Inditex Valuation

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Inditex Valuation
IE business school


1. Background
1.1 Company overview
Inditex is one of the world largest fashion retailers with more than 5,500 stores in 86 countries. The most famous brand that Inditex owns is Zara which opened its first store in 1975 in A Coruña, Spain. Besides Zara, Inditex also owns brands such as Pull&Bear, Massimo Dutti, Bershka, Oysho, Zara Home and Uterque. The growth of this company has been dramatically strong and steady for more than 10 years, focusing on Europe and the expansion of new markets such as Asia and Latin America. In 2012 the company achieved a turnover of 15,946 million euros and a net profit of 2,361 million euros. These prior figures included the fact that for the past 10 years the sales growth has maintained an average of 16% and the Net Income of 12%.

How are these numbers achievable? What is the competitive advantage of Inditex that makes them one of the biggest fashion businesses of the world? The answer to these questions is Inditex´ business s

model. The key to this model is the ability to adapt the merchandise to the customers’ expectations and taste in only a few weeks. Also, merchandise arrives twice a week to each store, and not only contains current fashion but also new collections in order to refresh and update the store frequently. This speed has been impossible to imitate for the competitors who usually take around 3 to 6 months to renovate their merchandise. Besides this, the company also pays a lot of attention to designed space specifically to make customers have the best experience at shopping. By doing so, they also obtain direct point of sales information from the customer of what they like and don´ Finally, the business model is t.

characterized as high vertical integration in every step of the process; design, manufacture, logistics and distribution and each of the stores has the ownership to manage it.

1.2 Macro-economic factors
Major macro-economic factors affecting overall apparel industry can be summarized as four; long term price deflation, consumer confidence, price of raw materials, and cost for production & logistics. [See Exhibit 1. Macro-economic factors affecting price and volume] - Long term price deflation of apparel: there was a continuous price deflation of clothes from early 1990s until the financial crisis. The trend is reversing after the financial crisis which will positively affect the apparel industry’s overall profitability.

- Consumer confidence: ongoing crisis in the Eurozone gives negative pressure on the consumer confidence in the region. But the confidence level in emerging economies is optimistic. - Price of raw materials: rising raw material prices such as cotton will negatively impact on the cost of textile and eventually apparel industry.

- Cost for production and logistics: PPI growth in outsourcing countries such as China and Turkey will also pose a negative impact on the margin of industry players. All in all, macro-economic factor are sending mixed signal on the top-line growth and the profitability of industry. We will take a neutral stance on the macro-economic impact on the valuation. [See Exhibit 2. Summary of macro-economic factor’s impact on the industry] 1

1.3 Fast fashion business
The recent trend in the apparel industry is the emergence and dominance of fast fashion. Fast fashion is characterized by shorter delivery cycles, offshore sourcing, and the latest fashion products at attractive prices. Growth in this sector has been aided by price deflation and the global recession. Inditex is a leading fast fashion retailer which has all the characteristics of fast fashion. During 2005 and 2011, leading fast fashion brands such as Inditex and H&M’s compound annual growth rate was 10.8%. Other medium sized fast fashion retailers achieved CAGR of 6.7%. On the other hand, traditional general apparel retailers saw the plunge in their sales with CAGR of -4.5% and losing grounds to the fast...
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