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 saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
June 16, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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