PARIS — Working its blueprint for a high-tech fast-fashion future, Zara owner Inditex posted a 14 percent rise in third-quarter net income, drawing on integrated store and online systems to keep stocks low while it rapidly expands its online presence.
“Inditex has a very unique business model that allows us to operate the stores and online in a remarkably integrated way,” said Pablo Isla, chairman and chief executive officer, speaking in a conference call to analysts.
Net income totaled 1.2 billion euros for the quarter, as the company continued its rapid online expansion, adding sites in South Africa, Colombia, the Philippines and Ukraine, as well as a Zara Home web site in the U.K. An extra boost came from IFRS accounting rules that change how companies report property rentals, which the company estimates will increase full-year net income by around 2.5 percent.
Inditex is becoming a cash-flow juggernaut, said analyst Richard Chamberlain of RBC Europe, raising his price target on the shares to 33 euros from 32 euros.
“The third-quarter results were interesting, not so much for the small earnings beat, but for the prodigious cash-flow generation, helped by a structurally lower level of inventory,” Chamberlain said.
“The execution over 2019 has been very strong, as seen in the results themselves, the tight inventory management as well as the strong cash generation,” Isla said, noting that inventory levels were down 5 percent on the year.
Inditex has been charging ahead of rivals with state-of-the-art logistics systems using radio frequency identification technology, freeing up resources to spruce up store networks. It plans to fully integrate online and in-store stockrooms by the end of next year, when it also seeks to sell all of its labels online everywhere around the world, offering same-day or next-day delivery in key markets.
The Spain-based fast-fashion retailer’s logistics systems are helping the company focus on full-price sales, which has given it an advantage over rivals, which have suffered from getting caught up in discount spirals in order to off-load inventory.
Store revamps are another key element of Inditex’s strategy, which includes improving their environmental standards. In their presentation, executives showed images of two flagships, one in Dubai Mall and another in the historic center of Barcelona as showcases of their view of the future, with click-and-collect stations and airy interiors, with the occasional live plant, curved couches outside the sitting rooms and modern, natural wood design chairs with a view on the shoe displays.
In Bilbao, Spain, for example, the company replaced four stores around the city with one flagship. “We are selling more than the others combined — it’s the same amount of space as the other stores combined and we are running the operation with 20 percent less inventory,” Isla told analysts, citing RFID technology and more attractive stores around the world as contributing to an improved performance. Other notable store revamps include the enlarged Grand Gateway flagship in Shanghai.
Executives cited growth at its smaller label, which combined, account for around 30 percent of sales. Bershka, which entered the U.S. market in 2017, recently collaborated with Billie Eilish, while Massimo Dutti has added personalization services at its Mall of the Emirates store in Dubai. While “not huge” in terms of volumes, personalized items are proving “very well-appreciated,” by shoppers, executives said.
The company did not break down quarterly sales, but said they grew 7 percent in the first nine months, keeping with the pace set earlier in the year. The group expects like-for-like sales growth in the 4 to 6 percent range.
Executives also said they are closely managing operating expenses, partly through active management of rents, adding that operating leverage is a key element of the company strategy.