Inditex

Market and Financial Analysis

Helen Sung, Sooyoung Kim, Brittany Macdonald

Table of Contents
3

MARKET ANALYSIS 3
EXCUSIVE SUMMARY-MARKET ANALYSIS: 4
INDUSTRY ANALYSIS: 5
TARGET MARKET 5
CUSTOMER PROFILE 6
SEGMENTATION 6
MAJOR COMPETITORS AND PARTICIPANTS: 9
MARKET GROWTH FORECAST: 10
PRODUCT UNIQUNESS 10
PRODUCT DESCRIPTIONS 11
COMPETITIVE COMPARISONS: 13
R&D 14
CONCLUSION-MARKET ANALYSIS: 15

FINANCIAL ANALYSIS 16
EXECUTIVE SUMMARY-FINANCIAL ANALYSIS: 17
CASH ASSESSMENT 18
WORKING CAPITAL AS A PERCENTAGE OF REVENUE: 18
CURRENT RATIO: 19
QUICK RATIO: 20
ACCOUNTS RECEIVABLE TURNOVER: 21
INVENTORY TURNOVER: 22
PAYABLES TURNOVER: 23
CASH FROM OPERATIONS AS A PERCENTAGE OF REVENUE: 24
PROFITABILITY ASSESSMENT 25
ROE: 25
PROFIT MARGIN: 26
ASSET TURNOVER: 27
EPS: 28
GROSS PROFIT MARGIN RATIO: 28
OPERATING INCOME MARGIN: 29
INCOME BEFORE TAX MARGIN: 29
RECOMMENDATION: 30

APPENDIX 31

REFERENCES: 34

CORUNA,(2012). ZARA, SPAIN’S MOST SUCCESSFUL BRAND, IS TRYING TO GO GLOBA,

35

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Market Analysis

Excusive Summary-Market Analysis:

Fast fashion is an extremely high competitive industry as companies have to compete with local
brands, international brands, local department stores and online merchandisers. Inditex is one of

3
the top two fast fashion leading companies, it offers a wide range of clothing and accessories
products that suits all age, gender, and income groups. Most of its market share is in Europe as
majority of the stores are in that region. Inditex’s consumer are mostly urbanist who seek for
high quality fashion garments at reasonable prices. Inditex’s biggest competitor is H&M who has
similar sales revenue with Inditex and the second largest competitor is Gap Inc. In this report
both of the strengths and weakness of these three brands will be discussed.
According to economy projection and Inditex’s annual report and goals, Inditex has growth
opportunity but they need a careful analysis before they expand. Inditex’s products will be listed
and will be compared with competitors’. However, Inditex does not invest in research and
development on forecasting trends. It is done by listening to consumers request during customer
service. Inditex focuses its investments on developing and accomplishing a sustainable business
plan which eventually helps them achieve their corporate objectives.
It is recommended that Inditex remain at its unique product position and focus on its current
sustainable development plan. The company should examine carefully when expanding based on
economy furcating.

Industry analysis:
Fashion industry is extremely huge, especially for the fast fashion industry. The size of the
market includes all populations in the developed countries, some fast developing second world
countries such as China, India and Brazil, as well as some parts of the Middle East and African
countries. With all of this combined, the fast fashion industry can have market size up to 2 billion
of potential customers or more1. Also the global market in the apparel industry is valued at 3
trillion dollars, and accounts for 2 percent of the world's GDP. The fashion industry includes
many sub industries, such as menswear, womenswear and sportswear. Womenswear industry
alone is valued at 621 billion dollars2. It is shown by Hemline Theory that there is a correlation
between fashion trends and economy. People still purchase clothes even during economy
downturn but the trend will be different3.
The Inditex Group currently has a total of 7,013 stores in 88 markets and operated online stores
in 29 markets4. With comparison Inditex’s biggest competitor H&M has 23 online markets and
3,924 stores in 61 markets. Gap Inc. has 3721 stores at Around 400 in locations across Asia,
Australia, Eastern Europe, Latin America, the Middle East and Africa5 by the end of January 31,
2016. Fast fashion is extremely competitive as companies have to compete with local brands,
international brands and online merchandisers. There are still spaces for growth opportunity as
technologies are more common and advanced, and demand for fashionable wear in developing

1 One World Nations Online,(2016).World Population by Continents, Retrieved from

http://www.nationsonline.org/oneworld/world_population.htm
2 Fashion United,(2016). Global Fashion Industry Statistics, Retrieved from https://fashionunited.com/global-fashion-industry-
statistics
3Fuller,(2015). Economy Of Fashion: How Different Trends Reflect The Financial State, Retrieved from
http://elitedaily.com/women/fashion-reflects-economic-state/948110/

4Inditex,(2016).Annual Report 2015,Retrieved from

https://www.inditex.com/documents/10279/18789/Inditex+Anual+Memory+2015+web.pdf/d8ce551b-fad0-4294-b160-
03160cde32dd
5 Gap Inc.(2016).About>Key Facts, Retrieved from http://www.gapinc.com/content/gapinc/html/aboutus/keyfacts.html

4
countries is increasing. However, there are many other important factors that determine success
for fashion retailers6. Failure to predict the trend and manage supply chain will result in sales and
profit drop. High level of company data security is also crucial. Good company code of conduct
is also highly important for multinational companies as it helps keep companies operating
smoothly and maintain good level of brand image.
Giant fashion manufactures and retailers such as Inditex, H&M and Gap should worry less about
new entrants and focus more on keeping current market share and business expansion. In the
long term companies should also cope their expansion with adequate business strategies and
operational model. Many details things include supply chain management, pricing, marketing,
and inventory management. Last but not least fashion retailers should pay a lot of attention in
fashion trends in different regions. Market share can be strongly influenced by the trend.

Target Market
Inditex has eight brands and while each brand has their own personality they share the same
business model and values4. With all the brands combined Inditex targets consumers of all ages.
Zara offers kids wears while some others are especially targeting to women. Some brands offer
higher quality with relatively higher price and are more sophisticated. On the other hand, some
brands offer younger, more hipster style targeting to the younger generation at cheaper prices.
Each brand has different style and personality that covers different age groups, lifestyles, and
preferences. Inditex offers little sportswear but are not towards the professional side. Zara Home
offers wide range of home textile and decoration items but does not carry furniture. Overall,
Inditex is mainly targeting towards consumers in urban areas who seek for fashionable clothing,
accessories and textile goods. The majority of the targeting gender is women.
Currently Inditex has a total of 7,013 stores in 88 markets and operated online stores in 29
markets and it is planning to accomplish 17 sustainable development goals by 2030 which aim to
change the fashion industry in terms of environmental and social responsibility.
Inditex is also aiming to target all consumers by opening more new stores each year and
launching new online stores in different regions. It’s just in time production and delivery allows
Inditex deliver high quality of products that meet consumers’ expectation and demands.

Customer Profile
Inditex consumers are expecting to portrait themselves as educated urbanist with fashionable
taste. At the same time consumers are looking for quality apparel and accessories that feels
comfortable to wear. Each brand of Inditex group has a different style and price, therefore each
brand is targeting to different consumer segment. The following market segment will get into
details about each brand and their target segment.

Segmentation
Pull&Bear

6 Deadal Research,(n.d.) Global Online Optical Retail Market: Trends & Opportunities (2014-2019),Retrieved
fromhttp://www.marketreportsonline.com/393854.html

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Target: It is targeted at urban sports enthusiasts, as well as a new collection inspired by the iconic
backdrops of a Californian summer. Pull&Bear's collections have a laid back and fun feel to
them [7][4].
Age group: Teens and young adults.
Gender: Male and Female.
Geographic Area: Pull&Bear currently has 936 stores across 68 markets and 21 online markets,
the majority in Europe.
Life style: Urbanist, young, fun, fashionable, and socializing.
Income level: Low to middle disposal income.
Occupation: Students in high school, post-secondary, or young graduates.

Zara
Target: It targets consumers who seek for the latest high fashion clothing at affordable price.
Zara is always striving to meet the needs of its customers, while at the same time as helping to
inform their ideas, trends and tastes. The idea is to share responsible passion for fashion across a
broad spectrum of people, cultures and ages.
Age Group: All ages.
Gender: Male and Female.
Geographic Area: Zara currently has 2,162 number of stores across 88 markets and is in 27
online markets. It has 1362 number of stores in Europe, 283 in America, and 517 numbers of
stores in Asia and in rest of the world[4][8].
Lifestyle: Urbanist, fashionable, socializing.
Income level: Middle to upper disposal income.
Occupation: Post-secondary students, business professionals, and office related jobs.

Massimo Dutti
Target: It targets independent women and men with sophisticated and elegant style, both formal
and casual.
Age Group: Thirties to early fifties.
Gender: Male and Female.
Geographic Area: The style is target to all groups globally as it is universally elegant. Massimo
Dutti currently has 740 number of stores across 69 markets and has 24 online markets. It has 532
stores in Europe, 56 in America, and 152 stores in Asia and in rest of the world[4][9].
Lifestyle: High-class, sophisticated, socializing.
Income level: Upper-middle to high level of disposal income.
Occupation: Professionals.

Bershka

7 Inditex,(2016).Brands>Pull & Bear, Retrieved from http://www.inditex.com/en/brands/pull_bear

8 Inditex,(2016).Brands>Zara, Retrieved from http://www.inditex.com/en/brands/zara
9 Inditex,(2016).Brands>Massimo Dutti, Retrieved from http://www.inditex.com/en/brands/masssimo_dutti

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Target: It targets younger hipsters with urban hip style. The stores are created to make a meeting
point where customers can find a blend of street fashion, music and art10.
Age Group: Late Teens to twenties.
Gender: Male and Female.
Geographic Area: Bershka currently has 1,044 stores across 70 markets and has 17 online
markets. It has 753 stores in Europe, 94 in America, and 197 stores in Asia and in rest of the
world [4].
Lifestyle: Hipster, active, young, artistic, urbanist, fashionable.
Income Level: Lower level of disposal income.
Occupation: Students and young graduates.

Stradivarius
Target: It targets at fashionable young women with lots of imagination. It offers unique new
trends and certified organic fabrics that are youthful and feminine11.
Age Group: twenties to mid-thirties.
Gender: Female.
Geographic Area: Stradivarius currently has 950 stores across 60 markets and has 18 online
markets. It has 711 stores in Europe, 55 in America, and 184 stores in Asia and in rest of the
world [4].
Lifestyle: Leisure, relaxing, feminine, young.
Income Level: Lower level of disposal income.
Occupation: Any.

OYSHO
Target: It offers different product lines including lingerie, gym wear, sleepwear, beachwear,
accessories and footwear. Oysho offers fashionable design while combining comfort and quality.
It is targeting at independent, self-confident women who appreciate quality and love dressing in
the latest fashion trends.
Age Group: Young adult to middle age.
Gender: Female.
Geographic Area: Oysho currently has 607 stores across 42 markets and has16 online markets. It
has 442 stores in Europe, 52 in America, and 113 stores in Asia and in rest of the world [4].
Lifestyle: Leisure, famine, free, independent, confident, active.
Income: Middle to upper middle level of disposal income.
Occupation: Any.

Uterqüe
Target: It is targeted to consumers who seek for high quality garments and accessories, including
a wide range of leather goods that is exclusively designed by Uterqüe creative team at
compatible prices. It has simple flattering style ranging from formal casual to casual. Uterqüe
also targets to customers with excellent customer services12.
Age Group: Thirties to fifties.
Gender: Female.

10 Inditex,(2016).Brands>Bershka, Retrieved from http://www.inditex.com/en/brands/bershka

11 Inditex,(2016).Brands>Stradivarius, Retrieved fromhttp://www.inditex.com/en/brands/stradivarius
12 Inditex,(2016).Brands>Uterque, Retrieved fromhttp://www.inditex.com/en/brands/uterque

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Geographic Area: Uterqüe currently has 72 stores across 25 markets and has 16 online markets.
It has 47 stores in Europe, 11 in America, and 14 stores in Asia and in rest of the world [4].
Lifestyle: Causal, middle-high class, socializing.
Income: Upper-middle to high level of disposal income.
Occupation: Professionals.

Zara Home:
Style: It specializes in the latest designs for the home. Its textile ranges, which include bedding
and bed linen, tableware and bath linen, are complemented by dishware, cutlery, glassware and
home decoration objects and accessories. Zara home is constantly refreshing its product range
throughout the year13.
Age Group: Adults who have their own living space.
Gender: Male and Female
Geographic Area: Zara Home currently has 502 stores 65 across 53 markets and has 25 online
markets. It has 359 stores in Europe, 52 in America, and 91 stores in Asia and in rest of the world
[4]
.
Lifestyle: Middle-high class, leisure, casual, artistic, fashionable, single.
Occupation: Any, housewife, non-students.
Income: Lower middle to upper middle level of disposal income.

Major Competitors and Participants:

Inditex remains in the top two in fast fashion industry with its biggest competitor H&M. H&M is
extremely competitive in terms of size, sales, market share and brand recognition. Every year
Inditex and H&M have competitive amount sales in dollar. In year 2015 Inditex has 23.25 billion
dollars of sales while H&M has 24.88 billion dollars of sales [4] [14]. The rest of the top
competitors are Gap Inc. and L brands but both have far less dollar sales than Inditex and H&M.
Gap Inc. has 15.8 billion dollars of sales and L Brand has about 12.7 billion dollars of sales[15][16].
Inditex should have little worried about new entrants as they do not have the resources and
capital to compete globally. Inditex should focus on their expansion and compete with H&M.

Inditex offers a wide range of product lines and brands that has wider target market. Inditex also
provides better quality fashion products and is focused more on social responsibility. Majority of
Inditex’s stores are located in prime area which gives consumers the illusion of cheaper luxuries
and therefore create more impulsive buying. And with its limited inventory strategies Inditex was
able to sell more products at its original price and decrease the lost from sale.

H&M offers cheaper but still fashionable clothes which more consumers are more willing to
purchase from them. It also has more stores not just in the downtown area. However, cheaper
means less quality. H&M’s clothing is easier to worn down and the materials used are less nice.

13 Inditex,(2016).Brands>Zara Home, Retrieved from http://www.inditex.com/en/brands/zara_home

14H&M,(2016) Hennes & Mauritz AB Full-Year Report, Retrieved from
http://about.hm.com/content/dam/hm/about/documents/en/cision/2016/01/1642932_en.pdf
15 LBrands,(2016).Investor Overview, Retrieved fromhttp://investors.lb.com/phoenix.zhtml?c=94854&p=irol-irHome
16Gap Inc.(2015).2015 Annual Report, retrieved from http://www.gapinc.com/content/dam/gapincsite/documents/GPS
%202015%20Annual%20Report.pdf

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Currently H&M has less stores worldwide and the company has established only one brand
which carry womenswear, menswear and kids wear, some accessories, lingerie, sportswear and
have less style choice in comparison to the diverse Inditex.
Gap Inc. on the other hand has a wider range of styles and brands that covers different income
level of consumers. Its cheapest brand Old Navy has been known for a good place for families
due to its cheap price and selection for both male, female and kids. Gap offers better quality
clothing at slightly higher price to both male, female, and kids as well. Banana republic is more
high class and offers more sophisticated apparel to adults only. Athlete offers casual and
sportswear at a reasonable price. And finally Intermix offers high-end fashion clothing at
premium prices. A weakness of Gap Inc. is that they do not follow the trend exactly from high-
end luxury brands. Most of the style are basics and staples, not considered as fashionable.

To distinguish Inditex with H&M, Inditex is targeting consumers who want high fashion at a
cheaper price but at the same time seek for good quality. H&M is targeting to vast consumers
who want fashionable clothing but are price sensitive. In order for Inditex to compete with H&M
more successfully the company may need to consider lowering the price at the same quality, or
do more market penetration to gain market share. For example, opening more stores and brands
in North America.

Market Growth Forecast:

According to Trading Economics Europe is forecasting (Appendix 1) to have better GDP, lower
unemployment rate and lower interest which means consumers are more likely to spend more
over the next four years. The CCI is shown to increase as well17. However, some other countries
are forecasted to have subdued economy. For example, China is forecasted to have a higher
unemployed rate and the interest rate will be higher (Appendix 2)18. GDP growth slows down
and more household and businesses are projected to have more debt. However, the CCI shows a
positive result. USA will have slightly higher GDP but unemployment rate and interest will
increase as well. Reversely American’s CCI is projected to drop (Appendix 3)19.
Since Inditex operate worldwide some regions may have positive growth while other will not.
The positive may be cancelled by the negative and result in little growth opportunity for Inditex.
Reversely if the negative growth is more than the positive company may suffer in expansion.
Material costs and production costs may also have influenced by the economy and each region
will have different level of impact.
According to the internal forecasting Inditex is looking forward to have increasing growth over
the next couple years. Inditex has been increased their store number each year and employed
more workers. The investment in sustainability development program has largely increased for
better results in expansion. The company profit has also been increased each year since 2011[4].

17 Traiding Economics (2015), Euro area | Economic Forecasts | 2016-2020 Outlook [Statistical Table], Retrieved from
http://www.tradingeconomics.com/euro-area/forecast
18 Traiding Economics (2015), China| Economic Forecasts | 2016-2020 Outlook [Statistical Table], Retrieved from
http://www.tradingeconomics.com/china/forecast
19Traiding Economics (2015), United States| Economic Forecasts | 2016-2020 Outlook [Statistical Table], Retrieved from
http://www.tradingeconomics.com/united-states/forecast

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In conclusion Inditex have growth opportunity globally but should take careful consideration and
analysis into the global economy and the regions it is planning to expand to.

Product Uniqueness
Inditex offers wide selection of fashion apparels and accessories for both kids, teenagers, and
adults in all genders and all income levels. Detailed product line is shown as follow:
 Apparel: womenswear, menswear, kids wear, gym wear, underwear, loungewear.
 Accessories: Jewelry, hat, sunglasses, handbags, shoes, scarf,
 Occasions offered: Causal, semi-formal, formal.
 Style offered: Urbanist, young, feminine, professional, sophisticated, high fashion,
 Price range: Cheap to upper middle level of price.
Inditex also commit to guarantee customers environmentally responsible and sustainable
products includes preventive control actions at all stages of production: design, selection of raw
materials and dyes, manufacturing and printing systems, monitoring during manufacturing and
continuous innovation in all processes.
Inditex uses a vertically integrated business model which ensures full transparency in the
business operation and management, allows stakeholders better understand and cope with each
other to achieve the same goal: listen to fulfill consumer’s demand and serve the best at their
interests including deliver high-quality, safe to wear, fashionable products, excellent customer
service and order deliveries.
Inditex makes sure all products are produced ethically in an environmental friendly way which
consumers know they are supporting to do good for the society (versus buying goods produced
by child labors or under-wage labors).

Product Descriptions

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Zara: Zara is always striving to meet the needs of its customers at the same time as helping to
inform their ideas, trends and tastes. The idea is to share responsible passion for fashion across a
broad spectrum of people, cultures and ages.

Pull & Bear: Pull&Bear is more than just clothing and

accessories, it also creates spaces in which to communicate its
product message. Pull&Bear's stores blend creative installations
with recycled objects to create a quirky and comfortable space
where its young customers enjoy spending time.

Massimo Dutti: It epitomizes elegant and universal style that

connects with the independent, cosmopolitan men and
women of today. Its collections span from the most
sophisticated of looks to more casual styles.

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Bershka: Its urban hip style characterizes its
spacious stores to create a meeting point where
customers can find a blend of street fashion, music
and art. Shopping at Bershka means immersion in
the very latest fashion trends.

Stradivarius: Stradivarius takes a youthful and

feminine approach to fashion. It introduces new
trends designs and fabrics to its young customers.
Its elegant spacious stores offer a broad range of
fashion choices for casual young women with lots
of imagination.

OYSHO: Oysho has different product lines

such as lingerie, gym wear, sleepwear,
beachwear, accessories and footwear. Oysho's
collections are carefully selected to offer design
and fashion, combined with garment quality
and comfort. Oysho's customers are
independent, self-confident women who
appreciate quality and love dressing in the latest
fashion trends.

Zara Home: It specializes in the latest designs for the home. Its textile ranges,
which include bedding and bed linen, tableware and bath linen, are
complemented by dishware, cutlery, glassware and home decoration objects
and accessories. Zara home is constantly refreshing its product range
throughout the year.

Uterqüe:
Uterqüe is a

sophisticated fashion accessory brand which boasts excellent quality at attractive prices. Its

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 collections also include clothing and
leather garments and are all
designed exclusively by Uterqüe's creative
team.

Competitive Comparisons:
Inditex is one of the leader of fast fashion industry although it has many rivals in the same trend
leader. Unlike the other competitors, Inditex try to meet customers’ satisfaction with its specific
business model, like staffs are working at one side of room and shoppers are sitting next doors.
Any competitors try to use this business model because it costs higher than current system they
are using. Inditex’s connection between stores, the in-house designers, and its factories make
possible to meet customers’ satisfaction.
Design from Inditex significant exclude Zara because Zara targets every people, cultures, and
ages. All brands of Inditex, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, OYSHO, Zara
Home, and Uterqüe, have significant design comparing with similar target markets sharing in the
industry.
Also, Inditex has complexity of priority between design, quality, and price. If considering only
design, products are fairly high quality and cheaper price than competitors. Again, if considering
one price or quality, design of products reaches a high standard. Many competitors of Inditex try
to cut down the cost and products price, so they produce many products in China; however,
Inditex keeps the majority of factories and logistic centers near the headquarter location.
Inditex Fashion forward: Zara, Spain’s most successful brand, is trying to go global.

Since some companies offer wide range with brands that target at different segments, for easier
comparison between Inditex and its rivals the most representative brand of the company will be
listed.

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Product Comparison Table
Inditex Zara H&M Gap
Product Quality $$$ $ $$
Price Medium to upper low Medium
medium
Style Trendy high fashion Trendy high fashion Daily fashion, more
simple less trendy
Comfortability Medium Low Medium

Target users All ages all genders Teens to adults All ages all genders
Distribution 7021 stores and 29 3924 stores and 23 3721 stores
online stores online stores
Locations Worldwide mostly in Worldwide, locate in Worldwide, located in
Europe and all locate in populated cities but not populated cities but not
downtown area necessarily downtown necessarily downtown
area area
Online shopping yes yes yes
Free shipping depends depends depends

In summary Inditex Zara has patriated themselves as affordable luxuries which is is not so low in
price and are only locate in prime location. This brand is targeting to a little bit higher class
family, or to individuals who would like to enjoy high fashion at the moment and still have the
quality that feels comfortable to wear. It definitely has its own place in the product positioning
map. Zara’s bran image is also significant.

Research & Development

Inditex does not have a lot of R&D as many of its design are based on consumer inquiries.
However, Inditex put a lot of their effort into conducting their sustainable business plan.[4]

Sustainable Development Goal: Inditex has strengthened its sustainability commitments to

protecting human rights in all of its activities by embracing the route to sustainability proposed
by the United Nations in its seventeen Sustainable Development Goals. The golas are to
transform the world and intensify the efforts to help end all forms of poverty, reduce inequality
and fight climate change, to ensure that no one is left behind.

Creating Economic and Social Value: Inditex maintain its corporate value by using vertical
organizational structure. Company reinforce and strengthen its value by solid training,
communication, teamwork and customer-centric approach.

Traceability of Supply chain: Inditex’s priority in management is to ensure to traceability and

transparency of supply chain. It allows just in time decisions, quality control and maintain high
level of code of conduct in each department and production stage. All of the activities are

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designed to produce safe-to-wear products for consumers, and to create healthy and safe work
environment.

Integrity of Supply Chain: The lines of action followed by Inditex to ensure a stable and
sustainable supply chain include making sure that the Group has accurate knowledge on its
suppliers, performing exhaustive assessments of suppliers and helping them to improve and
optimize the working conditions of their employees.

The Quality of Products: Inditex strives to deliver ever more sustainable products by working
hard on product design, on selecting the right processes and raw materials to be used, and on the
whole production process in general, right through to the end of the product’s life cycle.

Efficient use of Resources: All corporate objective and the sustainability plan were delivered and
communicated well internally which allowed company to introduce and consolidate various
work streams at all stages of the value chain. The newest 2016-2020 Plan will emphasize
environmental innovation and its local adaptation as its levers of transformation.

Developing Employee’s talent: Inditex makes sure all employees and new entrants receive
adequate training and opportunities in the workplace.

Innovation in Customer Service: Customer services is one of the most important to Inditex’s
business model as the company’s main objective is to listen to customers and fulfill their
requests. In 2015, this principle guided the consolidation of the RFID system or the self-checkout
tills and the interactive fitting room projects.

Contribution to Community: Inditex try to help generate social and human value in communities
and settings that need a positive impetus. In 2015, over one million people benefited from this
help.

Conclusion-Market Analysis:
Inditex is ahead in the fast fashion industry which the company should worry little about new
entrants as they have less resources to compete globally, but should carefully compete with
H&M who has the similar size and sales as Inditex. Other top competitors such as Gap Inc. offers
more family friendly product line (Old Navy and Gap) can be considered as threat. After all
Inditex has its own unique product positions. It is more recommended that they focus on their
current sustainability plan and keep the expansion based on the plan.

15
Financial Analysis

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Executive Summary-Financial Analysis:
Financial analysis gives managers and investors ideas on a company’s performance management
efficiency. In the analysis cash and profitability assessment will be investigated. Some ratios
include working capital as a percentage of revenue, current ratio, quick ratio, accounts receivable
turnover, Inventory turnover, Payables turnover, cash from operations as percentage of revenue
will be determined in cash assessment. Other ratios include ROE, ROA, EPS, profit margins,
asset turnover, gross profit margin, operating income margin and income before tax margin will
be examined.
Inditex is shown to have better and stronger cash position over the years and compare to two of
its top competitors. However Inditex does not have oblivious growth in profit throughout the
years. Some ratios indicate that the company may be less sufficient at managing costs, finance
debt and utilize assets compare to its rivals.
It is recommended for Inditex to examine and managing their costs and liabilities better if they
would like to have better profitability financial performance relative to its rivals and expand
more successfully in the future.

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Cash Assessment
Cash assessment is done with different ratios to complete a company generates cash that is
available to pay off liabilities, suppliers, and to purchase new inventories. All ratios, used for the
assessment, are able to compare with competitors within the same industry. Also, these ratios
make possible to compare with competitors that the company performs how much better than
competitors.
The following cash assessment for three years’ ratio of Inditex shows explanation, calculation
and comparison with top two rivals of Inditex which are H&M, GAP Inc.

Working capital as a percentage of revenue:

How much working capital should a company have on its balance sheet, this is the meaning of
working capital. Working capital as a percentage of revenue tells a business how much of every
sales dollar must go toward meeting operational expenses and short-term debt obligations; in
other word, how much working capital is enough depending on sales revenues, whether a
business focuses on services or selling products, whether it carries inventory or whether the
business is experiencing growth or undergoing an expansion. The formula for calculating
working capital is “Current Assets - Current Liabilities = Working Capital.” Calculate working
capital as a percentage of sales using gross sales revenue figures from the profit-and-loss or
income statement. The formula is “working capital divided by gross sales times 100.”20
The year beginning in 2015, 2014, and2013, Inditex’s working capitals are €3,779,084,
€3,302,668, and €3,207,086. The percentage of the year, 2015, is 19.84%; the percentage of the
year before, 2014, is 20.28%; and the percentage in 2013 is 21.71%. These percentages present
brief ability of the company’s liquidity. Inditex’s working capital percentage is stable which
means company has ability of urgent payback of the obligation of the liability.
However, the rival company of Inditex, H&M, has working capitals as a percentage of revenue
in 2015, 2014, and 2013 that are 12.5%, 14.82%, and 16.95%. The brief liquidity has been
reducing gradually for three years. Moreover, another competitor of Inditex, GAP Inc., has the
percentage of 9.18% in 2015, 12.67% in 2014, and 12.29% in 2013 [21][22][23][24][25][26] .
Inditex (in Euro, €)
Jan. 31, 2016 Jan. 31, 2015 Jan. 31, 2014
Current Assets 8,449,235 7,105,953 6,764,961
Current Liabilities 4,670,151 3,748,828 3,462,293

20 Sales to Working Capital Ratio. (n.d.). Accounting Tools. Retrieved from http://www.accountingtools.com/sales-to-working-capital-ratio
21 Inditex. (2014).Annual Report 2013, Retrieved from
http://www.inditex.com/documents/10279/18789/Inditex_Group_Annual_Report_2013.pdf/88b623b8-b6b0-4d38-b45e-45822932ff72
22 Inditex. (2016).Annual Report 2015, Retrieved from
http://www.inditex.com/documents/10279/18789/Inditex+Anual+Memory+2015+web.pdf/d8ce551b-fad0-4294-b160-03160cde32dd
23 H&M. (2016).H&M Annual Report 2015, Retrieved form http://about.hm.com/content/dam/hm/about/documents/en/Annual
%20Report/Annual%20Report%202015_en.pdf
24 H&M,(2015).H&M Annual Report 2014, Retrieved form http://about.hm.com/content/dam/hm/about/documents/en/Annual
%20Report/Annual%20Report%202014_en.pdf
25 GAP Inc. (2016).Gap Inc.Annual Report 2015, Retrieved from file:///C:/Users/User/Downloads/GPS%202015%20Annual%20Report
%20(1).pdf
26 GAP Inc. (2015). Gap Inc.Annual Report 2014,Retrieved from file:///C:/Users/User/Downloads/GPS%202014%20Annual%20Report
%20(1).pdf

18
 Working Capital 3,779,084 3,357,125 3,207,086
Net Sales 19,046,997 16,557,273 15,209,964

H&M (in SEK, K)

November 31, 2015 November 31, 2014 November 31, 2013
Current Assets 45,536 42,741 39,188
Current Liabilities 22,937 20,303 17,397
Working Capital 22,599 22,438 21,791
Net Sales 180,861 151,419 128,562

GAP Inc. ($ and shares in millions except par value)

January 30, 2016 January 31, 2015 February 1, 2014
Current Assets 3,985 4,317 4,430
Current Liabilities 2,535 2,234 2,445
Working Capital 1,450 2,083 1,985
Net Sales 15,797 16,435 16,148

Current ratio:
The current ratio is a financial ratio that shows the proportion of current assets to current
liabilities. The current ratio is used as an indicator of a company's liquidity. In other words, a
large amount of current assets in relationship to a small amount of current liabilities provides
some assurance that the obligations coming due will be paid27.
The current ratio is an indication of a firm's market liquidity and ability to meet creditor's
demands. Acceptable current ratios vary from industry to industry and are generally between 1.5
and 2 for healthy businesses. If a company's current ratio is in this range, then it generally
indicates good short-term financial strength. If current liabilities exceed current assets, then the
company may have problems meeting its short-term obligations. If the current ratio is too high,
then the company may not be efficiently using its current assets or its short-term financing
facilities. This may also indicate problems in working capital management [21][22][23][24][25][26].

Inditex (Euro, €)
January 31, 2016 January 31, 2015 January 31, 2014
Current Assets 8,449,235 7,105,953 6,764,961
Current Liabilities 4,670,151 3,748,828 3,462,293
Current Ratio 1.81 1.90 1.95

H&M (SEK, M)
November 30, 2015 November 30, 2014 November 30, 2013
Current Assets 45,536 42,741 39,188
Current Liabilities 22,937 20,303 17,397
Current Ratio 1.99 2.11 2.25

27 Current Ratio. (N.A). What is the 'Current Ratio'. Retrieved from http://www.investopedia.com/terms/c/currentratio.asp

19
GAP Inc. ($ and shares in millions except par value)
January 30, 2016 January 31, 2015 February 1, 2014
Current Assets 3,985 4,317 4,430
Current Liabilities 2,535 2,234 2,445
Current Ratio 1.57 1.93 1.81

Quick ratio:
Quick ratio is a liquidity ratio which measures the dollars of liquid current assets available per
dollar of current liabilities. The most common formula used to calculate quick ratio is “(Cash +
Marketable Securities + Receivables)/ Current Liabilities or (Current Assets − Inventories –
Prepayments)/ Current Liabilities.” 28
Looking at Inditex’s quick ratio in 2015 is 1.31, in 2014 is 1.37, and in 2013 is 1.38. These
numbers present Inditex has more current assets than current liabilities. In 2015, Inditex is
available the current assets, $1.00, to pay off the current liabilities, $1.31 the organization has.
Furthermore, the firm has the current assets are available to pay off the current liabilities that
$1.00 pays $1.37 in 2014. Lastly, it has ability of $1.00 to $1.38 on current assets to current
liabilities in 2013. The result of calculation briefly tells that Inditex either increased liabilities or
decreased the current assets in 2015. However, the ability of liquidity the current assets per dollar
of current liabilities of Inditex is higher than the two biggest competitors although the quick ratio
is decreased in 2015.
In contrast, the biggest competitor of Inditex, H&M, has the quick ratio of 0.83 in 2015, 1.07 in
2014, and 1.22 in 2013. Moreover, another competitor of Inditex, GAP Inc., has the quick ratio
of 0.83 in 2015, 1.09 in 2014, and 1.02 in 2013. H&M and GAP Inc. show the weaker quick ratio
in 2015 than previous years that imply H& M and GAP Inc. increased current liabilities or
decreased current assets in 2015.
Comparing the current ratio with competitors tells that Inditex has higher ability of quick pay off
with the current assets to the current liabilities for the years in 2013, 2014, and 2015. Also, the
calculation has implication of all these companies increased current liabilities or decreased
current assets in 2015 [21][22][23][24][25][26].
Inditex (Euro, €)
January 31, 2016 January 31, 2015 January 31, 2014
Trade and other receivables 668,807 861,811 815,227
Income tax receivable 89,086 68,284 95,637
Other financial assets 45,751 168,947 13,022
Current financial 1,085,648 222,259 104,580
investments
Cash and cash equivalents 4,225,527 3,797,930 3,846,726
Total 6,114,819 5,119,231 4,770,612
Current Liabilities 4,670,151 3,748,828 3,462,293

28 Financial Ratio. (N.A). Quick Ratio. My Accounting Course: accounting education for the test of us. Retrieved from
http://www.myaccountingcourse.com/financial-ratios/quick-ratio

20
H&M (SEK, M)
November 30, 2015 November 30, 2014 November 30, 2013
Current Assets 45,536 42,741 39,188
Inventories (24,833) (19,403) (16,695)
Prepaid (1,884) (1,516) (1,255)
Total 18,819 21,822 21,238
Current Liabilities 22,937 20,303 17,397

GAP Inc. ($ and shares in millions except par value)

January 30, 2016 January 31, 2015 February 1, 2014
Current Assets 3,985 4,317 4,430
Inventories (1,873) (1,889) (1,928)
Total 2,112 2,428 2,502
Current Liabilities 2,535 2,234 2,445

Accounts receivable turnover:

Accounts receivable turnover is the ratio of net credit sales of a business to its average accounts
receivable during a given period per year. It is an activity ratio which estimates the number of
times a business collects its average accounts receivable balance during a period. Accounts
receivable turnover measures the efficiency of a business in collecting its credit sales. Generally,
a high value of accounts receivable turnover is favorable and lower figure may indicate
inefficiency in collecting outstanding sales. Increase in accounts receivable turnover overtime
generally indicates improvement in the process of cash collection on credit sales29.
Inditex’s net sales in company- managed stores made is €19,046,997, and trade and other
receivable is €668,807 in 2015. The company’s account receivable turnover in 2015 is 28.48. In
2014 and 2013, Inditex made sales €16,557,273 and €15,209,964. Also, the receivable made
were €861,811and €815,227 in 2014 and 2013. Thus, the receivable turnover for Inditex are
19.21 and 18.66. The numbers, 28.48, 19.21, and 18.66 represent Inditex made the number of
times of collection that the receivable from customers per year.
In contrast, the receivable turnovers for H&M are 23.33, 22.79, and 24.4, and the receivable
turnovers of GAP Inc. are 11.53, 10.85, and 10.69. These two competitors of Inditex improved
the receivable turnover for the last three years [21][22][23][24][25][26].
The collection of Inditex has improved for the last three years which means every year the firm
collects the receivable from customers get faster than previous years, and competitors have
improved for three last years. The improvement of Inditex, H&M, and GAP Inc. present every
firm gets faster collections.

29 Financial Ratios. (N.A). Accounts Receivable Turnover Ratio. Accounting Tools. Retrieved from
http://www.accountingtools.com/accounts-receivable-turnover

21
Inditex (Euro, €)
January 31, January 31, 2015 January 31,
2016 2014
Trade receivables 163,765 182,496 145,977
Receivables due to sales to 229,873 176,766 162,039
franchises
Public entities 152,881 406,479 446,047
Other current receivables 122,288 96,070 61,164
Total 668,807 861,811 815,227
Net sales in company-managed 19,046,997 16,557,273 15,209,964
stores

H&M (SEK, M)
November 30, 2015 November 30, 2014 November 30, 2013
Accounts receivable 4,021 3,659 3,107
Net Sales 180,861 151,419 128,562

GAP Inc. ($ and shares in millions except par value)

January 30, 2016 January 31, 2015 February 1, 2014
Accounts receivable 1,370 1,515 1,510
Net Sales 15,797 16,435 16,148

Inventory turnover:
Inventory turnover ratio is used to assess how efficiently a business is managing its inventories.
Inventory turnover is an efficiency ratio which calculates the number of times per period a
business sells and replaces its entire batch of inventories. It is the ratio of cost of goods sold by a
business during an accounting period to the average inventories of the business during the
period. Dividing the total cost of goods sold by the cost of average inventories balance
maintained by a business gives us dollars of sales made per dollar of cash tied up in inventories.
In general, a high inventory turnover indicates efficient operations30. After all calculation, Inditex
has higher inventory turnover ratio than other competitors. In 2015, the inventory turnover ratio
is 4.01 which means about 4.01 times inventories sold out in the year 2015. Also, 4.06 times
inventories sold out in the year 2014 and 2013.
On the other hand, two biggest competitors of Inditex, H&M and GAP Inc. have different
inventory turnover ratios. H&M has 3.13 in 2015, 3.21 in 2014, and 3.15 in 2013. These ratios
tell us H&M hold inventories longer than Inditex to be sold out for every replaces its entire batch
of inventories. GAP Inc. has 5.38 in 2015, 5.37 in 2014, and 5.11 in 2013. GAP Inc. turns the
inventories more times than Inditex and H&M [21][22][23][24][25][26].
Inditex (Euro, €),

30 Inventory Turnover. (N.A). Inventory Turnover Ratio. http://www.myaccountingcourse.com/financial-ratios/inventory-

turnover-ratio

22
Cost of Sales
January 31, 2016 January 31, 2015 January 31, 2014
Raw materials and 9,146,638 7,730,274 6,897,088
consumables
Change in inventories (335,499) (182,637) (95,582)
Total 8,811,139 7,547,637 6,801,507
January 31, 2016 January 31, 2015 January 31, 2014
Raw materials and 87,940 64,925 52,034
consumables
Goods in process 32,955 22,237 35,789
Finished goods for sale 2,074,120 1,772,354 1,589,056
Total 2,195,015 1,859,516 1,676,879
Inventories

H&M (SEK, M)
November 30, 2015 November 30, 2014 November 30, 2013
Cost of Sales 77,694 62,367 52,537
Inventories 24,833 19,403 16,695

GAP Inc. ($ and shares in millions except par value)

January 30, 2016 January 31, 2015 February 1, 2014
Cost of Sales 10,077 10,146 9,855
Inventories 1,873 1,889 1,928

Payables turnover:
Accounts payable turnover is the ratio of net credit purchases of a business to its average
accounts payable during the period. It measures short term liquidity of business since it shows
how many times during a period. It is an amount equal to average accounts payable is paid to
suppliers by a business.
Accounts payable turnover is a measure of short-term liquidity. A higher value indicates that the
business was able to repay its suppliers quickly. Thus higher value of accounts payable turnover
is favorable. This ratio can be of great importance to suppliers since they are interested in getting
paid early for their supplies. Other things equal, a supplier should prefer to sell to a company
with higher accounts payable turnover ratio31.
A high ratio means usually there is a relatively short time between purchase of goods and
services and payment for them. Adversely, a lower accounts payable turnover ratio usually
signifies that a company is slow in paying its suppliers. A high accounts payable turnover ratio,
however, is not always in the best interest of a company. Many companies extend the period of
credit turnover getting extra liquidity. Inditex is in this case. Its payable turnover ratios are 2.03,
2.20, and 2.07 in year 2015, 2014, and 2013.

31 Asset management ratios. (N.A). Accounts Payable Turnover Ratio. IFRS financial reporting and analysis software.
Retrieved from http://www.readyratios.com/reference/asset/accounts_payable_turnover_ratio.html

23
H&M has higher number of payable turnover ratios that are 13.85 in 2015, 11.79 in 2014, and
11.09 in 2013. Moreover, GAP Inc. has ratio numbers like 9.05 in 2015, 8.62 in 2014, and 8.07
in 2013[21][22][23][24][25][26].
Inditex (Euro, €)
January 31, 2016 January 31, 2015 January 31, 2014
Cost of sales 8,811,139 7,547,637 6,801,507
Ending inventory 2,195,015 1,859,516 1,676,879
Starting inventory (1,859,516) (1,676,879) (1,581,297)
Net Purchases 9,146,638 7,730,274 6,897,089
Average Accounts 4,514,266 3,507,878 3,332,451
Payable

H&M (SEK, M)
November 30, 2015 November 30, November 30, 2013
2014
Cost of sales 77,694 62,367 52,529
Ending inventory 24,833 19,403 16,695
Starting inventory (19,403) (16,695) (15,213)
Net Purchases 83,124 65,075 54,011
Average Accounts 6,000 5,520 4,870
Payable

GAP Inc. ($ and shares in millions except par value)

January 30, 2016 January 31, 2015 February 1, 2014
Cost of sales 10,077 10,146 9,855
Ending inventory 1,873 1,889 1,928
Starting inventory (1,889) (1,928) (1,758)
Net Purchases 10,061 10,107 10,025
Average Accounts 1,112 1,173 1,242
Payable

Cash from operations as a percentage of revenue:

This ratio compares the operating cash flows a company to its sales revenue. This ratio gives the
analysts and investors indications about the ability of a company to generate cash from its sales.
In other words, it shows the ability of a company to turn its sales into cash. It is expressed as a
percentage.
Ideally there should be a parallel increase in operating cash flows with the increase in sales. It
will be a trouble if the changes in cash flows are not parallel to the changes in sales revenue.
The higher this ratio is the better for the company. Greater amounts of operating cash flows are
always desirable. Although there is not any standard guideline for this ratio but a consistent
and/or increasing trend in this ratio is a positive indication of good management32.

32 Richard Loth. (N.A). Cash Flow Indicator Ratios: Operating Cash Flow/Sales Ratio. Investopia. Retrieved from
http://www.investopedia.com/university/ratios/cash-flow-indicator/ratio1.asp

24
Cash is very important for all companies. Cash is needed for payments to suppliers, employees,
shareholders, and for operating expenses and investment in capital assets. Therefore, cash is just
as important as sales and profits. This ratio indicates the ability of a company to translate its sales
into cash. The formula for this ratio is simple. This ratio can be calculated like “Operating cash
flow / Sales Ratio = Operating Cash Flows / Sales Revenue x 100%.”[21][22][23][24][25][26].

Inditex (Euro, €)
January 31, 2016 January 31, 2015 January 31, 2014
Operating cash flows 4,225,527 3,797,930 3,846,726
Net Sales 20,900,439 18,116,534 16,724,439
Cash Flow Ratio 20.22% 20.96% 23.00%

H&M (SEK, M)
November 30, 2015 November 30, 2014 November 30, 2013
Operating cash flows (1,680) (275) (252)
Net Sales 209,921 176,620 150,090
Cash Flow Ratio -0.8% -0.16% -0.17%

GAP Inc. ($ and shares in millions except par value)

January 30, 2016 January 31, 2015 February 1, 2014
Operating cash flows 1,370 1,515 1,510
Net Sales 15,797 16,435 16,148
Cash Flow Ratio 8.67% 9.22% 9.35%

Profitability Assessment
Profitability assessment uses different kinds of ratios to determine an organization’s ability to
generate profits and sales relative to its expenses, costs, and assets. All ratios are only
comparable and much more meaningful when comparing them with ratios of competitors that are
in the similar businesses during the same period of time33. Only with comparison managers and
investors can better understand how well the company is performing in the industry.
In the following assessment three-year profitability ratios of Inditex will be explained, calculated
and then compared with its top two competitors, H&M and Gap Inc.

ROE:
Return on equity indicates how profitable the organization is relative to its average shareholder’s
equity. This ratio tells investors how well their investment has been employed. In other words, it
indicates the company’s earnings performance and the effectiveness of shareholders’ investment.
The higher the better for ROE because it means the organization is finance investors’ money well

33 http://www.investopedia.com/university/ratios/profitability-indicator/ratio4.asp?
ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186

25
on generating more profit. ROE is calculated by dividing net income with average share holders’
equity34.
Inditex For the year ended Jan. For the year ended For the year ended
31, 2013 Jan. 31, 2014 Jan. 31, 2015
Net Income 2,381,565 2,510,151 2,882,201
Average Shareholder’s equity 9,278,363 10,468,701 11,450,793
ROE 25.67% 23.98% 25.17%

With the same method of calculation, the most recent ratios for Inditex’s top two competitors are
as follow.
2015 Net Income Average Shareholder’s Equity ROE
Inditex 2,882,201 11,450,793 25.17%
H&M 20,898 58,049 36.00%
Gap Inc. 920 2,545 36.15%
[21][22][23][24][25][26

ROA:
Return on asset indicates how profitable the organization is relative to its total asset. This ratio
indicates how effective the organization has been on employing its total assets (including its debt
and equity) to generate profit. The higher the better for ROA because it tells the managers and
investors that the company has been utilized their total asset well to generate net income.
Therefore, indicate higher ability of the company to return its debt and payment to equity
holders. ROA is calculated by dividing net income with (average) total assets35.

Inditex For the year ended For the year ended Jan. For the year ended Jan. 31,
Jan. 31, 2013 31, 2014 2015
Net Income 2,381,565 2,510,151 2,882,201
Average Total (13,756,261+ (15,377,000+ (17,357,148+15,377,000)/2
Asset 12,890,316)/2 13,756,261)/2
ROA 17.88% 17.23% 17.61%

With the same method of calculation, the most recent ratios for Inditex’s top two competitors are
as follow.
2015 Net Income Average Total Asset ROA
Inditex 2,882,201 (17,357,148+15,377,000)/ 17.61%
2
H&M 20,898 (85,813+75,597)/2 25.89%
Gap Inc. 920 (7,690+7,473)/2 12.13%

Profit Margin:
It is one of the most important ratios which tells industry performance as well as management
performance of a company. The ratio is calculated as net income divided by revenue. The

34 http://www.investopedia.com/university/ratios/profitability-indicator/ratio4.asp?
ad=dirN&qo=serpSearchTopBox&qsrc=1&o=40186
35 http://www.investopedia.com/university/ratios/profitability-indicator/ratio3.asp?
ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186

26
number tells managers and investors how good the company is at managing expenditures and
sales. The higher the better for profit margin as it means the company is sufficient at maintaining
the balance of costs and sales. However, there is limitation to profit margin and particularly gross
margin which looks into the margin between revenue and production costs (cost of goods sold).
Gross margin only applies to companies that do production. Profit margin on the other hand is
only useful and comparable when analyzing it with competitors in the similar business36.

Inditex For the year ended Jan. For the year ended Jan. For the year ended Jan.
31, 2013 31, 2014 31, 2015
Net Income 2,381,565 2,510,151 2,882,201
Revenue 16,724,439 18,116,534 20,900,439
Profit Margin 14.24% 13.86% 13.79%

With the same method of calculation, the most recent ratios for Inditex’s top two competitors are
as follow.

2015 Net Income Revenue Profit Margin

Inditex 2,882,201 20,900,439 13.79%
H&M 20,898 180,861 11.55%
Gap Inc. 920 15,797 5.82%

Asset Turnover:
It measures how efficient can a company generate revenue or sales from usage of assets. It does
not indicate any information regarding to the efficiency of generating net profit. This is the
major distinction between ROA. The higher the better for the asset turnover rate because it
indicates sufficient management in balancing expenditures and price. Low asset turnover either
means the company is not sufficiently employing their assets into revenue, or It is usually due to
large amount of unutilized asset, too much wasted costs, or bad pricing strategy. Asset turnover
rate is calculated as revenue divided by average total assets37.

Inditex For the year ended Jan. 31, For the year ended For the year ended Jan.
2013 Jan. 31, 2014 31, 2015
Revenue 16,724,439 18,116,534 20,900,439
Average Total Assets (13,756,261+ (15,377,000+ (17,357,148+
12,890,316)/2 13,756,261)/2 15,377,000)/2
Asset Turnover 1.2553 1.2437 1.2770

2015 Net Sales Average Total Assets Asset Turnover

Inditex 20,900,439 (17,357,148+15,377,000)/ 1.2770
2
H&M 180,861 (85,813+75,597)/2 2.2410

36 http://www.investopedia.com/terms/p/profitmargin.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186
37 http://www.readyratios.com/reference/asset/asset_turnover.html

27
Gap Inc. 15,797 (7,690+7,473)/2 2.0836

EPS:
“Earnings per share is the amount of profit allocated to each outstanding share of common
stock”38. It is one of most important and quick indicators for investors as it tells about a
company’s profitability. It is more accurate to calculate EPS using weighted average outstanding
of common shares because outstanding common shares may be changing overtime. EPS is
calculated as (net income – preferred dividends) / weighted average number of common shares
outstanding. Low EPS can be an indicator of insufficient operating of an organization. However,
it can also mean too much outstanding common shares which the company may want to consider
purchasing them back if possible.

Inditex For the year ended Jan. For the year ended Jan. For the year ended Jan.
31, 2013 31, 2014 31, 2015
Net Income – Pref Div 2,381,565 2,510,151 2,882,201
Weighted Average 3,115,562,173 3,113,773,370 3,113,152
Common Shares
EPS 0.7644 0.8061 0.9258

2015 Net Income –Preferred Weighted Average EPS

Dividends Common Shares
Inditex 2,882,201 3,113,152 0.9258
H&M 20,898 1,655.072 12.6266
Gap Inc. 920 (421+397)/2 2.2494

Gross Profit Margin Ratio:

Gross profit margin is used to determine the company’s financial health by finding out what is
left over when you removed the cost of goods sold from the revenues. Without a healthy gross
margin, the company may have troubles paying its operating expenses as well as other expenses
in the future. Typically a company’s gross profit margin should remain relatively stable. A higher
gross profit margin is beneficial as it shows higher efficiency. Gross profit margin is calculated
by dividing revenue from gross margin. Gross margin is calculated by subtracting COGS from
revenue39.

Inditex For the year ended Jan. For the year ended Jan. For the year ended Jan.
31, 2013 31, 2014 31, 2015
Revenue-COGS 9,922,932 10,568,897 12,089,300
Revenue 16,724,439 18,116,534 20,900,439
Gross Profit Margin 59.33% 58.34% 57.84%

38 Investopedia,(n.d.)Earnings per Share definition, Retrieved from http://www.investopedia.com/terms/e/eps.asp

39 Investopedia,(n.d.).Gross Profit Margin Ratio definition, Retrieved from
http://www.investopedia.com/terms/g/gross_profit_margin.asp

28
2015 Gross Margin Revenue Gross Profit Margin
Inditex 12,089,300 20,900,439 57.84%
H&M 103,167 180,861 57.04%
Gap Inc. 5,720 15,797 36.21%

Operating Income Margin:

Operating income margin is used to determine the company’s pricing strategy as well as its
operating efficiency. It measures the left over portion of revenue after paying for variable costs
of production. It is calculated by dividing operating income by net sales40. This ratio gives us an
idea of how much the company makes on each dollar of sales. The higher the operating income
margin the better.

Inditex For the year ended Jan. For the year ended Jan. For the year ended Jan.
31, 2013 31, 2014 31, 2015
Operating Income 3,070,880 3,198,186 3,677,442
Net Sales 16,724,439 18,116,534 20,900,439
Operating Margin 18.36% 17.65% 17.60%

2015 Operating Income Net Sales Operating Margin

Inditex 3,677,442 20,9004,393 17.60%
H&M 26,942 180,861 14.90%
Gap Inc. 1,524 15,797 9.65%

Income before Tax Margin:

The income before tax margin shows the earnings before tax as a percentage of net sales. The
higher the income before tax margin, the more profitable the company is. This ratio is calculated
by subtracting all expense except for taxes from net sales and then dividing by net sales41.

Inditex For the year ended For the year ended For the year ended
Jan. 31, 2013 Jan. 31, 2014 Jan. 31, 2015
Income before taxes 3,052,698 3,244,794 3,743,118
Net Sales 16,724,439 18,116,534 20,900,439
Income before taxes margin 18.25% 17.91% 17.91%

2015 Income before taxes Net Sales Income before taxes margin
Inditex 3,743,118 20,900,439 17.91%
H&M 27,242 180,861 15.06%
Gap Inc. 1,471 15,797 9.31%

40 Investopedia, (n.d.).Operating Income Margin, Retrieved form http://www.investopedia.com/terms/o/operatingmargin.asp

41 Investopedia,(n.d.).Income Before Tax Margin, Retrieved form http://www.investopedia.com/terms/p/pretax-margin.asp

29
Recommendation:
Inditex is shown to have better and stronger cash position over the years and compare to two of
its top competitors. However Inditex does not have oblivious growth in profit throughout the
years. Some ratios indicate that the company may be less sufficient at managing costs, finance
debt and utilize assets compare to its rivals.
Inditex has the lowest current EPS, Asset Turnover rate, ROE and ranks the second for ROA.
However all profit margin ratios are better than two competitors and both of the revenue and net
income are the highest as well. It may due to the reason that Inditex has too much liabilities, too
much outstanding shares and too much expenditures. Considering the size of Inditex and its
organizational objectives, it is hard for them to compete with H&M based on costs.
It is recommended for Inditex to examine and managing their costs and liabilities better if they
would like to have better financial performance relative to its rivals. Another recommendation
will be to expand market share strategically.

30
Appendix
Appendix 1: Economic Outlook Europe Area

31
 Appendix 2: Economic
Outlook China

32
Appendix 3: Economic Forecast, USA

33
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