ZOZO Inc

TSE:3092

Earnings Call Transcript 2019-Q1

[Unknown Executive]

It is time, so we would like to begin the announcement of the consolidated business results for FY 2018 first quarter for Start Today. Please bear in mind that you -- please refrain from taking any videos or still images during the announcement.

We would like to first introduce the participants, the presenters: Founder and CEO, Yusaku Maezawa; Executive Vice President and CFO, Koji Yanagisawa; and the Executive Officer, Business Administration Office, [indiscernible] [ Hirose ].

The presentation will finish at 6:00.

Could we ask Vice President, Mr. Yanagisawa, to take the podium? Thank you.

[Koji Yanagisawa, executive]

Good afternoon, everyone. So if we can jump right in. I would like to start the announcement of our results for FY 2018 first quarter. The suits that we are all wearing were created through our private brand, the shirt and tie as well. So if you can come up and touch our -- the clothing, that will be great, later on.

So based on the document on the screen, if we -- I can take you through the results, the overview of the FY 2018 first quarter. The transaction value was JPY 70.4 billion, up by 18% year-on-year. OP decreased by minus 26 -- decreased by 26% year-on-year and was JPY 5.8 billion. The OP margin was 8.3%, which is down by 5.1 points year-on-year.

Next, this is now in your document, but if you can look at the screen. This graph focuses on ZOZOTOWN, excluding ZOZOUSED. And this expresses the growth rate for the transaction value of the ZOZO business. So the first quarter, we saw an increase in the number of shops, as well as better efficiencies in brand coupons, and we organized the sales event called ZOZOWEEK. So we were able to grow the transaction value at a higher rate than the organic growth. Some growth factors are: the organic growth accounted for 10%; and new shops contributed to plus 4% growth; and efficient brand coupons operation contributed to 2.5%; and ZOZOWEEK, that we organized in May contributed to 1.5%.

Page 5 of the documents that we distributed, this is the increase/decrease analysis of the OP. So OP came down from JPY 7.98 billion to JPY 5.87 billion, so by basically JPY 2.12 billion. First of all, transaction value grew by JPY 1.45 billion, so this is transaction value increase. Next, the gross profit ratio improved by JPY 0.79 billion, and this is due to increase in the other sales. Although the sales from premium member service decreased due to the end of the service offering, they increased due to deferred payment service charge and shipping revenue due to change in shipping policy, so this contributes to the increase in other sales.

In detail [ next, sorry ].

So we -- OP went up by JPY 0.27 billion due to change in payment mix. So the payments mix changed, and we saw an increase in the payment service charge by JPY 0.27 billion, and some decreases. We changed the shipping policy in September of last year, so the shipping fees increased, and this contributes to a decrease in minus JPY 1.57 billion. And ad expenses from free distribution mainly of ZOZOSUITs, it has decreased the OP by JPY 1.16 billion.

Next, the payroll increased by JPY 0.64 billion. So this is due to the number of employees, increase of number of employees on a consolidated basis, as well as more logistics centers. And lastly, we have seen an increase in cost of JPY 1.25 billion from other costs.

Next, if you can look at the consolidated balance sheet. So the main point here is that we did a share buyback, which amounted to a short-term loan amount, which amounts to JPY 24.0 billion. So you will see that reflected in the balance sheet, and that is a key major change in terms of our balance sheet.

Next, if you would turn to Page 9, this is a change in transaction value by quarter. The transaction value in the first quarter was JPY 70.4 billion, as I mentioned before, which went up by 18.2% year-on-year. So if we break this down, ZOZOTOWN business was JPY 68.3 billion, which was up by 18% year-on-year. Further breaking this down, consignment business was JPY 64.2 billion, increasing by 17.8% year-on-year. And ZOZOUSED business was JPY 4.0 billion, which has increased by 21.3% year-on-year. And the private brand was JPY 0.11 billion. And BtoB business was JPY 1.9 billion, which has increased by 24.5% year-on-year.

Next, jumping to Page 15, the operating profit and operating profit margin by quarter. The OP in the first quarter was down by 26.4%, as I mentioned earlier, landing at JPY 5.8 billion, and OP margin was 8.3%. Key factors are the upfront costs in private brand, so that's a major factor, as you can see from the graph. So the private brand has -- the costs were about JPY 3 billion. And in terms of the private brand costs, the large costs were mainly ZOZOSUITs which we distributed for free, so that's an advertising expense. And the staff costs for private brand, including engineers. Another point is the temporary costs for the wind up of first-generation ZOZOSUITs.

So we've already mentioned this at the last consolidated business announcement, so this is a temporary cost, though. It's from the wind-up of this first-generation ZOZOSUIT. So this total comes up to be about JPY 3 billion in costs for the private brand. But without that, we managed to do JPY 8.9 billion in operating profit. But OP for all business, excluding private brand, as I mentioned before, was JPY 8.9 billion this quarter; and OP net margin was 12.7%. So this has shown a steady growth, so we have been able to maintain profitability in this respect.

Next, if you turn to Page 16, this is the SG&A by quarter. SG&A was JPY 18.3 billion. So against the transaction value, this went up from 19.9% to 26.1%, so up by JPY 6.2 billion over the last year. I already talked about main factors already, but so, change in Yamato shipping fees, which actually occurred last fall, so this has resulted in higher shipping costs; and also advertising costs from the free distribution of ZOZOSUITs; also the higher labor costs; and also other expenses -- increase in other expenses as well, which we've already mentioned.

But if you go back to Page 14, you will see a detailed breakdown of the SG&A increase. So first, starting with payroll. In terms of -- with respect to employees, we hired more private brand staff and also engineers as well. So we've actively hired the staff, and we see more employees on a consolidated basis due to increasing number of consolidated firms. And we also changed the bonus payment policy, so we've seen a temporary increase in terms of the accounting.

Next, in terms of operational staff, including part-timers and content -- contract employees, people who work in the logistics centers, we had to hire outsourced workers with higher unit price due to the addition of new logistics centers. And we've also seen increase in shipping expenses between logistics centers because we have more logistics centers. And the third point is an increase in percentage when calculated against the transaction value due to the decrease in average retail price.

And other expenses, first of all, is the costs related to wind-up of first-generation ZOZOSUITs, and we also offer -- we've seen a temporary increase due to incentive fee for improvement of the ZOZOSUIT. And not in the document, this has resulted in a temporary increase. So it's about 0.8% against the transaction value, but this is a temporary cost increase.

And we've also seen an increase in our ordinary expenses due to increase in rate of supplies used attributable to follow in ARP and basket size. And we've also seen an increase in communication expenses in order to improve websites and services, so this has increased by 0.3% against the transaction value.

Now if you will turn to Page 18, I would like to go over the key KPIs for ZOZO business. So starting with the number of total buyers, we saw 7.39 million, up by 170,000 people from buyers from the previous quarter. Active buyers -- active members increased by 340,000, running at 5.45 million. And guest buyers decreased by 180,000, running at 1.93 million. The factors for the members increase is because the brand coupons are only available to members, and we've actually operated this brand coopers -- coupons more efficiently, which has contributed to an increase in active members. And for the same reason, number of guest members have decreased. And these numbers actually does not include users who only purchase body measurement device, the ZOZOSUIT. So these are only people who bought on ZOZOTOWN. But the number of buyers or members have increased on this, very stable-ly as well.

Next, the number of shops on ZOZOTOWN on Page 19. As at the end of first quarter, we have 1,139 shops, which is 28 shops more than the previous quarter. So we have continued -- we are continuing to actively add new shops onto our platform. In more detail, we welcomed junior brand JENNI and global brand BANANA REPUBLIC; as well as the selection of the HOUSE, which is a golf brand; PEARLY GATES brand, basically. So we welcome these brands, and this fiscal year, we believe that we can add about 150 shops this fiscal year.

Next, if you turn to Page 21, the annual purchase amount in pieces per active member. The annual purchase amount was JPY 46,870 and pieces were 11.3 items. So comparison to the previous quarter, the annual purchase amount came down by JPY 791 and pieces by 0.1 pieces. So we've seen an increase in light users, actually, so if we look at the overall for -- both KPIs for overall active members, we are seeing a lower figure. But if you only look at the existing active members on Page 22, we see the same trend as well. So these have come down as well.

So the annual purchase amount and pieces per existing active members was JPY 59,569 and the pieces were 14.2 pieces. So the annual purchase amount came down by JPY 1,529 and the pieces came down by 0.2. This is the same reason as before, but we see a huge increase in new members last year due to introduction of deferred payment and point campaigns for new members. And they have become active members after 1 year, so we are seeing a ratio of newer members versus older members. And this tends to drive the average down because people tend to buy more the longer they are members. But we have a lot of members who are in their second year, so they are bringing the average down. But we haven't seen a major change among the existing members, so we are not really concerned about this.

Next, the average retail price on Page 24, and also, average purchase amount per shipment on Page 25. The average retail price was JPY 3,953, down by 3.6% year-after-year -- year-on-year. We've seen an increase in number of lower-end shops. Having said that, so this has contributed to lower average retail price in the first quarter, but this trend is gradually stabilizing. And if we look at the average purchase amount per shipment, it was JPY 8,122, down by 4.8% year-on-year. This has decreased more rapidly than the average retail price. And this is because the proportion of preorders has increased, which also means that we have to ship more products separately. We see a lot more people just order one products, preorder one products, which we would have to send on its own, so this has contribute to these numbers.

Lastly, this is on Page 28, this is our fund for this fiscal year, but we have not -- we do not intend to revise these targets at this time.

So that's it for myself. Next, Maezawa will take us through the private brand status.

[Yusuka Maezawa, executive]

Good afternoon, everyone. Thank you for coming. I know it's a very hot day.

So I've been in the news quite often lately, but I don't have enough time to go into detail about what's been much talked about. But I would like -- so I would like to focus on the private brand today.

For the first quarter, we've seen a lower OP, but the existing business is doing well, as we planned. But we invested JPY 3 billion in the private brand, as well as -- and this also includes the wind-up of the first-generation ZOZOSUIT. But we would like to actually take you through the -- where the private brand is today.

So on Instagram, Twitter, social network, a lot of people have posted comments, and there's a lot of people who are very happy with the denim and T-shirts that they received. And this is due to the fact that we've been able to distribute ZOZOSUITs well. And as of July 31 -- but before we actually mention that we will be passing the shipping about 550,000 as of July, but we've actually added about 600,000.

So every day, we're shipping out about 20,000 ZOZOSUITs every day. So as I mentioned, we are going to be passing about -- we would like to pass out about 6 million to 10 million ZOZOSUITs, which I announced earlier in the year. So we think we are on track. And we can actually expand the speed or even increase this speed and also address the global markets as well. And we can actually address a lot of demand going forward.

So we believe we will see a lot more people commenting that they haven't got their suit yet. Because as of today, we've already distributed 1.1 million, basically. And on July 3, business suits and shirts as well, and we'll talk about the ties later. But on July 3, we announced the ZOZOSUITs, as well as T-shirts, dress shirts from ZOZO, our private brand, and as well, they are well received. And this number, we haven't talked about before, but as of now, the number of business suits ordered is 22,459 sets. And each suit setup is about JPY 25,000. So this amounts to about JPY 60 billion (sic) [ JPY 600 million ] in sales. But it is too hot right now to purchase suits. So when it -- the weather becomes cooler, I think we will start to sell even more. And the popular colors are navy and also navy herringbone that I was wearing on July 3. And we've seen a lot of people order white shirts, dress shirts. So these products will soon be arriving and being shipped to our customers. And I've seen the finished products already, but I think that everybody will like them, and I'm very much looking forward to getting them out to our customers.

And if we look at the average purchase amount per user for the private brand, we will like to announce that today. This is much higher than our forecast. So our average purchase amount per user is JPY 9,719.

So when I talk about the private brand, and I wanted to do JPY 20 billion this year. And I talked that the average purchase amount would be around JPY 7,500, I believe. So we started on May 1, but for over the 3 months, we've already surpassed this average purchase amount per user, and it's currently JPY 9,719. And this is also due to the fact that the business suit is doing very well. So it's -- we're seeing good trend.

And then items to be added in the future will include, from August onwards, we will be introducing neckties, which we are wearing. This is the first attempt for the private brand, so this is something that you can order without ZOZOSUITs. But based on the weight or height or body structure, we will recommend the best tie for you. But even if it's just a plain navy tie, it will look the same maybe, but we will actually we'll have 35 different sizes. The length is different. The width is different. So we will have 35 different types of ties, sizes of ties, and we will recommend the best one for you.

Until now, private brand was limited to people who had a ZOZOSUIT and also made -- took measurements. But going forward, with some items where you don't need such accurate measurements, we will like to start making that available to many more users with not so much information. But for example, we will like to introduce underwear, innerwear later, like shirts and socks. So that also might not require ZOZOSUITs. And cut and sew products are doing very well as well, so we want to add border T-shirts, sharp T-shirts and whole-garment knitwear sweaters.

As I introduced in July 3, we will actually use SHIMA SEIKI knitting machines, so there is no stitching. And it's actually knit 3D and it's a whole garment, so we can actually create something that fits everyone's bodies very well.

And also, we will be adding long-sleeve T-shirts, which might seem like a simple products, but I'm never had -- owned a long-sleeved T-shirt that I was very happy with. Some T-shirts are, for example, the sleeves are too short even though the body fits just right. But you can add -- change the sleeve length as well by centimeter, so we are confident that we will be able to make a long-sleeved T-shirt that will fit you just right. So this will be coming in August and September.

Next, starting in October, these are the items we are planning. So men's suits are doing very well, so we want to also offer women's suits as well. So this will be made to order as well. This is not a pattern order, this will be customized, made-to-order for each and every person. So each and every person -- for each and every person, we will be developing a different pattern.

Media and some people have commented that ZOZO products, private brand products are not for order, but we are actually developing original patterns for each individual, so it will be fully made-to-order. And in terms of coats, we will be developing coats, but we cannot say -- disclose at this time what kind of coats we will be launching. And innerwear, as I mentioned earlier, men's underwear, socks and also maybe innerwear that will keep you warm. So other casual items will be released in a timely manner as well, so please look forward to what we will be launching.

And we actually introduced this yesterday, but we would like to start developing shoes and ladies underwear, especially bras. So we are recruiting people with experience and expertise, as it's written there on the website, we are looking for people with 5 years’ experience or somebody who's researched this as a specialty. So we would like to welcome you to our team to develop this product. Of course, we already know how we will measure this as well. So measuring -- taking measurements for shoes or women's chest area. We already know -- have an idea about how we will be measuring that, but we cannot -- we will go into detail at a later time about how we intend to do that.

So in the first quarter, we did JPY 0.11 billion in transaction value. And you might think that this is quite low, but we haven't really shared these results with you. But in the second quarter, we plan to do the JPY 1.5 billion, JPY 7.7 billion in the third quarter and JPY 10.7 billion in the fourth quarter. So a total of JPY 20 billion.

So as I mentioned before, we have already done JPY 600 million in terms of business suits already, so we want to accelerate our efforts in Q2, Q3 and Q4 and achieve these results.

So that was a brief look at the private brand. Thank you very much for listening.

[Unknown Executive]

So that is the end of the live streaming.