Zara owner built a post-covid retailer before virus came along

The world's largest fashion retailer typically operates a lean warehouse operation, preferring instead to hold the majority of its stock in stores that double as e-commerce fulfillment centers. That way, turnaround is faster, shelves are replenished more regularly and inventory is kept to a minimum.

But with about 3,500 stores worldwide closed, this carefully balanced just-in-time cycle of goods was reaching breaking point. By April, Inditex sent out an unusual request to employees, seeking volunteers to retrieve clothes and accessories left in stock rooms and on shelves in the hundreds of Zara, Massimo Dutti and other brand stores to fulfill e-commerce orders.

The unorthodox blend of local manufacturing, nimble logistics and aggressive embrace of e-commerce has helped Inditex weather the fallout from the global lockdown better than many other retailers. It's also helped recalibrate operations for a future of shopping where face masks, limited store access and distancing stand to push consumers online in ever greater numbers.

While the company is set to report its first-ever loss when it unveils quarterly earnings on Wednesday, Inditex managed to rely on its online business to keep operations running, limiting the damage from the shutdown that's now beginning to ease in Spain and elsewhere.

The shares rose 0.4% early Tuesday in Madrid. So far this year they're down about 16%.

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"Pre-covid 19, online generated about 14% to 15% of Inditex's sales, and no doubt that will have accelerated now," said Richard Chamberlain, managing director of European general retail at RBC Capital Markets. "The advantage they have is a central pool of inventory, which is shipping out stock to shops a couple of times a week so the idea of shipping directly to people all over the world is pretty easy."

A relative latecomer to the Internet, Inditex launched its first online apparel business in 2010 and expanded the digital business with a big bet on technology that ties into its unique logistics and distribution system.

The system has two key pillars: heavy rotation of products that move quickly from commissioning to sale in stores; and proximity of production, with the bulk of garments made in Spain, Portugal, Morocco and Turkey. Almost all clothes are sent to a handful of centers in Spain and re-distributed from there to outlets worldwide.

The approach differs from Nordic rival Hennes & Mauritz AB, which has long struggled to reduce its $4 billion inventory buildup. At the end of February, H&M's stock-in-trade was the equivalent of 16% of rolling 12-month sales. Inditex and H&M's financial years differ by one month, complicating a direct comparison. Still, analysts expect H&M to report a loss for this fiscal quarter that's more than four times as big as that of Inditex.

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When Inditex launched its apparel online business in 2010, it made up for the late entry by harnessing technology that gave it a more robust overview of its product stream. Two years earlier, Inditex had introduced so-called RFID tracking, using radio-frequency identification inside the alarm tag that transmits data from the garment to a reader. The tag goes live as soon as a product enters a stock center, and is then deactivated when the item is sold, providing Inditex with exact, real-time control over its inventory.

"It was important that from the day of the launch that online is relevant for the company and totally integrated with the rest of the business," Inditex Executive Chairman Pablo Isla said in an interview in February. "We adapted so well to the online world because it was all natural. Without RFID, it wouldn't have been possible, and RFID wouldn't have been possible without thinking about alarms."

Knowing its inventory to the dot matters to Inditex. Its logistics operation requires the bulk of its products be shipped from the manufacturing centers to distribution centers in Spain. Then, based on requests from store managers spread across the world, the company sends clothes twice a week to each shop. This cuts down the amount of stockpile, which can turn into a huge burden for retailers if goods aren't sold , be it for unforeseen weather, a flopped collection -- or a global virus.

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When the store stock sat idle in the lockdown, Inditex relied on volunteer workers to go pick up the garments, helped by the fact that it hadn't furloughed employees in Spain. Getting its hands on the additional clothing was key because already in March, Inditex had ramped up web discounts, a rare move for a company that emphasizes how online and offline operations are always in sync.

During the pandemic, online had an opportunity to shine because in most major countries where Inditex operates in Europe, e-commerce was allowed to continue operating even as brick-and-mortar temporarily closed down. This occurred in Spain, Inditex's largest market, where the government declared a national lockdown March 14, causing retail sales to drop by a record 14% that month.

Still, the company remains in good shape, thanks to its strong balance sheet boasting 8 billion euros ($9.04 billion) of cash and cash equivalents, the integrated online business and low inventory compared with rivals, according to Chamberlain.

"Inditex has a relatively fortress balance sheet," he said. "Having a very strong balance sheet gives them a lot of capacity to weather the storm and to keep investing for the long term and look after their people and suppliers very well."