The Homa Files

Excerpted from WSJ, “Zara Grows as Retail Rivals Struggle” By Cecilie Rohwedder, Mar 26, 2009

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Defying the recession with its cheap-and-chic Zara clothing chain, Spanish retailer Inditex SA posted strong sales gains that show how low prices and a rapid response to fashion trends are enabling it to challenge Gap for top ranking among global clothing vendors.

The improved results highlight how Zara’s formula continues to work even in the economic downturn. The chain specializes in lightning-quick turnarounds of the latest designer trends at prices tailored to the young — about $27 an item.

While apparel chains in the U.S., Europe and Asia are struggling and closing stores, Inditex reported a 10% sales gain and higher gross margin, which already exceeds many rivals. A fast logistics system allows it to get clothes from drawing boards to stores in less than two weeks, compared with an industry average of nine months. Its lean inventory and fast shipments allow it to avoid profit-damaging markdowns.

Revenue hit €10.41 billion ($14 billion) for the fiscal year … up from €9.44 billion in 2007. Annual profit was flat at €1.25 billion, but the company said it expects same-store sales to increase this year. The company’s gross margin rose slightly to 56.8%, reflecting the lean inventories.

In contrast, San Francisco-based Gap, the largest independent clothing retailer by revenue, last month posted a 23% decline in full-year sales … It plans a modest 50 new stores this fiscal year. Gap’s gross margin rose, but to 37.5% …

In recent years, Inditex has become known as a low-priced alternative to designer boutiques. Zara stores sit on some of the world’s glitziest shopping streets — including New York’s Fifth Avenue, near the flagship stores of leading international fashion brands — which make its moderate prices stand out.

“Inditex gives people the most up-to-date fashion at accessible prices, so it is a real alternative to high-end fashion lines … Gap, Benetton and others haven’t been alternatives because they sell more basic styles.”

The chain keeps profits high by avoiding advertising and by building a low-cost perception. That is helping as shoppers trade down from higher priced chains … While competitors are resorting to deep discounting, Inditex isn’t. “We prefer to stick to our commercial policy even in the current environment,” said Marcos Lopez, capital-markets director at Inditex … “The key driver in our stores is the right fashion. Price is important, but it comes second.”

In the short term, Inditex must still weather the uncertainty over how long and how deep the economic slowdown will be in Spain and Western Europe, which together make up 79% of its sales.

Edit by SAC

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Full Article:
http://online.wsj.com/article/SB123801606310041287.html

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