Zara Is still well dressed

A cutting-edge business model no longer delivers blistering sales growth, but parent Inditex remains one of the steadiest bets in retail

By guest author Carol Ryan. She is a Wall Street Journal Heard on the Street columnist based in London, where she covers European luxury brands and consumer goods companies.

Zara’s once-innovative business model is losing some of its old power. But it still offers the world’s largest clothing retailer by revenue protection from problems that are causing huge damage to peers.

Inditex , ITX -1.15% Zara’s Madrid-listed parent company, said Wednesday that sales at constant exchange rates increased 5% over the three months through April. That was below what analysts expected and is the latest sign that the company’s days of blistering double-digit sales growth are over.

Compared with its rivals, however, Inditex is still looking very sharp. In their respective first quarters, sales at European rival Hennes & Mauritz and U.S. chain Gap dropped 4%. Both are struggling with emptying stores as more clothing spend moves online. In the difficult U.K. market, privately held Arcadia, which owns the once-trendy Topshop brand, is currently fighting with landlords to stave off bankruptcy.

Zara and other Inditex labels famously source a big chunk of their products from countries close to the company’s European hub. Just 40 % of its clothing stock comes from Asia. That is half the rate of H&M and leaves the Spanish retailer with lower exposure to rising wage inflation in countries like Vietnam.

Local sourcing also means Inditex gets new trends onto shop floors more quickly than rivals that must wait months for shipments from the East. Around one-third of its stock is highly fashionable, compared with 12% at H&M, according to UBS estimates. Fresher designs keep younger shoppers on board and help Zara to sell more items at full price, protecting profit margins.

The company was quicker to understand the need to stitch together its online and physical businesses than its rivals. Around one-third of its online orders are now collected in-store by customers, which is helping to sustain footfall in downtown shops. And, its stronger brand gives it an edge online. Zara doesn’t need to pay for traffic to its website, unlike Gap and H&M, which pay for 29 % and 12 % of their online traffic respectively through banner ads or sponsored listings, UBS analysis shows.

The model may no longer deliver the growth it used to, but Inditex stock remains a relatively safe retail investment. It used to trade at a big premium to H&M on a projected earnings multiple, but the gap has narrowed to just 6 % because of worries about slowing demand. The Spanish company’s growth is certainly maturing, but investors may underestimate the lasting appeal of its fashion credentials.