SWOT analysis of Inditex

COMPANY OVERVIEW

The Inditex Group is engaged in textile design, manufacturing and distribution.The company operates

approximately 3,113 stores in 64 countries.The company primarily operates in Europe.The company

is headquartered in La Coruna, Spain and employs about 69,240 people.

The company recorded revenues of E8,196 million (approximately $11,145 million) during the fiscal

year ended January 2007, an increase of 22% over 2006. The operating profit of the company was

E1,356 million (approximately $1,843 million) during fiscal year 2007, an increase of 24% over 2006.

The net profit was E1,002 million (approximately $1,362 million) in fiscal year 2007, an increase of

25% over 2006.

*The results mentioned above are unaudited. The company has not declared the audited results for

the fiscal year ended January 2007 at the time of the publication of the profile.

KEY FACTS

Head Office Inditex

Edificio Inditex

Avenida de la Diputacion

Arteixo

La Coruna

15142

ESP

Phone 34 981 18 54 00

Fax 34 981 18 54 54

Web Address http://www.inditex.com

Revenue / turnover 8,196.0

(EUR Mn)

Financial Year End January

Employees 69,240

Madrid Ticker ITX

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Inditex

Company Overview

SWOT ANALYSIS

Inditex specializes in fashion retailing. The company has a broad geographical presence. The group

is well established and has diverse offerings in its portfolio for retail spenders which help the group

to carve a niche for itself in the global retail market but it faces the threat of reduction in revenue

from price deflation in the Spanish clothing and footwear market due to opening of new stores.

Strengths Weaknesses

Weak international presence of other brand

concepts

Well established group with diverse

offerings

Zara's competitive advantage Over dependence on the European market

Increasing revenues and net income

Opportunities Threats

Expansion in the Italian market New avenues being utilized by competitors

Growth in online retail spending Increasing labor costs in Europe

Continual growth in the retail apparel Counterfeit goods

industry

Growth in Asian retail sector

Strengths

Well established group with diverse offerings

The Inditex group is a leading fashion distributor, comprising more than 100 associate companies.

Established in 1975, the group now operates in over 400 cities located around the world. The group

operates eight different sales concepts including Zara, Pull & Bear, Massimo Dutti, Bershka,

Stradivarius, Oysho, Zara Home, and Kiddy's Class.

Zara is an international fashion retailing division. While Pull & Bear's clothing and accessories are

targeted at the young, Massimo Dutti offers urban fashions and casual wear to grown up men and

women. Bershka offers music, art and street fashion to youths. Stradivarius offerings include the

latest international fashion trends in the fabrics, design and accessories. Oysho offers a wide range

of women's undergarments and lingerie, casual outerwear and informal clothes. Zara Home is

engaged in home furnishings and also offers cutlery, tableware, decorative items and glassware.

Kiddy's Class offers fashion products including apparel, cosmetics, fragrances, necklaces and

bracelets for children.

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Inditex

SWOT Analysis

This diverse product offering has enabled the Inditex group to carve a niche for itself and emerge

as one of the largest fashion distributor globally.

Zara's competitive advantage

Zara is a unique retail proposition, and is Inditex's strongest concept. Zara's philosophy is to

under-produce inexpensive high fashion apparel, thereby encouraging frequent purchases and

limiting its own markdowns. While the Zara concept has some similarities to H&M, Mango or Topshop,

it offers a higher degree of fashion more quickly and frequently than its competitors.

Zara accounted for 65.9% and 70% of the net sales and earnings before interest & taxes, respectively,

for the fiscal year 2006. As of January 2006, Zara operated 852 stores, which includes 129 new

openings from last fiscal year, having a total selling area of 1,000,000 square meters. Zara achieved

a 41% Return on Capital Employed, during fiscal 2005. Zara has mastered a mixture of attractive,

traditional styles and fashion which appeals to its customers and also has a higher flexibility in

sourcing than most of its competitors, which gives it an edge over the others. It can also protect its

gross margin better than its competitors which have longer lead times. This provides Zara a

competitive advantage.

Increasing revenues and net income

The company's net income for 2005 was E803.2 million ($971.5 million), increasing at a CAGR of

25% from E259 million in 2000. Inditex recorded revenues of E6,740.8 million (approximately $8,152.9

million) during the fiscal year ended January 2005, an increase of 21.1% over 2004. Revenues have

increased at a CAGR of 20% for the period 2002-2006.

The consistent increase in revenues over the years will provide the company with a strong base and

enable it to undertake new ventures going forward.This would further lead to good investor confidence

and would therefore, enhance the shareholder's value.

Weaknesses

Weak international presence of other brand concepts

In 2005, the Zara chain contributed 65.9% to the total sales, while all the other concepts put together

amounted to only 34.1% of the total sales. While Zara generated 68.9% of its revenues from the

international market during fiscal 2005, the other concepts focused mainly on the Spanish market.

Kiddy's Class generated only 14% of its revenues from the international markets; Pull and Bear

33.2%; Massimo Dutti 45.6%; Bershaka 41.5%; Stradivarius 17.4%; Oysho 31.8%; and Zara Home

23%. Apart from Zara, the company's other brand concepts including Kiddy's Class, Pull & Bear,

Massimo Dutti, Bershka, Stradivarius, and Oysho do not have a global appeal.

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Inditex

SWOT Analysis

The company has not been laying stress on opening the other stores apart from Zara in other

locations, because of which the revenue generation is highest from Zara stores as compared to

other stores. The revenues of the group might see an increase in the near term if equal attention is

paid to other outlets in other regions. Dependence on a single brand limits the company's revenues

and growth.

Overdependence on the European market

As of January 2006, Inditex operated 3,113 stores in 64 countries across the globe. The company

operated 1,461 stores (including 31 franchises) in Spain alone and another 724 stores (including

124 franchises) in the other European regions. Spain contributed to 43.1% of the company's revenues

during fiscal 2006 and the other European regions accounted for 38.7% of the total revenues.

The company is heavily dependent on Spain and the European markets for its revenues, thus making

it highly vulnerable to economic, political or social change taking place in these markets (especially

Spain).

Opportunities

Expansion in the Italian market

Zara has been expanding in Italy and plans to open roughly 15 stores every year. It is gaining

recognition amongst Italian consumers, who are highly fashion conscious.The company is expected

to operate more Zara stores in Italy by 2013 than in France or the UK. The untapped Italian market

presents strong growth potential for the company.

Growth in online retail spending

Online retail spending is expected to increase from $102.1 billion in 2006 to $144 billion in 2010, a

CAGR of 10%. By 2010, 71% of online users are likely to shop over the internet as compared to

65% in 2006. By 2010, the internet will influence about half of total retail sales, compared to 27% in

2006. The company doesn't sell it products online. Growth in online retail spending would enable

the company to earn more revenues from its online websites. US online retail sales are expected

to grow annually by 17% through 2008. Inditex markets its products through www.inditex.com. A

positive outlook in the US online and catalogue retail market would boost the company's revenues.

Continual growth in the retail apparel industry

Women's retail clothing sales in the US are forecast to expand 2.1% per year during 2004-2009 to

reach $ 137.5 billion. In addition, the intimates and sleepwear segments is expected to advance at

an above-average pace through 2009. The sales are primarily expected as a result of a shift towards

dressier apparel, sports clothes and premium fabrics. The positive outlook for the apparel sector is

likely to increase the demand for the company's offerings and help boost its topline growth.

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Inditex

SWOT Analysis

Growth in the Asian retail sector

Countries such as China offer a large and growing market for consumer goods. Rising income levels

and sustained economic growth is expected to improve the purchasing power of consumers in these

countries. In the period 2006-10, retail clothing sales are forecast to grow at a CAGR of 11.9% in

China. Inditex forayed into the Chinese market by opening Zara store for the first time in Shanghai

and Beijing in 2007.

Entering China offers the company an opportunity to diversify its revenues, which are heavily

concentrated in Europe.

Threats

New avenues being utilized by competitors

The company's competitors are determined to seek out cheaper manufacturing locations in order

to offer consumers lower prices. This is resulting in a shift in apparel manufacturing from Turkey to

Eastern Europe. The main advantage of Zara's vertical integration is not its internal production, but

the frequent feedback from store staff to design. Only if this feedback is truly effective, will Zara be

able to sustain higher manufacturing costs than its competition, in the future. Furthermore, the

competitors are reducing their lead-time, and if the competitors overtake Zara in this regard, then

Inditex would face a reduction in revenues and loss of market share.

Increasing labor costs in Europe

Europe is the primary market for Inditex, accounting for nearly 84% of the company's revenues.The

region has been witnessing an increase in labor costs. For example, the UK government increased

the adult minimum wage rate from £5.05 to £5.35 per hour in October 2005. The rate for those aged

18 to 21 years will be increased from £4.25 to £4.45 per hour and the rate for workers aged 16-17

years would increase from £3 to £3.3 per hour. An increase in labor costs could adversely impact

the company's margins.

Counterfeit goods

The proliferation of counterfeit goods and accessories is adversely affecting the sales of branded

accessories. According to Global Congress on Combating Counterfeiting, more than 5,000 incidents

of counterfeiting and piracy activities worldwide were recorded across the globe. In total, seizure of

more than 1.41 billion counterfeit items valued at more than $4.13 trillion. Counterfeiting is more

prevalent in fashion accessories such as watches, shoes, and handbags and these goods are

increasingly finding place in various retail shops. Low quality counterfeits reduce consumer confidence

in the products of the company. More importantly, what differentiates the products of companies

such as Inditex from competitors is exclusivity. Widespread counterfeits reduce the exclusiveness

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Inditex

SWOT Analysis

of the company's brands. Counterfeits not only deprive the company of revenues, but also dilute its

brand image.