ZOZO Inc

TSE:3092

Earnings Call Transcript 2020-Q1

[Operator]

It is time. So we would like to begin the briefing for the FY 2019 First Quarter Consolidated Business Results for ZOZO.

[Operator Instructions]

Let me introduce the presenters today, Vice President and CFO, Koji Yanagisawa; Director, Masahiro Ito; Executive Officer and General Manager of the Business Administrative Division, Fuminori Hirose.

These three will be the presenters today. This session will finish at 6 p.m. today. And once the briefing is over, at the back end of the room, you will be able to experience the ZOZOMAT. Once you take your measurements, you will be given socks that fit you up perfectly, so please have a go. Now I pass the microphone over to the CFO, Yanagisawa.

[Koji Yanagisawa, executive]

Good afternoon, everyone. As the emcee just mentioned, at the end of this session, we would like for you to have a go at ZOZOMAT. We believe we have 20 mats today. So please, there may be a queue, but please have a go at measuring -- taking your measurements.

So jumping right in, I would like to take you through the first quarter of FY 2019. Starting with the profits for the first quarter, May 20, we organized our first brand conference. So this is a short video showing you what the conference was like.

[Presentation]

[Koji Yanagisawa, executive]

So that was what the conference was like. The conference was a great opportunity, we heard great feedback from the brands. And there's been media coverage about how brands are leaving our platform, but we continue to have a great relationship with the brands as you can -- as you saw from the video, so please rest assured.

Also, starting this quarter, we've also changed the design of our [ base ] materials. The theme is Return to Our Origins. This reflects our hardcore culture which has been a part of us since the beginning. So we will go back to our roots and work even harder. So the theme reflects our attitude. So we hope you will continue to support us.

Now moving on to the results. If you will look at Page 3 and 4 of the document that we have passed out, the highlights for the first quarter, the GMV was 12.5% up year-on-year at JPY 79.2. OP was up by 32.6% year-on-year, landing at JPY 7.7 billion and OPM was 9.8%, up by 1.5 points year-on-year. So against our plans, both the GMV and OP grew steadily as we had planned. Now just giving you the highlights of our performance, starting with the increase/decrease analysis of our operating profit which is on Page 8. In terms of the increases of the OP, the operating profit was JPY 58.7 billion -- JPY 5.8 billion first quarter last year, which went up by JPY 1.91 billion to JPY 7.7 billion. And the GMV went up to -- went up by JPY 0.7 billion and promotion costs came down by JPY 1.5 billion. This is due to the ZOZOSUIT distribution, we distributed them last fiscal year, but we are no longer doing that. So that has radically improved the promotion costs. Next, shipping costs have decreased by JPY 0.2 billion. This is due to the average order value going up and also the distribution cost for the ZOZOSUIT. We're not distributing as many, so this has contributed to shipping cost savings and others have increased by JPY 0.5 billion. Last time, we had expense -- one-time expenses that were quite high, but we are no longer seeing that this fiscal year.

In terms of the decrease, the gross profit margin went down by JPY 1 billion. This is because in comparison to the previous year, the ad sales have gone up, but there was a greater impact from ZOZOARIGATO membership discounts. So that is why we're seeing a decrease. And also, rent ratio has also gone up so this has resulted in a minus JPY 0.2 billion impact. So we increased the number of logistic facilities since October 2018. So that is the impact that you see here.

Next, balance sheet is on Page 9. There's only one major change, tangible assets have gone up by JPY 1.6 billion. This is mostly due to the construction of the new office in East Chiba. Other than that, there are no major changes.

Next, if you would turn to Page 12, the gross merchandise value. In the first quarter, GMV was JPY 79.2 billion, up by 12.5% year-on-year. If we look -- take a closer look, consigned stocks were JPY 72.6 billion, up by 13%. The purchased stock is very small, at JPY 0.1 billion, up by 132.7%. ZOZOUSED was JPY 3.57 billion, down by 0.8%. And the PB business was JPY 0.46 billion, up by 306.7% year-on-year. And the B2B business was JPY 2.47 billion, up by 25% year-on-year.

We used to give an analysis of the year-on-year changes in the GMV growth rate, but we would like to refrain from doing so this quarter. There are many factors that are interrelated, and so it's difficult to clearly state what had how much impact. And we believe that it could be misleading. So starting this quarter, we would like to refrain from giving you a detailed analysis. However, if we launch any major promotions, we will let you know how much -- how each initiative contributed to the GMV. So we hope that you -- we have your understanding in this regard.

Next, changes in the operating profit. This is on Page 17. The first quarter operating profit was up by 32.6%, landing at JPY 7.7 billion, and the operating profit margin was 9.8%. So we have grown steadily in the first quarter. So last year, during the same quarter, we saw operating losses from the PB business as well as the distribution of ZOZOSUITs. But this quarter, we didn't see much of that. So the operating profit has recovered to near 10% -- the operating profit margin has recovered to near 10%.

The loss from private brand business continues to shrink this quarter. So we will refrain from disclosing the operating profit -- operating profit margin for the private brand business only. So it's mainly the ZOZOTOWN business. And of course, we're also recovering as well. Having said that, the first quarter, the operating profit margin or the cost -- actually didn't use a lot of the cost that we have budgeted so these numbers are more favorable. These numbers are slightly favorable, and next, going on to SG&A, Page 18. The SG&A for the first quarter was JPY 18.4 billion. So again, the GMV, it was 23.3%, down 2.8 points year-on-year. The private brand is -- had -- the cost from the private brand was the major impact. But taking a closer look at the SG&A, Page 16 of the documents that you have, against the transaction value, the reason why the percentage has gone down in GMV is that first one -- first factor is the payroll. So last year, same quarter, we changed the bonus payment policy. So we saw an increase in bonus payment, but first quarter this year, that has been normalized.

So we're no longer seeing a huge impact from that. And also, shipping fee, we launched the ZOZOARIGATO service, which drove the average order value up, so the shipping costs have come down. And this is -- ZOZOSUIT, as well, we're no longer distributing. So this has also had a favorable impact on the shipping costs, and the largest fee or impact was the promotion cost.

Last year, we had ZOZOSUIT production costs as well as promotional videos that we created for the private brand, we saw those costs last year, but we're not seeing them this fiscal year, so this has also had a favorable impact on SG&A. Other factors, as we mentioned, we had high one-off expenses for the private brand, which we are no longer seeing here. So those are the 4 major impacts that we saw. And please refer to the comments section for the other factors.

Now if you could turn to Page 20, these are the KPIs for ZOZO. The number of total buyers was 8.12 million, down slightly from the last quarter. The active members went up by 100,000, standing at 6.55 million, and guest buyers went down by 110,000, landing at 1.56 million.

This quarter, we didn't do any promotions, hardly any promotions. So the SG&A, you saw that promotion cost was significantly lower this quarter. So we didn't do any special promotions this quarter, which meant -- means that the growth in new members rose significantly, and as a result, in comparison to the last quarter, the number of buyers slightly decreased. Also, the enhanced services for members, the improvement in brand coupons is one, and also, the ARIGATO service we began last year, which contributed to the increase in active members. Having said that, because of that, the number of guest buyers have decreased for the same reasons. So the -- having the paid membership services that we launched last year, we're seeing the similar trends, but in the first quarter, we didn't really focus that much on acquiring new members. That is why the number of total buyers has slightly come down.

Next, moving onto the number of shops, which is on Page 21. The number of shops as of the end of the quarter was 1,297 shops. In comparison to the previous quarter, this is a 52 shop increase. This fiscal year as well, we plan to welcome 100 to 150 shops, and this is progressing as planned. So brands are not leaving us, we are continuing to welcome more brands.

This quarter, we welcomed new shops, including large sports equipment retailer, Murasaki Sports, as well as the British designer brand Anya Hindmarch as well as a famous sandal brand, Crocs. So we welcomed a total of 68 shops. So there was one shop that closed due to the impact from ZOZOARIGATO, and shops that temporarily ceased selling products having recommend -- have recommenced after May 30 when the ZOZOARIGATO service ended. So this is the final impact or ZOZOARIGATO didn't really have an impact.

Next, the annual purchase amount and pieces per active member, which is on Page 23. The annual purchase amount was JPY 46,934 and the pieces were 11.3. The annual purchase amount went up by JPY 619 and pieces went up by 0.2 pieces. The annual purchase amount for active members have gone up due to the increase in the number of ZOZOARIGATO members. So ZOZOARIGATO members tended to purchase items from higher price range shops. Therefore, this pushed the annual purchase amount up. But ZOZOARIGATO finished at the end of May so you will only see an impact in the first quarter.

Next, annual purchase amount and pieces per existing active members, which is on Page 24. So this was JPY 55,048 and the pieces were 13.3, and annual purchase amount came down by JPY 744 and pieces came down by 0.1. So both the annual purchase amount and items came down. And it has come down for the same reasons. So we are seeing an increase in the ratio of new or existing members, members who are maybe members for 2, 3 years. And so they are driving the overall average down. So [ ZOZO ] members tend to purchase more the longer they remain members. So it will actually bottom out and come back up again, in time.

Next, the average retail price is on Page 26. Average retail price was JPY 3,877, down by 1.9% year-on-year. This is because we accelerate additional lower price point shops. And so the retail price came down due to more lower price point shops and another factor is that ZOZOWEEK sales as well as other sales events, which meant more products were sold at a discount. Therefore, the average retail price has come down year-on-year. On the other hand, average order value was JPY 8,335, up by 2.6%. This is on Page 27. So up 2.6% year-on-year. This is due the ZOZOARIGATO. So ZOZOARIGATO pushed the purchase items up, therefore, we have seen an increase in this number.

Lastly, this is the business forecast, which we have not changed. So we do not intend to revise the business forecast at this moment in time. That is it from myself, but for the business results, next, I would like to pass the microphone over to Ito.

[Masahiro Ito, executive]

Good afternoon. My name is Ito, from ZOZO. Thank you for your time today. First, from myself, I would like to tell you about MSP business and how we are doing, and also the ZOZOMAT. MSP business is in -- we enlarged the private brand business last year and creating our own private brand, creating clothes, we actually are going to take a step back from that, and actually not do our own brand, but work with the brand as a platformer and share the know-how and thinking and also the data that we've acquired from the private brand and use that with our -- for our brands, with our brands.

MS stands for multi-sized ZOZOSUIT. We distributed more than 2 million pieces last year and many people took measurements. We have a lot of data now that we can use, for example, my height, I'm 174 centimeters, and I weigh 62 kilograms. So pick somebody with the same -- we know that there are many people with the same height and same weight that have taken ZOZOSUIT measurements. So we can -- we have the data for the average body size of somebody who is my height and my weight. And MSP will use that data to create clothing. So this is a MS mark, multi-sized, which allows users to specify your height and weight and they will be suggested the ideal size from 20 to 25 different sizes.

So MS mark is only available on ZOZOTOWN and users can actually purchase products from a new brand. They don't know how wide the clothing is, how long the sleeves are, and how long the pant legs are, but they can still use their own measurements to purchase new brands. And we actually are selling private brand products as multi-size on a pilot basis. This is the actual screen that you will see.

This is a ZOZO slim taper done in pants. And if we go to the app from the phone and choose multi-size, so you can specify the height, and I can select the 174 centimeters and 62 kilos, and it will display the sizes. And this is what they recommended to me and once -- if you have bought products [ after that time ], you can -- it would know what products you have purchased. So you can buy something that is a little bit longer, if you prefer to wear jeans that are a little bit longer or you can also specify your preference as well. So checking on this screen, you can actually change the preferences, and we've actually been doing this for a month now on a pilot basis. So you can choose your size and it's 90% -- actually satisfaction. So we have not seen any issues from this screen, it's set up to your own size to this screen. And we want people to try the multi-size service, so this is a special campaign. So multi-size items are being offered at special prices. So from that user interface you just saw, you can purchase right away. So please specify your height, and weight and try and purchase our private brand clothing.

And if you look on the social network, people are really amazed at how we know what the -- your ideal size is. So please give it a try yourself. And of course, if you're not satisfied, we have customer service that will help you. This fall and winter we will be fully launching this service, and we plan to sell 100 items from these brands. So don't worry, these costs have been already incurred in the initial -- are included in the initial plan, so we're not going to be seeing a huge cost from these. But these brands, you can purchase your ideal size and choose from 20, 25 sizes. So for example, if you choose Levi's, you specify your height and weight, and you don't need to change the length of your pants, you don't have to take it to a tailor afterwards. So this will start in the fall and winter this year.

Next, moving on to ZOZOMAT. So ZOZOSUIT will enable you to measure your body, and this will enable you to take measurements of your feet. ZOZOMAT, if you could watch the video and see how it works.

[Presentation]

You can measure your feet at home easily and accurately.

So ZOZOMAT, as you have just seen, will scan your -- create a 3D scan image of your feet. As you saw, it will take an accurate 3D measurement. And the reason why this is great is because it's very difficult to buy shoes on the Internet, it's maybe more difficult than buying clothing. And if you look at the data, the easy penetration of shoes is far lower than clothing. So shoes are difficult to buy, might hurt for example, but you can now take a measurement of your feet and then see what shoes fit you best.

So we actually took a survey when we launched the ZOZOMAT. So first question we asked is that, do you know the size of your feet? No, was 84%. Only 16% of people knew what size their feet were. Even the global footwear brands have released these similar data. So many people don't know what their shoe size is. And also, in addition to that, do you know the width of your feet? We thought this would be low, but 81% answered no, and yes, was only 19%. So it's very -- it's quite an obstacle to buy shoes that fit you when you don't even know your shoe size. So we hope that this will help.

So as a message to the investors, this can be manufactured at a low price, so -- and quickly as well. So we don't need to invest a whole lot. And there will be no delays in productions. So at the back of the room, you can have a go later, but the version that we have is for the press, it's very high quality but actually, it's about the cost of printed materials. So if you can print in color, you can use this. And it's very easy to measure, only takes about 2 minutes, and you don't have to wear anything either. So all you have to do is take off your socks and measure all around.

This also means that you can fold and send as separate materials, so the shipping costs are going to be very low. So we don't -- this will not require high investment. This is, of course, ultimately -- we can actually print this in the newspaper, and in the morning newspaper when they open the newspaper, you can use this newspaper and just take measurements of your feet. So there's different ways to actually distribute this and encourage people to use this.

Another big difference from ZOZOSUIT is, according to the survey, would you like to buy shoes on ZOZO time-based on ZOZOMAT measurement data or the ZOZOMAT? We thought this is quite high, but -- we thought it would be high, but this was far higher, 99% people of the people said yes. With ZOZOSUIT, there actually -- we saw a lot of people who wanted to wear ZOZOSUIT to Halloween or for different events. So many people are focused on the ZOZOSUIT, wearing it, but with the ZOZOMAT they want to actually take measurements and purchase shoes because in the past, these people had difficulty purchasing shoes. So they know what it's supposed to be used for. So they understand it's a tool for resolving an issue, a difficulty that consumers were facing in the past.

So for example, some people have very small feet, and they couldn't find feet (sic) [ shoes ] that fit them, so there's a lot of issues that people were facing in the past. So please have a look at this in different social media networks. So we're not really mentioning anything new today, as you imagine, it's difficult to buy shoes on the Internet. And we will be able to recommend optimal sizes and of course, we can facilitate purchasing and customize shoe orders -- made shoes -- bespoke shoes is something that we are also thinking about as well, but what we can say is that we will not be creating our own shoes. So we're not going to be creating a private brand leather shoes, for example. Though we will place it, we'll remain a platformer. So -- and just an overview, in terms of the merchandise value of the shoes category on ZOZOTOWN, last year, it was JPY 36.1 billion, which is 12% of the gross merchandise value.

We can't really say that we focus on this category that much. We didn't have any specialized features for shoes to recommend or make it easier to search, but we will continue -- well, going forward, we will focus on this shoes category and we believe that there is a lot of room for growth in this category. So this is a category that we will be focusing our efforts on going forward. Thank you very much.

[Operator]

That is it for the live broadcast.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]