Consolidated directors’ report at 31 January 2015

(Amounts expressed in millions of euros)

Translation of report originally issued in Spanish. In the event of discrepancy, the Spanish language version prevails.

Situation of the entity

Inditex is a global fashion group with a presence in five continents, 88 markets and in both the Northern and Southern hemispheres, which engages mainly in the retail sale of fashion goods, principally clothing, footwear, accessories and textile products for 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.

Inditex’s business model 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 centre 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 centres 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

Inditex’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 with the global expansion of its integrated store and on-line sales model.

Inditex’s operating performance was strong. Net sales in local currencies rose 11% in FY2014.

Net sales for FY2014 reached euros 18,117 million, 8.3% up on FY2013.

Inditex’s like-for-like sales increased 5% in FY2014, (4.5% in the first half of the year and 5.0% in the second) up 3% on those in FY2013. The like-for-like calculation includes 77% of FY2013 store sales (i.e. sales in stores open throughout FY2014 and FY2013).

The changes in scope of consolidation gave rise to a 1% decrease in sales.

In FY2014 Inditex retail space increased 10%. The contribution of new retail space to sales was 7%. The total selling area at FYE reached 3,786,099 square meters:

Total selling area 2014 2013 Var % 14/13
Zara 2,352,826 2,150,517 9%
Pull&Bear 318,554 284,429 12%
Massimo Dutti 216,175 193,614 12%
Bershka 427,165 384,911 11%
Stradivarius 253,814 232,034 9%
Oysho 84,193 78,742 7%
Zara Home 123,776 107,263 15%
Uterqüe 9,596 10,459 -8%
Total 3.786.099 3.441.969 10%

Net store openings in FY2014 amounted to 343 reaching a total of 6,683 stores in 88 markets. In FY2014 Inditex opened stores in 54 markets.

Store openings, by quarter and stores per market and concept, at FYE were as follows:

Net openings by quarter:

Concept 1Q 2014 2Q 2014 3Q 2014 4Q 2014 Total 2014
Zara 19 17 32 28 96
Zara Kids (2) 1 (1) 0 (2)
Pull&Bear 11 8 13 13 45
Massimo Dutti 8 8 14 11 41
Bershka 11 8 19 14 52
Stradivarius 8 11 16 17 52
Oysho 0 7 5 14 26
Zara Home 8 6 12 17 43
Uterqüe (10) 1 0 (1) (10)
Total 53 67 110 113 343

Total stores at the end of each quarter:

Concept 1Q 2014 2Q 2014 3Q 2014 4Q 2014
Zara 1,846 1,863 1,895 1,923
Zara Kids 162 163 162 162
Pull&Bear 864 872 885 898
Massimo Dutti 673 681 695 706
Bershka 965 973 992 1,006
Stradivarius 866 877 893 910
Oysho 549 556 561 575
Zara Home 402 408 420 437
Uterqüe 66 67 67 66
Total 6,393 6,460 6,570 6,683

Company-managed stores and franchised stores at FYE 2014:

Concept Co. Managed/th> Franchised Total
Zara 1,714 209 1,923
Zara Kids 162 0 162
Pull&Bear 767 131 898
Massimo Dutti 608 98 706
Bershka 865 141 1,006
Stradivarius 742 168 910
Oysho 510 65 575
Zara Home 390 47 437
Uterqüe 52 14 66
Total 5,810 873 6,683

Sales at company-managed and franchised stores:

Concept Co. Managed Franchised
Zara 88% 12%
Pull&Bear 84% 16%
Massimo Dutti 82% 18%
Bershka 84% 16%
Stradivarius 78% 22%
Oysho 86% 14%
Zara Home 86% 14%
Uterqüe 84% 16%
Total 86% 14%

Net sales by concept are shown in the table below:

Concept 2014 2013 Chg % 14/ 13
Zara 11,594 10,804 7%
Pull&Bear 1,284 1,191 8%
Massimo Dutti 1,413 1,293 9%
Bershka 1,664 1,556 7%
Stradivarius 1,130 1,006 12%
Oysho 416 353 18%
Zara Home 548 451 21%
Uterqüe 68 71 -
Total 18,117 16,724 8%

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

Area 2014 2013
Europe ex-Spain 46.0% 45.9%
Asia & RoW 21.1% 20.4%
Spain 19.0% 19.7%
Americas 13.9% 14.0%
Total 100% 100%

Inditex continued with the global expansion of its integrated store and on-line sales model with the launch in September 2014 of Zara on-line sales in Mexico and South Korea, which effectively means that Inditex’s on-line sales are available in 27 markets.

The gross margin rose to euros 10,569 million, 7% higher than the previous year, accounting for 58.3% of sales (59.3% in FY2013). The change in the method of consolidation of Tempe, which had been proportionately consolidated and is now accounted for using the equity method in accordance with the new IFRS standard communicated at the beginning of FY2014, gave rise to a reduction in Inditex’s gross margin of 40 basis points. This change in accounting policy did not affect net profit and was annualized.

Operating expenses were tightly managed over the year and increased by 7.7%, mainly as a result of the growth in sales and the new retail space added. They include all the start-up costs for new store openings.

Million Euros 2014 2013
Personnel expenses 2,932 2,698
Rental expenses 1,850 1,656
Other operating expenses 1,676 1,644
Total 6,458 5,998

At FYE 2014 the number of employees was 137,054 (128,313 at FYE 2013).

FY2014 EBITDA came to euro 4,103 million, 5% upon FY2013 and EBIT came to euro 3,198 million, 4% higher than the previous year.

The breakdown of EBIT by concept is shown below:

EBIT by concept (€m) % sales % total
Concept 2014 2013 Chg% 14/13 2014 2014
Zara 2,123 2,089 2% 18% 66%
Pull&Bear 188 196 -4% 15% 6%
Massimo Dutti 267 247 8% 19% 8%
Bershka 245 241 2% 15% 8%
Stradivarius 227 212 7% 20% 7%
Oysho 65 40 63% 16% 2%
Zara Home 81 55 47% 15% 3%
Uterqüe 2 -8 - 2% -
Total EBIT 3,198 3,071 4% 18% 100%

The following chart shows the breakdown of financial results:

Million Euros 2014 2013
Net financial income (losses) 16 11
Foreign exchange gains (losses) (2) (30)
Total 14 (18)

The result of companies accounted for using the equity method was euros 32 million.

Profit before tax amounted to euro 3,245 million, up 6% compared to FY2013.

Net income came to euros 2,501 million, 5% higher than the previous year.

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

Million Euros 2014 2013
Net income 2,501 2,377
Shareholders equity - previous year 9,246 8,446
Shareholders equity - current year 10,431 9,246
Average equity 9,838 8,846
Return on Equity 25% 27%

Return on capital employed, , defined as EBIT on average capital employed in the year (equity plus net financial debt):

Million Euros 2014 2013
EBIT 3,198 3,071
Average shareholders' equity 9,838 8,846
Average net financial debt (*) 0 0
Total average capital employed 9,838 8,846
Return on Capital employed 33% 35%

(*) Cero con caja neta

Retorno sobre el capital empleado por cadena:

Concept 2014 2013
Zara 29% 31%
Pull&Bear 39% 50%
Massimo Dutti 45% 45%
Bershka 43% 46%
Stradivarius 55% 53%
Oysho 53% 34%
Zara Home 36% 36%
Uterqüe 6% -
Total 33% 35%

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 2014.

Appendices II and III show a list of stores by concept and market at 31 January 2015 and the information on the markets in which the various concepts make online sales.

Issues relating to sustainability, the environment and employees

The business model of the Inditex Group is based on the premise that all its processes must be sustainable and responsible. Inditex views sustainability as a shared responsibility in which all the professional teams making up the Group play a role and which is reflected in a series of commitments including most notably the responsible manufacture of goods, the traceability and integrity of the supply chain, efficient use of resources, innovation and customer service and a commitment to its employees and the community.

All suppliers and plants involved in the production process are obliged on an explicit and binding basis to adhere to the social responsibility and environmental values and practices that define the Group and are transmitted 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 as well as, the establishment of tools for control and direct cooperation with suppliers and multilateral dialogue with bodies and institutions working in these areas.

Noteworthy among the measures that Inditex has initiated in order to face up to the challenge posed by a sustainable production chain are the following:

  • Manufacturer and Supplier Code of Conduct Compliance Programme.
  • Water Master Plan in the manufacturing chain.
  • Supplier Cluster Programme.
  • Framework agreement with the international trade union IndustriALL Global Union.
  • Program for improved energy, water and waste management in the manufacturing chain.
  • Forest product policy to protect primary forests in danger of extinction.

The goods sold by Inditex and its stores provide the Group’s main instrument of communication with its customers and are not exempt from this commitment to sustainability. Products must comply with the 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 the cornerstone of any sustainable development policy based on eco-efficiency.

Various environmental initiatives are carried out including most notably the implementation of certified environmental management systems in all of Inditex’s logistics centres, and programmes for product recycling and end of product life and for efficient resource usage.

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:

Categories W M Total
Manufacturing and logistics 3,813 4,734 8,547
Central services 5,906 3,467 9,372
Stores 96,013 23,121 119,134
Total 105,732 31,322 137,054

Bonus profit-sharing plan

In view of the Group’s performance in recent years a bonus plan was approved for 2015-2016 as a means of enabling employees to participate in the company’s growth. The plan was set up for all the employees of the stores, manufacturing and logistics centres, and chains and subsidiaries around the world with more than two years of service within the Group. Among those covered by the plan the Group will distribute 10% of the increase in net profit for the year attributable to the Parent of the Group with respect to the prior year up to a maximum of 2% of total net profit. This group of employees includes around 70,000 individuals in 54 markets.

The plan covers two years. The first phase of the plan will be collected in 2016 based on the increase in the Group’s profit in 2015 compared to FY2014. The second phase will be executed in 2017 in the same way. The plan will accrue in 2015 and 2016.

Liquidity and capital resources

Inditex continued to show a strong financial position in FY2014.

Million Euros 31 January 2015 31 January 2014
Cash & cash equivalents 3,798 3,847
Short term investments 222 213
Current financial debt (8) (3)
Non current financial debt (2) (2)
Net financial cash (debt) 4,010 4,055

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

Million Euros 31 January 2015 31 January 2014
Inventories 1,860 1,677
Receivables 862 815
Payables (3,658) (3,421)
Operating working capital (936) (929)

Funds from operations reached euros 3,349 million in FY2014, 14% higher than in 2013..

In recent years, Inditex has been involved in substantial capital expenditure at its head offices, logistics centres and stores and on-line sales platforms. Ordinary capital expenditure for FY2014 amounted to euros 1,396 million. Extraordinary capital expenditure amounted to euros 400 million mainly as a result of the acquisition of unique retail premises for Zara in Soho in New York.

The Group’s capital structure is characterised 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, against which no amounts have been drawn down, 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 in 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, geo-political, demographic and socio-economic changes in countries in which procurements or retail sales are made, the emergence of new means of communication and changes in consumer behaviour 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.

The risks included in this category include risks relating to tax, customs, labour law, commercial and consumption-related regulations, intellectual property regulations and risks relating to other types of legislation, in particular, regulations in relation to criminal risk, which determine the criminal liability of legal entities.

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, the corporate image of the Group, as well as its image in the social networks, and any other potential regulatory breach that might have an impact on the Organization’s reputation.

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 retaining talent, and maintaining an adequate working environment in all the work centres.

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, interruptions in energy and fuel supplies, withholding of goods in freight, 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 and counterparty credit 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 technological security of systems, in particular, the risk of cyber attacks on information systems, which could potentially affect the confidentiality, integrity and availability of critical data.

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 at corporate level and in 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 policies 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 2014.

Significant events after the reporting period

No significant events have occurred since the reporting date.

Information on the outlook for the Group

Store and on-line sales in local currencies increased by 13% from 1 February to 14 March 2015. The Spring/Summer season is influenced by the performance over the Easter period due to its significant sales volumes.

Capital expenditure in FY2015 is expected to be approximately euros 1,350 million, driven mainly by the addition of new retail space during the year.

FY2015 space growth is expected to be in line with long-term targets. In FY2015 Inditex expects 420-480 gross openings and the absorption of 80-100 small units into neighbouring stores. Approximately 70% of the new contracts have been signed but in some cases openings may not take place in FY2015.

On-line sales /h1>

Inditex continued with the global expansion of its integrated store and on-line sales model. In FY2015 Zara envisages launching on-line sales in Taiwan, Hong Kong and Macao.

R&D+I activities

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 Group 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 centre 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 26) and authorized the Board of Directors to derivatively acquire treasury shares to cater for that plan.

As a result, the following treasury share acquisitions were performed:

  • In FY2013 450,000 treasury shares of euros 0.15 par value each were acquired with an average acquisition cost of euros 103.32 per share (and, following the splitting of the shares approved by the Annual General Meeting on 15 July 2014, by splitting each old share into five new shares, thereby increasing the current number of shares to 2,250,000 treasury shares of euros 0.03 par value each at an average acquisition cost of euros 20.66 per share), representing 0.072% of the share capital.
  • In FY2014 1,250,000 treasury shares were acquired with an average acquisition cost of euros 20.94 per share, representing 0.040% of the share capital.

In total, Inditex is the holder of 3,500,000 treasury shares, representing 0.112% of the share capital.

Other salient information

Stock market information

Inditex’s share price rose by 18.0% in 2014 to euros 26,135 per share on 31 January 2015, following the 7.3% increase in 2013. The average daily trading volume was approximately 8.4 million shares. The Dow Jones Stoxx 600 Retail and Ibex 35 indexes rose by 7.6% and 4.9%, respectively, in the same period.

Inditex’s market capitalisation stood at euros 81,454 million at FYE 2014, up 789% on its capitalisation when its shares were admitted to trading on 23 May 2001, as compared with an 8% rise in the Ibex 35 index in the same period.

The dividend for FY2013 totalling euros 0.484 per issued share was paid in May and November 2014.

Dividend policy

Inditex’s Board of Directors will propose at the Annual General Meeting a dividend increase of 7.5%, composed of an ordinary dividend of euros 0.402 per share and a bonus dividend of euros 0.118 per share, equating to a total dividend of euros 0.52 per share. Euros 0.26 will be payable on 4 May 2015 as an interim ordinary dividend and euros 0.26 will be payable on 3 November 2015 as the final ordinary and bonus dividend.

Dividends paid to shareholders in 2014 reached euros 1,511 million.

Other information

Related party transactions

Transactions with related parties are described in note 29 to the consolidated annual accounts. The Company did not carry out any transactions with related parties in FY2014 that substantially affected its financial position or results.

The following table shows the information on average payment periods required by Law 15/2012, of 5 July, amending Law 3/2004, of 29 December

The Group’s supplier payment policy complies with the periods for payment to suppliers set in the late payment legislation in force. The Group is developing measures to try to reduce the payment period in those rare cases in which the established maximum payment period is exceeded. The aforementioned measures will focus on reducing the length of the processes involved in the receipt, verification, acceptance and accounting of invoices (enhancing use of electronic and technological methods) and improving the procedure for incident resolution in this connection.

Annual Corporate Governance Report

The Annual Corporate Governance Report for 2014 is available at and was published in the section on Relevant Event Communications of the CNMV (Spanish National Securities Market Commission) website ( on 18 March 2015.