Investors seeking exposure to the European fashion retail sector would be wise to consider Zara’s Spanish owner Inditex over Swedish rival H&M, reckon Citi analysts.
In initiation coverage on the pair, Citi highlighted Inditex’s markdown strategy and pricing architecture as key to its investment thesis.
“For Inditex, our proprietary analysis of Zara’s online pricing gives us confidence that its ‘demand-pull’ business model continues to be effective at maximising full price sales and driving SG&A (selling, general and administrative) leverage, said analysts.
Citi said the Zara owner’s international pricing architecture allows for a roughly 5% gross margin accretion year on year.
“We also believe consensus is not fully valuing Inditex’s ability to generate surplus cash,” added Citi.
In contrast, “We remain bearish on the pace of H&M’s turnaround and believe consensus’ SG&A forecasts are overly optimistic”.
Citi, however, said it will keep an eye on early signs of inflection at H&M.
The target price for Inditex is set at €52 against the current €46.27, based on 23 times the estimated earnings per share (EPS) for full year 2025.
For H&M, the target price is 143 Swedish krona against the current 160 krona price, reflecting a price-to-earnings ratio of 16 times the two-year forward estimate.