There are some retailers out there that do really well and Inditex is one of them. My wife loves Zara and raves so much about their stores and products. I got curious and decided to take a closer look at the group that owns them.

Inditex

Inditex SA, the world’s largest clothing retailer, which dates back to 1963 when it started life in a small workshop making women’s clothing. Today it has over 6,900 stores throughout the world. Years later, to the launch of the first Zara store in 1975. This was followed by the brand’s international expansion at the end of the 1980s and the successive launch of new retail concepts: Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe. They have an impressive 140,000-strong workforce and more if you include the indirect people they employ though their supply chain.

Corporate Governance

They have 7 Non-Executive Directors, 1 Executive Director (Chairman & CEO) and 1 affiliate. They have an Executive Committee but as you would expect, the Audit Committee is made of Non-Execs. A typical setup.

Financial Analysis

Tool: Inditex Interim Nine Months Results

Inditex reported the fastest profit growth in more than two years as the Zara owner opened more stores and benefited from the weak euro. This trend continued in the first nine months of the year with another set of string results.

Income statement analysis

Based on a vertical and horizontal analysis, the net income grew by a huge +19.7% vs. LY and accounted for 13.7% of the net sales, which is +0.7%pts vs. LY. This is a phenomenal achievement when taking into account the macroeconomics pressure.

The common-size income statement shows that inditex had a strong performance in the first 9 periods of the year. Net sales grew by +16% in line with their costs of sales (+16.4%), which meant a respectable increase in gross profit by +15.7%.

The growth in net income is due to tighter control over their operating expenses, which grew by only +14.6%. Interesting that inditex’s results from companies consolidated by equity method grew by +135%. fyi An accounting technique used by firms to assess the profits earned by their investments in other companies. The firm reports the income earned on the investment on its income statement and the reported value is based on the firm’s share of the company assets. The reported profit is proportional to the size of the equity investment. This is the standard technique used when one company has significant influence over another.

Finally, for shareholders, one of the key metric will be to look at the Earning per share ratio, which grew by +19.7%. Looking at the last 5 years growth it has been amazingly linear and a fantastic ROI.

Balance sheet analysis

Overall, very healthy.

The most important factor for any business is to have cash. You may have the highest turnover in the world, if you have no cash coming in you will go bust. Remember, sale is vanity, profit is sanity and cash is king! In the case of Inditex, its cash position grew by +37.3%.

Their account receivable also dropped by -26.2% meaning that clients are paying their debt faster than LY. One to watch out is their inventory, which grew by +12.5% but as a % of total assets, it actually dropped by -0.5%pts and their merchandising team would have been busy keeping a tight control over it.

In order to drive their net sales, they have had to invest in tangible assets (includes the likes of machinery, buildings and land). This grew by +15.8%.

Another big one to watch out is their current liabilities has they grew by +23.3% (higher than their income) and +1.9%pts of its total liabilities. It is interesting to note that their account payable grew by +22%, which we know is not down to a cash flow issue and therefore, I can only assume that they exerce more pressures on their suppliers and have negotiated long lead time in terms of payments.

Financial ratios

There are many ratios I could focus on but i have decided to look at the basics that you should know before investing.

• Current ratio: 1.52. A ratio under 1 indicates that a company’s liabilities are greater than its assets and suggests that the company in question would be unable to pay off its obligations if they came due at that point. This is not the case for Inditex. However, a high ratio (over 3) does not necessarily indicate that a company is in a state of financial well-being either. Depending on how the company’s assets are allocated, a high current ratio may suggest that that company is not using its current assets efficiently, is not securing financing well or is not managing its working capital well. To better assess whether or not these issues are present, a liquidity ratio more specific than the current ratio is needed.
• Quick ratio: 0.99. The quick ratio measures the euro amount (in our inditex case) of liquid assets available for each euro of current liabilities. Thus, a quick ratio of 0.99 means that a company has 0.99 € of liquid assets available to cover each 1 € of current liabilities. The higher the quick ratio, the better the company’s liquidity position. Also known as the “acid-test ratio” or “quick assets ratio.” In this case, this is a breakeven situation and I feel that it is a good result even though above 1 would be better.
• Cash ratio: 0.86. It improved by +11.6% vs. LY. The cash ratio is the most stringent and conservative of the three short-term liquidity ratios.Very few companies will have enough cash and cash equivalents to fully cover current liabilities, which isn’t necessarily a bad thing, so don’t focus on this ratio being above 1:1. Again for inditex this ratio is a good result.
• Inventory turnover in Days: 157 days, which is an improvement from 162 days LY. This ratio to make sense needs to be compared against industry averages. (Sorry I don’t have any but feel free to share)
• Debt ratio: 32.4% vs. 30.44 LY. Inditex has grown its debt and therefore is taking bigger risks. it may not be a bad thing but this metric is to watch out. Having debt is not an issue but it is the level of bad debt that is. No concern for me
• Gross margins: 58.74%, which is flat on LY. Again stabilising margins when raw materials and labour costs are going up is a great result.
• Net cash flows: 1,798 (€m) – please note that I have not included dividend payments as we would have to wait for the year. the reality is that it is positive and therefore healthy
• • Cash flow from operating (CFO): 3,543 (€m)
  • Cash flows from investing (CFI): -897 (€m)
  • Cash flows from financing (CFF): -848 (€m)

Recommendation

Overall: Invest

My recommendation is to invest in inditex as they have very healthy looking accounts and I believe that they have a lot more opportunities to come, especially internationally. Also, because I cannot help it, because my expertise lies in eCommerce the least I can say is that I am not a big fan and UX/UI is really poor in my opinion. I feel that they have a huge opportunity as far as Zara is concerned. A bon entendeur salut!

Benoit Mercier