The world is very colorful, with many very different markets and fields of activity. One of them is creating, sewing and selling clothes. This time we will take a closer look at the representatives of this field and examine their main financial performance indicators, compare them and perform other types of analyses.
In this review, we have identified four companies, namely Inditex, Hennes & Mauritz, LPP and Gap, which are engaged in analogous or similar activities, namely the creation (design), tailoring and retailing of clothing. All these companies directly or indirectly have their stores in our country as well, and this was the main reference point for choosing companies for this review.
Brief presentation of the companies
Inditex is the main and largest global group of fashion companies, operating on 5 continents, with its registered office in Spain. The main activity is to offer our customers an inspiring, high-quality and responsibly produced fashion offer. The company was founded in 1985 by Spanish businessman Amancio Ortega, who is the richest man in the country.
Each concept operates through an online store and brick-and-mortar store model that is directly managed by companies that Inditex controls with full or majority share capital and voting rights, except in certain markets where, for several reasons, the business is franchised.
Main brands: Zara, Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho and Zara Home.
Hennes & Mauritz is a global family of fashion and design brands and companies. Empowering customers around the world to express themselves sustainably through fashion and design. In 1947, company founder Erling Persson from Sweden had a vision to make great fashion accessible to everyone and do it right. All brands and businesses share the same passion to make great and more sustainable fashion and design accessible to all. Each brand has its own unique identity and at the same time complements each other and strengthens the H&M Group, all to offer its customers unparalleled value and enable a circular lifestyle.
The offering mainly consists of clothing, accessories, footwear, cosmetics, home textiles and household goods sold through unique brands.
Main brands: H&M, & Other Stories, COS, Monki, Weekday, H&M Home, ARKET and Afound.
LPP is a Polish family company founded in 1991, which dresses customers in almost 40 world markets. In more than 30 years since its inception, LPP has built the largest fashion company in Central and Eastern Europe. The collections are available in 39 markets. Brick-and-mortar stores are open in 28 countries, and online sales are available in 34 countries.
The company constantly improves its offers and adapts them to changing customer expectations. Increases the availability of its collections by expanding the network of stationary salons (increasing sales area per year) and online stores.
Main brands: Reserved, Mohito, House, Cropp and Sinsay.
Gap is an American global clothing and accessories retail company. Gap was founded in 1969 by Donald Fisher and Doris F. Fisher and is headquartered in San Francisco, California. It is the largest specialty retailer in the United States and ranks third in the international market. Gap is a collection of lifestyle brands offering clothing, accessories and personal care products for women, men and children.
Gap is a multi-channel retailer that sells to customers both in-store and online, through company-owned and franchised stores, company-owned websites and third-party arrangements. Company-operated stores are located in the United States, Canada, Japan and Taiwan. Franchise agreements have been concluded to operate the company's brand stores throughout Asia, Europe, Latin America, the Middle East and Africa.
Main brands: GAP, Old navy, Banana republic, Athleta.
Overview and analysis of relative financial indicators
In conducting the review and analysis of relative financial indicators, we focused on the period between 2017 and the first quarter of 2024, and specifically on the annual financial results of operations. As usual, various types of relative financial indicators were calculated so that in this case the selected companies could be compared as objectively as possible and conclusions could be drawn. We emphasize that all the data are taken from the annual and quarterly financial reports provided by the official companies.
We start with one of the profitability indicators, namely the EBITDA margin. As we can clearly see from the presented picture, the Inditex company stood out with the highest mentioned indicator during the entire period of our analysis, and it has also grown consistently over the last three years. Meanwhile, in the case of Gap, EBITDA profitability has basically been the lowest all along, although it has recently started to increase.
The overall average of the analyzed margins of the four companies had a tendency to fluctuate. In 2017, it reached 15.2 percent, and in 2023 it was already 17.9 percent, when after the first quarter of this year it already reaches almost nineteen percent. The EBITDA profitability of LPP and Hennes & Mauritz was closest to the overall average over the entire analyzed period.
When it comes to another profitability indicator, return on assets or ROA, in this case the Spanish company Inditex again leads the way. As we can clearly see from the graph, the year 2020 had a particularly negative impact on ROA, which was negative even in the case of two companies, so the overall average is also negative.
Gap generates the lowest return on assets among clothing market participants over the entire period. The profitability index of the Polish company LPP has been growing over the past two years, and at the same time it was the second highest among all four analyzed companies, while in the case of the Swedish Hennes & Mauritz it was usually the closest to the overall average.
The relative financial indicator of liabilities and assets shows what part of the asset structure is made up of liabilities held by companies. Basically, during the entire analyzed period, the American company Gap stood out with the highest mentioned indicator, however, after the first quarter of this year, Hennes & Mauritz already has the largest share of liabilities in the asset structure.
The Spanish clothing market player Inditex boasts the most modest financial ratio of liabilities to assets, and by the way it has been this way since 2017, although since then it has risen from a value of 0.33 to 0.48, which is quite a significant increase. Meanwhile, in the case of the Swedish company, the mentioned indicator grew the most (from 0.44 to 0.77 values). The overall average of the ratio of liabilities to assets increased from 0.46 to 0.67 during the analyzed period, and the data of LPP and Hennes & Mauritz were closest to it.
As for general liquidity, since 2017, Inditex has been characterized by the largest mentioned relative financial indicator. Meanwhile, neighboring Poland's LPP had the lowest overall liquidity among all four companies, and recently current assets are the same or similar to current liabilities.
During the analyzed period, the overall average of the mentioned indicator (which was closest to Hennes & Mauritz's data) adjusted from 1.7 to 1.3 values, as the overall liquidity of all four clothing market participants fell.
Since 2017, the overall average of the asset turnover of the participants in the clothing market has decreased from 1.7 to 1.3, because in this case, the relative financial indicator mentioned by all four companies appearing in this review also decreased.
Both the American company Gap and the Swedish representative Hennes & Mauritz stood out with the highest asset turnover during the analyzed period. Meanwhile, the indicator mentioned by companies from Poland and Spain, as we can see from the presented picture with graphs, was the lowest.
Let's take a look at how the clothing companies we cover manage their inventory. In this case, we have the same situation as in the case of the previously discussed financial ratio, that is, LPP has the lowest inventory turnover ratio.
Inditex and Gap companies have always had the largest financial ratios throughout the period analyzed in this review, meaning they have the highest inventory turnover.
In this review, the relative financial indicator of cash flows from operations and income was also calculated, which shows what part of income is made up of net cash flows from operations. As we can see in the picture, the Spanish representative Inditex could almost always boast the absolute highest mentioned indicator.
Meanwhile, in the case of Gap, the situation is the opposite, it was this American company that generated the lowest ratio of cash from operations to revenue in percentage terms. The closest to the general average, which has been growing since 2017, was the relative financial indicator mentioned by the other two analyzed companies.
Another percentage indicator that we present to you is the dividend payout. It shows what percentage of the net profit earned during the year went to dividends, if they were paid. Two companies, namely Inditex and Gap, have always paid dividends to their shareholders throughout the analyzed period, even despite the crisis of the 2020 Covid-19 year, and in addition, the American company did so even despite the fact that it suffered a net loss in both 2020 and 2022.
The other two analyzed companies, namely LPP and Hennes & Mauritz, also share their net profit with shareholders, although they did not do so in 2020. It should also be emphasized that the participants of the clothing market in some years paid out higher dividends than the net profit they earned during the year.
We present a table with the most recent financial ratios of the four analyzed companies, i.e. P/E, P/BV, P/S and EV/EBITDA and dividend yield. In the case of the American company Gap, they are essentially the smallest.
Meanwhile, the market value indicators mentioned by the global clothing market leader from Spain are currently the highest. Speaking specifically about the dividend yield, it is the lowest in the case of the Polish company LPP, and the highest in the case of the Swedish company Hennes & Mauritz.
Since the beginning of this year, Inditex's shares have risen the most, while only Hennes & Mauritz's market value has fallen. The past year was characterized by a noticeable rise in the equity prices of all four clothing market participants (most notably Gap), when there was a correction in 2022 and the capitalization of the Swedish company fell the most.
As for the medium-term (3 – 5 years) period, LPP and Inditex could boast of the highest share price appreciation, while the return of both Gap and Hennes & Mauritz shares was much more modest, and in some cases even negative. Meanwhile, in the case of a longer period of time, the situation is analogous.
Technical analysis
Inditex's share price is currently in a growth channel that started back in the spring of 2022. It is true that we have recently experienced consolidation, during which the share price is approaching the bottom of the growth channel, after which the further direction will become clear after testing.
The share price of Hennes & Mauritz tested the growth peak reached before the correction, and failed to sustainably rise above it, so the risk of a double top formation increased.
LPP's share price rose to a record high, but then fell below the uptrend line. We are currently in a period of consolidation, after the end of which the future direction will become clear.
Gap's share price is currently testing the lower part of the growth channel that started back in May 2023. If this level does not hold, that is, it is broken sustainably, then a larger correction would await.
Author: TI
