Inditex, H&M or JD Sports. His forecast is that measures of social distancing, in varying degrees of severity, will continue until a vaccine is available to the general population, something that at the earliest occurred in the summer of 2021.

Furthermore, they add that changes in consumer lifestyles and, therefore, in its way of spending, they are likely to last much longer. And retailers will face these changes with weaker balance sheets and poorly configured store portfolios, but also with less competition.

Therefore, from now on, the evaluation of textile chains as Inditex or H&M it will depend on "the strength of its balance sheet, the impact of social distancing measures, its more or less cyclical nature, the impact of the recession and the long-term changes in the way of consuming of the citizens"

Morgan anticipates that a increase in online shopping and that visiting physical stores is much less attractive for consumers, due to pandemic limitations and fear of Covid-19.

"It is likely that even when stores reopen, consumers choose to do more of their shopping online they used to do at physical points of sale ", they affirm. A lower general demand, together with an increase in online sales will cause"store sales density drops by 30-50% during the summer months"

"At the same time," they add, "social distancing measures also Retailers' operating costs will increase, because both its store operations and logistics will be less efficient. "

In his opinion, these criteria are likely to dominate the debate on investing in these companies for years to come. Usually, They expect the sector's earnings in 2020 and 2021 to drop 62% and 33% compared to 2019. However, they add that visibility remains extremely low for those already very negative forecasts.

One of the main negative factors that they anticipate in the coming months is the Christmas campaign. "Our greatest concern of all can be summed up in one word: Christmas"They say. Especially if, as it seems, another wave of the pandemic occurs during the next autumn / winter.

If retailers have to re-close before the holiday season, "a period when many of these companies make most of their annual profits is an almost too bleak prospect to contemplate"they conclude.

After this analysis, Morgan Stanley has reduced the valuation of Inditex to 18 euros per share from 20 euros, well below the current price of the parent company of Zara, which is trading at levels of 22 euros.

His forecast is that the company's pre-tax profit will plummet a fifty% compared to your previous estimate, until € 2.4 billion, in fiscal year 2020. And with respect to earnings per share (EPS), it anticipates a drop of 54% in 2020 and 36% in 2021.

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