Debt-free Zara looks beyond pain in Spain

Retail sales in Spain are down around six per cent and the textile industry has lost 70,000 jobs since last year, but investors can retain some hope for Spanish clothing retailer Inditex.

Even in a climate of enormous economic uncertainty and with a slumping home market, 20 of 29 analysts polled by Reuters Estimates have a "buy" or "outperform" recommendation on the stock.

Operating in a discretionary market and with Spain in dramatic slowdown, Inditex might be expected to suffer.

But analysts cite its lack of debt, tight control of the production process, geographical diversification, long-term growth prospects and attractive valuation as reasons to invest.

"Quality and safety at a good price," Goldman Sachs called the stock in a note earlier this month which added Inditex to its "conviction buy" list.

The company is best-known for its fast-to-market Zara brand, targeting the price-conscious consumer. Its model of high-speed delivery of almost real-time designs is so famous it has been cited by Harvard Business School as a case study.

While Spanish competitors like Adolfo Dominguez book sales falls of over 70 per cent and clothing manufacturers like the makers of Lois jeans go to the wall, Inditex has kept up rapid expansion abroad.

A core strength is iron-like distribution control: Every piece of Zara womenswear sold in nearly 1,500 stores worldwide passes through this cavernous distribution centre at the group's headquarters in the eucalyptus-clad hills of northern Spain. A row of tartan coats awaits shipment to Kuwait while fur-trimmed bodywarmers are destined for Colombia. The same black dress is off to stores in Mecca and Miami.

Also giving Inditex flexibility in difficult times is a rapid response to trends. A vast white space, scattered with racks of clothing, lies in a different part of the complex. This is where every item of Zara clothing is designed.

A French-speaking Inditex employee chats on the phone to a Zara store. The instant feedback on trends and sales is passed on to designers, who adjust patterns accordingly, creating a constant stream of new designs. Already Europe's biggest clothing retailer, outselling Sweden's H&M, Inditex's path of aggressive expansion abroad has propelled sales so it now vies for the top slot in apparel and accessories with Gap Inc. of the US.

But while Inditex stock has lost around a third of its value since the beginning of the year, it has traded in line with Spain's blue-chip index and outperformed other leading retailers by around six per cent.

A factor supporting Inditex so far has been diversification: Its expansion into the savings-rich economies of the Middle East and Asia has cut Spain's weighting in total sales to around 35 per cent from about half of all sales five years ago. Inditex says this figure will continue to fall.

"The international expansion means that although we sell much more in Spain, its relative percentage will go down. That will continue to happen in following years," said an Inditex spokesman.

Founded by a railway worker's son, Amancio Ortega, who started his business in the 1960s making dressing gowns in a garage in La Coruna, northern Spain, Inditex's retail empire now comprises more than 4,000 outlets in 71 countries.

The group reported this year's first-half net profit of €406 million last month, more than double that booked for the same period in 2004, with sales up 11 per cent at 4.56 billion.