If fast-growing Zara’s reality gets tougher, other retailers face greater challenges ahead.

(Bloomberg Gadfly)—Even Inditex SA can’t defy gravity forever.

The Spanish owner of the Zara fashion chain is still delivering the sort of sales growth rivals can only dream about.

Same-store sales rose 10% in the year through January, the fastest rate in 14 years. By contrast, many competitors are struggling to generate growth on the same basis.

But the gross margin, the difference between the price at which Inditex buys in and then sells on goods, shank to less than 55% in the fourth quarter, the lowest for almost eight years. Inditex is No. 50 in the Internet Retailer 2016 Europe 500.

If life is tough for this superstar, it will be even harder for its less stylish rivals.


Inditex blames the contraction on adverse currency movements. Without this, the gross margin would have increased last year, and the margin should be stable this year, according to the company.

Like all apparel retailers, the Spanish chain is being pressured on three fronts.

As women’s love for clothing wanes, the market remains extremely competitive, forcing retailers to keep prices keen and styles sharp.

Meanwhile, online rivals are multiplying, with upstart brands such as Boohoo.com Plc (No. 166 in the Europe 500) nipping at its heels. Even Amazon.com Inc., No. 1 in the Internet Retailer 2016 Top 500 Guide, wants to break into fashion. It’s not clear the U.S. giant will succeed, but it could cause havoc in the market as it tries.

The rising dollar is also hurting retailers who pay their suppliers in Asia primarily in the U.S. currency. Price rises will be necessary to recoup the higher sourcing costs—but that will be tough when demand is weak.


Inditex should be better-placed than its peers to ride all this out. Its fast fashion model allows it to get the hottest styles into stores within weeks. When women do want to spend, that should ensure its Zara brand is near the top of the list.

The group also has far less exposure to the strong dollar than its peers. About half of Inditex’s clothes are made close to its headquarters in northwest Spain, Portugal and North Africa. It only sources about 30% of its products from Asia. That compares with about 80% at H&M (No. 77 in the Europe 500), and the vast majority of the garments sold by Associated British Food Plc’s Primark.

Inditex shares trade at about 26 times estimated earnings, a steep premium to the Bloomberg Intelligence European apparel peer group’s average multiple of 21.

That’s understandable, given the retailer’s superior sales growth, smaller dollar exposure, and healthy cash generation—net cash climbed 15% in the year to 6.1 billion euros.

That all gives Inditex plenty of firepower to cope with further turbulence in the clothing market, but there’s little room for a fashion faux pas.


The retailer needs to convince investors that it can defend or elevate margins, as well as expand sales. Then it really would be leaving rivals in the shade.

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