Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Women don’t want new clothes any more. There aren't enough hot new fashions. The weather's too warm.

The excuses have been coming thick and fast from apparel retailers to explain their poor performance. Inditex, in contrast, has once more shown them up.

The owner of the Zara store chain said Tuesday that sales rose by 16 percent, excluding currency movements, in the six months to July 31, with same-store sales up by 11 percent.

Crucially, sales excluding currency movements were up 13 percent between Aug. 1 and Sept. 18 -- a period when others, including rival Hennes & Mauritz, were warning of difficult conditions due to warm autumn weather.

Inditex's outperformance is down to several factors.

First, its business model enables it to quickly transform the hottest trends into high street hits within weeks. That means it can respond quickly to changing fashions, and periods of unusually hot or cold weather, where others are left flogging winter coats during a heat wave.

World Domination
Inditex's global reach has helped it to outperform rivals
Source: Company report

Inditex also makes about half of its clothes close to its headquarters in northwest Spain, as well as Portugal and North Africa. A further 20 percent is made in Turkey, leaving about 30 percent sourced from Asia.

Rival H&M sources about 80 percent of clothes from Asia, and since these are usually priced in dollars it's more vulnerable to the impact of a stronger dollar than Inditex.

Finally, Inditex has also been investing in its online business and sprucing up its stores, focusing more on big flagships in major markets. And, it has been keeping pricing stable. With cheap chic Primark expanding in Europe and the U.S., no retailer can afford to move too far from its discount base.

Founder Amancio Ortgega, Europe's richest person, is no longer chairman, but he continues to remain on the board and no doubt still influences the direction of the business.

Catch Me If You Can
Inditex's same store sales growth leaves other apparel retailers trailing in its wake
Source: Bloomberg Intelligence

It seems churlish to find fault in such a stellar performance.

But if there is one niggle, it's that profits are not expanding as quickly as sales, as all that investment takes its toll. Net income rose 8 percent year on year, lagging the level of sales growth. And the gross margin, the difference between the price at which a retailer buys and sells goods, fell by just over 1 percentage point in the first half.

Wrinkle in the Dress
Growth in earnings before interest and tax has slowed as Inditex invests in stores and online
Source: Bloomberg Intelligence

Still, Inditex is right to keep investing. Many retailers focus too much on cutting costs, and not enough on innovation to keep their brands and stores fresh.

Shares in Inditex trade on a forward price to earnings ratio of about 29 times, almost twice the sector average.

That looks deserved, given the sustained outperformance compared with other non-food retailers.

But the premium looks substantial enough for now until that final wrinkle -- earnings growth lagging sales growth -- is ironed out of that Zara frilled dress.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net