Zara Extends Lead Over H&M, Faces Down Threat From Shein

Inditex on Wednesday reported a 17.5% rise in sales to 32.6 billion euros, equivalent to about $35 billion, for the 12 months to Jan. 31. Net profit rose 27% to €4.1 billion compared with the prior-year period.

The company said the performance demonstrated the strength of its business model and that customers had flocked to Zara stores because they offered something different from other retailers.

Looking ahead, Inditex said sales had grown strongly in the early weeks of 2023 and that U.S. expansion would be a priority for the company this year, given its relatively low exposure there. 

“This is a market in which for every $100 of fashion sold we take less than 50 cents, so we see very strong growth opportunities,” said Chief Executive Óscar García Maceiras.

The figures show how Inditex, which also owns the Bershka and Massimo Dutti brands, has promptly recovered from the pandemic and outpaced its rival. Sales last year were 15% higher than in prepandemic 2019, despite the economic turbulence triggered by Russia’s invasion of Ukraine and the related challenge of surging cost inflation.

This contrasted with the slower recovery at H&M, where 2022 sales were still about 4% lower than they were in 2019. The Swedish company’s profit fell by two-thirds in 2022 compared with the previous year, partly as it resisted big price increases in the face of rising inflation. 

As recently as 2016, Inditex and H&M were neck-and-neck in revenue terms, with both posting annual sales of around €23.3 billion. With 2022’s figures, Inditex’s revenue is now 60% higher than its Swedish rival’s. 

H&M said separately Wednesday that its sales in the three months to Feb. 28 had increased 12% year-over-year, suggesting it may be regaining momentum.

Even so, Inditex retains an edge over its competitors, said Patricia Cifuentes, an analyst at asset manager Bestinver SA’s investment-banking arm.

“Inditex has a very flexible business model; it offers affordable fashion with quality,” Ms. Cifuentes said. “Many have tried to replicate it, but nobody has managed to do so.”

Inditex predominantly produces its clothes in Spain, Morocco and Turkey, close to its base in Galicia, Spain, and its core European markets, enabling new designs to reach stores relatively quickly. Store managers order new stock regularly but in relatively small quantities, enabling little reliance on discounting to shift excess inventory, she said. 

H&M, in contrast, sources most of its garments in Asia, though it has recently shifted production of some fashion items to Europe to better match Zara’s ability to react quickly to fashion trends. 

Both companies are now seeing their dominance of the fast-fashion market come under threat from Shein. The online retailer, which was started in China and is now based in Singapore, has grown rapidly in the decade since it was founded thanks to its large assortment at ultralow prices.

While Zara has likely lost some sales to Shein, analysts say the brand is relatively insulated from new entrants to the cheaper end of the market because it operates mostly in a higher-price segment and is perceived by consumers to offer better quality. Zara accounts for more than 70% of Inditex’s revenue.

Recent collaborations with well-known fashion designers, including a 2022 partnership with U.S. designer Narciso Rodriguez, have resonated with consumers and helped drive Zara’s move upmarket, analysts say.

Inditex on Wednesday said its gross margin—the share of profits retained after costs are deducted—held steady at 57% last year, a sign that it was able to compensate for rising costs partly through price rises. Meanwhile, H&M’s gross margin fell last year to 50.7% from 52.8%, partly because the company feared that price increases would drive its more cost-conscious customers into the arms of Shein and other budget rivals.

As costs have surged and shopping online becomes more popular, many retailers have been consolidating their global store estates, reducing their overall footprint by closing relatively unproductive stores.

Since starting this process in 2020, Inditex has shrunk its global store count from around 7,500 before the pandemic to 5,815 at the start of 2023, the company said. Analysts have generally approved of the strategy of closing weaker outlets while investing in the remaining stores and developing e-commerce alongside.

While Inditex’s store count fell by 10% last year, total sales from physical stores rose 23%, indicating that the move to “destination stores” was proving effective, the company said.

H&M has also been downsizing but has done so less aggressively than Inditex, slashing its store count by roughly 12% since 2019 compared with Inditex’s 22%.

However, some analysts cautioned that Inditex faces various challenges in the year ahead, including rising wage bills and the erosion of some of its competitive advantages, notably its local sourcing model, as global supply chains return to normal.

One way Inditex plans to keep its brand growing is by expanding in the U.S. The country is the company’s second-largest market by sales, though with 98 stores it is only 14^th in the company’s list of markets by store count.

The company plans to invest in 30 U.S. projects by 2025, including both new stores and upgrades to existing properties, to unlock the market’s potential, Mr. García said. 

The rollout will see Inditex open stores for the first time in locations including Baton Rouge, La., and Charlotte, N.C., while also adding stores in cities including New York and Los Angeles. 

Write to Trefor Moss at Trefor.Moss@wsj.com

Inditex on Wednesday reported a 17.5% rise in sales to 32.6 billion euros, equivalent to about $35 billion, for the 12 months to Jan. 31. Net profit rose 27% to €4.1 billion compared with the prior-year period.

The company said the performance demonstrated the strength of its business model and that customers had flocked to Zara stores because they offered something different from other retailers.

Looking ahead, Inditex said sales had grown strongly in the early weeks of 2023 and that U.S. expansion would be a priority for the company this year, given its relatively low exposure there. 

“This is a market in which for every $100 of fashion sold we take less than 50 cents, so we see very strong growth opportunities,” said Chief Executive Óscar García Maceiras.

The figures show how Inditex, which also owns the Bershka and Massimo Dutti brands, has promptly recovered from the pandemic and outpaced its rival. Sales last year were 15% higher than in prepandemic 2019, despite the economic turbulence triggered by Russia’s invasion of Ukraine and the related challenge of surging cost inflation.

This contrasted with the slower recovery at H&M, where 2022 sales were still about 4% lower than they were in 2019. The Swedish company’s profit fell by two-thirds in 2022 compared with the previous year, partly as it resisted big price increases in the face of rising inflation. 

As recently as 2016, Inditex and H&M were neck-and-neck in revenue terms, with both posting annual sales of around €23.3 billion. With 2022’s figures, Inditex’s revenue is now 60% higher than its Swedish rival’s. 

H&M said separately Wednesday that its sales in the three months to Feb. 28 had increased 12% year-over-year, suggesting it may be regaining momentum.

Even so, Inditex retains an edge over its competitors, said Patricia Cifuentes, an analyst at asset manager Bestinver SA’s investment-banking arm.

“Inditex has a very flexible business model; it offers affordable fashion with quality,” Ms. Cifuentes said. “Many have tried to replicate it, but nobody has managed to do so.”

Inditex predominantly produces its clothes in Spain, Morocco and Turkey, close to its base in Galicia, Spain, and its core European markets, enabling new designs to reach stores relatively quickly. Store managers order new stock regularly but in relatively small quantities, enabling little reliance on discounting to shift excess inventory, she said. 

H&M, in contrast, sources most of its garments in Asia, though it has recently shifted production of some fashion items to Europe to better match Zara’s ability to react quickly to fashion trends. 

Both companies are now seeing their dominance of the fast-fashion market come under threat from Shein. The online retailer, which was started in China and is now based in Singapore, has grown rapidly in the decade since it was founded thanks to its large assortment at ultralow prices.

While Zara has likely lost some sales to Shein, analysts say the brand is relatively insulated from new entrants to the cheaper end of the market because it operates mostly in a higher-price segment and is perceived by consumers to offer better quality. Zara accounts for more than 70% of Inditex’s revenue.

Recent collaborations with well-known fashion designers, including a 2022 partnership with U.S. designer Narciso Rodriguez, have resonated with consumers and helped drive Zara’s move upmarket, analysts say.

Inditex on Wednesday said its gross margin—the share of profits retained after costs are deducted—held steady at 57% last year, a sign that it was able to compensate for rising costs partly through price rises. Meanwhile, H&M’s gross margin fell last year to 50.7% from 52.8%, partly because the company feared that price increases would drive its more cost-conscious customers into the arms of Shein and other budget rivals.

As costs have surged and shopping online becomes more popular, many retailers have been consolidating their global store estates, reducing their overall footprint by closing relatively unproductive stores.

Since starting this process in 2020, Inditex has shrunk its global store count from around 7,500 before the pandemic to 5,815 at the start of 2023, the company said. Analysts have generally approved of the strategy of closing weaker outlets while investing in the remaining stores and developing e-commerce alongside.

While Inditex’s store count fell by 10% last year, total sales from physical stores rose 23%, indicating that the move to “destination stores” was proving effective, the company said.

H&M has also been downsizing but has done so less aggressively than Inditex, slashing its store count by roughly 12% since 2019 compared with Inditex’s 22%.

However, some analysts cautioned that Inditex faces various challenges in the year ahead, including rising wage bills and the erosion of some of its competitive advantages, notably its local sourcing model, as global supply chains return to normal.

One way Inditex plans to keep its brand growing is by expanding in the U.S. The country is the company’s second-largest market by sales, though with 98 stores it is only 14^th in the company’s list of markets by store count.

The company plans to invest in 30 U.S. projects by 2025, including both new stores and upgrades to existing properties, to unlock the market’s potential, Mr. García said. 

The rollout will see Inditex open stores for the first time in locations including Baton Rouge, La., and Charlotte, N.C., while also adding stores in cities including New York and Los Angeles. 

Write to Trefor Moss at Trefor.Moss@wsj.com