Why Zara’s Owner Should Be on Investors’ Shopping List

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Zara owner

Inditex

has developed an innovative way to manage its inventory, a move that has been overlooked by the market. The system is driving down costs and increasing profit margins, and that isn’t yet factored into the share price.

The world’s largest fashion retailer (ticker ITX.Spain) is expensive, fetching a high multiple of 27 times this year’s expected earnings, but it is valued in line with its peers.

The stock price already incorporates a host of positives—the potential for the expansion of stores, tighter cost controls, and according to FactSet, an attractive dividend with a 2% yield.

What’s new is the detail buried in the Spanish retailer’s full-year update about SINT, an inventory management system it is developing around the world.

A big cost for retailers is matching supply with demand across store networks. Get it wrong and excess merchandise is discounted or popular items aren’t on shelves. Both eat into profits.

SINT uses radio-frequency identification (RFID) technology to identify and track tags attached to its clothing, whether in warehouses or stores, making the merchandise part of a single inventory pool.

If a store or warehouse runs out of a product, others step in to fill the order. During the pandemic, merchandise contained in closed shops was located and shipped to customers, and the system is also used for Inditex’s e-commerce arm.

With a single warehouse model, Inditex centralizes inventory far more than peers and minimizes allocation risk, “which partially explains the perpetually low markdowns,’’ Aneesha Sherman, an analyst at Bernstein, wrote in a note, giving Inditex stock an Outperform rating.

“SINT will drive even further improvements in markdowns and distribution costs, creating a structural margin benefit that the Street had not priced in,” Sherman wrote. She forecast the shares, recently 28.28 euros ($33.37), could increase to €33.20. Invest Securities estimates a 24.4% rise, to €35.20.

The shares have climbed 25.72% in the past year and are up 1.8% over the past month, despite worse than expected earnings that saw annual profits plunge 70%.

Net profit of €1.1 billion for the 12 months through Jan. 31 was down from €3.6 billion in the prior period. This was on net sales of €20.4 billion, down from €28 billion. Much of the poor performance was due to store closures, and online sales were unable to make up for the lower sales.

Inditex, which also owns Massimo Dutti and six other retailing brands, has a market value of €88.1 billion and employs 176,611. The company has been led by Executive Chairman Pablo Isla in various roles for more than 10 years. He said in a statement that over the past year SINT has contributed to €1.2 billion of online sales and “has allowed Inditex to transition into a company that is more responsive, adaptable, and agile.”

Inditex is confident in its strategy of store and online integration, digitalization and sustainability, Isla says.

The business has come a long way from Zorba, its first clothing store. Founder Amancio Ortega opened Zorba in 1975 in the port city of La Coruna in Galicia in northwest Spain. The name clashed with a bar just a few streets away, so letters from the Zorba sign were used to create Zara.

The inventory system is not Inditex’s only catalyst for growth. Anne Critchlow, an analyst at Société Générale, said in a note that Inditex looks set to exit the pandemic with a “lower rent bill” after closing some stores. However, Bernstein’s Sherman said that going forward, Inditex will benefit from a possible expansion of store space and rapid online sales.

It might be time for investors to add Inditex to their shopping lists.