Consolidated directors’ report

at 31 January 2016

Translation of a report originally issued in Spanish. In the event of a discrepancy, the Spanish-language version prevails. (Amounts expressed in millions of euros)

Oysho graphic designer at the brand’s head office in Tordera (Barcelona).

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 distribution 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, Oyso, Zara Home and Uterqüe.

Each format’s commercial activity is carried on through an integrated store and on-line sales model 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 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 continuous 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

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 Committee
  • Remuneration Committee
  • Regulatory Compliance Committee and Department
  • Ethics Committee

Business performance and results

Key financial and non-financial indicators

Inditex continues to expand its global, fully integrated store and online sales platform.

In FY2015, Inditex achieved a strong operating performance. Net sales reached €20.9 billion, with sales growth of 15.4%. Net sales in local currencies increased by 15%.

Like-for-like sales increased 8.5% in FY2015 (7% first half and 9.5% second half) on 5% in FY2014. The like-for-like calculation includes store sales (i.e. sales in stores opened for the whole of fiscal years 2015 and 2014) and online. This represents 78% of total sales.

In FY2015 Inditex new space in prime locations increased 8%. Space contribution to sales was 6.5%. Total selling area at FYE reached 4,086,904 square metres:

Total selling area 2015 2014 15/14
Zara 2,523,388 2,352,826 7%
Pull&Bear 351,799 318,554 10%
Massimo Dutti 233,084 216,175 8%
Bershka 456,914 427,165 7%
Stradivarius 271,386 253,814 7%
Oysho 92,891 84,193 10%
Zara Home 146,866 123,776 19%
Uterqüe 10,576 9,596 10%
Total 4,086,904 3,786,099 8%

Net store openings in FY2015 amounted to 330 reaching a total of 7,013 stores in 88 markets. In FY2015 Inditex opened stores in 56 markets.

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

Net openings by quarter:

Concept 1Q 2015 2Q 2015 3Q 2015 4Q 2015 Total 2015
Zara 15 9 36 19 79
Zara Kids 0 0 (2) 0 (2)
Pull&Bear 5 2 17 14 38
Massimo Dutti 9 1 13 11 34
Bershka 2 2 22 12 38
Stradivarius 8 1 18 13 40
Oysho 5 6 12 9 32
Zara Home 19 6 19 21 65
Uterqüe 0 4 1 1 6
Total aperturas 63 31 136 100 330

Total stores by quarter:

Concept 1Q 2015 2Q 2015 3Q 2015 4Q 2015
Zara 1,938 1,947 1,983 2,002
Zara Kids 162 162 160 160
Pull&Bear 903 905 922 936
Massimo Dutti 715 716 729 740
Bershka 1,008 1,010 1,032 1,044
Stradivarius 918 919/td> 937 950
Oysho 580 586 598 607
Zara Home 456 462 481 502
Uterqüe 66 70 71 72
Total 6,746 6,777 6,913 7,013

Company-managed stores and franchised stores at FYE 2015:

Concept Co. Managed Franchised Total
Zara 1,784 218 2,002
Zara Kids 160 0 160
Pull&Bear 803 133 936
Massimo Dutti 638 102 740
Bershka 895 149 1,044
Stradivarius 777 173 950
Oysho 542 65 607
Zara Home 449 53 502
Uterqüe 57 15 72
Total 6,105 908 7,013

Sales at company-managed and franchised stores:

Concept Co. Managed Franchised
Zara 87% 13%
Pull&Bear 83% 17%
Massimo Dutti 82% 18%
Bershka 82% 18%
Stradivarius 77% 23%
Oysho 86% 14%
Zara Home 85% 15%
Uterqüe 84% 16%
Total 85% 15%

Net sales by concept are shown in the table below:

Million Euros 2015 2014 15/14
Zara 13,628 11,594 17.5%
Pull&Bear 1,417 1,284 10.4%
Massimo Dutti 1,498 1,413 6.0%
Bershka 1,875 1,664 12.7%
Stradivarius 1,289 1,130 14.1%
Oysho 452 416 8.7%
Zara Home 666 548 21.5%
Uterqüe 75 68 10.3%
Total 20,900 18,117 15.4%

The Group operates a global store and online sales platform. Store & Online sales by geographical area are shown in the table below:

Area 2015 2014
Europe ex-Spain 44.0% 46.0%
Asia & RoW 23.5% 21.1%
Spain 17.7% 19.0%
Americas 14.7% 13.9%
Total 100.0% 100.0%

Inditex has continued to expand its global, fully integrated online sales platform with the launch of online sales for Zara in Taiwan, Hong Kong and Macau in September 2015 and in Australia for Zara Home in December 2015, taking the total for Inditex to 29 markets. Annex III includes information regarding the markets and concepts with online sales.

Gross profit rose to €12.1 billion, 14.4% higher than the previous year. The Gross margin was 57.8% of sales (58.3% in FY2014).

Operating expenses have been tightly managed over the year and have grown by 14%, mainly as a result of the growth in sales and the new retail space added as well as the special profit sharing plan for employees. They include all the start-up costs for new space addition.

Million Euros 2015 2014
Personnel expenses 3,335 2,932
Rental expenses 2,087 1,850
Other operating expenses 1,969 1,676
Total 7,392 6,458

At FYE 2015 the number of employees was 152,854 (137,054 at FYE 2014).

EBITDA rose to €4.7 billion, 15% higher than a year earlier.

EBIT rose to €3.7 billion, 15% higher. The breakdown of EBIT by concept is shown below:

EBIT by concept (million of euros) % sales % total
Concept 2015 2014 15/14 2015 2015
Zara 2,452 2,123 16% 18% 67%
Pull&Bear 206 188 10% 15% 6%
Massimo Dutti 273 267 2% 18% 7%
Bershka 299 245 22% 16% 8%
Stradivarius 274 227 21% 21% 7%
Oysho 70 65 7% 16% 2%
Zara Home 100 81 23% 15% 3%
Uterqüe 4 2 118% 5% 0%
Total EBIT 3,677 3,198 15% 18% 100%

The following chart shows the breakdown of financial results:

Million Euros 2015 2014
Net financial income (losses) 11 16
Foreign exchange gains (losses) (1) (2)
Total 10 14

Results from companies consolidated by the equity method came to €56 million.

Net income came to €2.9 billion, 15% higher than the previous year.

Return on Equity (ROE), defined as Net income on average Shareholder’s equity:

Million Euros 2015 2014
Net income 2,875 2,501
Shareholders equity - previous year 10,431 9,246
Shareholders equity - current year 11,410 10,431
Average equity 10,920 9,838
Return on Equity 26% 25%

defined as EBIT on average capital employed (Shareholder’s equity plus net financial debt):

Million Euros 2015 2014
EBIT 3,677 3,198
Average capital employed
Average shareholders' equity 10,920 9,838
Average net financial debt (*) 0 0
Total average capital employed 10,920 9,838
Return on Capital employed 34% 33%

(*) Zero when net cash

Return on Capital Employed by concept:

Concept 2015 2014
Zara 30% 29%
Pull&Bear 38% 39%
Massimo Dutti 43% 45%
Bershka 53% 43%
Stradivarius 65% 55%
Oysho 49% 53%
Zara Home 33% 36%
Uterqüe 12% 6%
Total 34% 33%

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 2015.

Appendices II and III show a list of stores by concept and market at 31 January 2016 and the information on the markets in which the various concepts make on-line sales.

Issues relating to sustainability 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 of goods for sale 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 the Sustainability Department and its 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 projects that Inditex has initiated in order to meet the challenge posed by a sustainable production chain are the following:

  • Supply chain traceability system
  • Manufacturer and Supplier Code of Conduct Compliance Program
  • Water Master Plan in the manufacturing chain
  • Supplier Cluster Program
  • Framework agreement with the international workers federation IndustriALL Global Union
  • Program for improved energy, water and waste management in the Green to Wear manufacturing chain
  • Forest product policy to protect primary forests in danger of extinction
  • Product health and safety standards compliance programs Clear to Wear and Safe to Wear.
  • Ready to Manufacture program to evaluate the wet textile manufacturing processes, with the aim of implementing practices to guarantee product health and safety.
  • The List, by Inditex, research and quality control program for the chemical products employed in textile manufacturing.

Other environmental initiatives are carried out at the Group’s facilities including most notably the implementation of ISO 14001 certified environmental management systems at head offices, central offices and all of Inditex’s logistics centers; the opening and refurbishing of stores based on the Ecoefficient Store Manual: LEED/BREEAM certification of flagship stores, logistics centers and offices; emission reduction programs; packaging and waste optimization programs; waste minimization plans at logistics centers and stores; design and buyer team awareness initiatives and programs for product recycling and end of product life programs.

Inditex understands that its relationships with its employees and with the community it forms part of 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.

The detail, by category, of the headcount of the Group and its jointly controlled entities is as follows:

Categories W M Total
Manufacturing and logistics 4,012 5,128 9,140
Central services 6,448 3,823 10,271
Stores 106,049 27,394 133,443
Total 116,509 36,345 152,854

Liquidity and capital resources

Inditex continued to show a strong financial position in FY2015.

Million Euros 31 January 2016 31 January 2015
Cash & cash equivalents 4,226 3,798
Short term investments 1,086 222
Current financial debt (10) (8)
Non current financial debt (1) (2)
Net financial cash (debt) 5,300 4,010

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

Million Euros 31 January 2016 31 January 2015
Inventories 2,195 1,860
Receivables 669 862
Payables (4,591) (3,658)
Operating working capital (1,728) (936)

Funds from Operations reached €3.9 billion in FY2015, 16.4% higher than in 2014.

In recent years, Inditex has been involved in substantial capital expenditure at its head offices, logistics centers and stores and on-line sales platforms. Ordinary capital expenditure for FY2015 amounted to €1.4 billion. Extraordinary capital expenditure in FY2015 amounted to €142 million.

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 considers that no changes will arise with regard to the generation and management of liquidity in FY2016.

Additionally, the Group has available credit lines, against which no amounts have been drawn down (see note 19 to the consolidated annual accounts), that guarantee access to such additional funds as might be required.

Analysis of contractual obligations and off balance sheet transactions

As detailed in note 24 to the consolidated annual accounts, the most significant contractual obligations related to future minimum payments under non-cancellable operating leases.

Also, commitments exist in relation to investments envisaged in the opening of new stores in FY2016, the amount of which is included in the figure for capital expenditure detailed under Issues relating to sustainability and employees.

Main risks and uncertainties

In order to facilitate unified and comprehensive risk management, the Group has established a common definition of risk for the Organization as a whole. Accordingly, the Group defines a risk as “any potential event that may have a negative impact on the fulfilment of the business objectives”.

The risks reviewed are classified and grouped 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 or in it performs retail activities.

In this regard, country-risk triggering 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 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 out its business activities.

The risks included in this category include risks relating to tax, customs, labor 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, suppliers) and society in general.

They arise from the possibility of incorrect management of issues relating to social responsibility and environmental sustainability, responsibility for product health and 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 centers.

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.

In view of the Group’s operating structure, the main operational risks are concentrated at logistics centers and at third party operators transporting goods. The clothing, footwear, accessories and household products of all the concepts are distributed from 14 logistics centers located throughout Spain. Logistics distribution is complemented by other smaller logistics centers located in other countries and with third party logistics operators which carry out small scale distribution operations.

Other risks included under this category would be those associated with property management, particularly in relation to the search for and selection of commercial premises and the return thereon.

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.

The euro is the Group’s functional currency. Its international transactions require the use of numerous non-euro currencies giving rise to foreign currency risk. The Group has investments overseas whose assets are exposed to the foreign currency risk. Given that the Group consolidates the annual accounts of all its companies in its functional currency, i.e. in the euro, it is exposed to foreign currency risk in the translation of the results of all its entities located outside the Economic and Monetary Union. The Group is also exposed to the risk arising from the payment and collection flows in currencies other than the euro in relation to the acquisition and provision of goods and services in both Group and non-Group transactions.

The Group is not exposed to significant concentrations of counterparty credit risk. The majority of its revenue relates to retail sales which are collected in cash or through credit or debit card payments. In any event, the Group is exposed to the risk that the (mainly financial) counterparties do not fulfil the obligations resulting from investing the Company’s liquidity, under the credit facilities or other funding and guarantee vehicles or the derivatives arranged to hedge financial risks.

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.

The Group’s various departments and particularly the Management Planning and Control and the Administration departments, which report to the Corporate Finance Department, are directly responsible for producing and supervising the quality of this 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 and Control 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.

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

  • Investment Policy
  • External Financing Policy
  • Payment Management Policy
  • Financial Risk Management Policy
  • Code of Conduct and of Responsible Practices
  • Criminal Risk Prevention Manual
  • Inditex Group Internal Code of Conduct for matters related to Securities Markets.
  • Corporate Social Responsibility Policy
  • Manufacturer and Supplier Code of Conduct
  • Occupational Risk Prevention Policy
  • Environmental Sustainability Policy
  • IT Security Policy
  • Purchasing and Contracting Policy
  • Tax Strategy and Policy

For more details, see Section E-Risk control systems of the Annual Corporate Governance Report for 2015.

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, adjusted for the calendar effect of an extra trading day in February due to the leap year, increased by 15% from 1 February to 7 March 2016. The Spring/Summer season is influenced by the performance over the Easter period due to its significant sales volumes.

In FY2016 Inditex expects 400-460 gross openings and the absorption of 100-120 small units into neighboring stores. Approximately 70% of the new contracts have been signed but in some cases openings may not take place in FY2016.

Store openings are planned in five new markets in FY2016: Vietnam, New Zealand, Paraguay, Aruba and Nicaragua.

Over the course of FY2016 all Inditex concepts will be present online in all European markets and Turkey.

Capital expenditure in FY2016 is expected to be approximately Euros 1.5 billion, driven mainly by the program to add new retail space in key locations during the year. Capital expenditure is expected to increase less than the growth in retail space in the coming years.

Inditex foresees significant opportunities for growth and continues with the global expansion of its integrated store and on-line sales model. In the coming years 6%-8% growth is envisaged in new retail space in prime locations and organic and on-line sales are expected to make an increasing contribution.

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, household products or certain logistical activities, 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 center delivery systems, systems for communications with stores and in-store garment labeling 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.

By virtue of the foregoing, the following treasury share acquisitions were made:

  • In FY2013 450,000 treasury shares of Euros 0.15 par value each were acquired for an average acquisition cost of Euros 103.32 per share (which, following the stock split approved by the Annual General Shareholders’ Meeting on 15 July 2014, in the ratio of five new shares for every existing share, are currently equal 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 for an average acquisition cost of Euros 20.94 per share, representing 0.040% of the share capital.

In total, the Group holds 3,500,000 treasury shares representing 0.112% of the share capital.

Other salient information

Stock market information

Inditex’s share price rose by 15.5% in 2015 to Euros 30.185 per share on 31 January 2016, following the 18.0% increase in 2014. The average daily trading volume was approximately 7.9 million shares. The Dow Jones Stoxx 600 Retail and Ibex 35 indexes fell by 4.4% and 15.3%, respectively, in the same period.

Inditex’s market capitalization stood at Euros 94,076 million at FYE 2015, up 927% on its capitalization when its shares were admitted to trading on 23 May 2001, as compared with an 8% decrease in the Ibex 35 index in the same period.

The dividend for FY2014 totaling Euros 0.52 per issued share was paid in May and November 2015.

Dividend policy

The Group’s policy consists of the payment of dividends equivalent to 50% of the net profit generated in the year under the concept of ordinary dividend and with the possibility of a bonus dividend.

Inditex’s Board of Directors will propose at the annual general meeting a dividend increase of 15.4% to Euro 0.60 per share, composed of an ordinary dividend of Euros 0.46 per share and a bonus dividend of Euros 0.14 per share. Euros 0.30 will be payable on 3 May 2016 as an interim ordinary dividend and Euros 0.30 will be payable on 2 November 2016 as the final ordinary and bonus dividend.

Dividends paid to shareholders in 2015 reached Euros 1,626 million.

Other disclosures

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 FY2015 that substantially affected its financial position or results.

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 2015 is available at and was published in the section on Relevant Event Communications of the CNMV (Spanish National Securities Market Commission) website ( on 9 March 2016.

This document is of a purely informative nature and does not constitute an offer to sell, exchange or buy, or the solicitation of an offer to buy, securities issued by any of the companies mentioned herein.

This document contains forward-looking statements. All statements other than statements of historical fact included herein, including, without limitation, those regarding our financial position, business strategy, management plans and objectives for future operations are forward-looking statements. Any such forward-looking statements are subject to risk and uncertainty and thus could differ materially from actual results.

Some of these risks include, amongst others, ongoing competitive pressure in the sector, consumer tastes and spending trends, economic, political, regulatory and trade conditions in the markets where the Inditex Group is present or in the countries where the Group’s products are manufactured or distributed.

The risks and uncertainties that could affect the forward-looking statements are difficult to predict. Except for the cases where the prevailing rules and regulations in force require otherwise, the company assumes no obligation to publicly revise or update its forward-looking statements in the case of unexpected changes, events or circumstances that could affect them. Given the uncertainties of forward-looking statements, we caution readers not to place undue reliance on these statements.

For a discussion of these and other factors that may affect forward looking statements and the Inditex Group’s business, financial conditions and results of operations, see the documents and information communicated by the company to the Comisión Nacional del Mercado de Valores (the Spanish Securities Commission).

The contents of this disclaimer should be taken into account by all persons or entities.