Inditex: inflation will test the cut of the retailer’s cloth

Inditex rules the retailing catwalk for bringing trends to the high street. Canny supply chain management puts fashion inspired by A-listers within the reach of everyday mortals within a matter of days. But a combination of input inflation, inflated living costs and snags in global supply chains have kept investors in seller mode.

Shares, which have lagged behind the wider European apparel retailing by nearly a third over the past year, are trading near the trough of March 2020. Missing analysts’ expectations on results this week — ebitda rose 60 per cent on the back of a 36 per increase in sales in the year to January — only added to the gloom.

True, gross margins are expected to remain stable this year and upcoming price rises have already pushed sales expectations for the next 12 months back up to pre-pandemic levels. And like other retailers, Zara has small exposure to Russia and Ukraine: combined, the two countries contributed to just one-sixth of sales growth at the beginning of the 2022 financial year. That will be excised by the ongoing war and sanctions — earlier this month it closed its 502 stores in Russia and halted online sales.

The group is becoming more international and increasing its ecommerce muscle. Last year the US became the retailer’s largest market after Spain. Online sales, which made up a quarter last year, should account for at least 30 per cent of total sales by 2024. In the physical world, selling space shrank a net 1.7 per cent last year.

But inflation in input costs — from labour to freight to energy — will prove the biggest challenge for incoming chair Marta Ortega, daughter of Inditex’s co-founder Amancio Ortega, who takes up the reins on April 1. Shortages and delays are at odds with the whole concept of fast fashion. Ortega will have her work cut out to turn Inditex into a good fit for investors.


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