Comparison of Inditex and H and M - Case Study Example

COMPARISON OF INDITEX AND H&M By of the of the School Introduction Different people have different goals and objectives in their investment decisions. These goals include wealth maximization, market share maximization and welfare maximization. The main focus of welfare maximization is to maximize value to each stakeholder considering sustainable use of economic resources. Attaining of market share maximization goal involves a focus on mass production at the lowest cost. And finally wealth maximization goal requires firms to make business decisions and investments with an aim of making the owner better of financially. An investor therefore needs to identify a goal that best suits their investment aim before embarking on company evaluation and analysis to select the best company to invest in. this study however looks at H&M and Inditex in details to determine the most preferable company to invest in. the analysis is going to entail company background, sales profit, growth, price shares and risks before making a valid decision on which company to invest in (Idowu & Leal Filho, 2009, pg. 25). Company background H&M H & M (in full Hennes & Mauritz) is a multinational company based in Sweden. H&M is a very active company in the clothing industry operating under brand names such as Cheap Monday, H&M, Weekday, Monki, COS and Other Stores (Walter, 2010, pg. 54). Its main activities include designing, manufacturing and marketing of clothing items and also other related accessories. Its product range is composed of clothing, such as sportswear and underwear, for women, children, men and teenagers. In addition it produces accessories, home textile, cosmetic products and footwear. These products are offered in a number of stores that are branded and spread across over 40 markets (Idowu & Leal Filho, 2009, pg. 25). For some time now the company has been at the forefront because of its affordable chic. It has been the place for fashionistas thereby challenging the retail clothing sector because it delivers fast fashion at low costs. H&M has over 1500 outlets in around 28 countries and a turnover of over SEK92bn in 2007(Walter, 2010, pg. 53). Because the company does not have its own factories, it has a multitude of buyers and designers and works with more than 700 suppliers that are independent to produce clothing collections that meets everyone’s needs and at affordable prices. H&M has a business concept that ‘fashion and quality at the best price‘which it actually lives by (Walter, 2010, pg. 57). The company invests more in expansion and last year it opened 168 new stores. Its main deciding factor in expansion decision is how attractive business locations are available; however, special focus is given to Canada, Spain, France, Germany and the US. It also focuses on the emerging markets such as Japan, China and Eastern Europe. The company is self-financing its expansion from its high sales volumes. Over the past 5 years the company’s sales has increased by 72%. It also has high earnings per share of 183%. This therefore makes the self-financing approach very affordable (Idowu & Leal Filho, 2009, pg. 25). Even though it is a global company, the H&M Company also recognizes local trade and tailor makes product mix to meet local tastes and purchasing preferences because of its high process innovation and its fast feedback platform from the customers (Idowu & Leal Filho, 2009, pg. 25). The company’s huge success I also attributed to its successful collaboration thereby widening its market share and consequently increasing its sales volume. Inditex This is a multinational clothing company based in Spain and deals with textile designs manufacturing and distribution. It operates over 6200 stores world wide making it the biggest fashion group in the world. It operates under brand names such as Zara, Oysho, Temple and Uterqüe, Massimo Dutti, Pull and Bear, Bershka, and Lefties, a low cost brand. It has its own factories hence designs and produces its products almost by itself dispatching new designs to Zara stores twice a week. Most of the stores are corporate owned but it uses franchises in countries that it is not possible to foreign own corporate properties, for instance, Middle Eastern countries (Pehlivan, 2013, pg. 21). The company’s Zara brand is now being manufactured in low labor cost countries especially Turkey, China and Morocco. In addition, the company has shoe design, manufacture and distribution industry in the own of Elche, found on the Mediterranean coat of Spain. The company huge success is linked to its extensive and intensive marketing campaigns. Further, it has a huge market share stemming from its wide coverage due to its numerous stores. Sales, growth and profit H&M has a strong growth potential. It continues to grow and expand at a rapid pace, more than one new store per day. It also has an online store hm.com which can now be found in nine countries inclusive of the US. The company’s targets to increase the number of its stores by 10-15% per year which will in turn increase its sales in the same comparable units (Walter, 2010, pg. 59). The company had over 3200 sores in 53 markets by last year and employs more than 116000 employees. The company’s core value has been continuous improvement by ensuring that they exceed their consumer’s expectation by giving them the best combination of quality, fashion, price and sustainability. Their attractive customer offering saw their sales grow by 9% in domestic currency to well over SEK 150 billion inclusive of VAT (Walter, 2010, pg. 54). This therefore made their profit after financial items to increase by SEK 22.6 billion for the year 2013. Despite an increase in sales volume Inditex has experienced a little change in its bottom line due to increased operating costs. Its sales grew in January 2014 from 15.9 billion Euros to 16.6 billion Euros. This translated to a net profit of around 2.4 billion Euros ($3.3 billion) for the year ending 31st January (Pehlivan, 2013, pg. 25). This was an increase of 1 percent from the previous year. The company registers strong sales growth leading to a rapid international growth and expansion that is sustained. This has been achieved through the help of the company’s operational flexibility, high fashion principles and attractive pricing (Idowu & Leal Filho, 2009, pg. 25). Europe still remains Inditex stronghold despite extensive internationalization since it accounts for about 79 percent of the total sales. The company’s growth potential in all the markets it operates is also derived from their online sale which gives it access to more markets and people. Price shares According to the Wall Street Journal, H&M has a share price of SEK 274.50. It pays a divided of SEK 9.50 and has a dividend yield of 3.46 percent. The company also has a beta of 0.60. On the other hand, Inditex has a share price of € 107.50. It pays a dividend 1.21 Euros and has a dividend yield of 2.25 percent. In addition, the company has a beta of 0.49. Both the companies have a beta of less than one meaning that they are less volatile than the market (Pehlivan, 2013, pg. 37). Risks a) H&M There are a number of factor that affect the business and results of the H&M Company. These factors are either from internal routines or external influences and are related to weather changes, trade interventions, macroeconomic changes, fashion, climate change, and foreign currency and production countries’ external factors. Other risks and uncertainties emanate from how brand is managed, the launch of new concepts and factors that are in connection with new market expansions (Cox, 2012, pg. 51). i) Fashion Being in fashion industry in itself is a risk because fashion normally has a limited shelf-life and hence there exist a risk that customers will not receive well some part of the collection that is produced and distributed. The most important aspect in fashion is that the company must ensure that they have the right volumes and also try to achieve a right balance in their mix between latest trends and the fashion basics(Idowu & Leal Filho, 2009, pg. 25).. . Their collections must therefore have the right combination of quality and sustainable fashion at the best price. Throughout the season, the company purchases items on an ongoing basis in order to maximize fashion precision. Increased awareness by the customers about the sustainability issues has caused the company to focus more and work hard on sustainability matters such as ethics and human rights, and environment (Cox, 2012, pg. 51). The Group therefore works on a daily basis so that they can offer their customers increased sustainability in all their collections. ii) Weather The H&M Group produces normal weather condition products and hence their sales are affected by any deviation in the normal weather patterns especially at the transition between two seasons for instance transition from summer to autumn (Idowu & Leal Filho, 2009, pg. 25). iii) Negative macroeconomic changes Economic downturn is most likely to change consumers purchasing behavior thereby affecting the company’s sales due to unfavorable macroeconomic changes that may occur in one or more countries (Cox, 2012, pg. 52). Such changes that may affect business should be identified and flexible buying model developed so that it is easy to adjust it with regards to different market conditions. iv) External factors in production countries How external factors such as suppliers’ capacity, raw material price and transport costs will affect purchasing costs of the Company’s products also creates uncertainties. The company also faces risks that are linked with social tensions existing in certain sourcing markets. These risks create instability in manufacturing process and the suppliers. The company should therefore monitor the fluctuations closely in order to develop strategies that may help arrest the situation in the most advantageous way possible for both the external stakeholders and the company (Cox, 2012, pg. 52). v) Climate change Further, there is a probable risk that the business of the Group will be affected by future increase in cost and regulation. These risks may be as a result of carbon taxes in the company’s various sales markets and emission trading taxes. These risks are brought about by the natural disasters and climate change especially in production countries, however, these risks can be considered very minimal because of the flexible business model which enables the Company to quickly adapt to changed circumstances (Cox, 2012, pg. 52). vi) Trade intervention Decisions formulated at the national level on textile quotas, import/export subsidies, embargos and customs duties may affect the company’s buying costs hence impacting companies in individual markets and customers(Idowu & Leal Filho, 2009, pg. 25).. . A global company like H&M Group is not affected greatly by trade interventions because it has operations in many countries hence trade intervention is competition-neutral. vii) Foreign currencies Most of the company’s sales are made in foreign currencies for instance over half of its sales are in Euros. The purchasing therefore takes place the Euros and the US dollars. The largest single transaction exposure that is subject to the company is therefore fluctuation or changes in the Euro/US dollar exchange rate. The company therefore uses forward contracts to hedge against future currency exchange rate fluctuations (Cox, 2012, pg. 51). The company also has subsidiaries hence its subject to translation exposures. This result from the fluctuations in the exchange rate between the Swedish krona and the local currencies of the numerous foreign sales companies. Consolidation of the Group’s net assets in the balance sheet of the foreign sales companies. There is no equity hedging, exchange rate hedging, for this risk exposure (Idowu & Leal Filho, 2009, pg. 25). b) Inditex The company’s risks reviewed are basically classified and grouped into the following categories: i) Regulatory risk This category of risks includes those that result from different laws and regulations that are in force in the countries that the company is present. These risks have been classified into two groups so that they can be managed in a better way. These groups include risks relating to employment, tax, trade and consumption, customs, and intellectual property rights (Geoff Cutmore, 2005, pg. 36). The other classification relates to the remaining laws and regulations. These risks are reduced by adopting close working relationship between the corporate tax, legal, HR and industrial property departments and the legal advisors and supervisors of each country. The company is also faced with criminal regulatory risk which is reduced by relying on a criminal risks prevention manual (Geoff Cutmore, 2005, pg. 36.). ii) Business environment Risks under this group emanates from the external factors that are related to the company’s business. This category comprises risks like difficulty to adjust to the environment or market that the company is operating (Geoff Cutmore, 2005, pg. 36.). It includes the company’s inability to respond to the new market demands. These risks are reduced by carrying out an intensive feasibility research for the new markets. iii) Corporate governance This group has risks due to inability to have appropriate management of the company as a result of breaching transparency standards and the corporate governance standards (Geoff Cutmore, 2005, pg. 36.). To manage this risk the company should ensure that the corporate governance system of the company is fully complied with. iv) Technology and information systems This category covers risks connected with the technical infrastructure and efficiency I information management and robotic networks. It also includes risks linked to logical and physical safety of the system. To reduce this risks classification, the IT department should permanently monitor the coherence and streamlining of the systems (Geoff Cutmore, 2005, pg. 37.). v) Financial Being a multinational company, Inditex is faced with financial risks such as interest rate risk, counterparty risk, foreign exchange rate risk and liquidity risk and also country risk existing in different markets (Geoff Cutmore, 2005, pg. 36.). The company hedges against these risks using foreign currency risk management policy, payment management policy, and investment policy. vi) Operations These operational risks arise from the company’s inability to recognize and take ongoing changes in fashion trends, supplying, manufacturing and putting new models in the market to meet customers’ expectation. This category of risk exposures is reduced by adopting flexible procurement and manufacturing systems (Geoff Cutmore, 2005, pg. 36.). Conclusion Upon the analysis of the companies, it is best to invest in H&M because it has higher growth potential than Inditex. H&M also pays higher dividend basically from its higher beta implying that it has more return than Inditex. H&M also has a higher growth in sales volume. Further, it has better risk management practices hence less risky than the Inditex. References Cox, E. (2012). Retail analytics the secret weapon. Hoboken, N.J., Wiley. Geoff Cutmore. (2005). New Market Mavericks. Chichester, John Wiley & Sons. Idowu, S. O., & Leal Filho, W. (2009). Global practices of corporate social responsibility. New York, Springer. Pehlivan, C. N. (2013). Financial Analysis and Valuation of INDITEX A Business Valuation Report and Theoretical Study. München, GRIN Verlag GmbH. Walter, S. (2010). Expansion Opportunities for H&M in Asia - Market Analysis. München, GRIN Verlag GmbH. Pppg54 H&M Read More