Zara's Latest Fashions Will Be a Post-Covid Hit

(Bloomberg Opinion) -- Don’t be fooled by red replacing black as this season’s color at Zara-owner Inditex SA.

The Spanish fast-fashion behemoth reported its first loss since it went public in 2001 after shutting stores during Covid-19 lockdowns worldwide. But nimble retailers will still prosper as economies open back up again, and Inditex is among them. In fact, with a big investment plan to bolster online sales, the company could well emerge even stronger than before the pandemic.

The world’s largest fashion retailer is also aggressively overhauling its store network to focus on more muscular flagships. It has already been closing smaller outlets, while opening fewer, larger stores for the past few years. This will accelerate over the next two years, with between 1,000 and 1,200 stores closed, many belonging to Inditex brands other than Zara, such as Pull&Bear, Oysho and Stradivarius. The aim is to transfer their profit contributions to bigger shops or online.

There are important costs related to that transformation. The first-quarter net loss of 409 million euros ($465 million) included a 308 million-euro charge for closing stores. And Inditex hasn’t been completely insulated by the retail dislocation. Net sales fell 44% in the three months from Feb. 1 to April 30 due to the coronavirus impact.

But Inditex’s business model came into its own during the pandemic. Most garments are ordered within the fashion season, and the company, which gets about two-thirds of its revenue from Europe, has kept its supply chain tight. About 60% of products come from manufacturers in Spain, Morocco, Portugal and Turkey.

In early March, the company scaled back purchases when it saw how the pandemic was developing. In early May, it sped them up again to make sure it had enough playsuits and flimsy blouses on hand for June and July. The strategy worked. Inditex actually ended the first quarter with 10% less stock, an impressive feat when other retailers have been saddled with a mountain of unsold spring and summer garments.

At the same time, its online business thrived thanks to efforts including the introduction of radio-frequency-identification technology that tracks where every maxi dress and balloon-sleeve blouse is. This enables online orders to be fulfilled from wherever the stock is, be that in warehouses or stores. As my Bloomberg News colleagues have noted, when shops were closed, Inditex was able to redeploy stock to its digital business. Online sales rose 95% year-on-year in April.

To capitalize on this trend, Inditex will spend 1 billion euros between now and 2022 to bolster its internet sales, and a further 1.7 billion euros upgrading its stores and further integrating them with its digital platform. Shops will become distribution hubs as well as places that customers can browse and buy products in real life. The aim is for more than 25% of sales to come from digital channels by 2022, up from 14% in 2019.

Despite its strengths, Inditex has not been immune from the pre-Covid-19 pressure on the apparel retail sector, with women generally buying fewer clothes and cheaper rivals, such as Boohoo Group Plc and Associated British Foods Plc’s Primark chain, nipping at its heels. That means the strategic blueprint for the next few years is not without risk.

Zara's Latest Fashions Will Be a Post-Covid Hit

Zara is not the cheapest clothes retailer, and in tougher economic times the chain could prove too pricey for some cash-strapped consumers. What’s more, it could be a tricky time for Inditex to put its faith in big flagships if people emerging from lockdown shun larger stores, malls or city centers. And rivals are not giving up. Even fusty British retailer Marks & Spencer Group Plc said it aimed to speed up its supply chain, including using factories closer to its U.K. market.

But thanks to its strong balance sheet, Inditex should be able to stay ahead. The company had net cash of 5.8 billion euros at the end of the first quarter. While Covid-19 has upended retail, some things should stay the same, including Inditex’s superstar status.

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

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

©2020 Bloomberg L.P.

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