Zara Case Study

Topics: Inventory, Inventory turnover, Strategic management Pages: 7 (2762 words) Published: April 6, 2010
Q1. 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? Ans. The four companies shown given in the case have very different business models. Inditex owned much of the production and most of its stores. Inditex is thus a vertically integrated company. This gave Inditex a competitive advantage, which is quick response to the market requirements. On the other hand, The Gap and H&M have a different business model. They owned most of the stores, but outsourced all the production. And Benetton had a third business model. It invested heavily in the production, but licensees ran its stores. 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 Zara’s competitors for comparison is Hennes and Mauritz (H&M), who as the case study states, “was considered Inditex’s closest competitor, [with] a number of key differences”. 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 . Just looking at Exhibit 5 from the case it is easy to see that their financial status is are comparable. 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&M’s financials is by using ratios and not merely a visual assessment of the financial statements given. The current ratio 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 ratio 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&M’s 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 margin was calculated to measure the efficiency of the companies’ profit per euro of sales. Inditex’s operating profit margin is 21.6% and H&M’s is 13.1%. Inditex is more efficient in generating a greater profit per euro of sales than H&M. Inditex’s higher operating income4 is a result of keeping their costs of goods sold and operating expenses much lower than H&M’s. Inditex’s 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 Inditex’s 1,284, but has a higher number of employees per store5, 29.7 to Inditex’s 20.8. H&M’s high employee to store ratio is partially to blame for their high cost of goods sold. There is a disparity between the working capital of Inditex and H&M, which is the money available to meet current obligations. Inditex only has 20 million euros of working capital as compared to H&M's 1035 million euros. This is because Inditex invests more than H&M in fixed assets7, Inditex owns 1228 million euros in property, plant, and equipment and H&M only owns 661 million euros. Having a small amount of working capital could potentially hurt Inditex because it could affect their ability to meet any liability obligations that may arise....
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