Investors looking for the quickest returns in the 'fast-fashion' sector should check out Zara-owner Inditex (IDEXY) , rather than competitors H&M (HNNMY) and Associated British Foods (ASBFY) analysts indicated Monday after the Primark owner updated on its first half sales.
Inditex's double-digit growth in a challenging retail environment and its innovative supply chain model make it a good choice, analysts at Jeffries have argued, particularly when compared to ABF, which expects sales to be 11% ahead for the first half of the year on a constant currency when earnings are released on April 19 and 21% ahead on actual exchange rate basis.
Like-for-like sales in the U.K., which generates half of Primark's sales, were up 2% in the first half of the year, the company said.
The retail, food and ingredients conglomerate also warned that margins at Primark would be under pressure in the second half of their fiscal year due to the sharp decline in the pound since the U.K. voted to leave the European Union last June.
George Salmon, an equity analyst at Hargreaves Lansdown, thinks Primark's organic growth is "stalling" and that it's now "dependent on new sales space for much of its growth, while margins will also take a hit as the pound's fall feeds through to higher input costs."
"In light of these challenges, there is increased pressure on the group to deliver seamless execution of its plans. Even after recent falls, the shares still trade on a premium to the majority of the sector," he said in a research note.
Primark could also see headwinds from a spike in cotton prices and freight rates, a team of Jefferies analysts led by James Grzinic wrote in a Monday note: "We estimate that Primark is currently priced in at c.23x cal 2018 earnings, and see better value in ITX at parity of valuation."
"For now, the relative comparison with Inditex would still suggest that the ownership case remains stronger for the latter," the note added.
ABF shares traded 0.5% lower by 10:00 GMT in London change hands at 2,576.72 pence, extending a 1% loss over the past three months.
However, others remained slightly more upbeat on the retail unit.
"In our view, Primark remains well positioned to take market share and drive mid-teens sales growth in FY17-18E, backed by visible new space additions of 1.3m sqf p.a.," Liberum said in a note Monday. "While Primark margin takes a hit near-term from adverse transactional FX (-200bps in FY'17E), there is scope for positive surprise if the industry raises prices to compensate higher sourcing costs."
Furthermore, Liberum argues the shares could be cheap and are priced at a 10% discount to global peers.
Inditex traded 0.45% higher in Madrid Monday to change hands at €30.34 each, but the owner of the Zara chain of fashion stores has fallen 6.34% over the past three months
Inditex, whose other brands include Massimo Dutti and Bershka, reported group sales for the nine months between Feb. 1 and Oct. 31 were up 15% on constant currency "underpinned by solid same-store sales growth," the company said in its most recent earnings released in December.
"This momentum is the result of sustained investment -logistic facilities and stores- as well as the ongoing development of integrated offline-online store model," Inditex CEO Pablo Isla said at the time.
The company is at the vanguard of fast-fashion retailing, with its business model allowing new designs and the latest fashion trends to be in stores at much quicker than competitors.
It is a model that H&M is now trying to leverage. The retailer said it would upgrade its supply chain to boost speed and flexibility, investing in RFID and automated warehouse technology in a bid to better compete with Inditex. The upgrades will also allow for new options for customers including next day and time-slot deliveries.
H&M sales grow 7% in constant currency in its most recent earnings released in January. The Swedish retailer said it expects sales to increase by 10% to 15% in local currency terms this year, while maintaining "continued high profitability" in a competitive marketplace.
Shareholders doubt over this is apparent, with stock losing 12% of its value over the past three months. Shares were marginally up on Monday morning in Stockholm at Skr238.60.