Inditex wins the war of margin: beats H&M with highest profitability since 2014

Revenue is vanity, profit is sanity, cash is king. The volume is, less and less, the great goal of the global giants of the fashion sector. After Retail Apocalypse has set the alarms of analysts, the new battle of giants is played in the field of margin. And Inditex is, for now, winning the war for the recovery of the lost margin.

In the last quarter (from August to October), the Spanish group managed to improve its gross margin by three tenths compared to the same period of the previous year, up to 60.8%. This is the most profitable period of the year for the group and, therefore, the evolution of the margin in this period is decisive for the margin war.

“Efficiencies have allowed operating expenses to be kept under strict control during the first nine months of 2019,” the company said in a statement sent to the National Securities Market Commission (Cnmv). The increase in margins also happened at the same time as a reduction in inventories for the second quarter in a row.

From 2014 to 2017, when practically no one was paying attention to profitability, Inditex was repeatedly losing margin during the third quarter. In this period of 2014, the company’s gross margin stood at 61.2%, almost one point less than a year earlier. This rose to 60.1% a year later, to 59.7% in the third quarter of 2016 and 59.4% to the same period of 2017.

In 2018, the group changed its evolution: in the third quarter of that year, margin recovered by more than one point, up to 60.5% of revenue. In the third quarter of 2019, as explained in the results made public yesterday, Inditex has achieved its highest profitability since 2014, with a margin of 60.8%.

However, the recovery achieved in 2019, of three tenths compared to the third quarter of 2018, is moderate. And it is preceded by an equally moderate evolution of this indicator in the preceding quarters.

In this sense, in the fourth quarter of 2018 Inditex’s margin improved only 0.15 points compared to the same period of the previous year; in the first quarter of 2019, 0.6 points, and in the second quarter of this year, it dropped, with a fall of 0.23 points.

The evolution is, however, better in the case of Inditex than in that of its competitors. Inditex’s gross margin exceeds exactly ten points that of its rival, the Swedish H&M, which in the third quarter of 2019 reached a margin of 50.8% (half a point more than in the same period of the previous year). It should be noted, however, that the fiscal year of H&M goes from December to November, so the strong quarter for the group in profitability is usually the fourth.

Despite the good evolution of the margin in the third quarter of 2019, H&M hadn’t had a positive evolution in the previous periods: in the second quarter, margin of the group fell by 1.1 points, after rising only 0.1 points in the first quarter of the year.