Inditex has a chance to exact revenge on its online rivals. Despite a painful pandemic, the 64 billion euro fast-fashion retailer has amassed a war chest of more than 9 billion euros. Typically such spoils will trickle back to shareholders. For 38-year-old Chair Marta Ortega, buying an ailing online foe like 9 billion euro Zalando might make more sense.
Inflation is taking a heavy toll on Ortega’s Spanish outfit. Since January, the Zara owner’s share price has shed over 25% as investors fret about consumers cutting back on handbags and shoes. Next boss Simon Wolfson voiced similar concerns about discretionary spending on fashion and home decor. Germany’s Zalando went a step further and said its more cost-conscious customers were simply not interested in buying flashy togs.
Hoarding cash is part of Inditex’s crisis-management playbook. The company relies on its surprisingly plump balance sheet to spruce up supply chains, revamp tired stores and open new ones. Excess funds are doled out sparingly to investors via special dividends.
Ortega has reason to be more daring. Thanks to its hyper-efficient operations, the owner of brands like Massimo Dutti and Pull&Bear operates with a 25% EBITDA margin, compared to 19% for rival H&M. Even with the spectre of inflation, sales are forecast to grow 5% a year for the next five years.
Removing a competitor and incorporating its digital savvy could turbocharge that growth once inflation subsides. Zalando’s online retail platform, which specialises in selling cheap clothes and shoes, has grown its top line by an average of 23% annually over the past five years. But now it looks cheap. Since January, Zalando shares have halved. After taking away net cash, Inditex trades at around 9 times its forecast EBITDA for the next 12 months. Zalando, which was trading as high as 30 times forward EBITDA in 2019, is now around the same level, comfortably its lowest valuation since listing eight years ago.
A swoop would still be an about-turn. To date, Inditex’s strategy for growth has been organic, steadily opening new stores in established markets like the United States. A sudden burst of inflation has given its young boss a reason to take a calculated risk.