ZOZO Inc

TSE:3092

Earnings Call Transcript 2021-Q1

[Operator]

It is now time to start the financial results announcement of ZOZO for the first quarter of FY 2020 ending in March. In order to prevent the spread of COVID-19, we changed the way we organized the session. We would only offer a live streaming at this time.

I would like to now introduce the participants, President and CEO, Kotaro Sawada; Executive Vice President and CFO, Koji Yanagisawa. We have 2 presenters today.

CFO, Yanagisawa, will take us through the business results.

[Koji Yanagisawa, executive]

Good afternoon. I am Yanagisawa. As it was mentioned, just like the previous time, in order to prevent the spread of COVID-19, we're offering this earnings results announcement only through live streaming on YouTube. The presentation documents we will be using today has already been uploaded to the IR page of our website, so please take a look at it.

Now I would like to walk you through the earnings results of the first quarter of FY 2020 ending in March 2021. And by the way, the fashion that we are wearing -- more fashion is the keyword for this fiscal year.

[ Saki Inowe ] from EC division dressed us up today. She served as our stylists to do a makeover for us. And my theme of this styling -- what was the theme of my styling? I forget what it was. Was it botanical mode? I see botanical mode it is. In every 3 months, whenever we have the financial results announcement, we will be styled in different ways. So please look forward to that.

Now I would like to walk you through the earnings results of the first quarter. Let's jump right in. Gross merchandise value, GMV, went up by 19.5% year-on-year, landing at JPY 95.3 billion. Operating profit was up by 33.9%, landing at JPY 10.4 billion. Operating profit margin was 10.9%, improving by 1.1 points year-on-year. We are quite happy. We did more than what we expected.

If you go to the next slide, you have the quarterly changes of the business results. Regarding GMV, the impact coming from the spread of COVID-19 resulted in a significant growth, which exceeded the level of the past few quarters on a year-on-year basis.

In Japan, people were requested to stay home until the end of May after the state of emergency declaration was issued. And we did see some negative impact of that as the demand for fashion slowed down.

But -- for the brands, the sales channels were restricted because their [ clothes ] were temporarily closed. And we focused our initiatives to maximize our sales capabilities, support the brands. As a result of that, the positive impact from digital shift proved to be greater, offsetting the negative impact, allowing us to land with a high-growth rate.

Regarding OP, we saw an increase of gross profit from GMV growth. And there was a discount expense incurred for ZOZOARIGATO program up until the end of May last year. These factors resulted in the improvement of OP from the same period of the previous year.

Next, I'd like to touch on the highlights of the business results. Let's first look at increase and decrease analysis of the operating profit. OP was JPY 7.7 billion in the first quarter last year. It was JPY 10.4 billion this year, up by JPY 2.7 billion approximately.

To give you a breakdown, factors attributable to the growth of the OP were -- there were 4 of them. The increase in sales of consignment shop commission that was JPY 5.45 billion; the increase of gross profit with advertisement business, that's JPY 220 million; and the increase of gross profit with other sales, that was JPY 330 million; and reduction of other expenses amounted to JPY 320 million.

On the other hand, factors that drove down the OP, we have 3 of them, first, the increase in fixed costs due to higher number of logistic bases and the number of employees, that's JPY 810 million; and the increase of variable costs that go up in correlation with GMV growth, that's JPY 2.73 billion; and the increase in promotion expenses, that's JPY 140 million. For the breakdown of fixed and variable costs, please refer to the document of the financial results.

Next, here is the balance sheet. There is no special topic to highlight. Please check the document for details.

This is the quarterly changes of GMV. Please refer to the breakdown by business in the consolidated financial results. You will be able to find that in consolidated financial results. There's not much change.

Next, SG&A. SG&A against GMV for the first quarter amounted to 22.9%, down by 0.3% year-on-year. It is attributed mainly to some reasons. There -- as a matter of fact, 3 reasons behind it. First, we started granting ZOZO points equivalent to 1% of the purchase from April 1, but we finished that program. This brought SG&A down by 0.2% in the point-related expenses column. And there is a decrease of rent, 0.2%. And one-off expenses accrued last year saw a decrease resulting in 0.8% decline.

Factors that drove up SG&A are: The shipping cost increase in correlation with the average order value decline, that's plus 0.7%; ratio increase from the average retail price decline, increase of part-timers, hourly wages and contract conditions alteration with staffing companies resulted in 0.2% increase in logistics-related expenses; the increase in payroll costs of employees, employees that is, was up by 0.1%. So these are the factors that drove up the SG&A.

Let's now look at the OP and OPM changes. This is quarterly basis. As I mentioned, SG&A ratio saw a decline. And on top of that, gross profit improved because we no longer have the discount of ZOZOARIGATO that we had last year. This improved OPM year-on-year.

Moving on to the main KPIs of ZOZOTOWN, the number of total buyers. Just like before, these KPIs do not include the results of PayPay Mall. This is strictly the performance of ZOZOTOWN. The number of total buyers was up by 390,000 from the previous quarter, amounting to 8.66 million, of which active members was 7.22 million, increasing by 380,000 against the previous quarter. The 390,000 increase, that was also from the previous quarter. And the guest buyers just slightly increased, finishing at 1.43 million.

Concerning active members increase. As I have been saying, with the spread of COVID-19, digital shift accelerated. Therefore, the number of newly recruited active members turned out to be high. And it saw a significant increase at a level that we haven't seen in quite some time.

On the other hand, guest buyers just slightly increased. And this is in reaction to ZOZOARIGATO program that we conducted last year because the active members increased quite dramatically during ZOZOARIGATO period last year.

Let's go to the number of shops on ZOZOTOWN. As of the end of the first quarter, the number of shops was 1,348 shops, up by 11 shops from the end of the previous quarter. That's a net increase. We had 28 shops joining our platform this quarter. To name a few, we welcomed a luxury brand of LVM Group, LOEWE, and STELLA McCARTNEY, and a casual wear specialty store, Right-on, that's come back on board.

Next, let's look at average retail price. Average retail price was JPY 3,443, down by 11.8% year-on-year. The decline is attributed to -- from the beginning of June, already, we started the summer sales. And we also had ZOZO week and we also did time-bound sales and other sale events. This is a special circumstances we're in. So we decided to proactively conduct sales.

Also multiple brands decided to launch sales earlier than usual in order to sell down the inventory. These factors pushed up the sales ratio of GMV. And this worked to decrease the average retail prices.

Also in the same period of last year, we offered ZOZOARIGATO program. That was a subscription-based discount program. And ARIGATO members tended to buy higher-priced products than usual. So we had a higher performance, and this affected us this year negatively. And we saw a significant drop of average retail price.

Let's go to average order value. The decline is exactly -- the reason for the decline exactly the same as what I have mentioned. The average order value was JPY 7,409, down by 11.7% year-on-year.

On the other hand, there is the number of shipments. ARP and average order value are going down, but the shipments, the number of shipments is growing to drive up the GMV. The number of shipments saw an increase of 24.6% year-on-year.

In the first quarter, we were in a very tough market. But with the fulfillment centers and the customers support centers, we were able to operate them without stopping the services. And I think that worked positively for us.

That is it for the business results of the first quarter of FY 2020 ending in March 2021.

When we made the full year earnings results announcement of FY 2019 on April 28, we could not fully assess the impact of COVID-19 back then on our business performance. So we decided not to disclose the full year business plan. However, this time, we have disclosed our business plan based on information and projections obtainable at this stage. But this announced business plan does not factor in the possible large-scale stagnation of consumption, which may take place with the resurgence of COVID-19.

Our actual business performance may be greatly different from the plan depending on the future development of this epidemic. So please bear that in mind.

Please allow me to share our full year consolidated business performance forecast. I'm sorry, I forgot to say this in the beginning. But the theme for this fiscal year is -- year 2020 ZOZO year has a rather pop culture design, and this will be the design that we will implement for this fiscal year. And you're going to notice that there are employees of ours that are showing up as characters.

Back to the topic. This is the business performance forecast and estimated dividends for FY 2020. The plan of this fiscal year is to achieve GMV of JPY 387.3 billion, which has increased by 12.2% year-on-year; net sales of JPY 143.7 billion; OP of JPY 39.5 billion; OPM of 10.2% against the GMV; profit attributable to owners of parent, JPY 27.6 billion; net profit per share $90.04, and estimated dividends per share, JPY 37. This is the plan.

Regarding the shareholder return, we would like to sustain payout ratio of 40% for this year as well. So that's why the estimated dividends per share is JPY 37. This is our target by business. Please take a look at it in the documents.

Consigned shops, that's up by 7.2%, JPY 331 billion; ZOZOUSED, JPY 14.9 billion; PayPay Mall, JPY 20 billion, so that's 220% increase that we are estimating to have.

And BtoB, that's also JPY 20 billion, plus 66.2%; PB, that's going to shrink; MSP, JPY 1.2 billion; and ad business revenue, JPY 4.2 billion, an estimated increase by 54.6%. That is the plan.

This brings me to the end of my part. I'd like to pass the microphone over to Sawada.

[Kotaro Sawada, executive]

Good afternoon. I'm Sawada, the President of ZOZO. From my side, we would like to talk about how we spent the first quarter and how we're going to spend the rest of the fiscal year. And by the way, my theme of my styling is Memory of Summer. Remote work is really -- take the main stage now, and I wanted to look good on screens. That's why I'm dressed up like this.

Our business is operating well. I think that is the question that you have in your mind. In a nutshell, the logistics and the operation are going well. In April, to be honest, we couldn't really anticipate what was to come. And we were very cautious in the operation of our business. We were very wary. But -- and it is true that many unexpected things did take place, but we overcame each one of them.

And at this stage, we are able to operate our business in a good way, rest assured. And people who are working from home, they're getting used to that new normal, and it's going very smoothly.

Going forward, we believe that COVID-19 situation will prolong. As I said in the beginning of this fiscal year, we would like to support the very foundation of this fashion industry with our sales capability. That's going to be the mission for us going forward as well.

We're going to leverage our sales capability, and we looked into other things we could do in the first quarter. And there were some things that we made into actual initiatives. So that's what I would like to touch upon.

As you can see here, we sold charity T-shirts. We reached out to the brands to see if they can support us. And you don't really see the visual, but if you look at the backside of this T-shirt, you see all of the brands that supported us in this initiative. And the proceeds that we gain from this -- as you can see here, there's a label that says SAVE FASHION, SAVE THE TOWN. What we're going to do is to distribute these hand sanitizer gels to physical stores in Japan. SAVE FASHION, SAVE THE TOWN is the concept. This is special times that we are living in, and we are hoping that fashion comes back to town as early as possible. That's the hope that we embedded it in this program. If you have the chance, please make sure that you take all the measures you can to protect yourself from the infection and go to the stores.

One more thing that we did. This is a collaboration program that we initiated with Yamato Transport. It's called EAZY. It's a service provided by Yamato Transport.

In the first quarter, we were the first player to implement the service before the full launch. Basically, this allows for users to have non-face-to-face receipt of packages. If you sign up for it, then the delivery person will leave the package at the doorstep.

People are a bit hesitant to receive packages physically. This may be an answer to that hesitation. And the number of packages is surging. We believe that we are also contributing to lessening the workload of the delivery sector as well.

There's a huge demand for this. Actually, 17% of eligible users are actively using the service. I believe that this is in tune with the time as a service. And what we would like to do together with Yamato Transport is to spread this even further. And by the way, it's not s, it's z, EAZY. And this is not maybe because Yamato wanted to use z for s. I don't think so. Those are the initiatives that we have undertaken.

As Yanagisawa mentioned, he talked about the business performance, but I want to go and to talk about the actual business from here on. As you can see here, I think this is the performance in a nutshell. In one word, this is what happened as it was explained to you by Yanagisawa just now.

Around April, we weren't really sure which direction the sign will face. We were uncertain. But looking back in retrospect, we were able to understand that the -- there was more effective digital shift than the lowering in demand. It could be because of the uniqueness of the services that we offer. And I'd like to talk a little bit more about that.

On the y-axis, you have e-commerce usage, high and low; and on the x-axis, there is interest in fashion, high and low. And we want to map out where our users are in this chart.

ZOZOTOWN users are -- have high interest in fashion. And their e-commerce issues is, of course, very high. So that's right top. And next to it, that's on left-hand side for you, that's where PayPay Mall ZOZOTOWN will be positioned. They're less fashion-sensitive, but the usage of e-commerce is quite high. These are the segments that we have as our clients, and these will be the positions that will be mapped out in the chart.

And what happened with COVID-19 is this. First of all, on the right, that's people who have high interest in fashion. What we realized in this first quarter is that those who are very fashion-sensitive exhibited strong demand for fashion regardless of the COVID-19 situation. And then the more left you go, the more people tended to buy other categories.

But that was not the case for the right-hand segments. And we have some factual data here. The right bottom arrow is the percentage of new users we required during this period. Against the previous year, the number of new users increased by 59.6%. I think this is the embodiment of digital shift.

What happened to the existing users? That's indicated on the right top. In these circumstances, the demand did not slow down. Compared to the last year, the usage of the existing users increased by 8.5%. ZOZOTOWN has a lot of clientele that belongs to these -- this group. And I believe that, that was our strength under COVID-19 environment.

What happened to PayPay Malls ZOZOTOWN? We were able to leverage great synergies here as well. PayPay Mall is a comprehensive mall. And the demand to buy various categories of merchandise was something that we saw during these times, and people came from other categories to fashion.

We were able to bring about great synergies here. If we have 100% -- if the number of new users that comes to ZOZOTOWN was 100%, then we are able to get about 24.5% of new users via PayPay Mall. So this is how we look at the business performance of the first quarter.

Next, what are we going to do in the future? I believe that this is in line with what you would expect from us. First of all, in the future, we're very certain that there will be further acceleration of e-commerce. And for our brands, there -- we're saying that they are trying to redefine their physical stores. We don't know yet what will be the ultimate right answer. We're exploring different ideas now in that field. We have interviewed the brands, and we realized that there are fewer brands that can kick into full gear when it comes to production. I believe that they want the control over their production.

And for the competitors, we're going to try to make e-commerce even bigger, not -- and it's not just limited to fashion, but in all -- across categories. Keeping these in mind, the directions that we will take is to increase touch points with users through selling space expansion and product lineup expansion policies that we have. There is no change to that policy. We're going to further accelerate this. And there could be a risk of scarcity of inventory. But we have a lot of brands as our clients, and we have a very strong connection bond with the brands. We would like to leverage these connections so that we will be able to have a secured inventory for us at an early stage.

And in the beginning of this fiscal year, I also talked about differentiating our products. And I'm going to delve into this more in detail later on. We are progressing our initiatives in D2C and luxury brands.

Also when brands redefine the physical store operation, we would also think of how we can contribute to that redefining initiative. I can't really talk about this more in detail today, but we would like to lead physical stores by offering store solutions so that they can shift more towards digital.

Let's talk about the selling space expansion. How are we progressing there? I would like to mainly here talk about PayPay Mall and PayPay. As you know, we have already launched ourselves the PayPay Mall.

And in this first quarter, we established the linkage with PayPay Furima. We launched this on July 1. What you can do is to list the items that you have purchased from ZOZOTOWN on PayPay Furima very easily. And this is thanks to the connection that we established between Yahoo! JAPAN ID and ZOZO ID. We will be able to establish a firm fashion ecosystem by having an initiative like this, and we're going to undertake other initiatives in this area as well.

And this is on our way as well. This is starting in mid-August. We're going to introduce PayPay as a payment method. In physical stores, numerous stores will allow you to pay via PayPay payment. And what we are going to do is to implement a feature that would allow users to use payment -- PayPay as a payment method so that we will be able to recruit PayPay users as our users.

And we also want to accelerate the drive for e-commerce. And of course, we are planning to do different types of promotions. So please look forward to this new initiative that will kick off in mid-August.

Aside from those, we have other programs that we will run in collaboration with Z Holdings and SoftBank. There is going to be a ZOZOTOWN promotion using SoftBank. And we can also use Yahoo! JAPAN with ZOZOTOWN and WEAR, and they can also do -- we can also use data science as a forte for product recommendation. That was about the expansion of selling spaces.

And from here on, I would like to talk about the expansion of product lineups. As Yanagisawa mentioned, we were able to welcome some luxury brands. To be more specific, there is LOEWE, STELLA McCARTNEY and MARNI who we were able to welcome this first quarter. We didn't just welcome them on board, we devised great ideas for the promotions.

In the back of ZOZOTOWN, there's a lot of AI that is going on that is in operation. For luxury brands, what we can do is to identify those who are likely to buy luxury brands like these, and we will reach out to them through promotions. And so far, it's going quite well. We have a positive feedback of that. If you receive an e-mail to recommend luxury brands. That is because our AI has identified you as someone who can look magnificent in luxury brands.

And we have also received offers from other luxury brands, and we are very proactive in our sales activities as well. We would like to continue to differentiate ourselves from other e-commerce players with our product lineup.

Let's go on to talk about shoes. ZOZOMAT has been released. And I mentioned that we're committed to expand the revenue of shoes. And I want to give you the status of this.

ZOZOMAT has been delivered to 1.28 million -- more than 1.28 million, that's more than 1 million, and it's been measured by more than 1 million as well. And GMV of the shoe category grew by 18% year-on-year.

When it comes to the shoe category, we believe that this is a category that's going to be greatly impacted when people refrain from going out. But nevertheless, the growth rate is at the par level as the average GMV growth. And that is thanks to ZOZOMAT.

The ratio of those who made the purchase for the first time at ZOZOTOWN, many of them made the purchase of shoes because there was ZOZOMAT. And this is something that we would like to continue to do as an initiative.

And this is not a part of the shoe category, but we would like to have similar technologies as the one that we have with ZOZOMAT. We already have technologies that is similar to the technology that is leveraged for ZOZOMAT, and they're close to being complete.

And we want to introduce these new technologies in different categories to further grow our business. And we believe that we will be able to launch some of them in the first half. So please look forward to those initiatives that are on the way.

And next, this is also about the expansion of product lineup. We have kicked off a project called YOUR BRAND PROJECT 2020.

In the previous announcement session, we talked about D2C. YOUR BRAND PROJECT 2020 is a D2C program. D2C is a bit difficult to define, so what we have done is to give a name to it. And we are working very hard on this right now.

This chart is the same as what we have shared with you before. I just wanted to take some time to explain this once again to you. We will deploy influencers. And together with influencers, we will do the item planning.

And the manufacturing will be done by us. And the sales will be done through ZOZOTOWN and the brand's own e-commerce sites. And influencers, many of them happen to be specialists of social media. So the influencers can promote them on their accounts.

Of course, there is a possibility that these items can be manufactured under our brand partners. That's one way to go about this as well.

When we thought of the future of apparel business, we thought that the style of sales is going to be a reality in the future. We were very certain about that. And the people in the field are really excited to engage in this program.

And how are we gathering influencers right now to take part in this program? Maybe some of you are aware of what is going on, but we conducted auditions. We had some 7,000 people who participated in these auditions, and we're very grateful for their participation. And humbly, we had interviews with them.

And of course, aside from those 7,000, we also had other influencers that we wanted to team up with. And we reached out to them and then we narrowed it down to 20 people that would have partnership with us in this program.

I'm afraid I cannot disclose the specific names of people who would take part in this program, but -- sorry that the letters are quite small. But we have fashionistas who have caught on, on WEAR. We also have sports YouTubers with more than 400 million cumulative views. And we also have a female comedian who is starting to establish a new comedy on social media. So of course, we have fashionistas.

But aside from them, we also have other talents that exude their skills and their uniqueness in other categories as well. They can also take part in making apparel items, fashion items. When these 20 can get together, I believe that we can make something very interesting. And I'm sure this will work to excite the people.

And we are already preparing ourselves for the launch that is planned in October 2020. And on top of that, we are starting to get an outlook on big-name influencers that we may be able to partner with.

In the context of D2C in the context of influencer, we believe that we have been able to create strong item planning. I think that was great.

And in the course of it, we were able to gain a very strong partner today. The release has been announced already. We did an M&A of a company called yutori. yutori was established only 2 years ago. It's a very young company and the leadership, the 2 of them, are very young, too.

We would like to fully leverage social media and fully understand the needs of the consumers so that we can sell fashion to them. In the last 2 years, this company has exuded a track -- proven track record in doing so.

And we have been speaking to those 2 people in the leadership. And we saw that they have great passion and great intelligence, but at the same time, they're very flexible in the way they think. And I believe that there was a strong affinity we have with them. And it didn't seem like it was the first time for us to meet when we met for the first time. And I am relieved to be able to make this announcement today. And we're very excited to be able to partner with them.

CEO of yutori, Mr. Takanori Kataishi, is here with us. And he would give us a few words later. And this brings me to the end of my presentation for this fiscal results announcement. Thank you very much.

[Takanori Kataishi, executive]

Hello. Nice to meet you. My name is Takanori Kataishi from yutori. The 2 of them mentioned that their styling has a theme. My theme of my styling is a yutori classic. I just named it now. This was -- this is the very first time to wear a suit this year. Thank you for giving me the opportunity to wear a suit today.

Just want to quickly introduce our company to you. Paving the first step of the way for brilliant but shy people has always been the mission for us.

yutori started with one person's pure love for vintage clothing. We don't have many people with apparel business experience, but we created our business from scratch because we simply loved vintage clothing. It was this intense love for something that shaped who we are. When we express our love and if that love brings concrete results, you get to love yourself a little more. We are producers who help the brilliant minds develop through our brands.

I have always loved clothes, and I've been going to vintage clothing stores. There's a store that I've been going for about 10 years. On the weekdays, I work on clothes and on the weekends, I go to vintage clothing stores that I have searched on Instagram.

This pure love for fashion, pure love for apparel items, I didn't think that, that could be a source of business for me. But what I am thinking is that it's not the shrewdness or talent that matters. What drives people is passion, and that's what attracts other people, too.

What we would like to do is to approach shy but brilliant people, and we would like to serve as their producers through our brands so that they can love themselves a little bit more.

Now we operate 2 medium and 3 brands. So we have Furugi-joshi which is a medium, and we also have a virtual model business, which is an IP business. I loved vintage clothing and then the medium that I created as a hobby became a company in brands.

We have 3 brands now: 9090, with street style of the '90s; and Spoon embodying relaxed mood of the girls in a café; and also centimeter, themed around American casual vintage clothing.

It's only been 2 years since the launch. In a short period of time, I believe that we have been able to grow rapidly. And as far as the sales is concerned, our sales grew 10x from last year, and the number of followers exceeded 800,000.

That was a quick introduction of our company and myself. As I said, we all love clothing, and we have worked to strive focusing on what we love. And we believe that this will create a new movement.

I first encountered ZOZO when I was in junior high. ZOZO started a revolution with online sales of clothing, but for me, it was just a part of everyday life because I'm from a young generation.

And yutori is a brand that solely focuses on Internet. And basically, our main target are the teens and twenteens. And we know how they buy clothing. We have insights for them. The assets and -- that we have is that insight and the know-how. And we want to combine the assets and structures of ZOZO with them to create a leading apparel business. We want to do what we love with the people that we love to strive even further. Thank you.

[Operator]

That brings us to the end of the financial results announcement for the first quarter of FY 2020 ending in March. Thank you very much for your attention.