Description:
Inditex SA, operating out of Spain, is one of the largest global fashion retailers. It has eight brands under its umbrella, and therefore reaches a wide range of customers. Inditex designs, manufactures, and distributes apparel, accessories, and some home related products through about 6,000 stores in more than 85 markets. Their flagship brands are Zara, Bershka, Massimo Dutti and Stradivarius. The company is expanding into e-commerce with offerings mainly in Europe, North America and Asia.
Inditex’s business model is very different compared with traditional operators. It has developed a push strategy, which in essence means the company is very reactive to customer trends. It has reduced the time to market to just on 2 weeks. This requires that its products are manufactured nearby. About 65% of sales occur in Europe, as much as is produced locally. In comparison with its competitors, which mostly produce in low-cost Asia, Inditex has almost no inventories. Further advantages of the fast circular information flow between shop and factories are: low transportation costs, less exposure to rising labor costs, and benefits from higher recurring same-customer-visits in their shops due to limited availability and rapidly changing collections.
Forecasts anticipate, that given similar macroeconomics, Inditex will continue to drive both margin and return improvements in the years ahead. In addition, due to its innovative sourcing model, the company benefits from lower capital costs; this will enable it to expand into emerging markets such as China and Latin America. Location growth is expected to reach on average about 400 units per year, of which about 120 units are in China.
Financially, the company is very healthy due to the following facts: a) most of its growth has been achieved organically, and b) it focuses on using its own resources and competencies. Inditex’s financial health is represented in the high historic median PE ratio of around 20, and annual sales growth is expected to top 10% on average in coming years. During the past decade, the company has generated about EUR 800 million of free cash flow annually, and this in rather difficult market conditions. Because of the extreme low time to market, Inditex’s operating cycles may, from time to time, be negative – testament to the high quality of the management.