Online shopping

Zara owner has $10 billion to shop online

Zara’s logo is displayed on a window, at one of the company’s largest stores in the world, in Madrid, Spain April 7, 2022. REUTERS/Juan Medina/File Photo

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LONDON, May 18 (Reuters Breakingviews) – Inditex (ITX.MC) has a chance to get revenge on its online rivals. Despite a painful pandemic, the 64 billion euro fast-fashion retailer has amassed a war chest of more than 9 billion euros. Generally, these profits will accrue to the shareholders. For 38-year-old president Marta Ortega, buying a sick online enemy like 9 billion euros Zalando (ZALG.DE) might make more sense.

Inflation weighs heavily on Ortega’s Spanish outfit. Since January, the owner of Zara’s share price has lost more than 25% as investors worry that consumers are cutting back on purchases of handbags and shoes. Next (NXT.L) boss Simon Wolfson expressed similar concerns about discretionary spending in fashion and home decor. Germany’s Zalando went further and said its most cost-conscious customers were simply not interested in buying flashy togs.

Hoarding is part of Inditex’s crisis management playbook. The company is leaning on its surprisingly plump balance sheet to spruce up supply chains, revamp tired stores and open new ones. Excess funds are distributed sparingly to investors via special dividends.

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Ortega has reason to be bolder. Thanks to its hyper-efficient operations, the owner of brands like Massimo Dutti and Pull&Bear operates with an EBITDA margin of 25%, compared to 19% for its rival H&M (HMb.ST). Even with the specter of inflation, sales are expected to grow 5% per year for the next five years.

Eliminating a competitor and integrating its digital know-how could boost this growth once inflation subsides. Zalando’s online retail platform, which specializes in selling inexpensive clothes and shoes, has grown its revenue by an average of 23% per year over the past five years. But now it looks cheap. Since January, Zalando shares have halved. After drawing net cash, Inditex is trading at around 9 times its forecast EBITDA for the next 12 months. Zalando, which traded at up to 30 times forward EBITDA in 2019, is now around the same level, comfortably its lowest valuation since its IPO eight years ago.

A swoop would still be a U-turn. To date, Inditex’s growth strategy has been organic, regularly opening new stores in established markets such as the United States. A sudden surge in inflation gave his young boss a reason to take a calculated risk.

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BACKGROUND NEWS

– The chief executive of British retailer Next said on May 5 that he feared discretionary spending on clothing and household goods could be hurt by inflation.

– German online shopping platform Zalando on May 5 reported its first year-on-year decline in quarterly sales since its inception in 2008. Co-CEO Robert Gentz ​​said the main problem was that “people just don’t like to buy fashion”.

– The CEO of Britain’s second-largest supermarket group, J Sainsbury, said on April 28 that shoppers were “watching every penny” in response to the biggest cost-of-living squeeze since the 1950s.

– The net cash of Zara’s owner, Inditex, increased by 24% in 2021 to reach 9.4 billion euros.

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Editing by Ed Cropley and Oliver Taslic

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