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Zara Still Has Room to Grow: Analyst

A logo sits above the entrance to a Zara fashion store, operated by Inditex SA, in Barcelona, Spain.
Bloomberg
A logo sits above the entrance to a Zara fashion store, operated by Inditex SA, in Barcelona, Spain.

Inditex, the world's largest clothing retailer, will experience slower growth in the next three years but will still be far ahead of major competitors like Hennes & Mauritz (H&M), according to one analyst.

The owner of Zara posted a 22 percent rise in 2012 profits to 2.4 billion euros ($3.13 billion) on Wednesday, but the shares dropped 2.8 percent in Madrid as analysts warned of slowing growth given a lower than expected fourth quarter performance.

"Nothing has changed," countered Allegra Perry of Cantor Fitzgerald. "This is a company which has revolutionized clothing retail and the model is very, very strong.They have a big competitive advantage which continues to get bigger, with high barriers to entry. If in the last three years we've seen a CAGR (Compound Annual Growth Rate) of earnings growth of about 20 percent, I think going forward, for the next three years, that's going to be more like 15 percent."

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"That level of growth was always going to be unsustainable over the longer term. That said, I think you're still looking at a solid growth for the next few years."

Perry said Inditex is still a lot stronger structurally than its main rival Sweden-listed H&M, which is why it remains a safe investment in the retail sector. Perry cites supply chains as key to the dominance of Inditex.

"There's a question of different supply chains and that really goes to the heart of why Inditex has been so successful. They source 65 percent from proximity markets, they're closer to the consumer, and they leave a bigger portion of their budget open for buying in seasons so they can follow recent trends and really keep up with where consumer demand is going."

On the other hand, Perry said, H&M source 80 percent from Asia, thus locking its budget at the beginning of the season and leaving less flexibility.

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H&M also positions a lot of its product in basic clothing, whereas only 5-10 percent of Zara's product is reserved for basic goods. That worked for the Swedish multinational in the early 2000s, Perry said, but consumers now prefer to spend the same amount of money on fewer, more fashionable, high-end goods.

Inditex already has over 6,000 stores across 86 countries and is launching the Zara online brand in Russia later this year. Perry said the brand can still grow in other markets and it can expand its 12 percent market share at home in Spain. Its market share is only in the low single digits in countries like the U.S., China,and Brazil, giving it more room to grow.

"I think there are a lot of opportunities considering this is a very global product with global appeal," Perry emphasized. "Why can't they replicate the success they've had in their own market?"