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Executive summary
The main objective of this thesis is to determine the value of Inditex´s share by conducting own valuation. Over the recent years, Inditex has demonstrated remarkable growth and continuously been expanding its operations year after year. Furthermore, Inditex has had a continuous increase in share value since being publicly listed in the Madrid stock exchange in 2001, until mid of 2007. However, from 2007 until today, the share price has plunged from 51 EUR to 25 EUR. Experts seem to disagree whether the huge decline is caused by external factors such as the current economic meltdown or internal factors such as a decrease in growth and lower expansion.

The valuation is based on thorough strategic and financial analysis in which I incorporate theories and models such as, PEST. Porter´s five forces, Porter´s generic strategies and Porter´s value chain, and CAPM. Furthermore, I analyze the firm´s historic performance, in which I base my future predictions.

The valuation is conducted by using DCF approach. My own estimated value of Inditex, on first of March, is 40 EUR per share. The observed share price on the IBEX stock exchange on the same date was around 30 EUR. Thus, my own estimated valuation was approximately 33 percent higher than market expectation.

Due to current economic recession and many uncertainties in the future, I also perform valuation based on different scenarios, best-case and worst-case scenario where I implement all possible risks and opportunities identified in strategic and financial chapters.

Table of Contents
1. INTRODUCTION ............................................................................................................................................. 2 1.2 PROBLEM STATEMENT ...............................................................................................................................................3 1.3 THESIS STRUCTURE....................................................................................................................................................3 1.4 DISCUSSION OF MARKET EFFICIENCY AND VALUATION.......................................................................................................5 1.5 DELIMITATION .........................................................................................................................................................6 1.6 STUDY DESIGN .........................................................................................................................................................7 1.7 CRITIQUE ................................................................................................................................................................8 2. INDITEX ......................................................................................................................................................... 9 2.1 HISTORY .................................................................................................................................................................9 2.2 SHARE INFORMATION ................................................................................................................................................9 2.3 OWNERSHIP, CORPORATE GOVERNANCE, AND PRINCIPAL-AGENT CONFLICT ........................................................................10 2.4 INDITEX´S PRODUCT PORTFOLIO .................................................................................................................................12 3. STRATEGY ANALYSIS .................................................................................................................................... 13 3.1 MACRO-ENVIRONMENTAL ANALYSIS ...........................................................................................................................13 3.2 INDUSTRY ANALYSIS ................................................................................................................................................17 3.3 INTERNAL ANALYSIS .................................................................................................................................................24 3.4 SUB-CONCLUSION – STRATEGIC ANALYSIS ....................................................................................................................35 4. FINANCIAL ANALYSIS ................................................................................................................................... 36 4.1 REORGANIZING FINANCIAL STATEMENT .......................................................................................................................36 4.2 PROFITABILITY ANALYSIS AND PEER GROUP...................................................................................................................41 4.3 CASH FLOW ANALYSIS OF INDITEX ..............................................................................................................................51 4.4 SUB-CONCLUSION – FINANCIAL ANALYSIS ....................................................................................................................53 5. VALUATION ANALYSIS ................................................................................................................................. 55 5.1 BUDGETING ...........................................................................................................................................................55 5.2 VALUATION ...........................................................................................................................................................63 5.3 MULTIPLES VALUATION............................................................................................................................................68 5.4 SCENARIO ANALYSIS ................................................................................................................................................71 5.5 SUB-CONCLUSION – VALUATION................................................................................................................................76 6. CONCLUSION ............................................................................................................................................... 77


Some analysts have pointed out that the further away Inditex moves away from Spain. Analysts disagree on whether this huge decline is caused by external factors such as the current recession. Inditex´s current situation makes it an interesting subject for value estimation based on detailed strategic and financial analysis.1. A failure in predicting future fashion trends can have severe consequences for a fashion apparel company. whereas other analysts point out that Inditex is a “healthy” company with a competitive business model and the decline in share value is solely due to the economic recession. because of its specified operational model. after a continuous increase in share value since being publicly listed in the Madrid stock exchange in 2001. due to short product circles. Inditex has changed the whole perception of business processing in the clothing industry with its alternative in-house fast-fashion model. in a market where a company’s performance is dependent on seasonal collections´ success or failure.1 It seems today that Inditex is passing a milestone in its development after experiencing continuous high growth for years. Hence. volatile demand.htm 2 . or internal factors such as a decrease in growth and lower expansion. However. the more it will lose its competitive advantages. Introduction The fashion apparel industry is sometimes categorized as one of most difficult industries to operate in. This brings up the question of whether Inditex is capable of retaining its high growth or if it will slowly begin to reach a maturity stage.businessweek. Inditex today is a global enterprise operating with more than 3.500 stores in 67 countries. 1 (04-09-2007) http://www. and it has recently exceeded GAP as the world’s largest retailer. a decline of almost 49 percent in only one year. After constant growth in the last 10 years. its share plunged from a highest of 51 EUR to a lowest of 25 EUR. its share value began to decline for the first time at the end of the year 2007. and fierce From the year-end of 2007 until the year-end of 2008. the Spanish fashion retailer Inditex is an extraordinary example of a company that is capable of constantly generating growth and continuously expanding its operations year after year.

I refer to the calculated value of Inditex based on my own subjective assumptions. and profit. Figure 1 . expenses. Valuation is never objective because it is based on subjective predictions on future sale growth.Structure of the thesis Introduction Strategic analysis Financial and peer group analysis Valuation Conclusion Source: own construction 3 . Financial information is divided into internal information that targets key actors within the company such as managers. By law. Calculated value can differ from market price if the information is different or interpreted differently. quarterly reports. External information in this regard means all publicly disclosed information available to external stakeholders and derived information thereof from external analysts. and the like.3 Thesis structure The structure of the thesis is demonstrated below. statements. and external information that targets external stakeholders. publicly listed companies are obligated to report required information to the market such as annual reports.2 Problem statement The considerations above lead me to the following problem statement: What is the estimated value per share of Inditex when only external information is applied? By estimated value per share.1. 1.

in a simplistic way. I choose two theoretic models when analyzing industry competition: Porter´s five forces theory.I am aware that valuation essays are often considered practical papers rather than research papers. Figure 2 – Applied theories and models in the thesis Applied theories and models in the thesis macro-environmental. Introduction Efficient market theory Inditex Principal agent theory Strategic analysis . Furthermore. Hence.Porter´s five forces . I will initiate the thesis with a short presentation chapter of Inditex and its retail brands. I choose to perform a PEST analysis that.PEST model . I employ Porter´s value chain framework to identify the firm´s internal resources and analyze whether the company possesses capabilities that create competitive advantage. and internal analysis. to fulfill the requirements of an academic research paper I incorporate following theories illustrated in figure 2. In the internal environment analysis. emphasizes macroenvironmental factors that drives development in the industry.2 In the macro-environmental analysis. I will address and point out possible interest conflicts regarding its ownership structure. (2005. p.Porter´s Value chain Valuation CAPM theory Source: own construction Hereafter I will perform a strategic analysis that includes industry.37) 4 . which examines a company´s competitiveness and how it chooses to position itself regarding other firms in the same industry. Subsequently I will perform a financial and peer group analysis in which I intend to accentuate Inditex´s operational activities and compare key growth and profit margins with the identified 2 Petersen.

p. In addition. according to modern finance. Lastly. arguing that all information is embedded into current prices and changes in prices are random. and thus arbitrage will eliminate any profit opportunities and drive prices back to fair value.337) 5 . p. (1969.6 Hence. or announcement of quarterly earnings. I infer on the achieved results. these theories are often categorized as the pillars of modern finance. I choose an appropriate valuation method to execute my own valuation. along with the CAPM5 theory. Hence. share issues. Furthermore. Furthermore. I will apply same-store analysis and examine Inditex´s FCF (free cash flow). depending on the amount of information available. in the conclusion. In this part. (1965. it is 3 4 Fama. I will use the DuPont method to disintegrate profit margins. 1. (2006.4 The efficient market hypothesis quickly grew popular and. In that relation. I will create different scenario analyses based on all possible future risks and possibilities that are not implemented in my own valuation. one must assume that today´s global stock markets will become more effective as financial markets grow and competition increases. p.17) Fama. In a highly global competitive market.33) 5 CAPM theory is addressed further in part 5. they generally assume that investors behave rationally and predictably.2. Together. which means that price movements will not follow any patterns and trends and past price movements cannot be used to predict future price movements. he categorizes market efficiencies into weak.3 Furthermore. I apply the CAPM model as my preferable theory. semi-strong. it became the most applied theories within finance and economics today.2 6 Brealey. Afterwards. stock prices are immediately readjusted to new public information such as merger plans. and strong. I will execute valuation analysis. and that all information is equally interpreted and acted upon.4 Discussion of market efficiency and valuation Eugene Fama developed the efficiency market hypothesis with the article “Efficient capital markets: A review of theory and empirical work”. The most difficult task when performing valuation is to create an appropriate budget scheme that represents realistic future development.peer group.

The valuation date is set to first of March 2009. which includes annual reports until and including 2007. markets are not completely effective because investors do not behave rationally to given information in terms of overconfidence and overestimation in a bull market. estimating fair value by analyzing all macro and internal factors is not completely objective because it is based on subjective assumptions. Studies have shown that regardless of available information. p. Below I have listed the most relevant delimitations that I have chosen not to incorporate in the project. (2008. modern finance market perception has received criticism from behavior economists arguing that markets are imperfect due to cognitive biases such as human “errors” and informative biases such as inabilities in interpreting market information. there must exist some anomalies. and quarterly reports until and including the third quarter of 2008.44) 6 . Current turbulences and fluctuations in global stock markets give weight on the argument that the markets are not completely efficient. 1. p. However.5 Delimitation Defining and writing a master thesis inevitably requires some delimitation due to irrelevance and limited resources.7 This entails that prices fluctuate much more due to these human biases than if the market was completely efficient. this questions whether a fundamental analysis contributes to creating a more efficient market or not. and pessimism and underestimation in a bear market.8 If my own estimated valuation is equivalent to the market price then the market should be efficient: whereas if my own valuation differs from the market. Nevertheless. Hence.impossible to beat the market with timing or expert stock selection. (2006.345) Niculita. and the only way to obtain higher returns is to take on more risk. I intend to estimate Inditex´s intrinsic value by analyzing all factors that affect the business without any cognitive or informative bias being included. On this basis. The year 2008 7 8 Brealey. as fundamental analysis is not completely objective.

it has a similar business and operational model for all of its brands. I do not take into consideration any acquisition possibilities. The thesis is a single-case analysis that focuses on one objective: the estimation of Inditex value. reports from analysts. There are mainly three types of study designs. quarterly reports. and media articles. I prefer using qualitative data. I mostly employ quantitative data when constructing the financial analysis part. I will solely use secondary data in this master thesis. the case study perspective was applied to answer the problem statement. Inditex is a public company and hence compelled to publish financial information required such as annual reports. but in the strategic analysis. The thesis is based on analysis from external information. Due to the limited scope of the project.has been difficult year for the world´s stock exchange markets.9 In the thesis. and how the problem statement should be addressed from a methodic point of view. there is a risk that the conclusion will differ from a valuation that includes the annual report from 2008. Therefore. This entails that only publicly available information is applied as earlier stressed in the problem statement. through diverse theoretical and empirical learning. I will analyze Inditex from single brand perspective instead of analyzing each brand for facilitation purpose. 9 Andersen. static studies. 1. and case studies. I use only secondary data and not primary data such as personal or telephone interviews. This implies that tax is set to a percentage of pre-tax earnings. (2008. Although Inditex consists of many brands. I will use financial databases. In the budgeting part. and other reports related to the firm´s operations. scholar books. where stocks in most industries have declined in value. Among other secondary data. p. dynamic studies.6 Study design Study design helps clarify the object of investigation. detailed tax issues are not included in the forecast.115) 7 . This thesis is a case study as I use Inditex as a case-object to answer the problem statement by applying relevant theoretic and empiric material. internet home pages.

which are not objective. 1. Infinacials receives its raw data from companies´ annual reports and it cooperates with analysts to create as fair value as possible. valuation.Infinancials. Both quantitative and qualitative information data in annual and quarterly reports must be categorized as subjective. Infinancials´ objectivity is more or less aligned with public company data. I combine my qualitative and quantitative data to get a comprehensive result. I believe that it tries to be as objective as possible because its credibility as a financial provider is based on its objectivity. reviews.10 Infinancials is a financial and valuation database that provides historical data. The full objectivity and credibility of the data is questionable. One must keep in mind that companies have an interest in making their annual reports as positive as possible. This is the fact that I need to be aware of when I apply results from Inditex´s annual and quarterly reports. My main data sources are historical annual reports. quarterly reports. analysis. when applying theory. Hence. I use well-recognized academic literature from respected scholars with high expertise within the field. Apart from these sources above.In the valuation analysis chapter. 10 (15-02-09) www. Another much applied data source is the Infinancials database. Hence. I use various news articles and financial reports from different media. Finally. Hence. and other financial information from Inditex and peer groups. emphasizing the good results and concealing the bad results. and estimates future performance for companies. I believe that my theory sources are highly valid and relevant. there is a risk that Inditex sets up a more positive outlook of the company than what it is in reality. I try to limit the use of this type of data as much as possible.7 Critique The data used in my study has been collected from various 8 . Therefore.

2. Inditex
In this part, I will introduce Inditex to the reader before actual analysis is initiated. This part will be brief because I prefer to implement relevant company information directly when necessary in the analysis.

2.1 History
Founded in 1975 and listed on the Madrid stock exchange in 2001, Inditex represents a unique success story on how a local Spanish company expands its business model around the world. Today, Inditex accounts for more than 3.900 stores around the globe, and in 2007, it opened 560 new stores.11 Its most famous retail brand is the apparel fashion chain Zara. Inditex was established in Spain when shirt-designer Amancio Ortega launched the retail chain Zara to produce and sell look-a-like fashion clothing at low prices. In the mid-80´s, customers opened their eyes to its collections and by the end of the decade, Inditex had opened around 80 shops in Spain. The success in Spain paved the path for Inditex to expand abroad, and in 1989, it opened its first shop abroad in Portugal. In the 90s, it opened shops all around Europe and in the beginning of 2000, it had turned into a global clothing retailer chain with stores in all continents.12

2.2 Share information
Inditex was listed on the Madrid stock exchange market at the beginning of 2001 where 26 percent of the shares were sold to institutional and private shareholders. Today it is listed at all four stock markets in Spain: Madrid, Valencia, Barcelona, and Bilbao. It has been listed at IBEX 35 and Eurostoxx since September 2001.

11 12

Inditex annual report, (2007, p.4) (01-01-2009)


Figure 3 – Inditex´s historical share price

55 50 45 40 35 30 25 20 15 10 01-06-01 01-10-01

Inditex´s stock price






















Source: (01-03-09)

Figure 3 shows Inditex´s historical stock development. At the end of the year 2003, the closing share price was around 16 EUR per share. Thereafter, the price of the share continuously kept rising from 2003 until 2007 were it peaked in October at 51 EUR.13 From the 2007 to present, the stock price has dropped to around 29 EUR per share, a decrease of approximately 43 percent. In the same period, the IBEX only fell by 26 percent.14

2.3 Ownership, corporate governance, and principal-agent conflict
The board represents a broad range of expertise with experience from different industry sectors and areas. Inditex had 64.154 shareholders at the end of 2007 and out of these, 60.434 were individual shareholders, and the rest were institutional.15 The ownership structure is showed in table 1.
Table 1 – Inditex´s biggest shareholders
Private shareholders Institutional investors Partler S.L. Gartler S.L. Total shares 24.987.213 228.743.124 57.872.465 311.727.598 623.330.400 percentage 4,01% 36,70% 9,28% 50,01% 100%

Source: Inditex´s annual report 2007, p. 219

13 14

(01-03-2009) (01-03-2009) 15 Inditex annual report (2007, p 32)



Amancio Ortega, the founder of Inditex, owns Gartler S.L. and Partler S.L. All shares are in the same class. Hence, Amancio Ortega holds the majority of the shares and he has the controlling voting rights of the company. This means that, even though the company was listed in 2001, the founder Ortega still has majority control of the company, despite not officially being active in day-to-day operations.

Theoretically, there should be a complete interest alignment between dominant and minority shareholders in terms of maximizing the firm´s profit, whereby all parties receive returns in accordance to the amount of invested capital. Nevertheless, studies have demonstrated that separation of ownership and control can lead to a conflict of interest between principals and agents,16 which in this example are the minority and dominant shareholders. Minority shareholders are the principals because they solely act as owners and Ortega is the agent because he both acts as an owner and a manager.17 It is necessary to address the fact that agency costs are not as obvious between dominant and minority shareholders as it is between shareholders and managers, because evidently, dominant shareholders bear interests in maximizing firm’s value, as they own majority of shares.

However, to some degree, interest conflict erupts when Amancio Ortega decides to sell out 40 percent of the company´s shares, but he still maintains majority shares and thus majority voting rights. The problem arises because minority shareholders bear interest solely in maximizing value, whereas Ortega, as the controlling shareholder can theoretically prioritize his own financial benefit, power, prestige, or career development at the expense of maximizing shareholder value.18 Another possible matter in this regard is the asymmetric information between Ortega, who knows every part of the firm´s operations, and the external minority shareholders.19 Minority shareholders need to be aware of this potential conflict of interests.

16 17

Jensen, (1976, p.4) I am aware that conventional principal agent theory defines principals as shareholders and agents as management but in this case, I adjust principal agent theory to dominant and minority shareholders. 18 Henrikse (2003, p.91) 19 Henrikse, (2003, p.92)


More information on its retail brands can be found on Inditex´s home page www. Bershka brand is mostly aimed at young females in the age group of 13 to 23.2. but differ in their customer segment targets. Inditex retail brands are showed in figure 4. p.inditex. with highly trendy apparel. The Osysho brand focus on lingerie garments for young women.21 Moreover. The style is casual with affordable prices. Inditex´s retail brands: Zara Pull & Bear Maximo Dutti Bershka Stradivarius Oysho Other Source: www. six apparel chains and one fashion in-home. mostly for the age group of 25 to 45. Other brand consists of the newly opened Zara Home. which specializes in fashion for the home. its most important retailer chain. The Bershka brand style is very fashionable.4 Inditex´s product portfolio Inditex consists of seven retailer chains.40) 12 . it starts by rolling out Zara and thereafter. Maximo Dutti brand targets mostly independent and cosmopolitan men and women with elegant and stylish clothing. When Inditex enters new markets.20 The chains are similar in 20 Due to limited length of the project. mostly from the age group of 14 to 21 Inditex annual report. While Zara aims at catching the trends for all ages. Pull & Bear attempts to focus on casual wear for young people. The Stradivarius brand is designed for the rapid and dynamic style for women from 15 to 25 who want a unique look by combining international avant-garde styles. Zara usually targets young people. Figure 4 – Inditex´s retail brands Zara is Inditex´s flagship and without doubt. Zara is its most profitable chain per store with average annual sale of more than 4 million euro per store. from the teenagers to around 45. other retail brands. I have decided to describe the different detail brands only briefly. It contributes to more than 66 percent of Inditex total sales. (2007. often colorful and aesthetic.inditex.

3. Strategy analysis This chapter is concerned with the strategic analysis of Inditex. Pull and Bear. where factors are divided into political. I chose to analyze Inditex as one entity.22 Inditex operates in 67 countries. economic. Figure 5 – Theoretic framework Macro-environment analysis Industry analysis Internal Analysis  PEST – model  Five Forces  Generic Strategy  Value Chain Source: Own construction Figure 5 above illustrates how the strategic chapter is constructed.However. p. The main objective is to identify and analyze internal and external factors that have an impact on Inditex and the fashion apparel industry. socio-demographic.65) 13 . 3. the Inditex group consists of multi-brands such as Zara. Maximo Dutti and so on. it is necessary to initiate by examining its strategic position with a brief external analysis. Most of its internal resources and competitive advantages are similar. and thus. separating all brands and conducting strategic analyses of each would not give us a better qualitative outcome. therefore.1 Macro-environmental analysis The macro-environmental analysis will be conducted through the PEST model. 22 Johnson (2006. to make the strategic analysis as informative as possible and avoid unnecessary complications. because Inditex´s strategic approach for all of its retail brands is very similar. As explained in previous chapter. and technological factors. This is a deliberate decision.

the quotas do not cover other regional countries.1. p. EU felt forced to impose import regulations in the forms of quotas from China. However. The new quotas are set to expire in 2009 and it is uncertain what will happen after new quotas expire.europa. Inditex is exposed to minimal political risk because of its global position. Inditex is very active in creating social projects in poorer countries and providing aid to emergency areas.24 23 24 (19-07-07) Inditex wishes to profile itself as a corporately responsible company and demands the same social responsibility from its partners and The most important incident regarding export and import quotas is the liberalization of the world clothing and textile market in 2005. such as possible export regulation as well as political stability within the regions that Inditex operates in. which signify that firms within the industry can easily move production into other Asian countries.pdf Inditex annual report (2007.105) 14 .68) Primary political factors may influence Inditex and the fashion apparel industry.3. To protect European apparel producers.23 The event led to over-flooding of importing apparel to Europe from China that was priced much lower than the European produced garments. Furthermore. This quota issue had some significance on Inditex because Inditex purchases raw textile from Asian countries. p.1 Political factors Figure 6 – Macro-environmental analysis P • Liberalization of Import quotas •Social resonsibility E •Customers more price-sensitive in recession period •Increasingly operating outside Spain to diversify risk •Weak dollar against euro benefits Inditex S •Limited growth in "old" Europe and North America •Potential growth in Asia and Eastern Europe T •Focus on tecnological processes • Implementation of new technologies Source: Johnson (2006.

p.28 However.29 3. because fashion apparel is a luxury product industry that is sensitive to global macroeconomic Economic factors Changing economical factors. will have a strong impact on Inditex and the industry.Inditex is a global apparel retailer with operations in all continents and hence. analysts have pointed out that Inditex´s high percentage sale share in the Spanish market to total market would turn out to be a liability for the company. 25 26 In this relation Spain withdrew its soldiers from Iraq in 2004 (05-02-09) www. the global economy experienced a profound economic recession that began in the financial sector and today seems to be spreading into all sectors. In 2008. To respond to the criticism. which indicates that raw material cost will increase in the future. In recent years. its political risk is highly diversified.marketsharepartners. A recession or a boom will have impact on the industry.pdf 27 (26-10-08) www.borsen. which is beneficial to Inditex since most of its raw material is purchased in American dollars.26 For many 28 Inditex annual report ( 15 . without doubt. which then is carried over to its consumers in lower prices.comMarketingStrategiesDekimpe. The last economical factor that can affect Inditex and the whole industry is currency risk. the Euro has grown strong against the American dollar. to be better prepared for a Spanish and European recession.27 Decrease in sales in Spain could hit the company hard. such as in Asia.reuters.1. the euro is expected to lose its strength over the dollar. Inditex has been diversifying its geographic market position by expanding outside Spain and EU.3 Socio-demographic factors Socio-demographic factors comprise the demographical development within Inditex´s operating markets.1. and the classification of its potential customers.25 3.216) 29 (16-01-09) www. This infers that people become more pricesensitive and more likely to spend money on low-cost brands rather than expensive brands. Inditex is known as a Spanish company and Spain is not currently involved in any politically controversial issues that could damage Inditex´s foreign operations.

almost everybody can afford Inditex´s price level because Europe has low span between rich and poor when compared with other geographical regions.33 The North American market is at first glance a lucrative market because of its of large population and high percentage of population that can afford Inditex. In 2003.32 The Asian middle-class is growing rapidly and increases in millions each year. Inditex could launch a new retail brand that could target older demographic In response to the changing EU demography. On the other side. p. It is expected that sales in fashion apparel will increase in the region because of amplified interest in fashion.18) Inditex annual report (2007.18) 33 (12-04-07) www. p. particularly in Asia and the Americas (Latin American and Caribbean). p. In 2003. an estimated 14 million of the population in Mexico could afford Inditex out of total population of 120 million. In recent years. the span between rich and poor is much higher in these regions.30 Growth possibilities are limited in “Old” Europe (West and South Europe) because of its aging population. Inditex has been penetrating Eastern-European countries where EU membership and implementation of the euro currency recently have increased wealth and purchasing power. In regions outside Europe. One of Inditex´s main competitors. Inditex is positioning itself as high fashion with medium prices because of the high transportations cost that are transferred directly to the customers.49) 32 Ghemawat. in some countries like Spain and Portugal. However. around 80 to 85 percent of the Spanish population could afford Inditex´s products.In Spain and most countries within EU. Furthermore. Eastern Europe is lucrative market for Inditex in the future because of increased purchased power and increased interest in fashion apparel. (2003. some of Inditex´s retail brands are reaching to their saturation point.php?id=6649768&infomedia 16 . purchasing power in the region is high among all demographic groups.finans.tv2. 30 31 Ghemawat.31 Hence. when global market starts to improve. H&M estimates that the Asian market for affordable fashion apparel could become as big as the European market within a few years. (2003. and less percentage of the total population can afford Inditex.

p. Inditex position is limited to progressive high trendy “pockets” along the east and west coasts and current growth possibility is considered low. Inditex is an exception to this notion because it handles almost all aspects in its supply chain. I will employ Porter´s five forces framework. the apparel industry is not an industry that requires a high level of technological expertise.4 Technological factors When compared to other industries. social and demographic factors are important to Inditex when focusing and defocusing on geographic regions. whether it is design. 3. Most apparel retailers outsource production to external suppliers and therefore do not need to deal with day-to-day technological production processes.35 3.2 Industry analysis After having completed the macro-environmental analysis. Markets in East-Europe and Asia are particularly important to focus on in the future because of increasing purchasing power and positive demographic development. As I will examine in more detail in my internal analysis.5-6) 17 . In retrospect. p. who its main competitors are and how the company gains its competitive advantage. Inditex has always been a pioneer in technological processes. distribution. From an early stage. it has been very efficient in implementing new technologies into all parts in the supply chain. On the contrary. In this part. (2003. (2008. I believe that technological progresses will not be a threat to Inditex. I now proceed to competition analysis. The idea is to examine the apparel industry and how the different factors are influence Inditex. I believe that technological progresses will be beneficial for the company because historically. or marketing.However. 34 35 Ghemawat.1.19) Gallaugher. especially in developing a communication platform between its headquarters and regional stores. the market is complicated because of preferences that don´t fit Inditex´s slim apparel design and intensified competition.34 Hence.

p. sophisticated information technology. competitors that outsource production have been creating unique resources through a broad network of suppliers. These unique resources.2. comprise of developed networks. this cannot be duplicated immediately. and effective distribution systems. In terms of the industry. which is not easy to duplicate. which will be explained in detail in the internal analysis. size.Figure 7 – Industry analysis Entry Barriers Buyers Competitors in the industry Substitutes Suppliers Entry barriers •High entry barriers due to brand. Inditex has slowly been building-up its unique resources for the last 20 years to respond perfectly to demand. customized vertical integration structure.1 Entry barriers Entry barriers into the fashion apparel industry are relatively high due to certain factors. (1980. 18 . with the objective of Inditex becoming the market leader.4) 3. network and unique resources •Threat from new entrants depends of current state of economy Substitutes •Inditex covers almost everything related to fashion •Relatively low threat from online retailers Suppliers •Inditex partly owns important suppliers to strengthen its bargain position •High volume and many suppliers increases Inditex´s bargain power and minimizes risk Buyers •Recession strengthens position in home market due to lower prices •Recession weakens position in foreign markets due to higher prices Competitors •Strong market position compared to peer group through unique market position •Alignment between overall strategy and operations Source: Porter.

Inditex´s multi-brand concept focuses on different customer segments such as age. society position. the biggest threat regarding substitute products is not directly related to the product itself. I believe that there are high entrance barriers for companies that wish to create a similar concept and achieve the same brand value. substitute products that can replace Inditex products do not pose an obvious threat to Inditex and other competitors in the industry. Through remarkable growth in recent years. However. sunglasses and the like) are also included. Inditex has been one of the pioneers in selling the latest fashion at bargain prices and hence. A more realistic threat for the industry is that Internet 19 . Hence. the other important factors regarding new entrants that can´t be neglected are the state of the global economy and the level of fashion apparel interest. The Inditex retail portfolio stretches widely from clothing to gadgets. However.2 Substitutes The threat of substitutes refers to new products that are capable of replacing existing products. Inditex today has become one of leading fashion apparel brands in the world with retail networks in most important cities around the globe. has been dismantling the notion that you should launch either high fashion with high-end prices or low fashion with bargain prices. and youth-trendy. new entrants will more likely hesitate to enter the market. 3. If the current recession ends quickly and the global economy becomes prosperous in the near future. lingerie. This gives the company large amount of publicity and credibility among customers that is not easy to match.Inditex and its competitors in the industry have been creating strong brand value. Fashion accessories (earrings. but rather to the sales channel. Furthermore. and culture.2. global purchasing power will increase and new entrants are more likely to see possibilities in the fashion apparel industry. and hence gaining market shares. Lastly. if the current economic recession continues. and covers almost everything within the fashion apparel industry: classic-stylish.

The retail shopping experience as a whole should not be underestimated. similar to the Amazon model. has not yet launched or seems to be planning online retail. Thus. and sewing to sub-suppliers. 3. Inditex has around 40 to 50 percent stake in the important printing.203) 20 . avoids market over-exposure and uniquely creates market differentiation.2.40 Competitive theory claims that a company can strengthen its bargaining position by increasing its number of suppliers. the online book retailer Amazon revolutionized the whole book retail industry by offering books on lower prices than traditional book retailer. truthful to its original physical store business plan. it totally controls its supply. dyeing. which acts as a social forum where people meet and interact. and people seem to enjoy the shopping experience. printing. I don´t believe that online sales channels pose a great threat to Inditex because its products can only be purchased in its own retail stores and not though wholesale. Most of the fabric dyeing is outsourced to firms in northern Spain that are partly owned by Inditex. In most cases.html 39 Inditex´s annual report. and sewing companies.37 Their retail stores could lose market shares to online stores. if you want to see and purchase Inditex apparel.38 Inditex.purchases will grow because of the lower expenses that are directly transferred to customers in the form of lower retail prices.41 36 In the mid-90s. you have to enter an Inditex retail store. Some companies within the industry are acknowledging the possibilities online and have expanded their sales channel with online stores. which is mostly dyeing. 38 (27-03-08) http://marketpublishers. (2007. Therefore.3 Suppliers Inditex employs vertical integration organization and outsources only a small part of its production. which in my opinion is the correct strategic move for the company. 37 Wholesale is defined as: sell of goods to merchants in large quantities for resale to consumers. because it gets less dependent on each. which gives them considerable decision control and better bargaining position in terms of prices. which is impossible when buying online.36 This particularly could be a threat to players in the industry that are operating with both retail stores and wholesale.39 Inditex had 1187 suppliers globally. Customers prefer trying out different garments before making the actual purchase.

4 Buyers External market conditions such as global economic fluctuations are a potential risk factor for Inditex and the industry.42 The accusations turned out to be false.ece 43 See part 5. and these specialize in customized sewing from special designs.24) Porter. operating with many suppliers makes it easier to stop doing business and allocate orders to other supplies if an ethical scandal of a similar scale should occur.4) 42 (01-06-06) http://business. Around 35 percent of suppliers are located in Asia. which could affect Inditex because it has more than one-third of its total sales in Spain43. Asian contractors mainly supply large. and standardized orders such as standardized t-shirts and jeans that don´t require fast lead times. simple. but it could have had huge impact on its operations if these turned out to be true. p.2. Inditex using child labor in its factories could have created bad publicity for the company that could have resulted in many of its traditional customers purposely boycotting its products. (1980.1. This depends on its duration and profoundness: how long the current recession will last. In 2006.2 21 .uk/tol/business/industry_sectors/retailing/article670351. The current recession can have an effect on market demand and further total sales. The company continuously presents itself as a corporately responsible company that creates social projects in poor countries. and how deeply it will affect people´s purchasing power in general. 40 41 Inditex annual report (2007. Therefore. The recession could strengthen Inditex´s position in the home market because of its low prices. Spain seems to be one of the countries in Europe that is most affected by the current recession. Inditex was thrown in a media storm when a Portuguese magazine accused one of Inditex´s subcontractors in northern Portugal of acquiring child labor. The geographical location is important because Inditex can minimize its leading times.More than half of its suppliers are located in Spain and northern Portugal.timesonline. 3. especially for high-fashion garments. Another reason to prefer many suppliers rather than a few is to avoid any kind of risk that might occur.1.

Hence.5 Competitors in the Industry In this part. the reader might disagree 44 Dutta. but they vary in terms of size. In other European countries and other continents. classic.2) 22 . and structure.2. which gives it a competitive advantage over local competitors in the crisis periods because customers will switch from highend priced to less expensive apparel.44 Figure 8 – Industry peer group The selected companies are all fashion-oriented trendsetters and market leaders within different market segments. effective control of the supply chain and the right pricing strategy. Inditex´s retail chains are price-leaders in the home market. Inditex cannot take the same price leadership position because of higher transportation costs. 3.Inditex is benefitting from the low transportation costs in Spain. Inditex claims to have obtained its competitive advantage through high fashion. the term “fashion” is highly subjective and interpreted differently into modern. I will examine Inditex´s position and competitiveness in the industry by conducting an industry rivalry analysis. (2002. whereas others operate in specific geographic regions on a smaller scale such as the IC Companies. I will create a price-to-fashion figure 9. and specifically how Inditex´s retail brands are positioned in the industry. p. Some are global apparel enterprises such as H&M and GAP. which can be directly canalized to customers though lower prices. I have used some limitations in designing the figure. To give an overview of how the companies position themselves. My definition of fashion is apparel that follows certain modes and trends that are constantly changing. Thus. Peer group in the fashion apparel industry: H&M GAP Benetton IC Company´s Esprit Next Polo Ralph Lauren Limited Brands Burberry Group Source: own construction It is difficult to categorize brands into price-to-fashion models for several reasons. business model. For simplicity. and youth fashion. First. The company could lose market share outside of its home markets to other lower-cost apparel retailers during the current crisis.

the purpose of the figure is to analyze Inditex´s position within the industry and examine whether there is an alignment between its overall strategy and operations. I have tried to set average global prices. 23 .on brand´s position in the figure. Inditex´s Spanish retail prices will be lower and Asian prices higher. However. Figure 9 – Inditex and peer group´s strategic positioning in the industry High price Burberry Polo Ralph Lauren Esprit Massimo Dutti Benetton Limited Brands IC Companys GAP Oysho Low fashion Pull & Bear H&M Bershka Zara Stradivarius High fashion Low price Source: Own construction with inspiration from Ghemawat. 23) 45 For instance. Second. I acknowledge that the figure is insufficient for us to draw any major conclusions because of the limitations mentioned above. whereas within the peer groups I combine all minor brands and try to valuate them as total averages regarding of price-to-fashion45. IC Companys comprises of many brands that could be categorized differently in the figure above. Third. prices tend to increase the further away Inditex operates from home. (2003. I include all of Inditex´s brands. p. Hence.

Inditex has differentiated themselves from its competitors by constructing and integrating processes that aims at optimizing lead times. I will address and analyze these unique resources in the next part.3 Internal analysis After having completed the industry and competition analysis. 24 . Taking a closer look at the figure. The value chain model is an excellent framework that identifies and analyzes all valuecreating activities within the company. This is not how other competitors are positioning themselves. I have adjusted the framework slightly to fit Inditex´s activities so that the analysis is specific to the firm. one can observe how Inditex successfully targets its retail brand as high fashion with low cost. I will conduct the analysis through Porter´s value chain framework. and how it has achieved its competitive advantage. 46 H&M financial position will further be analyzed in chapter 4. and continuously tracking the latest fashions. Inditex has gained its competitive advantage not only though market position. Giant apparels like GAP seem to be pursuing a different targeting strategy for its products.The figure above can help answer the question of how Inditex deliberately positions itself. compared to other groups in the industry. Most of its brands are within the high fashion with low cost segment. 3. The firm is positioned within the low fashion with middle price segment. The objective is to analyze the feasibility of its operational model and identify its internal strengths and weaknesses. H&M has been successful and generating high margins and seems to be pursuing same product strategy as Inditex: high fashion with low prices.46 This could indicate that the market is increasingly demanding high fashion apparel with low prices and Inditex has been gaining its competitive advantage by fulfilling market demand. I now move on to examine Inditex´s internal position. The only competitor that is positioned in high fashion with low cost segment is H&M.

777 Design • Minimizing product risk through flexible design and continous improvements •Communication with stores and market experts •Low percent unsuccessful collections Production and procurement •Fashionable garment production close to headquartes •Standardized garments produced in cheap labor-cost regions Distribution •Sophisticated and efficient distribution system • Focus on fexibility and quick response •Centralized logistics and distribution problematic. (1980. p. Ortega has been the visionary architect of Inditex´s strategic development from its initial days until the present. the further it operates away from Spain Marketing and management •No advertising •Stores designs main display to market •Adjust supply after demand •Expensive store locations •Cannibalization threat Source: Porter.1 Management: It is difficult to analyze Inditex´s competitive capabilities and unique resources without examining the importance and role of Amacio Ortega and the management. P.Figure 10 – Inditex´s value chain Support activities Management Vertical Integration Structure IT integration Technology Human Resource Production & Procurement Vertical integration structure •Unique supply chain structure that increase flexibilty and differentiation •Control over all key posts •Enhanced efficiency Design Distribution Marketing & Sales Primary Management •Clear visionary and strategic direction •Strong company culture •Uncertaincy when founder Amancio Ortega retires IT technology •State-of-the-art communication platform between headquarters and stores •Innovation processes developed through IT integration Human resource •Autonomous and flexible organizational structure •Store managers involved in product development Source: Porter. and he still plays a very active role in the daily operations and in forming future strategic visions.3. 25 . 37) 3. 1980.

could spread throughout the entire organization. it can overtake control earlier or later in the value chain and hence. be 47 48 Ghemawat. manufacturing. and predicting future trends. disagreements about strategic direction. Companies such as H&M.Early on. There is a potential risk that management transition can be difficult for Inditex when Ortega steps down from the board. through his managerial. which should be consumed immediately rather than piled up in warehouses. The big question for Inditex today is how to deal with the inevitable retirement of Ortega. Ortega created the whole concept of “fast-fashion” business model by integrating design. Risk factors such as top-management conflicts. and lack of visionary ideas. Inditex has maintained strong management. Inditex made all of the necessary investments in IT and manufacturing logistics and then started rolling out stores in Spain in the 80s. where the tasks between key stakeholders were clearly set from the beginning. (2006. whereas Inditex owns and keeps all its supply chain processes in-house. (2003. It will be important for Inditex to find a person that possesses the same qualities as Ortega in terms of strategic direction.285) 26 .3. Benetton and GAP follow an outsourcing strategy by outsourcing all production to external suppliers. or both. different from yogurt or bread. clear strategic direction. and financial skills. Instead of being responsible for one part in the supply-chain and independent of suppliers and buyers. market understanding.48 The concept behind vertical integration is that companies can integrate either forward. p. backward.47 A visionary management style is one of the reasons why Inditex has become one of the largest fashion apparel retailers in the world. Ortega took the viewpoint that customers should regard clothes as a perishable commodity . and a company culture without any radical changes. p.2 Vertical integration structure Inditex´s supply chain model is unique when compared to its competitors within the industry. and distribution towards a quick response to fashion trends and his management made it all feasible. technological. This type of supply chain structure is often referred to among scholars as vertical integration.3) Johnson.

Quarter 5th. and faster decision procedure that leads to shorter cycle time. Quarter Traditional supply chain st 2 . Quarter 4th. Traditional industry supply chains may involve production cycle periods of up to six months from design to the stores.49 Whether or not a company should vertically integrate depends often on the industry. and sale to end-customers. The vertical integration creates a series of supply improvements such as increased flexibility. pattern cutting. distribution. Quarter Visits to Exhibitions design procurement manufacturing Distribution and sales Season Inditex´s supply chain 49 50 1st. p. and three months from manufacturing to the stores. Quarter 3rd. Quarter th 5th. (2006. p. Quarter 2nd. p.50 Thus. 30) Johnson. Quarter nd 3 . Inditex is able to gain competitive advantage through fast response. (2003.25) 27 .287) Inditex annual report. Inditex is capable of a much faster production cycle period. Quarter Visits to Exhibitions design procurement manufacturing Distribution and sales Source: own construction with inspiration from Ghewanat. Quarter rd 4 . around four weeks on entirely new collections from design to the stores and less than two weeks on modification of existing products. raw cloth. Fast response to change in trends is possible through its vertical integration structure.responsible for the whole supply process. (2007. traditional supply chain Season 1 . Inditex controls all key points in the supply chain management. easier communication. Figure 11 – Inditex vs. The main reason for Inditex for pursuing a vertical integration strategy is to enhance efficiency throughout the whole supply chain and hence create a platform that generates a faster response to changes in market trends.

54 51 52 Ghemawat. it was estimated that Inditex had 11000 distinct garment products. Moreover. Furthermore. keeping all production and logistics in-house increases cost for Inditex because of the high salary cost of workers in the Euro Zone (Spain) rather than outsourcing all manufacturing and logistics to countries with cheaper labor costs. Inditex is capable of adjusting supply to demand. which refers to the incapability of gaining the economic advantages of producing large quantities of goods at a discounted rate. supply is demand-driven which reduces operational risk. Conventional producers face higher risks because of their longer production cycle and are unable to quickly respond to fashion changes. Thus. (2006. p.24) 28 . keep excess inventories low. and by this. Inditex is trying to decrease cost by outsourcing some of its activities such as sewing to countries with lower labor costs.9) Risk is diversified is diversified between 3-6 times due to Inditex amount of distinct garments. p. Inditex is adapting processes that stimulate continuous and dynamic interaction between all divisions. there are some drawbacks for Inditex that are important to identify. p. 53 Johnson. which enables the company to readjust and redesign successful collections and quickly withdraw unsuccessful items. both up and down in the supply chain.53 This leads to higher cost per-unit produced for Inditex than compared to its competitors.51 Through its vertical integrated supply-chain model. whereas competitors had 2000 to 4000 different products. but most of its operations are done in-house. The most important limitation is the inability to create an “economics of scale”.69) 54 Inditex annual report (2007. Inditex can offer more diversified products in smaller batches than competitors can.52 Although the vertical integration model has more advantages than disadvantages. (2003. The conventional apparel producers’ single one-way outsourcing supply-chain model (from design to store) does not create the same flexibility as Inditex´s supply chain model.Figure 11 demonstrates the differences between the conventional outsourcing apparel supply chain and Inditex´s vertical integrated supply chain. In 2003.

the system catches all sales coming in from the different geographical regions and can immediately process these data and pass it along to designers and product decision which are integrated throughout the whole supply chain. One of the strengths of Inditex´s current information technology system is the excellent alignment between the stores and headquarters. Regional stores constantly communicate with designers.4 Human resource Inditex seeks to achieve an autonomous and flexible corporate culture though an open and transparent communication environment rather than a hierarchical one. the information technology model is the platform for creating innovative processes by responding to immediate demand. The IT system has removed the need for expensive communication and distribution infrastructure in the stores. designers can instantly readjust less successful collections and catch the current market demand better.3.php?option=com_content&task=view&id=878&Itemid=91 Inditex annual report (2007. Therefore.56 Top management recognizes that store managers have better knowledge about specific market trends due to their closeness to the customers. Hence. and market specialists. the company has gained a competitive advantage by developing the quickest response-time to fashion changes in the industry.3. which makes it capable of reacting faster to changes in trends. because all sales data go automatically through the IT system.22) 29 . p. 3. managers. In general. Because of information technology´s fundamental importance for its business model.3. store managers are often key players in 55 56 (09-06-08) http://www. Through this. rather than actual product planning. it uses a centralized IT infrastructure to drive a fast supply that matches a demand-driven business model As a result.3 IT integration and communication technology Inditex has become an industry leader by building-up state-of-the-art information technology instruments.55 Hence. I believe that Inditex will strive to gain technological superiority in the industry by obtaining state-of-theart technology and continuously implementing it throughout the value These readjusted collections can be in stores two to three weeks later.

which are then collected and passed on to Headquarters. 3. p 141) 30 .5 Design Design is the first stage in the supply chain process and a critical part in the apparel value chain. and quantities for their regions. Through the implemented information technology. Thus. and market specialists that make the supply chain lead-time faster than its competitors.57 Product demand in the fashion apparel industry fluctuates greatly. They get to be involved in the process of selecting product lines.58 Inditex design and marketing specialists visit all of the main fashion capitals around the world (Paris.deciding new collections. Inditex emphasize minimizing the risk associated with new designs. 23) 59 Inditex annual report (2007. without doubt.59 57 58 Inditex annual report (2007. procurement teams. they seek alternative brands to satisfy their requirements. p. Inditex has 350 designers that draw up design sketches and discuss it with procurement staff and design inspiration mainly comes from exhibition shows and store reports. Inditex adds value by utilizing its store managers´ geographic market knowledge in developing collections. Hence. 337) Inditex annual report (2007. Its vertical integration model enhances the level of communication between designers. as well as university campuses and nightclubs. To create a framework that focuses on fast lead times and design flexibility. To respond to the vital design risk that can undermine the whole value chain. its autonomous organization structure gives store managers the sense that they are running their own business. This infers that other parts in the value chain become irrelevant. p. Milan and Tokyo). the biggest challenge for the industry. Product risk is. to identify and analyze recent trends. Products can become out-of-fashion before they even reach the market due to high uncertainty and constant changes in fashion trends.3. sizes. New York. If a new design is unsatisfactory for customers. store managers maintain close relationships with in-house designers and managers. Inditex designs all of its products itself.

3. Designers then draw on the gathered information in designing new collections or readjusting existing ones. Faster production time and quicker response to 60 61 Ghemawat. Headquarters collects reports from stores instantly. and because of its fast production and distribution time. it does not entirely own all of its production assets. p. These factories are relatively high-tech and much of the sewing and pressing is done through machines. and Asian suppliers have a clear advantage in terms of price. The salary level is high compared to other geographical regions such as Asia.24) 31 . Competitors rely heavily on inexpensive.61 Inditex outsources less production than its main competitors do. Unsuccessful collections are quickly discarded. More than half of Inditex´s supplier factories are located in Spain or northern Portugal and these factories specialize in fashion-customized sewing from special designs. Request orders need to be placed up to six months in advance. designers can constantly alter and readjust collection to cope with customer demand.60 3. Most fashionable garments are shipped to nearby factories to minimize production and transportation time. (2003. The main advantage of optimizing lead times through vertical information is to create a constant product flow that responds to immediate changes in demand. which are combined with the analyzed trends.6 Production and procurement Although Inditex has a vertical integration structure. Around 35 percent of total suppliers are located in Asia. p. stores constantly report to designers about new trends and purchase statistics. As a result. Inditex constantly responds to the fashion changes during seasons. (2007. A study shows that unsuccessful collection rates at 1 percent for Inditex compared to an average of 10 percent in the industry. Asian contractors mainly supply simple standardized garments such as t-shirts and jeans. external suppliers that don´t provide a high degree of flexibility. These types of products don´t require the same fast lead time because of the standardized product type.Furthermore. and successful collections are readjusted and shipped to stores.10) Inditex annual report.

3. effective distribution helps Inditex gain competitive advantage and strong market position.3. particularly during peaks in January and July (start of selling seasons). and recently has inaugurated a new state-of-the-art logistic center in Madrid close to all major infrastructure hubs. the distribution centers run on half of their capacity but during surges in demand. There are two orders per week from each store on specific days and hours. The idea is “quick in – quick out” which entails that products should immediately be transferred rather than stored. The current successful centralized production and distribution facilities may become a limitation to future growth due to Inditex´s inability in benefitting from economics of scale. However.change in trends decreases Inditex product risk.62 The distribution structure makes it possible to keep an average deadline of 24 hours for European stores and up to a maximum of 40 hours for stores in America or Asia upon leaving headquarters. there is also an internal dilemma in its centralized distribution model. with shipment in distribution centers typically prepared overnight. this clearly defined schedule that focuses on deadline on every stage in the supply chain induces Inditex to reduce time and space by avoiding intermediate warehouses and constantly shipping garments directly from distribution centers to the stores. As a result. On average. the distribution centers hire hundreds of temporary workers and hence. p. Inditex can respond quickly to new fashion trends. 62 Inditex annual report (2007.26) 32 . by keeping fashion production close to headquarters. maximize utilization rate. Hence. Trucks leave and arrive at the stores at specific times.7 Distribution Inditex´s logistics consists of state-of the-art distribution technology with minimal human intervention. Inditex has eight distribution centers in Spain. Hence. This gives Inditex flexibility in immediately responding to seasonal fluctuations and optimizing supply.

its advertisements are limited to sales periods at the end of 061299/ 33 .co.65 A study from 2003 indicated that Inditex in 2002 spend 0.telegraph. and instead concentrates all of its marketing on in-store displays and decorations.Although Inditex is capable of quickly supplying Scandinavia. All additional costs associated with higher transportation costs are directly passed on to customers in the form of higher prices. Inditex avoids advertising mainly for two reasons: to limit 63 64 Ghemawat. the further away Inditex operates from Spain. Inditex will probably open distribution centers in these regions. and outside Europe. but not design and production centers. Most competitors have huge advertisement budgets to spend.17) (23-08-08) http://www. it may not be able to supply infinite retail locations and retain the same level of speed and flexibility due to its centralized logistics model.3. Inditex avoids spending a huge budget on advertising. Huge efficiencies in its supply chain become less evident the further away from home market it operates.64 3.html 65 (06-06-06) http://www. because these will undermine the whole business idea. which signed Madonna to be their star promoter in 2006.3 percent of its total revenue on advertising. prices can even exceed more than double the prices in Spain. the more expensive and slower the operations will become. in Spain and southern Europe. This entails that prices between countries differ. p. compared with 3. A good example is H&M.5 percent for most specialty retailers. Its centralized supply chain model is constructed in the way that.000 stores. whereas in UK. For instance. (2003. Inditex is considered more of mediumpriced fashion because the prices there tend to be 40 percent higher than in Spain. Inditex´s retail brands are considered cheap fashion style brands. In some regions.8 Marketing and sales In contrast to most competitors.fashionunited.63 Inditex officially states that if operations in Asia and Americas grow

among other methods. window and interior designs in stores are crucial factors in presenting a correct image. Inditex seeks to not create too strong of a presence to protect the value of its retail brands and keep them trendy. Inditex has 1747 stores in Spain. The Spanish market must soon reach a saturation point. 66 67 Ghemawat. Inditex deliberately purchases or rents exclusive real estate locations. garments never stay longer than necessary in stores.66 This low spending on advertising entails that Inditex relies on stores to protect and strengthen its image. store image and location play a very important role. and an optimal display. Another threat that Inditex faces is cannibalization.13) Inditex annual report (2006 -2007) 68 Ghemawat (2003.68 Inditex needs to be careful about selling the same products to the same people that reside in the city. but with more affordable prices. When deciding on store locations. such as Fifth Avenue in New York and Regent Street in London. which is around 47 percent of total stores (fiscal year 2007). p.67 The rationale behind acquiring expensive locations is to give Inditex a sentiment of exclusivity and fashion on the same level as high-end brands. which it achieves by regularly refurnishing stores and carefully deciding on the display inventory. The focus is in creating an environment that encourages customers to purchase products. except when a purchase is necessary to secure access to necessary locations. (2003. which keeps the percentage of discount clothes as low as possible. Thus. To be consistent with the business model in terms of exclusivity though fast fashion and scarce supply. Instead of advertising. and high-end shopping malls. p. This could result in excess supply in stores and a decline in sales for each store.advertisement spending and to avoid overexposure. In addition. Inditex could try to address the problem by differentiating neighboring stores so that people who want a comprehensive knowledge about the latest collections need to visit all of the stores instead of just one. Inditex prefers to sign long-term lease contracts. Inditex prefers to spend on expensive store locations. Today.19) 34 .

I applied Porter´s five forces framework in the competitor part.3. Inditex chooses not to spend on advertisement and rather allocates resources in buying or leasing stores at the most expensive locations and uses the stores as its main display windows. flexibility. network and resources. The most important observations in the industry analysis are the relatively high entry barriers due to strong brand value. I applied the PEST model that divides external factors into political. Most important factors in this part are clear and visionary management. and technological factors.4 Sub-conclusion – strategic analysis In the macro-environmental analysis. size. I identified that Inditex has gained strong market position due to its unique market positioning in high fashion with low cost segment. I concluded that consumers are more price-sensitive during recession periods than during boom periods. The weakening of the dollar towards the euro is beneficial for Inditex because most of its garment material is purchased through dollars. and decreases its sales risk due to more products launched. In the industry analysis. Inditex decreases its production risk and strengthens its bargaining power to suppliers by co-owning most important suppliers. low threat levels from online retailers because of flexible supply control. which benefits price-leading companies. I demonstrated that growth possibilities are highest in Eastern Europe and Asia and are lowest in Western Europe. socio-demographical. 35 . I applied Porter´s value chain to analyze the most important internal factors that influence Inditex. In the socio-demographic part. In the economic part. a vertically integrated supply chain that enhances efficiency. In addition. economical.

com there are annual and financial reports available back to 1999. The objective is to examine how Inditex has performed in recent years and to try to give an indication of how the firm will perform in the future. 69 70 On inditex´s home site www.70 To get consistency as far back as possible I used IFRS. The chapter is structured as shown in figure below. the revenue is around 0. Financial analysis After having concluded the strategic analysis part. This helps me get a detailed picture of the company´s financial performance in recent years. a fiscal year is from 1 February to 31 January of the next year. which creates minor complications with regard to reorganizing financial statements. p. Operating activities are activities directly associated with necessary day-to-day operations. I move on to analyze Inditex´s financial position. Figure 12 – Financial analysis structure reorganizing financial statement profitability and peer group analysis Inditex´s cash flow analysis Source: own construction In the financial analysis. Inditex annual report (2005.100) 36 . The balance sheet is accounted 31 January of each year and hence.1 Reorganizing financial statement The core objective in the reorganizing financial statement chapter is to separate operating activities from the non-operating ones. 4. 4.1 Accounting policy Inditex changed its auditing principles from Spanish GAAP to IFRS in 2004.2 percent lower. I choose a ten-year period. even though the numbers deviate slightly. In the Inditex annual report 2005. whereas non-operating activities are not directly contribute to daily operations and thereby do not create any operational value for the company. the two accounting methods are demonstrated for year 2004 and the result shows that by using IFRS rather than GAAP.4. which is the longest historical period possible69. which means that I have data five-years back that are constructed with IFRS.1.Inditex.

Inditex states in its annual reports that its net working capital is current assets less current liabilities. the operating assets are inventories. which I will apply in the profitability analysis. by studying company’s quarterly reports. it is possible to calculate the amount of cash used in working capital. www.72 According to this method. In order to calculate an accurate ROIC and invested capital I need to investigate if Inditex employs more cash in its operating working capital. p.1 Net working capital Net working capital measures a company´s efficiency and short-term financial health and is calculated as current assets less current income tax receivables.258) Koller.71 Generally. On Inditex´s balance sheet. which are liabilities from suppliers and government. (2005. I need to analyze quarterly reports to see if working capital is higher than stated in the annual report.4. To do so. receivables. However. These assets are operating assets because they relate directly to assets that create value for the company.cfm/3012013?f=related 37 .2.73 This has the obvious effect of decreasing the capital invested item and hence. I should deduct approximately equivalent to two percent of total sales from excess cash and define this as an operating activity.1. Operating current liabilities are trade and other payables and income tax payable. Companies tend to have higher working capital in operations during a fiscal year than at the end of a fiscal year. there are controversies on the issue whether companies place excess cash into invested capital or not.1. increasing ROIC.171) 73 (01-03-04). I do this by dividing the quarterly working capital with last four quarterly net sales. 4. By this.cfo. Below I will address the most important issues regarding reorganizing and defining the balance sheet. p. Recent studies indicate that companies use a little less than two percent cash of their total sales as operating working cash.2 Reorganizing the balance sheet The main objective is to find operating invested capital. it is neglecting all cash and cash equivalents as operating activities. 71 72 Inditex annual report (2007. and other current assets.

Figure 13 – Quarterly net working capital to sales ratio 0. (2007. Inditex tends to have lower working capital at fiscal year-end (fourth quarter) than in other quarters. Another issue that is important to address is Inditex´s negative net working capital.00% Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 -2. net working capital increases from fourth quarter to first quarter. This clearly confirms that Inditex uses more net working capital during a whole fiscal year than stated in the annual reports.06% 2004 2005 2006 2007 2008 -6.75 It reveals the health of the company because it simply tells how much there would be left if a company raised all of its operating resources and used them to pay off its current liabilities. The average difference in working capital to sales ratio between year-end and first quarter in 2007 is slightly more than four percent.1% The graph clearly shows that.258) Seidman.2007 2003 -4. p.00% Source: Inditex´s quarterly reports 2003 . 74 75 Inditex annual report. The figure above proves that Inditex has negative working capital during the whole period.00% -10. p. on average.00% -4. Inditex doesn´t give any reason for why it carries negative net working capital in their annual reports. (2004. It infers that its current liabilities are higher than its operating assets.00% -6.4% -8.92) 38 . Hence. except by stating that it is due to their type of business model. Between all years.7% -6.74 Conventional working capital theory states that net working capital should be positive. Negative working capital normally leads to a lower credit rating and financial distress because then the company cannot pay off its debts.00% -8. I need to include quarterly net working capital calculations to get a proper calculation of the invested capital.4% -7.00% -12. when restructuring the financial statement.

2 Other operating activities 78 Net property. negative net working capital and financial distress is not necessary always directly interrelated. p. (2006. Inditex´s negative net working capital is partly explained by the fast cycle-period in production and design. 4. p. Inditex claims that its investment properties consist mainly of properties leased to other parties. 821) Ghemawat.According to this. investment property is categorized as an operating asset. This argues that Inditex negative working capital is partly because of low inventory and accounts receivable. all of its sales are done by cash in their retail stores and not by credit.6) 78 Following division between operating and non-operating activities are inspired from: Koller (2005). constant growth in sales for last ten years and a good credit history. In addition. plant and equipment are categorized as current assets because they benefit by creating value for the company. Companies can have negative working capital while having low inventory and low accounts receivable without facing financial distress. This fast lead-time reduces the working capital intensity. However. and lets Inditex commit to the bulk of its product lines much more effectively than its competitors. Inditex´s business model comprises of adjusting supply to demand. This entails that by keeping supply amount to a minimum. and intangible assets that include brands and software applications. facilitates the continuous manufacturing process. Hence. 39 . In 2007 annual report.2.76 As previously explained in the strategic analysis part. (2003. and doing business on a cash-to-cash basis. companies with low or even negative net working capital are under financial distress because they can´t pay off their current liabilities. Right over leased assets includes the amount paid to proprietors and other parties that lease commercial premises. Inditex 76 77 Brealey.77 Additional factors that support the argument that Inditex does not face financial distress despite carrying negative working capital are.1. for instance. The cash flow analysis will additionally demonstrate that Inditex is not facing liquidity difficulties. which gives them better a option to keep the net working capital low. Inditex must have a relatively low inventory.

202) 81 Koller. p. p.3 Reorganizing the income statement The main rationale for reorganizing the income statement is to calculate Net Operating Profit after tax (NOPLAT).1.80 These assets should be defined as nonoperating assets and should be calculated separately from invested capital. cash equivalents (withdrawn from operating working capital). and the like. In Inditex annual statement 2007.2. that are all part of Inditex´s operations.leases most of its retail locations outside Spain and hence. provision is stated as provision for liabilities and thus I treat it as debt equivalent. and other illiquid assets. common and preferred stock. as well as all investors` funds reinvested into the company. NOPLAT is the operating profit with adjustments made for taxes. and paid-in capital. Equity equivalent mainly consists of deferred taxes. Goodwill is normally categorized as an operating intangible asset. To find 79 80 Koller.173) 40 . according to Inditex annual reports.3 Non-operating activities Excess cash. (2005. credit facilities.168) Inditex annual report (2007.1.79 4. Deferred taxes are often tax benefits issued by the government and classified as equity equivalent for companies. 4.1. Inditex´s reorganized balance sheet and invested capital calculation is showed in appendix 1. p. software expenses.4 Equity and debt equivalent Equity includes all original investor funds. these lease contracts are operating assets because they are directly involved in day-to-day operations for the company. and other net assets are categorized as operating assets as they contribute to operations. Excess cash has low return and low risk and does not have significance on daily operations. bank deposits.81 Debt includes all short-term and long-term debt. Intangible assets. and other excess liquidity are always categorized as non-operating assets because these assets are unnecessary for core operations.2. (2005. Financial investments are. Goodwill is a type of intangible asset that is often used in an acquisition context. goodwill. Intangible assets and other net assets are mostly brand value. investment securities. 4.

2 Profitability analysis and peer group There are a variety of simple profitability calculation instruments in analyzing a firm’s profitability.84 4. (2007. 4. p. the tax shield and tax interest are included in reported taxes.83 Inditex´s reorganized income statement and net operating earnings after tax (NOPLAT) is showed in appendix 2. Since EBITDA originates from its revenue.2.173) Damodaran. but are deducted because both are non-operating82. return on equity (ROE).operating taxes. p. companies have to operate in the same industry and be similar in terms of products. ROE is sensitive towards leverage. it is necessary to withdraw non-operating activities that are included in the reported taxes in the account income statement. p.176) Koller. First. Table 2 shows last 5-year EBITDA margin for peer group. (2005. Moreover. the EBITDA margin is simply the EBITDA with net sales.12) 41 . I choose to discard ROA and ROE because in my opinion there are too many items that do not reflect the true operational value of a company. The strategic analysis clarified that H&M and GAP were Inditex´s strongest competitors in terms of strategic position. (2005. structure and size. which I use to calculate tax shield and tax interest.1 EBITDA margin analysis In applying the EBITDA margin to analyze Inditex´s and peer group’s profitability. Changes in deferred taxes are also withdrawn when calculating operating taxes because it is equity equivalent instead of an operating liability. I use the statutory Spanish tax rate of 33 percent. business 82 83 84 Koller. and return of assets (ROA). Some of the most common are EBITDA and EBIT ratios. which entails that little change in capital structure can alter ROE radically without operational change. whereas ROA and ROE calculate net income as a percentage of total asset and book equity. EBITDA and EBIT ratios are all similar profitability ratios that originate from the income statement and measure percentage from total net sales.

As part 3.model and size. Esprit is positioned slightly below Burberry in the high-end price segment. its business model differs radically from Inditex and I don´t consider it as one of Inditex´s main competitors. Esprit is considered a regional player because it operates in a smaller scale. I intent to show its EBITDA margin against the peer group average in figure 14. It possesses only 600 retail stores around the world and most of its revenue is generated through wholesale. Figure 14 – EBITDA margin for Peer group 30% 25% 20% 15% 10% 5% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Inditex and peer group´s annual reports 1999 – 2007 Inditex Peer group H&M GAP 85 It has not been possible to collect EBITDA margin from all companies before 2002. Table 2 – EBITDA margin for peer group Year Inditex H&M GAP Benetton IC Companys Espirit Next Polo Ralph Lauren Limited brands Inc Burberry group 1999 20% 18% 19% 20% 4% 15% 85 2000 20% 14% 15% 20% 9% 17% 15% 2001 22% 16% 8% 27% 9% 17% 16% 2002 22% 20% 12% 19% 8% 17% 14% 2003 19% 21% 16% 18% -3% 20% 17% 14% 14% 21% 2004 22% 22% 17% 19% 10% 23% 18% 12% 16% 23% 2005 22% 24% 15% 16% 13% 23% 18% 15% 13% 22% 2006 22% 25% 11% 14% 13% 23% 20% 19% 14% 22% 2007 23% 26% 12% 16% 12% 23% 21% 18% 14% 21% Source: Inditex and peer group´s annual reports 1999 – 2007 Only two firms (except H&M) Burberry and Esprit have higher average operational margins than Inditex.2. Hence. Even though it has a high growth rate and an excellent operating margin compared with peer group. Burberry is a high-end brand that sells products at a higher premium than Inditex and can generate a higher profit margin for each product.5 demonstrated. Burberry does not directly compete with Inditex because it focuses on a different high-end customer segment. Hence. 42 .

it demonstrates how H&M has been improving its EBITDA margin and exceeds Inditex´s EBITDA margin in 2002. Inditex has a relatively stable margin in the whole period whereas the GAP margin declines from 2004. The peer group improves its EBITDA margin.2. Inditex generates a higher EBITDA margin than its peer group along with H&M. which infers that Inditex´s EBITDA will most likely decline in 2009 due to the higher cost of goods sold to sales ratio. However.ecb.The figure above illustrates that during the whole period. especially those companies that perform sales in EUR and other strong currencies and purchase raw material in USD.1.html 43 . the dollar strengthens in mid-2008. I explained how Inditex benefits from a weak US dollar towards the Figure 15 – Development of index value of USD and SEK compared with EUR 140 130 120 110 100 90 80 70 01-01-1999 01-01-2000 01-01-2001 01-01-2002 01-01-2003 01-01-2004 01-01-2005 01-01-2006 01-01-2007 01-01-2008 01-01-2009 EUR USD SEK Source: European Central Bank www. However. 86 (31-03-2009) www. GAP is not able to achieve the same currency benefit because both net sales and cost are made in USD. which might indicate that the industry is improving its profitability in the period. while GAP generates a lower margin from 2000. This could partly explain the peer group´s strong position towards GAP in the period 2002-2008. In the strategic analysis part 3.en. as sales are done in EUR and SEK while purchase of raw material is done in 86 The figure above illustrates how Inditex and H&M benefits from the weak USD. one must be aware that EBITDA margin can be caused by different currency ratio. especially in the period of 2002 to 2008. Further.

NOPLAT and invested capital exclude all non-operational activities.Inditex H&M and GAP´s ROIC 140% 120% 100% 80% 60% 40% 20% 0% Inditex.2007 87 NOPLAT and invested capital calculation for H&M and GAP are shown in appendix 5 and appendix 6. This issue will most likely have significant effect on its EBITDA because of higher cost of goods sold to net sales. and thus are independent of capital structure. On the other hand. Figure 16 shows ROIC for the three core competitors in the period to 1999 of 2007. H&M and GAP´s ROIC Inditex H&M GAP 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: H&M. and GAP´s true operational profitability. GAP and Inditex´s annual reports 1999 . 44 .2. instead of calculating percentage of total revenue (EBITDA margin). This has the obvious advantage of clearly revealing how much of the firm´s resources are actually used in creating value for the company.2 ROIC and profitability analysis ROIC (return on invested capital) measures how effectively a company uses its operational assets.87 Figure 16 . and how much return the firm gains from this invested capital. 4. H&M can boost net sales in SEK due to SEK´s favorable currency position towards EUR as most sales are done within the Euro-zone and can be exchanged to a low SEK. I will conduct a profit analysis of the companies by applying ROIC instead of EBITDA. which is a more sophisticated profitability analysis instrument. Hence. it calculates the percentage of capital invested. H&M. ROIC is calculated by dividing NOPLAT with invested capital. To get a better comparison between Inditex.Another interesting observation is the rapid decline of SEK towards the EUR and USD in 2008 and the beginning of 2009.

(2008.167) 45 . During the period. This could indicate that Inditex is not generating sufficient return from its actual invested capital or. I divide ROIC into NOPLAT margin and invested capital turnover. To get a clearer idea about the company´s ability to generate profit. I have readjusted the DuPont method in figure 17. Inditex has a relatively slow constant ROIC growth. p. and in the end of year 2007 H&M´s ROIC exceeds the other two more than double their values. Figure 17 – Profitability analysis Level 1 Level 2 Level 3 PP&E to sales Invested capital ROIC NOPLAT Margin NWC to sales Intangibles to sales Store growth Trend indexation Same-store sale Source: Own construction First. The method is flexible and is easy to apply. I will decompose ROIC with the DuPont method. GAP shows the poorest ROIC and EBITDA margin performance.The graph clearly demonstrates H&M´s superiority in terms of retaining high ROIC. The main difference is H&M has a slightly higher EBITDA but a much higher ROIC than Inditex.88 The perception behind the method is to divide ROIC into two segments: resource use efficiency and operating efficiency. ROIC demonstrates similar results as the EBITDA margin but with some minor differences. The NOPLAT margin measures the operational efficiencies and profitability from total revenue and invested capital 88 Niculita. H&M is more effectively using its invested capital. H&M retains a higher ROIC than Inditex and GAP.

00 2.2007 Figure 19 – Inditex´s invested capital turnover 8. and invested capital turnover is sales divided with invested capital.00 6. H&M and GAP´s annual reports 1999 .00 1.00 x times 5. Figures for NOPLAT margin and invested capital turnover are showed in figure 18 and 19.00 7. NOPLAT margin is NOPLAT divided with net sales.00 1999 2000 Invested capital turnover Inditex H&M GAP 2001 2002 2003 2004 2005 2006 2007 Source: Inditex. The opposite is the case for low capital-intensive companies that usually have low profit on products sold but can generate higher invested capital turnover because of their low degree of investment. there is a close relationship between the invested capital turnover and NOPLAT margin. 46 .turnover measures how effectively invested capital is used to generate sales. which requires high investment. H&M and GAP´s annual reports 1999 . Capital-intensive companies normally have high profit margins and low invested capital turnovers because they can sell products with higher profit.00 3.00 4.2007 In general. Figure 18 – Inditex´s NOPLAT margin 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% NOPLAT margin inditex H&M GAP 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Inditex.

Inditex gradually improves its turnover ratio in the period of 2002 to 2007. which is slightly better than Inditex´s ratio. The NOPLAT margin demonstrates similar results to the EBITDA margin. look at the number of stores opened. Inditex has the lowest invested capital turnover that is caused by the increased cost of having vertical integration structure and high investments as earlier described in the strategic analysis. GAP has relatively constant turnover ratio in the period. what is more surprising is H&M´s high NOPLAT margin.2. which either indicates better operational performance (higher sales per investment) or a decline in operational investments. which makes it the most profitable among the three. Not surprisingly. GAP demonstrates lowest NOPLAT profitability ratio with only around five percent in 2007 and a constant decrease from 2004. Inditex uses almost four times more invested capital than H&M in 2007 despite only generating 11 percent higher net sales.3 Decomposition of profitability ratios To decompose profit margins and examine the factors influencing the companies´ value creation. which demonstrates remarkable turnover growth for H&M. H&M has a turnover of seven times the invested capital. which begins in 2002 due to the extraordinary bad result for GAP´s NOPLAT in 47 . despite having the highest turnover ratio.The results above support this notion up to a certain degree. I choose to conduct a trend indexation of key profitability drivers. it is relevant to analyze trends in key posts on the financial statement to see how the companies have been performing in recent years and to compare the results. 4. H&M has outstandingly higher turnover rate than Inditex and GAP. Inditex shows better NOPLAT margin that compensates for the low invested capital turnover and demonstrates that its large shares of investments is canalized to generate higher profit. In comparison with H&M. This I will do by indexation. Net sales exceed investment capital. To begin with. and find the PP&E turnover ratios. Investment capital turnover ranges from two to seven times. However. which confirm that the industry is relatively not capital-intensive. What is especially interesting in this relation is the period of 2000 to 2002. In 2007.

I wish to analyze and compare developments in three key profitability factors in the financial statements: net sales. High sales growth is often correlated with an increase in invested capital because it requires new store openings. H&M has been experiencing growth in sales. and the like. In the strategic analysis part. Both companies 48 . which will generate biased results. Inditex has the highest increase in invested capital. This is not necessarily a drawback for the company. I concluded that Inditex uses considerable resources on optimizing all supply resources by acquiring and implementing technologies that are value-beneficial. NOPLAT. which could indicate that it spends more resources in increasing its operations and sales than H&M and GAP. H&M. H&M seems more conservative in their expansion plans and more focused on profit rather than expansion. and invested capital. H&M does not manage to achieve the same net sales growth figures as Inditex. Although having outstanding ROIC. Although the company creates lower margins than H&M and chooses to canalize profit to expanding operations.2001. Unsurprisingly. its strategy seems to emphasize long-term performance. which inevitably requires higher expenditures and that its high operating capital investments are aligned with its overall strategic goal. and GAP´s annual reports 2002 -2007 Inditex has the highest growth in sales but lags behind H&M in NOPLAT growth. updating facilities. vertical integration and more expensive labor cost has higher operating cost and cost of good sold. whereas Inditex with customized production. but not to the same extent as Inditex. which partly explains its low ROIC and invested capital turnover. This factor inevitably benefits to higher a NOPLAT for H&M. which entails lower operating costs through low labor cost and economics of scale. H&M outsources its entire production to inexpensive labor-regions. Table 3 – Trend indexation of the companies´ key margins year 2002 2003 2004 2005 2006 2007 Net sales Inditex 100 116 140 170 206 237 H&M 100 106 118 133 149 170 GAP 100 110 113 111 110 109 NOPLAT Inditex 100 97 148 178 223 271 H&M 100 113 130 163 190 238 GAP 100 193 217 181 124 133 Invested Capital Inditex 100 121 147 165 190 225 H&M 100 125 131 155 156 175 GAP 100 88 87 90 92 84 Inditex.

rather than inefficiencies in operations. This indicates that GAP has neither been able to boost sales nor increase operational efficiency to some extent relative to the decrease in sales.have higher growth in NOPLAT than net sales. In 2007. and hence retaining its ROIC to an acceptable level. 49 . in terms of new stores openings. GAP manages to retain its profit margin by enhancing efficiency though invested capital streamlining. its ROIC would be catastrophic. To put net sale growth in relation with operational growth. Thus far. To a point. Fortunately. Inditex has four times more stores than in 1999. GAP has the lowest sales growth among the three companies. despite the decrease in NOPLAT and net sales. Inditex is expanding more aggressively than its competitors are. I choose to demonstrate development in store expansion for the companies. I have demonstrated that Inditex has been increasing sales and invested capital but not how this increase has occurred. H&M and GAP´s annual reports 1999 and 2007 The graph very evidently demonstrates the companies´ different expansion strategies. What is worrying for GAP is that sales have been decreasing in last four years and NOPLAT margin even more in proportion to net sales. Figure 20 – Amount of stores for Inditex and main competitors 4000 3500 3000 2500 2000 1500 1000 500 0 Number of stores 3097 Number of stores 3691 3167 922 613 1522 Inditex H&M GAP 1999 2000 2001 2002 2003 2004 2005 2006 2007 Year Source: Inditex. and its revenue and NOPLAT have been decreasing for last three years. the company is able to decrease its invested capital because without a decrease in invested capital. it verifies that the increase in invested capital and low invested turnover rate results from the aggressive expansion strategy and opening of many new stores. which indicate that both companies have been increasing their operational efficiency (and benefiting from advantageous currency exchange).

Inditex´s aggressive expansion strategy can shift focus from actual operations and decrease its brand value because of over-exposure. whereas H&M leases all store locations. In 2001.The analysis confirms that H&M is achieving the highest profitability results. as figure 20 shows. Inditex deliberately pursues most lucrative and expensive locations. GAP proves that size doesn´t necessary equal profitability. lack of focus.8% 1. Inditex owns most of its supply chain facilities solely or through coownership. and so on. and its rapid expansion and focus on multi-retail brands can increase its competiveness towards H&M in the long term. Contrary to H&M and GAP. (2003.3% 6% 7% PP&E to sales 34% 34% 10. the graph shows H&M´s business model focusing on profit rather than expansion. Another interesting observation is Inditex and GAP´s high intangibles to sales ratio compared to H&M´s. which evidently increases leasing expenses.3% 20% 21% Net working capital to sales -4% -3% 2.89 Hence.90 It is difficult to explain the huge differences in intangibles to sales.14) Property leasing is included in intangible post. Most importantly. Highest ROIC. Inditex has by far the highest PP&E to sales compared to H&M and GAP. NOPLAT margin and invested capital indicate that H&M is the most successful among the three companies. Table 4 – Decomposition of operating activities to sales ratios Inditex H&M GAP Year 2006 2007 2006 2007 2006 2007 Intangibles to sales 7% 7% 0. Further. However. Furthermore. Inditex initially purchased its store locations but since mid-nineties.6% 3% -1% Source: Inditex. Inditex´s net working capital to sales confirms earlier results that Inditex is 89 90 Ghemawat. GAP had more retail stores than Inditex and H&M together. p. H&M and GAP´s annual reports 2006 and 2007 Several observations are noteworthy in analyzing and comparing the companies´ ratios.3% 0. it began to lease locations instead when purchase was necessary to obtain attractive locations. The most evident rationale is that companies are generating similar sales but Inditex is operating with more than twice as many stores than H&M. ownership of facilities and ownership of initial stores in Spain increases Inditex´s PP&E to sales ratio. Furthermore. 50 . Inditex has more than doubled the number of its retail stores compared to H&M. I will investigate the different invested capital turnover ratios below. which increases its PP&E ratio.4% 11. which increases leasing expenses further.

both debt and equity holders.164) 51 . GAP is not able to benefit from the increased store amount between years and hence the company faces high risk. The store-openings figure confirmed that GAP has an almost flat store-openings curve. Operating gross investment consists of change in all operating activities from the beginning to the end of the year. H&M faces a small decrease in same-store sales in 2008.3 Cash flow analysis of Inditex The valuation of Inditex will be based on future predictions on the FCF discounted with the cost of capital rate. net operating working capital.91 This entails that all financing and non-operating income are excluded. (2005. Hence. net capital 91 Koller. one of the essential factors is to measure and compare same-store sales growth. and Gap´s annual reports 2003-2007 Figure 21 demonstrates the risk that retail companies face when they are not expanding. 4. Operating gross cash flow is the sum of NOPLAT and depreciation.retaining negative net working capital along with GAP. When valuating retail industries in general. p. Figure 21 – Inditex and main competitors´ same-store growth rate 15% 10% 5% 0% -5% -10% -15% 2003 Same-store growth rate Inditex H&M 2004 2005 2006 2007 2008 GAP Source: Inditex. The FCF is the after-tax operating cash flow available to all investors. and is calculated by operating gross cash flow minus operating gross investment. it is appropriate to define and examine key trends in Inditex´s FCF. H&M. Hence. it includes changes in operating activities that are previously included. whereas H&M retains positive net working capital. particularly in a recession period as the same-store sales decline of 10 percent in 2008 shows.

000 1. net change in leased issues. FCF was high due to an extraordinarily decrease in operating working capital rather than actual high cash flow. the company demonstrated for the first time. Another interesting method when analyzing the FCF is to look at FCF development in relation to net sales. In 2000. mainly a low increase in working capital. Inditex´s operating FCF calculation can be viewed in appendix 3. Figure 22 – Inditex´s free cash flow development 2.000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -500. which alone exceeds total gross cash flow. makes the gross investment larger in the period. The post that weights heaviest in gross investment is PP&E. it seems that Inditex is controlling its gross investments through operating working capital post. Inditex seems to be capable of controlling its operating investments and keeping it low and relatively constant.000.2007 shows outstanding FCF performance.expenditures.000.000 500. and change in operating assets/liabilities.500. which is driven by a higher increase in gross cash flow relative to gross investment. The optimal scenario would be a constant or increasing ratio between net sales and 52 . In 2001. a positive FCF despite a decrease in NOPLAT. Increase in working capital and leased assets. When analyzing posts within gross investment. both gross cash flow and gross investments increased which gave the company a small positive FCF. investment in intangibles and goodwill. High investments in PP&E and leased assets indicate that Inditex is making long-term investments in its future operations.000 Thousand € 1. The period 2003 .000 Inditex´s FCF Gross cash flow Gross investment Free Cash Flow Source: Inditex´s annual reports 1999-2007 Inditex generates positive cash flow throughout all years except in 1998 and 1999. The positive FCF is caused by a decrease in investments. In 2002.

92 In the period 1998 and 1999. Figure 23 – Inditex´s FCF to net sales ratio 20% 15% 10% 5% 0% -5% -10% FCF to net sales FCF to net sales 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Inditex´s annual reports 1999 . It is positive that the company can demonstrate similar FCF growth rate as net sales. I analyzed Inditex´s net working capital. and that increase in sales is directly canalized to FCF. 4. can offset the negative operating working capital.92 The FCF to net sales ratio is constant from 2004 and fluctuations in operating working capital between years indicates that Inditex is controlling its working capital between years. both large fluctuations between quarters and the rationale for working capital being negative. I confirmed.4 Sub-conclusion – financial analysis I defined Inditex´s operating activities and reorganized its financial statement with the intention to separate operating assets from the non-operating ones. It confirms that Inditex is canalizing its net sales growth into FCF.FCF that would demonstrate high correlation between two. through positive FCF and high net sales growth. that Inditex is not facing financial distress despite a negative working capital. FCF analysis confirms that Inditex is not facing any liquidity or insolvent problems because Inditex generates high cash flow that.2007 Figure 23 shows relatively high ratio and between FCF to sales from 2004 to 2007. the figure shows a negative ratio simply because of negative FCF in the period. The 2002 high FCF to net sales ratio is due to extraordinarily decrease in operating working capital as earlier demonstrated 53 . in any case.

which is demonstrated with decrease in invested capital without a decline in number of stores.H&M demonstrates the best profitability margins at all levels and. I identified that the difference in profitability margins between Inditex and H&M is caused by different expansion strategies and business structure. despite having higher growth in net sales than H&M. I analyzed Inditex historical FCF and calculated the FCF to net sales ratio. when decomposing profitability margins. at first sight. whereas Inditex pursues an aggressive expansion strategy and canalizes a larger amount of its profit into new investments. The FCF confirmed Inditex´s healthy financial position with a constant increase in FCF from 2003 and constant FCF to net sales ratio for the last four years. GAP has been demonstrating very poor profitability margin in recent years and its EBITDA margin was below the peer group. Inditex has a lower NOPLAT margin and invested capital turnover. Consequently. 54 . However. Lastly. The companies have similar net sales but Inditex has almost four times higher capital invested. H&M has a more conservative expansion strategy and emphasizes on creating profit. Although GAP has been cutting down on its operational activities. it is mainly suffering from a decline in sales. seems to be strongest among the three.

I assume. Below.11) 55 . which infers that inflation is included. Below I will identify the most important parameters in terms of future performance and apply them in developing a budget scheme.93 Before creating a forecast performance.1 Budgeting Before conducting a budget analysis and forecasting future performance. Valuation analysis At this stage of the project.5. The budgeting is performed in nominal terms. The figure below shows the structure of the chapter. after examining the main factors that influence Inditex examination through strategic and financial analysis. I will demonstrate different account posts. Creating a budget period is extremely difficult because future performance is mostly based on historical performance which implies that any never-occurred-before incidents like unpredicted market changes or evolution of new trends are difficult to apply in future predictions. certain assumptions are required. all parameters are completed to initiate the valuation analysis. 93 Porter. I need to determine the length of the actual forecasting period. This dilemma is especially apparent in the fashion apparel industry because of high operational risk and fast-changing trends. p. in accordance to economic theory that companies that gain strong market position through sustained competitiveness will eventually be caught up by competitors that will eventually duplicate the firm´s core competences. Complete budgeting and budgeting calculation is placed in appendix 4. (1984. A long forecast period diminishes the terminal value and increases the value of the actual discounted cash flow. Figure 24 – structure of valuation chapter Budgeting Valuation Multiples Scenario analysis Source: own construction 5. which allows a more realistic valuation. I have decided to carry out a 15-year period.

5. 5.4 9. I have divided revenue estimation into three categories: sales by retailers.1.2007 56 . whereas growth in supplementary retail brands will occur in Europe.1 Net sales growth To predict future revenues. This is consistent with Inditex´s historic strategic approach in entering new markets.1 Zara Bershka Maximo Dutti Pull & Bear 66. p.5 6.1 Sales by retailers I believe it is relevant to investigate sales by different brands to total sales. In general. sales by retail brands.5 7. 41 The figure confirms that Zara is beyond any doubt the firm’s flagship and represents around twothirds of Inditex´s total sales in 2007. Table 5 demonstrates Inditex´s growth in the most important retail segments towards total sales growth in the period of 2001 to 2007. Another relevant trend to investigate is the historical growth rates for Inditex´s brands.8 2.1. Figure 25 – Sales by Inditex´s retail brands to total sales 5.1. Table 5 – Growth in Inditex´s retail brands Year 2001 Zara 19% Pull and Bear 31% Massimo Dutti 31% Bershka 50% Stradivarius 29% Oysho 0% Other -12% 2002 20% 18% 19% 48% 33% 0% 32% 2003 11% 8% 35% 32% 31% 93% 51% 2004 19% 32% 24% 31% 49% 59% 281% 2005 2006 2007 16% 21% 17% 17% 17% 18% 11% 15% 13% 24% 25% 16% 41% 26% 22% 49% 54% 29% 93% 78% 45% Source: Inditex´s Annual Reports 2001 .3 2.4 Strativarius Oysho Other Source: Inditex annual report 2007. and same-store sales growth. I believe that Zara´s growth will occur mainly in the emerging markets in Asia and Eastern Europe. which is demonstrated in figure 25 below.

retail brands are different in terms of size and structure. Despite the decline in 2007 sales. I illustrated that Inditex is rapidly expanding its amount of stores and hence it is significant to analyze the relationship between store increase and net sales increase. it generated 10 percent of total sales in 2007.2. the most appropriate method is to examine historical change in total sales to square meters. different store sizes in different regions. However. The most appropriate method for this is to divide total net sales to total square meters. I expect Berhska to maintain a reasonable growth in sales margin. Zara shows good growth margins between 10 to 20 percent in the period. The reason behind the decline in sales growth in 2003 is Zara´s weak performance whereas other retail segments do not show decline. However. I expect Zara´s high growth will eventually decrease when European markets reach the saturation point and most of its growth will come from the emerging regions.From 2001 to 2006.4. from 70 percent in 2003 to 67 percent in 2007. Inditex has been reducing the percentage generated from Zara sales to total sales. Stradivarius and Oysho show high growth in sales margin and are likely to become important retail brands in the future. This clearly reveals Inditex´s dependence on Zara´s performance. space reductions. Inditex demonstrates high growth in total sales except in 2003. which obviously affects sales per square meter.94 Berhska seems to be the retailer brand with the highest growth in the period. Berhska success indicates that Inditex. which means that they are not directly comparable. To respond to this operational risk. and so on. in some degree is able to focus and create growth for retail segments other than Zara. 94 95 Inditex annual report 2003 and 2007 Some retailers focus on space and distance between garments few items per square whereas others have higher amount of garments displayed per square meter. In part 4. I choose to refer to rates as efficiency in which I assume that higher positive growth equals enhanced efficiency. the results is inadequate because increase in growth could occur because of structural changes. because of more sales per square meter. which can reveal whether there is a consistency between total square meters and net sales. different designs. 57 .95 Therefore.

from 47 to 37 percent97. 253 Inditex has deliberately been decreasing its sales share in Spain by 10 percent from 2000 to 2007.Table 6 – growth in sales per square meter year 2005 2006 2007 Zara -2% 2% 3% Pull and Bear -9% 0% -1% Massimo Dutti -15% 5% 6% Bershka 0% 7% -2% Stradivarius 20% 16% -10% Oysho -2% 19% -10% Other 6% 27% 4% Total -0.96 It seems that Inditex is improving its total efficiency by a higher increase in net sales per square meter. Turning to growth rates in regions.1. Figure 26 – sales in geographic regions to total sales 10.8 9.2 Sales by markets Figure 26 illustrates total sales weighed between regions in 2007. In general. in 2006 most retail brands are increased in efficiency whereas in 2007 Oysho and Stradivarius decreased in efficiency.4 37. It clearly shows Spain and Europe´s significant importance for Inditex by generating almost 80 percent of the total sales. p.4 Americas Source: Inditex annual report 2007. especially due to high increase in 2006. table 7 shows historical sales growth in the period of 2001 to 2007. partly because of its high fluctuations and partly because of the short length of the observed period.1. 5.3% -0.4% 5. 96 97 Data on amount square meters only available from 2004 Inditex annual reports 2000 and 2007 58 .4% Source: Inditex´s annual reports 2004 -2007 It is difficult to draw any certain conclusions from table 6 above.4 Spain Rest of Europe Rest of the World 42.

South Pacific and Eastern Europe are priority regions for the 59 . The rest of the world. Expected growth in same-store sales is divided into annual volume growth and increases in prices.1.99 5.Table 7 – growth in sales between regions year 2001 Spain 20% Rest of europe 29% Americas 31% Rest of World 18% 2002 22% 35% 2% 12% 2003 16% 20% 3% 16% 2004 20% 27% 10% 21% 2005 2006 2007 15% 12% 9% 26% 28% 20% 22% 25% 13% 36% 44% 22% Source: Inditex Annual reports 2001 -2007 Observation above shows that growth in Spain has been declining. This clearly confirms that Inditex is emphasizing increasing operations in this particular region. in 2007. which is consistent with the strategic and financial analysis. It plans to open the first Zara stores in India in 2010. Another region that has been experiencing high growth is Europe. This puts additional pressure on the company to seek and gain shares in new markets.1. markets have still not reached a maturity point and hence Inditex is still capable of generating high growth in the region in the coming years. According to Inditex. is the region with the highest growth in 2007. the growth was 9 percent.98 Inditex opened their first Zara stores in Japan and China in 2007 and in South Korea in 2008. The simplest method is to assume 98 99 Inditex annual report (2007. especially the Eastern European. which consists mostly of Asia and Pacific.inditex.125) (05-02-2009) www. The Americas showed promising growth rates in 2005 and 2006 but declined in 2007. I separate future sales growth into same-store sales and new-store sales. Same-store sales growth Expected same-store sales growth is showed in table 8. This indicates that the European. Asia. This might indicate that the Spanish market is reaching a saturation point and that Inditex will not achieve the same high growth rates as previously. p. especially with retail brands other than Zara.3 Forecasting future sales growth Before estimating future sales growth.

I need to divide new store opening growth by half. I expect 2. its store opening growth rate will gradually decline through the period and reach 6 percent in 2022. the state of the global economy will slightly begin to improve. but from 2011 onwards. I need to make certain assumptions. In the period of 2011 to 2014. First. First. coherent with competition theory.cifs. Table 8 – Expected same-store sales Year Volume Prices Same-store sales E08 2% 3% 5% E09 0% 3% 2% E10 0% 3% 3% E11 2% 3% 4% E12 4% 3% 6% E13 4% 3% 6% E14 3% 3% 5% E15 3% 3% 6% E16 2% 3% 4% E17 1% 3% 3% E18 0% 3% 2% E19 0% 3% 2% E20 -1% 3% 2% E21 -1% 3% 1% E22 -1% 3% 1% Source: own construction based on above observations and assumptions The most uncertain factor in estimating future growth is to determine the length of current recession.5 percent annual price increase. I assume that Inditex´s store openings is spread equally throughout a fiscal year.that prices increase proportionally to the expected inflation. From 2014 percent inflation and hence 2. I estimate that Inditex will maintain a high percentage in 2008 and 2009. the world economy improves and people´s purchasing power and fashion spending increases. because of intensified competition and limited growth possibilities for Inditex. which entails that to find real sales growth. Inditex enhances volume growth for two reasons. Second. In the financial analysis part.asp?id=1763 60 . New store sales growth Table 9 – Expected new stores sales Year New stores of total stores Sales growth (50%) New store sales (80%) E08 15% 8% 6% E09 15% 8% 6% E10 14% 7% 6% E11 14% 7% 6% E12 14% 7% 6% E13 13% 7% 5% E14 13% 7% 5% E15 12% 6% 5% E16 12% 6% 5% E17 11% 6% 4% E18 10% 5% 4% E19 9% 5% 4% E20 8% 4% 3% E21 7% 4% 3% E22 6% 3% 2% Source: own construction based on above observations and assumptions In estimating new store sales growth. and then in 2011. Second. I need to estimate the percentage of net stores opened per year to total existing stores.100 I believe that the economic recession will continue to affect the purchasing power in 2009 and 2010. 100 (20-03-2008) www. I believe that volume growth will gradually decline. I illustrated the high percentage of new openings to total stores for Inditex. numerous new store openings in India and China will provide an increase in new store sales and same-store sales.

I estimate an EBITDA of 17 percent in year 2022. I predict that increasing operations in Asia will entail higher production and distribution expenses. the dollar is currently extremely low towards the euro and the budgeting estimates that dollar strengthens slightly.7 61 .3. EBITDA will drop further because of increased operating expenses. The given assumptions lead me to new store sales growth demonstrated in table 9. I addressed the limitation of Inditex´s vertical integration structure when the company operates further away from Spain. Second. strong bargaining power due to higher volume purchases is offset the by increase in garment material prices.1. First. and competitive advantage decreases. Total sales growth Table 10 –Total sales growth Year Same-store growth New store growth Total sales growth E08 5% 6% 11% E09 2% 6% 8% E10 3% 6% 8% E11 4% 6% 10% E12 6% 6% 12% E13 6% 5% 11% E14 5% 5% 11% E15 6% 5% 10% E16 4% 5% 9% E17 3% 4% 8% E18 2% 4% 6% E19 2% 4% 6% E20 2% 3% 5% E21 1% 3% 4% E22 1% 2% 4% Source: own construction based on above observations and assumptions Hence.103 Thus.1 103 See part 3. I assume that new stores do not perform as well as existing stores because it takes time to build up a customer base in new areas. which in the long term increases cost of good sold ratio. Hence. Consequently. The estimation is based on a statement from the company that if operations grow rapidly. I assume that new store sales are equivalent to 80 percent of same-store sales during the same period. the company will consider opening a distribution center in the region. the calculation above presumes that distribution center will open in the Asian regions. 101 102 See net sales growth with decimals in appendix 12 See EBITDA margin calculation in appendix 4. Hence. which in the long term increases operating expenses margin in the period. same-store growth and new-store growth added together lead me to the total sales growth demonstrated in table 10.2 EBITDA margin In the strategic analysis part.101 5. Without a new distribution center.Third.102 Cost of goods sold will mainly be affected by two factors.

I set the depreciation-to-sales ratio to 5. Further. the intangibles and goodwill to sales ratio has been decreasing from 4 percent to slightly above 1 percent. it still generates positive cash flow throughout the period and.2 106 See part 4.3 NOPLAT margin Average historic depreciation-to-sale ratio is around 5 percent. I believe that Inditex will decrease its operating working cash to 3 percent on the long term and thus.5. Hence. net working cash (including cash) to minus 2 percent.1 See appendix 4.6 percent in 1999 to 5.1. 104 105 See appendix 4. I believe that Inditex will maintain a minus 5 percent working capital to sales ratio. From 2003 onwards. it has been stable at around 5. From 2000 to 2007. The reason for high working cash to sale in 2008 to 2010 is based on the high fluctuation in 2008 quarterly reports.5 percent.2 107 See appendix 4.8 percent in 2003.1. Therefore. I predict leased issues to sales to be around 5 percent.1. thus the company is not facing any financial distress.5 PP&E.105 Although growth margins and FCF decreases in the budget period.106 5. I set the intangibles to sales ratio to 1 percent.4 Working capital Inditex has retained low and negative capital without indicating financial distress because of its high growth rate and FCF.5 percent lower margin than EBITDA. Leased issues and intangibles PP&E to sales ratio is 30 percent which is around 1 percent higher than average for the whole period.5 percent.107 Leased issues to sales has been gradually decreasing in the period from a peak 10. Hence. which is 2 percent higher than in 2007.2 62 .3. 5. Hence. which gives me an EBIT of 5. which indicates that depreciation tends to change in proportion to sales. The NOPLAT to sales margin is EBIT adjusted tax deducted from EBIT.104 The predicted operating interest rate in EBITDA is 28 percent in the forecasted period.

109 I choose to apply the DCF model for my valuation process.7 percent.5. Hence. the inflation rate has been exceptionally high but in 2009. WACC is the cost of capital invested and g is the expected growth rate to perpetuity. p. perpetual growth equals inflation plus real volume growth I will use the Spanish inflation rate to be consistent with WACC calculation in next chapter.5 percent perpetuity growth. Therefore.108 I believe that in the upcoming years it will remain low and on the long term stabilize to around 2. p. FCFt is each year cash flow.asp?idarticulo=94002 Petersen. However. which infers that inflation is included. 5. it has plunged to 0. Figure 27 – DCF model 5. I believe that Inditex will have a slow real growth of 1 percent because of the continuous rollout of Zara stores in Asia and other retail stores in Europe.high proportion horizon value of total value Source: Brealey. There are a number of shortcomings. (2005. (2006.2 Valuation There are a number of valuation tools to apply when conducting a valuation analysis. p.508-510) Koller. I expect 3.101) In applying the DCF method. DCF valuation is one of most used valuations tools today because of it is relatively simple to apply and solely relies on FCF rather than earnings and hence not dependent on accounting practices. In recent years. perpetual growth rate should be equal to inflation.6 Perpetual growth Perpetual growth is calculated in nominal terms. If no real growth is expected. Figure 27 demonstrates DCF formula and the most important element regarding applying the method.1 DCF model and WACC theory DCF model Present value = discounted FCF + continuing value 𝑃𝑉 = ∑𝑁 𝑡 =1 𝐹𝐶𝐹𝑡 𝐹𝐶𝐹𝑁 +1 + 1 + 𝑊𝐴𝐶𝐶 𝑊𝐴𝐶𝐶 − 𝑔 The FCFN+1 is the first FCF observed after the explicit forecasting period. The model is only as good as its assumptions .elsemanaldigital.25) 63 . (2005.2.sensitive towards WACC and perpetual growth . The DCF method consists of estimating discounted free cash flow and continuing the 108 109 (12-03-09) http://www.5 percent to perpetuity.

189-203) Elton.111 Figure 28 – CAPM theory 5. Source: Brealey. β is the sensitivity to the market. whereas if WACC is estimated too low. The critique is based on empirical tests that 110 111 See appendix 7. it has been criticized by the Fama-French. CAPM is theoretically easy to apply and therefore widely used risk to return model. (2003. One of the reasons for its popularity is that it is simple to apply. the firm will be overvalued. the firm will be undervalued. The three-factor model main point of criticism is that CAPM oversimplifies the market by using only one. beta whereas the threefactor model applies three betas: market factor.292-293) Recently. Markets are perfectly efficient All investors are equally rational and have same idea of return. The CAPM theory 𝐸 𝑅 = 𝑟𝑓 ∗ 𝛽 (𝐸(𝑅𝑚 𝑟𝑓 ) Where E(R) is the expected cost of equity. rf the risk free rate.1 for WACC formula and assumption Koller. three-factor model. and book-to-market factor.2 CAPM and cost of equity There are a number of methods in estimating cost of equity. The most important principle when using the DCF method is the consistency between the different components of WACC and free cash flow because since the free cash flow. and E(Rm) is the expected return to the market. (2006. p. p. (2005.most difficult task is to estimate the WACC rate.110 The WACC rate consists of different inputs that need to be addressed carefully because even small deviations in each component can have huge impact on the final WACC. p. it has a number of unrealistic assumptions that are illustrated in figure 28. is available to all investors (both debt and equity).2. size factor. The CAPM model is probably the most famous and most applied return to risk model. but it is built on unrealistic assumptions. If WACC is estimated too high. the WACC needs to incorporate the required return for each investor. Fama-French´s three-factor model and (ATP) arbitrage pricing theory have empirically criticized CAPM theory. All investors can borrow from or lend at risk free rate No transaction costs or inflation Many small investors (no large investor can impact price) Further. Despite its simplicity.291) 64 .

it uses fewer assumptions as more factors are implemented but the theory is more complex to apply in practice. I need to define the risk-free rate. This entails that I need to make certain assumptions in applying CAPM. Despite the fact that the three-factor model and ATP theory have gained respect. p. p.113 Compared to CAPM. they have still not outperformed the traditional CAPM model.2 that shares of small firms and those firms with high book-to-market have provided higher average returns. it tells little about how to implement it in practice. (2006. 5. p. the 10-year bond was 3.203) Brealey. which is the stock´s sensitivity to the market. to find an appropriate 10-year government bond I calculated the average price from 2006 to 2008. Hence.296) 115 (01-03-09) http://www. (2006.115 The Spanish 10-year government bond has been fluctuating in recent years. the investment is less volatile than the market. An appropriate risk free-rate can be a 10-year government bond. which is 4. First. When beta equals one. (2006. ATP does not require an efficient market. whereas if beta is less than one.112 The CAPM model has also received criticism from the ATP (arbitrage pricing theory).116 112 113 Brealey. the investment has same volatility as the market and thus bears the same risk. (2005.2.3 Estimating the risk-free rate Although CAPM model is built on strong theoretical foundation. 5.4 Beta Beta is an instrument that measures the systematic risk.170) 65 . It assumes that each stock return depends partly on pervasive macro-economic influences and partly on events that are unique for that company.2. The CAPM model is the still most commonly used model globally and therefore I will choose this model to calculate Inditex´s cost of equity.86 percent at end-year 2008.bde. If beta exceeds one. p.114 Due to the current financial crisis.pdf 116 Brealey. the investment is more volatile than the market.199) 114 Koller.

To calculate the beta.67) 66 . this assumption also has its weaknesses. However.59) 121 Koller. (2005. p. I use historic return data from the period of 2003 to 2008 for Inditex and IBEX 30. thus requiring a new beta estimate. (2001. product demand) can easily change.89. sales channels. (1999. that there is a tendency that all beta moves toward one.33.122 117 118 See beta calculation formula in appendix 7. p.117 I use historic observations to find an appropriate beta. It is problematic to assume that historical beta is equivalent to future beta because it doesn´t include new trends and potentials.5 and 5. 5. Market conditions (trends. and it measures the compensation that investors demand when they invest in a market where the risk-free rate is withdrawn.11) 120 Petersen.5 percent121 but Damodaran sets the risk premium rate to slightly lower than 4 percent. which is the same risk as market.119 By applying this method. which is adjusted beta equivalent to the stock´s beta multiplied by 0. but for simplicity.67 plus 0. However.84. The calculated 5-year historic beta is 0.2 Koller (2005. To estimate beta. There are several methods for adjusting beta towards industry. p. I need to adjust my calculated beta towards the industry beta.306) 122 Damodaran. Koller states that the appropriate range for the risk premium today is believed to be between 4. p. I get an adjusted beta of 0.2.314) 119 Damodaran. Despite of the imperfection of the method I still consider it to be the most appropriate method to work out the beta. (2005. I choose to use the formula that beta equals the covariance divided by market variance.120 Defining a proper risk premium is a difficult task with many uncertainties.5 Risk premium The risk premium is the difference between the expected return on the stock market and the riskfree rate.118 The method assumes that all share betas eventually move towards beta 1. I choose to adjust Inditex beta towards industry beta by applying the Bloomberg adjustment calculation. p. This implies that the forecasted beta is built upon the assumption that the forecasted beta is to a large extent equivalent to historic beta. The rationale is that studies have indicate that over time.

330 registered shares outstanding.4 126 Inditex annual report (2007. So far. less excess cash. the next step to execute the actual valuation is to calculate Inditex´s value and compare this with the company´s current stock price on the Spanish stock exchange.5 percent. which means that there is no debt level in Inditex´s capital structure because the net debt is negative.123 I have chosen to set my market risk premium to 4. (2005.294) 125 See appendix 4.145 25. Inditex has 623. excess cash is non-operating cash where working cash is withdrawn. the calculated WACC is equivalent to the cost of equity.ncb.015 15.161 414 24 24.2.5 percent. the risk premium was set to 4.723 623 39.32) 127 Fully illustrated in appendix 4. Nonoperating excess cash exceeds the sum of reported debt and operating leases. my calculated value should be close to the market value.7 DCF valuation After calculating WACC and the estimated budget period.124 In my case. 5. p.Inditex´s valuation report conducted by Caja Madrid in 2003.125 5.2.18 percent. Hence.6 WACC Net debt is defined as reported debt plus the present value of operating leases.5 67 . I estimate Inditex´s WACC to be 8.126 CDF valuation is partly illustrated in table 11. Now I have all inputs to calculate the WACC (weighted average cost of capital).66 € Source: own construction I estimate the fair value of a Inditex share to be approximately 40 EUR 123 124 (16-12-03) http://ftp. I have tried to be as accurate and consistent as possible while analyzing and calculating each component and thus.127 Table 11– CDF valuation (millions €) PV of FCF (2008-2022) PV Horizon value PV enterprise value Interest bearing debt Minority interests Equity value Shares outstanding Value per stock 10.pdf Koller.

Despite this. The rationale behind the method is to compare market prices from the peer group to a company that is being valued. Theoretically. in terms of business. risk and accounting principles. and results from these companies should be more comparable than peer group results. strategic position. it is highly relevant to conduct a scenario analysis that reveals different possible scenarios of how the macro-economical environment and Inditex could develop. I have chosen to use multiples valuation as a “sanity check” to investigate whether my estimation is comparable to multiples peer group estimates.128 Thus. I am aware that my peer group election is very divergent in terms of the factors mentioned above. It consists of range from small-size retailer to global enterprises that vary in capital structure. this is problematic because I expected my own valuation to be closer to the market value. Therefore.Infinancials. in addition to peer group multiples valuation.inditex. Due to many uncertain factors regarding future perspectives. However. 5. I have chosen to use two multiples instrument: P/E (price earnings) and EV/EBITDA. To some 68 .On 1 March 2009. and other factors. I will apply and compare multiples own estimates with estimates from the financial database Infinancials. risk. 128 129 (01-03-09) www. and so on.129 where multiples valuation exists until 2010.3 Multiples valuation Previously I have argued that relative valuation and multiples are not appropriate valuation tools because of certain drawbacks. companies within the same industry should be identical to the given www. the share price was approximately 30 EUR. I estimate the value of the company to be 33 percent higher than market estimation. structure. There are a number of different multiples instruments to employ. revenue potential. I will separate and find weighted average of Inditex´s strongest competitors H&M and GAP because these companies are more similar to Inditex.

only H&M and Inditex have a higher than 10 times P/E ratio.88 multiples H&M and GAP value per stock 27. This can be interpreted such that the peer group is expecting far lower earnings in the future.17 multiples peer group value per stock 14. Hereafter.74 € Inditex own valuation 20.56 € 27. I compare the peer group weighted average with Inditex´s Infinancials and my own valuation estimates. which indicates that they are expecting to obtain higher profit than the rest of the peer group. It is noteworthy that multiples peer group value per share spread is far lower than market price per share and my own value per share. According to Financials. 130 131 Brealey.130 Investors are more interested in the fluctuation in P/E ratio rather than the value itself.68 € Weighted average H&M and GAP 14.1 69 . which might influence the result. I find the weighted average of the peer group because of their different market sizes. p.1 P/E Price earnings Price earnings is defined as the purchase price for receiving one euro (or any other currency) of a company´s earnings and calculated as the market value of a share divided with earnings per share after taxes. which infers that it is sensitive towards differences in accounting practices.35 14. Subsequently.06 12.50 8.34 Weighted average peer group 7.3. 5. One should notice that P/E consists of income after taxes. Table 12 – price earnings (P/E) multiples estimates P/E Multiples E2008 E2009 E2010 Inditex 14.65 20.91 12.57 8.28 Source: (10-02-09) www.42 20.First.36 13.financials. (2006. or it cannot be compared because of excessive differences. I calculate the peer group and strongest competitors´ market value and compare these with Inditex.00 € 24. Normally a high P/E ratio indicates that the market has high expectation regarding a company´s future earnings and a low P/E ratio the opposite.46 € and own construction 131 P/E multiples valuation clearly demonstrates the differences between Inditex and the peer group.795) See entire multiples valuation in appendix 8.41 € 16.

2 EV/EBITDA EV/EBITDA has two major advantages over P/E. First.31 € 19.3. Therefore.88 5.43 multiples peer group value per stock 17. it is less affected by different accounting methods. the benefit of applying EBITDA is that it is calculated before non-operating gains.369) See full multiples valuation in appendix 8. it is not affected by capital structure.69 7.49 5. 5.90 € Inditex own valuation 11.65 multiples H&M and GAP value per stock 28.3 Discussion of multiples valuation Peer group multiples valuation gave disappointingly far lower results than the market and my own calculated P/E and EV/EBITDA. losses. Multiples peer group value per share is calculated by multiplying Inditex´s expected EBITDA with the peer group´s weighted average and divided with shares outstanding.Therefore. Second.48 11.23 7. Table 13 – EV/EBITDA multiples estimates EV/EBITDA multiple E2008 E2009 E2010 Inditex 7. because it derives from enterprise and own construction 133 EV/EBITDA multiples for peer groups provides similar results as P/E multiples. 132 133 Koller. 5.85 Source: (10-02-09) www. it is more relevant to use H&M and GAP average P/E to compare with Inditex because the companies are more similar. It contributes to slightly higher multiples value per share than P/E.95 € 26. p.financials.132 EV/EBITDA multiples is calculated by dividing the calculated enterprise value from DCF valuation with the future estimated EBITDA. EV/EBITDA multiples for H&M and GAP value per share covers the market value.51 € 28.15 10.11 8.48 Weighted average peer group 4. and depreciation.26 6.3. A multiples valuation of H&M and GAP is much closer to my own calculated value per share. my own EV/EBITDA is higher than results from Infinancials.09 € Weighted average H&M and GAP 8.17 € 19. but it is still much lower than my own value per share and market value.2 70 . (2006. but it is below my own calculated value. Consistent with earlier results.

I have decided to divide the analysis into two main scenarios whereby my own valuation is a base-case scenario. which is directly transferred to the higher multiples ratios because of more optimistic expectations. my own valuation of Inditex exceeded the peer group and strongest competitors. The main motive behind my high multiples valuation is my high-calculated value in DCF valuation. 5. which indicates that market expects H&M to generate higher earnings than Inditex. because of many possible risk factors and unclear future perspectives. To make the scenario analysis as realistic and thorough as possible. I have reached the last stage in the thesis. which reflects lower market value than otherwise. Hence. Inditex strong performance compared with peer group and my high calculated value gave high multiples results.1 Scenario 1 – best-case scenario The best-case scenario analysis generally assumes a better performance than a base-case scenario on all levels and includes the identified internal and external factors that can stimulate Inditex´s operations.4. 5. In both cases. I emphasized the importance of the scenario analysis previously. I estimated that the current economic crisis will begin to improve in 2011 and I did not include all possible risk factors that I previously identified in the strategic part. The objective is to identify and analyze different scenarios by realizing all possible opportunities and threats that I identified in the strategic and financial analysis. the scenario analysis. Hence.Only H&M had higher P/E and EV/EBITDA than Inditex. I feel compelled to perform a scenario analysis were I intend to construct different future scenarios that comprise possible opportunities and threats that Inditex may face in the upcoming future. The assumed best-case scenario is demonstrated in figure 29 and the calculations are posted in appendix 9.4 Scenario analysis At this stage. This raises the question of whether my predictions were too optimistic in conducting the valuation of Inditex. It looks like the market has a more pessimistic future scenario for Inditex. due to highly uncertain market perspectives. 71 .

which maintains a low cost of goods sold to net sales ratio. Inditex achieves great success because of its high-fashion products and strong brand.5 percent real perpetual growth and hence a 4 percent perpetual growth when inflation is included. and South Korea. In the beginning of 2010. Markets in Eastern Europe and Asia begin to recuperate and demand for fashion apparel increases after a low demand period during the economic crisis. I assume that Inditex builds up an Asian distribution center. I predict that Inditex will have a successful management transformation when Amancio Ortega retires and the new management is capable of preserving Ortega´s visions and retaining a strong organization without any major conflicts between stakeholders. In the period. The good-case scenario expects Figure 29 – assumed factors in best-case scenario Assumed factors in best-case scenario: Shorter recession than expected in base-case Increased demand in new markets for fashion Low dollar against euro High growth in annual new store openings Very successful on new markets Focus on growth and profits reinvested into operations Higher perpetual growth Strong organization and no management conflicts Lower distribution costs due to new production centers abroad Source: Own construction continuous high growth rate in net sales. which decreases operating expenses that are canalized to customers in term of lower prices. 72 . Inditex begins to rollout its Zara stores in China. I further assume that Inditex is consistent with its business model and reinvests its profit back into operations. the best-case scenario analysis emphasizes the rapid recovery of the economic crisis at the end of 2009 and the beginning of 2010. as well as the enhanced global demand for fashion apparel. Despite higher prices in Asia than in Europe because of higher distribution costs. and I expect that Inditex´s fashionable styles and sizes fit the Asian market well. I expect a 1. Lastly. I expect that operating expenses will be relatively low due to new distribution centers outside Spain. India. I expect a continuous weak dollar towards the euro.First.

I assume that the company is not capable of transferring its successful operational model from the European to the Asian markets because different preferences and the wrong pricing strategy. which I analyzed previously in the strategic chapter.2 Scenario 2 – Worst case scenario The worst-case scenario analysis generally expects a poorer performance than the base-case scenario. Further. and customers will eventually prefer brands that are more inexpensive. 73 Figure 30 – Assumed factors in worst-case scenario Assumed factors in worst-case scenario: Longer recession than expected in base-case Slowdown in annual new store openings No perpetual growth Dollar strengthens towards euro Management conflicts Lack of alignment between strategy and operations Competitive advantages decreases Unsuccessful in new markets Higher distribution and transportation cost Source: Own construction . and thus differentiate itself from cheaper brands. The assumed factors in the worst-case scenario are illustrated in figure 30 and all calculations are posted in appendix 10. are strong in the region. I intend to include the most important risk factors. Hence. Inditex´s strategy is to keep prices higher than in the home market due to higher distribution costs and to position itself as more expensive brand. First. Eastern Europe is one of the regions that will be hit hardest by a long and profound economic recession because of the countries´ vulnerable financial markets. which entails that Inditex competes in a different price segment and is forced to readjust its position strategy.4. Inditex positions itself as middle to high-end brand. 5. I assume that the current economic meltdown will last longer than expected in the base-case scenario. I assume that Inditex mainly focuses on new markets in Asia and Eastern Europe as stated earlier but both markets will create higher difficulties for Inditex than it earlier expected. the purchasing power for the middle class is low. In regards to the Asian market. Although Inditex´s brands.I expect a value per share of approximately 54 EUR when the best-case scenario factors are included. especially Zara.

3 percent perpetual growth when inflation is included. I believe that Inditex will improve its operating working capital deficit by increasing operating assets to sales by two percent. Some posts such as operating expenses. Further. and PP&E are fixed costs and cannot be decreased in proportion to the negative growth in net sales. A principal-agent conflict arises between new management and shareholders. Moreover. leased issues. 74 . I expect the American dollar to strengthen towards the euro in the long-term. lower growth in raw volume decreases Inditex´s bargaining power with suppliers and impedes the firm to compress prices further. and strategic direction. I expect a value per share of approximately 22 EUR when all worst-case scenario factors are included. Asian preferences diverge from Europeans in such a way that Inditex cannot directly assume that successful apparel in Europe will be automatically successful in Asia. the new entrants with competitive business models enter the industry. The company loses some of its competitive advantages in terms of being the trendy and fastfashion retailer to low price. which intensifies competition. In addition. The rationale behind improving its operating working capital is to create trust and avoid external actors interpreting the decline in sales as a sign of distress. which infers higher raw material costs because Inditex transactions with external suppliers are made in dollars. which inevitably increases distribution and transportation cost. Furthermore. I expect 0.In addition. Low sales growth and low store openings growth in the Asian region encumbers Inditex to open a distribution center in Asia.5 percent real perpetual growth and hence. The negative operating working capital is another dilemma. which eventually spreads out through the entire organization. Ortega´s retirement from the board creates the managerial risk factors mentioned in the internal part in the strategic analysis such as top management conflicts. Most of the posts are a percentage of the total sales and decreases in proportion with the increase and decrease in sales. Inditex´s negative net sales growth rate creates some complications when forecasting other posts. disagreement on visionary ideas. whereby local trends are integrated into apparel preferences.

5.4.3 Compare all case scenarios´ ROIC

Perhaps the best method to compare different scenarios is to compare ROIC development among the three scenarios because it shows annual development. Figure 31 demonstrates ROIC for all three scenarios along with WACC.134
Figure 31 – Different case scenario´s ROIC

40% 35% 30% 25% 20% 15% 10% 5% 0%

Case scenario´s ROIC
base case scenario (own valuation) Best-case scenario Worst-case scenario WACC

E08 E09 E10 E11 E12 E13 E14 E15 E16 E17 E18 E19 E20 E21 E22 base

Source: own construction

All case scenarios have higher ROIC than WACC which indicates that all scenarios are profitable. There are two interesting observations to draw from the figure above. First, the spread between the different scenarios is highest in the middle of budget period and lowest in the end. Second, the ROIC in all scenarios is far higher than WACC, which is surprising because according to competitive theory, ROIC should approach WACC as the company loses its sustainable competitive advantages.135 However, in the strategic analysis, I stated that Inditex possesses unique resources such as intangible value, supply chain, and brand value, which it has been developing in recent years. Hence, the difference between ROIC and WACC is the value of unique resources that is difficult to duplicate for its competitors.

134 135

Diiferent case scenario ROIC is showed in appendix 9 Porter, (1984, p.21)


5.5 Sub-conclusion – Valuation
The budgeting part concluded that the Zara brand is reaching its saturation point in South and West Europe and therefore Inditex seeks to roll out supplementary brands such as Bershka and Oysho in the region. Inditex sees high market potential in Eastern Europe and Asia the in upcoming future, and it will begin to roll out stores in the regions in upcoming years. When global economic situation improves, I estimate that Inditex will gain considerable success in new markets because of its strong business model and strategic position. In the second part, I calculated the expected WACC by applying CAPM method. The WACC was estimated to be 8.18 percent. Thereafter, I constructed my own valuation model by applying the DCF valuation method. I calculated the value per share to be 40 EUR, which is around 33 percent higher than market value. High differences between my own estimated valuation and market value encouraged me to perform multiples P/E and EV/EBITDA valuation where I used the peer group and main competitors as multiples. In last part, I assumed and constructed two case scenarios of Inditex´s future performance. The best-case scenario incorporated all possible opportunity factors, whereas the worst-case scenario included all possible risk factors that could occur.


6. Conclusion
In the introduction chapter, I discussed the relevance of creating a valuation, based on internal and external factors, and the efficiency of markets. In the Inditex chapter, I briefly introduced the company and described its retail brands. Furthermore, I discussed possible principal-agent conflicts between the dominant and minority shareholders due to possible conflict of interests and asymmetric information.

I divided the strategic analysis into three parts: macro-environmental, industry competition, and internal analysis.

In the macro-environmental analysis, I used the PEST model to divide external factors into political, economical, socio-demographical, and technological factors. In recession periods, customers tend to become more price-sensitive than in boom periods, which benefits price-leader companies. In addition, I estimated that the dollar would most likely strengthen towards the euro in the future, which affects Inditex to some degree. I concluded from a socio-demographic perspective that growth possibilities are most favorable in Asia and Eastern Europe because of rising middle class, increasing fashion awareness, and purchasing power.

In the industry competition analysis, I applied Porter´s five forces framework strategy in the competitor part. I identified that Inditex has attained a strong market position due to unique positioning in the high fashion with low cost segment. I further concluded that there are relatively high entry barriers due to strong brand value, size, and unique resources that Inditex has been building up in recent years. Inditex co-owns most of its important factories, which improves its bargaining power over its suppliers.

In the internal analysis, I applied Porter´s value chain to address Inditex´s unique business model that has gained a strong competitive advantage in the industry. Inditex emphasizes a fast-fashion business model that responds quickly to changes in trends, and adjusts supply to demand. I identified that Inditex has developed certain essential processes to supplement its operational model such as its vertical supply chain management that enhances efficiency, differentiation, and


I started by analyzing Inditex and the peer group´s EBITDA ratio to get an idea of their profitability. H&M. and Inditex´s cash flow analysis. canalize increase in sales to FCF. the analysis of profitability margins illustrated that Inditex´s low margins. compared to H&M. In profitability and peer group analysis. Hereafter. Inditex decreased sales risk by launching more products than competitors do. Hence. profitability and peer group analysis. I identified H&M and GAP to be Inditex´s strongest competitors due to their similarities in terms of business model. GAP showed a very poor performance with decline in sales and was not able to improve its operational efficiencies. Inditex´s FCF analysis has demonstrated that. Inditex generated higher net sales growth and same-store sales than H&M and GAP. which included a higher amount of invested capital. were mainly caused by Inditex´s aggressive expansion strategy. I further calculated that Inditex uses more operating working capital throughout a year than at the end of each fiscal year. The main objective in reorganizing Inditex´s financial statement part was to separate operating activities from non-operating activities. Inditex has been able to increase its FCF by keeping its gross investment relatively low compared to its gross cash flow. 78 . size and structure. Hereafter. and GAP´s ROIC. I divided the financial analysis into three parts: reorganizing Inditex´s financial statements. in comparing the three companies. Inditex has been able to maintain a relatively constant proportion between FCF and net sales and thus. However.flexibility. I argued that it´s operating working cash flow was negative due to its business model and high expansion rate. I expanded the profitability analysis by calculating and decomposing Inditex. Inditex prefers to canalize profit into new operations while H&M pursued a more conservative expansion strategy and seemed to focus on creating profit. I concluded that H&M demonstrates superior profitability margins at all levels and at first sight seemed to be the most profitable company. in recent years. Furthermore.

and calculated its value per share and ROIC. and other. In the best-case scenario. such as long recession. I decided to perform a “sanity check” by conducting peer group multiples valuation. best-case and worst-case performance scenarios. In the worst-case scenario. and that consequently economic situation will improve. Hereafter. and perpetual growth rate. Best-case scenario´s value per share was 54 EUR and worst-case scenario´s value per share was 22 EUR. I constructed two possible scenarios of Inditex´s future performance. I applied conclusions from the strategic and financial parts to create a valid budgeting scheme. I decided to use two multiples P/E (price earnings) and EV/EBITDA. I assumed a better performance than the own valuation and included factors such as shorter recession. valuation. when only external information is applied. multiples. In the budgeting part. and scenario analysis. Furthermore. I assumed that Inditex´s future growth would come from Asia and Eastern Europe due to prosperous conditions in the regions. Results from both the peer group and the market multiples gave a lower value per share than my own estimated valuation multiples. I estimate the value per share to be approximately 40 EUR. 79 . The reasons for higher P/E and EV/EBITDA valuation in own estimation are higher expected earnings and the higher estimated enterprise value. I included risk factors that I had identified earlier in strategic and financial analysis. managerial conflicts. The own estimated value per share was 33 percent higher than market price per share. I assumed that the economic recession would slowly begin to reach its conclusion in 2011. which entailed estimating future FCF. Thus. WACC. increased demand in new markets. I decided to apply the DCF (discounted cash flow) valuation instrument. failure in new markets and others.I divided the valuation chapter into four parts: budgeting.

Porter. Myers. & Pratt. Brealey. first edition. Shannon P. (1999) “Estimating Risk Parameters”. Richard (2006) “Exploring Corporate Strategy” Prentice Hall. 2008. first edition. Karl. John Wiley & Sons. Inc. Michael E. Return on Invested Capital (ROIC)and Return on Equity (ROE): Measurement and Implications” Social Science Research Network Damodaran. Tim.(2002) “Den skinbarlige virkelighed – vidensproduktion indenfor samfundsvidenskaberne” samfundslitteratur. (2003). Niculita. Alina V. McGraw Hill International. Scholes Kevan. ”Valuation” McKinsey & Company. 2. F. “Competitive strategy: Techniques for analyzing Industries and competitors” New York. The Free Press first edition Porter. Stephen J. “Economics and Management of Organizations”. (1980). Elton. Seidman. fourth edition. Aswath (2007) “Return on Capital (ROC). København. Damodaran. (1984) “Competitive Advantage: creating and sustaining superior performance” New York.List of literature Books Andersen.3isite. Johnson. Franklin (2006). “Modern Portfolio Theory and Investment Analysis”. Michael E. Martin J. - 80 . (2001) “The Dark Side of Valuation” Financial Times: Prentice Hall. Hendrikse. George (2003). McGraw Hill international. David (2005). (2004) “Economic Development Finance” Sage Pubns. Christian V. & Goetzmann. Academic articles Damodaran. seventh edition. Gruber. Udgave. Koller. Gerry. Stuart C. 6th edition. William N. Petersen. Edwin J. The Free Press. & Allen. Richard A. first edition. The McGraw Hill International. Wittington. Aswath. www. Marc. Goedhart. (2005) “Regnskabsanalyse for beslutningstagere” Forlaget Thomson. Wessels. Brown. Devangshu. “Corporate Finance”. (2002) “Retail at the speed of fashion” Third Eyesight. “Valuing a Business”. Stern School of Business. 8th edition. fifth edition. Aswath. New York Dutta. Ib. & Plenborg. first edition.

John “Fashion Conquistador” (04-09-07) Industry reports “H&M profit rises with 28% on new Ghemawat. Pankaj & Nueno. - - - Newspaper articles “Debt free Zara looks beyond pain in Spain” (26-10-08) www. 2 page Various reports “4 scenarios for the future of global financial crisis” (20-03-2008) “10-year government bonds yields on domestic markets” (01-03-09) “Zara and the art of supply chain management” (09-06-09) “La inflación en España cae a sus mínimos en cuarenta años”(12-03-09)www.europa. Eugene 1965 “Random walk in stock market prices” Financial analyst Journal 51 – September – October 1965.timesonline. Journal of Financial Economics “Textile liberalization and the EU memo” (19-07-09) www.elsemanaldigital. José 3 No.cifs. dollar decline”(27-03-08) www. Jensen.ft. (2008). (2003) “Zara: Fast Fashion” Harvard Business Publishing. 25 “Inditex Company Report” (16-12-03) www. Gallaugher. Michael & Meckling William H. “Zara case – Fast fashion from Savvy Systems” “Marketing strategies for fast-moving consumer goods” (05-02-09) ”Hennes & Mauritz lander i Kina” (12-04-07) www.- Fama. Eugene 1969 “Efficient capital markets: Review of theory and empirical work” Journal of Finance 81 .ie “Scrubbing the numbers” (01-03-04) “Madonna to star in H&M ads” (06-06-06) “Euro vil komme under pres” (16-01-09) “Zara is now bigger than GAP” (23-08-08) Agency costs and ownership structure. Fama. (1976) Theory of the firm: Managerial “Zara puts on the back foot over Portuguese child labor claim” (01-06-06) www. List of Appendix Appendix 1 Appendix 2 Appendix 3 Appendix 4 Appendix 5 Appendix 6 Appendix 7 Appendix 8 Appendix 9 Appendix 10 Appendix 11 Appendix 12 Inditex´s invested capital calculation Inditex´s NOPLAT calculation Inditex´s free cash flow calculation Inditex´s forecasted performance H&M´s NOPLAT and invested capital calculation GAP´s NOPLAT and invested capital calculation WACC and Beta Multiples valuation Best-case scenario calculation Worst-case scenario calculation Different scenario´s ROIC Net sales growth (with decimals) 82 and Quarterly reports Benetton annual reports 2000 – 2007 Burberry Group annual reports 2004 – 2007 Esprit annual reports 2000 – 2007 GAP Annual reports 2001 – 2007 H&M Annual reports 1999 – 2007 IC Companys annual reports 1999 – 2007 Inditex annual reports 1999 – 2007 Inditex quarterly reports 2003 – 2008 Limited Brands annual reports 2004 – 2007 Next annual reports 2004 – 2007 Polo Ralph Lauren annual reports 2001 – 2007 Database

600 659.085 83 .200 2.612 2.698.793 2.926 9.800 -1.800 - -1.382 2000 396.034 2006 8.095.801.618 172.459 290.129 165.593 407.696 -27.264 -8.264.535 366.337.315 1.561 496.959 5.739 309.143 560 378.570 1.223 141.658 164.400 1.612 1.479.261 -238.073 3.085.600 151.739.367 138.713 9.789.606.00 1.002 1.900 4.137.436 3.015 11.046.751 360.651 529 214.871 1.459 670.227 410.100 1.886 128.148 33.827 -203.363 2.542.618 358.078 57.247 9.200 -22.958 -251.296.604 -109.147.553 11.581 149.849.470 7.418 921.376 -305.711 -3.207 1.583 -2.010 516.069 1.764 1.300 704.375 4.608 722.912 -15.816 11.787.616 21.000 -313.148 2006 1.441 3.115 1.804 229.000 -1.025 203.495.966 76.989 -2.113 5.203 -1.636 -583.227.179.974.957 8.700 -102.826 -2.275 2.095 76.400 -76.082.730 1.500 -158.410.548 447.625 41.483.032 14.592 -286.329 30.421 1.136 1.348.432.824 475 262.900 814.817 41.788.258 16.000 EUR) 1997 139.795 -66.800 -489.734 10.900 -1.095 1.261 1.444 347.000 -264.035.219 2001 3.670 -4.800.589.900 7.558 329.455 -64.047.789.686 -433.303 Appendix 2 – Inditex´s NOPLAT calculation year Net sales cost of goods sold gross profit operating expenses net operating ex/income operating profit (EBITDA) ammortization and depreciation operating profit (EBIT) taxes on EBIT NOPLAT (1.900 -57.700 -816.500 -41.729.656.965 1.208 2001 544.672 1.500 873.267 607 352.265 -3.259 -347.480 184.926.000 2.706 1.434 1.209 286.319 88.929 2.632 -135.045.434.112 9.00 1.200 521.276 4.405 61.568.664 -1.800 -1.848 2003 4.563 1.392 250.305.784 -2.552 206.148.653 18.333.690 -119.843 -496.000 EUR) excess cash financial investment Investment in associates Total funds invested (1.728 18.198.561 -2.019 -1.201 2.882 2002 3.085 1.248 1999 317.200 241.085.243 -17.927 3.963.700 868.700 379.598.00 1.577 2007 1.965 387.196 -91.531 425.396 447.787 18.871 32.723.200 325.953.520 2000 2.144 -65.392 437.874 136.480 2.700 -799.097 324.680 106.369 26.307 20.100 -988.851 454.05 668.600 10.013 303.367 49.686.366 396.513.296 2004 789.816 -29.356.828 1.942 53.032 60.208 1.212 2.680 273.500 -141.141 2002 629.129 86.Appendix 1 – Inditex´s invested capital calculation year operating current assets non-interest bearing liabilities operating working capital excl operating cash operating cash operating working capital incl operating cash net property and equipement establishment expenses Investment property Rights over leased issues deferred net expenses/income parent company shares net other assets (liabilities) operating invested capital (ex.196.719 136.008.443 23.322 -365.791 -571. goodwill) acquired intangibles and goodwill Invested capital (1.031 318.100 -208.700 -982.400 198 143.216 -238.429 319.817 870.538 65.500 -114.406 100.501 2.682 669.000 -253.294 1.208.423.719 670.603 72.664 -497.060 1.151.00 914.760 2.466 1.740.472.539.793 3.827 189.652 452.849.442 275.855.396 114.077 49.900 -2.294 2007 9.400 -186.086.558 807.955 868.021 7.735.614.451.500 626.515.163 8.045 2003 810.200 1.531 23.296.758.810 -8.960 -83.300 296.484 134.180 -425.543 98.508 2004 5.641.230 2.622 -418.500 -206.459.194 251.600 -84.174 4.581 251.242.429 2.851 2.551 347.502 4.031 3.446 3.563.186.756 2005 1.000 EUR) taxes on EBIT income tax (account statement) tax shield on interest paid taxes on interest received net deferred tax asset/liabilities decrease (increase) in deferred taxes operating taxes on EBITA 1998 1.200 410.040 3.263 158.082 7.333.279.226.236 20.166 915.872 -318 22.192.596 -142.293.070 10.237 77.182.734 670.987 2.468 13.900 517.000 1.427 1.995 1.644 -2.652 164.560 1998 239.475 504.759 -31.800 2.112 1.614.913 89.835 36.995 -17.900 -189.232 2.137 22.576 833.868 16.719 1.765 -19.700 -636.277.093.875 2.400 -246.082.480 22.063 37.271 1999 2.499 2005 6.652.112 410.151 10.663 1.013.184 1.398 62.065 1.753 -2.077 1.

227.376 -50.820 -31.271 84.016 -12.538 -41.539 -0 -343. (% net sales) EBITDA (% of total sales) depreciation and amort (% net sales) EBIT (% of total sales) account tax (of total EBIT) Net income (P/E) statuary tax rate in Spain accounting operating taxes (% EBIT) readjusted EBIT tax NOPLAT (% of total sales) E2008 11% 45% 34% 0% 21% 6% 16% 26% 11% 33% 28% 28% 11% E2009 8% 46% 34% 0% 20% 6% 15% 26% 11% 33% 28% 28% 10% E2010 8% 47% 34% 0% 19% 6% 14% 26% 10% 33% 28% 28% 10% E2011 10% 47% 34% 0% 19% 6% 14% 26% 10% 33% 28% 28% 10% E2012 12% 47% 34% 0% 19% 6% 14% E2013 11% 47% 34% 0% 19% 6% 14% E2014 11% 47% 34% 0% 19% 6% 14% E2015 10% 47% 34% 0% 19% 6% 14% E2016 9% 47% 35% 0% 18% 6% 13% E2017 8% 47% 35% 0% 18% 6% 13% E2018 6% 47% 36% 0% 17% 6% 12% E2019 6% 47% 36% 0% 17% 6% 12% E2020 5% 47% 36% 17% 6% 12% E2021 4% 47% 36% 17% 6% 12% E2022 4% 47% 36% 17% 6% 12% Horizon 4% 47% 36% 17% 6% 12% 33% 28% 28% 10% 33% 28% 28% 10% 33% 28% 28% 10% 33% 28% 28% 10% 33% 28% 28% 9% 33% 28% 28% 9% 33% 28% 28% 8% 33% 28% 28% 8% 33% 28% 28% 8% 33% 28% 28% 8% 33% 28% 28% 8% 33% 28% 28% 8% 84 .642 -369.062 -93.216 142.464 2006 1.098 44.441.692 -44.218 2001 358.069 -355.409 Appendix 4 – Inditex´s forecasted performance Appendix 4.353 584.708 -2.1 – Forecasted NOPLAT year net sales growth cost of goods sold (% net sales) operating expenses (% net sales) net operating income/exp.003 -1.917 -44.476 9.368 2007 1.555 -611.449 -889.058 -641.517 -447 -566.900 2000 251.578 -773.980 -313.425 2003 437.260 -316.300 531.294 433.704 -489.083 -314.095 496.949 54 -47.524 47 -26.300 387.473 -96.849 -27.720 -101.700 392.002 560 -11.723.848 208.959 -24.506 -857.600 661.406 -48.349 718.701 37.034 365.211 -25.721 49.448 374.499 305.500 684.000 EUR) 1998 165.008.520 114.408 -1.451 553 -331 -71.269 -489.782 -87.488 -16.611 -10.862 2004 670.219 141.008 -135.900 545.591 1999 273.855 -609.214 2.882 186.295 -258.910 -3.910 55.806 2.976 1.418 975.730 1.005.097 53.758 -60.427 1.029 -3.508 246.753 2005 807.772 562 -42.170 2.471 -13.172.200 249.715 17.146 117.Appendix 3 – Inditex´s free cash flow calculation year NOPLAT amortization and depreciation Gross cash flow decrease in working capital decrease net capital expenditures decrease in intangibles and goodwill decrease net other liabilities net establishment expenses decrease net investment properties decrease investment in leased issues net investment in parent company shares Gross investment FCF (1.764 206.164 261.977 706.872 2002 452.663 1.047 -6.919 -7.036 -714.238 16.051 -812.805 9.376 -43.

507.145.191.917.198 E2020 28.154 6.261.207 506.262 4.258 1.754 E2022 30.675.178.738 1.206 -7.570 E2013 16.743.926 2.966.625.413.771 -11.136 452.078 -4.926 980.350 -6.250.998 -9.003 4.395.754 697.346.688 -5.551.444.251 3.146.459.710.675 -12.940.575.310 946.207 1.218.167 2.523 E2016 22.980 566.647.807 816.156.495 1.875 E2021 29.616.970 1.143 980.555 2.387 -671.320 1.807 2.015.675 -11.533 -14.210.540 7.244.617.104 -4.635 2.170.226 Year net sales cost of goods sold gross profit operating expenses net operating ex/income operating profit (EBITDA) ammortization and depreciation operating profit (EBIT) account tax and interests earnings (P/E) income tax (account statement) readjusted taxes on EBIT NOPLAT E2015 20.075 -1.625 -8.794.237 1.437.626 834.866 -10.336.583 2.786 11.988.638.783.456.434.034 -5.186.954.734.922.092.861 16.218.565 908.740.621.982.611 2.893 458.093.113 -8.754 1.637 E2014 18.097.986 16.207.624 E2017 23.377 775.157.808 E2018 25.397.842.317.529.880 2.463 -11.363 -1.038 E2011 13.495 775.626 2.750.995 15.692 2.545 1.132.553.895 10.226.897 3.275 1.637.301.837 12.796.176 1.673.636.146 1.380.815 865.751 697.882 3.861 -13.311.381 1.611 946.798.112 1.024 -620.231 -1.877 3.772 -1.884 1.696.994.407 -3.146 770.783 9.664 85 .257.686.463.361 865.259 -1.203 -7.366.337.992 -10.379 -917.335 -1.663 14.041 1.107 -1.318.350.015.888.818.342 1.922 770.429 -736.927.673 -10.250 630.330 -6.869 4.679.093.816.970 452.682 1.516 8.148.677 14.565 2.871.243 3.580 -824.216.191.846.697 5.015.176 458.098 3.544.610.769.792 -574.Year net sales cost of goods sold gross profit operating expenses net operating ex/income operating profit (EBITDA) ammortization and depreciation operating profit (EBIT) account tax and interests earnings (P/E) income tax (account statement) readjusted taxes on EBIT NOPLAT E2008 10.738 630.309 3.100.676 E2012 14.001 -7.836.983 461.245 -9.757 -14.182 816.237 461.641 -10.166 E2010 12.338 -9.503.467.391.923 4.258 2.230 2.320 566.374.312.846.382 908.815 2.834 506.164.337 13.478.675.956 6.872 5.807.129 834.781 E2009 11.137 3.980.120.713 5.734.303 -13.997.189 2.741 2.059 -1.360.306 Horizon 31.940 2.964 -3.548.636 -1.197.571.615 2.980.491.843.118 -5.947 3.583.285.522.022.460 -5.754.580.168 E2019 26.618 -4.294.801 -1.114 7.733 -6.

410.525 610.906 -609.531 535.438 -1.774 8.469.610.798 913.312 761.610 610.861 834.707.394 -476.494.046 664.412 86 .690.319.927 1.098 1.610.304 6.489 -564.698.724 5.782 599.779 4.962.536 564.893 338.734 922.009.Appendix 4.513 -631.274 1.153.738.344.075.325 - 362.566.506.331 10.587 154.256 129.189 6.430 806.060 1.066.005 4.050 2.660 -537.192.082.894.586 -333.331 945.017.005.813.627.018.767.458.533.297 Horizon 5.177 350.280 6.117.917 4.000 -507.372 5.576.805 7.719 E2019 4.442 -1.384 E2009 1.137 5.434 309.029 564.900.102 140.756 -1.894 5.947.023 -1.256 3.140 6.226 104.893 -630.868 E2021 4.280 -149.303.112.660.102 3.850 254.220 9.676.613 E2017 3.411.785 846.274.600 749.974 -1.293 5.496.703 626. Cash (% total sale) working cash (% of total sale) working capital total (% total sales) PP&E (% total sales) leased issues (% total sales) intagibles and goodwill (% total sale) E2008 16% 22% -5% 6% 1% 30% 5% 1% E2009 16% 22% -5% 5% 0% 30% 5% 1% E2010 16% 22% -5% 5% 0% 30% 5% 1% E2011 16% 22% -5% 4% -1% 30% 5% 1% E2012 16% 22% -5% 4% -1% 30% 5% 1% E2013 16% 22% -5% 3% -2% 30% 5% 1% E2014 16% 22% -5% 3% -2% 30% 5% 1% E2015 16% 22% -5% 3% -2% 30% 5% 1% E2016 16% 22% -5% 3% -2% 30% 5% 1% E2017 16% 22% -5% 3% -2% 30% 5% 1% E2018 16% 22% -5% 3% -2% 30% 5% 1% E2019 16% 22% -5% 3% -2% 30% 5% 1% E2020 16% 22% -5% 3% -2% 30% 5% 1% E2021 16% 22% -5% 3% -2% 30% 5% 1% E2022 16% 22% -5% 3% -2% 30% 5% 1% Horizon 16% 22% -5% 3% -2% 30% 5% 1% Year operating current assets non-interest bearing liabilities operating working capital excl operating cash operating cash operating working capital incl operating cash net property and equipement Rights over leased issues acquired intangibles and goodwill invested capital E2008 1.313.315 -1.956 212.266.891 5.815 324.194 E2012 2.341.710 -443.877.298 881.240.016 6.146 611.002 1.709 -1.908.483 E2020 4.707.233.227 -407.334 291.680.603 1.886 -738.2 – Forecasted invested capital Year operating current asset (% of total sale) operating current liabilities (% total sale) working capital ex.233 553.496 2.855 120.854 -1.635.723.310 191.928 500.027 -810.929 7.075 10.271 9.570 E2010 1.787 Year operating current assets non-interest bearing liabilities operating working capital excl operating cash operating cash operating working capital incl operating cash net property and equipement Rights over leased issues acquired intangibles and goodwill invested capital E2015 3.781 3.535.567 E2018 4.957 715.326 8.684 -1.819.403.323 274.537.820 4.035 E2011 2.960.523.669 -133.296 4.131.647.371 3.843.079 -683.709 4.039.805 E2016 3.524 6.847 -1.027 3.100 172.957.443.234 8.939 1.173 E2013 2.768 -906.986 3.182.358 1.936 -587.079.891 1.308.613 4.592 10.779.226 6.268.973.662.333 7.559.361 2.712 234.810 2.065.698.595 9.485 6.717 8.323 4.131 521.385.370 E2022 4.773 -369.338 E2014 2.406.182 5.520 669.487 9.464.107.831.502.965.

904 -1.004 -12.682 1.319 1.038.675.288 -79.429.086 -9.030.025 23.4 – Inditex´s WACC WACC estimated through CAPM: WACC = Cost of equity 8.002.598 -85.091 -18.950.477 -17.478.474 -1.89 Risk-free rate 4.189.705.695.640 183.182 1.129 1.503 -76.284 -2.882.456.794.011 -1.846 -1.764 35.196 -12.18% Beta 0.583 3.903 -1.208 E2011 1.897 3.539.024 -95.549 Appendix 4.815 -147.995.545 2.798.789 -1.100.137 4.226.914.821 -417.2% Market premium 4.349.020.801 21.166 620.777 Horizon 2.054.620.935.303 -1.250 824.795 - 3.185 -15.231 -17.857.280.631 -1.112 1.682 -59.581.336.899 917.212.385.032.255 -53.041 1.917 -1.321 E2009 1.188.655 -1.344.078 -2.882 4.545 -45.494 4.458 -1.404 -1.616.848 104.610.553 -1.251 2.737 33.906 1.547.980.569.005 E2015 1.010 2.487.502 -89.271 E2020 2.120.482 -76.453 E2014 1.282 1.577 854.187 -10.998.851 -916.621.197.388 -88.038 671.518 E2019 2.664 1.551.259 30.513 -1.252 2.262 -53.401 -822.311.186.326.827.039.925 E2021 2.774.485 -1.734 E2022 2.222 133.442 1.395.227 E2010 1.738.371 -875.313 -1.005.573 E2018 2.301.645 -1.146.641 E2013 1.989 897.676 736.381 -2.324 -2.440 -1.397 -19.960 38.218.361 1.757 -1.246.382 1.458 -20.226 1.167 3.781 574.421 2.207 26.002 -19.093.888.734.3 – Forecasted FCF Year NOPLAT amortization and depreciation Gross cash flow decrease (increase) in working capital decrease (increase) net capital expenditures decrease (increase) in intangibles and goodwill decrease (increase) other Gross investment Free cash flow (FCF) Year NOPLAT amortization and depreciation Gross cash flow decrease (increase) in working capital decrease (increase) net capital expenditures decrease (increase) in intangibles and goodwill decrease (increase) other Gross investment Free cash flow (FCF) E2008 1.477 35.980 E2017 2.700 1.868 975.851.971.706.382.301.310 1.356 -5.555 3.143 1.753.Appendix 4.098.741 2.268 -66.164.377 1.640 1.588 -59.123 -22.261 15.619 E2012 1.210 -1.100.359 E2016 1.384 2.522.5% 87 .150 -946.817 251.015.495.455 -13.457.877 3.752 -42.875 21.137 -1.510 1.350 -13.704 1.601 1.381 30.994.311 -2.100 -1.429 -84.124 -20.888.

033 1.302 737 2.312 3.552 3.145 25.54 711 2016 1.799 -823 976 0.190 0.039 2.540 -1.980 1.395 3.888 -2.456 824 2.101 -1.213 -1.889 1.857 -1. and depreciation Gross cash flow Gross investment Free cash flow (FCF) Discount rate Discounted FCF PV of FCF (2008-2022) PV Horizon value PV enterprise value Interest bearing debt Minority interests Equity value Shares outstanding Value per stock 2008 1.39 670 2020 2.219 3.31 670 2023 horizon 2.621 1.015 2.999 1.189 0.336 1.003 855 0.775 1.158 0.100 1.098 2.794 1.005 1.42 671 2019 2.031 0.36 683 2021 2.707 0.161 414 24 24.038 -1.280 -1.93 232 10.723 623 39.569 0.675 4.34 682 2022 2.345 -2.86 835 2010 1.705 -1.739 -1.50 687 2017 2.66 € 2009 million € 1.809 -1.178 621 1.734 4.479 3.247 88 .46 720 2018 2.488 251 0.Appendix 4.015 15.581 0.73 736 2012 1.617 4.051 -2.458 -1.5 – Inditex´s valuation year CDF Valuation Noplat Am.79 676 2011 1.226 1.383 897 0.434 1.165 574 1.58 689 2015 1.994 1.020 2.827 1.611 1.63 745 2014 1.622 918 2.883 0.914 1.522 1.146 1.186 671 1.006 0.385 0.326 0.350 1.68 608 2013 1.121 3.198 -2.496 -1.

832 9.152 467 250 149 9.603.112 -1.062 2002 5.899 -2.355 -525.044.467 -98 -398.607 -409 -120.829.649 -2.126.979 1.430 -590 -163.192.899 1.254 1.440.003 4.462 4.785 -2.531 3.247 8.778 5.704 1.199 -3.589 3.418.977.735 2.325 -572 -199.827.087 41.417 year operating current assets non-interest bearing liabilities operating working capital net property and equipement Investment property Rights over leased issues net other assets invested capital liquid funds (excess cash) financial investment total funds invested 1998 3.540 2002 4.966 -190.738 9.167.246 5.968.787 -353.081 -8.064 4.667 2001 5.443.487.759 1.258 -541.900 32.801 -2.912.996 1.372 -463 11.885 1.630.772.410 1.141 -467 -185.017 89 .086 42.716 37.071 -1.463 1.870 -2.489 -452.073 -3.347 -463.033 2.696 -134.256 26.174 5.156 2.996 -151 -579.484 12.877 8.981 2000 5.698 2.Appendix 5 – H&M´s NOPLAT and invested capital calculation Year net sales cost of merchandise gross profit operating expenses administration cost EBITDA amort and depreciation EBIT taxes on EBIT NOPLAT taxes on EBIT income tax (account) total interest income total interest expense tax-shield on interest paid taxes on interest received operating tax EBITA 1998 2.219 192 36 60 3.417 1.063.501 392.564 -307 11.008 -116.821 466 266 253 11.733 -2.705 689.862 -2.695 3.010.787 591.164.284 2004 5.157 5.255 -408.972 21.502.127 -4.658 901.793 2.830 10.834 1.704 -403 -309.981.635 -185.455 -1.063 16.178 -45.914 -1.041 1.133.933 2001 4.479 5.254 29.381 352.595 -579.242 -3.850 519.897 -6.966 231.652.485 1.226.802 1.584 -130 -452.574.298 -171.563 -180.765 -175.713 41.575 -151 -525.106 -2.861 -37.284.251 1.626 -540 15.337 517 104 97 7.457 2007 10.965 -2.059 3.422 3.182 -5.596.816 281.739.364 -4.220 4.814 12.244 55.465 389.391 2.656 30.283 592.215.967 -1.274.305 -1.167 -1.407.059 1999 4.209 4.134 420 222 155 9.485 -51.613 -1.018 -114.639 2006 8.820 1.044 1.820 -603.505 -106.388.380.287 -106 5.355 1.468 5.745 -2.702 -540 23.198 -74.918 -86 -341.149 -4.501 -321.481 2.748 28.038 1.168.749 -163.573 608 87 107 7.986.260 -6.347 770.360 -309.324 -97.467.449 445.016.715 281 95 76 4.992 437 101 146 8.513 1999 3.535 2007 8.504 -785.567 23.410.094 -2.387.164 16.775 7.799 -1.091 1.836 571.795 -108.885 -93.182.792 -123.844 -156.960.106 8.258 966.926 7.220.303.207 2005 8.038 2.538 -341.860 -2.337 2000 3.729 -142.610 508 118 115 6.263 85.244 1.832 -1.899 7.303.639 -196.717 -398.726 2003 6.208 -1.423 5.752.414 -122.382 -351 10.972 2004 6.750 -60.255 669.480 -120.217 982 2.441 11.573 2003 5.543 1.831.041 -199.684.231 2006 7.053 16.370 2005 6.816 -207.677.043 8.668 6.590 14.664 460 112 120 7.467 520.267 20.882.394 1.215.298 334.264 1.931 -1.581 19.543 -75.177 -125.901 7.

012 -404 608 323 -14 95 404 2003 15.913 -3.143 -3.296 2.901 1.019 -10.775 -674 1.692 -4.806 337 337 -285 52 249 -5 41 285 2002 14.885 5.174 653 -14 89 727 2004 16.012 1.432 1.085 2.101 692 -35 17 674 2006 15.068 1.854 -9.848 -9.901 -727 1.874 -4.901 1.923 -10.000 $) 2001 2100 2114 -14 4161 385 4532 1036 0 5568 2002 2351 2226 125 3777 385 4287 3389 -1380 6296 2003 2018 2264 -246 3626 384 3764 4685 -1380 7069 2004 2227 2242 -15 3376 368 3729 4077 -1373 6433 2005 2197 1942 255 3246 336 3837 3042 0 6879 2006 2385 1947 438 3197 318 3953 2644 0 6597 2007 2147 2295 -148 3267 485 3604 1939 0 5543 year net sales cost of goods sold gross profit operating expenses operating profit (EBITDA) ammortization and depreciation operating profit (EBIT) taxes on EBIT NOPLAT taxes on EBIT income tax (account statement) tax shield on interest paid taxes on interest received operating taxes on EBITA 2001 13.145 5.315 -504 811 539 -44 10 504 90 .085 -763 1.322 722 -22 63 763 2005 16.377 1.266 5.542 4.381 -4.775 1.071 5.657 -4.886 6.969 -4.099 1.225 1.455 -9.267 -9.Appendix 6 – GAP´s NOPLAT and invested capital calculation Year operating current assets non-interest bearing liabilities operating working capital net property and equipement net other assets invested capital cash and cash equivalents senior convertible notes total funds invested (1.315 1.705 4.225 -472 753 506 -50 16 472 2007 15.763 -10.000.

Debt usually consists of borrowings from banks and financial institutions. The formula for WACC is: 𝐃 𝑬 k d + (1-T) k e 𝐕 𝑽 𝑾𝑨𝑪𝑪 = Where kd the cost of debt. D the debt. (2006. p. p.1 – WACC formula and assumption WACC consists of two types of capital: debt and equity. The purpose of WACC is to work out the different return requirements and then find the average return from weighted shares of total shares. (2003.Appendix 7 WACC and Beta Appendix 7.2 – BETA formula The beta calculation formula I applied when calculating beta 𝜷𝒊 = 𝛔𝐢𝐦 2 𝛔𝟐 𝐦 Where 𝛔𝐢𝐦 is the covariance. 𝛔𝟐 𝐦 is the total market variance and 𝜷𝒊 is the shares volatility against the market 1 2 Brealey. which have different requirements of returns than debt holders. E equity and V total value1 Appendix 7.218) Elton. ke the cost of equity and T the operating tax rate.140) 91 . while equity holders consist of investors and shareholders.

35 10.95 5.06 27.95 € E2010 6.65 E2009 13.43 19.41 € 14.48 5.43 6.08 5.86 4.49 4.46 € 14.08 3.85 92 .57 16.Appendix 8 – multiples valuation Appendix 8.97 5.99 7.31 4.00 € 20.02 9.13 10.28 Appendix 8.8 4.74 € 20.38 4.54 4.93 3.93 3.48 11.42 7.11 28.44 9.42 E2010 12.41 4.68 € 12.59 5.02 4.2 – EV/EBITDA multiples EV/EBITDA multiple Inditex H&M GAP Benetton IC Companies Esprit Next Polo Ralph Lauren Limited Brands Burberry Groups Weighted average peer group multiples peer group value per stock Weighted average H&M and GAP multiples H&M and GAP value per stock E2008 7.93 8.49 19.48 10.91 7.94 6.26 10.74 8.58 4.88 24.52 4.09 € 7.50 14.03 9.45 8.51 € E2009 7.47 8.88 17.8 4.17 15.69 10.86 9.56 € 20.1 8.1 – P/E multiples P/E Multiples Inditex H&M GAP Benetton IC Companies Esprit Next Polo Ralph Lauren Limited Brands Burberry Groups Weighted average peer group multiples peer group value per stock Weighted average H&M and GAP multiples H&M and GAP value per stock Inditex own valuation E2008 14.14 5.17 € 8.36 17.31 € 8.23 28.53 9.35 27.15 10.39 4.96 5.57 8.43 5.63 7.11 6.57 8 9.11 8.74 7.01 8.65 26.18 4.90 € Inditex own valuation 11.15 8.98 9.34 14.43 4.09 5.47 8.91 16.

5% 46% 33% 21% 5.0% E11 5.1% E14 9.5% E10 4.6% 15.0% 10.2% 11.5% 14% 26% 10% 27% 10% E21 5.5% E12 6.7% E16 6.8% 47% 33% 20% 5.0% 4.9% 46% 33% 21% 5.5% 14% 26% 10% 27% 10% E20 5.5% 5.7% 47% 32% 21% 5.2% 14.5% 16% 26% 11% 27% 11% E10 10.0% 5.7% E17 5.1% 46% 34% 20% 5.5% 46% 34% 20% 5.0% 47% 33% 20% 5.9% 47% 34% 19% 5.9% 6.5% 16% 26% 11% 27% 11% E09 9.2 New store sale growth Year new stores to old stores sales growth (50%) new store sale growth (80%) E08 15% 8% 6% E09 15% 8% 6% E10 15% 8% 6% E11 15% 8% 6% E12 15% 8% 6% E13 14% 7% 6% E14 14% 7% 6% E15 13% 7% 5% E16 13% 7% 5% E17 12% 6% 5% E18 12% 6% 5% E19 11% 6% 4% E20 11% 6% 4% E21 10% 5% 4% E22 9% 5% 4% Appendix 9.5% 4.5% 6.1% Appendix 9.5% 13% 26% 9% 27% 9% E22 4.5% 16% 26% 11% 27% 11% E15 14.5% 13% 26% 9% 27% 9% horizon 4.5% 5.0% 6.4% 6.8% 8.4% 5.5% 15% 26% 11% 27% 11% E12 12.5% 47% 35% 18% 5.5% 46% 34% 20% 5.5% 15% 26% 11% 27% 11% E18 8.0% 47% 35% 18% 5.5% 15% 26% 11% 27% 11% E13 13.5% 4.5% 6.0% 10.6% 4.5% E22 0.6% 13.5% 6.Appendix 9 – best-case scenario calculation Appendix 9.1% 46% 33% 21% 5.0% 9.5% 14% 26% 10% 27% 10% E19 6.0% 11.5% 13% 26% 9% 27% 9% 93 .3% E19 2.9% E21 1.5% 5.5% 4.9% 47% 34% 19% 5.1% 47% 35% 18% 5.7% 47% 33% 20% 5.5% 15% 26% 11% 27% 11% E17 9.1 Same-store sale growth Year Volume Prices same store sale growth E08 2% 3% 5% E09 1% 3% 4% E10 2% 3% 4% E11 3% 3% 6% E12 4% 3% 7% E13 5% 3% 8% E14 7% 3% 10% E15 7% 3% 10% E16 4% 3% 7% E17 3% 3% 5% E18 1% 3% 4% E19 0% 3% 3% E20 -1% 3% 2% E21 -1% 3% 2% E22 -2% 3% 1% Appendix 9.5% 15% 26% 11% 27% 11% E11 11.3 Total sale growth Year same-store sale growth new-stores sale growth Total sale growth E08 4.5% 5.5% 16% 26% 11% 27% 11% E16 11.0% 12.9% E09 3.4 Expected NOPLAT year net sales growth cost of goods sold (% net sales) operating expenses (% net sales) EBITDA (% of total sales) depreciation and amort (% net sales) EBIT (% of total sales) account tax (of total EBIT) Net income (P/E) readjusted EBIT tax NOPLAT (% of total sales) E08 10.9% E20 1.5% 15% 26% 11% 27% 11% E14 15.5% 3.1% E15 9.5% E13 7.3% 47% 34% 19% 5.5% 4.8% E18 3.8% 9.

030 E15 23.777.651 1.166 12.154 4.2% E18 13% 18% -5% 3% -2% 29% 437.450.823.983 1.763 1.940 5.991 3.158.813 3.5% 1.564 6.273.477 1.445.867 17.859 E10 12.523 9.133.865 10.416.547 E22 38.466.057 1.985 14.5% 1.2% Horizon 13% 18% -5% 3% -2% 31% 4.410 4.463.293.238 3.200.138 1.402 7.394 4.266.790 829.670.473 6.643.682.981.746 3.year net sales cost of goods sold operating expenses EBITDA depreciation and amortization EBIT account tax (of total EBIT) Net income (P/E) readjusted EBIT tax NOPLAT year net sales cost of goods sold operating expenses EBITDA depreciation and ammortization EBIT account tax (of total EBIT) Net income (P/E) readjusted EBIT tax NOPLAT E08 10.524.756 1.544 E21 37.224.861 3.452.892.360.579.605.516 5.658.296.487 3.340 1.607 2.905 2.843 Horizon 40.602.053.5% 1.879.010 1.829 3.337 E20 35.398 475.423 4.719 1.963 4.238 3.557.553.673.661 1.733 1.722 5.032.549 693.659.090 1.003 3.2% 94 .5% 1.197.563 3.806 1.2% E11 13% 18% -5% 3% -2% 30% 4.644 1.813.694 1.271.256 2.445 11.713 16.743 1.956.317.321.421 3.2% E17 13% 18% -5% 3% -2% 28% 4.749.143.606.189.328.2% E09 13% 18% -5% 3% -2% 31% 4.843.680.100.575.235 2.0% 1.894 E09 11.752.079.957.918.244 3.094 994.140 13.487 8.368.791.463.089.912 3.5% 1.050 13.798 3.045 12.412 772.352.700.2% E15 13% 18% -5% 3% -2% 28% 4.2% E16 13% 18% -5% 3% -2% 28% 4.5% 1.549 1.139 3.904 14.089 7.5% 1.363 E11 14.5 Expected invested capital year operating current asset (% of total sale) operating current liabilities (% total sale) working capital ex.197.292.254 15.592.835 5.311 E19 33.5% 1.526 6.887 3.829 E12 15.352.052 1.471 2.123 1.364 E16 26.773 421.259 618.827.271 2.142.905 E13 17.2% E13 13% 18% -5% 3% -2% 29% 4.2% E19 13% 18% -5% 3% -2% 31% 4.233 1.651 1.253 4.457.054 6.000 E17 28.394 3.2% E21 13% 18% -5% 3% -2% 31% 4.148 18.098 8.221.345 2.5% 1.392.699.059.290 9.757 1.740.270.621.639 1.189.410 E18 31.037.791.923.091.469 699.642 1.700 2.947 4.122 479.2% E12 13% 18% -5% 3% -2% 29% 4.846 2.565 7.004 2.786 550.026 E22 13% 18% -5% 3% -2% 31% 4.780.297.394 19.934 1.507.176.735.823 2.240 575.5% 1.493.417 3.790.982 1.558 13.743.5% 1.138 7.599.5% 1.049 4.334.713 869.841 461.067.935 E14 20.289 4.2% E20 13% 18% -5% 3% -2% 31% 4.987 5.545.614 595.707.368.2% E10 13% 18% -5% 3% -2% 31% 4.321.430 987.553.863 6.540.151 1.667 3.872.161.689 951.548 529.2% E14 13% 18% -5% 3% -2% 29% 4. Cash (% total sale) working cash (% of total sale) working capital total (% total sales) PP&E (% total sales) leased issues (% total sales) intagibles and goodwill (% total sale) E08 13% 18% -5% 3% -2% 31% 5.058 6.743 5.405.487.879 1.274 493.497.986 1.027 Appendix 9.897 983.5% 1.166 4.790.775.315.137 1.592.106.5% 1.088 1.822 1.523 4.155 1.516.243 2.810.314.064.263.5% 1.372 2.259 2.039 5.808.445 861.463.303.978 630.950.397 1.366.696.863 2.526 674.520.806 2.

501 -579.151 22.939 -23.662 6.113 6.711 -229.996 -1.372 2.557 -1.385 181.005.522 1.586 -922.528 1.274 -11.308 -893.691 E18 4.602 4.272 -1.176 -51.325 10.583.240.376 -748.014 1.451 7.319 -13.106.219 -1.497 E13 2.743 E12 1.609.798 5.349 -523.518 E12 2.502 868.212 -810.027.382 E20 4.185.643.872.274 28.993 E22 5.057 1.685.156 1.211 8.704.752 332.494 -630.366.328.323 7.043 -1.231 385.572 E21 4.183.675.196 1.529.800 -1.914.874 11.816 -93.617 632.year operating current assets non-interest bearing liabilities operating working capital excl operating cash operating cash operating working capital incl operating cash net property and equipement Rights over leased issues acquired intangibles and goodwill invested capital E08 1.567 131.883.131.251 7.048.653 E14 2.488 -670.047.878 5.586 5.346 1.293 1.891 -209.932 4.041 4.216.986 -1.090.813 1.852 343.039 1.614.627 474.027.487.370 -702.362 -104.587 -627.270.113 -147.558 10.544 983.000 693.759.910 -1.364 630.236.151 2.215 14.325 3.489.673.745.001 8.551.324 471.808 35.216.308 3.030.623 12.906.268.197 -6.061 95 .302.875.484 711.894 575.344.388.447.740.302.686 1.261 3.811 -709.526 1.133 -472.638.6 Expected free cash flow year NOPLAT amortization and depreciation Gross cash flow decrease (increase) in working capital decrease (increase) net capital expenditures decrease (increase) in intangibles and goodwill decrease (increase) other Gross investment Free cash flow (FCF) E08 1.863 2.257 -316.914 -1.470.567.137 378.542.256 -1.308 790.728.415 2.219 1.994 926.584.134.385 -357.530 1.004.431 7.020 1.506 5.562 -281.723 E19 4.067.460.247 Appendix -411.881 360.082 -252.949.603 421.183 6.243.418 -1.754.009 -1.861 3.334.296.614 5.508.599 4.850 567.218.985 -527.410.318 466.410 772.089 6.064 430.577 205.850 E11 1.974 536.262 E10 1.283 13.506.137 1.434 -779.297.357 2.068 236.630 -16.795 -1.186.337 869.824.549 7.062.245 1.051 1.677.333 3.239 1.768 2.826.880 -938.967.200 -79.450 1.926 9.864 E10 1.963 6.917 11.137 937.360.343 161.891 E17 3.523 -1.138 E15 3.447.113 1.645 940.667 -65.607 -1.217 408.542 -790.968 Horizon 5.055.804 -31.051 804.141 3.964 617.578 53.477 303.774.357.084.130 - 120.974.169.162.178 12.161.271 -2.152 448.427.916 41.324.180.608.267 -572.545 523.388 E14 2.756 3.675.471 2.547 1.892.682 515.222 708.048 -121.358 E13 1.191 -1.390.058 9.055 3.318.016.590 5.028.807 year operating current assets non-interest bearing liabilities operating working capital excl operating cash operating cash operating working capital incl operating cash net property and equipement Rights over leased issues acquired intangibles and goodwill invested capital E16 3.659.038 E09 1.868 - -20.845.501 19.219 -1.613.719.437 11.123 144.075.491 -2.200 271.762 E09 1.123.342 1.567.062.014 E11 1.837.298.171 4.763.808 12.248.926 -1.926.152 313.

394 5.442 2.224 1.298.410 4.240 0.027 1.089.68 840 E13 1.5% E12 1.450.879 -97.926 0.025.351 -3.064.159 96 .740 -29.813 0.311 2.053 1.275 -2.447 0.740.229.963 5.476.030 2.633 -108.675.055 base 3.790.919.503 -1.549 -2.091 -24.952.50 950 E17 2.31 940 Horizon 3.700.132 -2.421 43.247 0.324.238 48.029 E16 1.847 -2.1% 3.563 E18 3.738 -27.678 -2.year NOPLAT amortization and depreciation Gross cash flow decrease (increase) in working capital decrease (increase) net capital expenditures decrease (increase) in intangibles and goodwill decrease (increase) other Gross investment Free cash flow (FCF) E15 2.592.297 34.715 -116.303.710.662 623 54.139 4.0 € E09 1.159.706 -2.004 0.741 -88.450.741 E21 2.699.087 60.859 1.73 824 8.656 -69.043 -2.244 3.716 E21 3.39 756 E20 2.514 E22 3.497.93 436 12.774 E17 3.42 855 E19 1.052 2.664.670.246.919 0.829 1.969.088 -17.722 5.030 E18 2.557.36 1.63 762 E14 1.637.913 1.944 2.126 0.917 0.143.495 -34.803 21.421 -31.34 920 E22 3.931 -70.016 0.450 -87.315.220.619.523 5.234 -2.939.935 2.929.789 -136.905 1.616 51.032 Appendix 9.7 Best-case scenario valuation year Free cash flow (FCF) Discount rate Discounted FCF PV of Discounted FCF PV Horizon Value PV enterprise value Interest bearing Debt minority interests equity value shares outstanding value per stock E08 471 0.724.843.54 1.796 E19 3.812.060 39.900 -17.565.986 -2.267 -3.154 5.368 E20 3.46 1.458 39.049.033 31.58 839 E15 1.814.253 4.174 E16 2.363 1.916.86 859 E10 937 0.993 30.141.770.025 0.099 414 24 33.277 -2.998 55.656.088 -2.713.938 3.416.798.79 742 WACC growth E11 1.057 -2.760 -124.240.167 -22.344 2.216 0.015.000 3.128 -2.223.735.691 -22.843 1.926.166 -2.185 -2.

0% 1.6% E09 3.Appendix 10 – worst-case scenario Appendix 10.9% E16 -3.7% E13 -5.1% 49% 35% 16% 6% 11% 26% 8% 27% 8% E22 3.0% 4.5% 4.Expected NOPLAT performance year net sales growth cost of goods sold (% net sales) operating expenses (% net sales) EBITDA (% of total sales) depreciation and amort (% net sales) EBIT (% of total sales) account tax (of total EBIT) Net income (P/E) readjusted EBIT tax NOPLAT (% of total sales) E08 10.5% 49% 35% 16% 6% 11% 26% 8% 27% 8% E21 3.4% 5.2% Appendix 10.8% 4.4 .0% 10.4% E15 -4.8% E18 1.4% -1.1 .0% -2.3 Total sale growth year same-store sales growth new store sales growth Total sales growth E08 4.2% 1.6% 6.4% E20 2.1% 47% 35% 18% 6% 13% 26% 9% 27% 9% E11 3.5% 5.0% 9.2% 3.0% 49% 35% 16% 6% 11% 26% 8% 27% 8% 97 .7% 47% 35% 19% 6% 13% 26% 10% 27% 9% E12 0.5% 1.7% E12 -4.3% E17 -1.New – store sale growth year New store to old stores sales growth new store sale growth E08 15% 8% 6% E09 15% 8% 6% E10 14% 7% 6% E11 13% 7% 5% E12 12% 6% 5% E13 11% 6% 4% E14 10% 5% 4% E15 9% 5% 4% E16 8% 4% 3% E17 8% 4% 3% E18 7% 4% 3% E19 6% 3% 2% E20 5% 3% 2% E21 4% 2% 2% E22 3% 2% 1% Appendix 10.4% 49% 35% 16% 6% 11% 26% 8% 27% 8% E20 4.5% E21 1.2 .Same-store sale growth year Volume Prices Same-store growth E08 2% 3% 5% E09 1% 3% 4% E10 -2% 3% 1% E11 -4% 3% -2% E12 -7% 3% -4% E13 -8% 3% -5% E14 -9% 3% -6% E15 -7% 3% -5% E16 -6% 3% -4% E17 -4% 3% -1% E18 -1% 3% 1% E19 1% 3% 3% E20 0% 3% 3% E21 -1% 3% 2% E22 -1% 3% 2% Appendix 10.1% E11 -1.1% 47% 35% 19% 6% 13% 26% 10% 27% 9% E14 -2.0% 49% 36% 16% 6% 10% 26% 7% 27% 7% E19 5.2% 2.5% 3.5% 5.2% 49% 35% 16% 6% 11% 26% 8% 27% 8% Horizon 3.9% 49% 36% 15% 6% 10% 26% 7% 27% 7% E16 -0.8% 49% 37% 15% 6% 9% 26% 7% 27% 7% E18 4.1% E22 2.4% 49% 36% 16% 6% 11% 26% 8% 27% 8% E15 -0.6% 45% 34% 21% 6% 16% 26% 11% 27% 11% E09 9.5% 2.0% E19 3.5% 46% 35% 19% 6% 14% 26% 10% 27% 10% E10 6.6% -0.1% E14 -6.1% 4.7% 47% 35% 19% 6% 13% 26% 10% 27% 9% E13 -1.8% 0.3% 50% 37% 14% 6% 9% 26% 6% 27% 6% E17 1.2% -0.5% 6.4% 4.0% 2.5% E10 0.6% 3.4% 3.5% 3.6% 6.2% 3.

398 666.196.352 1.208 E20 14.918 E18 12.044 E12 12.055 2.115.698 2.526.817.177 5.756 1.033.321.462 416.608 937.755 1.966 1.191.342.929.691.065 439.045 384.426.783.782 774.542.522.469.515.5 .266.024 696.897 1.466 423.149 2.999 1.985 4.644 1.007 824.930.493 399.387 441. 849.981 3.037 E10 12.894 1.209.019 299.988 5.856 703.381 409.199.431 1.076 676.587 5.415.604.306 424.201.437 1.703 E21 14.182.694 1.141.325.044 1.524.795 Horizon 15.323.752 818.745 4.473 1.395 E13 12.552 1.770 949.516 401.156.339 1.920 1.746 427.826 4.227 E11 12.437.962 346.422 4.730 741.560 6.819 807.283.617.813 2.393 1.895 396.588 5.217.385 420.738 E19 13.403.895 5.167 7.340.046 5.984 2.788.662 5.628.080 1.383 345.361.180.987.160 1.887.999.620.238 1.164 672.062 2.212 5.635 3.659.074 6.362 382.468 437.079.146 1.106.116 2.985 298.193.Expected invested capital year operating current asset (% of total sale) operating current liabilities (% total sale) working capital ex.767 1.692 409.571.354 367.479.054 1.564.148.979.845.226.949 628.008 2.479 1.year net sales cost of goods sold operating expenses EBITDA depreciation and ammortization EBIT account tax (of total EBIT) Net income (P/E) readjusted EBIT tax NOPLAT E08 10.775 840.209 4.435 1.296 573.400.936.302 933.146 666.566 4.422 411.317.164.244 E16 5.780 E14 12.744 691.902.380 1.278.573.433 1.532 424.433 688.125 year net sales cost of goods sold operating expenses EBITDA depreciation and ammortization EBIT account tax (of total EBIT) Net income (P/E) readjusted EBIT tax NOPLAT E15 12.183.811 7.315 1.116.911 1.082.686 1. Cash (% total sale) working cash (% of total sale) working capital total (% total sales) PP&E (% total sales) leased issues (% total sales) intangibles and goodwill (% total sale) E08 13% 18% -5% 3% -2% 30% 5% 1% E09 13% 18% -5% 3% -2% 30% 5% 1% E10 13% 18% -5% 3% -2% 30% 5% 1% E11 13% 18% -5% 3% -2% 30% 5% 1% E12 13% 18% -5% 3% -2% 30% 5% 1% E13 14% 18% -4% 3% -1% 31% 5% 1% E14 14% 18% -4% 3% -1% 32% 5% 1% E15 14% 18% -4% 3% -1% 32% 5% 1% E16 14% 18% -4% 3% -1% 33% 5% 1% E17 15% 18% -3% 3% 0% 33% 5% 1% E18 15% 18% -3% 3% 0% 32% 5% 1% E19 15% 18% -3% 3% 0% 32% 5% 1% E20 16% 18% -2% 3% 1% 32% 5% 1% E21 16% 18% -2% 3% 1% 31% 5% 1% E22 16% 18% -2% 3% 1% 31% 5% 1% base 16% 18% -2% 3% 1% 30% 5% 1% 98 .691 E09 11.809 277.265 851.379 393.025.992 1.695.409.640 5.520 1.152 1.126.846 2.228 749.982.852 444.788 4.434.634.542 E17 12.079.589 4.128.865 436.708 4.150 664.531 4.173 E22 14.957 6.697.376 1.896 332.277 1.722 1.541 7.540.621 4.342 1.170.960 759.259 Appendix 10.263 1.343.069 1.188.886.513 946.956.401 1.645.639 2.754 310.141 6.022 5.479.379 1.769 266.737 287.732 333.834 4.717.121.547.151.903 421.253.488.650 798.

5% E21 3.0% 99 .year operating current assets non-interest bearing liabilities operating working capital excl operating cash operating cash operating working capital incl operating cash net property and equipement Rights over leased issues acquired intangibles and goodwill invested capital E08 1.5% 3.377 172.064 E17 1.614.1% 3.571.254.4% 3.259.733 2.505 -281.778.632 576.130.444.878.398.456.106 -290.549 627.809 Horizon 2.180.697.631.7% E12 0.6% 1.521 3.323.883 616.8% 1.334 4.480 -121.335 -483.172 131.781 -228.737 313.228 4.073 4.669 4.021.461 3.858 177.401 E11 1.7% 3.424 511.062 138.626 149.765.302 342.116 E18 1.6% E10 8.1% 1.7% 1.991 5.146 -606.7% 3.8% 1.751 449.878 -484.4% E20 4.066 375.473 -368.501.226 144.148 -251.7% 9.238 2.260 3.2% 1.875 4.575.182.799 -501.186 362.302.2% E16 0.142.878.092.643 2.537 139.7% 0.134 704.757 -299.691 -242.1% E22 3.071 726.645.432 3.042 -208.584 140.344 2.197 586.0% -2.690 -308.452 E20 2.979 379.876 569.0% E19 5.502.356.079.1% 1.485.012 5.978 155.415 4.585 4.734.684 145.987 E19 2.1% 6.090 E16 1.527 5.6 – Growth in fixed activities year Cost of goods sold operating expenses PP&E growth leased issues growth E08 E09 11.1% 0.416 4.476 565.427.669 383.9% 12.642.4% 5.151 141.015 5.115 154.814 514.560.844.691.912 3.918.721 144.5% 2.057 4.007 2.041 366.313.031 E09 1.7% 0.174.5% 0.192 3.753.2% 3.6% 3.1% E14 0.000 3.160 3.466 639.7% E13 0.877.1% 6.688 -571.200.262.820.116 605.910 545.636.012 -383.640 363.5% 0.648 E14 1.293 E21 2.448 147.415.916 4.8% E18 4.994 2.5% 3.781 -122.386 2.996.579 377.3% 3.8% E15 0.4% 6.951 E13 1.456 435.141 167.2% Horizon 3.0% 1.1% E11 2.771.947 2.696.796 3.5% 0.934 2.7% 0.4% 2.535.400 3.4% 0.3% 1.278.452 E22 2.306 2.357 5.267 3.851.385 year operating current assets non-interest bearing liabilities operating WC excl operating cash operating cash operating WC incl operating cash net property and equipement Rights over leased issues acquired intangibles and goodwill invested capital E15 1.213.797.746 2.799 139.321 -404.684 -489.469.339 E12 1.864 E10 1.254 -521.8% 1.912 368.8% 1.908 Appendix 10.886 -628.861 4.782 2.426.5% 4.561 2.200 749.2% 2.0% 3.925.150 2.387 404.517 1.459 673.150 771.599 4.723 422.573 4.540.387 4.726 -632.650 4.7% 0.7% E17 0.844.695 3.743 463.372 4.303 120.681 145.437.7% 3.307 161.9% 5.800 -125.0% 1.634.711.253.788 -253.152 363.553.389 -120.849 140.

369 -7.173.481 -941.203 E10 1.623 -1.303 -4.125 672.440 -140.364 -901.344 -23.826 -925.227 666.870 -920.413 -6.950 -711.647 -893.864 -8.413.754.772.594 703.767 1.037 628.716 E09 1.259 849.012 -3.796 -747.911.623 -713.518 -5.469 19.033.994 -5.602 -104.823 -11.262 -723.017.044 691.914 1.690 E11 1.171.918 676.437 1.890 1.971 -826.530 -1.584 -962.973.754.911 1.006 -702.942 -34.375 1.457 -10.091.084 795.567 E17 807.481 8.703 774.003 -5.297 -817. 1.208 741.257 -120.171 -22.Expected free cash flow year NOPLAT amortization and depreciation Gross cash flow decrease (increase) in working capital decrease (increase) net capital expenditures decrease (increase) in intangibles and goodwill decrease (increase) other Gross investment Free cash flow (FCF) E08 1.431 1.691 573.672 1.173 798.310 -5.329 -1.877.188.986 -799.795 824.083 E14 937.147 418 -10.484.106 E12 1.862 E21 1.664 1.032.304 871.940 -875.044 2.433 1.545 -844.738 1.774.168 896.339 1.529 -6.079.834 -894.046.393 1.861 -898.376 1.636.760 -722.925 -711.180.994 13.022 -21.443 -5.496 -908.539 E16 749.380 1.014 E22 1.185 -842.841 769.193.042.996 3.579 777.438 base 1.500 -11.966 1.866 E18 933.005 -2.755 1.785 -915.886 580.160 100 .264 819.743 E20 1.106.783 E13 1.148.089 -881.379 1.Appendix 10.244 666.556 -3.722 1.788 -147.884.395 696.854.388 year NOPLAT amortization and depreciation Gross cash flow decrease (increase) in working capital decrease (increase) net capital expenditures decrease (increase) in intangibles and goodwill decrease (increase) other Gross investment Free cash flow (FCF) E15 840.110 -4.265 -18.657 -12.960 -725.015 -31.976 -30.277 1.076.747 -127.266 834.678 -1.367 -863.033.113.391 602.897.004.542 664.400 -2.506.928 -4.723 E19 1.780 688.795 -1.355 690.922 -363 -713.143 1.7 .299 1.236 -926.315 1.692 -5.100 -692.609.158 -20.

2% E16 12.4% E20 8.5% 5.4% 5.5% 3.6% E09 0.4% 2.6% 8.0% 4.6% E19 0.6% 9.5% 6.5% 4.5% 2.6% E08 15.2% E14 5.63 647 E14 896 0.8% 8.5% 6.2% 5.5% 2.0% E19 2.31 325 Horizon 1.9% E21 1.5% 1.042 0.6% E16 1.0% 5.0% 6.6% E20 1.1% E10 0.1% 2.0% 6.6% E18 2.636 13.5% E10 14.68 794 E13 1.5% 5.2% 4.7% 2.7% E19 9.0% 7.5% 1.5% 6.5% 4.5% 4.7% 2.42 348 E19 770 0.6% E12 6.5% 2.8% E12 3.0% 5.0% 4.2% E21 1.0% E20 0.5% 2.3% 2.0% 7.6% E22 6.0% 5.39 302 E20 778 0.1% 2.1% 6.4% E17 11.1% 2.4% E17 3.5% 5.0% 2.4% 7.506 623 21.0% 4.0% 6.0% 8.36 282 E21 1.172 0.5% 4.46 276 E18 820 0.7% 2.58 519 E15 796 0.8% E16 4.2% E14 2.50 342 E17 603 0.2% 10.93 537 7.0% 7.0% 4.7€ E09 834 0.6% 4.Inditex´s sales growth (with one decimal) Year Volume Prices Same-store sales Year New stores of total stores sales growth (50 %) New store sales (80%) Year Same-store growth New store growth Total sales growth E08 2.54 426 E16 691 0.0% E08 4.017 0.8% E22 1.0% 10.4% 3.2% 4.5% 3.5% 2.0% 3.2% E11 14.4% E15 3.2% E21 7.8% E18 0.0% 5.0% 4.0% 7.5% 6.0% E15 12.6% E11 4.7% 3.2% E13 6.Appendix 10.4% E18 10.2% 5.0% 2.1% E09 15.0% 4.4% 3.944 414 24 13.0% 5.3% E13 3.0% 6.4% E17 0.8% 2.86 714 E10 872 0.79 690 WACC growth E11 1.2% E22 1.8% 2.8% 10.3% 5.1% 2.0% 3.4% 4.1% 2.1% E11 1.9% E13 13.4% 101 .308 6.8% E15 5.033 0.4% 2.34 341 E22 1.73 763 8% 3% E12 1.0% E09 2.046 0.5% 5.6% 6.2% 2.5% 2.4% E12 14.5% 1.6% E10 2.0% 6.8 – Worst-case scenario valuation year Free cash flow (FCF) Discount rate Discounted FCF PV of Discounted FCF PV Horizon Value PV enterprise value Interest bearing Debt minority interests equity value shares outstanding value per stock E08 581 0.5% 5.091 Appendix 11 – Different scenario RIOC year base case scenario (own valuation) Best-case scenario Worst-case scenario WACC E08 30% 32% 33% 8% E09 29% 33% 29% 8% E10 27% 31% 27% 8% E11 28% 31% 28% 8% E12 28% 32% 28% 8% E13 28% 32% 27% 8% E14 28% 35% 21% 8% E15 28% 36% 19% 8% E16 26% 33% 16% 8% E17 26% 33% 17% 8% E18 24% 30% 19% 8% E19 24% 28% 20% 8% E20 24% 28% 20% 8% E21 24% 26% 20% 8% E22 24% 26% 20% 8% base 24% 26% 21% 8% Appendix 12 .0% 7.0% 3.6% 6.2% 11.9% 2.4% E14 13.8% 4.6% 11.