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."
Frequently Asked Questions about this Article…
Zara opened its first Australian store in April 2011 and grew quickly: by the year to January 2012 it had three stores with $68.5 million in sales and $9.4 million net profit. By the year to January 2013 it had six stores generating $106.8 million in sales and $18 million in profit.
According to the reported accounts and Deutsche Bank analysis, Zara's Australian operation shows higher profitability: a gross profit margin of about 66.7% in Australia versus roughly 60% for the group, and a local EBIT margin of around 25% compared with a global Zara margin of about 21%.
Yes. Zara's Australian accounts show a tax bill of $7.8 million, which is consistent with the 30% Australian corporate tax rate referenced in the filing.
Key efficiency metrics from the Australian filing include a stock turn of 8.5 times (well above local speciality apparel peers) and operating cash flow of $33.3 million that essentially flowed through to EBITDA of $31.5 million, helped by supplier-funded working capital.
Deutsche Bank analysts say Zara's higher Australian gross margin (66.7%) is consistent with industry feedback that local prices are higher in Australia, enabling better margins compared with the global average.
Industry feedback cited in the article suggests Zara has not yet devastated local retailers; some established retailers have suffered, while some local shops have benefited from increased foot traffic near Zara stores. The long-term impact may change as more fast‑fashion brands enter Australia.
Analysts noted Zara's operating cash flow of $33.3 million converts almost directly to EBITDA ($31.5 million), with part of this performance assisted by supplier-funded working capital arrangements that reduce working capital strain.
The article highlights several investor-relevant points: Zara's Australian startup has produced rapid sales growth, strong margins and efficient inventory turns, and it is paying standard corporate tax. Those are positive signs, but it also notes this is early days and there are long‑term concerns if more fast‑fashion entrants arrive and competition intensifies.
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