Zara, unfashionably, pays taxes and yet is a runway success
And it would be unfair to blame the Spanish clothing empire for making more profit out of Australians than it does elsewhere in the world - if the local competition is so slack that Zara can charge more here than it does elsewhere, so be it.
Besides, local consumers obviously don't mind. While plenty of established rag traders suffer, the customers keep throwing money at Zara's tills. And it's still early days in the international retailers' invasion of these shores.
Zara's annual accounts filed with ASIC showed the retailer's
start-up in Australia has been extraordinarily successful. It opened its first store here in April 2011, and by the end of January 2012 it had three stores that had generated sales of $68.5 million for the year and net profit of $9.4 million.
The figures now in for the year to January 2013 show six stores, $106.8 million in sales and $18 million profit - but that's not the half of it.
An examination of the numbers by Deutsche Bank's retail analysts shows Zara is doing proportionally better out of Australia than from the rest of its global operations, despite all the costs of being in start-up mode - and never mind the usual retailers' complaints about high Australian wages and rent.
Zara enjoys a gross profit margin of 66.7 per cent in Australia, compared with group gross margin of about 60 per cent. Deutsche says that's consistent with industry feedback of higher local prices. "Zara's local EBIT (earnings before interest and tax) margin of about 25 per cent is also higher than the global Zara margin of about 21 per cent, likely driven by a higher gross margin," write the analysts.
Zara's operating cash flow of $33.3 million flows virtually straight through to EBITDA of $31.5 million, "assisted by supplier-funded working capital".
The company's stock turn here of 8.5 times "is well above local speciality apparel retailers" covered by Deutsche.
Basically, Zara is running rings around the local competition on every score, finding Australian consumers make more profitable customers than the global average. And it's not doing it with an unfair tax advantage. Unlike some of the more obvious multinational tax avoiders, Zara's tax bill of $7.8 million is right on the 30 per cent corporate tax rate.
Deutsche says industry feedback is that Zara is yet to have an impact on Australian retailers, with some locals benefiting from the higher foot traffic that a nearby Zara store brings.
However: "Long-term we are concerned, particularly with more fast-fashion brands [yet] to arrive in Australia."
Michael Pascoe is a BusinessDay contributing editor.
Frequently Asked Questions about this Article…
Zara's Australian start-up has been very successful. It opened its first store in April 2011; by the year to January 2012 three stores generated $68.5 million in sales and $9.4 million in net profit. For the year to January 2013 it had six stores, $106.8 million in sales and $18 million in profit.
Zara enjoys a higher gross profit margin in Australia of about 66.7%, compared with the group's global gross margin of roughly 60%. Deutsche Bank analysts also estimate Zara's local EBIT margin in Australia is about 25%, versus a global Zara margin around 21%.
Yes. Zara's reported tax bill in Australia was $7.8 million, which is consistent with the 30% corporate tax rate cited in the article — indicating it is paying tax on its Australian profits rather than using tax-avoidance strategies.
Zara's operating cash flow in Australia was $33.3 million and it translated almost straight through to EBITDA of $31.5 million. The article notes this was assisted by supplier-funded working capital, which can improve cash conversion in retail.
Inventory turns are strong — Zara's stock turn in Australia was 8.5 times, which Deutsche Bank says is well above the local specialty apparel retailers they cover. High stock turn is a positive indicator for fast-fashion retail efficiency.
Industry feedback cited in the article is mixed: some local retailers haven't been negatively impacted and even benefit from higher foot traffic near Zara stores, but Deutsche Bank expresses long-term concern about the impact if more fast-fashion brands enter Australia.
Deutsche Bank analysis suggests Zara's higher Australian profitability is consistent with industry feedback of higher local prices. The article also notes that if local competition is slack, Zara can charge more — and Australian consumers appear willing to pay, despite higher local wages and rents.
Key takeaways are strong early growth (rapid sales and profit gains), superior margins and inventory turns in Australia, solid cash conversion supported by supplier-funded working capital, and that Zara is paying standard corporate tax locally. At the same time, investors should note Deutsche Bank's caution about long-term competitive pressure as more fast-fashion brands arrive.
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