Battle of the Titans: Inditex Versus H&M More Differences than Similarities? Deborah Weinswig Managing Director, FGRT deborahweinswig@fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Zara and H&M are often spoken of in the same breath as the fast-fashion invaders that are stealing market share away from mass-market rivals in a number of countries. Yet, despite the similarities, we see some key distinctions between H&M and Zara s parent company Inditex. 1) H&M is largely not a fast-fashion retailer: according to a number of reports, H&M produces just 20% of its clothing ranges in-season, in contrast to 60% at Inditex. Similarly, only 32% of factories that H&M uses are located in or close to Europe, compared to 59% of Inditex s factories. 2) H&M s revenue growth is being supported entirely by new store openings, and its sales-per-store growth is negative. Inditex continues to report positive comparable sales growth and sales-per-store growth. 3) We see these distinctions as related. H&M s product offering is strongly focused on basic apparel items, and this provides it with less differentiation. 4) In the context of heightened fast-fashion competition, including from ultrafast-fashion retailers such as Boohoo.com and Missguided, we think H&M will continue to find it tough to maintain underlying sales growth. 1
Contrary to widespread belief, H&M is not a majority fastfashion retailer: only a minority of H&M fashion ranges are designed in response to in-season trends. Introduction: Inditex and H&M, Head to Head Zara and H&M are often spoken of in the same breath, as the fast-fashion invaders that are stealing market share away from mass-market rivals in a number of regions. Yet, we think there are some key distinctions between H&M and Zara s parent company Inditex, and in this report, we bring together some key metrics to put these two firms head to head. We focus on three themes in this report: H&M is not a majority fast-fashion retailer as is widely believed: only a minority of H&M fashion ranges are designed in response to in-season trends. Inditex has been growing much more strongly than H&M, and we believe this is due to Inditex s more comprehensive fast-fashion offering. Revenues by segment: we look at where these companies generate their revenues. Fast fashion is produced with short lead times in response to fashion trends, catwalk styles and consumer demand. It demands manufacturing in or close to the market proximity markets in which the product will be sold, to eliminate lengthy shipping times. Proximity markets: For products manufactured in proximity markets, Inditex is typically reported to have lead times of around five weeks although its corporate website claims it can get a product from design to sale in as little as three weeks, and the company is understood to be able to replenish stocks of existing designs in two weeks. H&M can get fast-fashion products to market in around two to six weeks, according to Morgan Stanley research cited in Business Insider. Asia-sourced markets: It takes between three and six months for H&M s Asian-sourced products to reach store shelves, according to the same Morgan Stanley research. The lead times at Inditex for Asian-manufactured garments are roughly similar. Readers may also be interested in our May 2017 report Fast Fashion Speeding Toward Ultrafast Fashion. 2
For the current fiscal year, analyst consensus is for eurodenominated revenue growth of 10.4% at Inditex and 4.5% at H&M. Fast Facts We begin with a comparison of some top-line figures. By revenues, Inditex is 14% larger than H&M. For the current fiscal year, analyst consensus is for euro-denominated revenue growth of 10.4% at Inditex and 4.5% at H&M. Figure 1. Inditex and H&M: Key Facts Last Fiscal Year Inditex H&M Revenues (EUR Bil.) 23.3 20.4 YoY Revenue Growth (%)* 11.5% 5.7% Gross Margin (%) 57.0% 55.2% Number of Stores 7,292 4,351 Year-End January 2017 November 2016 This Fiscal Year Consensus YoY Revenue Growth Estimates (%)* 10.4% 4.5% Consensus Gross Margin (%) 56.6% 54.3% * Euro-denominated. YoY = year over year. Source: S&P Capital IQ/FGRT A visit to any H&M store will dispel the notion that it is mainly a fast-fashion retailer: its shops are filled with rack upon rack of basics and staples. 1. H&M Is Not a Majority Fast-Fashion Retailer One of the most meaningful differences between Inditex and H&M and it is one that may come as a surprise to some readers is that H&M is not predominantly a fast-fashion retailer. According to a number of news websites, including WSJ.com, just 20% of H&M s product offering is fast fashion in other words, only 20% of its clothes are designed in-season in response to current trends. The remaining 80% of products are ordered months in advance. When we tried to verify this with the company, H&M neither confirmed nor denied this widely reported 20%/80% split. Inditex, in contrast, designs around 60% of its products in-season, according to research by Fung Business Intelligence. Indeed, a visit to any H&M store will dispel the notion that it is mainly a fast-fashion retailer: its shops are filled with rack upon rack of basics and staples, from plain shirts and t-shirts to chinos and hooded tops. A split of the factory locations used by the two firms gives a strong indication of how much is manufactured in-season and how much in advance: fast fashion must be produced in or close to the market in which it is sold (predominantly, Europe for Inditex and H&M), due to the long shipping times for orders from the more traditional Asian sourcing markets. While a majority of factories used by Inditex are located in or close to Europe, just under one-third of those used by H&M are in such proximity locations. 3
Figure 2. Inditex and H&M: Split of Factory Locations Proximity Locations vs Other Locations (%) Proximity Other 0% 20% 40% 60% 80% 100% Inditex 59 41 H&M 32 68 H&M data are for manufacturing factories only, excluding processing factories and fabric/yarn factories. Source: Company reports/fgrt Further distinctions include the following: Factories: H&M does not own factories, while Inditex is vertically integrated to a certain degree. In Arteixo, Galicia, where its head office is located, Inditex owns 11 factories focused on skilled work such as cutting out garment pieces, according to a 2013 Guardian report. Third-party factories then stitch such pieces into finalized garments. Inditex s own factories account for just 2% 3% of the company s manufacturing capacity, per the Guardian, while the Telegraph in 2014 stated that Inditex s own factories accounted for 5% of Zara products. In-house design teams: Zara alone employs around 350 in-house designers, according to sources such as Bloomberg and the Financial Times. Inditex s corporate website states that the group has design teams of over 700 individuals. H&M, on the other hand, has a much smaller design team, employing 160 designers, according to Fung Business Intelligence. 4
Figure 3. Inditex and H&M: Distribution of Factory Locations (%) We provide a more detailed breakdown of the factory locations of the two companies below. Africa, 5.1 Americas, 1.9 Turkey and Northern Africa, 15.6 US, 0.2 Asia, 39.3 Europe, 53.7 Europe, 16.3 Asia and Southern Africa, 67.9 H&M data are for manufacturing factories only, excluding processing factories and fabric/yarn factories. Source: Company reports/fgrt 2. Varying Performance Inditex is growing much faster than H&M. In the companies most recent respective fiscal years, Inditex grew euro-denominated sales at almost double the pace that H&M did. And the growth gap has widened in the first half of the current fiscal year: H&M saw sales per store return to negative territory in the year ended November 2016, where it remained in the first half of the current fiscal year. Inditex: In 1H17, Inditex grew total revenues by 11.5% year over year and comparable sales grew by 6%. H&M: In 1H17, H&M grew total revenues by 5.2% in euros, or by 8.6% in Swedish krona. H&M does not report comparable-sales growth. Total growth at both retailers has been supported by new store openings. To look at underlying growth, we chart the year-over-year change in average sales per store. This metric underscores the divergence in top-line performance between these two retailers. H&M saw sales per store return to negative territory in the year ended November 2016, where it remained in the first half of the current fiscal year. 5
Figure 4. Average Revenue per Store: YoY % Change Inditex H&M 9.7 9 7 5 3 1 (1) (3) (5) (7) 5.9 6.8 6.6 2.7 3.2 1.3 (2.0) (0.3) (4.3) (5.0) (4.9) 2012 2013 2014 2015 2016 1H17 Based on euro-denominated revenue per store. For H&M, this was converted from SEK at average annual exchange rates; Inditex reports in euros. Years reflect closest calendar years, so 2016 is the year ended November 2016 for H&M and the year ended January 2017 for Inditex. Source: Company reports/fgrt Even while H&M has seen sluggish sales growth, it has continued to grow its orders with suppliers very strongly. As a result, H&M is growing its inventory at a much faster pace than it is growing its sales. This glut of stock will likely pressure H&M s gross margin downward in the near term. In its nine-month report for fiscal 2017, H&M noted that aggressive markdowns were made over summer 2017, due to an excess of stock. H&M is growing its inventory at a much faster pace than it is growing its sales. Below, we chart the percentage-point difference between the year-overyear increase in inventories and the year-over-year increase in revenues: the higher the number, the more inventory the retailer is accumulating. We provide the supporting data in the tables directly below the chart. Figure 5. Inditex Versus H&M: YoY Inventory Growth Minus YoY Revenue Growth (%) Inditex H&M 21.3 17.7 8.2 0.3 3.4 1.2 2.6 2.7 8.3 4.6 (1.5) (7.9) 2012 2013 2014 2015 2016 1H17 Source: S&P Capital IQ/FGRT 6
Figure 6. Inditex: YoY Inventory Growth and YoY Revenue Growth (%) 2012 2013 2014 2015 2016 1H17 Revenue Growth 15.6 4.9 8.3 15.4 11.5 11.5 Period-End Inventory Growth 23.8 6.0 10.9 18.0 16.1 3.6 Source: S&P Capital IQ/FGRT Figure 7. H&M: YoY Inventory Growth and YoY Revenue Growth (%) 2012 2013 2014 2015 2016 1H17 Revenue Growth 13.6 7.7 12.2 15.5 5.7 5.2 Period -End Inventory Growth 13.9 11.1 10.7 23.7 27.0 22.9 Source: S&P Capital IQ/FGRT 3. Revenues by Segment Both Inditex and H&M are multi-banner groups, although H&M was traditionally a mono-brand retailer and launched its additional banners only in the 2000s. H&M launched Weekday in 2002, Cheap Monday in 2004, Monki in 2006, Cos in 2007, & Other Stories in 2013 and Arket in 2017. H&M does not split out revenues by banner. Zara continues to be the dominant banner at Inditex: it accounted for twothirds of Inditex s revenues in the year ended January 2017. Apart from Zara, the company splits out figures for Bershka only, as we chart below. Inditex s other banners are Massimo Dutti, Oysho, Pull&Bear, Stradivarius, Uterque and Zara Home. Figure 8. Inditex: Revenue Split by Banner (EUR Bil.) Zara continues to be the dominant banner at Inditex: it accounted for two-thirds of Inditex revenues in the year ended January 2017. Zara Bershka Other 5.91 3.92 4.36 1.49 1.56 4.86 1.66 5.40 1.88 2.01 10.54 10.80 11.59 13.71 15.48 2012 2013 2014 2015 2016 Source: Company reports/fgrt 7
The regional sales split is one area of relative commonality between the two companies. In total, Europe accounted for 64% of Inditex s revenues and 65% of H&M s revenues in the latest fiscal year. Figure 9. Inditex: Revenue Split by Region (EUR Bil.) Europe accounted for 64% of Inditex s revenues and 65% of H&M s revenues in the latest fiscal year. Spain Other Europe Americas Asia and Rest of World 3.24 2.58 2.91 2.45 2.17 2.27 7.65 8.01 8.72 4.20 3.00 9.70 4.83 3.48 10.75 3.55 3.53 3.71 4.00 4.25 2012 2013 2014 2015 2016 Source: Company reports Figure 10. H&M: Revenue Split by Region (EUR Bil.) Sweden Americas Rest of World* Other Europe Asia Corporate/Unallocated Franchise 0.28 0.22 0.95 0.26 1.21 1.69 1.88 0.33 0.33 1.49 2.21 0.47 0.51 0.48 0.65 0.92 1.96 2.25 3.10 3.41 9.96 10.43 11.42 12.29 12.44 0.76 0.77 0.79 0.81 0.86 * Including Russia and Turkey. Source: Company reports/fgrt 8
Key Takeaways H&M is largely not a fast-fashion retailer: a number of reports state that the company produces just 20% of its clothing ranges in-season, in contrast to 60% at Inditex. Similarly, only 32% of factories used by H&M are located in or close to Europe. At Inditex, this figure is 59%. These two retailers have been diverging in terms of growth. H&M s revenue growth is being supported entirely by new store openings, and its sales-per-store growth is negative. Inditex continues to report positive comparable-sales growth and sales-per-store growth. H&M s product offering is focused much more strongly on basic apparel items, which provides it with less differentiation in the market. We see these distinctions as related and that a strong fast-fashion positioning is supporting growth at Inditex. H&M s product offering is focused much more strongly on basic apparel items, which provides it with less differentiation in the market. We think H&M will continue to find it tough to maintain underlying sales growth, in the context of heightened fast-fashion competition, including from ultrafast-fashion players such as Boohoo.com and Missguided. We see Inditex as better placed to compete with such upstart rivals. 9
Deborah Weinswig, CPA Managing Director FGRT New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 deborahweinswig@fung1937.com John Mercer Senior Analyst Hong Kong: 2nd Floor, Hong Kong Spinners Industrial Building Phase 1&2 800 Cheung Sha Wan Road, Kowloon Hong Kong Tel: 852 2300 4406 London: 242-246 Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0)20 7616 8988 New York: 1359 Broadway, 18th Floor New York, NY 10018 Tel: 646 839 7017 FungGlobalRetailTech.com 10