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Great, I hope that you're ready for this analysis.
We are going to start by analyzing the balance sheet of the Inditex Group for
the year 2014.
These are the most recent annual financial statements that they
have available on their website.
The first thing I would like to highlight on this balance sheet
is the date of presentation.
The date of which the picture was taken.
So as you see this is generated for the first of each year.
That's a fiscal year end.
Why is that the case?
Well, because this is a very seasonal business.
So it's very typical among retailers to have the fiscal year end on January 31st.
By January 31st, the Christmas season is over.
So this point in time what you're going to find is a lot of cash.
Most of the receivables have been collected and
many of these companies do not have receivables actually.
And they won't have much inventory, because most of it has been sold.
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So by presenting the balance sheet at the end of January,
we are giving a much better picture.
Now, lets examine the biggest items on the asset site.
So the first thing that we see is property plant, and equipments.
Then, we are going to examine inventories.
And finally, cash.
The huge amount in property, plant and
equipment suggests that Inditex owns many of the stores.
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Besides that, these amounts may include also manufacturing and
logistic facilities.
As you see this amount has increased, and
one of the reasons is that Zara has been opening many stores around the world.
Now, despite the fact that they own many of these stores,
you'll see that they also rent many of their stores.
I show you what you see here.
One of the intangible assets that you have is the lease holder rights.
So these are the amounts that they pay in advance.
You know they're too secure.
It's like a prepaid rent if you will.
And so, owning stakes might be owning some of the stores and renting some others.
Here, different retailers can have different strategies.
The next large item we are going to examine are inventories.
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So as you see there's been an increase in inventories.
Should we be concerned about that?
Well, I don't think so, because as you see the growth in inventories is the same
growth as in our sales.
I show you the estimate the number of days of cost of sales and
inventories, you see that, that was 90 days last year.
I mean, in 2014 it is still 90 days.
So there's been no change.
So what we are saying here is that, on average,
in the text holes, inventories equivalent to 90 days of sales.
The stability of these numbers is just a reflection of
the amazing logistic platform that Inditex Group is well known for.
The last question we should ask is whether the business is seasonal, and
of course, we know that's the case.
And maybe this is why the inventory level is kind of low
because this is the end of the Christmas season so inventories might be lower.
Finally, the last big item on the asset side.
Cash and cash equivalents.
Here, we are talking about the business where customers pay in cash in the store.
So it's normal that this kind of business generates so much cash.
Especially given the fact that suppliers are paid much later.
Let's examine the changing cash for the year.
And we'll do that by looking at the cash flow statement for the Inditex Group.
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Inditex provides a cash flow or statement using the indirect method,
this is why I'm going to skip the first part of the cash flow from operations.
So I'm going to start just using the amount of cash flow from operations and
what we see here is that cash flow from operations is huge actually,
it's much bigger than the profit of the company so
the company's profitable by the cash collected is even bigger.
That's the case because the company's growing sales.
And every time you're growing sales,
you're collecting more cash from the customers that pay in cash in the store.
Whereas, you're paying much later to your suppliers.
In addition, as I mentioned before,
Inditex Group is very good at managing inventories.
So they can keep them at a low level.
And so, even though they are increasing sales,
the increasing inventory is always kept under control.
So the next question is, what does Inditex has do with so much cash from operations?
Actually, Inditex is carrying out a huge expansion plan all over the world.
So they need a lot of cash to invest in new stores, in new manufacturing,
facilities, etc.
Now, the other big item here is the payment of dividends.
So most of this cash that is generated with the operations is repaid,
is returned to the shareholders through dividends.
So if you're an investor in Zara, in Inditex,
you'll receive a lot of cash dividends every year.
After analyzing the cash generation and consumption of Inditex Group,
let's move back to the balance sheet.
And now let's continue with the equity and liabilities side.
The first thing that we see here is equity, owners equity.
Here, you have an increasing equity that is mainly due to the profit generated
by the firm.
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Now, part of this equity has been paid out as divided.
So the increase is now the equivalent to the total profit for the company.
In any case, the company's retaining profits and
is self financing the business.
So with the resources they generate in the business, they can invest in newer stores.
Before we can analyze the generation of profit,
the profitability of the business, let me take a look at accounts payable,
which is the other big item on the label on this side.
As you see, the company has no financial debts.
Actually, with so much generation of cash, it doesn't have any need to ask for loans.
However, the company gets a lot of financing from the suppliers.
So if we examine the numbers of accounts payable here,
you will see the average amount of time that it takes, in the text,
to repay the debts to the suppliers is more than 170 days, this is huge.
Now, probably here the question is, if this is a seasonal business,
maybe the amount we are observing here is a little bit abnormal.
Actually, the most plausible reason for this long period is seasonality.
So maybe we took the picture at a point in time where there were a lot of
purchases to suppliers and therefore we are observing these big numbers.
So I hope this is not representative of the rest of the year.
In any case, what you observe in this business, in this great business,
is that they collect immediately from the customers in the stores, they have
the minimum level of inventory they can, and they pay very late to the suppliers.
So it's normal that they generate so much cash.
It cannot be any other way.
Now, let me go back to the equity.
We said that part of the equity is the profit, the redeemed profits for the year.
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So let's look carefully at the profits.
How do we do that?
Remember, to examine the P and L, what we do is we prepare the income statement.
So let's take a look at the income statement for Inditex Group.
So the first thing that you see here are net sales.
So we are selling clothes, remember fashion clothing.
Next thing that you have here are the cost of the cost of sales.
Now, remember, this is not purely a retailer,
this is also a manufacturing company and therefore,
this cost of are going to include also the cost of manufacturing,
labor costs, depreciation of machinery, utilities and so on and so forth.
Everything that has to do with production.
So the first bottom line that you get here is the gross profit.
And as you see the gross profit for Zara is huge.
I mean, they have almost 60% of gross margins and this is a number that you have
to monitor very well year over year and also in comparison to other competitors.
So as you see here there's a drop of 1% in the margins.
And for a company like this,
I'm sure that they are wondering themselves what is the reason for it.
Is it that we're selling at lower prices?
Maybe we have a different product mix where we are seeing products with
less margin.
Maybe our manufacturing cost have increased.
Maybe we are less productive so we need more inputs for each unit of output.
So all of these are relevent questions that we need to ask managers in
the company.
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Marc BadiaAssistant Professor
