Overall Assessment: Right Track (Strong)

expand business beyond Spain and within 5

years of the Inditex’
Summary report incorporation, Zara entered Portugal, France,
and the US. Inditex expanded its stores
Ticker / Exchange: ITX.MC/IBEX
worldwide and started 7 other brands until
Market Capitalization: €80.925.5bn 2008. The company is into fast fashion and
retails trendy fashionable clothes at low prices.
Stock Price (SP): €25.59
Inditex has brought innovation in the clothing
52 weeks Stock Price: €21.85 - €28.86 industry, they did not follow the old business
model of launching collection for every change
Outstanding Shares: 310.53m
of season as was followed by existing players.
EPS: €1.13 They introduced fast fashion and bring new
products fortnightly. They refreshed their stock
DPS: €0.66
twice every week. It gives the customers a
chance to visit stores frequently and their
Inditex, IBEX35 (14'-19'- daily)
stores worldwide get more visitors than any
40.00 14,000.00 other brand. Inditex does its business from such
35.00 12,000.00 stores where customer not only purchase the
30.00 10,000.00 clothes but gets a buying experience. It has
25.00
8,000.00 more than 7,448 stores worldwide and
20.00
6,000.00 presence in 96 markets through online
15.00
4,000.00 platforms. The company’s supply chain model is
10.00
2,000.00
also different. Instead of getting its clothes
5.00
manufactured from Asian countries in large
- -
quantities at lower prices, the company
Inditex IBEX35
procures and manufactures more than half of
its products within Spain, Portugal, and
Morocco. It allows for Inditex better control and
Company Overview speedy production and logistics. The company
claims that it can bring a new product from
Inditex is the world’s largest fashion retailer. It designing to development to the sales store
is Spain’s largest company in terms of market within 14 days and can transport stock to its any
cap at €93.19 billion. It has annual revenue of store within 48 hours. Its operational excellence
€26 billion and is listed on Madrid Stock allowed it become a market leader, the
exchange and a component of IBEX35. The company grew in the recession period as well
company was started in 1975 with the brand and expanding in new markets in Asia, Africa,
name Zara by Amancio Ortega. The company and South America.
did business within Spain for 10 years and 1985
Inditex was incorporated and Zara became its SWOT
subsidiary. The restructuring was done to
Strengths:

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 Innovation in business Recommendations
 Fast supply chain
 Wide reach Inditex different model gives them an edge over its
competitors but also possess threats. The
 Brand name
geopolitical environment in Europe is volatile where
 Customer loyalty
the company has 50% market share. Zara accounts
Weakness: for two-thirds of the total business. Inditex needs to
diversify both geographically and brand wise. The
 Overdependence of only one brand Zara
challenge from online players shall be addressed by
 Low sales from offline platforms
strengthening its online experience and reach as it
 Over-dependence on the European market did with its offline stores. The company has limited
Opportunity: its production from Asian countries but shall
evaluate measures to reduce its production costs
 Emerging markets in China, Africa, and which will provide benefit in long run. Although the
South America profitability of Inditex is good and consistent, it has
 Online marketplace never achieved the level of profit margin that its
competitor H&M had 10 years ago. These are
Threat:
feasible and can be achieved by Inditex as well. The
 The European slowdown supply chain is fast and innovative but expensive. All
 Competition from independent artists and of its logistics centers are located within the
online players proximity of its head offices. They shall be expanded
 Changing trends at different locations of the world so that the global
 Declining domestic sales shipments can be handled from their respective
closest centers. The company has never emphasized
on taking debt and it is capitalized through equity
Financial Performance Review only. The scope for expansion is high in Asian and
Profitability rest of the world market where it can make its
ROCE 30% presence fast if it goes with the additional capital.
ROE 23% These markets need lesser investments as compared
ROA 20% to European and American markets and give more
Gross profit Margin 55% return on such investments. China is emerging the
Liquidity most favorite destination for Zara where demand is
Current Ratio 2x increasing rapidly which is equally supported by their
Quick Ratio 1.4x huge spending capacity. The domestic market of
Efficiency Spain is slow for past many years and the share in
Asset Turnover revenue is decreasing. Inditex has most of its stores
Inventory Turnover 259 days in Spain only but their turnover is worst. The
Debtors Turnover 23 days company is growing all around the world but its
Creditors Turnover 113 days
domestic market disappoints. It shall do an in-depth
Solvency
study for the reason of unpopularity in Spain and
Debt to Equity Ratio 0%
address this weakness as earliest. Overall, the
Total Asset to Liability Ratio 32.30%
company is concluded to be on the right track for its
Cash Flow Activities (in million €)
Cash flow from operating Activities 4029.00 strong fundamentals, progressive revenue growth,
Cash flow from investing Activities -1875.00 strong performance against competitor, and positive
Cash flow from financing Activities -2260.00 track investment record.

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Table of Contents
1. Introduction .............................................................................................................................................. 1
2. Business Environment and Strategy ......................................................................................................... 2
2.1 Business Model ................................................................................................................................... 3
2.2 PESTLE Analysis ................................................................................................................................... 5
2.2.1 Political ......................................................................................................................................... 5
2.2.2 Economic ...................................................................................................................................... 7
2.2.3 Social .......................................................................................................................................... 10
2.2.4 Technological ............................................................................................................................. 11
2.2.5 Legal ........................................................................................................................................... 11
2.2.6 Environmental ............................................................................................................................ 12
2.3 Porter’s 5 forces ................................................................................................................................ 12
2.3.1 Internal Rivalry ........................................................................................................................... 13
2.3.2. The threat of new entrants ....................................................................................................... 14
2.3.3 Supplier power ........................................................................................................................... 14
2.3.4 Buyers power ............................................................................................................................. 14
2.3.5 Threat of substitution ................................................................................................................ 14
2.4 SWOT Analysis................................................................................................................................... 15
2.5 Strategic Recommendations ............................................................................................................. 15
2.5.1 Porter’s generic strategy ............................................................................................................ 16
2.5.2 Ansoff Matrix ............................................................................................................................. 16
2.6 Conclusion ......................................................................................................................................... 17
3. Analysis of the company’s accounts ....................................................................................................... 17
3.1 Data collection .................................................................................................................................. 18
3.2 Overview of Past performance ......................................................................................................... 18
3.3 Common size analysis ....................................................................................................................... 20
3.4 Trend Analysis ................................................................................................................................... 21
3.5 Combined Size Analysis ..................................................................................................................... 23
3.6 Ratio Analysis ................................................................................................................................ 24
3.6.1 Profitability................................................................................................................................. 24
3.6.2 Long term solvency .................................................................................................................... 27
3.6.3 Short term solvency ................................................................................................................... 28

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 3.6.4 Activity ratios ............................................................................................................................. 30
3.6.5 Conclusion .................................................................................................................................. 32
3.7 DuPont analysis ................................................................................................................................. 32
3.7 Segment Analysis .............................................................................................................................. 34
3.7.1 Operating segments ................................................................................................................... 34
3.7.2 Geographical segments.............................................................................................................. 35
3.8 Conclusion ......................................................................................................................................... 37
4. Investment Performance ........................................................................................................................ 38
4.1 Treynor ratio ..................................................................................................................................... 40
4.2 Jensen’s Alpha score ......................................................................................................................... 42
4.3 T square test...................................................................................................................................... 42
4.4 Conclusion ......................................................................................................................................... 43
5. Recommendations .................................................................................................................................. 44
5.1 Overview ........................................................................................................................................... 44
5.2 Specific recommendations................................................................................................................ 44
5.2.1 Business Environment and Strategy .......................................................................................... 44
5.2.2 Analysis of Company’s Accounts ................................................................................................ 45
5.2.3 Investment Performance ........................................................................................................... 45
References .................................................................................................................................................. 46

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1. Introduction
Industria de Diseño Textil, S.A. or simply Inditex is a clothing company registered in Spain. It is traded on
Bolsa de Madrid i.e. Madrid Stock Exchange (Yahoo Finance, 2019), which is the largest stock exchange
in Spain (Raddant, 2016). The study of Statista (2017) shows that Inditex was the largest company in
Spain in 2017 in terms of market cap at €90.52 billion (figure 1). With the current net worth of €83.751
billion (Yahoo Finance, 2019), Inditex is still the largest company in Spain. It is also the world’s largest
fashion retailer ahead of Sweden based H&M (Olanubi, 2018). It has presence in 202 countries through
online platforms and in 96 countries through 7,448 retail stores (Inditex, 2019). The company was
originated in A Coruña, Galicia, Spain in 1985 and the purpose for its formation was to expand existing
brand “Zara” globally (Bloomberg, 2013). Zara was the first and most successful brand of the group
whose store was first opened in 1975 in A Coruña (Inditex, 2019).
Inditex became the holding company of Zara and the first international store was opened in O Porto,
Portugal in 1988 followed by stores in New York in 1989 and Paris in 1990 (Inditex, 2019). Later they
launched more brands starting with Pull & Bear (casual urban brand) and Massimo Dutti (high end
cosmopolitan clothes) in 1991, Bershka (youth fashion) in 1998, Stradivarius (for young and dynamic
women) in 1999, Oysho (lingerie brand) in 2001, Zara Home (interiors brand) in 2003, and Uterqüe
(fashion accessories) in 2008 (Inditex, 2019). Zara is the oldest and largest brand in the group with 2,256
stores (30.29%) (figure 2). Zara was ranked 30th on the list of best global brand published by Interbrand
in 2015 and by 2018 it reached 25th spot (Interbrand, 2018). The aim of the study is to do a detailed
analysis of the company and provide a recommendation about the performance of the company and
future directions. This study will discuss in details the business environment and strategy; analysis of the
company’s accounts; investment performance followed by a recommendation.

Figure 1: Top 10 Spanish Companies based on market capitalization. Source: Statista (2017)

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 Timeline of brands introduced by Inditex

Inditex stores worldwide

Uterqüe

Zara Home

Oysho

Stradivarious

Bershka

Massimo Dutti

Pull & Bear

Zara

0 500 1000 1500 2000 2500

No. of stores

Inditex brands No. of stores

Zara 2257
Pull & Bear 972
Massimo Dutti 761
Bershka 1103
Stradivarious 996
Oysho 673
Zara Home 595
Uterqüe 91
Figure 2: Inditex Stores worldwide. Source: Inditex (2019)

2. Business Environment and Strategy

The mission of the company is to contribute to the sustainable development of the society and the
environment it interacts with (Inditex, 2019). It’s not just the clothing business that the mission
statement encompasses but the whole idea for which the company stands, i.e. contributing to the
society and the environment. The mission binds the entire workforce together and gives a uniform
direction to the company which distinct a high-performing organization to a low-performing one
(Williams, 2008). Inditex large workforce which includes 174,386 employees (Annual Report 2018, p.21)
and which is growing at the rate of 6.81% over the past 5 years has been instrumental in making it the
largest fashion retailer in the world (The Telegraph, 2019).

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2.1 Business Model
The business model of Inditex drives the operations of the company for quality products that are
beautiful and ethical at the same time. They do it by acting precisely and responsibly at every stage of
the process (Inditex, 2019). It includes designing, sourcing, manufacturing, quality control, logistics, and
ultimately the sales through online and offline mode.

Figure 3: Business model of Inditex. Source: Inditex (2019)

Inditex keeps its customers at the center of its model (figure 3) as it is in a fast fashion where customers
expectations changes at a very fast rate. They recognize the need and deliver new products in their
stores fortnightly. The product design and development process is so fast that Zara – the most
successful brand of the company takes only 10 to 15 days to go from design to the sales floor (Forbes,
2012). This allows them to lead the trend and not follow it. They are always on the curve. Zara is able to
deliver new products twice each week. They were delivering 10,000 new designs in their stores annually
in 2012. One of the main reason for this flash delivery is that the company has a significant number
(35%) of suppliers located in the Spain and rest of Europe (figure 4 and 5), which reduces its
manufacturing and logistic time (Annual Report 2018, p.136). Further, 96% of these suppliers are rated
high as per companies internal standards (Annual Report 2018, p.132). The company does not follow the
seasonal trends as the industry does. It rather focuses on the fast-changing trends that are influenced
not only by the weather but by other dynamics of the society. That makes them distinct from the rest of
the players like H&M and Benetton who releases their stock with the beginning of every season.

Figure 4: Inditex suppliers. Source: Annual Report (2018)

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 INDITEX SUPPLIERS
Africa
8% America
1%

Europe
35%

Asia
56%

Figure 5: Region-wise share of Inditex Supplier. Source: Annual Report (2018)

The marketing concepts have evolved from early production-based concept to present-day customer-
centric concepts. The company is directed toward customer-focused innovation and has invested €2
billion in such new technologies (Inditex, 2019). Further, the supply chain of the company is very strong
and aimed primarily towards quality management and not cost reduction. Whatever is manufactured
around the globe first reaches the centralized warehouse in Spain for quality assessment and records
purpose and then dispatched to the supplier’s location (Forbes, 2016). This process is followed for all the
manufacturing units across the globe even if the manufacturing is done in Bangladesh for delivery in
China, the consignment will first go to Spain and then to China. Further, as the company refreshes its
stock twice a week its logistic system is super-fast. The company claims it can deliver fresh stock
anywhere in the world within 48 hours or less (Inditex, 2019). Its system is flexible, responsible and
highly efficient. Further, all the logistic centers of the company are located near its head offices and
most of the production is done within the proximity of these logistic centers. This model is again
different from what the industry follows i.e. getting the production done in large quantities from Asian
countries at lower costs to gain economies of scale. The local procurement and manufacturing approach
of the company is a costly affair but gives it an edge through its designs that are always fresh.

Inditex has adopted the RFID system into its supply chain. Majority of the products are covered and the
full implementation will be completed by the end of 2020. The company has also introduced in latest
technologies for example in Barcelona and La Coruña it has installed a highly-advanced multi-shuttle
area where stock is handled through automatic machines. It is more efficient and precise than ever and
reduces the dispatch time by half (Inditex, 2019). Moreover, the company has aligned its logistic
activities to its mission of sustainable development. It is using renewable energy sources such as bicycles
and electric vehicles for internal transport. The efficiency in transport is also increasing, the high
packaging density allowed the company to cut shipments equivalent to 50 round trips to the world (The

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New York Times, 2018). Although Inditex owns more than 85% of its stores (Annual Report 2018, p.317),
the distribution and transportation are entirely done by third-party contractors (Inditex, 2019) leaving
the company focus on their core activities of product designing, development, and selling. The stores are
very important to the company’s strategy. 90% of the workforce is engaged in the stores and they
receive training in the store only. The main advantage it gets from the stores is insight about customer
interaction and feedback which helps the company understand the customer needs which allow it to do
iteration on its designing and development processes which ultimately gives it an edge to stay updated
with the latest fashion and holds the position of trendsetter rather than a trend follower.

2.2 PESTLE Analysis

In order to implement a strategy for the business, it is a prerequisite of conducting an in-depth analysis
of various dimensions of the company in which it operates. These dimensions are its internal
environment, external environment, and shareholders expectations within which the company exists
and operate. Rastogi & Trivedi (2016) argues that PESTLE is a tool to identify external risks of the
business and gives an insight into the various key elements in the external environment that impacts the
business. The strategies are later formulated based upon such perceived risks. However, the analysis
does not provide any prioritization to the encountered issues (Zalengera, et al., 2014) but is able to
provide detailed scrutiny which can be used as per the desirable objectives. The surface-level
observation made from the segmental analysis of the company revealed that 65% of the sales of the
company is in Spain and the rest of Europe (Annual Report 2018, p.333). It is important to do the PESTLE
analysis from the point of view of these regions. Although a significant increase has been witnessed in
the share of Asian markets which primarily includes China, consideration to these regions will also be
given in our analysis.
2.2.1 Political
The Headquarter of the company is situated in La Coruña, Spain. It is governed by the laws and
regulations of the country. The government of the country is fairly stable in the recent past except for
some rebellious activities in Barcelona, which too are immune to the commercial activities. Spain is
ranked 78th in the political stability index issued by The World Bank (The Global Economy, 2019). The
comparison can be made with the UK and the US which are ranked very close at 80th and 75th spot
respectively. The government is open to the foreign direct investment although the financial statement
of the company revealed that the major part of the financing is done through equity investments, the
opportunity is unutilized as of now and can be taken advantage in the case of rapid expansion and time
of distress in the future. The rapid growth of the Asian market indicates the future opportunity for the
company. Countries such as China and ASEAN countries, in particular, holds maximum share in the Asian
market for Inditex. The top 5 FDI destinations in the world ranked by Business Insider (2018) are form
these regions. China’s FDI from January to July this year is up 7.3% to a whopping $75.56 billion
(Reuters, 2019). The company is capital-rich and can invest more in these regions for market
development.

The textile industry in Spain is significant and the government understands this fact. The largest industry
in Spain is for creating textile machinery and there are 160 such companies (López‐Maya, et al., 2015).
The government has made policies supporting the textile industry. Inditex has also benefitted from
these moves. The existing share of the sale in Europe is very high at 65%. Apart from government
policies and fashion, Inditex is delivering to the European market, the huge sale is also a result of free

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trade in the region. The free trade agreements of the European Union allows the companies to do
imports and exports without any tariffs. This makes the transactions very fast and reduces international
trade hurdle. Further, these trade agreements make no limit to the quality and quantity of the products
transacted. The free flow will result in the future as well and contribute to the company’s high sales.
Another important incident that took place in 2016 and shocked the whole world was the Brexit
referendum that took place on 23rd June 2016 (BBC, 2019). The UK is the largest exporter of textiles
products in Europe and Zara imports significant quantities form it (Kim, et al., 2019). The company has
mentioned that although the exit deal is not yet finalized when it does, the trade from the country will
be subject to the customs controls and duties (Annual report 2018, p.384). The kind of deal the UK will
be able to finalize with the EU will make a major impact on the future operations of the company.

The tax rate in Spain for EU members is considerably low at 25% (KPMG, 2019). Although the company
pays €980 million in taxes on income of €4,428 (Annual Report 2018, p. 311), the effective tax rate is
22%. Further, it still exposed to tax levy through its 358 subsidiaries (Annual Report 2018, p.367). The
total taxes (both direct €2,764 and indirect €3,402) paid by the company in the financial year ending
January 2019 amounts to €6,166 million (Annual Report 2018, p.21). The average indirect tax rate comes
out to be 12% which is adequate for the kind of products the company is dealing with. The corporate tax
rates in Sweden (home country of H&M) is 21.4%, the US is 21%, and the UK is 19% (Deloitte, 2019). It
can be concluded that the company is not gaining any tax advantage but it is a victim of high tax rates in
Spain. However, the tax rates are at par if compared with 25% in China and even better in comparison
with 30% in India (Deloitte, 2019).

The geopolitics of the region is stable except for the Brexit issues and ongoing stiff arisen due to the
difference of opinion by EU member counties on the immigration from war-affected the Middle East and
African regions. Spain has rejected immigration plans proposed by France and Germany early this year in
Brussel (El Pais, 2019). Spain is resilient from taking immigration from the beginning and figure 6 shows
its share which is very low (6th spot) when compared with other counterparts (BBC, 2018). Although the
current trade is unaffected by the resilient attitude of Sapin, it is observed from the past that countries
put restrictions on the bilateral trade as a counter-measure in such situations. Overall, it can be
concluded from analyzing the FDI, bilateral trade, government policies, tax rates and geopolitical
scenarios that the political risk is medium for Inditex.

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 Figure 6: Share of European countries in taking immigrants from war-affected Mediterranian region. Source: BBC (2018)
2.2.2 Economic
Inditex has a global presence and does trade all around the world through its retail and online stores. It
makes it very important to do an in-depth economic analysis. The important variable to conduct an
economic analysis is exchange rates, inflation and interest rates, GDP, per capita income, ongoing oil
prices, and balance of payment (Rastogi & Trivedi, 2016). Currently, the interest rates in Spain are at a
historic low at 0% (Trading Economics, 2019). The inflation rates are at 0.5% (Figure 7 and 8). The reason
for such low is the ongoing economic slowdown in the Europe region where most of the industries
aren’t performing well enough and the monitory policies the ECB is currently struggling with (CNBC,
2019). The ECB is expected to make a rate cut to cope with this adverse situation but only this measure
will not be sufficient. The ongoing US-China trade was had already disrupted the local European market
where China is dumping its surplus products at very low prices (Forbes, 2019). More recently, the
international market is hit by recession in the automobile industry which is constituted by a lot of large
scales European manufacturers especially from Germany (Business Insider, 2019). The business insider
report further raises concerns that this might be a start and could lead to another global recession.

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 Figure 7: Bank deposit interest rates in Spain - a timeline. Source: Bank of Spain (2019)

Figure 8: Timeline for the inflation rate in Spain. Source: Trading economics (2019)
The foreign trade is affected by the forex rate and when there is a huge fluctuation then it can turn a
profit-making affair into a loss-making. Euro is the domestic currency of Spain and the Euro/USD
exchange rate in the past two years have strengthened despite some underperformance in the early
part of the year (Dua & Suri, 2019). Figure 9 shows that the Euro has performed better over the past 2
years. The GDP of the world grew at the rate of 3.035%, the EU by 2%, Spain by 2.58% and China by
6.6% in the year 2018 (The World Bank, 2019). The comparative graph can be observed in figure 10
where it can be seen that although Spain’s GDP underperformed when compared with the global
benchmark, it performed well in the European context. The moderate GDP in Spain indicates that the
economy of the country is stable and does not impact adversely to Inditex in the short run. The high
GDP in China indicates that the income of individuals over there is increasing and it will help Inditex
developing their market over there in the near future. Figure 11 shows that the GDP per capita growth
rate in Spain (2.3%) and China (6.1%). The higher per capita GDP will increase the disposable income in
China and will be beneficial to the Inditex.

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 Figure 9: EUR/USD in the last 2 years. Source: Xe.com (2019)

Figure 10: GDP growth rate in the past 10 years. Source: The World Bank (2018)

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 Figure 11: last two years of crude oil prices per barrel. Source: Macrotrends (2019)

The oil price is an important indicator to determine the economic growth of a country. Oil is used for
production activities and its consumption is directly linked to the total produces in that country. The oil
prices reached a historic low at $29 per barrel in June 2016 (Macro Trends, 2019). The prices recovered
thereafter but a sudden downfall was caused in the last quarter of 2018 due to 3 main reasons vis stock
market crash, lowering demands and geopolitical issues (CNBC, 2018). The prices are volatile thereafter
and it appears from the ongoing geopolitical scenario that these will remain so for a significant period of
time. Further, another important factor of production is labor. The products made by Inditex requires
highly skilled labor. Although it has some factories located in China and other Asian countries, it still
manufactures the majority of its products in Spain where labor cost is high. Although it gives a time and
quality advantage, the setback is that the prices of end product get increased which hurts in the
competitive market. From the above analysis, it can be concluded that economic risk is high for Inditex.

2.2.3 Social
Inditex main model of doing business is selling offline through its stores. Kotler has emphasized on 4 E’s
of marketing which are Experience, Exclusivity, Engagement, and Emotion (Constantinides, 2006).
According to Pamela N Danziger, Zara has emphasized a lot of these factors and its highly-engaged
workforce interacts with its customers very well to understand their need and give back the feedback to
the designing team (Forbes, 2018). Unlike its competitor H&M which pushes its customers to buy
clothes, Zara excels in pulling the customers in its stores. Through its stores, it delivers a customer
experience through the exclusivity of its products. The stocks are refreshed every two weeks which
keeps the customers visiting the stores regularly. It builds customer engagement and over a period they
develop emotion with the brand. The company has built a cult following for its brands.

Inditex has been a pioneer in the fashion industry, however, the company got a challenge from online
platforms due to their low overheads and more customization. Zara opened its first online store in 2010
(Inditex, 2019). Its retail revenue is €3,200 in 2018 which is only 12.24% of its total revenue. Although

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the business model of the company is interactive, it lacks the ease of online experience and huge
overheads add up the cost of final products. The large workforce of sales representatives (90%) are paid
huge salaries and the fixed assets of €8,335 million majorly include the stores, primarily buildings which
depreciate fast and need replacement. Overall, the cost burden is high as compared with online
platforms where main overhead costs are the maintenance of servers and designing cost only. Further,
online players are more agile and dynamic and more customer-centric. They respond quickly and to the
changing trend and comes up with new products almost immediately. There seems no major threat right
now but the company is vulnerable to the online challenge. It has opened online stores in 96 markets so
far (Inditex, 2019) and needs to increase contribution from them. Further, Inditex operates globally and
sells in many markets where culture is diverse. It will always be challenging for the company to cater to
all these markets. Overall, being a market leader in the industry, it can be concluded that social risk is
low.

2.2.4 Technological
Technology has always been at the core of Inditex. The innovation in its design is led by high-end
computing machines and production is done through modern equipment. The company has also started
a new augmented reality display at their stores where customers can see how their models wear and
walk with their clothes (Sandler, 2019). These are primarily for luring millennials where 120 such
displays are installed worldwide. The technology has also enabled them starting online, although their
customers still prefer offline there is a scope for growth. The logistics department uses RFID technology
which is best in class and their plans are to implement the technology 100% by 2020 (Inditex, 2019). The
logistics centers use high-density packaging techniques that help the company save shipment cost worth
50 round trips. Further, the company has earmarked €227 million in various R&D projects (Annual
Report 2018, p.293). Inditex has been the first mover in the market place bringing new designs and
patterns. Technology has played an important part in getting the first-mover advantage and with such
high investment into R&D, it will continue to stay ahead on the technological battle. Overall, the
technological risk is low.

2.2.5 Legal
Inditex is legally bound to follow the commercial and corporate laws of Spain. The country is a member
of the European Union, so various laws of the Union are applicable to it such as it follows IFRS based
financial reporting standards, labor laws and various other commercial laws. The labor laws of the EU
are very strict in terms of anti-discrimination regulations, job security and individual labor’s right
(Williams & Lapeyre, 2017). Further, the copyright laws in Europe allows Inditex to secure its design
from getting reproduced through illegal measures which are a significant problem in the Asian markets.
However, the company is vulnerable to the copyright breaches as Zara along with Forever 21 and was
alleged for copying independent artist’s designs in 2018 (Business Insider, 2018). Gabby Bess reported
for Vice (2019) also mentioned that the summer 2016 collection of Zara was copied from instagram
pages of a number of artists. However, despite such allegations, no conclusive evidence has been
surfaced so far in the media denting the company’s image. Overall, it can be concluded that the legal
risk for the company is low.

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2.2.6 Environmental
Environment sustainability is one of the prime agenda of the EU and is highlighted in many of its
important meetings. EU Sustainable Development Strategy (2019) prescribes that businesses shall come
forward and incorporate sustainable development into their corporate strategy. Inditex mission also
includes sustainable development and has invested €6 billion in sustainability targets (Inditex, 2019).
Further, all the Zara stores are planned to get eco-friendly by 2020 in order to support greener
environment initiative by the government. Their competitor H&M are also joining in, they have installed
fashin bins at high streets where people can dump their unwanted clothes which are then recycled (CBC,
2018). Inditex also uses 100% renewable energy for its internal transport in its logistics centers (Inditex,
2019). The company is performing well on its sustainability mission and the environmental risk is low.

Political Economic Social Technological Legal Environmental

Medium High Low Low Low Low

2.3 Porter’s 5 forces

The fashion retail industry is highly competitive and saturated. PESTLE gives an in-depth analysis of the
macro-environment but Porter 5 forces will highlight the key elements of the competitive environment.
Inditex through its 8 brands targets price-savvy fashion-forward customers. The porter 5 forces analysis
will give an overview of how the company is affected by the competitive forces in the market.

12 | P a g e
 THREAT OF NEW ENTRANTS

- Low entry cost.

- No entry barrier.
- Less skill set and
technologyis required.

SUPPLER POWER BUYER POWER

INTERNAL RIVALRY
-Inditex vertical - Low shifting cost.
- High competition.
integration..
- Rapid growth infast fashion - Large nuber of
- Large number of buyers.
industry.
suppliers.
- increased competition - Order size is small.
- No dependence of
from online market place. - Brand loyalty.
suppliers.

THREAT OF
SUBSTITUTION
- Low in lesser
developed price
sensitive markets.
- Threats from high
end fashio retailers.

Figure 12: Porter's five forces in the context of Inditex

2.3.1 Internal Rivalry

Although Inditex competes with many fashion brands, it’s the Hennez & Mauritz (H&M) that is its closest
competitor. It also offers affordable trendy clothing like Zara. H&M was founded in 1947 in Sweden and
has 4,968 stores worldwide (H&M , 2019). Zara is leading ahead in terms of profitability and revenue
where its counterpart could manage to sale only €19.6 billion (H&M Annual Report, 2018) Inditex
bagged €26 billion. However, Business Insider (2019) reported that the rivalry is intense and H&M leads
in terms of varieties offered and comparatively cheaper prices. On the other hand, the report also claims
that H&M operating profits are suffered by 62% and unsold stock piled up at $4 billion. The main
competitive edge Inditex get is from its unique business model of fast fashion. This allowed Inditex to
grow fast and stay ahead with the latest trendy clothes in the store. The rivalry is strong but Inditex has
an advantage through vertical integration, minimal inventory and short supply chain. The business
model not only covers the risk but also creates a buying environment for more sales. Although the
switching cost is low the Inditex enjoys customer loyalty which makes its position even stronger in the
market.

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2.3.2. The threat of new entrants
The fashion industry is not only highly competitive but also witness a large number of players joining this
force and at the same time exiting every year. The barrier to entry is low and although there is
specialized knowledge required to design clothes it’s not much sophisticated. There are strict patent and
copyright norms in Europe but still, designs are often imitated and protection of technology is low.
Economies of scale give a competitive edge in many industries but Zara has proved that innovation is
more important in climbing the success ladder than large scale production. Inditex is getting a serious
challenge from the online marketplace where new and independent artists are offering innovative
designs and don’t have to care for overhead cost burden. The threat of new entrants is high.

2.3.3 Supplier power

A total of 1,866 suppliers work for Inditex (Inditex, 2019). It employs 174,000 people and through these
suppliers provide jobs to millions. Further, the company has 13 textile manufacturing units and 11
logistic subsidiaries (Inditex, 2019). The company sources both internally (to maintain quality) and
externally (so that competition is maintained). 50% of the suppliers are located in Spain, Portugal and
Morocco and 35% in Asia. These suppliers are large in numbers but not significant in size which means
the business of the company is not dependent on these suppliers and they hold substantially less
bargaining power. Further, there is no uniqueness of service and the same job-work is performed by
many vendors, substitutes are easily available and cost of changing these suppliers is also insignificant.

2.3.4 Buyers power

The industry is highly concentrated where fashion retailers are competing at every price level and for
each fashion category. The number of customers is large and size of the order is small. Inditex competes
through product distinction and although there is high price sensitivity, many substitutes are available
and there is no monetary cost of changing it enjoys brand loyalty through this strategy. Customers are
emotionally attached to the brands and this allowed the company to perform better even in the period
of recession. The price factor also favors Inditex, the kind of clothes it offers at a price tag with its brand
value looks like a bargain even to the lower-income shoppers. Although the bargaining power of
customers is generally high in the industry, Inditex has managed to tackle it so far.

2.3.5 Threat of substitution

The impact of the threat of substitute is difficult to measure as fashion is no more considered a luxury in
the west and people like to express themselves through their clothing style. In the lesser developed
countries, budget constraint often forms a barrier where people compromise with mass-scale producing
brands but Inditex has pricing advantage as discussed above. There is a very marginal risk of shifting of
customers to high-end fashion brands like Gucci and Armani in the urban markets, the large customer
base is not likely to shift, the main risk is however from the competitors.

Forces Rivalry New Supplier Buyer Threat of

Entrant Power Power Substitute
Strategic
High High Low Moderate Low
Importance

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2.4 SWOT Analysis

2.4.1 Strength

Inditex has followed the strategy of vertical integration and owns textile manufacturing units to retail
stores. It creates a huge tangible estate for the company and it can strengthen its market reach through
these widespread roots. Another key strength is its unique business model, innovation in design,
manufacturing, and logistics, global market coverage and Brand name.

2.4.2 Weakness

The most successful brand of the company is Zara which accounts for 65% of total revenue. Its other
brands have not yet made any successful impact. Further, there is too much dependence on the
European and domestic market which accounts for 66% of total sales (Annual Report 2018, p.333). The
share of the sale in Spain is reducing, Europe is stable however, the Asian market is growing but the
total share is mere 20%. Its online sales are also low despite Zara opened its first online store in 2010,
the total online sale of the group is 12%. It has a presence in 96 markets through online platforms, which
is more than its offline market, yet the sale is low.

2.4.3 Opportunity

The sale in Asian and American market is increasing. Both the market’s share 10 years ago was 10% each
and now the American share is 15% and the Asian market share has grown to 20%. The company has a
great opportunity to expand into these markets and unexplored market places in lesser developed
countries. Zara has gained huge popularity in China and has opened 589 stores so far which are second-
highest to Spain which has 1,635 stores (Annual Report 2018, p.386). It employs the maximum number
of employees in China (11,680). China’s economy has performed outstandingly over the past decade and
the per capita GDP has increased to 280% from $3,468 in 2008 to $9,771 in 2018 (World Bank, 2019).
People get more disposable income and the potential for growth is very high. Further, the online
platform will enable it to increase the reach where Inditex is not physically present. The millennial
generation is both time and cost-savvy so the online platform will be the real opportunity for the
company in the coming 5-7 years.

2.4.4 Threat

The biggest threat to the company is the saturated European market. The economic slowdown, US-
China trade war, and Brexit have emerged as a new threat to Inditex business in the recent past.
Moreover, there is increased competition from existing rivals and the online store are posing a new
threat. The fast fashion has created environmental concerns over early dumping of clothes. The UK
government has announced that it will look into the impact of fast fashion on the environment (BBC,
2019). Further, people getting fatigued of fast fashion are now looking for quality basics that are durable
and low price.

2.5 Strategic Recommendations

Through external, competitive and internal analysis of Inditex, a good understanding of the company
and its environment has been obtained. This will assist in evaluating the right strategy for the Inditex.

15 | P a g e
The two important models that are widely used for formulating strategy are Porter’s generic strategies
and Ansoff Matrix (Boyd, 2015). Johnson, et al (2002) suggest that an ideal strategy must be suitable,
acceptable, and feasible. Based on these principles the strategy of Inditex is evaluated.

2.5.1 Porter’s generic strategy

Michael E Porter argued that in order to get a competitive edge, an organization can follow either of the
three suggested strategies for its products. These are Differentiation strategy i.e. making product
substantially different from existing ones either through different features or branding; Cost leadership
strategy i.e. making the same product in large quantity in order to reach economies of scale and
reinvesting the profit earned for the betterment of the business; and the Focus or Niche strategy i.e.
tailoring a unique product for a specific target customers (Salavou, 2015). Inditex has been making
differentiated products for a mass audience from the beginning and it has horizontally expanded its
product line through 7 more new brands. The company’s strategy is refreshing stock frequently and
delivers new designs as per the changing trend. The company has earmarked €227 million on R&D and
foster innovation to bring the distinctiveness into its products. It does not manufacture seasonal
clothing on a large scale neither serve unique clothing like Boohoo to a specific audience. The customer
base is worldwide and fashion-loving individuals of all age group but the youth in particular. It can be
observed from the operating style of the company that it is following a differentiation strategy. Forbes
(2018) also reported that the key to Zara’s success is its close relationship with customers and satisfying
their needs through fresh and unique products. The strategy has served Inditex well and it is able to
surpass H&M which follows cost leadership strategy. Zara is the 25th best global brand and Inditex is a
market leader in the retail clothing industry.

2.5.2 Ansoff Matrix

Ansoff matrix is easy to understand and implement. Professor Igor Ansoff argued that there can be four
strategies that an organization adopt singly or I combination at a given point of time based on two
dimensions of product and market expansion (Burgelman & Doz, 2001). These are Market penetration
(selling an existing product in the existing market), Market development (bringing an existing product in
the new market), Product development (introducing a new product in the existing market), and
Diversification (introducing a new product in a new market) (figure 13). Inditex through its multi-brands
offers a wide range of products in many markets and it is expanding in a progressive manner. The last
brand launch was Uterqüe in 2008 and after that Inditex has focused only on market development. It
can be concluded that the company is primarily focusing on the first column of the Ansoff Matrix (figure
13). Since no new product was launched in the past one decade and diversification is far from reality for
Inditex which has never been into any other business from the very beginning, it can be easily concluded
that the company is not following product development or diversification strategy. In recent years, it has
expanded into South Americas and Asian markets especially China and is rapidly growing there. Inditex
has also entered unexplored territories through its online platforms and expanding its stores in the
existing European market. It can be concluded that the company is focusing more on market
development and also penetrating the existing markets.

16 | P a g e
 Figure 13: Ansoff Matrix highlighting Inditex strategy.

2.6 Conclusion

The business model of the company enables it to excel through innovation. Inditex follows 4 E’s of
marketing diligently and has placed its brand more as a fashion symbol than the clothing company. The
economic uncertainty in the European region caused by many geopolitical issues is the major external
risk the company is facing and the competitive environment is filled up with existing rivals and new
entrants posing threat to Zara both in terms of cost and trendy designs. However, through its
widespread presence and innovation in product development and logistics Inditex followed the product
differentiation strategy and focused on existing market penetration and new market development with
its 8 different brands.

3. Analysis of the company’s accounts

The financial statement analysis reveals the actual performance of the company that is supported by
numerical evidence. The overview of past performance will be conducted and after that the four major
areas covered under ratio analysis are (i) Profitability, (ii) Long term solvency, (iii) Short term solvency
(Liquidity), and (iv) Activity (Williams & Dobelman, 2017). The analysis is conducted through ratios and it
is primarily of two types vis vertical and horizontal analysis. Both trend and industry analysis are
conducted. Another important component of financial analysis is a segmental analysis which is adopted
by many scholars (Loughran, 2016). This part of section evaluates the performance of the company and
compares it with past data and industry.

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3.1 Data collection

In order to conduct the research, the last 10 years’ financial statements are taken into study. Inditex is
registered in Spain and follows the financial year from 1st February to 31st January. The research period
taken for the study is from 1st February 2009 to 31st January 2019. The financial year ending on 31st
January 2019 will be referred to as FY 2018 and so on. The financial data is collected from annual reports
published by the company and available on its official website. The closest competitor of Inditex is
Hennez & Mauritz (H&M) which is incorporated in Sweden and follows their financial year which starts
from 1st December and ends on 30th November. The financial year ending on 30th November 2018 will be
referred to as FY 2018 in the latter part of the dissertation and the data period is from 1st December
2008 to 30th November 2018. The industry data is obtained from Yahoo finance and other professional
websites.

3.2 Overview of Past performance

The three important standalone indicators to measure the past performance before conducting ratio
analysis are revenue, net profit (EBIT) and the trend of its Assets. Further, for easiness in the
comparison, the figures of H&M are converted from SEK to Euro. All the figures mentioned are in million
Euros unless specified. The corporate strategy of the company is to sustainably grow, reach operational
efficiency through innovation and increase its market presence through its online stores. The better
profitability and operating ratios indicate that Inditex has able gain advantage over its competitors and
managed to perform as per its corporate strategy. The ratio analysis section below will describe each
and every part of the company’s financial statements well and a comparative analysis with its
competitor.

Despite ups and downs in the revenue growth rate, Inditex revenue has grown at a faster rate (10%)
then H&M (9%) and the global rate of 3.8% (Statista, 2019) over the past 5 years and the gap increased
indicating better performance. The revenue did not give a complete picture of the competitive
performance. The level of operating profit was almost the same for both of the companies 10 years ago
but Inditex leaped ahead and their profit is 3 times its competitors. The operating profit growth rate
shows that H&M has been struggling in the recent past and its profits are shrinking each year and are
negative in the past three years and the most recent year was its worst. Inditex also suffered a 2% drop
in the profit but the impact was much lower in comparison. In contrast with its competitor, the
performance of Inditex is much better. The total assets of both the companies have increased over the
period at the same rate and Inditex is ahead of its competitor here as well.

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 Revenue
30,000
25,000
20,000
15,000
10,000
5,000
-
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 11,084 12,527 13,793 15,946 16,724 18,117 20,900 23,311 25,336 26,145
H&M 9,468 10,130 10,271 11,280 12,005 14,139 16,888 17,953 18,676 19,647

Revenue growth rate

25%
20%
15%
10%
5%
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 13% 10% 16% 5% 8% 15% 12% 9% 3%
H&M 7% 1% 10% 6% 18% 19% 6% 4% 5%

Operating profit
5,000
4,000
3,000
2,000
1,000
-
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 1,728 2,290 2,522 3,117 3,078 3,200 3,705 4,056 4,429 4,356
H&M 2,021 2,303 1,903 2,031 2,063 2,389 2,516 2,225 1,921 1,447

Operating profit growth rate

40%
30%
20%
10%
0%
-10%
-20%
-30%
2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 33% 10% 24% -1% 4% 16% 9% 9% -2%
H&M 14% -17% 7% 2% 16% 5% -12% -14% -25%

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 Total Assets
25,000.00
20,000.00
15,000.00
10,000.00
5,000.00
-
2014 2015 2016 2017 2018
Inditex 13,756.26 15,377.00 17,357.15 19,621.00 20,231.00
H&M 7,030.52 7,980.61 9,167.85 9,910.27 11,047.47

3.3 Common size analysis

The common size analysis is conducted to compare various elements of financial statements to a single
base element of that particular year. This base element is sales for the income statement and total
assets for the Balance Sheet. Each element is shown as a percentage to the base element. Instead of
amounts, the financial statement shows percentages and an easy internal comparison can be
conducted. The percentages reveal which items are major and which are minor. As can be seen from the
common size balance sheet below, in the year 2009 the COGS accounted for 43% of total sales and it can
be understood that the material and work costs of Inditex are very high and need special attention as
any minor increase can affect profitability a lot. Further, the workforce plays an important role in the
company’s success, yet the personnel expenditure is only 16%. The company can provide more
incentives to get more marginal benefits. The amortization and depreciation cost is 6% which is a non-
cash expenditure, most of the expenses are incurred in cash. It can further be observed that these
percentages are the same at the end of 10 periods indicating the stability and consistent the company
has maintained over the period.

From the Balance sheet analysis, it can be observed that the property plant and equipment constitute
42% of the total assets in 2009 and in 2018 they are 25%. The note 13 to the financial statement in the
Annual report of 2018 states that the large part of the company’s PPE investments is in Stores to the
tune of €8,335 million and more than 60% of these are in furniture and fixtures. As Inditex does its
business primarily through its stores, it is understandable why they constitute such a huge percentage.
Further, In the early years, the major portion of the money was also locked in the cash and cash
equivalents (31%). CCE are non-cash generating assets, however, supports liquidity. The proportion
reduced gradually and in 2015 suddenly fell from 25% to 16%. The analysis of the balance sheet revealed
that in the year 2015 Inditex has reclassified its various items of the balance sheet under the head of
other current assets and some ready to sell financial statements that were part of CCE earlier were
transferred under this head. This resulted in a huge jump in other current assets from 6% to 36% which
still stood at the same level.

The inventory is another important element. Earlier it was mere 13% in 2009 but after 10 years it is 26%.
It cannot be judged as a good indicator as the nature of business in which Inditex operates in i.e. fast

20 | P a g e
fashion does not allow it to hold much stock. Note 13 of the financial statement states that the company
has instituted a lot of SKU (Stock Keeping Units). These units hold large quantities of stocks and do fast
sales. It is understandable that this new innovative idea has its own costs which are a high investment in
inventory. The other percentages can also be observed but the major one that can be discussed is the
equity which was 68% in 2009 but managed to 45% in 2018, it is a good indicator from return
prospective.
Common Size Analysis

Consolidated Income Statement

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Percentage Percentage Percentage Percentage Percentage Percentage Percentage Percentage Percentage Percentage
Net Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Less: Cost of Sales 43% 41% 41% 40% 41% 42% 42% 43% 44% 43%
GP 57% 59% 59% 60% 59% 58% 58% 57% 56% 57%
Expenses:
Personnel expenses 16% 16% 16% 16% 16% 16% 16% 16% 16% 16%
Other 20% 20% 19% 19% 20% 20% 19% 20% 20% 20%
Total operating expenses 36% 36% 36% 35% 36% 36% 35% 35% 35% 36%
EBITDA (GP - Operating Expenses) 21% 24% 24% 25% 23% 23% 22% 22% 21% 21%
Less: Amortisation and Depreciation 6% 5% 5% 5% 5% 5% 5% 5% 4% 4%
EBIT 16% 18% 18% 20% 18% 18% 18% 17% 17% 17%
Net Finance Cost 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
EBT 16% 19% 19% 20% 18% 18% 18% 17% 17% 17%
Less: Incometax 4% 5% 4% 5% 4% 4% 4% 4% 4% 4%
EAT 12% 14% 14% 15% 14% 14% 14% 14% 13% 13%

Consolidated Balance Sheet

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Percentage Percentage Percentage Percentage Percentage Percentage Percentage Percentage Percentage Percentage
PPE 42% 33% 37% 35% 37% 39% 25% 25% 25% 25%
Other Non-Current Assets 8% 17% 13% 15% 13% 15% 9% 8% 8% 8%
Total Non-Current Assets (A) 50% 50% 50% 50% 51% 54% 34% 33% 33% 34%
Inventories 13% 12% 12% 15% 16% 18% 21% 24% 26% 26%
Trade Receivables 3% 2% 2% 2% 2% 2% 2% 2% 1% 1%
Financial Investments 0% 0% 0% 2% 2% 1% 4% 7% 5% 6%
CCE 31% 33% 32% 29% 28% 25% 16% 14% 16% 15%
Other Current Assets 4% 3% 4% 5% 5% 6% 36% 36% 35% 36%
Total Current Assets (B) 50% 50% 50% 50% 49% 46% 66% 67% 67% 66%
Total Assets (A+B) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Equity 68% 62% 69% 63% 67% 68% 44% 43% 45% 45%
Long Term Debt 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Total Capital Employed 68% 62% 69% 63% 67% 68% 44% 43% 45% 45%
Other Non-Current Liabilities 8% 7% 7% 7% 7% 8% 5% 5% 5% 5%
Total Non-Current Liabilities (C) 8% 7% 7% 7% 7% 8% 5% 5% 5% 5%
Trade Payables 20% 19% 17% 17% 17% 16% 11% 12% 12% 11%
Other Current Liabilities 0 0 0 0 0 0 0 0 0 0
Total Current Liabilities (D) 29% 26% 25% 26% 25% 24% 18% 19% 17% 16%
Total Liabilities (C+D) 38% 33% 32% 33% 33% 32% 22% 23% 22% 21%

3.4 Trend Analysis

The trend analysis involves comparing different elements of financial statements with the base year
items. Each item is shown as a percentage of base year value. The base year in the study is 2009. Trend
analysis is very informative; those items can be identified easily that are changing at an abnormal rate
either increasing or decreasing. Special attention can be paid to these items; this is very useful by the
management in the capital budgeting. The financial statements below revealed that revenue has
increased to 236% in 10 years which is very impressive. All the other items of the income increased at

21 | P a g e
the same rate except for the amortization and depreciation which remained low (good indicator as
investment in PPE is high) and net finance cost increased to 1175% which is whopping but on examining
closely it was observed that the finance cost was very less throughout and the high jump is only in terms
of percentage and not in terms of amount. The EAT increased more than sales which highlights the
better efficiency the company has achieved in these years.

The Balance sheet reveals that the total assets increased to 415% in these 10 years. It’s only the other
current assets that rose at more than this rate (1775%) and the reason for this change is the
reclassification of some assets. Rest of the assets grew at a lesser rate, the long term borrowing holds
the same proportion and Equity grew at a lesser rate than TA.

Trend Analysis

Consolidated Income Statement

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
PercentagePercentagePercentagePercentagePercentagePercentagePercentagePercentagePercentagePercentage
Net Sales 100% 113% 124% 144% 151% 163% 189% 210% 229% 236%
Less: Cost of Sales 100% 107% 118% 135% 143% 159% 185% 211% 233% 238%
GP 100% 117% 129% 151% 157% 167% 191% 210% 225% 234%
Expenses:
Personnel expenses 100% 112% 125% 142% 151% 164% 186% 203% 221% 231%
Other 100% 113% 124% 142% 153% 163% 188% 211% 232% 242%
Total operating expenses 100% 113% 124% 142% 152% 164% 187% 207% 227% 237%
EBITDA (GP - Operating Expenses) 100% 125% 137% 165% 165% 173% 198% 214% 222% 230%
Less: Amortisation and Depreciation 100% 105% 114% 123% 132% 140% 158% 165% 149% 170%
EBIT 100% 133% 146% 180% 178% 185% 213% 233% 250% 252%
Net Finance Cost 100% 800% 925% 350% -450% 1175% 1650% 1450% 925% 1775%
EBT 100% 134% 148% 181% 176% 187% 216% 235% 251% 256%
Less: Incometax 100% 141% 150% 186% 164% 179% 210% 224% 239% 239%
EAT 100% 132% 147% 179% 180% 190% 218% 239% 255% 261%

Consolidated Balance Sheet

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
PercentagePercentagePercentagePercentagePercentagePercentagePercentagePercentagePercentagePercentage
PPE 100% 103% 123% 142% 156% 183% 200% 221% 232% 253%
Other Non-Current Assets 100% 278% 211% 312% 285% 343% 356% 375% 375% 419%
Total Non-Current Assets (A) 100% 132% 138% 170% 177% 210% 226% 247% 256% 281%
Inventories 100% 122% 129% 159% 169% 187% 221% 257% 270% 274%
Trade Receivables 100% 89% 95% 130% 135% 157% 173% 204% 190% 201%
Financial Investments
CCE 100% 142% 143% 159% 159% 157% 175% 170% 204% 201%
Other Current Assets 100% 117% 157% 234% 238% 286% 3121% 3451% 3535% 3866%
Total Current Assets (B) 100% 132% 138% 170% 172% 180% 440% 497% 513% 550%
Total Assets (A+B) 100% 132% 138% 170% 174% 195% 333% 372% 384% 415%

Equity 100% 120% 139% 158% 173% 195% 213% 237% 252% 273%
Long Term Debt 100% 80% 40% 80% 40% 40% 20% 20% 80% 100%
Total Capital Employed 100% 120% 139% 158% 173% 194% 213% 237% 252% 273%
Other Non-Current Liabilities 100% 111% 122% 140% 155% 177% 189% 216% 234% 246%
Total Non-Current Liabilities (C) 100% 110% 121% 140% 154% 176% 187% 215% 233% 245%
Trade Payables 100% 124% 118% 144% 152% 159% 192% 223% 230% 240%
Other Current Liabilities 100% 100% 116% 167% 146% 169% 224% 265% 214% 219%
Total Current Liabilities (D) 100% 116% 117% 151% 150% 163% 203% 236% 224% 234%
Total Liabilities (C+D) 100% 115% 118% 149% 151% 166% 199% 232% 226% 236%

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3.5 Combined Size Analysis

Combined size analysis is a combined form of these two analyses. An item is compared with the base
item of that year and its last year amount. The percentage gives a complete result but one has to look
for both the other analysis to know the reason for the change. The income statement below shows that
almost all the elements are close to 100% except for finance cost whose reason is already known to us.
This reflects the uniformity and consistency Inditex has maintained. The Balance sheet items are also
close to 100% in FY 2018, however, few elements fluctuated in between. Overall, it can be concluded
that the company is consistent.

Common Size Analysis

Consolidated Income Statement

2010 2011 2012 2013 2014 2015 2016 2017 2018
Net Sales 100% 100% 100% 100% 100% 100% 100% 100% 100%
Less: Cost of Sales 95% 100% 99% 101% 102% 101% 102% 102% 99%
GP 104% 100% 101% 99% 98% 99% 98% 99% 101%
Expenses:
Personnel expenses 99% 101% 99% 101% 100% 99% 98% 100% 101%
Other 100% 100% 99% 102% 99% 99% 101% 101% 101%
Total operating expenses 100% 100% 99% 102% 100% 99% 99% 101% 101%
EBITDA (GP - Operating Expenses) 111% 100% 104% 96% 96% 99% 97% 96% 100%
Less: Amortisation and Depreciation 93% 99% 94% 102% 98% 98% 93% 83% 111%
EBIT 117% 100% 107% 94% 96% 100% 98% 99% 98%
Net Finance Cost 708% 105% 33% -123% -241% 122% 79% 59% 186%
EBT 119% 100% 106% 93% 98% 100% 98% 98% 99%
Less: Incometax 125% 96% 108% 84% 101% 102% 95% 98% 97%
EAT 117% 101% 105% 96% 97% 100% 98% 98% 99%

Consolidated Balance Sheet

2010 2011 2012 2013 2014 2015 2016 2017 2018
PPE 78% 114% 93% 107% 105% 64% 99% 102% 101%
Other Non-Current Assets 211% 73% 120% 89% 108% 61% 95% 97% 103%
Total Non-Current Assets (A) 100% 100% 100% 102% 106% 63% 98% 100% 102%
Inventories 93% 101% 101% 103% 99% 69% 104% 102% 94%
Trade Receivables 67% 102% 112% 101% 104% 64% 106% 90% 98%
Financial Investments
CCE 108% 97% 90% 97% 88% 65% 87% 116% 91%
Other Current Assets 89% 129% 121% 99% 108% 639% 99% 99% 101%
Total Current Assets (B) 100% 100% 100% 98% 94% 143% 101% 100% 99%
Total Assets (A+B) 100% 100% 100% 100% 100% 100% 100% 100% 100%

Equity 91% 111% 92% 106% 101% 64% 100% 103% 101%
Long Term Debt 61% 48% 162% 49% 89% 29% 90% 387% 116%
Total Capital Employed 91% 111% 92% 106% 101% 64% 100% 103% 101%
Other Non-Current Liabilities 84% 106% 93% 107% 102% 62% 103% 105% 97%
Total Non-Current Liabilities (C) 84% 105% 94% 107% 102% 62% 103% 105% 98%
Trade Payables 94% 91% 99% 103% 94% 71% 104% 100% 97%
Other Current Liabilities 76% 111% 117% 85% 104% 77% 106% 78% 95%
Total Current Liabilities (D) 88% 97% 105% 97% 97% 73% 104% 92% 96%
Total Liabilities (C+D) 87% 99% 102% 99% 98% 70% 104% 95% 97%

23 | P a g e
3.6 Ratio Analysis
Ratio analysis is one of the simple and easiest tools to understand the fundamental indicators of any
business. The four broad groups of ratios are analyzed in details and comparison is done with the
competitor H&M.

3.6.1 Profitability
The profitability ratios indicate the firm’s performance in terms of earnings against different
benchmarks. It shows the firm’s ability to generate profit relative to revenue, capital employed and
assets of the company (Tamulevičienė, 2016).

3.6.1.1 Profit margin ratio

The profit margin ratio is defined as the net percentage of margin to the revenue. There are two types
of profit margins vis gross margin and the net margin. The formulas for both of them is as follows:

Gross Margin = x 100% Net Margin = x 100%

In the last 10 years, the trend in both gross and net margin remains the same with a very lesser increase
in the mid-years but coming almost to the same point by the end. The company is able to keep the
margins indifferent although, its sales folded 2.5 times. This indicates a better cost management system
and committed revenue generation by its marketing workforce. The competitor H&M suffered a drop in
GP margin by 10% from 62% in 2009 to 53% in 2018. The fall in the net margin is even more from 21% to
a mere 7% as can be seen from the graph below. The company is facing a tough time and the way trend
is going, it looks sustaining profits will be a challenge for H&M.

Gross Margin
65%
60%
55%
50%
45%
2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 57% 59% 59% 60% 59% 58% 58% 55% 55% 55%
H&M 62% 63% 60% 59% 59% 59% 57% 55% 54% 53%

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 Net Margin
25%
20%
15%
10%
5%
0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 16% 18% 18% 20% 18% 18% 18% 17% 17% 17%
H&M 21% 23% 19% 18% 17% 17% 15% 12% 10% 7%

3.6.1.2 Operating Efficiency Ratio

The Operating efficiency ratio describes the relationship between firm’s expenses and net sales. It deals
with the operating efficiency of the firm and a lower ratio is considered as better. The formula is as
follows:

Operating Ratio = x 100%

It can be seen from the graph below that the operating efficiency of Inditex has increased over the years
and the H&M decreased after 2011-12.

Operating Ratio
95%
90%
85%
80%
75%
70%
65%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 84% 84% 82% 82% 80% 82% 82% 82% 83% 83%
H&M 79% 77% 81% 82% 83% 83% 85% 88% 90% 93%

3.6.1.3 Return on Assets (ROA)

The ROA is defined as the percentage of net operating income to the total assets of the company. It
signifies the company’s efficiency in utilizing its total assets to generate revenue (Barillas & Shanken,
2018). The formula is as follows:

ROA = x 100%

Inditex ROA is stable throughout the past decade touching highest of 24% in 2012. The stable ratio
indicates that the company has utilized its profits in expanding its asset base which grew by 1.6 times
showing a rapid growth for the company. Its competitor performed significantly well in the first 7 years

25 | P a g e
recording a maximum ROA of 42% in 2010 but the low profitability impact here as well. Their downfall
was so fast that within three years the if fall way behind Inditex at 13%.

ROA
50%
40%
30%
20%
10%
0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 21% 23% 23% 24% 22% 21% 21% 21% 22% 20%
H&M 40% 42% 34% 36% 34% 34% 31% 24% 19% 13%

3.6.1.4 Return on Capital Employed (ROCE)

ROCE is one of the most important indicator of the profitability of a company. It takes into account all
the capital employed (i.e. both equity and debt) in the business and calculates the percentage of
earnings on that capital that is more logical as compared with other ratios. For profitability, operating
profits are taken and the formula is as follows:

ROCE = x 100%

The average ROCE of Inditex is 33% over the 10 years and it is stable, this is an impressive performance
by the company as it is able to justify their investor’s decision. The money invested in generating profit
and it is huge at 33%. Here again, the initial performance of H&M was much impressive at more than
50% which seems impossible at large-scaled business, but H&M did it in most part of its business and it
stayed ahead of Inditex until last year before falling to 23%. One of the reasons for this is that the H&M
€950 million loans for the first time and it increased the toll. The high performance of H&M indicates
that the industry has the potential to generate more money and it can stretch more through working on
more profitable projects.

ROCE
60%
50%
40%
30%
20%
10%
0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 32% 36% 34% 37% 33% 31% 32% 32% 33% 30%
H&M 53% 56% 46% 50% 49% 50% 46% 39% 34% 23%

26 | P a g e
3.6.1.5 Return on Equity (ROE)
ROE is the most important indicator of profitability as it shows how much the true owners are earning
i.e. the equity holders. It takes into account the Earnings after Tax (EAT) and calculates it as a percentage
of total equity.

ROE = x 100%

The ROE trend is same as ROCE; this is because both the companies did not have any material debt in
their whole timeline.

ROE
50%
40%
30%
20%
10%
0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 24% 27% 26% 28% 26% 24% 25% 25% 25% 23%
H&M 40% 42% 36% 38% 38% 39% 36% 30% 27% 22%

3.6.2 Long term solvency

Long term solvency ratios measure firm’s ability to sustain its operation in a long run or indefinitely and
in order to understand the ability, level of debt is compared with assets, equity, and earnings (Singh &
Schmidgall, 2002). The two most commonly used ratios for checking long term solvency are Debt to
Equity (DE) ratio and Equity ratio.

3.6.2.1 Debt to Equity ratio

DE ratio shows the proportion of external funding (long term borrowings) to internal funding (equity). It
is calculated by dividing such loans to total equity.

DE ratio =

Inditex does not have any long term debt that is material. Almost entire capital employed is equity-
based, hence, there is no risk on long term solvency. Its competitor has also followed the same policy
but the harsh times led it to borrow €950 million last year. Having a low or nil DE ratio means that the
company will enjoy the highest level of autonomy and can raise funds easily. However, as the ROE is
high (23%), Inditex is losing leverage opportunity as it will have to pay much less to what it can earn on
borrowed funds.

27 | P a g e
 DE Ratio
0.20000
0.15000
0.10000
0.05000
0.00000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 0.00053 0.00051 0.00010 0.00044 0.00016 0.00000 0.00000 0.00000 0.00000 0.00000
H&M 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.00000 0.17371

3.6.2.2 Total Liabilities to Asset ratio

The debt to equity considers only those borrowings which are long term in nature but this ratio
expresses how much of the assets are funded by the outside liability of any kind. This will give a broader
picture of for understanding the asset backing. It is preferred ideally that not more than half of all the
assets shall be funded by outside liabilities, the higher the ratio, the adverse it is. The formula is:

Total Liabilities to Asset Ratio =

The graph below indicates that Inditex has performed well over the past years, its proportion of total
liabilities has decreased from 35.6% in 2009 to 32.3% in 2018. If compared with the competitor, the
performance is even better as H&M’s performed bad on this ratio and the share of its total liabilities has
doubled in the past.

Total Liabilities to Asset Ratio

60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 35.6% 34.6% 32.0% 34.2% 32.6% 31.9% 34.0% 35.0% 33.2% 32.3%
H&M 25.3% 25.4% 26.7% 27.2% 31.1% 31.8% 32.4% 37.9% 44.0% 50.7%

3.6.3 Short term solvency

Short term solvency ratios measure the liquidity of a company. They describe how strong is a company
in surviving the short term challenges like in case of sudden demand by the short term lenders, will the
working of the company will be impacted and how much it will be impacted. The liquidity is very
important as the first hit any business get is here, and it is the most vulnerable part of any business.

28 | P a g e
3.6.3.1 Current ratio
The current ratio is the most common and widely adopted from the smallest of the organization to any
big corporate house. It measures how much of the current assets are financed by current liabilities. It is
ideally preferred that not more than half of the CA shall be financed from the CL, a high ratio is the
better. The formula is as follows:

Current Ratio =

Inditex has improved its CR from 1.7 times in 2009 to 2 times in 2018 which is deal, H&M performed
badly again and from a much better position in 2009, its ratio dropped more than half to 1.4 times in
2018. It indicates that Inditex was able to reduce its current liabilities over the years and most of its CA
are funded by long term sources. In the event of distress, the impact on the working of Inditex will be
late.

Current ratio
3.5x
3.0x
2.5x
2.0x
1.5x
1.0x
0.5x
0.0x
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 1.7x 1.9x 2.0x 1.9x 2.0x 1.9x 1.8x 1.8x 2.0x 2.0x
H&M 3.3x 3.0x 2.7x 2.7x 2.3x 2.1x 2.0x 1.6x 1.4x 1.4x

3.6.3.1 Quick ratio

The quick ratio is a more refined form of Current ratio; it calculates the Quick Assets (QA) ratio to
current liabilities. QA are current assets less liabilities, the ideal ratio is 1:1. The ratio is calculated as
follows:

Quick Ratio =

The performance of both the companies is the same here as well, Inditex outperformed H&M even
earlier as compared to the CR. The quick ratio of H&M dropped to very low at 0.5 times.

29 | P a g e
 Quick ratio
2.5x
2.0x
1.5x
1.0x
0.5x
0.0x
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 1.2x 1.5x 1.5x 1.4x 1.4x 1.3x 1.3x 1.3x 1.4x 1.4x
H&M 2.2x 2.1x 1.7x 1.5x 1.2x 1.1x 0.8x 0.5x 0.5x 0.5x

3.6.4 Activity ratios

Activity ratios are an indicator of the operational performance of a company. These are efficiency
measurement tools. They show the conversion cycle and there are three most important elements of
working capital for which these are calculated. These are inventory, debtors and creditors.

3.6.4.1 Inventory turnover ratio

The inventory turnover ratio shows how much days the inventor takes to get converted into finished
goods, the lesser is better. It is calculated by diving the average inventory to the total purchases made
over a period and then multiplying with 365 days. A shorter cycle is better as it allows more circulation
and an opportunity to earn profit.

ITR = x 365 days

The graph below indicates that although Inditex has outperformed its competitor, its inventory
conversion cycle has increased. The increment is not significant but it reflects the trend which is not
favorable. The ITR was 78 days in 2009 which has increased to 84 days in 2018.

Inventory turnover ratio

140.0
120.0
100.0
80.0
60.0
40.0
20.0
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 78.6 78.9 81.0 81.5 87.4 85.5 84.0 83.1 82.9 83.6
H&M 87.9 98.6 105.3 108.6 110.8 105.6 103.9 120.2 129.9 131.0

30 | P a g e
3.6.4.2 Debtors turnover ratio
The debtor’s turnover indicates how many days it takes a company to collect its cash from account
receivables. The lesser is better. The formula is as follows:

DTR = x 365 days

Inditex has performed well in this segment, the overall average days have reduced from 34 in 2009 to 23
in 2018. This shows that the collection has become fast and the company is adequately cash-rich. H&M
performed miserably with such a huge gap between the ratios of these two companies. While Inditex
does the collection in 23 days, H&M does it in 116 days.

Debtors turnover ratio

140.0
120.0
100.0
80.0
60.0
40.0
20.0
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 34.0 32.8 33.2 23.6 28.0 22.4 18.8 19.7 21.0 23.2
H&M 62.2 72.2 80.3 84.4 87.6 84.6 86.4 102.6 111.1 116.4

3.6.4.3 Creditors turnover ratio

The creditors turnover ratio is the opposite of DTR. It shows how much time a company takes to pay off
its creditors. The higher is better as if it will get more time to settle its bills, the money can be utilized in
working capital. The formula is as follows:

CTR = x 365 days

The graph below shows a huge difference between the two competitors. H&M is nowhere near Inditex
in managing its payables. While Inditex gets a 113 period to settle its bills, H&M has to do it in 24 days.
This reflects the strong credit Inditex has and how much the suppliers trust the company.

Creditors turnover ratio

140.0
120.0
100.0
80.0
60.0
40.0
20.0
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Inditex 120.5 118.0 119.8 111.0 122.0 114.6 109.3 109.5 110.4 113.0
H&M 32.9 33.6 32.7 31.1 30.8 29.1 25.3 26.1 28.1 24.7

31 | P a g e
3.6.5 Conclusion
From all the different ratios calculated for assessing profitability, it can be observed that Inditex not only
improvised from its past position but also outperformed its competitors. From assessing the long term
solvency, it can be observed that Inditex has strengthened its equity whereas the competitor’s
performance was negative. Inditex was slow and progressive in improving its liquidity ratios, it has a
very strong position and the ratios are above the ideally accepted benchmark. Further, the table below
shows the amount of cash and cash equivalents of Inditex which reflects a trend of fall in CCE. It is a
good indicator as CCE does not generate any further income from themselves but only strengthen the
company’s liquidity. Since the liquidity of the company is already maintained well, a reduction in CCE
means more funds will be invested in working assets and more revenue can be generated.

It can be concluded from the above analysis of activity ratios that the Inditex has a storing and efficient
operational system in place. All the ratios are consistent, Inditex is high on the excellence curve. H&M
performance is worst on the liquidity scale.

3.7 DuPont analysis

DuPont analysis is the extension of ROE. It decomposes the ROE into 3 different drivers that measure
the profit margin (an indicator of operating efficiency), asset turnover (an indicator of asset use
efficiency), and the equity multiplier (an indicator of financial leverage) (Soliman, 2008). As the
profitability of a company is depended on many factors, ROE can show the profitability of a company
overall but how much each factor is contributing to the profitability cannot be measured. The
management also needs to check these factors to know the strength and weakness. Unless these are
not identified, the appropriate measures cannot be taken. The investor can also make comparison
among two companies on the grounds of these three factors as not every investor gives the same
weight to these factors. These ratios are explained below:

Profit margin ratio =

Asset turnover ratio =

Equity Multiplier =

The DuPont equation looks like this:

DuPont analysis = Net profit margin X Asset Turnover X Equity Multiplier

ROE = = x x

32 | P a g e
These different ratios calculated for different periods. Further, from the graph below, it can be observed
that although the ROE is almost constant throughout the decade, the three components are not. The
Asset turnover ratio rises significantly in FY 2012 and continues to grow at a slow acceleration. The
positive impact of this ratio was diluted by the sudden fall in the equity multiplier in the same year. The
profit margin was in line with the ROE. If we consider the standalone analysis for one the particular year
2018 then it is revealed that although the profit margin of the company is mere 12% in FY 2018 it was
able to increase its ROE through its effective asset turnover and equity multiplier which are 1.41 and
1.47 respectively. The effect of this multiplier is that the ROE doubled giving better profitability to the
company’s equity shareholders. Through these analyses, it is revealed that the management has
effectively used their assets to make more sales in a year. The more the sales are in relation to the total
assets the more profitability will be there in the end. The profitability rose from 12% to 17% through this
effect. Similarly, the equity part in the total assets has been increased which reduced the overall
profitability but still as all the assets are not fully financed by the equity, the company is able to gain
certain leverage from the non-equity financed assets and the profitability increased from 17% to 25%.
So, the performance of the company is impressive.

DuPont Analysis
250%

200%

150%

100%

50%

0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Profit margin 13% 13% 14% 14% 14% 14% 15% 14% 14% 12%
Asset TO 0.80 0.84 0.79 0.80 1.18 1.22 1.19 1.27 1.20 1.41
Equity Multiplier 2.23 2.24 2.30 2.29 1.47 1.48 1.58 1.46 1.62 1.47
ROE 23% 25% 25% 25% 24% 26% 28% 26% 27% 25%

33 | P a g e
3.7 Segment Analysis

In the era of globalization and product diversification, a standalone analysis of company’s profits, sales,
and assets do not provide adequate knowledge as the investments are made into different regions, in
different brands and the revenues are also different from these different sources. Therefore, segment
analysis gives insight into the micro-level performance of the company in terms of its different units or
brands and different areas it serves. Any company can classify its segments based on any factor and can
have any number of such different segment types but the IFRS provide that segment analysis be done in
for operating segments and geographical segments (Nichols, et al., 2012). Inditex segmental analysis is
done based on these two elements.

3.7.1 Operating segments

The operating segments show the results and position of each individual units which are distinct in
operations and has some autonomy. Not each and every such distinctly operated units are disclosed by
companies, only the major ones which accounts for 10% of revenue, assets, or the income to the group’
or any unit which the board considers important enough to disclose separately are disclosed in such
manner and rest of the units are grouped into “other segments” (Pardal & Morais, 2011). Inditex has 8
brands and classifies its operating segments into three categories vis “Zara and Zara home”, “Bershka”,
and “Other”.

The segment analysis revealed that Zara and Zara Home are still the strongest brand of the company.
They account for two-third of the total sales in 2009 and the proportion remained almost the same 10
years later with just 4% increase. The performance of all the brands remain the same in the long run and
it shows how consistent is Inditex overall. Bershka sale fell by 2% and the rest of the brands by 3%. The
only threat to the company is that despite diversification into 8 brands the main, they are dependent
too much on their eldest brand Zara. It’s a matter of pride and serious concern as the other brands are
not yet mature to support the group and any damage to Zara will impact the whole group. However,
with the consistency the company is progressing, the risk of such vulnerability is too low.

Operating Segment Financial year: February to January

(Amount in million Euros)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Revenue
Zara / Zara Home 7,077 8,088 8,938 10,541 10,804 11,594 13,711 15,483 17,551 18,127
Bershka 1,177 1,247 1,316 1,485 1,556 1,664 1,879 2,013 2,228 2,240
Other 2,830 3,192 3,539 3,920 4,365 4,858 5,403 5,908 5,661 5,886
Total Revenues 11,084 12,527 13,793 15,946 16,724 18,117 20,900 23,310 25,336 26,144
Operating Profit Before Tax
Zara / Zara Home 1,105 1,534 1,725 2,233 2,089 2,123 2,454 2,764 3,126 3,122
Bershka 196 197 159 239 241 245 300 333 354 326
Other 427 559 638 644 741 831 927 923 848 909
Total Operating Profit Before Tax 1,728 2,290 2,522 3,117 3,071 3,198 3,677 4,021 4,314 4,356
Assets
Zara / Zara Home 5,169 6,393 7,079 8,284 10,243 11,453 13,251 15,074 16,023 17,345
Bershka 823 894 824 1,006 827 881 886 938 993 1,057
Other 2,344 2,539 3,057 3,600 2,686 3,043 3,220 3,610 3,215 3,282
Total Assets 8,335 9,826 10,959 12,890 13,756 15,377 17,357 19,622 20,231 21,684
Market Share
Zara / Zara Home 64% 65% 65% 66% 65% 64% 66% 66% 69% 69%
Bershka 11% 10% 10% 9% 9% 9% 9% 9% 9% 9%
Other 26% 25% 26% 25% 26% 27% 26% 25% 22% 23%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

34 | P a g e
 SALES IN FY 2009 SALES IN FY 2018
Zara / Zara Home Bershka Other Zara / Zara Home Bershka Other

23%
25%

9%
11% 64% 68%

REVENUE
Zara / Zara Home Bershka Other

20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

3.7.2 Geographical segments

Geographical segment analysis discloses the performance of a company in different regions. These can
be within a country or worldwide. Inditex segments its market into four vis Spain, Rest of Europe, the
Americas, and Asia and the rest of Europe. The sale and profit from the domestic market are increasing
but the overall share is decreasing. Spain has 1,635 stores (Annual Report 2018, p.386) which is the most
in a country by Inditex. The fall in share is a concern but Inditex has gained much success in Asian and
rest of the world market which grew 5 times in past decade followed by Americas (4 times) and Rest of

35 | P a g e
Europe (2 times). The European market is the favorites, it is consistent with the overall growth of the
company and accounted for 47% of share in revenue throughout.

Since all the markets are geographically different, the cost of business is also different in there and
Inditex has to spend different level of investment in these regions. The cost of such an investment is
always low in underdeveloped markets like in Asia and Africa. The Asset Turnover ratio is the measure
that reflects the relationship between revenue and investments. From the graph below it can be
observed that the ATR Asian and the rest of the world market has increased significantly and the
Americas has fallen sharply. These two markets are the fastest growing for Inditex but this relationship
states that the Asian and rest of the world market is generating more profit to the company and the
Americas is costly affair comparatively. The Lowest ATR is of Spain and it is falling significantly which
demonstrate the bad performance of the company domestically. It is a major concern for Inditex which
it shall address immediately. However, the European market is a relief which is the biggest, providing
half of the revenue and the ATR is increasing slowly but consistently.

Geographical Segment Financial year: February to January

(Amount in million Euros)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Revenues
Spain 3,709 3,685 3,755 3,550 3,529 3,707 4,003 4,251 4,424 4,557
Rest of Europe 5,221 5,907 6,415 7,649 8,012 8,724 9,695 10,796 11,954 12,388
Americas 1,097 1,441 1,650 2,169 2,272 2,446 3,002 3,484 3,877 4,033
Asia and Rest of the World 1,056 1,493 1,973 2,579 2,911 3,240 4,200 4,779 5,081 5,167
Total Revenues 11,084 12,527 13,793 15,946 16,724 18,117 20,900 23,310 25,336 26,145
Assets
Spain 1,933 1,892 2,036 2,173 2,303 2,541 2,921 2,806 3,056 3,486
Rest of Europe 1,784 1,831 1,988 2,344 2,673 2,864 2,916 3,188 3,458 3,725
Americas 210 250 521 584 696 1,204 1,362 1,495 1,421 1,567
Asia and Rest of the World 230 351 621 714 789 1,018 1,016 958 884 864
Total Assets 4,157 4,324 5,166 5,816 6,462 7,627 8,214 8,447 8,819 9,642
Percentage
Spain 33% 29% 27% 22% 21% 20% 19% 18% 17% 17%
Rest of Europe 47% 47% 47% 48% 48% 48% 46% 46% 47% 47%
Americas 10% 12% 12% 14% 14% 14% 14% 15% 15% 15%
Asia and Rest of the World 10% 12% 14% 16% 17% 18% 20% 21% 20% 20%

36 | P a g e
 REVENUE
Spain Rest of Europe Americas Asia and Rest of the World

30,000

25,000

20,000

15,000

10,000

5,000

-
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

ASSET TURNOVER RATIO

7.00
6.00
5.00
4.00
3.00
2.00
1.00
-
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Spain 1.92 1.95 1.84 1.63 1.53 1.46 1.37 1.51 1.45 1.31
Rest of Europe 2.93 3.23 3.23 3.26 3.00 3.05 3.32 3.39 3.46 3.33
Americas 5.21 5.76 3.17 3.71 3.26 2.03 2.20 2.33 2.73 2.57
Asia and Rest of the World 4.58 4.26 3.18 3.61 3.69 3.18 4.14 4.99 5.75 5.98

3.8 Conclusion

The ratio analysis revealed that Inditex is consistent in mostly all the grounds. 10 years ago, H&M was
leading in terms of profit margin, solvency and liquidity but Inditex were ahead in operational excellence
which is revealed through activity ratios. H&M has received a setback in the last four years and Inditex
has outperformed it on almost all the performance indicators. The DuPont analysis showed the various
components of ROE, the common size analysis revealed that the important elements of financial
statements which management need to focus especially the rising inventory. The segment analysis
highlights that the Zara is still the favorite brand and the Asian and rest of the world market has great
scope for market development.

37 | P a g e
4. Investment Performance

The study has discussed the performance of the company from an internal user’s point of view which
included the environmental and strategy analysis and the company’s financial statement analysis. This
portion will analyze Inditex performance on the stock market. This portion will help the investors in
assessing the return and risk Inditex has, its past performance in the market and future prospects. There
are different indicators of the company’s performance like return, standard deviation, systematic risk,
market return based on which various analysis can be conducted. The basic way to identify the
performance of the company is calculating its return over a period and comparing it with its past
performance and/or with the market performance or the return on a risk-free investment. The
comparison can also be conducted against any competitor company. Although these comparisons are
both vertical and horizontal, the results don’t disclose the complete picture. The risk element is not
considered by these basic analyses. In order to understand the performance of a company in a better
way, different tools are used. The three most commonly used tools are Treynor ratio; Jensen’s alpha and
T squared analysis. These tools are discussed in the later part of the study.

For conducting the investment performance analysis of the company, the data for the share prices,
market index and the risk-free rate of return is required. Inditex is listed on “Bolsa de Madrid” i.e.
Madrid Stock Exchange. Inditex is a constituent of IBEX35 which is the index on Bolsa de Madrid (Inditex,
2019). IBEX35 is taken as a proxy for the market performance. The period taken for this study is 5 years
from 1st August 2014 to 31st July 2019. The share price data of both the companies and the index data of
IBEX35 and OMX30 for this period is obtained from Yahoo finance and the data for the risk-free rate of
return is obtained from trading economics. On analyzing the data, it is observed that over the period of
last five years the share of Inditex has increased by 38%. The average return remained at 8.94%. The
share price jumped from €19.57 to €27.03 touching a high of €35 in May 2017. On the other hand, the
market index fell from 10,728 to 8,971 reflecting a drop of -16% and averaging -2.46%. The volatility of
both Inditex price and IBEX35 are 7.48% and 5.29% respectively. The performance of H&M remained
weak on the market as well, it made a consistent net loss of 5% over the period and the volatility
remained high as well. The overall return of Inditex is better but the volatility is also high. The chart
below shows a comparison of these two, it can be seen that Inditex has outperformed the market index
and the volatility is also high.

The important calculations for conducting further analysis are given under table below:

Daily return Inditex IBEX35 H&M OMX30

Mean 0.04% -0.01% -0.01% 0.02%
Standard deviation 1.45% 1.18% 1.76% 1.05%
Variance 0.02% 0.01% 0.03% 0.01%
Covarance 0.01% 0.01%
Correlation 0.70 0.53
Beta coefficient 0.87 0.88

Monthly return Inditex IBEX35 H&M OMX30

Mean 13.24% -2.46% -3.55% 6.31%
Beta coefficient 0.87 0.88

38 | P a g e
 Combined graph of Inditex and IBEX35
40 14000

35 12000
30
10000
25
8000
20
6000
15
4000
10

5 2000

0 0

1/1/2019

7/1/2019
7/1/2014

10/1/2014

1/1/2015

4/1/2015

7/1/2015

10/1/2015

1/1/2016

4/1/2016

7/1/2016

10/1/2016

1/1/2017

4/1/2017

7/1/2017

10/1/2017

1/1/2018

4/1/2018

7/1/2018

10/1/2018

4/1/2019
Inditex IBEX35

Combined graph of Inditex and H&M

40 350

35 300

30
250
25
200
20
150
15
100
10

5 50

0 0
7/31/2014 7/31/2015 7/31/2016 7/31/2017 7/31/2018

Inditex H&M

39 | P a g e
 Comparision of return and volatility
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
Average Return Std dev
-2.00%
-4.00%
-6.00%
-8.00%

Inditex IBEX35 H&M

4.1 Treynor ratio

Treynor ratio is a performance matrix that determines the ratio of excess return earned by an asset to
its beta co-efficient (Hübner, 2005). It is also known as a reward to volatility ratio. The three elements
that are required to do this analysis are the rate of return on the asset, risk-free rate of return, and the
beta of the asset. The formula is as follows:

Treynor Ratio =

is the rate of return on the asset.

is the risk-free return.

is the beta coefficient of the asset.

can be calculated as follows:

From the 5 years’ data obtained from Yahoo finance the calculation for the determining the beta co-
efficient is performed and the value is obtained which is 0.87. The calculations are shown below.

40 | P a g e
The risk-free rate of return is obtained for the Spanish market from trading economics, these rates are
obtained for the same period of five years and then mean value is calculated which comes out to be
1.8%.

Figure 14: Graph showing the risk free rate of return in Spain. Source: trading economics (2019)

Treynor Ratio (Inditex) =

= 13.15

Treynor Ratio (IBEX35) =

= -4.26%

Treynor Ratio (H&M) =

= -6.08

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The Treynor ratio of 3.37 indicates that the excess return Inditex is earning is 3.37 times of its risk factor
i.e. beta co-efficient. The higher the ratio, the better it is but it can only give meaningful results if
compared with any other asset. The Treynor ratio of both the market and competitor H&M is negative
which indicates that the company performed really well against both the benchmark and the rivalry.

4.2 Jensen’s Alpha score

Jensen’s Alpha measures the excess return the asset earns over the required rate of return calculated by
CAPM. The formula for calculating the required return as per CAPM is as follows:

= + -

The is negative because the Spanish market did not perform well and the market return was
negative.

Now, the Jensen’s Alpha can be calculated as follows:

α = actual return - or,

α= + -
α (Inditex) = 13.24% - (1.8%+0.87(-2.46%-1.8%))

= 15.15%

α (IBEX35) = -2.46% - (1.8%+1(-2.46%-1.8%))

= -4.92%

α (H&M) = -3.55% - (1.8%+0.88(6.31%-1.8%))

= -9.27%

The Jensen’s alpha score of Inditex is 15.15%, whereas that of INEX35 is -4.82% and that of H&M is -
9.27%. It shows that the stock has performed much higher than expectations and its competitors.

4.3 T square test

T-square test is another measure to determine the performance of the asset. It determines the excess
return an asset earns over its adjusted return. The formulas are as follows:

Adjusted return = +(

Adjusted return (Inditex) = 1.8% + ( x 1)

42 | P a g e
 = 14.95%

Adjusted return (IBEX35) = 1.8% + ( x 1)

= -2.46%

Adjusted return (H&M) = 1.8% + ( x 1)

= -4.28%
The formula for T-square is as follows:

T-Square = Adjusted return – market’s return

T-Square (Inditex) = 14.95% - (-2.46%) = 17.41%

T-Square (IBEX35) = -2.46% - (-2.46%) = 0

T-Square (H&M) = -4.28% - (6.31%) = -10.59%

The T-square value of 7.63% is the excess return Inditex was able to earn due to its operational
excellence. The T-square of market is always zero so is in the above case with IBEX35. The T Square of
H&M comes out to be -10.59% which shows how adversely the competitor has performed.

4.4 Conclusion

The three performance measures highlighted that the stock of Inditex has performed well above the
expectations and industry competitors. The European market is facing an economic slowdown, the
Spanish index IBEX35 gave a negative return over the period of 5 years and there are a lot of geopolitical
factors that are impacting trade and business in the region. The H&M performed worse, their stock fell
down and the annual loss is 5%. However, Inditex has performed well in its operations and that reflects
its performance in the stock market as well. The beta of the company is 0.87 yet the performance is so
incredible. The company’s abnormal return is much higher than the expectations set by the three
performance measuring tools. The table below shows the results of these tests. Inditex not only
surpasses the expectations but the leap it made is quite high.

Treynor Ratio 13.15%

Jensen's Alpha 15.15%
T-Square 17.41%

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5. Recommendations

5.1 Overview

The study does a detailed analysis of Inditex in terms of its business environment and strategy which
included macro environment analysis, competitive force analysis, SWOT and the evaluation of strategies
based on two different models vis Porter’s generic strategy and Ansoff Matrix. It is followed by an in-
depth analysis of the company’s financial statement which is conducted through ratio analysis, common
size and trend analysis, and segment analysis. The performance of the share price is measured through
three different performance measurement tools. There are Treynor ratio, Jensen’s alpha square, and T-
square test.

The observations from these analyses indicated that Inditex is not exposed to any serious risk except for
the economic risk and its strategy is well aligned with its objective and addresses each and every risks
well. The ratios highlighted that Inditex was lagging in many areas especially in the profitability at the
starting of the period but it increased its performance consistently and gradually and by the end of these
10 years the company was leading in all areas. The combined size analysis revealed no major abnormal
changes in elements of financial statements except for inventory and fixed assets. The segmental
analysis revealed the weakness and the opportunities of the company which is overdependence on a
single brand and emerging markets in Non-European regions respectively. The investment performance
is outstanding as the stock of Inditex outperformed expectations with big margins.

In short, it can be summarized that the company is consistent, progressive, and is constantly
improvising. Its activity ratios are most impressive which clearly reflects the operational excellence it has
attained over a long period of time. The performance in the stock market is also impressive where it
gave an annual return of 13.24% over the period of 5 years as against a market fall of 2.46% annually.
However, there is also scope for improvement and the company needs to do an in-depth analysis into its
weak areas and make strategies to overcome them.

5.2 Specific recommendations

5.2.1 Business Environment and Strategy

Inditex is procuring a lot of raw materials (textiles) from the UK and the speculations that surround
Brexit deal indicates that the company is vulnerable to the risk of higher cost If custom duties will be
imposed. The company shall seek other alternative sources for procurement outside the UK which are
less volatile.

In order to cover the risk of the adverse impact of European economic slowdown, the company shall
strive for gaining access to external markets, especially China. Although, it has started a lot of stores in
China, yet the country is too big and need more investments. Inditex DE ratio is almost zero and the
company can afford to get loans to support its expansion plans. The profitability is high and asset
turnover in the Asian market is high. Any investment in these markets will result in an abnormal profit,
and it will make the brand even stronger there and more benefits will come to the company in the long
run as well. The domestic market in Spain is not performing well. Sales, profitability, and asset turnover
– these are an all-time low. The idea to shut stores may seem an instant choice but the company shall do

44 | P a g e
an in-depth analysis and address the findings appropriately as the domestic market is also a matter of
pride for Inditex. Further, there is too much dependence on the main brand Zara which along with Zara
homes account for two-third of total revenue throughout the period of study of 10 years. The last brand
launched took place in 2008. The company is not able to sufficiently develop market for these brands.
These are still contributing very less. Inditex shall consider advertising, R&D design, and production,
customer surveys, cost-cutting or any innovation to help boost sales for these brands. This will make the
brand distribution wide and diversified and reduce the risk of complete brand damage.

5.2.2 Analysis of Company’s Accounts

Apart from the procurement of raw materials, the company should focus on reducing its COGS which is
43% of the total cost. H&M was able to achieve a gross margin of 63% and a net margin of 23% during
its good times. H&M gets its clothes manufactured from Asian markets where the cost of production is
low. Inditex does most of the manufacturing in Spain and neighboring countries. If it shifts its
manufacturing into Asian markets, its cost will surely decrease and better profitability can be obtained.
The stock is piling up over the years and the PPE holds significant investments, the Auditors have also
expressed their attention to these two and gave them a place in Key audit matters. The company shall
introduce measures to reduce its stock and focus on improving Inventory turnover ratio. The stores
constitute major investments, Inditex shall focus on expanding its online sale which is mere 12% of total
revenue currently. The trend is changing and millennials prefer low cost easy to obtain products. Online
platforms give variety, tools to check the product details and heavy discounts as well. The top brands of
today’s era are digital for instance Amazon, Google, and Apple. Online selling has a lot of potentials, it
gives global access and product holding cost and other overheads are very less. The company shall
consider putting more efforts on increasing online sales.

5.2.3 Investment Performance

Lastly, the stock has performed well over the past years but the only concern visible is its low beta.
Although these factors are not in control of the company it shall monitor these changes well and make
strategies to handle them in case the fluctuations are severe. Inditex has performed really well against
its competitor and benchmark and it would now be the right situation to leverage its high profitability
and get debt into its balance sheet. The extra debt will increase the Asset base and will result into more
profit. As the interest rate on debt is low the financial leverage gained by the company will be high.

45 | P a g e
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