Inditex has more problems than meets the eye, basically everything about the company Amancio Ortega founded and now led by his daughter Marta seems to be not only okay but also a record. This is how the Galician textile company told the media, analysts and investors that it had become a historic district, also that the pandemic and its economic consequences had been left behind. A perfect farewell to President Pablo Isla.

And between so many records and so many good news, anyone could expect an equally optimistic response from the markets. Although they are hard to impress, they always judge good results well. adopted the price of Inditex. In particular, the company dropped to 5.21% in the middle of all praise for its performance. A fall that a few sessions later is still far from recovering and leading to a loss of almost 9% in the last month.

This contrast between what the company has and what the market sees arises because the company is under attack from different fronts. First, from an operational point of view, as the data provided leaves some important questions. It threatens Inditex's dominant position. Finally, as the direction in which it has to face these important challenges for the future is somewhat unknown. The new CEO, Óscar García Maceiras, does not have a long career in the industry. And the heir to the empire did not show much either.

INDITEX: A RECORD QUARTER OR A STATISTICAL EFFECT?

Let's start with the business plan. The company was pleased that "sales, profit before tax and net profit for the third quarter of 2021 have reached record levels." For his part, still CEO Pablo Isla noted that "these results are very satisfactory. and once again demonstrate the robustness of our business model, the quality and commitment of our teams, and the potential of our integration strategy between the physical and digital world. ”But behind so many flattering words there are qualifications.

Inditex headquarters in Arteixo

The first thing to verify is whether the record performance is due to the good performance of the company or to the existing embalmed demand that is beginning to emerge. In fact, its main competitor, H&M, also posted double-digit sales growth, up to 14%. In addition, Inditex signed in the second quarter. also a record-breaking quarter in sales figures in euros, and for the latter, it intends to do the same after it recorded a 33% increase in sales between November 1 and December 10, 2021 compared to the same period in 2020 and by 10% higher in the same period of 2019

But these numbers need to be put in the context of higher inflation. In other words, because prices are obviously higher, turnover goes up. This effect is exacerbated when the numbers are expressed at a constant exchange rate, it's like saying "if the currencies have moved like this this year. like last one. ”A phrase that simplifies understanding of the evolution of local business in each location, but has its pitfalls. After all, the inflation spiral makes the data seem better than it really is.

GROSS MARGIN OPENS THE MARKET

To reduce this interference, analysts often run a "cotton test" using gross margin and inventory levels. For the first, discounting the upward effect of inflation on sales is great. After all, rising prices that the item sells uses also increases cost. delivery.

In the case of Inditex, this figure was slightly higher in 2021, from 60.9%, 60.5% a year ago and 60.7% in 2019. Still, it was below expectations. "Gross margin and operating profit margin (EBIT) are equal to the levels of the third quarter of 2019, but do not reach the levels expected by the consensus "- explain from Bankinter. This is the first moment when the company does not enter the market. It can be argued that these are of course huge numbers, but lagging behind may signify that brand equity or price power has been reduced.

Amancio Ortega and his daughter Marta Ortega

Inventories also reflect the actual activity of the group. After all, the higher volume of items in them means they have sold less than expected, which in turn also increases costs. Thus, even though Inditex is celebrating that the results are better than in 2019, the volume of inventories in the balance sheet was the highest in the history of the group with 3,650 million, which is almost 20% more than a year ago and 6.2% more than in 2019.

RECORD STOCK IN INDITEX COULD MEAN LOWER COMMERCIAL ACTIVITY

The remarkable increase in inventories, unlike in the first half, caught analysts' attention. An issue for which the new CEO preferred to throw balls. First, he noted that it was important that the increase in inventories was "significantly less than sales." On the other hand, it is important to "generate cash strongly (...) The priority is to generate cash," concluded García Maceiras. But the statements clash with statements by Inditex itself a few years ago.

Thus, in 2019, which Inditex has already exceeded, indicated that the lower inventory levels at that time (5% lower than in 2018) resulted from "good operational results, complete store and online integration and the space optimization program." additionally translated into “strong cash generation.” Now, despite the loss of inventories, it turned 180 degrees, the company does not seem to change discourse. In fact, it defends investors that its “integrated inventories” bring “improvements” to the dynamics of working capital. , another game that deteriorated significantly in 2021. With a hole of 3545 million, which is 18.6% more than a year ago and 9.4% more than in 2019.

This deterioration also occurs despite Inditex's introduction of a new performance enhancement system, particularly SINT and RFID technologies. The first is an integrated inventory system that allows customers to receive orders both from the store and online. garments using radio waves recorded on a chip inside the alarm, thanks to which Inditex is able to instantly locate any product and streamline the logistics process so that it reaches any store in the world in a maximum of 48 hours.

DIFFICULT PROFITABLE FIT ONLINE

Nevertheless, the group did not see an improvement in its inventory levels, and it did not manage to significantly improve margins, as seen above a few tenths, despite the fact that a significant number of stores were closed in the last year and turnover in others improved. These pointers lead to the conclusion that perhaps online is not as profitable as would be expected, or at least the group is struggling to achieve visible economic return After all, transportation costs (now higher) and high investment (around 1,500 million per year) are important a counterbalance to the savings resulting from the closure of the premises.

Shein expects to outperform Zara in turnover as early as 2022.

Inditex himself feels how difficult it is to keep the balance in the omnichannel strategy. And he is a gifted student. A difficult situation because competitors are starting to put pressure on the Spanish company. Some because they prefer to move away from the Internet until their cost-benefit ratio becomes more apparent - to this Until now, only the sales volume was taken into account - as was the case with Primark. The British company is unbeatable in terms of price because it offers a long-term delivery strategy with basic series that are kept over time, thus managing to keep costs to a minimum.

SHEIN, A COMPETITION OF FEAR IN THE YEARS TO COME

The Chinese Shein in the US is already a market leader, with outstanding results that analysts expect to exceed Zara's by 2022. In fact, in May, the company became the most downloaded shopping app in the US, surpassing Amazon. Its success is based on three fundamental pillars: the first is that updating its product offering is even faster than the Spanish company. So while the Galician company launches around 10,000 new products per year, Shein launches 6,000 new products every day. storage units ”(including old designs in new colors).

And at a typical price of 7.5 to 27 euros, Shein's clothes are able to compete even with Primark and are 30-50% cheaper than other similar clothes from Zara or H&M. Secondly, the Chinese company engages in a kind of influence marketing for Through thousands of social media influencers, his strategy of sending clothes to some high-follower characters has, for example, amassed 250 million followers on Instagram, TikTok and other social media platforms. Likewise, around 70% of them buy from the company's mobile app, which has 24 million active users daily. Every day, every second user who buys clothes online does so through their app.

Finally, its founder, Xu Yangtian, who had no industry experience when he founded Shein in 2008, managed to avoid geopolitical controversy. An essential ingredient if you come from China but one of your reference countries is the United States. Chinese companies that have tried to conquer the world, such as Huawei and Xiaomi, sell almost nothing in the country, which weakens his already loose association with China in the eyes of the West. Consumers rightly assume that, like most of his clothes, including Western brands, , Shein's outfit is sewn in Asia.Therefore, few realize (or bother) that the label is Chinese.

TOO MANY CHALLENGES FOR A "NEW" LEADERSHIP TEAM

And Inditex has to face these challenges with a new team. And, perhaps worst of all, with very little experience from both the new CEO who has barely any industry experience, and the new CEO, although the center of the eyes will be focused on the second character. finally, more the financial results in which García Maceiras has shown sufficient capacity. Nevertheless, achieving profitable visibility on the Internet seems to be a commendable task. The problem is the role and strategy that Ortega has to outline for the next few years.

Basically because competition already surrounds the company on several fronts: Shein is able to implement the operational strategy that made Inditex even better than the Spanish ten years ago, and the Chinese company can win on the low cost spectrum where it additionally The Primark is very conveniently located. Finally, the top of the line has started to blur with other brands and even cheap collections from other design companies. A threat that, for example, has destroyed Inditex's premium brand as Uterqüe. Therefore, Ortega has to target very well to position Zara. in trends and prices, while maintaining the leading position.

The sum of all this makes Inditex investors cautious. For this reason, the market punished the company when it announced management changes, and for this also punished it forcefully again, presenting the results. The Spanish and Galician company will continue to be a benchmark in the textile sector. years to come, but living in the past has never been a good idea. The challenges and demands are too great despite the current "records".