Industria de Diseño Textil S A : Inditex exceeds €1.1 billion net profit

10 March 2021

Inditex exceeds €1.1 billion net profit

A year dominated by the pandemic and key to the transformation of the company

• Online sales increased by 77% in local currencies to €6.6bn, making Inditex a global leader in online fashion.
• The Group generated net sales of €20.4 billion in FY20 - from 1 February 2020 to 31 January 2021 - reducing the year-on-year decline to 28% or 25% excluding the foreign exchange impact. This was despite 100% of its stores being mandated to close or having restricted trading hours or capacity during periods of the financial year.
• Inditex's executive chairman, Pablo Isla, said of the results, 'Inditex has emerged stronger after such a challenging year thanks to the amazing commitment displayed by everyone here at the company'. Under this context, he underlined the relevance of 'the digital transformation strategy initiated in 2012, which is built around the integrated store and online sales platform'. 'Inditex as a company is stronger today than it was two years ago, with a unique business model and a global, flexible, digitally integrated and sustainable sales platform, which places us in an excellent position for the future'., Isla concluded
• During the year, Inditex launched its online sales platform in 25 new markets and opened new stores in 29.
• The Group's eight retail brands are currently available online in 216 markets around the world, 91 of which offer the integrated store and online shopping experience.
• The fast deployment of the integrated stock management system (SINT), which is already available in 5,777stores across 89 markets, has played a crucial role during the pandemic. Specifically, SINT made it possible to fulfil 46 million online orders worth €1.16 billion from the Group's stores during the year.
• In a year dominated by the pandemic, Inditex continued generating cash to reach €7.6 billion net financial position by close of FY20.
• Store and online sales in local currencies decreased by 15% between 1st and 28th February 2021, with 21% of stores closed. Between 1st and 7th March, with 15% of stores closed, sales decreased 4%. Excluding the five more significant markets with mandated closures (Germany, Brazil, Greece, Portugal and UK) sales registered growth of 2%.
• Thanks to the robust net financial position, the Board of Directors will submit a motion for the payment of a €0.70 per share dividend at the next Annual General Meeting: an ordinary dividend of €0.22 and an extraordinary dividend of €0.48. €0.35 will be paid out on 3 May 2021 and the remaining €0.35 on 2 November 2021.

I. A year dominated by the pandemic

Inditex generated net sales of €20.4bn in FY20 (1 February 2020 to 31 January 2021), a year dominated by the COVID-19 pandemic. The company prioritised the health of its staff and customers at all times, and every one of its stores was mandated to close or restrict trading hours and capacity during long periods of the year.

Against that backdrop, online sales registered growth of 77% in local currencies, to over €6.6bn in FY20, with growth of over 100% during certain periods of the year. Those figures rank Inditex as one of the leading players in online fashion globally.

Active and continuous cost management throughout the pandemic drove a reduction in operating expenses of 17%, evidencing the company's flexibility and ability to adapt. In parallel, gross margin stayed at a robust 55.8%, despite the restrictions faced across the store network, particularly during the fourth quarter, which has the biggest impact on this metric every year. In local currencies, gross margin growth increased 170bps to 57.6% of sales (257bps in the second half).

The Group ended the year with a solid liquidity position of €7.56bn and high-quality inventory, thanks to continuous improvement in stock management. Inventory decreased by 9% following the impairment in value provision recognised in 2019 in anticipation of the effects of the pandemic.

The integrated management of online and store inventories was one of the highlights of the year: thanks to the rapid deployment of the Integrated Stock Management System (SINT) - already available in 5,777 stores across 89 markets - the Group was able to fulfil online orders worth over €1.16bn from its stores.

The Group's tax contribution was €4.7bn, while its effective global income tax rate was 21.2%, in line with previous years.

As a result, the Group was able to reach a net profit of €1.1bn in FY20. In this sense, the company reached a remarkable €1.3bn net profit during the second half of the fiscal year.

In light of these results, Inditex's executive chairman, Pablo Isla, said, 'Inditex as a company is stronger today than it was two years ago, with a unique business model and a global, flexible, digitally integrated and efficient sales platform, which places us in an excellent position for the future' He added that 'the digital transformation strategy initiated in 2012, which is built around the integrated store and online sales platform, has demonstrated correct'. 'Inditex as a company is stronger today than it was two years ago, with a unique business model and a global, flexible, digitally integrated and efficient sales platform, which places us in an excellent position for the future'.

2021 trading update. Store and online sales in local currencies declined by 15% between 1 and 28 February, with 21% of the stores closed. Between 1 and 7 March, with 15% of stores closed, sales contracted by 4%. Excluding the five more significant markets with mandated closures (Germany, Brazil, Greece, Portugal and UK) sales registered growth of 2%.

Thanks to the robust net financial position and cash flows generated by the strong operating performance, the Company was able to pay dividends worth €1.1bn last November, while maintaining its ability to reinvest in the growth of the company. In this same line, Inditex's Board of Directors will submit a motion for a €0.70 per-share dividend at the Annual General Meeting scheduled for July. The proposed payment will consist of an ordinary dividend of €0.22 and an extraordinary dividend of €0.48 per share, divided into two equal payments, €0.35 per share to be paid on 3 May 2021 and another €0.35, on 2 November 2021.

A committed company. Throughout the pandemic, the Group has reinforced its commitment to its various stakeholders (refer to page. 8-9, Committed to people throughout Covid-19).

The company's commitment during the pandemic included a focus on its suppliers, by supporting health and safety improvements, guaranteeing payments for orders as per the original terms, not cancelling any orders and endorsing financial support initiatives (refer to page. 8-9).

Specifically in Spain, the number of local suppliers increased to 6,384 and they invoiced the Group more than €4bn. Total invoicing by Spanish suppliers over the past five years stands at €24.4bn.

Another highlight was the launch of volunteer initiatives with employees. These initiatives raised €1.4 million through solidarity projects in areas close to the headquarters. This amount also strengthened the collaboration with the charity Caritas, by supporting online training activities for vulnerable groups whose employment programmes had been suspended.

Commitment to people throughout COVID-19

As soon as the effects of the pandemic began to be felt, the Group rolled out a plethora of initiatives designed to contain the effects of the crisis. This included the activation of a global emergency relief programme within its community investment effort to which Inditex committed over €40.4 million; among other things, this effort enabled the mobilisation of more than 177 million units of protective equipment and other basic necessities.

The first country to suffer the effects of the virus was China, where Inditex's efforts focused on the purchase of personal protective equipment (PPE) for distribution to hospitals, with the help of the Tsinghua University Education Foundation and the Hubei Provincial Charity Federation. Through that collaboration, Inditex donated over 2.5 million items of PPE.

When the pandemic spread to Europe, the Group made its full logistics and procurement capabilities available to the emergency response effort with the aim of acquiring and transporting much-needed materials as quickly as possible.

Between the purchases made by the authorities and private donors, including those made by the Amancio Ortega Foundation and the Group itself, the Group delivered over 177 million priority items, which were transported on 66 flights: 2,300 ventilators, 2.8 million N95/FFP2 face masks, over 120 million surgery masks, nearly 44 million pairs of gloves, 425,000 face shields, 540,000 protective suits, 1.5 million surgery gowns, 350 hospital beds, 1.9 million tests and 17 robots to accelerate test processing. In total Inditex committed €24.6 million to that effort.

In addition, Inditex made more than 140,000 waterproof health gowns in its facilities, which were distributed locally via the regional authorities.

It also donated 31,000 items from the Zara Home bedding collection (blankets, sheets and pillows) to health, homeless and women's refuge centres, in addition to more than one million garments for people in need. Those products were distributed mainly through a number of organisations with which the Group works on a long-term basis, including charities such as the Red Cross and Caritas, and public bodies such as the city council of Coruña, the regional governments of Galicia and Madrid and the IFEMA conference centre, among others.

The Group also put in place a number of different actions and programmes to tackle the health and economic consequences of the Covid-19 pandemic on its supply chain workers, paying particular attention to those in greatest need.

In a number of markets affected by the pandemic, the Group also made monetary and material contributions. It is the case of US, Brazil, Mexico, Italy, Romania, Portugal and the UK, where the company supported different entities and charities such as the New York Presbiterian Hospital, American Red Cross, The Door - A Center of Alternatives and Food Bank For New York City (US); Fondazione Costruiamo il Futuro (Italy); Alianza por el Centro Histórico (Mexico) and Women's Aid (UK), among others.

II. A key year for Inditex's strategy

Fiscal 2020 was a key year for Inditex's strategy. The strategic plan initiated nine years ago and the investments made to integrate the online and store platforms since 2012 enabled the company to continue its business throughout the pandemic, leveraging a single, digitally integrated 'stockroom' to respond to its customers' evolving needs.

Thanks to those capabilities, the Group was able to seamlessly transition to meeting demand from its stores with the flexibility and efficiency needed. Full deployment of the RFID system paved the way for rapid rollout last year of the integrated stock management system, which is presently available in 5,777 stores across 89 markets. Thanks to that system, the Group was able to fulfil 46 million online orders worth €1.2 billion from its stores, and stock management was more precise and efficient.

The Group has invested over €11 billion in technological integration, digitalisation, transformation and store adaptation since 2012. The Group invested further in fiscal 2020 and that momentum is set to continue in 2021 and 2022, with capital expenditure of €2.7bn.

These technological investments supported the 77% online sales growth in local currencies to €6.6bn putting Inditex among the top global players in the online fashion arena. Online visits increased by 50% in 2020 to 5.3bn.

The Company leveraged its response capabilities, specifically its online channels and agile logistics capability, to adapt seamlessly to the new environment, with the number of orders per hour surging 57%, and peaking at over 400,000.

The Group's eight brands have 50 million online users, who increasingly show a preference for mobile apps, with 132 million active app users in 2020. All the brands also have a strong social media presence, evidenced by their 200 million followers.

The reach of the integrated store-online sales platform continued to grow, to 91 markets, as did the various brand's global websites, which between them now reach 216 countries around the world.

In FY20, zara.com launched its integrated online platform in Argentina, Paraguay, Uruguay, Chile, Panama, Costa Rica, Puerto Rico, Iceland, Georgia, Tunisia, Kazakhstan, Cyprus and Algeria, among others. Elsewhere, Lefties launched its new online sales platform in Spain and Portugal.

The rest of the Group's brands (Bershka, Pull&Bear, Massimo Dutti, Stradivarius, Zara Home, Oysho and Uterqüe) also continued to expand their online reach throughout the year.

Inditex Open Platform

At the heart of the integrated sales system is the Inditex Open Platform (IOP), a hybrid cloud-based digital replication of every phase in Inditex's business model. A virtual building adapted for each department and its needs which integrates the entire product life cycle and enables constant interaction, feedback and adaptation.

That entire complex architecture is being developed internally by multidisciplinary teams to address the needs of the e-commerce effort and ensure flexible adaptation for each area.

The platform has been 80% implemented and will be fully deployed by the end of 2021.

Thanks to its open and modular nature, it allows all areas of the company to adapt their processes for customer demands in real time and react to their preferences. That customer-driven responsiveness has always been the inspiration for Inditex's model. As a result, the IOP has the ability to constantly generate technological solutions by means of micro-services adapted for each phase of the business process, bringing extraordinary agility and versatility in a purely digital environment. Thanks to its adaptability, the speed with which solutions can be built is increasing exponentially, with the ability to offer the best possible service in the face of any new need increasing in tandem.

Quality stores

A cornerstone of the integrated platform, Inditex ended the year with 6,829 stores across the world's most important cities, shopping streets and shopping centres. Throughout 2020 the Group continued to open new stores and expand existing ones, continuing its focus on quality stores and locations.

In total, Inditex opened 111 stores in 29 markets, fitted with next-generation technology to support the integrated model. The ambition to make its entire store network eco-efficient in 2020 was achieved, and nearly half of the group's stores are already connected to Inditex's central energy efficiency control system Inergy. The digital transformation plan completed on target this year with the absorption of 751 smaller and older stores.

Of all the stores opened, expanded and refurbished, Zara Paris Pont Neuf stands out in a building listed as a 'monument historique' in 1990, with floor space of over 2,000m2. At another world class retail location, Barcelona's Paseo de Gracia, the Zara flagship store added another 800m2 to its floor plan, increasing the sales area to 4,800m2. This iconic store has also been fitted with 'Store Mode' functionality, another in-house software development that improves the customer experience. The functionality allows customers to precisely locate a piece of clothing within the store, book a fitting room or pay without having to go to the checkout, all through their mobile devices.

This innovative functionality, already enabled in several stores in Spain, the UK, France, Japan, Italy and Dubai, is possible thanks to the latest in-store technology, whereby each item in stock can be notified to individual shoppers virtually in real time.

In Moscow, on Kuznetsky-Motz, Zara carried out a major refurbishment, thanks to which it has been able to add the Zara Home ranges in a store spanning over 2,500m2 designed to facilitate simple and intuitive navigation of the latest clothing and home fashions.

Zara's Bluewater store near London also underwent a full refurbishment of its more than 3,100m2 and welcomed the Zara Home ranges.

In the rest of the Europe the Group's other brands also opened flagship stores, such as the Pull&Bear on Grote Markstraat in the Hague (floor area: 1,400m2) and the Bershka on Amsterdam's Kalverstraat (over 1,000m2).

On the other side of the Atlantic, Zara was also active regarding openings and refurbishments, opening a flagship store, which stands out for the architectural features of its façade, in Bogota, Colombia. Other Group brands also opened prominent stores in the Americas, such as the Stradivarius store in Madero (Mexico City, Mexico).

In parallel, the Group continued to selectively set up automated online order pick-up stations in its stores, whereby customers can use a QR code to collect their packages in just a few seconds.

Stores such as the expanded Zara in Heraklion, Crete (Greece), and the store on Tauentzienstrasse in Berlin (Germany), which now boasts a sales floor of 3,800m2, are a couple of the latest stores to be equipped with these automated online pick-up points as part of the integration of stores and online.

One of last year's other high-profile openings took place in Beijing (China), on Wangfujing, where the Group opened a Zara store of over 3,500m2 - the biggest in Asia - which not only meets the newest technology, integration and sustainability standards, it also features a new cosmetics section as well as an area devoted to the Zara Edited capsule collections.

New Zara store concept

Zara continues to update its global flagship stores and in doing so it is keeping its customers, front and centre, regardless of how they choose to shop. Framed by its online-store integration philosophy, the Group's stores are increasingly designed to facilitate new experiences and channel new emotions throughout the customer contact and shopping process.

That constant evolution is already tangible in the key flagship stores opened or refurbished by Zara in 2020 and will continue to be fine-tuned and implemented in upcoming openings.

Framed by organic lines or material warmth, the new store image has been designed around five principles:

Operational agility: enhanced service both in-store, thanks to efficient stock replenishment, and online, spurring the use of stockrooms as local logistics platforms for e-commerce fulfilment, thanks to the integrated stock management system.

Sustainability: with part of the furnishings made from biomass and new areas set aside for cardboard and used clothing recycling.

Less is more: larger sales floor with reduced display density in tidier spaces to demonstrate the scale of the collections.

Living store: multi-purpose spaces devoted to housing he many different collections inside, such as Edited, Woman, Showroom, Take away, Capsule collections, Zara Home and the new Cosmetics collection.

Customer Experience: service areas dedicated to improving the customer experience in-store, with up to eight waiting spots in the fitting rooms, showroom space and returns areas. Dedicated returns lines have been set up separate from the ordinary checkouts and new areas set aside for online order pick-up and recycling.

New Zara.com building

One of the best physical examples of the integrated model is the new 67,000m2 zara.com building, in which the Group has invested €130 million, including the work done on the surrounding natural ecosystem.

Its 9,000-m2 fifth floor is home to the zara.com studios, all filled with natural light, in which the photographers, models, stylists and make-up artists bring the brand's clothing and looks to life. The third and fourth floors will accommodate the rest of the multidisciplinary team: from the image professionals who work on Zara's collections at the start of each season to the team of engineers and programmers working exclusively on the IOP. The first and second floors of the new eco-efficient and cutting-edge facility will be given over to the Zara Man design teams.

The 28m-tall building stands out for its glass façade, clad with 720 high-energy-efficiency glass modules. Inside, its square, pillar-free floors are characterised by wide and diaphanous modular work stations. The introduction of the latest connectivity solutions - WiFi 6 and 5G - play a key role in facilitating the use of innovative technology tools.

The building was designed around bioclimatic functions and aims to meet the most stringent green building certification: Platinum LEED. The roof is fitted with 554 photovoltaic panels which, together with the 2,826 installed outdoors, supply half of the building's electricity.

III. Commitment to sustainability

In spite of the challenges over the year, the Group further accelerated its sustainability objectives, under which it is working to introduce advanced environmental sustainability solutions all along its production chain.

These efforts, in which every department of the Group is involved, reached their first milestone over the year when the Group significantly surpassed its 2020 target of having 25% of the garments put on sale being marketed under the 'Join Life' label. Join Lifedistinguishes those items made using more sustainable materials and/or processes, and in fact, over 35% of its garments carried the Join Life label in 2020.

This initiative, which takes action at the beginning and end of the product life cycle, drove growth of 91% in the use of more sustainably grown cotton, to 73,874 tonnes, and led to the completion of the rollout of the take-back programme designed to give used clothing a second life or to be recycled.

All the Group's designers received specialist training on the latest best practices in sustainability to ensure that the most advanced environmental techniques are implemented from the drawing-board stage.

The stores continued to execute their environmental transformation plan and having delivered the target set for 2020 of making them all eco-efficient, are currently focused on connection to the energy efficiency control system, Inergy (page 15).

Also as part of the plan, plastic bags have been eliminated entirely and the paperless receipt system is being used by all the brands for all online orders.

On the energy front, the Group continues to search for new sources of renewable power, which now accounts for 80% of total consumption, well above the 2020 target of 65%, putting the company on track to deliver its next target of 90% ahead of schedule in 2021.

The Group has also embraced specific science-based targets (SBTs) and reiterated its commitment to using sustainable raw materials only by 2025.

Just as important to its strategic and corporate governance commitments is the company's constant monitoring of its entire supply chain where it fosters the adoption of best social and labour practices.

In 2020 the Group made a special effort to help its suppliers put in place the health and safety measures needed to keep workers safe during the covid-19 pandemic, while continuing to push forward with its Worker at the Centre 2019-2022 strategy, which focuses in particular on social protection, living wages and female empowerment.

Last year, the Group maintained all its community investment initiatives, which mainly involve education, social wellbeing and humanitarian aid programmes. In 2020 those programmes, delivered with around 439 specialist charitable organisations, benefitted over 3.3 million people and received funding of €71 million from Inditex throughout 731 initiatives.

IV. Innovation in product, experience and communication

In 2020 as every year, the Group's brands delivered a range of initiatives related to their products and customer engagement with the aim of communicating an image aligned with the creative ideas of the Group's 700-plus designers.

During the lockdown, the creative teams' ability to adapt and search for solutions stood out. As recounted by the Lithuanian model, Giedre Dukauskaite, on the video linked from this page, many Inditex people took their work home, with all the teams working remotely to bring the latest fashions to light. That flexibility and creativity were unquestionably the fruit of the team spirit that pervades everything the Group's design departments do.

Beyond this, all the brands launched compelling initiatives and experiences relevant to the unprecedented circumstances affecting their customers. For example, Zara offered its customers the option of adding video greeting cards when sending gifts, at a time when social distancing requirements and mobility restrictions have prevented many from delivering presents to their loved ones in person.

The teams' responsiveness was also evident in their ability to adapt to their customers' evolving preferences, shifting to the design of functional and comfortable - yet fashion-forward and creative - clothing, without compromising on sustainability. The Comfy collections are a good example of that initiative: clothing inspired by sportswear patterns made from knit fabrics and warm cottons.

In parallel, Zara continued to create cutting-edge fashion, with new SRPLS editions and The Archive Collection, which brought back and updated its most iconic designs. During the fourth quarter, Zara launched its jewellery collection, The Essentials Collections, a collection of gold plated sterling silver designs. Zara Man worked with David Bailey, who shot Lennon Gallagher, while Zara Kids launched its new Ski Collection.

During the last quarter of the year, Pull&Bear also launched its costume jewellery line, the Gold and Silver Plated Collection, as well as unveiling new ideas for the new SS21 season: light pieces and denim clothing given a makeover in soft tones - pastel shades and every variety of green -, combined with floral and marine prints, tie-dyeing and digital graphics.

Massimo Dutti also put out its own jewellery line, in collaboration with the designer, Aurélie Bidermann, and in January introduced a new women's collection made up entirely of pieces that take a new approach to comfort. Exquisite-quality materials, with a focus on comfortwear fabrics such as wool knits in neutral and natural tones, give shape to versatile wardrobe staples with just the right touch of fashion.

Bershka's Art Series consisted of capsule streetwear collections in prints featuring iconic Baroque works of art. Artist Johanna Jaskowska created a special Instagram filter for that new collection that was used over 90,000 times in just a few hours.

'Stradivarius Meets Art, a look at art and talent' was the brand's global effort to give emerging artists greater visibility by turning its stores into small art galleries. The art exhibited included illustrations, ceramics, macramé, floral art and dance, among other disciplines.

Yoga Dance, a new yoga discipline that combines dance movements to hone physical flexibility and balance, was the focus of Oysho, which launched a specific range designed to give participants maximum comfort and total freedom of movement during its performance. In January, Oysho also launched Compressive, a range designed for medium and high-impact sports activities made from highly durable fabrics in softer finishings thanks to laser cutting technology.

Zara Home, which is poised to launch its new global image at the store on calle Compostela in A Coruña (Spain), was exceptionally active all year long. Throughout the latter part of the year, it launched a series of capsule collections, designed to meet its customers' household needs, an area to which the chain has been paying meticulous attention in recent collections.

For example, right now shoppers can find products designed for the pets in their lives as well as a specific clothing and footwear care line. Another of the collections that has proven highly popular was the art and stationery collection and more recently, the music collection: record players, speakers and earphones, as well as a collection of vinyl records for music fans to enjoy at home.

Lastly, towards the end of the year, Uterqüe launched O.0 Studio, a capsule collection of oversized and androgynous pieces. Comfort and quality are the prerequisites for this range, which is flooded with colour, casting off the neutral tones of the previous months.