Financial Analysis and Valuation of INDITEX

A Business Valuation Report and Theoretical Study

Master's Thesis, 2011

89 Pages


Table of Contents

Executive Summary


2. Corporate Information
a) History
b) Brand portfolio
c) Shareholding structure and corporate governance

3. Industry Analysis
a) Manufacturing costs
b) Macroeconomic factors
c) Currency Risk
d) Market competition

4. Geography Analysis
a) Suppliers
b) Buyers

5. Strategy Analysis
a) Cheap-and-chic
b) “Fast” fashion
c) Technology
d) Continuous growth
e) Centralised and vertically integrated model

6. Financial Analysis
a) Reorganising financial statements
i. Accounting rules
ii. Reorganising the balance sheet
iii. Reorganising the income statement
b) Profitability analysis
i. EBiTDA margin
ii. Return on invested capital (ROIC)
c) Decomposition of the profitability ratio ROIC
d) Sales and stores
e) Cash flow analysis

7. Valuation
a) introduction
b) Assumptions
i. Sales and stores
ii. EBiTDA margin
iii. NOPLAT margin
iv. Working capital
v. Invested capital
c) DCF Valuation
ii. CAPM
iii. Risk-free rate
iv. Beta (ß)
v. Risk premium
vi. WACC - conclusion
vii. DCF valuation - conclusion
d) Multiples V aluation
i. Price/Earnings ratio
iii. Multiples - conclusion
e) Scenario analysis
i. Best-case scenario vs. Worst case scenario
ii. Comparison of results

8. Conclusion

Bibliography (only cited)


Disclaimer & Disclosures

Executive Summary

In this study, we are interested in determining the value of the Spanish clothing giant INDITEX Group, now the world’s largest clothing retailer. Its flagship chain store is well-known Zara. The Group also owns brands such as Massimo Dutti, Pull and Bear, Oysho, Uterqüe, Stradivarius and Bershka.

In this study, we are interested in determining the value of the Spanish clothing giant INDITEX Group, now the world’s largest clothing retailer. Its flagship chain store is well-known Zara. The Group also owns brands such as Massimo Dutti, Pull and Bear, Oysho, Uterqüe, Stradivarius and Bershka.

The Spanish Group now runs more than 5000 stores in 78 countries with a remarkable expansion into higher-growth emerging markets.

INDITEX’s cheap-and-chic line has changed the face of the industry. Thanks to its “fastfashion” strategy and highly flexible supply chain, new designs can be created as the season moves along and hence rapidly adjust its supply to meet the customer’s demand.

INDITEX’s balance sheet analysis shows a net negative working capital that can be explained by its business model. Profitability analysis such as EBITDA margin and ROIC, based on the NOPLAT calculations through income statement, demonstrates that its closest competitor H&M is slightly above INDITEX. Finally, cash flow analysis confirms the financial health of INDITEX and demonstrates that it is not facing any liquidity or insolvency problem.

According to the DCF valuation, the target price is estimated at EUR 81, 38% higher than the current share price. A comparison with the market multiples valuation indicates a soaring target price. This difference leads us to conduct a scenario analysis focused on the best and the worst cases.

1. Introduction

In this study we are interested in determining the value of the Spanish fashion apparel giant Inditex Group (hereinafter “Inditex” or “Group”), which owns brands such as well known Zara and some other developing brands. Now present in 5 continents, the world’s largest fashion group has been cited several times as a unique success story, and its business strategy has been taught at the top Business Schools around the world[1]. Hence, we are going to update these studies, and analyse whether this success and continuous growth is still unchanged and possible in the current global economic recession and financial crisis as well as in the future.

In order to answer to this question, we are going to conduct several analyses. First of all, we will take a closer look at the general information of the company such as its history, brand portfolio, shareholding structure and corporate governance. Then, we are going to analyse the fashion and apparel retailer industry wherein the Group operates and see the challenges that it is currently facing. After that, we will see the geographical market position of Inditex and the regions wherein it runs some thousands of stores. Subsequently, we are going to analyse the business strategy of Inditex, which is the key to its worldwide success. Later, we will move on the financial analysis of Inditex and explore its financial performance and profitability. Finally, we are going to conduct a stock valuation in order to estimate the iNDiTEX’s economic value per share and determine the intrinsic value of the shares. On the basis of our analyses and valuation, we will be able to predict its probable price evolution and give a recommendation to the investor to buy, hold or sell the shares.

2. Corporate Information

a) History

Industria de Diseño Textil, S.A. (Textile Design Industry), more commonly known as Inditex, is founded in 1985 as the holding company of the group of businesses operating at the time. However, its origins as a fashion distribution group started ten years earlier when Amancio Ortega Gaona[2][3] opened his first Zara store in A Coruña, in north-western Spain, the city which is still home to its headquarters[4]. After extending its network to major Spanish cities, the Inditex Group moved to the international markets with its first store in Portugal in 1988. In the 90’s, Inditex began creating or acquiring subsidiaries to manage different brands such as Bershka, Pull and Bear, Massimo Dutti, and Stradivarius. In the 2000s, the Group turned into the world’s largest clothing retailer with more than 5000 stores in 78 countries. Today iNDiTEX’s brand stores can be seen in the most important fashion capitals such as New York, London, Paris and Milan.

b) Brand portfolio

Inditex currently runs 5154 stores segmented into eight branded chains: its flagship brand Zara[5], Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe. The distribution of stores per brand is as follows:

Figure 1: Inditex’s stores distribution per brand in 2011 (04/30/2011)

Source: Own construction,

illustration not visible in this excerpt

With 1745 stores, Zara is the largest and the best known fashion brand of Inditex. Zara is known for its stylish designs similar to the famous Italian fashion houses but with modest prices.

After Zara come the lesser brands. Bershka, created in 1998, is the second important brand of the Group. It is aimed at a young target market with 734 stores in 51 countries. Pull & Bear focuses on casual clothing for young people with an independent, urban style at accessible prices in 47 countries. Stradivarius presents its apparel for young women in 46 different countries. The 542 Massimo Dutti stores offer an elegant and classic style. With 443 stores in 27 countries, Oysho focuses on women's lingerie. Zara Home specialises in home decor and linens. Finally, launched in 2008, Uterqüe is the newest retailer of the Inditex Group, sells accessories and fashion extras.

When we look at the sales proportions below, the previous distribution differs.

Figure 2: Inditex’s sales distribution per brand in 2010

Source: Own construction, Annual Report 2010, p. 21.

illustration not visible in this excerpt

For instance, Zara realises approximately 65% of all sales with only 34% of the stores in 2010. This almost gives a double sales-to-stores ratio. Therefore, Zara is extremely successful compared to the other brands of the Group in terms of sales-to-stores ratio.

illustration not visible in this excerpt

Table 1: Inditex’s sales-to-stores ratio per brand in 2010

Source: Own construction, Annual Report 2010, p. 21.

Bershka and Massimo Dutti are occupying the second position. On the other hand, young brands such as Oysho and Uterqüe represent the weakest brands with the lowest sales-to-stores ratio.

In conclusion, Inditex brands are aimed at all target markets. The Group continuously grows with new stores and new brands as well as strengthens its principal brand Zara. This multi-brand strategy offers higher growth potential whilst diversifying risk. It is therefore the key strategy of the Group that we are going to take a closer look at afterwards.

c) Shareholding structure and corporate governance

Inditex has been entirely owned by the founder Amancio Ortega Gaona (74) and his relatives until May 2001 when he decided to proceed to an IPO and to sell 26% of his shares to public investors. The IPO has been valued at EUR8.9bn ranking Amancio Ortega Gaona as the Spain’s richest individual and world’s 7th wealthiest person with an estimated net worth of USD31bn[6]. However, he is known for his very low profile and reclusive personality away from paparazzi.

Since, Inditex is listed on the Spanish stock exchange Ibex 35 and is also part of international indexes FTSE Eurotop 100, Eurostoxx 600 and sustainability indexes such as FTSE4Good and Dow Jones Sustainability[7].

As of January, 31 2011, parent company share capital amounted to EUR93,499,560 and is represented by 623,330,400 registered shares of EUR0.15 par value each, subscribed and fully paid. All shares belong to a single class and series, have the same voting and profit-sharing rights and are represented by book entries[8].

illustration not visible in this excerpt

Table 2: Shareholders of Inditex

Source: Own construction,

With regard to the figures above, we note that Amancio Ortega Gaona is the indirect holder of the shares held by two significant shareholders: Gartler, S.L. and Partler 2006, S.L.[9]. Therefore, Amancio Ortega holds the majority of the shares and he has the controlling voting rights of the company. In other words, regardless of the public trading of Inditex, Amancio Ortega keeps control over his self-made empire. In terms of corporate governance, this may lead us to ask the potential principal-agent problem which arises under conditions such as asymmetric information, moral hazard and conflict of interest to the detriment of minority shareholders. Nevertheless, we note that Amancio Ortega recently stepped down as chairman of Inditex in favour of his successor, Pablo Isla (47) who is the current Chairman and CEO of Inditex[10].

3. Industry Analysis

a) Manufacturing costs

First of all, the textile and apparel industry went through a tough year struggling with the surging and fluctuating prices of raw materials. It is important to note that the latter account for c50% of input costs. Not only gasoline is very expensive, but also cotton prices skyrocketed and reached historic highs by more than 100% in last March[11]. According to the International Cotton Advisory Committee, cotton was the most volatile of all the 53 exchange-traded commodities in 2010. As a consequence, soaring cotton prices have pushed clothing prices up since the beginning of 2011, a trend likely to continue until the end of the year[12]. Although cotton prices are currently reduced by half since this peak, the future seems uncertain and the volatility of cotton prices threatens the industry.

In addition, weather constitutes a risk factor for the cotton production. The second largest cotton producer behind China, India suffered of low rainfall which was 80% below normal in June, threatening cotton crop[13]. Similarly, the USA, the third largest producer of cotton, had losses because of the poor harvest due to the extreme weather[14]. As shown above, we should also take into consideration the whims of the nature, which may have a negative effect on the global cotton production, so prices and the industry.

Secondly, with regard to the labour cost, minimum wages have been raised by average c15% by the Chinese government in 2010[15], and by c20% in China’s biggest export province, Guangdong. However, we do not expect higher wages and social charges in other third world countries such as India, Bangladesh, Cambodia, Pakistan and Vietnam which offer the lowest labour costs in the textile industry. This strong competitiveness across Asian countries is likely to even further reduce the prices in the industry.

b) Macroeconomic factors

The consumer climate in the most important export markets such the USA and Europe is highly uncertain[16]. Consumers are affected by the slumping housing market and high unemployment rates in the US. Stock-market is also turbulent partly due to the Standard & Poor’s recent downgrade of the American debt. In Europe, sovereign debt crisis also hit consumers. Hence, slowdown in consumer spending across Europe fused with rising raw materials and supply chain costs. Therefore, consumers are currently more price-sensitive. On the other hand, this may represent a growth opportunity for brands with relatively accessible prices such as Inditex.

In addition, the world’s largest cotton producer and consumer China is facing a growth slowdown. A sharp slowdown in China’s economy could reduce its demand for commodities exported from other countries. A slowdown could also crimp the appetite of China’s 1.3 billion people for products from the United States and Japan, affecting their economies.

However, in general, we expect an improvement in 2012 compared to 2011, with a return to GDP growth in most countries.

To conclude, the textile and apparel industry is currently facing a very unstable world economy that is hit by a severe recession and financial crisis.

c) Currency Risk

Raw materials are typically paid for in USD. Therefore, a strong USD against EUR would put additional pressure on the companies that outsource predominantly in USD out of the Far East but receive the vast majority of revenues in Euro or similar currencies (e.g. SEK).

Inditex sources 65% of its cost of goods sold (CoGS) from Spain and neighbouring countries (Portugal and Northern Africa), other Eastern European territories such as Turkey. The remaining 35% is sourced from the Far East. This low exposure to Far East sourcing allows Inditex to better handle input costs pressures. This is not the case of Hennes & Mauritz (H&M) that sources 65% of CoGS from the Far East in USD, and receive an important part of its revenues from the European markets in EUR or SEK. The geographical exposure will be further discussed in the geography analysis.

d) Market competition

Finally, we can mention the fierce competition as a challenge that market players face in the industry. Present in 78 countries, Inditex faces competition with local retailers in all of these markets. However, in general terms, we can compare the Spanish Group to large international apparel retailers such as H&M, GAP, Esprit and Benetton.

illustration not visible in this excerpt

Figure 5: Inditex brands and peers’ market positioning map

Source: Ghemawat/Nueno, p. 23 and own construction

In the Figure 5 above, we can see the peers’ market positioning in terms of price and fashion/trend[17]. Abovementioned competitors have different positions and targets within the market. Indeed, while GAP, Benetton and Esprit are positioned within the low fashion with middle price segment, most of the Inditex brands are within the high fashion with low cost segment of the market[18]. According to the same figure, H&M seems like the iNDiTEX’s closest competitor operating in the same segment of the market.

Inditex and H&M are by far the world’s largest apparel retailers with market capitalisations of EUR36bn and EUR34bn, respectively. GAP is the American competitor with a market capitalisation of EUR6bn. In our analysis, we will especially consider these three companies.

4. Geography Analysis

a) Suppliers

We discussed above the low exposure of CoGS to Far East suppliers of Inditex and we saw that this allows the Group to reduce the currency risk and better handle input cost pressures compared to its closest competitor H&M. Moreover, this gives Inditex a high degree of production flexibility, which will be also discussed in the strategy analysis.

We see in the Figure 6 below that Asian suppliers are increased by 6% compared to the last year, while number of suppliers from the European Union dropped. The Asian supply price competitiveness explains it all.

Inditex adopted an internal Compliance Programme of Code of Conduct (Tested to Wear) and the International Framework Agreement signed with the International Textile Garment and Leather Workers Federation (ITGLWF). The objective is to “strengthen the relationship in the long term with its suppliers”[19] [20]. An environmental strategy has also been implemented, and it involves suppliers, who must include this variable in their working processes.

Recently, a supplier in Brazil has been accused of slave labour by authorities facing fines and possible functions[21]. To avoid this kind of incidents and damage of the company image, further control and monitoring of the supply chain have to be improved.

b) Buyers

As previously mentioned, Inditex has been operating in 78 different countries in 2011. However, its home market, Spain, is essential for all of the Inditex retail chains. Indeed, only Spanish market comprises 38% of all Inditex’s worldwide stores, therefore, ranked as its second largest market after the rest of Europe.

illustration not visible in this excerpt

Figure 7: Inditex’s stores and sales per geographical area in 2010

Source: Own construction, Annual Report 2010, pp. 160, 162.

On the other hand, Spain is not the INDITEX’s most profitable market. Despite the high number of stores, only 29% of the global sales of INDITEX come from Spanish stores. This means that Spanish market has the lowest sales-to-stores ratio.

This means that Spanish market has the lowest sales-to-stores ratio.

Table 3: Inditex’s sales-to-stores ratio per geographical area in 2010

Source: Own construction

illustration not visible in this excerpt

Its largest market, Europe (without Spain), generates slightly higher sales in proportion to the number of stores that it houses. This market represents an important growth opportunity for Inditex retail chains. Hence, the Group has a significant presence in Europe. Indeed, the highest proportion of stores (41%) is granted to the European markets; as a consequence, a similar but higher percentage of sales (47%) are collected from this market. Hence, we obtain a proportionally fair sales and stores ratio: 1.1. We also note that American market has a remarkable ratio.

illustration not visible in this excerpt

Figure 8: Inditex’s sales by geographical area

Source: Own construction and Annual Report 2010, p. 192.

Our analysis is confirmed by the Figure 8 above. Spanish market suffered a loss of 4% of the sales. They also decreased by 1% in the rest of Europe. These facts may be explained by the decline in the Spanish consumer spending due to the 2008-2009 financial crises as well as the 2010 Euro zone debt crisis. Inditex’s 51% revenue exposure to southern European states such as Spain (32%), Portugal (8%), Italy (7%) and Greece (4%) presents therefore the most short-term risk. Its closest competitor H&M favourably operates for the most part in the more stable northern Europe. Furthermore, we believe that Inditex reached an important market share in mature western European markets; therefore, the growth opportunities remain limited. In order to sustain the past growth, the expansion to the emerging countries and new markets will be the key for Inditex.

In 2010, Inditex reacted to this high exposure to Southern Europe by new penetrations in the emerging eastern European markets such as Bulgaria with 22 openings in its first year, and by strengthening others such as Russia and Poland with respectively 72 and 19 new stores. The knowledge that the company accumulates in the European markets favours penetration of its young chains.

The southern European revenue exposure is furthermore offset by other emerging market growth: Asia, Africa and America. In this analysis, we consider the latter as an emerging market because 88% of the Inditex stores are situated in Central and South America including Mexico with more than the half of some 400 stores. In addition, the North America is also a very lucrative market because of its large population and high purchasing power of its population. Recently, Inditex launched online sales in the US for its Zara chain, offering a fresh challenge to rival Gap Inc. on its home turf[22].

Finally, we estimate that the Asian middle-class is rapidly growing and increases in millions each year and those markets are particularly important due to their developing economies and increasing demography.

In conclusion, we believe that this expansion to the higher-growth emerging market economies allowed INDITEX to reduce this short-term risk, and therefore to avoid loosing a greater part of the sales. Hence, these new penetrations and expansions are expected to boost the future sales and be lucrative for INDITEX.

illustration not visible in this excerpt

Figure 10: Inditex’s new store openings rate by geographical area

Source: Own construction and Annual Report 2010, p. 160.

According to the Figure 10, we can confirm that INDITEX follows a geographical strategy similar to our analysis in terms of store openings. Indeed, in 2010, we witness a significant increase of stores in Asia and the rest of the world (c30%) compared to the last year. The European markets (without Spain) including emerging Eastern countries are in the second position in terms of store openings with a c12%. In the American continent, the number of stores is raised by c8%. Finally, in Spain, there has been a minor increase by only 1%. These numbers confirm Inditex’s willing to explore new markets and to further grow.

5. Strategy Analysis

a) Cheap-and-chic

“There is no fashion if it doesn’t go down in the streets” claimed the pioneering French fashion designer, Coco Chanel. This statement summarises very well the business model of Inditex. We have previously seen that Inditex has been very successful to position its well defined fashion brands in the low-priced high fashion segment of the market. Since, fashion apparels are not anymore under the luxury Franco-Italian fashion houses’ monopoly, and the people at large have welcomed the verdict. Hence, this new fashion phenomenon has changed the face of the industry and the market demand. We believe that this cheap-and-chic line has been the key of the success of the iNDiTEX’s brands.

b) “Fast” fashion

INDiTEX’s brands have been commonly referred to as the fast-food of the textile industry. Indeed, it has implemented highly flexible and responsive supply chains that allow them to make and revisit most product design and assortment decisions during the selling season[23]. Hence, new designs can be created as the season moves along. This extremely efficient strategy enables stores to immediately adjust the supply to meet the customers’ demand.

It has been claimed that design to shelf lead time range for new or modified product is 2-5 weeks, versus 3-9 months for a more traditional retailer[24]. The capacity of Inditex to change assortments at a high frequency, hence, adapt to the current fashion trend and supply stores with the right merchandise and styles faster than other rivals is the key to its fast-fashion business model[25]. This time-to-market advantage, achieved through a very tight supply chain, helps Inditex to boost its sales. Moreover, this strategy requires small-scale production ability. Thus, the Group must operate its supply chain at peak efficiency and maintain the flexibility.

Furthermore, due to this very efficient production and sales model, inventory costs also drastically fall below those of its competitors.

As a result, according to the figures in 2006, a brand such as Zara manufactured some 11,000 different products per year (without including variations in colour, size and fabric), compared to only 2,000-4,000 items for key competitors[26]. Thanks to this performance, Inditex gains a very important advantage over its competitors.

c) Technology

In the previous section, we have analysed the remarkable time-to-market business model of Inditex. This strategy has been made possible by a high information technology system. For instance, store managers send customer feedback to in-house designers via handheld devices, keeping the designers instantly abreast of fast changing trends, which help Zara cull less-desirable merchandise more quickly[27]. As we noted, this flexibility enables the Group to manage its inventories more effectively, tighten links between supply and demand, and reduce obsolescence costs.

In 2006, Inditex won the jointly instituted by the Wharton School of the University of Pennsylvania and Infosys Technologies, Wharton Infosys Business Transformation Award (WIBTA) for their innovative and successful implementation of information technology to drastically decrease the time it takes to get new merchandise from the design stage to the in-store stage[28].

d) Continuous growth

Inditex continuously grows, and grows fast. The Group continuously acquires, creates and launches new brands:

Table 4: Inditex’s brand expansion by category

Source : Own construction and

illustration not visible in this excerpt

According to these figures above, we note that in average, Inditex launches a new brand each 5 year starting to count from 1975, year of opening of the first Zara shop in A Coruña. However, this number falls to 3 if we consider the timeline starting from the opening of Pull & Bear in 1991.


[1] “ZARA: Fast Fashion”, Ghemawat/Nueno, Harvard Business School, 2006; “ZARA: Fashion Follower, Industry Leader”, Craig/Jones/Nieto, The Wharton School - Philadelphia University, 2004.

[2] we are/timeline

[3] we are/board members/amancio ortega

[4] we are/our group

[5] In this study, we consider that the brand “Zara kids” with 205 stores is related to Zara, rather than an independent brand.


[7] Inditex Annual Report 2010, p. 8.

[8] Inditex Annual Report 2010, p. 169.

[9] Inditex Annual Report 2010, p. 208.

[10] releases/extend/00000823 ; style/fashion/news/end-of-the-line-for-zara-tsar-who-built-a-83649bn-empire-2183197.html




[14] 10001424052702303657404576361103883263890.html

[15] Rossington, p. 29.


[17] Fashion is a subjective notion and mostly depends on individuals’ taste. To be as objective as possible, the Figure 5 has been prepared on the basis of several personal interviews with people in charge of retail stores.

[18] Zara Home and Oysho specialised respectively in home décor and women’s lingerie have not been included in the Figure 5.

[19] Suppliers producing more than 20,000 units a year.

[20] Inditex Annual Report 2010, p. 8.



[23] Saure/Zeevi, p. 2.

[24] Caro, p. 11; 3.html

[25] id102641.aspx

[26] Ghemawat/Nueno, p. 9.

[27] Matchette/Lewinski, p. 4.


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Financial Analysis and Valuation of INDITEX
A Business Valuation Report and Theoretical Study
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ISBN (Book)
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Analysis, Business, Valuation, Inditex, Zara, Finance, Report, Ibex 35, Bershka, Massimo Dutti, Apparel, Textile, Clothing, Industry, Financial Analysis, Stock, economics, investment
Quote paper
Ceyhun Necati Pehlivan (Author), 2011, Financial Analysis and Valuation of INDITEX, Munich, GRIN Verlag,


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