Inditex formula to lose just €175 million in the Covid-19 quarter

Just 175 million euros. These have been the losses (excluding a €308 million provision) Inditex had between February and April, the worst quarter of the Covid-19 pandemic. While international rivals such as Gap losses have rocketed in the same period to more than 820 million euros with almost half of sales, the Spanish giant has managed to contain the red numbers. What is the secret of Inditex? Fast fashion is revealed as the key to Inditex’s ability to contain the impact of the coronavirus.    

Over the last few years, analists that have questioned the validity of the fast fashion model have been increasingly frequent. In 2018, Morgan Stanley published a devastating report that indicated an “inevitable long-term reduction” of Inditex, which was added two weeks ago by another from the same firm in a similar sense.    

However, the Inditex formula to avoid the impact of the coronavirus has been precisely the fast fashion and the flexibility in sourcing .As a result, in the first quarter of 2020, Inditex has reduced the cost of sales, that is, the cost of supply, by 42.8%, practically the same proportion as the group’s sales have decreased, by 44.3%.    

Between February and April, Inditex cost of sales stood at 1,374 million euros, compared to 2,402 million euros in the same period of 2019. The group’s sales stood at 3,303 million euros at end of period, compared to the 5,927 million euros in the first quarter of 2019, impacted by the forced closure of stores almost everywhere in the world to stop the Covid-19 pandemic.

While giants such as Primark had 2,100 million euros in stock in early June, Inditex has been able to reduce inventory by 10% at the end of the first quarter from the same period last year.

Inditex has reduced supply costs by 42.8% in the first quarter, in line with the drop in sales

The elements of the formula 

If the Spanish group had kept the cost structure stable (including supplies) compared to the first quarter of 2019, the company would have lost 1,888 million euros, compared to the 409 million it finally noted (175 million discounting the impact of the provision) .    

In just over a month and a half (as Isla recognized yesterday, the changes were implemented from mid-March) Inditex has managed to cushion its losses by 1,713 million euros.    

More than a billion are related to cost of sales. Sourcing has become Inditex’s main weapon against the coronavirus, but not the only one, since the group has also reduced its operating expenses by 21.4%, with special emphasis from mid-March, when the impact of the coronavirus crisis was already clear.    

If the Spanish group had kept its operating expenses in line with those of the first quarter of 2019, it would have lost 394 million euros more. However, the company has managed to carry out adjustments for this amount in items such as central services, logistics or personnel expenses. Although in Spain the group has ruled out filing a ERTE (or expediente de regulación temporal de empleo, as the temporary layoff plan is called in Spanish) and has assumed personnel costs during the state of alarm, in other countries it has opted for the different mechanisms introduced by governments.

Rental expenses are included within depreciation and amortization. Although the company has not specified whether, like many other retailers, it has stopped paying its rents during the state of alarm, Isla admitted yesterday that it has renegotiated with its landlords.

Finally, another of the elements of the alchemy of Inditex in the first quarter are taxes on profits, that don’t appy since the company fell into the red.

Provisions

Inditex has opted in this quarter to anticipate the impact with a new provision. The company includes a €308 million provision for the completion of the store optimisation programme (which includes to absorb up to 1,200 stores until 2021).  

In the first quarter of the last fiscal year, Inditex provisioned 287 million euros for the foreseeable impact of the expansion of the pandemic on the inventory valuation of the spring-summer collection. Taking into account the evolution of the group in the first quarter and its ability to contain the stock, industry sources consider that Inditex could have oversized the impact.