Zara Case

Topics: Production line, Distribution center, Revenue Pages: 12 (3833 words) Published: November 12, 2011
1. With which of the international competitors listed in the case is it most interesting to compare Inditex's financial results? Why? What do comparisons indicate about Inditex's relative operating economics? Its relative capital efficiency?

We think H&M’s financial results are the most interesting one to compare with Inditex’s. H&M is the most important and largest competitor of Inditex and due to their similar background, both being large international European apparel brands and offers fashionable clothing with in season style.

We have notice and quoted from Exhibit 6, their net operating revenues, aka their sales, are more alike when compared to Gap and Benetton; and their net incomes are also similar. The negative ROE in Gap, caused by the failed attempt of repositioning and the massive decline in stock price during 2001, affects the total financial figure of Gap too much that we think it not suitable to be used to directly compare with Inditex’s results. As for Benetton, we find its sales, net income and operating profit per store especially low to be compared with the other 3 firms.

Inditex has an operating margin of 21.7% while H&M has a 13.1%. The operating margin can be used as a measure of each firm’s capital efficiency. It shows that Inditex has a greater power to earn a profit per each Euro of sales than H&M. Inditex, though has lower net operating revenues, but has resulted in keeping their operating income higher than H&M. This may be done by lowering cost of goods sold and having a smaller proportion of staff employed. Inditex owned 1,284 stores, hiring 26,724 people while H&M owned 771 stores, hiring 22,944 people. Inditex has a lower staff to store ratio than H&M. This keeps the amount of money needed to be paid as wages low. Inditex also spends lower advertising expense than H&M, only 0.3% of its revenue and by using vertical integration, i.e. production by own self, lower the total costs.

There is a huge difference between the working capital of Inditex and H&M. Inditex has around 20 million working cap. While H&M has around 1036 million. Working capital is a measure to show the ability of paying off debts or act as a cushion to a sudden need in money. The low working capital of Inditex may be a cause of the larger amount of PPE Inditex owned. Inditex owned 1,228 Million Euros of PPE while H&M owned only around half the amount Inditex has, 661 million Euros. This may be a potential danger to Inditex if any sudden liability occurs, Inditex might not be able to pay the debt off.

With respect to operating economics, Inditex is having a relatively higher or more efficient one than H&M. This is mainly due to the high operating margin Inditex has over H&M. Inditex’s operating margin is 66% more than H&M, but when comparing their relative capital efficiency, we consider H&M as the more efficient one. H&M has a much higher operating profit per store than Inditex does. Profit per shop in H&M is 0.764 million Euro while Inditex has only 0.548 million. This difference in profit is contributed by the large number of stores Inditex has opened and operated and therefore resulted in lower relative capital efficiency. Inditex will have to maintain a high operating margin in order to cover the expense or liability and use the money for further investments.

2. How specifically do the distinctive features of Zara's business model affect its operating economics? Specifically, compare Zara with an average retailer with similar posted prices. In order to express all advantages/disadvantages on a common basis, you may find it convenient to assume that on average, retail selling prices are about twice as high as manufacturers' selling prices.

| |Representative Competitor |Zara | |Posted Selling Price |100.0 |100.0 |...
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