Situation of the entity

INDITEX is a global fashion group with a presence in five continents, 87 markets and both the Northern and Southern Hemispheres which engages mainly in the retail sale of fashion goods, principally clothing, footwear, accessories and textile products for the home. INDITEX carries out its activity through various commercial formats such as Zara, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe.

Each format’s commercial activity is carried out through chains of stores managed directly by companies in which INDITEX holds all or the majority of the share capital, with the exception of certain countries where, for various reasons, the retail selling activity is performed through franchises.

The business model of INDITEX is a flexible, integrated and customer-orientated model with a clear multi-channel and multi-concept strategy.

The business model encompasses all the phases of the value chain: design, manufacturing and supply, distribution, logistics and retail sales. The offer of an attractive combination of fashion at very competitive prices, the constant renewal of designs and dispatches to stores between twice and six times a week place the customer at the center of the Group’s strategy, and the remittance of information on a daily basis from the stores makes it possible to update collections on an ongoing basis.

The Group’s logistics system facilitates constant deliveries from the distribution centers of the various commercial formats to stores throughout each season. This system essentially operates through centralized logistics centers for each concept in which inventory is stored and distributed to stores worldwide.

Organizational structure

The INDITEX Group’s corporate governance is articulated through the following institutional and operational bodies and mechanisms:

• General Meeting
• Board of Directors
• Audit and Control Committee
• Nomination and Remuneration Committee
• Regulatory Compliance Committee and Department
• Ethics Committee

Business performance and results

Key financial and non-financial indicators

Inditex continues its global, multiconcept, multichannel growth.

In FY2013 INDITEX achieved strong like-for-like sales and space growth. INDITEX continued the global rollout of its online sales platform which now covers most of the Northern Hemisphere. Additionally, INDITEX strengthened its highly differentiated retail proposition through the optimization of its retail base.

Net sales for FY2013 reached euros 16,724 million, 5% higher than in FY2012 Net sales in local currencies rose 8%.

The Group’s Like-for-like sales increased 3% in FY2013 (2% in the first half of the year and 3% in the second) on 6% in FY2012. The like-for-like calculation includes 74% of FY2013 store sales (i.e. sales in stores opened for the whole of fiscal years 2013 and 2012).

In FY2013 INDITEX retail space increased 9%. Total selling area at FYE reached 3,441,969 square metres:

Net store openings in FY2013 amounted to 331 reaching a total of 6,340 stores in 87 markets. In FY2013 INDITEX has opened stores in 61 markets.

INDITEX continued the optimization of its retail base. In FY2013 INDITEX opened larger new stores, enlarged 100 global flagships, introduced the new image in key stores around the world and absorbed small units into neighboring stores.

Information on quarterly openings and stores opened as at FYE by concept and by market:

Net openings by quarter:

Total stores at the end of each quarter:

Company-managed stores and franchised stores at FYE 2013

Sales in company-managed and franchised stores:

Net sales by concept are shown in the table below:

The Group operates a global sales platform. Store sales by geographical area are shown in the table below:

Online sales were launched for Zara in Canada in March 2013 and Zara, Berhska, Massimo Dutti, Stradivarius and Oysho in the Russian Federation over the second half 2013.

Gross profit rose to euros 9,923 million, 4% higher than the previous year. The Gross margin has reached 59.3% of sales (59.8% in FY2012).

Operating expenses have been tightly managed over the year and have grown by 7%, mainly as a result of the growth in sales and the new retail space added. They include all the start-up costs for new space addition.

At FYE 2013 the number of employees was 128,313 (120,314 at FYE 2012).

FY2013 EBITDA came to euros 3,926 million versus euros 3,913 million a year earlier and EBIT to euros 3,071 million, versus euros 3,117 million a year earlier.

The breakdown of EBIT by concept is shown below:

The following chart shows the breakdown of financial results.

Net income came to euros 2,377 million, 1% higher than the previous year.

Return on equity, defined as net income on average shareholders’ equity:

Return on capital employed, defined as EBIT on average capital employed (shareholders’ equity plus net financial debt):

(*) Zero when net cash

Return on capital employed by concept:

To complement the financial statements included in the consolidated annual accounts of the INDITEX Group, attached hereto is Appendix I showing the income statement by quarter for 2013.

Appendices II and III show a list of stores by concept and market at 31 January 2014 and the information on the markets in which the various concepts make online sales.

Issues relating to the environment and employees

The business model of INDITEX is based on the premise that all its processes must be sustainable and responsible. In this regard, it is understood to be a shared responsibility in which all the professional teams making up the Group play a role and which is applied to the various categories: sustainable production chain, responsibility for products and customers and a commitment to people.

All suppliers and plants involved in the production process must be obliged on an explicit and binding basis to adhere to the social responsibility and environmental values that define the Group, through both its Corporate Social Responsibility and Environmental Departments and its sales and purchasing teams. INDITEX responds to this challenge through the creation and implementation of policies that are in tune with fundamental employment standards and environmental protection, the establishment of tools for direct cooperation with suppliers and multilateral dialogue with bodies and institutions working in these areas.

The measures that INDITEX has initiated in order to face up to the challenge posed by a sustainable production chain are as follows:

• Management and strengthening of the production chain
• Water Master Plan in the production chain
• Greater commitment to its suppliers
• Industrial framework agreement

INDITEX perceives its activity as an exercise in responsibility in all facets of its business model. In this regard, this process must be fully embraced by both the products sold by the Group and its stores, since the latter are its main channel of communication with the ultimate users of its products, its customers. The products must comply with Clear to Wear (health) and Safe to Wear (safety) standards, which set down the most stringent requirements in this connection in the world. In turn, the stores constitute a cornerstone of any sustainable development policy based on eco-efficiency.

Similarly, all INDITEX’s logistics centers have an Environmental Management System certificate pursuant to the ISO 14001 standard.

INDITEX understands that its relationships with its employees and with the community in which it is integrated must be based on the principles set forth in its Code of Conduct and Responsible Practices. The policies on equal opportunities and the balance between family and working life and the integration projects constitute essential instruments for creating a work environment that encourages the personal and professional growth of the workforce.

People constitute a key driving force behind the push to consolidate INDITEX’s growth. In a complex, demanding and competitive environment, and as part of a modern, different and changing industry, the workforce is one of the factors that sets the Group apart from its competitors.

The average headcount, by category, is as follows:

Liquidity and capital resources

INDITEX continued to show a strong financial position in FY2013.

The operating working capital position remains negative, as a consequence of the business model.

Funds from operations reached euros 2,949 million in FY2013.

Ordinary capital expenditure for FY2013 amounted to euros 1,240 million driven by retail space growth in the year.

The Group’s capital structure is characterized by the low debt/equity ratio as a result of the practically non-existent financing and the strength of its equity.

The Group’s organic growth and its CAPEX needs have been financed substantially in full with the funds generated by the business, which has enabled the Group to maintain its solid cash position.

The Group has available credit lines that guarantee access to such additional funds as might be required.

Analysis of contractual obligations and off balance sheet transactions

There are no contractual obligations or off balance sheet transactions that might have a significant impact on the consolidated annual accounts.

Main risks and uncertainties

The Group is exposed to various risks inherent to its operations in the various markets in which it operates.

For the purposes, of the management of these risks, the Group classifies them in the following categories:

1. Business environment

Risks arising from external factors relating to the Group’s business activities.

This category includes risks relating to difficulties in adapting to the environment or market in which the Group operates, as regards both the procurement processes and the product retaining and sale activities. These risks are inherent to the fashion retailing business and consist of the Group’s potential inability to continue operating and react to changes in its target market or to adapt to new situations in the countries from which it obtains its supplies.

In this regard, demographic cha socio-economic changes in countries in which procurements or retail sales are made, the emergence of new means of communication and changes in consumer behavior or a downturn in demand in certain markets constitute, inter alia, factors that might have an adverse effect on the optimum achievement of the Group’s business objectives.

2. Legislative and regulatory

These are the risks to which the Group is exposed as a result of the legislation in force in the countries in which it carries on its business activities.

To facilitate their management, the risks included in this category were classified, on the basis of their nature, as risks relating to tax. customs, labor law, commercial and consumption-related regulations and risks relating to other types of legislation.

3. Reputation

These are risks which have a direct influence on the perception of the Group held by its stakeholders (customers, employees, shareholders and suppliers) and society in general.

They arise from the possibility of the incorrect management of issues relating to social responsibility and sustainability, responsibility for product safety and the corporate image of the Group.

4. Human resources

The main risks relating to human resources are those arising from potential dependence on key employees and the difficulties involved in identifying and adequately managing talent in the event of the Organization’s lack of ability to respond to new labor market expectations due to changes in the scale of values of new generations.

5. Operational

The principal operational risks to which the Group is exposed arise from the possible difficulties involved in recognizing and taking on board the constant changes in fashion trends, and in manufacturing, buying and selling new items that meet customer expectations.

The risk arising from the interruption of operations is associated with the possible occurrence of extraordinary events not within the Group’s control (natural disasters, fires, transport or key supplier strikes, etc.), which could have a significant effect on the normal functioning of the Group’s operations.

6. Financial

The normal functioning of the Group’s operations exposes it to risks of a financial nature. This category includes foreign currency risk, counterparty credit risk, liquidity risk and interest rate risk. In addition, the increasingly international nature of the Group’s businesses exposes it to country risk in its various different markets.

7. Information for decision-making

The risks in this category relate to the availability of adequate information at all levels: transactional and operating information, financial and accounting information, management information and budgeting and control information.

8. Technology and information systems

These include the risks associated with the technological infrastructure, the effective management of information, IT and robotic networks and communications. They also include those relating to the physical and logistic security of systems.

9. Corporate governance

This category includes the risk relating to the possibility of an inadequacy in the Group’s management leading to the failure to comply with corporate governance and transparency rules.

Risk management at the Group is a process promoted by the board of directors and senior management and is the responsibility of all members of the Organization, the purpose of which is to provide reasonable assurance that the objectives established by the Group will be achieved, furnishing shareholders, other stakeholders and the market in general with sufficient guarantees to ensure that the value generated will be protected.

In this context, the Group’s Risk Management Policy establishes the basic principles, key risk factors and the general action guidelines for managing and controlling the risks that affect the Group. This Policy is applicable to the entire Group and forms the basis for an Integral Risk Management System that is currently being implemented gradually, starting with at corporate level and with key areas of the business.

The Risk Management Policy is implemented and complemented by specific policies relating to certain units or areas of the Group. The polices developed and implemented by these areas for the management of the different types of risk include most notably:

• Investment Policy
• Payment Management Policy
• Foreign Currency Risk Management Policy
• Policy regarding Powers of Attorney
• Code of Conduct and of Responsible Practices
• Manufacturer and Supplier Code of Conduct
• Occupational Risk Prevention Policy
• Environmental Risk Management Policy
• IT Security Policy
• Product Health and Safety Policies (Safe to Wear and Clear to Wear)

For more details, see Section E-Risk control systems of the Annual Corporate Governance Report for 2013.

Significant events after the reporting period

No significant events have occurred since the reporting date.

Information on the outlook for the Group

Store sales in local currencies have increased by 12% from 1 February to 15 March 2014. The Spring/Summer season is influenced by the performance over the Easter period due to its significant sales volumes.

Capital Expenditure in FY2014 is expected to be approximately euros 1,350 million driven mainly by the addition of new retail space during the year.

FY2014 space growth and conversion rates are expected to be in line with long-term targets. In FY2014 INDITEX expects 450-500 gross openings and the selective absorption of 80-100 small units (mainly non-Zara concepts) into neighboring stores. Approximately 70% of the new contracts have been signed but in some cases openings may not take place in FY2014.

Online sales

Zara began online sales in Greece in March and will launch in Romania in April 2014. Additionally, Zara plans to launch online sales in South Korea and Mexico in Autumn/Winter 2014.

Zara began online sales in Greece in March and will launch in Romania in April 2014. Additionally, Zara plans to launch online sales in South Korea and Mexico in Autumn/Winter 2014.

The INDITEX Group generally does not carry out research and development projects, which are defined as projects, other than those involving the design of garments, accessories or household products, in which amounts are invested over several years to develop assets on which a return is expected over multi-year periods.

Since its inception, the Company has been run with the help of the technology available in all areas of activity in order to improve manufacturing and distribution processes, and by developing in-house or third-party tools to facilitate the management of the business. Some examples of this are point-of-sale terminals, inventory management systems, distribution center delivery systems, systems for communications with stores and in-store garment labelling systems.

Acquisition and sale of treasury shares

The annual general shareholders’ meeting held on 16 July 2013 approved a long-term share-based incentive plan (see note 27 to the consolidated annual accounts) and authorized the board of directors to derivatively acquire treasury shares to cater for that plan.

As a result, in FY2013 450,000 treasury shares were acquired with an average acquisition cost of euros 103.32 per share in order to cover the first tranche of the plan, which expires on 30 June 2016.

Other salient information

Stock market information

INDITEX’s share price rose by 7.3% in 2013 to euros 110.70 per share on 31 January 2014, thereby consolidating the positive trend evidenced by the 54.7% increase in 2012. The average daily trading volume was approximately 1.8 million shares. The Dow Jones Stoxx 600 Retail and Ibex 35 indexes rose by 14.4% and 18.6%, respectively, in the same period.

INDITEX’s market capitalization stood at euros 69,003 million at FYE 2013, up 653% on its capitalization when its shares were admitted to trading on 23 May 2001, as compared with a 3% rise in the Ibex 35 index in the same period.

Dividend policy

INDITEX’s Board of Directors will propose at the annual general shareholders’ meeting a dividend increase of 10%, composed of an ordinary dividend of euros 1.92 per share and a bonus dividend of euros 0.50 per share, equating to a total dividend of euros 2.42 per share. euros 1.21 will be payable on 2 May 2014 as an interim ordinary dividend and euros 1.21 would be payable on 3 November 2014 as the final ordinary and bonus dividend.

Dividends paid to shareholders in 2013 reached euros 1,378 million.

The dividend for FY2012 totaling euros 2.20 per share was paid in May and November 2013.

Other information

Related party transactions
Transactions with related parties are described in note 30 to the consolidated annual accounts. The Company did not carry out any transactions with related parties in 2013 that substantially affected its financial position or results.

Corporate Governance Report
The Corporate Governance Report is available at www.inditex.com and was published in the section on Relevant Event Communications of the CNMV (Spanish National Securities Market Commission) website on 19 March 2014.