Inditex_report

STRATEGIC AND
FINANCIAL
ANALISYS OF
INDITEX
GROUP MEMBERS
BLÁHA JAKUB 851390
ARAFATI SURUSH 858412
BELTRÁN TORO YIRA BIBIAN 854580
ALBANO PENALOZA ALFONSO 850122
ABDUL RAWOOD ABDUS SAMAD 840561
ACCOUNTING FINANCE &
CONTROL

Content
...................................................................................................................................................................................................................0
ABOUT INDITEX ....................................................................................................................................................................................3
Evolution of Inditex...............................................................................................................................................................................3
TEXTILE AND APPAREL INDUSTRY – FAST FASHION AND FUTURE SHIFT............................................................................3
Future trends..........................................................................................................................................................................................4
Sustainability.....................................................................................................................................................................................4
Digitization. .......................................................................................................................................................................................5
GLOBAL COMPETING ENVIRONMENT - H&M and Gap Inc............................................................................................................5
H&M .....................................................................................................................................................................................................5
GAP Inc. .................................................................................................................................................................................................6
INSIDE INDITEX .....................................................................................................................................................................................6
Mission..................................................................................................................................................................................................6
Strategy analysis - Porter’s value chain analysis...................................................................................................................................6
FINANCIAL ANALYSIS .........................................................................................................................................................................9
Return on Equity .............................................................................................................................................................................10
Net Profit Margin ............................................................................................................................................................................11
Overall company’s perspective ...........................................................................................................................................................11
Return on Assets .............................................................................................................................................................................11
Return on Investment .....................................................................................................................................................................12
Operating profit margin ..................................................................................................................................................................12
Stakeholder’s perspective....................................................................................................................................................................13
Debt to Equity .................................................................................................................................................................................13
Effective Tax Rate............................................................................................................................................................................13
Liquidity Analysis ...............................................................................................................................................................................14
Current Ratio...................................................................................................................................................................................14
Inventory Turnover .........................................................................................................................................................................14
Absolute indicators..............................................................................................................................................................................15
Economic Value Added ...................................................................................................................................................................15
RELATIVE VALUATION..............................................................................................................................................................................17
Defining Possible Multiples .................................................................................................................................................................17
Analysis of the Market.........................................................................................................................................................................18
Defining Comparable Companies........................................................................................................................................................19
Analysis of comparable companies .....................................................................................................................................................20
VALUE DRIVERS..................................................................................................................................................................................22
Raw materials - Cotton........................................................................................................................................................................22
Energy .................................................................................................................................................................................................24
Energy efficiency (EE):.....................................................................................................................................................................24
Energy independency (EI): ..............................................................................................................................................................25

Market share........................................................................................................................................................................................25
Number of stores .................................................................................................................................................................................26
Time to market ....................................................................................................................................................................................26
Customer Satisfaction..........................................................................................................................................................................27
CRITICAL ANALYSIS...................................................................................................................................................................................28
Emerging markets................................................................................................................................................................................28
Sustainability dilemma ........................................................................................................................................................................28
Dyeing with CO2 ..............................................................................................................................................................................29
Circular economy ............................................................................................................................................................................29
METHODOLOGY ..................................................................................................................................................................................30
BIBLIOGRAPHY....................................................................................................................................................................................32
ANNEX ...................................................................................................................................................................................................35

ABOUT INDITEX
Industria de Diseño Textil, S.A. (Inditex) is the largest fashion retail group in the world with eight brands and
over 6,700 stores in 88 markets.
Inditex dates back to 1963 when it started life in a small workshop making women's clothing. Through its history
the Group has evolved to become the business it is today reaching many notable milestones along its journey. It
has always remained focused on listening closely to its customers to offer them the fashions they desire. This
strong customer orientation would give rise, years later, to the launch of the first Zara store in 1975. This was
followed by the brand's international expansion at the end of the 1980s and the successive launch of new retail
concepts: Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe. This customer focus
underpins an organisational structure that encompasses all stages of the fashion value chain (design,
manufacturing, distribution and sale in proprietary stores). The customer promise is also the driving force behind
the integration of the sustainable and environmental policies used throughout the Group's supply chain.
The Group's brands strive to sell fashionable products of the highest quality. Inditex is committed to its customers;
which means that its 140,000-strong workforce is focused on staying true to its word.
Evolution of Inditex
TEXTILE AND APPAREL INDUSTRY – FAST FASHION AND FUTURE SHIFT
The global apparel market was estimated at 1,100bn USD in 2014. The largest consumer market was the EU with
350bn USD while the largest exporter was China with 228bn USD. The design, distribution and marekting
concentrated in developed countries such as the US, the EU and Japan. The biggest manufacturers were
developing countries such as China, India, Pakistan, Bangladesh, Indonesia, Turkey and Morocco. The size of
the global apparel business is growing as well and is expected to generate double digit growth between now and
2020. Much of this growth is coming from developing markets, notably from the exploding buying power among
Asian consumers (China and India), who are migrating into the middle class. Also foreign spending of Asian-

Pacific residents outside of their home countries will triple, totalling $600 billion by 2020. In the luxury goods
segment, 75% of all sales will be from Chinese consumers, with more than half of that being spent outside of
China1.
The global apparel industry can be divided into 5 segments – 1) Supply of raw materials, including natural cotton,
thread, etc; 2) Production of intermediate goods - products of this stage are fibers; 3) Design and manufacture
finished products implemented by garment companies; 4) Export by commercial intermediaries; 5) Marketing
and distribution.
India has been characterized as the most promising market over China. Household expenditures are an important
factor for textile industry and in India this number is expected to rise by 77% together with a positive demographic
development between 2013 and 20202.
The Fast Fashion term is a concept where fashion retailers such as Inditex, H&M or Gap Inc. bring quickly the
latest fashion trends presented by “Haute Couture” collections to theire stores at lowest price possible. The secret
is to get inspired by latest trends - basically design new clothes every day and bring it fast to customers. For
example Inditex is able to deliver new clothes (collections) to stores in three weeks and changes collections every
two weeks. This model was developed in 1990’s when globalization allowed companies to move to low cost
countries such as China, Cambodia, Bangladesh and India and increase profits. The low costh was characterized
by low social, environmental and labour standards3. However this model is under scrutiny in recent years from
customers, especially after the collapse of Rana Plaza in Dhaka in 2013 where 1000 people died inside the
factory4. There is an increase pressure on global multinational companies to adopt social, environmental and
labour practices in countries where they produce. The profitability of the textile industry is remaining generally
low due to this business model, the challenge for the future is then how to turn rising revenues to a better
profitability.
Future trends
Sustainability. Around the globe, fashion consumers are becoming more environmentally conscious together with
investors. They expect ecologically unobjectionable fabrics, a conservation-minded use of resources, reduced
emission of pollutants, greater social commitment, and fair treatment of employees in production facilities. In
many countries, legislators are requiring companies to create more sustainable products, such as prohibiting
1
Succeeding in tomorrow’s global fashion market. McKinsey&Company [online]. 2014 [cit. 2015-11-14]. Available at:
http://www.mckinseyonmarketingandsales.com/succeeding-in-tomorrows-global-fashion-market
2
Global Textile Report. Euler Hermes [online]. 2015 [cit. 2015-11-14]. Available at: http://www.eulerhermes.com/economic-research/sector-risks/Global-Textile-
Report/Pages/default.aspx
3
Britain's appetite for fast fashion is pushing workers into starvation conditions. The Guardian [online]. 2010, 2010-08-08 [cit. 2015-12-18]. Available at:
http://www.theguardian.com/world/2010/aug/08/fashion-sweatshops-lucy-siegle-comment
4
One year on from the Rana Plaza building collapse in Bangladesh. Oxfam International [online]. 2014, 2014-04-24 [cit. 2015-12-18]. Available at:
https://www.oxfam.org/en/pressroom/reactions/oxfams-response-one-year-rana-plaza-building-collapse-bangladesh

certain harmful dyestuffs. A clear commitment to sustainability is also considered good style in the industry, with
the rise of sustainability reports.
Environmentally-friendly products require the right commodities like organic cotton, which is in scarce supply,
or a complete overhaul of the manufacturing processes to reduce the huge amount of water typically used for
apparel. Ethical products require appropriate working conditions and a fair share of profits across the supply
chain. In short, it entails a complete rethinking of functions and processes.
Digitization. Young fashion customers readily use a spectrum of digital platforms to get information on trends,
exchange experiences, or compare prices. Within these customer journeys, social media plays a key role. Up to
35 percent of consumers indicate that they rely on recommendations from social networks. This is why adidas’
fast fashion brand NEO, for instance, has equipped several of its European concept stores with interactive mirrors.
These enable customers to take a picture while trying something on and then to post it to networks like Facebook
for instant feedback from their friends before purchasing.
Other trends are represented by big data, urbanization, digital shopping and moving targets (men, people aged
over 55, shift from the USA, Europe and Japan towards South East Asia and South America)5.
GLOBAL COMPETING ENVIRONMENT - H&M and Gap Inc.
The most direct global competitors of Inditex are H&M, Gap Inc. and Fast Retailing. Since Fast Retailing’s main
brand Uniqlo is mainly present in Asia and few european countries (17 international markets) we do not consider
it in this report since the others operate in much larger global scale6. These companies were identified as
competitors because they all operate in the fast fashion industry offering “cheap” clothing. They all sell wide
range of products from clothing, shoes, perfumes, bags and accessories to home interior design products.
H&M Hennes and Mauritz AB is comprised of six companies. H&M, COS, Monki, Weekday, Cheap Monday
and & Other Stories. H&M offers wide-ranging and varied collections for women, men, teenagers and children.
H&M aims to offer inspiring fashion for best price which comprises of great quality, design and sustainability.
H&M does not own factories, but instead buys products from independent suppliers that are close long-term
partners of H&M. Lately H&M became heavily engaged in its campaign called H&M Conscious which puts
emphasis on sustainable aspects of H&M's business.
"At H&M, we have set ourselves the challenge of ultimately making fashion sustainable and sustainability
fashionable." - Karl-Johan Persson, CEO.
5
Succeeding in tomorrow’s global fashion market. McKinsey&Company [online]. 2014 [cit. 2015-11-14]. Available at:
http://www.mckinseyonmarketingandsales.com/succeeding-in-tomorrows-global-fashion-market
6
UNIQLO Business. FAST RETAILING CO., LTD. [online]. 2015-12-18 [cit. 2015-12-18]. Available at: http://www.fastretailing.com/eng/group/strategy/

The company has about 3700 stores in 61 markets. It continued to grow in new and existing markets with a focus
on quality, sustainability and continued high profitability. H&M’s growth target is to increase the number of
stores by 10–15 percent per year, and at the same time increase sales in comparable units. Expansion includes
H&M as well as COS, Monki, Weekday, Cheap Monday, & Other Stories and H&M Home. The strong pace of
expansion continued into 2015 with a planned 400 new stores net. Most new stores in 2015 are planned to open
in China and the US. H&M head office is located in Stockholm, Sweden. The company is listed on Nasdaq
Stockholm, stock exchange7.
GAP Inc. - Doris and Don Fisher opened the first Gap store in 1969 with a simple idea — to make it easier to find
a pair of jeans. Over the last 46 years, the company has grown from a single store to a global fashion business
with five brands — Gap, Banana Republic, Old Navy, Athleta and Intermix. Gap's clothes are available in 90
countries worldwide through 3,300 company-operated stores, almost 400 franchise stores, and e-commerce sites
and is still growing. The global headquarters of GAP is in San Francisco, California, United States of America.
The company is listed on New York Stock Exchange8.
INSIDE INDITEX
Mission
To design and offer quality and responsible fashion to Inditex’s customers in order to keep their trust in the long
term.
Strategy analysis - Porter’s value chain analysis
The performing and critical success factors of Inditex will be identified using the Porter's Value Chain tool,
considering Inditex as a system made up of subsystems each with inputs, transformation processes and outputs.
The supporting of the primary activities of Inditex
are 1) Procurement 2) Technology development
3) Human resources management and 4)
Company’s infrastructure.
For the primary activities we consider the value
chain of Inditex involved in the creation of the
product and its distribution and sell.
These activities are 5) Sales 6) Design 7) Manufacture 8) Distribution.
The main garments and other necessary materials are produced
by group companies located in different countries in Europe,
7
H&M [online]. 2015 [cit. 2015-12-08]. Available at: http://about.hm.com/en/About.html#cm-menu
8
Gap Inc. [online]. 2015 [cit. 2015-12-08]. Available at: http://www.gapinc.com/content/gapinc/html/aboutus.html

Asia, America and Africa. The rest of the production is acquired through numerous national and international
suppliers. The goal is to have a wide sourcing that makes available all types of tissue needed at an affordable
price. For this reason Inditex employs a system in which suppliers disclose all factories used for manufacturing
the orders, including all processes and tiers of the manufacturing process. This ensure traceability and control of
quality.
Moreover, the company applies a control to all potential suppliers and factories before any orders are formalized
by means of a pre-assessment process guarantee the quality in products.
Information systems: for Inditex the IT department is a
cornerstone that uses, develops and implements various
technology solutions and services to support the value activities of the group. One of the most important is the
RFID technology in the processes providing advantages in terms of efficient stock management and quality of
customer service.
Besides, the company count with the Technological Centre as the main data processing center, which guarantees
the continuity of store operations, offices and logistics centers across the world and ensures on going
communication in real time between the Group's decision making centers.
Research: Inditex research is performed on artificial textile
fibers from cellulose pulp such as viscose, modal and lyocell,
in order to ensure that they originate from forests that are managed in a sustainable manner.
For the Inditex group one of the key factors are the people. Inditex uses internal promotion of professionals as a
motivational factor. The Group's corporate culture is based on teamwork Self-reliance, innovation and non-
conformism. This allows all professionals in the organization to participate in identifying global fashion, social,
demographic and environmental trends, while remaining aware that the entire company is focused on the customer
and the customer's needs.
The Inditex business model is based on horizontal, flexible
organization, focused on innovation and team work. Inditex
does not address the entire production process of their collections, they focus principally with the cutting, sewing,
ironing, labeling, quality control and packing of clothes. Its production process mainly aims to be flexible, to have
a quick response to the demand and needs of each zone. To achieve this, the company counts on the latest
technology with a high degree of automation, using robots and the latest computer systems.

Shareholder’s perspective
Return on Equity
ROE measures the profitability of a company. As
can be seen on the graph, the ROE of Inditex is a
bit volatile over time, fluctuating around 26%
(being 23,98% in 2014). Although revenues and
net profits of Inditex are rising every year, the
Equity has been rising proportionally more
than compared to the rise of net profits. The
average ROE in the apparel industry on the most
important financial market in the United States was 18,48% in 2014.14 Although Inditex is listed in Spain, finance
is the most globalized sector so national borders are not really a restriction15. Therefore this number is taken as a
benchmark ROE. Inditex has been performing well, better than the rest of the industry, which is good for the
company as it generates more value for its shareholders than the rest of the apparel industry.
COMPETITORS
Although Inditex has been performing better
than the rest of the apparel industry, its
competitors H&M and Gap were 20% better.
Gap radically raised its ROE since 2011. As
seen in the financial structure of Gap, the
company moved from almost zero debt in 2010
to a considerably high debt in 2011. We can see
a radical change in the financial strategy that
was probably caused by the financial crisis and historically low interest rates of the FED16 that aimed into boosting
the US17 economy.18 Gap decided to use the financial leverage and raise its profits through long-term “cheap”
debt. As can be seen, this strategy was successful. H&M on the other side have had quite stable ROE around 38%
on average. The slight drop between 2010 and 2012 can be explained by the european sovereign debt crisis
resulting in fiscal consolidation in Eurozone and decrease in private disposable income that could lead into a
decline in revenues. The ROE has been getting better again since 2013 as also the Eurozone economy stabilized19.
14
Return on Equity by sector (US). NYU Stern School of Business [online]. 2015 [cit. 2015-12-27]. Available at:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/roe.html
15 The Globalization of Finance. International Monetary Fund [online]. 2002 [cit. 2015-12-27]. Available at:
http://www.imf.org/external/pubs/ft/fandd/2002/03/hausler.htm
16 Federal Reserve System
17 United States
18
How do central banks impact interest rates in the economy? Investopedia [online]. 2015 [cit. 2015-12-27]. Available at:
http://www.investopedia.com/ask/answers/031115/how-do-central-banks-impact-interest-rates-economy.asp
19
Consumers and the recession: Trends in Eurozone consumer spending. Deloitte University Press [online]. 2013 [cit. 2015-12-27]. Available at:
http://dupress.com/articles/global-economic-outlook-q3-2013-special-topic/
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
20142013201220112010200920082007
ROE
INDITEX H&M GAP

Net Profit Margin
Net Profit Margin of Inditex has been stable
around 12% - 14% between 2007 and 2014,
being 13,86% in 2014. This means that the
company has been able to keep its
composition of revenues and costs constant.
Both revenues and costs have been rising
over time but with the same pace which
allows for this result.
COMPETITORS
H&M has been performing almost the same as Inditex. However we can see a slight decrease since 2008 until
2013. Because revenues were rising during this period, the decline was caused by an increase in overall costs as
there was no financial expense. H&M manufactures its products mostly in developing countries like China, India
and Bangladesh which are characterized by low production costs. However in recent years, especially China, has
been rising wages to switch itself from export-led economy to a more mixed export-consumption led economy20.
There is also pressure from consumers on these companies to pay fair wages in those countries. Both those reasons
can explain the decline. Gap on the other hand has a very low ratio compared to H&M and Inditex. Gap has a
very high production cost compared to H&M and Inditex because it did not have any financial expenses until
2011. However it has been getting better since 2011 thanks to its new financial structure that is explained above.
Overall company’s perspective
Return on Assets
As already mentioned, the revenues and net profits, in this case EBIT, have been rising over past decade
proportionately. Inditex was able to manage the
same development of revenues and costs since
2007. The size of the company has been also on
the rise since 2007 resulting in ROA fluctuating
between 20% - 23%. In 2014 ROA dropped to
20,8% because of a higher increase in asset
value. The main increase compared to 2014 was
in property, plant and equipment account and in
financial assets both long-term and short-term.
20
6 factors shaping the global economy in 2016. World Economic Forum [online]. 2015, 2015-12-23 [cit. 2015-12-27]. Available at:
https://agenda.weforum.org/2015/12/6-factors-shaping-the-global-economy-in-2016/
0,00%
5,00%
10,00%
15,00%
20,00%
20142013201220112010200920082007
NET PROFIT MARGIN
INDITEX H&M GAP
0,00%
20,00%
40,00%
60,00%
20142013201220112010200920082007
ROA
INDITEX H&M GAP

COMPETITORS
Gap has been performing on the same level as Inditex over the observed period. H&M is more successful than its
competitors in deploying assets to generate operating income. However its ROA declined in 2011 by 5%
holding stable around 35% since then. There has been a faster increase in assets compared to the increase of the
operating income.
Return on Investment
Inditex is again able to hold his position in ROI
not changing much. The return on investment is
stable around 33% on average.
COMPETITORS
H&M has been in a similar stable situation as
Inditex even with the level of its ROI. Gap saw a
more volatile history dropping in 2011 but
rebounding in 2012. This can be again caused by
the increase in debts and usage of the financial leverage which changed the financial structure of the company,
decreasing equity and increasing liabilities in 2011.
Operating profit margin
As can be seen on the graph, the operating profit margin of Inditex has been constantly around 18%. This means
that Inditex is has not had any unexpected
development in both revenues (rising with
brand recognition and expansion) and
operating expenses.
COMPETITORS
H&M was the best performing out of these 3
companies in the beginning in 2007 but has
been declining since then and switching
place with Inditex in the best performing enterprise in this comparison. As described earlier, the increase in
operating costs can be increased by the rise in wages in countries where H&M manufactures. It can be also caused
by price volatility of commodities that is a result of combined factors such as climate change, rising demand and
financial speculation (described later in value drivers analysis). As identified before, Gap has higher production
cost compared to Inditex and H&M therefore its operating profit margin is lower in the observed period.
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
20142013201220112010200920082007
ROI
INDITEX H&M GAP
0,00%
5,00%
10,00%
15,00%
20,00%
25,00%
20142013201220112010200920082007
OPERATING PROFIT MARGIN
INDITEX H&M GAP

Stakeholder’s perspective
Debt to Equity
An interesting development can be observed here.
Inditex has been constantly decreasing its debts
from almost 69% in 2007 to 47% in 2014. Putting
more emphasis on equity financing which can be
less effective in the environment of low interest
rates but which is always safer then debt
financing. Considering the fact of the financial
crisis and ongoing European sovereign debt
crisis, there has been a push in the European Union to decrease debts in the economy.
COMPETITORS
H&M is again in a very similar situation as Inditex, focusing on equity financing. H&M does not have almost any
debts with explicit interest rate. Gap on the other side is the opposite. Changing radically its financial structure in
2011 which was mentioned before but can be seen most significantly here. Gap is trying to increase its returns by
using the financial leverage in the environment of long lasting extremely low interest rates. Therefore using debt
instruments is extremely cheap. We may see a similar thing happen with H&M and Inditex in the future as the
European Central Bank started quantitative easing in January 2015 and even increased the volume during the
year. This development is delayed by almost 5 years compared to the USA where the QE21 started in 2010. The
question is if the management decides for such measures and the need of it.
Effective Tax Rate
Inditex's effective tax rate has been steadily
around 22% to 25%. According to the annual
reports the major portion of taxes is paid in
Spain where the company is registered
followed by Europe and the USA. All the
Spanish subsidiaries pay taxes in Spain
according to the consolidated tax return
scheme. The other companies which have
domicile in other countries pay taxes in those countries. The corporate tax in Spain was 30% in 2014 and lowered
to 28% since 1st of January 201522.
21
Quantitative Easing
22
Corporate tax rates table. KPMG [online]. 2015 [cit. 2015-12-30]. Available at: https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-
online/corporate-tax-rates-table.html
0,00%
50,00%
100,00%
150,00%
200,00%
20142013201220112010200920082007
DEBT TO EQUITY
INDITEX H&M GAP
0,00%
10,00%
20,00%
30,00%
40,00%
20142013201220112010200920082007
EFFECTIVE TAX RATE
INDITEX H&M GAP

COMPETITORS
H&M has a similar effective tax rate as Inditex, it pays about 94% of its taxes in Sweden where the corporate tax
rate is 22%. Giving a fact that both companies are registered in the EU, this similarity can be owed to the attempts
to harmonize corporate income taxes across the EU and avoid tax dumping. H&M has been decreasing its volume
of taxes in the given period. Gap pays more than its European competitors, its effective tax rate fluctuates around
38% and it is caused by a high corporate tax rate which is in the United States – 40%23
.
Liquidity Analysis
Current Ratio
Inditex is currently able to cover its current
liabilities twice with its current assets. Every
number above 1 means that company's structure
of current debts is taken care of. Inditex was also
able to make this ratio (structure) stronger over
the observed period increasing from 1,2 to 1,9.
COMPETITORS
GAP has held almost the same ratio as Inditex
during the observed period. However H&M current ratio has been decreasing since 2007 from 3,5 to 2 in 2014.
That is because H&M current liabilities value rose faster than the value of its current assets which means that the
financial structure of H&M is changing more compared to Inditex and GAP.
Inventory Turnover
There is a benchmark Inventory Turnover on the
apparel market. If the inventory turnover of our
companies is higher than the market average, it
means that the companies are competitive and
that they are able to sell the goods efficiently and
avoid costs for excess storage. As can be seen on
the graph, Inditex's inventory turnover has been
sold 10 times throughout the observed period on
average. According to found data, the average market inventory turnover (retail clothing) was 4 until 201124.
23
Corporate tax rates table. KPMG [online]. 2015 [cit. 2015-12-30]. Available at: https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-
online/corporate-tax-rates-table.html
24
The Average Merchandise Turnover for Clothing Stores. Houston Chronicle [online]. Houston, Texas, 2015 [cit. 2015-12-30]. Available
at://smallbusiness.chron.com/average-merchandise-turnover-clothing-stores-18292.html
0,00
1,00
2,00
3,00
4,00
20142013201220112010200920082007
CURRENT RATIO
INDITEX H&M GAP
0,00
5,00
10,00
15,00
20142013201220112010200920082007
INVENTORY TURNOVER
INDITEX H&M GAP

Cost of capital (WACC)
GAP
2014 2013 2012 2011 2010 2009 2008 2007
Risk free rate (Rf) 2,45% 2,41% 1,78% 2,61% 3,20% 3,35% N I N I
Beta of security (B) 1,272 1,21 1,03 0,85 0,76 0,97 N I N I
Expected market return (Rm) 8,16% 16,52% 72,18% -1,50% 0,99% 69,14% N I N I
Cost of equitiy (Ke) 9,72% 19,48% 74,29% -0,88% 1,52% 67,16% N I N I
Cost of capital (WACC) 8,11% 14,72% 54,96% 0,18% 1,17% 54,96% N I N I
Inditex kept its EVA positive throughout the observed period with exception of 2009 when the EVA was slightly
negative. While Gap Inc. was the steadiest in terms of generating economic profit, HM’s EVA as well as Inditex’s
EVA was more volatile.
Cost of capital (WACC) 22,33% 20,39% 4,66% 4,28% -
36,90%
34,14% -
7,93%
-
10,12%

RELATIVE VALUATION25
Relative valuation is undoubtedly the most diffused approach to estimate the value of a company. This technique
compares the target company, in this case Inditex, with other “similar” listed ones with the idea that the value of
the target company should be in line with that of “similar” companies. The fundamental idea of this method is to
estimate one or more multiples based on “comparable” company and then apply it to estimate the value of the
target company.
The relative valuation is divided in four main steps:
1. Definition of possible multiples;
2. Analysis of the market;
3. Definition of comparable companies;
4. Analysis and application of the multiples;
Defining Possible Multiples
The identification of a subset of possible multiples is fundamental to compare the values of Inditex with “similar”
companies in the stock exchange. Overall, multiples can be divided into two categories according to the two
methods for calculating the firm value: Enterprise Value (EV) and Equity (E). While EV multiples are those that
support the valuation of the target company enterprise value looking at the EV of comparable companies, Equity
multiples allow analysts to directly evaluate the company equity value. It is not possible to say at the beginning
which multiple is the best. It can depend on different industries, different business models, and different value
drivers. Therefore, the multiple that can express the value of the company in the most complete way must be
determined on a case-by-case basis. There are a number of variants for each multiple.
To ensure that the multiple is defined consistently and measured uniformly across the firms being compared, the
whole analysis uses data of last four quarters of earnings (TTM, trailing twelve months).
In the relative valuation of Inditex four multiples have been chosen:
• EV/EBITDA and P/E which are earning multiples. They are both the most common multiples;
• EV/Sales and P/S which are revenue multiples. One of the advantage of using revenue multiples, however,
is that it becomes far easier to compare firms in different markets, with different accounting systems at
work, than it is to compare earnings. These multiples are widely used in the relative valuation of
companies in the Retail Sector.
25
All the calculations are made using Excel and are sent separatly through email

Among the Enterprise Value multiples the analysis is focused on:
• EV/EBITDA (TTM) is the ratio between the EV and EBITDA of a company. In economic terms, it
represents the number of years EBITDA should be multiplied by to obtain the company enterprise value.
EBITDA can be considered a first approximation of the company cash flows but is not a good choice for
companies for which outsourcing is relevant because of the overvaluation of EBITDA. The EV/EBITDA
multiple requires prudent use for companies with low profit margins. For an EBITDA estimate to be
reasonably accurate, the company under evaluation must have legitimate profitability.
• EV/Sales (TTM) is the ratio between the EV and revenues of a company. It represents the number of
years the sales should be multiplied by to obtain the enterprise value. In companies with negative
EBITDA, EBIT, or FCFF, the previously described multiples become senseless. Due to the positive sales
at each company, this multiple becomes the first choice in such cases. However, it has the serious
disadvantage of not taking the company’s profitability into consideration.
Among the Equity multiples the analysis is focused on:
• P/E (TTM) is the ratio between the market capitalization of a company and its earnings or, equally, the
ratio between the price of the stock and the EPS. It represents the number of years the EPS should be
multiplied by to obtain the company market capitalization (the stock price). It is one of the multiples that
can always be computed as it is easy and quick to calculate. However, the earnings of a company suffer
from depreciation and amortization policies, its financial structure, and the profit or loss of discontinued
operations. To avoid the latter, the adjusted P/E adjusts the earnings in order not to be affected by the
profit or the loss of discontinued operations.
• P/S (TTM) is the ratio between the market capitalization and revenues of a company.
Analysis of the Market26
It is always useful to have a sense of what a high value, a low value or a typical value for that multiple is in the
market. Therefore, is necessary to be aware of the multiples (distribution, average, median, standard deviation,
max and min), not only across firms in the sector being analysed but also across the entire market.
In the “Consumer Cyclical Sector” (more than 1500 firms):
Avg PE Ratio (TTM) Avg PS Ratio (TTM) Avg EV to EBITDA (TTM) Avg EV to Revenues (TTM)
18,16 1,111 11,13 1,484
26
Data provided by https://ycharts.com, December 2015

More specifically, in the “Fashion and Apparel Retail Industry” and “Footwear and Accessories Industry”
(about 170 listed companies):
P/E (TTM) P/S (TTM) EV/EBITDA (TTM) EV/Revenues (TTM)
Average 23,4 1,2 11,8 1,6
Median 17,5 0,9 9,8 1,0
Standard Deviation 19,8 1,2 10,4 2
Max 111,5 5,5 89,4 16,1
Min 0 0 0 0
Defining Comparable Companies
While the conventional practice is to look at firms within the same industry or business, this is not always the
optimal way of identifying these firms. In fact, according to the definition there is not a component that relates to
the industry or sector to which a firm belongs. A comparable company is the one with cash flows, growth potential
and risk similarities to the firm being valued. It would be ideal to value a firm by looking at how an exactly
identical firm, in terms of risk, growth and cash flows, is priced. However, no matter how carefully comparable
firms are chosen, differences will remain between the target company and similar companies.
It is known27, using both analytical proofs and statistical evidences, that there is a correlation between some
variables and multiples.
For the Enterprise Value multiples taken into account, holding all other variables constant:
• increasing the expected growth rate, the enterprise value multiples will increase;
• as the cost of capital increases, enterprise values decrease dramatically across the board;
• as the tax rate is increased, all enterprise value multiples decrease.
For the Equity multiples taken into account, holding all other variables constant:
• the higher is the expected growth rate in EPS during high growth period, the higher is the values for the
multiples;
• the longer is the high growth rate, the higher is the values for the multiples;
• increasing the risk of equity will decrease all equity multiples;
• as the return on equity increases, the equity multiples all go up;
• as the net margin increases, all of the equity values increase.
27
Valuation: Chapter 7-8-9, 2Ed, A.Damodaran, NYU. Available online at: http://pages.stern.nyu.edu/~adamodar/pdfiles/damodaran2ed/ch7.pdf

Clearly, this is just a first rough schematization of which variables affect each multiple and how changes in these
variables can affect Enterprise Value and Equity multiples. In fact, the relation between these variables and
multiples are not linear and each multiple depends at the same time on more than one variables. In the relative
valuation of Inditex the “fashion and apparel retail industry” and the “footwear and accessories industry” are
considered (about 170 listed companies). According to the relations between the different variables and multiples,
nine companies with more similar cash flows, growth potential, and risk have been selected. This approach
allowed not only to find a consistent number of similar companies but also to optimize the time spent for the
analysis. Moreover it allows to avoid to run a more advanced and complicated technique such as the regression
analysis suggested by A.Damodaran.
Analysis of comparable companies28
For each multiple the average and the weighted average by Enterprise value have been computed.
PE Ratio (TTM) PS Ratio (TTM) EV to Revenues (TTM) EV to EBITDA (TTM)
Buckle Inc 9,7502 1,3088 1,9925 4,9568
VF Corp 25,648 2,1455 2,6726 16,5704
Gap Inc 10,245 0,6493 1,0453 4,7012
Adidas AG 33,125 1,0481 0,717 11,7628
Hennes & Mauritz AB 21,2459 2,6338 3,0536 13,2346
Luxottica Group SpA 34,2093 3,0707 2,6749 14,9618
TJX Companies Inc 21,1238 1,5754 1,5131 10,7136
Fast Retailing Co Ltd 37,7361 2,5658 2,6066 16,7964
Nike Inc 32,5225 3,6517 2,6949 21,0185
Industria De Diseno Textil
SA 33,4413 4,7112 3,6617 19,5271
Weighted Average 29,69641248 3,15503068 2,717446389 16,7355913
Average 25,90471 2,33603 2,26322 13,42432
28
Data provided by https://ycharts.com, December 2015

The Enterprise Value of Inditex can be calculated multiplying the weighted average EV/EBITDA by EBITDA.
The Equity of Inditex can be computed multiplying the weighted average P/E by EPS (earning per share).
Comparing the weighted average of each earning multiple with the value of the same multiple of Inditex the
Enterprise Value seems to be overestimated of approximately 12.5 % and as well as the Equity of about 16.7%.
Looking at the revenues multiples this difference is way more amplified. In fact, no matter how carefully the list
of comparable firms is built, it ends up with firms that are different from the target company. The differences may
be small on some variables and large on others and control for these differences in a relative valuation is crucial.
There are two ways of controlling for these differences: subjective adjustments or regression analysis.
On the one hand, looking to the company data, the difference may be due to the fact that Inditex presents lower
risks than “comparable” companies. On the other hand, using other valuation tools provided29, it seems that
INDITEX is overestimate of around 20%. While the results found is surely consistent, probably further analysis
(through regression analysis and/or other evaluation methods) are suggested in order to come out with a more
precise rate of overestimation.
29
Available online at: https://ycharts.com/companies/idexy/valuations, December 2015

VALUE DRIVERS
Based on the nature of the business and Inditex strategy, we identified the main risks and opportunities that the
company is facing or may face in the future. According to us, these elements will have a great impact on the value
of the company in the long run but they can be also tracked throughout financial year and give early signals on
how the strategy or day-to-day business is or will be affected. Most of our indicators are affected by both external
and internal environment. A simple balanced scorecard of Inditex with its main strategic objective can be seen
below, however the value drivers analysis focuses on the most important indicators identified.
Raw materials - Cotton
The necessity of raw materials is vital for the fashion industry. The main natural raw materials which are used for
apparel production are linen, wool, silk and by far the most important one is cotton. The cost of cotton was
therefore identified as a value driver of Inditex (apparel industry overall) since it represents an external risk for
Inditex in terms of crops volume and price volatility.
Cotton is a tropical and subtropical crop, comes up well up to 500m mean sea level and a short cool season
before harvest is useful for high yields. Cotton requires four to five months of uniformly high temperature during
its growth period. Optimum temperature for vegetative growth ranges from 21o to 28o C while relatively higher
day temperature of 27o to 32oC and cool night favour flowering and boll formation. However, with sufficient soil
moisture, the crop can withstand up to 45o
C but for shorter periods. A minimum of 500 mm of well distributed
rainfall is essential, particularly in the initial stages of growth. Sunny days are important at all stages of growth,
particularly during flowering and maturity stages. (Commodities Info Services, 2014)

The TOP 5 largest producers of cotton in 2014 were China, India, the United States, Pakistan and Brazil. As can
be seen in the characteristics of the plant, cotton is highly dependent on water, sun and stable warm temperatures.
Therefore the biggest risk for cotton crops in these countries is climate change – rising temperatures, droughts
and changing weather patterns. For example as can be seen on the graph below India produces most of its cotton
in the state of Gujarat. Pakistan, neighbour to Gujarat, is the 4th largest producer. Therefore the crops are highly
dependent on monsoons and heat waves.
Identified as a value driver, the price of cotton can radically change the overall operating costs of the company.
In extreme situations in can lead to change in business strategy – fast fashion, outsourcing or higher use of
synthetic materials. On the other side, if prices of cotton remain stable or decrease, Indtiex can save money and
focus on ways how to increase profitability. The price of cotton is determined by two main factors. The demand
and supply (textile indistry and crops) and speculation. There are two types of speculation. Economically justified
speculation that predicts future relation between demand and supply and then financial speculation that is based
on trading sentiment and the growth of trading of commodity index funds. In recent years, especially after the
financial crisis of 2008, it has become increasingly difficult to identify if the cotton price is based on demand and
supply or driven by mentioned financial speculation where institutional investors poured money into
commodities.

Energy
Inditex’s Global Energy Strategy is framed in the
long-term context of the UN Secretary General’s
commitment to Sustainable Energy for All by
2030 and Europe’s Energy Roadmap 2050.
Inditex’s targets for energy efficiency and
greenhouse gas emissions reductions are aligned
with and coherent within the UN 2030 objectives
and Europe’s 2020 targets and Inditex’s supplier activities are helping move towards the UN SEA goal to increase
access to modern energy services in countries where this is of priority concern. (Industria de Diseño Textil, S.A.,
2015).
Energy30 was identified as a cost value driver. Energy is mainly consumed in stores, logistic centres, head offices
and supply chain, both direct and indirect consumption is considered, as Inditex owns factories where it produces
goods. Inditex can address energy costs in two ways – energy efficiency and energy independency.
According to Inditex’s 2020 strategic objectives, the energy intensity per item should be decreased by 15% and
the energy used in stores should be decreased by 10% overall, moreover all Inditex stores should be eco-efficient
by 2020. This will positively effect the GHG31 emissions that should be also decreased. However taking into
consideration Inditex rapid expansion, the GHG emission could increase in absolute terms which is happening
right now. As Inditex states in its 2014 annual report, overall energy is produced by burning fossil fuels.
Therefore two indicators were developed by the working group. Indicators that are believed to positively influence
the value of the company by cutting energy costs, having positive effect on the environment and improving the
overall brand image of the company by marketing this change in a massive way.
Energy efficiency (EE):
EE = (Energy consumption (t) per garment – Energy consumption (t-1) per garment) / Energy consumption
(t-1) per garment.
This indicator will give the company percentage increase or decrease in the energy consumption per garment.
Inditex should set targets after 2020 that will lead into larger and faster energy use reduction. According to the
Inditex Annual Report 2014, the overall energy consumption increased by 5% compared to 2013 but relative
30
By Energy, electricity is meant
31
Greenhouse gas

To reflect how Inditex is maintaining and increasing customers in the market share competition, we calculate the
revenues of Inditex in a period of time over the total revenues in the market.
Market share = Total revenues of the company / Total Revenues of the market.
Number of stores
Fast Retailing, Inditex and H&M have increased the number of their overseas stores by an annual average of
47.3%, 19.6% and 11.6% respectively. The expansion of the fast fashion companies have been related to its
revenues. Much of this expansion have been focused on emerging markets by strengthening the brand. To reach
this propose, companies are flooding the market with stores in major commercial areas of the principal’s cities
around the world such as the Fifth Avenue in New York or cities like Milan. These high-traffic areas can quickly
increase brand awareness and sales.
Store efficiency = Total revenues / number of stores.
Measures the ability of stores to generate revenues.
Corresponds with the strategy of each company. According
to the graph we can understand that although Inditex has the
largest amount of total revenues, sales per store are lower.
This means that Inditex has a potential to reach sales for the
amount of 31,774.70 thousand euros per year by improving
the efficiency of sales in each of its stores.
Time to market
Time to market is the time it takes to identify a trend and get it as a product and then deliver it to the stores and
make it accessible to the customers. In last years the time to market have been decreased as a respond to renewed
needs of customers. Nowadays products are available to the customer in less than one month. Trends creates the
possibility of profit, however it can also lead to high level of inventory and the force of price reduction if the
product is not introduced to the market at the right time (Christopher et al, 2004; Ferni & Sparks, 2004). Shorter
time-to market increases the opportunity for fashion companies to copy fashion trends and get the product in the
market at the right time (Bruce et al, 2004).

This inventory optimization strategy use by Inditex
ensures that less popular stock is not accumulated and
customers get sense of scarcity and exclusiveness that
allows to the company to sell more items at full price.
Inditex’s business model is built on above described
strategy. It is therefore very important to monitor this
value driver.
Customer Satisfaction
Customer satisfaction is one of the one of the core value drivers of Inditex and it has grown significantly through
good customer service. The shopping experience and convenience that a store and its employees offer is a very
important element of each successful business. Therefore, Inditex implemented RFID (Radio Frequency
Identification) which allows a more precise in store product management. Inditex have also implemented a special
training programmes with emphasis on customer service.
In order to promote the transparency and traceability of the supply chain, Inditex started in 2014 a pilot project in
Brasil called “Fabricado no Brasil” through which all products have assigned a unique QR code printed on the
label. With this “special” code, consumers know all the product’s manufacturing details as well as the
manufacturer's identity. In addition, costomers can send questions or comments to the CSR department in Brazil
via email.
Since Inditex proclaims that customer satisfaction is the core of its business model, it was decided to track the
amount of complaint in the company. Lower is this indicator, better the company is performing.
Number of complaints on spanish example can be seen below.
No of Complaints No of Complaints
Zara 3,617 Bershka 405
Pull&Bear 432 Oysho 364
Massimo Dutti 198 Zara Home 122
Stradivarius 404 Uterqüe 56
Inditex Group 5598 (In Total)
Complaint ratio per store: Number of complaints received per year / Number of stores
= 5598/1822
= 3.072 complaints per store (In Spain)

CRITICAL ANALYSIS
The financial year 2014 was again very successful in terms of rising revenues and international expansion of
Inditex. Sales have increased to 18,117 million euros. It was also the first year in the history of the company when
Inditex has been present at all five continents opening 343 new stores, having 6683 in total globally. Inditex shares
experienced a 18.0% gain in 2014, closing at €26.14 per share on 31 January 2015.
Emerging markets
Inditex generated 65% of its revenues in Europe, 14% in the United States and only 21% in the rest of the world.
We see a huge potential for change in this ratio and Inditex should be aware of quickly changing demand and
purchasing power in different parts of the world, especially in Asia. According to the World Bank’s GDP growth
forecast from June 2015, India will become the fastest growing economy in 2016 with 7,9% followed by China
(7%), Bangladesh (6,7%) and Indonesia (5,5%). Eurozone, the United States and Japan, on the other hand, will
grow only by 1,8%, 2,8% and 1,7% respectively. Inditex’s flag ship brand Zara owes its success to the business
model of Inditex when there is a highly frequent change of collections which creates an environment of exclusivity
for customers.
Sustainability dilemma
Inditex’s annual reports have been made according to Global Reporting Standards (GRI) since 2002. These
standards should assure a very high commitment towards sustainability meaning to assure a triple bottom line
approach - the balance between an economic, social and environmental aspects of a business. All three aspects
can be seen in detail in all Inditex’s GRI compliant annual reports. Unfortunately it’s clear that the fast fashion
business model is in long-term unsustainable in all three aspects. It relies on cheap labour which will not last
forever (e.g. China is increasing wages in pursue of more balanced economy). It relies on resources such as water
which will become more and more scarce in regions of manufacturing and raw material production (China, India,
US, Pakistan, Bangladesh) because of climate change. These regions are more frequently experiencing heat
waves, lower perticipation and prolonged droughts. Their emissions of GHG will increase in the future because
of the nature of the business model, even though Inditex is becoming more efficient in the energy department.
And lastly it faces a huge competition for market share which actually pushes all fast fashion companies to keep
low prices. It means that if prices will remain stable and operating costs will increase overtime, Inditex (as well
as HM, Gap Inc. etc.) will see their profits fall. Therefore a big importance should be given in research and
development and in exploring and applying new business models where Inditex can actually learn from companies
around.

Dyeing with CO2
In 2012, Nike has entered into a strategic partnership with DyeCoo Textiles Machines, a dutch company that has
developed first commercial dyeing machine which does not use water but CO2. It is generally known that water
dyeing is very toxic for the environment and using water that can be used for agriculture or drinking. CO2 dyeing
is water free, moreover the CO2 used in DyeCoo’s machines is used as a waste product (already emmitted CO2)
and recycled by 98%. One of the opportunities that Inditex should definitely explore and engage in such
technologies since it would reduce both the water footprint of the company and the GHG emissions of the
company and moreover it could improve the image of the brand which eventually can result in rising revenus.
Inditex’s commitment to sustainability which the company strongly presents would be also fulfilled.
Circular economy
Circular economy is a new economic model where everything which is used by consumers is designed to be
reassembled, refurbished and recycled. Circular economy does not create waste by design. There are rising
problems these days such as plastification of oceans, finite resources such as metals and huge amount of waste
that is created every day. In 2015 the EU adopted an ambitious circular economy package – EU action plan for
the circular economy, which encourages the system change and sets targets towards 2030. Also in 2015 HM
became a global partner of Ellen MacArthur Foundation which aim is to accelerate transition to a circular
economy. HM joined companies like Unilever, Kingfisher, Philips, Renault, Intesa Sanpaolo, Cisco and Google.
We believe that HM’s step into this world signals that the company is ready to work on its business model,
eventually leaving the fast fashion industry. Inditex can also explore the possibilities of circular economy. It could
change its business model from selling (linear economy of today) to leasing (circular economy). Clothes, shoes,
accessories etc. would be designed to be refurbished from the beginning before being manufactured, then leased
to customers and once an item would be at the end of its life cycle it would be recycled. This model is also actually
more profitable and less risky (guarding of precious materials) for companies accroding to a report made by Ellen
MacArthur foundation and KPMG. For example, Inditex could save large amounts of money on purchasing of
raw materials and water. Inditex would also stop creating waste. Again all these steps would support the strategy
of the brand enhancing both its value and image.

METHODOLOGY
For the strategic and financial analysis Inditex has been chosen because it is one of the largest business groups in
the world. It has been highlighted in the recent decades for its international expansion, continuous growth and
innovation. Furthermore, Inditex has been remarkable for its efficient logistic model in the fast fashion sector.
The decision to analyze Inditex as a whole and not their most important business unit (ZARA), was based on the
similarity of its eight brands business model, horizontal and flexible. Most of its internal resources and
competitive advantages are similar. The most significant difference between the units is the target to what is each
brand devoted. However, all of them have the same objective: to design and offer quality and “cheap” fashion.
For this reason has not been consi all brands and conducting the analysis of each would not give us a better
qualitative outcome.
The main resources for the information and data use for this analysis, was taken from the annual reports from
2007-2014, the Corporate Governance Reports and Sustainability Reports – global water strategy, global energy
strategy, eco-efficient store concept etc. All used reports are available on the website of Inditex, Gap Inc. and
H&M. Among other secondary data, we use financial databases, internet home pages, academic articles and
reports from associations related with the industry.
In the first part of the analysis we present brief description of Inditex and its history. For the strategy analysis we
identify and analyze internal and external factors that have an impact on Inditex and the fashion industry. For the
internal analysis and to identify the critical success factors we use the Porter's Value Chain tool, considering group
as a system made up of subsystems each with inputs, transformation processes and outputs.
The objective to perform a financial analysis to Inditex is to examine how the group has performed in the last
eight years and compare it with its competitors. To achieve this objective we present indicators that were found
important or interesting to compare between Inditex, GAP Inc. and H&M. Return on equity, net profit margin,
return on assets, return on investment, operating profit margin, debt to equity, effective tax rate, current ratio,
and inventory turnover were chosen as they are related with the mission and strategy of the company.
Inditex auditing principles is IFRS and Gap Inc.’s accounting system is tailored according to US GAAP (generally
accepted accounting principles). This means that compering the two have differences in conceptual approach.
IFRS is principal based whereas US GAAP is rule based. All the difference were analyzed to assure consistent
cooperation.
In order to estimate the fair value of Inditex a relative valuation has been done. Inditex has been compared with
other "similar"listed companies through multiples. In fact the main idea of this method is to estimate one or more
multiples based on “comparable” company and then apply it to estimate the value of the target company. In doing

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EUROPEAN COMMISSION, develoment disponsable income [online] 2015, 2015-12-23, available in:
http://ec.europa.eu/economy_finance/db_indicators/ameco/index_en.htm
STATISTA, cotton producers, [online] 2015, 2015-12-20, available in:
http://www.statista.com/statistics/259392/cotton-production-worldwide-since-1990/
MINISTRY OF AGRICULTURA & FARMERS WELFARE, Government of India, state wise production of
cotton [online] 2015, 2015-12-20 available in:
http://agricoop.nic.in/documentreport.html

ANNEX
Please, for the calculation of Financial Indicators and Relative Valuation refer to Excel files sent at your email.

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