Inditex: Marta’s charter is to grow like it is going out of fashion

Inditex is showing rivals a clean — and fashionable — pair of heels. The market value of the Spanish fast fashion group has surged to more than €100bn for the first time since the pandemic. One year into the job, chair Marta Ortega is defying governance fundamentalists who doubt the capabilities of second-generation dynasts.

Scale helped Inditex lift margins despite inflationary pressures. Investors took their hats off to consensus-beating first-quarter results, marking Inditex’s stock up 6 per cent on Wednesday. 

Inditex, founded by Ortega’s father Amancio, owns brands such as Zara, Massimo Dutti and Pull & Bear. It is on a tear.

Bears touted last year’s blowout sales as a post-lockdown one-off. But growth is continuing into 2023. Revenues in the three months to the end of March were up 13 per cent to €7.6bn — and have accelerated since. 

That puts Inditex on a stronger trajectory to rivals. It is now about 30 per cent bigger, in sales terms, than before the pandemic hit. Rival H&M is only just poking its head above the 2019 high watermark. Some online competitors, notably Asos of the UK, are coming apart at the seams.

Inditex’s symbiosis with suppliers helps it get more of what is selling well in stores. It quickly discontinues duds, reducing the need for bargain bin discounts. Despite inflation, Inditex has managed to lift its gross margin to 60.5 per cent of revenues, ten percentage points higher than H&M. 

Its growth has been all the more astonishing because it has been culling stores. Space fell 6 per cent last year. Squeezing more revenue out of every square metre is a drag on operating margins, although the predictable crush at the till is a limiting factor. 

The limiting factor on the shares, meanwhile, has been the fear that the Inditex juggernaut is running out of steam. Gross margins, for instance, may be bumping up against the limit of what is achievable at about 60 per cent. With inventory rising, the group may be forced to give more away to bargain-hunting shoppers.

But sales are still growing strongly across channels and geographies — a feat given cost of living concerns. There is still plenty for Ortega to play for. As Inditex grows, so does its competitive advantage. In that context, its 12 per cent premium to H&M on next year’s earnings looks too tight a fit.