Even though Inditex's third-quarter 2021 financial report said its sales "reached new historical heights", under this seemingly good prospect is the fact that the fast fashion dividend is disappearing and Zara brand growth is slowing.
On December 15, Zara's parent company Inditex reported for the first three quarters of 2021.Inditex reported that sales, pretax profit and net income all reached all-time highs in the third quarter of 2021, accelerated by the transformation of digital and sustainable business models.
In the first nine months of 2021, Inditex Group earned 19.33 billion euros in net sales, up 37 percent year on year, gross profit was 11.41 billion euros, up 40 percent year on year, and pretax profit was 3.23 billion euros, up 277 percent year on year.
The results in the first nine months were explained, thanks to store reopening and online growth.Online sales were up 28 percent from the same period last year, and up 124 percent from the same period in 2019.Inditex is optimistic that online sales will account for more than 25 percent in fiscal 2021.
Inditex's third-quarter growth was particularly prominent in the third quarter, with strict epidemic control and store reduction, its net sales were 7.39 billion euros, up 6 percent year on year, gross profit was 4.50 billion euros, up 6 percent year on year, pretax profit was 1.59 billion euros, up 7 percent year on year, and net revenue was 1.23 billion euros, up 5 percent year on year.
The Inditex may not be able to remain "optimistic"
In the eyes of analysts, Inditex has reached a record high or stems from the "lipstick effect" under the outbreak.Under the impact of the epidemic, the demand for wearing masks has increased significantly, stimulating consumers' demand for fast fashion brands with "new fast, many styles and low prices". However, it is unknown how long this increase will last, and the "lipstick effect" brought by the epidemic may only be a short-term effect.
On the other hand, when Inditex Group's global stores fell by 11 percent in 2021, store sales were "hot" more than the same period in 2019.
By the end of October, the Inditex Group had 6,657 stores worldwide.Among them, Zara remains the main driver of growth, with 1,975 stores during the reporting period, including 72 children's clothing stores and 507 home stores during the reporting period.
Even though sales, pre{{0}}tax profit and net income increased significantly from 2020, they did not reach the same period level in 2019.Net sales in the mid-nine months of 2019 reached 19 EUR 19.8 billion, gross profit of 11.5 billion, gross margin reached 58.2 percent , net income of 2.726 billion, pretax profit of 3.473 billion, earnings per share of 0.874.
In May this year, Zara added makeup business sale beauty series, trying to use "affordable" makeup and more consumption to "bundle" —— from 159 yuan of 6 color disc eye shadow to 99 yuan of lipstick, but from the overall revenue, makeup business support did not bring significant growth to the brand.
Zara began in 2020, when Zara and Jo Malone launched 159 yuan in May to break its conservative image as a fast fashion brand.
With almost no publicity, Zara's makeup business has not made waves in the market, even on social media, Zara hasn't caused a "phenomenal" planting boom.
It is worth noting that the "recovery" of 2021 performance may result from proper cost control and the implementation of the digital transformation strategy, but in the post-epidemic era, in addition to measures to reduce costs such as store closure and layoffs, fast fashion brands are the most important to maintain the healthy operation of their own cash flow.
Cash flow from operations in the first nine months of 2021 was EUR 5.431 billion, compared with EUR 5.702 billion in the same period in 2019. Although 2021 increased by 62.89 percent from 2020, it still has not reached the 2019 same period despite large store closures worldwide.
Under the inflation caused by global quantitative easing in the epidemic era, it is obvious that many financial indicators in 2021 are not as good as the same period in 2019. Even if the 2021 Q3 financial results are optimistic, it can be seen that Inditex did not return to the pre-epidemic level, and its sales prospects are not as optimistic as its financial results disclosed.
By comparing group rates for 2019-2021, we found that Inditex Group rates were 30.8 percent in 2021,34.16 percent in 2020,29.31 percent in 2019 and decreased in 2021 from 2020, even with a significant increase in cost control but not reaching 2019 levels.
In terms of depreciation and amortization, 2021 lower average 2019,2020 also indicates enhanced cost control (high inventory backlog in 2020 or due to the epidemic, which has more impact on the fast fashion industry with relatively high inventory turnover).
The current ratio of Inditex Group was 1.58 in the first nine months of 2018,1.34 in 2019,1.4812 in 2020, and 1.4896 in 2021, indicating that from the decline in 2019 (1.34) to basically unchanged during the epidemic period (1.48), the company's solvency has not been significantly improved after adopting the digital transformation strategy and cost control.
Online sales fight more price wars, which also makes Inditex face the double pressure from online and offline. With the continuous uncertainty of the epidemic, the recovery of offline passenger flow is unknown.
Inditex, which vigorously develops online business, still has many uncertainties in the battle of the young youth market.
On December 6th, the cooperation series between ADER ERROR and fast fashion brand Zara was officially launched. The popular styles were quickly sold out on the official website, client, Tmall flagship store and WeChat mini program.
This was followed by Zara announcing a partnership with the social app ZEPETO: consumers can buy ADER ERROR X Zara joint equipment on ZEPETO.
Instead of the H M designer and the global launch, Zara chose to launch as Drop; With little publicity, the series was instantly killed.
It seems to be a joint name of the two brands, which is actually ordinary, but for the Zara brand, it is opening a new chapter of youth.Just days before the launch of the series, Zara parent Inditex Group announced that founder Amancio Ortega daughter Amancio Ortega Marta Ortega will succeed Pablo Isla as the new chairman in April, and Oscar Garcia Maceiras will succeed Carlos Crespo as the new CEO.
This attempt can be said to be the beginning of the group's younger transformation.
Zara has always taken a wait-and-see attitude to the joint series; working only with niche artists on individual prints.In contrast, rival H M is matured in the co-branded field.
It has been 17 years since H M launched the designer joint series, and this year, H M did not launch the heavyweight designer joint series in autumn and winter, Zara hit a time gap, quickly ignited consumer enthusiasm.
In enough gimmick hype, the joint series is inevitable, but also short.
For consumers who are increasingly pursuing personality, solving the problem of "food and clothing" is not the rigid need of consumers now. The clothes of these three brands lack of innovation in design, lack of stickiness and loyalty.
Fast fashion turmoil for 3 years
Fast fashion industry dividend disappeared, Zara growth slowdown has become an established fact.
Around 2018, the fast fashion industry fell into a cold winter of sluggish growth. With Topshop, New Look, Forever 21 and other brands announcing bankruptcy, Inditex Group's strategy of aggressive expansion of stores in the early years pushed up maintenance costs, and the overall profit growth rate showed signs of slowing down in recent years.
In fiscal 2018, Inditex Group sales increased by 3 percent to 26.1 billion euros, comparable sales increased by 4 percent , further slowing from the 9 percent sales growth in fiscal 2017, gross margin was 56.7 percent , net profit rose 12 percent year on year to 3.4 billion euros, the most "worst" profit growth in nearly five years.
After optimizing store network, strengthen the supply chain and electricity and a series of strategic adjustment, Zara recovery in 2019, Inditex group annual sales in electricity business 23 percent strong growth of 8 percent to 28.3 billion euros, compared with the 4 percent increase in the previous fiscal year, mainly benefit from electricity revenue rose 23 percent to 3.9 billion euros, group gross profit rose 7 percent to 15.8 billion euros, gross margin of 55.9 percent .
In 2019, the Inditex Group reduced production by 17 percent to 450,000 clothing tons at the end of 2020.Inditex has also adjusted significant adjustments, reducing the number of suppliers in China for the first time in five years.
The group divides its global supply into 12 clusters, or 97 percent of total production.China is the largest of these clusters.
Inditex managed to reduce inventory, especially centralized systems could keep more easy track of each item from entry to warehouse to sale.It also addresses a 77 percent surge in online sales by serving store orders. —— each of its nearly 7,000 stores acts as a small distribution center, where its e-commerce and physical store inventory were two completely separate systems.
While most fashion and sportswear companies rely on Asian manufacturing for most products, Inditex is working on streamlining supplier quantity and optimizing quality, with more than half of the products produced in its so-called "adjacent" market —— primarily Spain, Portugal, Morocco, as well as Turkey.
Inditex has now stopped working with 65 suppliers in China.
By the end of 2020, the group's Chinese suppliers remained at 412, down 13.6 percent year-over-year.The company has reduced the number of suppliers in China for the first time in five years.The company reduced the number of suppliers, but was actually working with larger companies, as reflected in the company recording a 26 percent increase in the number of manufacturing workers in 2020 to up to 635,532 employees.
At its closing price of 16.24 on December 14, Inditex was 15.59, or 4 percent , to 87.687 billion euros.