LOV business model, lessons from Zara and Shein

 Examining Inditex (Zara) with a look through to Lovisa

Inditex e$150B market cap, is a fast fashion apparel designer and retailer. Owns Zara which is 70% of sales.

Lovisa US$2.1B market cap, fast fashion jewellery and accessories.

This summary is based on a Business Breakdown podcast on Inditex and my musings and opinions!

Despite being in adjacent industries, INDI and LOV share similarities. INDI is arguably the most successful fast-fashion company, running an offline and online strategy.

The similarities stem from the business model, which allows new fashions to be introduced into stores quickly. The measurement of success is constantly bringing the right fashion to customers.

A large proportion of the inventory is created very late in the cycle, relative to competitors. The feedback loop is important, ie to quickly assess what is selling and what is not. Designs can change in a couple of weeks and new, fresh products can reach store shelves in a few weeks. The dynamism of the business model is the core value of both companies.

Important to this is vertical integration being the control of the manufacturing design, the shipping and the retail outlets. Manufacturing is outsourced for both and scale is an advantage in this regard. Relationships with manufacturers are important but probably not critical. Vertical integration and scale are considered competitive advantages.

INDI has 30% of sales online, this is a high number to me and shows the importance of the channel. LOV do not disclose that number, I would think that online would be less for LOV given the lower average sales size but don’t know for sure. Online sales have caused many brick-and-mortar retailers much trouble optimising their sales channels. It is unclear how large and how successful LOV’s online business has become.

INDI is now much more mature with net new stores comprising 1-2% growth, while I'm expecting 10% for LOV (N5Y). SSS for INDI are expected to be +6-8%, Im expecting much lower for LOV 1-2%. Price is difficult for both but LOV has taken price in the past.

Gross Margins for INDI are around 57-58% which is market-leading and were higher before online transparency. LOV GM’s are around 75-80% which I suspect are market-leading. High GM shows the ability to differentiate products. INDI competitors are around 35-40%. Interestingly, EBIT margins for both LOV and INDI are around 18%. The lack of operational leverage achieved is interesting and due to reinvestment into, I suspect, higher fulfilment costs mainly staff and some rent slippage. The stability of the margin is a sign of excellent operational control.

One of INDI’s large advantages of the business model is lower markdowns due to fresher inventory. INDi has markdowns believed to be half the industry, 15% versus 30% of inventory. The rest of the inventory is sold at full price. LOV does not disclose markdowns and it would be interesting to see how LOV compares to INDI and competitors. I suspect a better outcome.

The inventory cycles for INDI are 80 days compared to H&M at over 100 days. These are important as they reduce the amount of cash held in inventory. LOV cycles have been longer at 177 days in 2024 increasing steadily from around 150 in 2020. The absolute levels probably point to differing industries with LOV (jewellery) holding inventory much longer, while the trend is not positive and may show the lower efficiency of newer stores. Could also be LOV targeting slower moving but higher-margin products. LOV’s higher GM would allow some leeway here. A situation worth monitoring for LOV.

INDI highlights the advantage that the omnichannel holds over online only, with one-third of online sales being picked up in-store and two-thirds of returns being done in-store. Attachment sales on returns are very high, showing the strength of a blended model if operated well.

An interesting way to look at the robustness of the business model is that it is not based on a brand, or a super designer, fashion is written and created every day with the constant feedback loop to directing design and inventory build. It could be argued that this model if executed well is of a lower risk level.

The Shein model is described as a test and repeat model, with an enormous amount of new products launched each day but only those that show sales momentum followed through. The similarities are the ability of the model to adapt to changes in customer trends and feedback very quickly which brings about success.

ESG is a big deal in apparel the use of cotton is sensitive to the environment. Not really an issue with LOV, so far.

CONCLUSION

It is usually dangerous to draw too many conclusions across adjacencies however, some seem to appear here. The ownership, integration and flexibility of the business model to adjust to end customer demand is critical. This speaks to the business model, which is interesting and how it is designed rather than relying on one creative genius, brand or product. Duplicating that structure on an existing business base would be very difficult with many institutional and structural barriers. A start-up could replicate it if having the knowledge but then is up against incumbent knowledge and scale with all its benefits.

From LOV’s point of view, what could go wrong? TAM saturation occurs but this looks a long way off. Plastic fashion becomes passe. Competition emerges and scales quickly. All of these appear possible more than probable to me. Growth pains as short-term diseconomies occur are likely. The existential risk IMO comes from a breakdown or ineffectiveness of the integrated business model. The ability to quickly and effectively bring ideas from the design room to the store shelves falls apart for some reason. Maybe the diversity of end markets becomes too complex stretching the design and logistical functions. We just don’t know at this stage. The opportunity is huge and the rate of success depends on LOV finding where the unit economics makes sense and effectively executing on these.