Inditex: fashion statement
The clothing retailer is unlikely to take a Naomi Campbell-like tumble just yet
Not many companies do fast fashion quicker than Spain’s Inditex, and certainly not as profitably. For Inditex, business is more of a canter than a catwalk. Brands such as Zara and Pull & Bear are reasonably priced. Its shares are pricier. They trade at a 70 per cent premium to peers. That might seem a lot to pay for a business that just undershot half-year earnings forecasts. But Inditex is unlikely to take a Naomi Campbell-like tumble off its platforms just yet.
For one thing, the group has got its costs well under control relative to its peers. Of the Spanish retailer’s key listed competitors — Hennes & Mauritz, Primark and Fast Retailing — none, not even online specialist Asos, come close to its 56 per cent gross profit margin. Only Primark, owned by UK-quoted Associated British Foods, can beat it on earnings growth in recent years. That explains why Inditex shares have far outrun its fast fashion peers, not to mention all European retailers, over three years.
The only loose thread that could lead to an unravelling is the sense that profitability has peaked. Analysts pointed to a strong euro for the greater than expected compression of margins in interim results on Wednesday. Yet, look back a few years when the currency had weakened and one sees that a downward trend began in 2013, and now totals two percentage points. Inditex is in a highly competitive market with fickle customers.
Yet the balance sheet is robust. Cash flow has easily exceeded capital investment needs by an average of more than €2bn annually, meaning Inditex has had no need for debt. That will not change soon.
As more than 60 per cent of production is in euro-based economies, further currency strength may keep a lid on its shares for a time. But Inditex has racked up years of growth for good reason: it is formidably well run. Fashionistas sometimes justify splashing out on an expensive garment on the basis it is “a good investment”. The same applies to Inditex.