Inditex/Marta Ortega: inflation gives dynast a baptism of fire
Three challenges loom for the world’s biggest clothing retailer
Inditex is the world’s biggest clothing retailer. It remains remarkably nimble. Impressive interim results show it is coping with tough conditions better than peers.
A European economic crisis is giving a baptism of fire to a new top team. Marta Ortega, daughter of founder Amancio Ortega, took over as chair in April, albeit after a long apprenticeship. Chief executive Óscar García Maceiras became chief executive a few months earlier.
Three challenges loom. First, inflation is pushing up costs while cutting consumers’ spending power. Second, China’s Shein is proving tough competition. Third, the Ukraine war has forced Inditex to suspend its big Russian operation, which last year accounted for 8.5 per cent of operating profit.
The shares trade on a forward price/earnings ratio of 18 times, about 30 per cent less than the 10-year average. The stock is down just 5 per cent since Russia’s invasion of Ukraine. Swedish fashion group H&M has fallen far more.
Inditex’s big advantage is that it produces about half its clothing close to home. Manufacturing in Spain, Portugal, Morocco and Turkey allows it to respond quickly to demand. Short runs reduce unsold stock.
Inditex limits dollar-denominated costs. Analysts estimate it uses the dollar for 40 per cent of stock purchases, compared with about two-thirds for European rivals. The strength of the greenback prompted Primark owner ABF to warn on profits last week. Inditex also benefits from a growing US business.
No consumer company is immune from inflation. Shipping costs from Asia have soared. Inditex is stocking up to guard against disruption, eroding the benefits of short supply chains.
That will give Ortega and Maceiras headaches if sales cannot be sustained. The cost of living crisis will squeeze clothes budgets. More shoppers will trade down to cheaper offerings such as Shein’s.
Inditex will need all its skill in stock management and cost control to keep its shares out of the discount bin.