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Photographer: Angel Garcia/Bloomberg
Technology

Zara Owner’s Lean Business Model Helps It Cope With Pandemic

Updated on

Zara Owner’s Lean Business Model Helps It Cope With Pandemic

  • Inditex cut costs, reduced inventory level 19% in first half
  • Sales decline is moderating and is offset by online surge
Inditex SA Retail Stores Ahead Of Earnings
Photographer: Angel Garcia/Bloomberg

Inditex SA’s quick-reaction strategy allowed the operator of Zara stores to reduce inventory in the middle of Covid-19 lockdowns, buoying first-half earnings.

The Spanish clothing retailer managed to reduce stock-in-trade by 19% at the end of July, taking advantage of flexible purchasing agreements that allow the company to rapidly adapt to changes in demand. That softened the blow to earnings, which exceeded analysts’ estimates even though they were less than half last year’s level. The stock rose as much as 6.7% Wednesday morning.

The world’s largest clothing chain operator has shown steady improvement after suffering its only loss on record in the first quarter. Chairman Pablo Isla is motoring on with a plan to invest about $3 billion in e-commerce, renovations and new stores over the coming three years to better position Inditex when the pandemic ends.

Inditex has seen a “turning point” during the second quarter, Isla said on a call with analysts. The company can run in the future with even lower inventory levels, he said.

A 74% surge in online orders buoyed sales, and almost all shops have reopened.

Isla is navigating his most difficult year since joining the company a decade and a half ago. He reduced operating expenses by 21% in the first half, and revenue is gradually returning to more normal levels. While sales plummeted 72% in April, the decline was 11% in the first weeks of the third quarter.

The results come a day after Hennes & Mauritz AB reported higher-than-expected quarterly earnings. Inditex’s Swedish rival has however been struggling to get rid of unsold garments, and its $4.6 billion inventory position was at a record proportion of sales at the end of May.

Inditex is trouncing H&M in terms of inventory management

The owner of Zara relies on production in Spain and nearby countries for the bulk of its garments, giving it more flexibility in adjusting orders because of the proximity to suppliers. H&M relies much more on clothes made in Asia, which need to be ordered longer in advance because they take months to be shipped to their final destinations.

Consumers have been shifting to buy more informal clothing as many employees work from home, and that was reflected in Inditex’s results. Massimo Dutti, which sells office wear, was the chain that had the biggest drop in first-half sales, reporting a 42% decline. Oysho, which sells lingerie and yoga wear, had the smallest drop, at 31%.

Gross margin should improve in the second half and should be stable over the full year, Isla said.

— With assistance by Anton Wilen

(Updates with chairman comment in fourth paragraph)