Ready, steady, go! Inditex and H&M race for leadership

On 20th of June 2011, Inditex´s market capitalization briefly surpassed H&M’s on before closing a fraction below its rival’s, with both valued at about €38.8bn ($56bn). Shares in the Zara´s owner have gained almost 6 per cent over the past

six months, while H&M’s have fallen by a similar amount.

Soon after this landmark, largely commented by analysts worldwide, H&M´s market capitalization was Swedish krona 335,979,616,000, slightly over the Inditex´s one, set at €39,070,349,472, according to data from the FashionUnited Top 100 Index. It is well worth a line to remember that Inditex overtook Gap as the world's number one fashion retailer in 2008 and that it has taken other three years to surpass H&M.

But racing to hold the largest market price is not the only competition that both fashion giants have been involved lately. In a tight duel for reaching the first the coveted title of the largest world´s fashion retailer, Inditex and H&M have taken similar measures but with a different twist. Thus, while both companies have largely externalized their production in an era characterized by clothing chains have been hit particularly hard because they are also facing higher costs of raw materials such as cotton and rising wages in Asian, Inditex has suffered less than HM because it buys a larger proportion of its garments in Europe and north Africa, where wage increases have been much lower than in Asia. And both, retail analysts note, say they are unwilling to raise prices to pass on rising costs to their consumers, “which is slowly nibbling away at both companies’
margins.”

The online battle has also been a win for the Spanish textile emporium as Inditex is opening its different brands to the digital market place whereas H&M is not seeing yet the massive response it waited for its online store.

Both companies are well acknowledged on the importance of diversification. Inditex owns 8 different brands ranging from high-end accessories (Uterqüe) to acclaimed home wear (Zara Home) and is unstopping opening new stores around the Globe. Having taken the same path, H&M has preferred to set a solid ground with its flagship H&M before testing the waters with higher segment oriented COS. Recently the Stockholm based company has also ventured in to the home wear market with a still timid yet modern and economic range.

But competition is not confined to the high street. Inditex posted a 10 per cent rise in first-quarter net profit as its expansion into fast-growing emerging markets such as China helped to offset sluggish demand in its home market while Sweden’s H&M, which makes a larger proportion of its revenues in Europe, missed forecasts with a 2 per cent rise in same-store sales in May. As per Reuters data, strength in emerging markets and a lack of exposure to rising Asian wages helped Inditex deliver a 10 percent rise in quarterly profit to outperform fashion rival H&M which missed forecasts.

"A good set of results from Inditex. A bit more worrying from Hennes," said Santander analyst Rebecca McClellan, who has an "overweight" rating on Inditex shares and an "underweight" recommendation on H&M. Meanwhile, Liberum Capital analysts said in a recent research note that Inditex's online drive could add 1.8 percent to like-for-like sales this year, and 3 percent next year.

Inditex and H&M shares have recovered from losses earlier this year as cotton prices have come off their highs. However, while Inditex has beaten the STOXX Europe 600 retail index by 14 percent, H&M has outperformed by just 3 percent. Inditex shares trade at 20.5 times forecast earnings, compared with 21.8 times for H&M.

Finally and just to have a better picture of the ‘pole’ positions in this singular race, some data for comparison:

• The Spanish company started in La Coruña, Spain, in 1975 with the first Zara, the group´s flagship. The brainchild of Amancio Ortega employs 100.138 people, working for eight different brands. In total, Inditex its present with 5,221 stores in 78 countries spread on Asia, Africa, Europe and America. On the other hand, H&M was established in Västerås, Sweden in 1947 by Erling Persson. Today H&M operates in 41 markets and has 87,000 employees working in their 2.300 stores set in 41 different markets.
• Inditex has increased its turnover in over a 50% for the past five years, going from the euro 8,196 m of 2006 to its current euro 12.527 million. In the same period, H&M started stronger, with a turnover of euro 8,751.82m in the fiscal year 2005/06 and surpassed its rival´s yearly sales in 2010 with euro 13,875.74m.
• Zara´s owner net profit in 2010 was 1.18 billion euros, compared to H&M´s euro €2.11 billion.
• None of the fashion giants disclose the actual number of garments they sell yet close sources highlight that while Inditex is seeing an important increase in this section thanks to its online stores, H&M relies on other initiatives such as its collaborations with well known designers.

Angela González-Rodríguez