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Zara Owner Pulls in $1.3B 2020 Profit, Even with 30% of Stores Closed

Fast fashion giant Inditex saw net profit of 1.1 billion euros ($1.3 billion) for the period from Feb. 1, 2020 to Jan. 31, 2021, plunging drastically from the 3.6 billion euros ($4.6 billion) earned through 2019, a nearly 70 percent decline. The Spanish company, most known for its Zara brand, saw 2020 net sales of 20.4 billion ($24.4 billion) euros, also down from 28 billion ($33.5 billion) euros.

In a Nutshell: It’s been a story of store closures for European-based retailers like Inditex throughout much of the Covid-19 pandemic amid extended lockdowns, with the impacts rolling into 2021. Inditex and its 6,829 stores worldwide were no exception.

About 30 percent of Inditex’s stores, including Pull & Bear, Massimo Dutti, Bershka, and Stradivarius among others, were closed on Jan. 31, with 52 percent subject to restrictions.

Store and online sales in local currencies decreased by 15 percent in February 2021, with 21 percent of stores closed. And between March 1-7, with 15 percent of the company’s stores closed, sales were down 4 percent year over year. Excluding the five more significant markets with mandated closures (Germany, Brazil, Greece, Portugal and U.K.) sales registered growth of 2 percent.

Inditex expects almost all stores to be open by April 12.

In total, Inditex opened 111 stores in 29 markets throughout the year, while also 751 “smaller and older stores” on target with the company’s transformation plan to shutter 1,200 stores in favor of investing in flagship locations that serve both in-store and online consumers. Flagships in London, Barcelona, Berlin, Moscow, Paris and Amsterdam have been refurbished to include more digital- and mobile-friendly offerings, while new flagships were opened in Beijing, Mexico City and Bogota, Colombia.

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It is notable that one union has recently accused Inditex of “disguised layoffs” as part of the store closures, in that while the company says it is providing all affected staff with new positions matching their old contracts and positions within 25 kilometers, 40 percent of the new positions were outside the province where the worker was previously employed. Additionally, hours were reportedly slashed.

During a pandemic where retailer-supplier relationships were put on the hot seat, Inditex made it a point to guarantee payments for orders as per the original terms, not cancel any orders and endorse financial support initiatives for suppliers.

Specifically in Spain, the number of local suppliers increased to 6,384 and they invoiced the group more than 4 billion euros ($4.8 billion).

Inventory decreased by 9 percent year over year, with Inditex saying that the integrated management of online and store inventories was one of the highlights of the year. The retailer cited the rapid deployment of the Integrated Stock Management System (SINT), available in 5,777 stores across 89 markets, as the reason it could fulfill online orders worth over 1.16 billion euros ($1.4 billion) from its stores.

The strategic plan was first initiated nine years ago, but Inditex said it has now rolled out RFID inventory-tracking technology across all its brands. During the pandemic, the system enabled the Zara owner to seamlessly meet demand from its stores with flexibility and efficiency, “leveraging a single, digitally integrated ‘stockroom’ to respond to its customers’ evolving needs.”

At the heart of the integrated sales system is the Inditex Open Platform (IOP), a hybrid cloud-based digital replication of every phase of the fashion giant’s business model. Currently at 80 percent, the platform will be fully deployed by the end of 2021, the company said.

The virtual building adapts for each brand and its needs, integrating the entire product lifecycle and enabling constant interaction, feedback and adaptation. The open and modular platform allows all areas of the company to adapt their processes for customer demands in real time and react to their preferences. The IOP can generate technological solutions by means of microservices adapted for each phase of the business process, bringing agility and versatility in a digital environment.

The company leveraged its response capabilities, specifically its online channels and agile logistics capability, to adapt to the new environment, with the number of online orders per hour surging 57 percent, and peaking at over 400,000.

Inditex credited its active and continuous cost management throughout the pandemic with driving a 17 percent reduction in operating expenses. In parallel, gross margin stayed at 55.8 percent, despite the restrictions across the store network. In local currencies, gross margin growth increased 170 basis points to 57.6 percent of sales (and 257 basis points in the second half).

Inditex continued generating cash to reach 7.6 billion euros ($9.1 billion) in liquidity by close of 2020.

In a statement, Inditex also highlighted its sustainability acceleration across brands, with the company reaching its first major milestone by surpassing its 2020 target of having 25 percent of garments marketed under the “Join Life” label. Join Life distinguishes items made using more sustainable materials or processes, and more than 35 percent of its garments carried the Join Life label in 2020.

This initiative, which acts at the beginning and end of the product lifecycle, drove growth of 91 percent in the use of more sustainably grown cotton, to 73,874 tons, and led to the completion of the rollout of the take-back program designed to give used clothing a second life or to be recycled.

Inditex also says it has embraced specific science-based targets (SBTs) and reiterated its commitment to exclusively using sustainable raw materials by 2025.

Net sales: Inditex generated net sales of 20.4 billion euros ($24.4 billion) in 2020, reducing the year-on-year decline to 28 percent when accounting for foreign exchange impacts. The Zara parent reeled in 28 billion euros ($33.5 billion) in sales in 2019.

Against that backdrop, online sales registered growth of 77 percent in local currencies, to more than 6.6 billion euros ($7.9 billion) over the full year, with growth of over 100 percent during certain periods of the year as stores were closed.

Net earnings: For the full year, Inditex was able to reach a net profit of 1.1 billion euros ($1.3 billion). The net income was carried by a bounce back in the second half of the year, where profits reached 1.3 billion euros ($1.55 billion).

2020 profits dropped 69.4 from the 3.6 billion euros ($4.6 billion) that were earned in the year prior.

CEO’s Take: In light of these results, Inditex’s executive chairman, Pablo Isla, said, “Inditex as a company is stronger today than it was two years ago, with a unique business model and a global, flexible, digitally integrated and efficient sales platform, which places us in an excellent position for the future,” adding that “the digital transformation strategy initiated in 2012, which is built around the integrated store and online sales platform, has demonstrated correct.”