Zara Fast Fashion Case Study Solution
1. With which of the international competitors listed in the case is it most interesting to compare Inditex’s financial results? What do comparisons indicate about Inditex’s relative operating economics? Its relative capital efficiency?
Even though H&M follows a strategy which differs significantly from Inditex’s approach it is the closest competitor from the financial point of view. H&M differs from Zara because it outsources all of the production, it is more price oriented and spends more money on advertising. But both companies are based in Europe, are fashion forward at lower price retailers, and have a strong international expansion strategy. Exhibit 6 indicates that the financial results of Inditex and H&M seem to be very comparable. However, a closer analysis reveals that Inditex has enjoyed a competitive advantage in operating metrics over H&M.
Some comparisons of financial and commercial parameters will help to understand the relative operating economics of Inditex (all numbers in € Millions). 1. ROIC = Return on Sales x capital turnover.
Inditex: 27.24% H&M: 24.16%
Inditex was the most profitable firm, measured by ROIC. Return on Invested Capital is a key measure of a company’s profitability that focuses on the true operating performance of the company.
2. Operating Margin
Inditex: 21.7% H&M: 13.1%
The operating margin can be used as a measure of each firm’s capital efficiency. It shows that Inditex has a greater power to earn a profit per each Euro of sales than H&M. Inditex has a higher operating income by keeping cost of goods sold and operating expenses low.
For example Inditex has a lower staff to store ratio which keeps the amount of money needed to be paid as wages low.
Staff to Store Ratio:
Inditex: 20,81 H&M: 29,76
Additionally the company spends lower advertising expense than H&M.
3. Current ratio = Current AssetsCurrent Liabilities Inditex: 854834 =1.023 H&M:
Even though H&M follows a strategy which differs significantly from Inditex’s approach it is the closest competitor from the financial point of view. H&M differs from Zara because it outsources all of the production, it is more price oriented and spends more money on advertising. But both companies are based in Europe, are fashion forward at lower price retailers, and have a strong international expansion strategy. Exhibit 6 indicates that the financial results of Inditex and H&M seem to be very comparable. However, a closer analysis reveals that Inditex has enjoyed a competitive advantage in operating metrics over H&M.
Some comparisons of financial and commercial parameters will help to understand the relative operating economics of Inditex (all numbers in € Millions). 1. ROIC = Return on Sales x capital turnover.
Inditex: 27.24% H&M: 24.16%
Inditex was the most profitable firm, measured by ROIC. Return on Invested Capital is a key measure of a company’s profitability that focuses on the true operating performance of the company.
2. Operating Margin
Inditex: 21.7% H&M: 13.1%
The operating margin can be used as a measure of each firm’s capital efficiency. It shows that Inditex has a greater power to earn a profit per each Euro of sales than H&M. Inditex has a higher operating income by keeping cost of goods sold and operating expenses low.
For example Inditex has a lower staff to store ratio which keeps the amount of money needed to be paid as wages low.
Staff to Store Ratio:
Inditex: 20,81 H&M: 29,76
Additionally the company spends lower advertising expense than H&M.
3. Current ratio = Current AssetsCurrent Liabilities Inditex: 854834 =1.023 H&M: