For Spain's Inditex, holding inventory low and slowing down store growth pay off
By Saabira Chaudhuri and Patricia Kowsmann
Fashion-retailing giant Inditex SA's nimble, low-inventory strategy is helping it sidestep headwinds hitting rivals like Hennes & Mauritz AB and Gap Inc. that are struggling with fast-fashion challenges.
Luxury and fast-fashion retailers alike have grappled with tougher sales conditions lately amid terror attacks in Europe, currency gyrations, unfavorable weather and the rise of online shopping. Consumer confidence is sluggish ahead of Britain's vote on whether to leave the European Union and the U.S. presidential election. People also are spending less money on clothes and shoes, and more on eating out and vacations.
But Inditex, the world's largest fashion retailer by sales, has continued to report double-digit sales growth, retaining its crown as the darling of the fast-fashion world as its strategy allows it to jump on big fashion trends.
The Spanish owner of brands such as Zara and Massimo Dutti on Wednesday posted strong first-quarter profit and revenue growth across all its major regions. Its shares rose 5.5% in Madrid.
While rivals make their clothing primarily in Asia, Inditex's operations are largely based in Spain, allowing it to make garments quickly and ship them to Europe, its biggest market. The company keeps inventory low, shipping products based to demand. That lets it take fewer markdowns for things like bad weather and shifting consumer tastes, avoiding the kinds of problems competitors like Gap and H&M regularly run into.
"We believe that Inditex has the best business model in apparel," said Bernstein analyst Jamie Merriman.
Inditex's shares are roughly flat over the past year, compared with a 50% decline at Gap, a 36% decline at Marks & Spencer Group PLC, a 25% drop at H&M and a 5.6% fall at Primark owner Associated British Foods PLC.
Gap's first-quarter comparable sales were down 5% as the company entered April with more inventory than planned due to weaker-than-expected traffic in late March. Gap has found itself squeezed by competition from Zara and H&M while also grappling with a store base that some analysts have described as outsize, at more than 3,000. The company has been closing stores and made changes to its product designs and selections, but the moves haven't yet paid off. Gap last month reported its fifth straight quarter of lower revenue and profit.
Analysts and investors see Inditex -- whose full name is Industria de Diseño Textil SA -- as sensibly adapting to changing shopping habits. In March, the Arteixo, Spain-based company ratcheted down its store-expansion target to a range of 6% to 8% over the next several years from a previous target of 8% to 10%.
By contrast, H&M has stuck with a store-expansion target of 10% to 15% a year since going public in 2008 even as it has invested in digital. The strategy has concerned analysts, who think the Swedish retailer is cannibalizing its own store sales.
But H&M can't easily back away from continuing to open new physical stores, Liberum analyst Tom Gadsby said. Its localized business model means the Stockholm-based company is forced to rapidly open stores in new markets to justify the cost of local distribution centers, merchandising and property teams and other infrastructure it opens in every market.
The strategy has squeezed profit margins. Liberum expects H&M's margin on earnings before interest and taxes to slide to 13.2% this fiscal year from 16.9% in 2014. That compares with a forecast margin of 17.8% for Inditex, about flat with 17.7% in 2014.
While Inditex has far more stores than H&M overall -- about 7,000, compared with H&M's 4,000 -- they are divided among several brands, including Stradivarius, Massimo Dutti and Bershka. Flagship brand Zara has only about 2,000 stores.
In H&M's top 10 markets -- including places like the U.S., U.K. and Germany -- H&M has close to five times the number of stores that Zara does, according to Bernstein.
Inditex said net profit for the quarter ended April 30 rose to EUR554 million ($621 million) from EUR521 million a year earlier. Sales grew 12% to EUR4.88 billion. The results exceeded market expectations. Analysts polled by FactSet had expected net profit of EUR547 million on sales of EUR4.84 billion.
The company reported a strong performance across a broad swath of markets, including China. The country has been difficult for many brands lately, particularly luxury players like Burberry Group PLC and Ralph Lauren Corp. "We are very pleased with our performance in China," said Inditex Chief Executive Pablo Isla on a conference call with analysts. "We believe very much in the market."
On Wednesday, H&M reported monthly sales growth of 9% for May, strong on the surface but below analysts' estimates. The result translated into a second-quarter decline of 4% in adjusted like-for-like sales, according to Exane BNP Paribas.
"There are some deep structural differences separating the product, business model and likely future fortunes of these two fashion retailers, " Société Générale analyst Anne Critchlow said. "We must prefer Inditex, today, tomorrow and well into the future."
Write to Saabira Chaudhuri at firstname.lastname@example.org