Essay About H&M And Financial Differences Of Inditex

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ZARA: Fashion Follower, Industry Leader
Business of Fashion Case Study Competition
Amanda Craig, Charlese Jones and Martha Nieto
Philadelphia University
April 2, 2004
ZARA: Fashion Follower, Industry Leader
Table of Contents
Financial Analysis and
Strategic
Strategic
Possibilities for
Calculations and Financial
Articles: The Recent Status of
Works Cited
Works Referenced
The global apparel market is a consumer-driven industry. Also, globalization and new
technologies have allowed consumers to have more access to fashion. As a result, consumers are
changing, competition is fierce, and companies are evolving to meet these demands. Zara, a
Spanish-based chain owned by Inditex, is a retailer who has taken a new approach in the industry.
With their unique strategy, Zara has the competitive advantage to be sustainable. In order to
maintain that advantage and growth they must confront certain challenges that face traditional
retailers in the apparel industry.
Financial Analysis and Comparison
To prove Zara has the prospect of sustainable growth in the international apparel market,
it is important to understand and compare the financial differences of Inditex, its parent company,
and its major competitor. The most interesting of Zaras competitors for comparison is Hennes
and Mauritz (H&M), who as the case study states, “was considered Inditexs closest competitor,
[with] a number of key differences” (Ghemawat 5). H&M differs from Zara because they
outsource all of their production, spend more money on advertising, and is price-oriented. The
key similarities for comparison between Zara and H&M are that they are European based
companies, are fashion forward at lower price retailers, and have a strong international expansion
strategy (1; 5).
Just looking at Exhibit 6 from the case it is easy to see that their financial status is are
comparable (24). Their net operating revenues are closer to each other than that of Benneton or
the Gap, as is their net income. The best way of comparing Inditex and H&Ms financials is by
using ratios and not merely a visual assessment of the financial statements given. The current
ratio1 shows that for every euro in short-term debt, Inditex has 1.02 million euros in current
assets. H&M however, has 3.40 million euros in current assets for every euro in short-term debt.
From this we can infer that Inditex is less liquid, possibly because they have more fixed assets
and turn their inventory over quickly. To support this inference, the inventory turnover ratio2 was
calculated that Inditex turns over its inventory 4.42 times per year. This does not mean, however,
that H&M is more efficient due to its liquidity. H&M is not making good use of the cash that
they have because cash not invested does not generate a return. H&Ms excessive inventories
may be the main contributor to its high current ratio because they do not own manufacturing
facilities and have to store products in a warehouse.
The operating profit margin3 was calculated to measure the efficiency of the companies
profit per euro of sales. Inditexs operating profit margin is 21.6% and H&Ms is 13.1%. Inditex
is more efficient in generating a greater profit per euro of sales than H&M. Inditexs higher
operating income4 is a result of keeping their costs of goods sold and operating expenses much
lower than H&Ms. Inditexs decreased costs are made possible by in-house production, lower
advertising expenses and keeping a cost-effective number of employees per store. H&M only has
771 stores to Inditexs 1,284, but has a higher number of employees per store5, 29.7 to Inditexs
20.8. H&Ms high employee to store ratio is partially to blame for their high cost of goods sold.
There is a disparity between the working capital6 of Inditex and H&M, which is the
money available to meet current obligations.