Zara and H&M, the twin titans of fast fashion, are taking two very different approaches to how they manage inventory to bolster the bottom line.
Zara parent Inditex has been focused on reducing its inventory position, now down 19 percent from the year-ago first-half period, and relies on proximity sourcing and a single inventory position to fill a growing influx of online orders. Flexibility in order volume has allowed the apparel giant to quickly pivot to what is working while keeping operations lean.
“Inventory integration proved to be pivotal during this period,” the company said when reporting results this week, noting that online sales grew 74 percent in the first half ended July 31. Inditex said its supply chain “continued to operate normally” during the period, which stands in stark contrast to the disruption many other fashion retailers have experienced over the first seven months of the year.
H&M Group said a focus on selling more product at full price while containing costs will help it post a third-quarter profit, although it still projects a sales decline at a level it describes as “better than expected.” The firm has been struggling with a reported inventory glut of more $4 billion worth of goods.
Results at both firms continue to illustrate Covid-19’s bottom-line impact.
Net Sales: For the first half that started Feb. 1 and ended July 31, Inditex said Wednesday that net sales fell 37.3 percent to 8.03 billion euros ($9.48 billion) from 12.82 billion euros ($15.14 billion).
Its largest concept, Zara and Zara Home, saw sales decline by 37.8 percent to 5.53 billion euros ($6.53 billion) from 8.9 billion euros ($10.51 billion) in the year-ago period. Most stores across Inditex’s different concepts had reopened by the end of July. Shifting to a single inventory position has supported its performance in the period. Inventory was down 19 percent to 2.16 billion euros ($2.55 billion) from 2.66 billion euros ($3.14 billion).
“Collections for Spring/Summer were very well received by our customers. Our supply chain continued to operate normally due to the flexibility of our business model based on proximity sourcing and the single inventory position,” the company said, adding that the “flexibility of the business model has been key to the operational and financial performance.”
Gross margin for the period slipped slightly to 56.2 percent from 56.8 percent, while gross profit was 4.51 billion euros ($5.32 billion), down sharply from last year’s 7.28 billion euros ($8.6 billion).
The company launched online sales for Zara in the period in Argentina, Peru, Uruguay, Paraguay, Bosnia-Herzegovina, Albania and Algeria. In August, the start of the third quarter, Zara launched e-commerce in Chile, Northern Macedonia and Montenegro. September so far has seen Tunisia and Andorra open Zara web stores, with Costa Rica, Guatemala, Honduras and Nicaragua to follow by the end of this month.
In addition, sustainability and circularity are a key part of its strategy. A focus on sustainability in the supply chain, renewable energy, sustainable fabrics, eco-efficient stores and zero-waste recycling were key points Inditex noted in the period.
Earnings: The company posted a net loss for the first half of 195 million euros ($230.3 million), against net income of 1.55 billion euros ($1.83 billion) a year ago.
Inditex said it’s been “very active in the differentiation of its retail base.” It opened stores in 14 markets during the first half, bringing the total to 7,337 doors. In addition to Zara and Zara Home, other concepts include Pull&Bear, Massimo Dutti and Stradivarius.
By region, its largest geographical area by stores and online sales is Europe, excluding Spain, at 48.9 percent. Asia follows at 24.4 percent, then Spain at 14.7 percent and America at 12.0 percent.
The company said operating expenses fell 21 percent in the period and “have been very actively managed.”
Looking ahead, the company said its “unique business model” is driving a “rapid recovery in operations” going into the second half of 2020, as “online sales continue growing at a remarkable pace.”
Net Sales Estimate: H&M on Tuesday provided preliminary third-quarter results for the three months ended Aug. 31. The Swedish fast-fashion chain expects net sales to decrease by 16 percent in local currencies versus a year ago. Converting to Swedish krona, net sales fell by 19 percent to 50.87 billion ($$5.77 billion)
The company said sales reflect an impact from the Covid-19 pandemic, with about 900 of its more than 5,000 stores still temporarily closed. By the end of the quarter, a little more than 200 doors had yet to reopen.
Earnings Projection: The retailer said it expects to post a third-quarter profit, helped by “more full-price sales combined with strong cost control.” On a pre-tax basis, profit should be in the range of 2 billion Swedish krona ($226.9 million).
“As a result of appreciated collections together with rapid and decisive actions, the H&M group’s recovery is better than expected,” the company said.
H&M is slated to report third quarter results on Oct. 1. The full nine-period began Dec. 1, 2019 and ended Aug. 31.
At that time, it is expected that investors will learn more about cost-cutting efforts, and whether more full-price selling is due to fewer sales promotions and if it also includes a similar reduction in inventory levels. For the past two years, H&M has been battling an issue involving unsold goods, giving it a bad case of inventory bloat. In 2018, the clothing company was stuck with a $4 billion inventory problem resulting from sluggish growth, and last year it indicated a push to reduce discounting.