Inditex Sets Global Retailer Trend in Brushing Off U.S. Border Tax

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By Ben Stupples

Whether with cropped jeans or cropped tops, following global fashion trends is an important part of the business model for Inditex SA, the world’s largest clothing manufacturer and retailer by market capitalization.

On tax matters, however, the Arteixo, Spain-based company has broken the trend of retailers with U.S. operations warning about the U.S. Republican Party’s border-adjustment tax plan.

The company still sees “strong growth” opportunities in the U.S., Chief Executive Officer Pablo Isla said in a conference call after Inditex’s 2016 results, filed March 15.

We “have not changed at all our plans about our development and expansion in the U.S.,” he added in responding to a question about whether the company’s expansion plans have changed due to the possible border tax or other trade barriers.

Private and Public Caution

While it may not worry fast-fashion retailer Inditex, the Republican Party’s plan for a 20 percent border-adjustment tax on U.S. imports has other retailers issuing both public and private caution.

In its 2016 annual report, filed March 9, global fashion retailer Hugo Boss AG warned of the impact of “protectionist” U.S. policies on the fashion industry, in a reference to the border-adjustment tax.

Among U.S. companies, meanwhile, the border-adjustment tax has pitted the country’s industry giants against one another, with retailers on one side and U.S. exporters on the other. Four retail industry executives, including a representative from Netherlands-based home furniture company Ikea Group, met with Republicans in Washington March 8 to lure the lawmakers away from supporting the tax.

House Speaker Ryan

The border-adjustment tax, backed by House Speaker Paul Ryan, would apply to imported goods sold in the U.S., while companies exporting out of the country are exempt from the levy. The measure aims to tackle the “self-imposed unilateral penalty” for exports and subsidies for imports that currently exist in the U.S., according to the Republican party’s June 2016 tax reform proposal.

European clothing retailers and luxury goods companies—such as Hugo Boss and LVMH Moet Hennessy Louis Vuitton SE—are at risk due to the importance of the U.S. to their business. In 2016, the Americas region accounted for 22 percent of Hugo Boss’ sales, according to its annual report.

Inditex’s U.S. Presence

While most of Inditex’s presence in the U.S. is online, the country has been a core market for the owner of the Zara, Massimo Dutti and Zara Home brands. In its 2015 annual report, Inditex identifies the U.S. as a “key market” due to “symbolic stores” opening in New York, Los Angeles and San Diego.

“It is an important market, but it’s difficult to measure because most of it is via online, and they don’t disclose those figures,” Rafael Bonardell Trianes, an analyst who covers Inditex at Madrid-based online brokerage GVC Gaesco Beka, told Bloomberg BNA in a March 17 email about the U.S. market.

Having “said that, Inditex only has Zara, Massimo Dutti and Zara Home in the U.S. market (between physical and online) so there is still a lot of potential with the launching of other brands,” he added.

2016 Results

According to its full-year 2016 results filed March 15, Inditex’s profitability shrank to an eight-year low due to adverse currency swings, higher garment costs and increasing competition. Operating profit, however, still rose 9.5 percent to 4 billion euros ($4.3 billion) on revenue of 23.3 billion euros, matching analysts’ estimates.

“2017 will be another year of strong expansion for Inditex,” Isla said in the March 15 conference call with analysts following Inditex’s results, without specifying the amount of growth for the U.S. “We expect 320,000 square meters of new space in prime locations in conjunction with our global online sales rollout.”

An Inditex spokeswoman declined to comment on the border-adjustment tax in a March 17 email.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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