Inditex, the owner of Zara that vies with H&M as the world’s top clothing company, is only getting bigger.
The Spanish company logged its highest sales growth of the past few years, helped by an uptick in consumer spending in Spain, with 2015 sales climbing 15.4% to €20.9 billion ($22.9 billion). Profit edged out analysts’ expectations. Other clothing retailers—especially US companies such as Gap, J.Crew, Urban Outfitters, and Abercrombie & Fitch—have struggled while Zara’s steady stream of low-cost, on-trend clothing has kept sales robust.
The company opened 330 stores in 56 markets around the world last year, bringing its total number to 7,013. However, it said it plans spend more on e-commerce and slow openings of actual storefronts.
Inditex CEO Pablo Isla said in a call with analysts that the company does not see e-commerce and physical stores sales as separate businesses. Online sales often bring Zara customers into stores. “The business is integrated from every point of view,” he said.
“Two-thirds of returns are in-store returns because our customers prefer to go to the stores. In many cases this is an online return but at-store sale, because the customer goes to the store and is changing the size” he said.
Zara attracts shoppers into its brick-and-mortar locations through twice a week distribution of new products to shops worldwide. Since it’s constantly trickling new items into stores in limited quantities, it creates an incentive to buy now or miss out.
That contrasts with Gap’s business model. Gap dumps a bunch of seasonal collections that sit on store racks for weeks, giving consumers little reason to check in regularly. Store traffic is a major problem for the company, which is the world’s third largest apparel retailer behind Zara and H&M. Short-seller Andrew Left of Citron Research caused a dip (paywall) in the company’s stock recently after he called it “irrelevant” on Bloomberg TV. “Anyone who’s watching the show, go to the mall today, walk in to Banana Republic, walk in to Gap—you could swing an umbrella and not hit anyone,” he said.
Do the same at Zara and you’re likely to take out a couple people with armfuls of clothing. According to a recent analysis by Credit Suisse, Zara and H&M are killing their fashion-retail competition in the US—Gap’s home turf.
Zara also beats Gap on price, and it may be increasing that pressure. As Bloomberg reported, Credit Suisse calculated that Zara reduced the price on its less-expensive products by 36% in the 18 months through Nov. 2015. An analyst for Societe Generale told Reuters the price drops are “booting like-for-like sales growth.”
All those cheap clothes are adding up to a lot of sales.