Inditex wins war on margin: closes first most profitable quarter since 2013

Margin, margin, margin. Few words have been repeated so many times in Inditex conferences with analysts like this one. The battle was tough and the environment was complex, but the largest fashion distribution group in the world is beginning to win the war that has choked itself the most in recent years, and the one that most worries investors. The parent company of Zara closed the first quarter with a gross margin of 59.5%, the best one in this period since 2013, with which it has accumulated three consecutive quarters of improved profitability.

Specifically, the gross margin of Inditex rose between February and April to 3,524 million euros, 6% more than in the same period of the previous year, reaching 59.5% of sales, with an increase of 61 basic points.

Its margin is also much higher than rivals such as H&M, which in the second quarter of last year (the most comparable by calendar, since it covers from March to May) stood at 56.1%. The Swedish group has been reducing its profitability for seven consecutive quarters. Gap's, on the other hand, does not reach 40%.

If, years ago, the strength of Inditex and its rivals was measured by their growth rates and their rate of openings, the margin is now at the center of the debate. This is the variable that is most impacted by the digital transformation that the sector faces and by the increasingly bitter war of promotions and discounts.

In the last conferences with analysts, Inditex has hastened to deny both effects. On the one hand, Pablo Isla has reiterated on more than one occasion that the contribution of online sales is not dilutive. On the other hand, in the last presentation of results, the president surprised the sector saying that "we have responded to a volatile and complex environment without discounts".

An affirmation outside the usual script in the presentations that was in fact a call to the calm: in spite of the Black Friday and the increasingly more usual mid seasons, the control of expenses and the planning of inventory continues to be in the center for Inditex.

Inditex began to worsen its margin in 2012, when it began its transformation plan 

The group's inventories stood at 2,923 million euros on April 30, only 1% more than at the end of the first quarter of 2018. Inditex has reduced operating expenses by 16% compared to the same period of the previous year, to 1,842 million euros.
 
The margin of the group in relation to sales began to fall in 2012, just when the company launched its transformation plan, which has shaken its commercial network with closures, extensions and reforms. But after years of decline, the group began to turn around at the closure of 2018, improving the margin to 56.7% of sales.
 
 
And what about sales?
But while fighting the battle against the margin, what happened to the rest of the indicators? After growing only 2% in the third quarter of last year and 4.5% in the fourth, sales have advanced by 4.8%, far from the double-digit growth that the group registered until 2017, during its years of intense expansion with retail.
 
The benefit, on the other hand, accelerated significantly regarding previous quarters, with a rise of 9.9%, the highest increase since the first quarter of 2017, although discounting the impact of the application of the new accounting regulations (IFRS 16 ) the advance would have been somewhat smaller, of 7%.