With which of the international competitors listed in the case is it most interesting to compare Inditex’s financial results? What do comparisons indicate about Inditex’s relative operating economics? Its relative capital efficiency? Even though H&M follows a strategy which differs significantly from Inditex’s approach it is the closest competitor from the financial point of view. H&M differs from Zara because it outsources all of the production, it is more price oriented and spends more money on advertising. But both companies are based in Europe, are fashion forward at lower price retailers, and have a strong international expansion strategy. Exhibit 6 indicates that the financial results of Inditex and H&M seem to be very comparable. However, a closer analysis reveals that Inditex has enjoyed a competitive advantage in operating metrics over H&M. Some comparisons of financial and commercial parameters will help to understand the relative operating economics of Inditex (all numbers in € Millions). 1. ROIC = Return on Sales x capital turnover.
Inditex was the most profitable firm, measured by ROIC. Return on Invested Capital is a key measure of a company’s profitability that focuses on the true operating performance of the company.
2. Operating Margin
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 has a higher operating income by keeping cost of goods sold and operating expenses low. For example Inditex has a lower staff to store ratio which keeps the amount of money needed to be paid as wages low.
Staff to Store Ratio:
Additionally the company spends lower advertising expense than H&M.
Current ratio = Current AssetsCurrent Liabilities
Inditex: 854834 =1.023
H&M: 1468432 =3.398
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. This indicates that Inditex is less liquid which is probably due to the fact that the company has more fixed assets and a quick inventory turnover. But a high liquidity does not consequently mean high efficiency. H&M lacks a good strategy in using its cash. If its cash is not invested it will not generate a return. H&M’s high current ratio may be the result of its excessive inventories because the firm does not own manufacturing facilities and products need to be stored in a warehouse. 4. Total assets turnover
Total assets turnover = salestotal assets
Inditex: 32502605 = 1.248
H&M: 42692183 = 1.956
The total assets turnover indicates H&M is more efficient than Inditex but that may be the result of Inditex’s strategy of owning the stores and plants which tie up capital. In contrast to that H&M depends on outsourcing the production which leads to lower assets. 5.
Inditex: 9823250 =0.302
H&M: 16154269 =0.378
The ratio of revenues by sales and operating expenses indicates the share in revenues used to cover the costs for running products, business and system. 30% of Zara’s net operating revenues are sufficient to serve operating expenses which means there are 70% left for counterbalancing production costs, taxes and other components. H&M cannot keep up with this because it offers its fashion at a lower price (reduces sales) and applies a more extensive marketing-strategy (rises operating expenses). 6. Success outside Europe
Both companies have most of its stores located in Europe:
But H&M is more dependent on the sales from its home continent: Inditex: 77%
Even though both companies have a strong focus on international expansion, Inditex is more efficient in exploiting the markets it has...
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