Financial Analysis
FINANCIAL ANALYSIS
About The Company
ZARA, a Spanish brand was set up in 1975 in A Coruña, Spain by Amancio Ortega. In 1985,
Amancio has set up Inditex and brought ZARA and seven other retail lines under the roof of
Inditex. ZARA, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, ZARA HOME
and Uterqüe are the eight retail lines under the group Inditex. ZARA is the major contributor
of sale to Inditex. It contributes as much as 64.8% to the total sales of Inditex. The group's
success and its unique business model, based on innovation and flexibility, have made Inditex
one of the biggest fashion retailers in the world.
Due to the research limitations we can’t get the complete financial data of ZARA as the
company is not listed. Hence we’ll be analysing its parent company’s financial data as ZARA
is the major contributor to the sale and profits of the company Inditex.
Inditex is a company that is an amazing combination of core values and hard work and
dedication. This combination is the prime asset of the company on the basis of which the
group claims to continuously provide the quality of work by imbibing the combination of
core values and hard work in to the new employees who join the company. By 2011, the
family of Inditex comprised of 110,000 employees which increased by 10,000 employees.
Inditex has spread its presence in to 82 markets across the five continents around the globe. It
opened its inaugural stores in Australia, Africa, Taiwan and Azerbaijan. Inditex has 5527
stores by the end of financial year 2011. 483 stores have increased in the year 2011. ZARA
had 1830 stores on the whole by the end of the financial year 2011. Around 113 new stores of
ZARA were opened in the year 2011. This means that the commercial area has increased by
250,000 square metres, with the result that on 31st January 2012, it amounted to more than
2,800,000 square metres.
In the same way growth is seen in the headquarters where the design, creation and production
development centres as well as the bulk of in-house manufacture and logistic activities are
situated. The headquarters and corporate head office were to be extended by 70,000 sq.m.
Logistic platforms were also extended which lead to substantial increase of jobs. The group
was also expanding on its online platforms like the other retail chains. The group has enabled
its presence in European countries. ZARA has also entered the US and Japanese online
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Financial Analysis
markets along with the European markets. This expansion will continue till the group
acquires its presence in all the online markets in reality.
Inditex has started a new strategic environmental plan called sustainable Inditex 2011-2015.
The key point of the new plan is to put up Eco-efficient stores. Group plans to build and
design new outlets which perform at highest efficiency standards, efficiency rational
consumption as well as the use of certified environmental-friendly materials, smart water and
card board recycling process and waste sorting. Social responsibility is another key point of
the group’s philosophy. The group is in thought of implementing this new strategy in its
entire stores worldwide by 2020.
As mentioned earlier the group Inditex is build upon core values, principle and hard work and
discipline, its employees has accepted two of the core principles without a question. They are:
(i) zero tolerance of breaches of its code of conduct & (ii) empowerment of its teams to
improve conditions throughout the supply chain, articulated in a clear commitment to gradual
enhancement of social conditions and the creation of jobs and social wealth.
Not all but a few lines of group use 100% organic cotton. Animal skin and hair (fur) is a strict
no. Inditex is collaborating with several programmes such as BCI (Better Cotton Initiative),
LWG (Leather Working Group), The CEO Water Mandate, Textile Exchange as part of its
strategy sustainable Inditex.
Corporate Governance
Good corporate governance refers to the administrators and managers responsible for
governance acting diligently, ethically and transparently in performing their functions.
Corporate Governance Regulations Of Inditex
“They consist of:
— Social Statutes, approved by the General Shareholders’ Meeting in July 2000, with various
subsequent modifications, the most recent having been approved by the General meeting held
19 July 2011.
— Regulations for the General Shareholders’ Meeting approved by this body at its 18 July
2003 meeting and modified at General Meetings in subsequent years. The most recent
modification of this regulation was approved at the General Meeting held 19 July 2011.
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Financial Analysis
— Regulations for the Board of Directors, approved by the Board of Directors in July 2000.
After various modifications, the most recent was approved by this body at its 13 July 2010
meeting.
— Internal Regulations for Conduct for Inditex and its company group with regard to
subjects related to the Securities Markets, approved by the Board of Directors in July 2000; it
was written at the Board of Directors meeting held 13 June 2006.
— Internal Code of Conduct and Code of Conduct for Inditex External Manufacturers and
Suppliers, approved by the Board of Directors on 23 February 2001, the latter being rewritten
at the meeting of the 17 July 2007.
— Internal Directive on Responsible Staff Practices for the Inditex Group, approved by the
Board of Directors on 13 June 2006. During 2011, Inditex has continued with practical
application and consolidation of the changes made to the above-mentioned standard so as to
adapt it to the Unified Code of Good Governance, maintaining nearly complete compliance
with recommendations of the cited Code.”(Inditex Annual Report, 2011)
Inditex corporate governance is carried out through the following institutional and
operational bodies and mechanisms: There are six corporate governance bodies namely The
General Shareholders Meeting, The Board of Directors, The Audit and Control Committee,
The Regulatory Compliance Committee and Management and The Ethics Committee. There
must be transparency and information for the good governance which is maintained by
Inditex.
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Financial Analysis
FINANCIALS
The below table shows the net sales, cost of goods sold, gross profit and net profit. All these
are supposed to be increasing every financial year.
year
2009
2010
2011
11084
12527
13793
4756
5105
5612
6328
7422
8180
1322
1741
1946
ratio
Net Sales
(mn €)
COGS
(mn €)
Gross Profit
(mn €)
Net profit
(mn €)
Table 1.1
Sales, COGS & Profits
14000
In Million Euros
12000
10000
8000
6000
4000
2000
0
2009
Net Sales
11084
COGS
4756
Gross Profit
6328
Net profit
1322
2010
12527
5105
7422
1741
2011
13793
5612
8180
1946
Graph 1.1
All the values above are in million Euros.
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Financial Analysis
GROWTH
The growth ratios enable us to understand the overall growth of the company. Here I’ve taken
growth figures of 3 consecutive financial years. The determination of any growth ratio is
done by the following procedure.
[value of present year – value of previous year]
Growth (%) = ---------------------------------------------------------- X 100
Value of previous year
The below table shows the sales growth, profitability growth, assets growth and debt growth.
The sales, profitability and assets growth should always be positively increasing. This shows
that the company is doing well. The debt growth must be negative because the debt growth
should decrease for the company to run profitabily.
year
2009
2010
2011
Sales Growth
6.16%
13.39%
10.11%
profitability
4.75%
31.69%
11.77%
Assets Growth
6.87%
7.17%
17.88%
Debt Growth
-81.99%
-83.81%
-82.50%
ratio
growth
Table 1.2
The below graph clearly depicts the growth for previous three years. The sale growth has
been increasing positively. In 2011, there has been 10.11% growth in sales. Even the
profitability growth has increased by 11.77% in the year 2011. The profitability growth for
the year 2010 was 31.69%. Due to this the huge reinvestment of capital in business was
possible. As a result the assets growth in the year 2011 has increased by 17.88%. The debt
growth is in negatives i.e. -82.50%. All these clearly show that the company has been doing
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Financial Analysis
well in the previous year and is expected to do well in future also. Increased sales and assets
and decreased debt shows that the financial condition of the company is good.
Growth
40.00%
20.00%
0.00%
-20.00%
-40.00%
Sales profitability
Growth
growth
Assets
Growth
-60.00%
2009
Debt
Growth
2010
2011
-80.00%
-100.00%
Graph 1.2
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Financial Analysis
PROFITABILITY RATIOS
The gross profit ratio must be as high as it can recover the fixed and marketing expenses. The
higher the Gross Profit Ratio, the better, as that reveals the company is doing well. Similarly
the Net Profit Ratio must also be higher. The standard range that is considered for Operating
Profit Ratio is from 75% -80%. Hence even this ratio must be high for the benefit of the
company. ROA: The higher the percentage, the better, because that means the company is
doing a good job using its assets to generate sales. ROE: The higher the percentage, the
better, as it shows that the company is doing a good job using the investors’ money. ROI: The
higher the percentage, the better, as it shows that the invested money is being utilized
efficiently.
Profitability Ratios
Operating Ratio
ROI
ROA
ROE
Net Profit Ratio
Gross Profit Ratio
0.00%
20.00%
2011
40.00%
2010
60.00%
80.00%
2009
Graph 1.3
The above graph shows the profitability ratios of last three years. And below is the table
presenting the values for the various profitability ratio for past three years.
The values show that the Gross Profit Ratio has increased till 2010 and has a sudden fall in
2011. This is not a good sign for the company. The below might be the reasons for the
decrease of Gross Profit ratio:
Decrease in the selling price of goods, without corresponding decrease in the cost of
goods sold.
Increase in the cost of goods sold without any increase in selling price.
Unfavourable purchasing or mark-up policies.
Inability of management to improve sales volume, or omission of sales.
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Financial Analysis
year
2009
2010
2011
57.09%
59.24%
40.96%
11.93%
13.89%
14.10%
ROE
27%
32.41%
30.29%
ROA
16%
20.88%
19.80%
ROI
26.40%
32.17%
30.26%
Operating
78.56%
76.29%
76.36%
ratio
Gross
Profit Ratio
Net
Profit
Ratio
Ratio
Table 1.3
Over valuation of opening stock or under valuation of closing stock.
The Net Profit Ratio has been increasing gradually through the years. ROE and ROI
were more or less the same and have been increasing. That is a good sign for the
company’s efficiency. Whereas, ROA has increased in the year 2010 but has
decreased in 2011. But the decrease is very less. Hence it can be treated as almost
constant in 2010 &2011. Therefore it is a positive sign for the company. The
operating profit ratio is lying in the standard range of 75% - 80%. Therefore, on the
whole the company is doing well.
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Financial Analysis
LIQUDITY RATIOS
The liquidity ratios include the Current Ratio and the Quick Ratio. The Current Ratio
indicates company's ability to pay its debt over its business cycle. It must be ideally 2:1. The
higher the ratio, the more capable the company is to pay its obligations. The Quick Ratio
indicates company's short-term liquidity, i.e. the company’s ability to use its quick assets to
pay its current liabilities. The ideal ratio must be 1:1. A quick ratio higher than 1:1 indicates
that the business can meet its current financial obligations with the available quick funds on
hand. A quick ratio lower than 1:1 may indicate that the company relies too much on
inventory or other assets to pay its short-term liabilities.
YEAR 2009
2010
2011
1.365
1.71
1.94
RATIO
Current Ratio
Times Times Times
0.923
Quick Ratio
1.28
1.49
Times Times Times
Table 1.4
The above table shows the liquidity ratios of Inditex for last 3 years. The same figures are
shown in graph below.
Liquidity Ratios
Current Ratio
Quick Ratio
1.94
1.71
1.49
1.365
1.28
0.923
2009
2010
Graph 1.4
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2011
Financial Analysis
The values indicate that the current ratio has always been above 1 and has been increasing
and have been nearing to the ideal ratio 2:1. This shows that the company is capable of
paying its obligations without any difficulty. The Quick ratio for the year 2009 was below 1:1
but in the year 2010 & 2011 has gone above 1:1. This clearly shows that the company can
meet its current financial obligations with the available quick funds on hand.
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Financial Analysis
DEBT RATIO
The debt ratios include debt ratio, debt equity ratio and TIE ratio. All these ratios must be
low. The lower the ratios, the better the company performs. The low TIE is desirable. The
lower the debt ratio, the lower the financial risk for the company.
The below table and graph show the values for debt ratios for the years 2009, 2010 and 2011.
Debt Ratios
Debt Ratio
2011
Debt Equity Ratio
0.0007
0.001
2010
0.004
0.007
0.031
2009
0.052
Graph 1.5
year
2009
2010
2011
Debt
0.052
0.007
0.001
Equity
Times
Times
Times
Debt
0.031
0.004
0.0007
Ratio
Times
Times
Times
ratio
Ratio
Table 1.5
The above values clearly show that the debt ratio and debt equity ratio were very low and
have been decreasing through the three years. This indicates that the company has very
negligible debt which is good.
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Financial Analysis
DAYS SALES OUTSTANDING (DSO)
The other important ratio is days sales outstanding (DSO). Since, cash is very important in
the business, the collection of outstanding receivables as early as possible is advisable. The
days sales outstanding must be low.
The below graph shows the DSO for previous three years. In the year 2009 the DSO was less
but in the year 2010 it has drastically increased. However, in the year 2011 it has decreased
drastically. Hence as of now the company is maintaining low DSO which is beneficial for the
company.
Days Out Standing
80
70
60
50
40
30
20
10
0
Days Out Standing
2009
2010
2011
Graph 1.6
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Financial Analysis
COMPETITOR ANALYSIS:
The major competitor for ZARA is H&M. In strategy, merchandise designs, price and in
many other aspect H&M gives tough competition to ZARA. H&M has not been doing well
apparently. Looking at the key ratios like Net Profit Ratio, Gross Profit Ratio, Current Ratio
and debt equity ratio we can infer that the company is not doing that well but it’s not running
in losses either.
YEAR
2009
2010
2011
13.7%
14.7%
12.2%
54.3%
53.76%
51.3%
2.6 times
2.7 times
2.4 times
0
0
0
RATIO
Net Profit
Ratio
Gross Profit
Ratio
Current
Ratio
Debt Equity
Ratio
Table 1.6
The above table shows that the gross profit ratio and net profit ratio which are suppose to
increase year by year have decreased. The ideal current ratio is 2:1. Over here it can be seen
that it’s more than 2:1. That means the company still have the capacity to pay its obligations.
The debt equity ratio throughout the three years has been constant and is zero. This is a good
sign for the company as the company has zero debts. Over all the company is not running in
losses but it’s not in high profits either.
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Financial Analysis
PEST ANALYSIS
POLITICAL
>100 % FDI allowed by Indian
Government in retail sector. FDI would
be a great help as Indian market is an
open market. 100 % FDI will reduce the
conflicts over asymmetric investment.
>Political benefits from the Government,
depend upon the extent of participation of
organization in a political situation
>Complete Support from the parent
company, hence making the growth
easier.
>National government plays the role of an
International banker through membership
of International financial organizations or
either by granting subsidies is finance
based promotional activity.
ECONOMICAL
>Global expansion will provide the Firm
with a mix of location that may be better
able to endure downturns in any region.
>Indian work force works a lesser price
than the rest of the work force, hence
making them get better profit margins
SOCIAL
>India market has diverse culture and
society, so the company has to
acknowledge the difference and act
accordingly.
>Spending power has increased in India,
hence making the market more suitable
for ZARA.
>Western wear concept is catching up,
hence increase in the spending power
along with acceptance of Western culture
is a great combination for ZARA’s
success.
TECHNOLOGICAL
>With use of E-Commerce, websites are
increasing really at a fast pace in the
recent times. ZARA’s online expansion
would be really game changer.
>With great business strategies, ZARA
can use its contemporary trust worthy IT
service to perform well.
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Financial Analysis
SWOT ANALYSIS
STRENGTHS
WEEKNESSES
•20% of its merchandise is fast fashion
clothing.
•Stores located at prime locations of the
country.
•Visual Merchandise.
•good CSR & HR policies.
•Vertical integration system.
•stong communication network.
•consumer driven and store
management.
•Online presence is not stong yet.
•lack of Advertising.
•low in-store inventory.
•centralized production
•Old technology at point of sales.
OPPURTUNITIES
THREATS
•With FDI liberating the 100% retail
investment option ZARA can expand in
the country very easily.
•Growing online retail
•can experiment and expand into
various products.
•With FDI liberating the 100% retail
investment option ZARA's tough
competitor H&M can enter the indian
market.
•H&M- with similar stategy but much
more better designs.
• Its fast fashion strategy is being
adopted by many other firms.
• Major manufacturing unit being in
spain makes it expensive for the firm.
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Financial Analysis
Hi,
Good work. Do following:
Include financial strengths and weaknesses in SWOT,
Make graphs for competitor analysis
Add references
Add findings from director’s report
Add risk factors.
Please email it by 17th.
Rahul
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