ZOZO Inc

TSE:3092

Earnings Call Transcript 2019-Q2

[Unknown Executive]

It is time, so we would like to begin the announcement of FY 2018 second quarter consolidated business results. Please refrain from taking any photographs or video of the announcement. Thank you very much for your cooperation.

So we would like to start by introducing the presenters. CEO, Yusaku Maezawa; Executive Vice President and CFO, Koji Yanagisawa; and the Executive Officer of the Business Administration Division, [ Minoru Hirose ]. These 3 will be your presenters today. We plan to finish at 6 p.m.

Mr. Yanagisawa, please take the stand.

[Koji Yanagisawa, executive]

Good evening. If we can jump right in. We changed our company name to ZOZO, so this is the first time since we changed our name -- company name to ZOZO. So we would like to give you an overview of the FY 2019 second quarter results.

So today, we're wearing our private brand dress shirts and whole-garment knit sweaters and denim as well. So please, you can buy the whole entire outfit, so please have a look later.

Now if we can start. So the [ transaction ] value landing at JPY 141.2 billion, up by 18%. OP went down by 27%, landing at JPY 10 billion and OPM was 7.1%, which decreased by 4.5% year-on-year. Both the GMV and OP were under target. So the key reasons for the shortfalls are the underperformance of private brand and ZOZOUSED.

ZOZOUSED, with respect to ZOZOUSED, in order to raise the average retail price, we cut down on purchases of low-price used goods. As a result, we didn't have enough product to sell. So those -- this is a key reason. And with the private brand, Mr. Maezawa will describe in detail.

And in terms of the OP, OP was lower than anticipated due to the fact that the ad business launched later than planned. In the private brand, we held related events for the private brand, campaigns for the oversea market and we also made donations to disaster-stricken areas. And we also had incurred other unforeseen SG&A, such as stock options.

Next, this is the graph of the GMV growth for ZOZOTOWN, excluding ZOZOUSED. So for the second quarter, as we mentioned, we grew at 18% and this is due to the addition of new shops. And another factor was the efficient operation of brand coupons. Therefore, we grew faster than the organic growth. If we break down the growth factors, organic growth contributed to 10%, new shops added 4.9%, and the efficient operation of brand coupons added 3% to the growth. So that is the breakdown.

Next, the increase, decrease analysis of the OP, which is on Page 5 of your document. The OP decreased from JPY 13.8 billion to [ JPY 10.10 billion ]. So by -- it decreased by JPY 3.78 billion. So the breakdown of this comes out to be GMV went down by -- went up by JPY 2.49 billion, gross profit margin improved by JPY 2.51 billion. This was due to the increase in other sales. So this is attributable to the increase in shipping revenues, due to change in shipping policy. And the payment -- due to the payment collection fees, payment collection option, the fees went down by JPY 0.6 billion.

And in terms of the decreases, since September 2017, we changed the shipping policy and also, the purchase amount per shipment and shipping costs have increased by JPY 3.1 billion. And the ad spend due to distribution of ZOZOSUITs have gone up by JPY 3.1 billion and we also increased the number of employees as well as the number of logistic centers, so this resulted in an increase of JPY 1.17 billion and other costs increased by JPY 1.8 billion.

So this is the -- on Page 6, the consolidated balance sheet. There were no major changes, there's nothing really to mention. So this is the balance sheet for this quarter.

And the cash flow, this is on Page 7. So the cash flow from investment activities, this is due to the -- we actually spent JPY 0.11 billion because we purchased investment securities and cash flow for financing activities, we -- short-term borrowings went up in order to purchase treasury stocks and we also saw expenditures in relations to the purchase of treasury stocks.

On Page 10, this is the quarterly change in the GMV. For the second quarter, GMV went up by 17.9% year-on-year, landing at JPY 70.8 billion. The breakdown of this comes out to be ZOZOTOWN business, JPY 68.4 billion, up by 16.9% year-on-year. Consignment contributed to JPY 64.7 billion, increasing by 17.3%. ZOZOUSED was JPY 3.6 billion, which went up by 10.7% year-on-year. BtoB business was JPY 1.8 billion, going up by 19.2%. And the private brand was JPY 0.54 billion. So the ZOZOTOWN business continues to grow steadily.

On Page 16, this is the quarterly changes in the OP. As we mentioned before, OP went down by 28.6% year-on-year, landing at JPY 4.1 billion. OP margin was 5.9%. Key factors that this has decrease can be -- is due to the upfront investment in the private brand business, same as we saw in the first quarter, and these costs include the free distribution of ZOZOSUITs, so ad spend. And we -- the payroll cost increase, including engineers. And lastly, rewards for improvement of the ZOZOSUITs. So these are one-off costs that we incurred this quarter.

So due to these factors, the OP for the private brand business was minus JPY 3.9 billion. But if we exclude the private brand business, the OP comes out to be JPY 8.1 billion. So the OPM was -- OP margin was 11.6%, which is higher than the same period previous year.

However, or in the second quarter last year, we incurred costs, such as branding costs for private brand and ZOZOSUIT development costs, so that amounted to approximately JPY 0.7 billion. So JPY 5.85 billion includes JPY 0.7 billion in costs that we just mentioned.

Next, Page 17, the quarterly changes in the SG&A. The second quarter SG&A was JPY 20.5 billion. Against the transaction value, last year it was 22.8% and it has come up to 29.0%. So it increased by 6.2%. The key factors -- there are 4 key factors. First one is the increase in shipping fees due to changes in Yamato's shipping rates; and then the second reason is the increase in ad spend for ZOZOSUITs; the third is increase in payroll; and the fourth reason is the increase in other costs.

This is the breakdown of the SG&A. This is on Page 14. In terms of increase/decrease factors, please see the comments here.

Having said that, on Page 15, we'd like to -- this page explains some of the factors that impacted the SG&A. So if you turn to Page 15. So in terms of the increase in payroll, for the -- we -- after we hired staff for private brand and engineers, and we also had an increase -- saw an increase in employees due to increase in consolidated subsidiaries, that's why the payroll has come up. And another reason is the change in bonus payment policy. So we already explained this in the first quarter, but this is a -- this has also impacted the SG&A.

And the second reason is the other factors. There are 2 key other costs, other factors. One is the, we mentioned before, we were -- we're successfully improving the ZOZOSUIT. And then the other is donations to disaster-stricken areas. But these are one-off costs. And the other factor is the increase in recurring costs, such as supply costs due to decline in average retail price and purchase amount per shipment and also increase in telecommunication fees due to website and service improvement and R&D for the private brand. So these are recurring costs that have come up.

So these are the 2 key factors. So there are some that were included in the first quarter, second quarter and both. And there's a list -- there's a chart that explains which are included in which quarters. So please feel refer to the chart on Page 15.

Next, Page 19. From here forward, we would like to cover the key KPIs for ZOZO. So on Page 19, you'll find the number of total buyers. We have 7.76 million, which went up by 370,000 from the previous quarter. Active members went up by 330,000, landing at 5.78 million and guest buyers went up by 50,000, landing at 1.9 million. The active members increased due to the increase in site traffic, resulting from various media exposures. So if you compare to the previous quarter, it has increased significantly. And guest buyers were on a decreasing trend, but it has started to trend up this quarter.

These KPIs do not include -- these numbers do not include buyers who only purchased ZOZOSUITs. So these are people who are purchasing on ZOZOTOWN. As you can see, we have been able to increase the number of buyers at a healthy rate.

Next, on Page 20, we have the increase in number of shops. As of the end of the second quarter, we had 1,183 shops. So in comparison to the previous quarter, we increased 44 -- increased by 44 shops, so we are continuing to actively open shops. Specific brands include a large mass clothing retailer, Shimamura, as well as the British brand, MARY QUANT, sorry, it's hard to pronounce for me. And also, TOKYO BASE's new casual brand, PUBLIC TOKYO. And lastly, street brand, THRASHER. So these are some of the 53 shops that we opened this quarter. We plan to open 150 shops this year, and we are on track in this respect.

Next, on Page 22. The annual purchase amount per active member and pieces. The purchase amount was JPY 46,120, and they purchased 11.2 items. The annual purchase amount went down by JPY 750 from the previous quarter and purchase items went down by 0.1. So due to the increase in light users, we have continued to see a decline in annual purchase amount and pieces for all active members.

But on Page 23, we have these KPIs just for the existing members. The annual purchase amount was JPY 57,563 and pieces were 13.8. So against the previous quarter, it has, annual purchase amount came down by JPY 2,006 and pieces came down by 0.4 pieces. So we gained many new members due to deferred payment and point giveaway campaigns for new members. But now that it's been 1 year since they joined, they have become active members. So these are the same reasons or factors that we've seen since the first quarter, but we are seeing more new joiners, more recent active members.

Members tend to purchase more the longer they remain members, so if we -- the more new joiners we have, these -- the more recent active members we have, these KPIs tend to come down. And this is not in your deck, but this is the active members mix by elapsed time. So 2017 first quarter and at the bottom, you'll see 2019 second quarter. And the red portion is the new members who have been members for 1 year. This is just a proportion. As you can see, we're seeing more new joiners, especially in the last couple of years. We see more new joiners and this is due to deferred payment and they have actually shifted to existing members. And this tends to impact the overall annual purchase amount and purchased pieces.

Next on Page 25, this is the average retail price. The average retail price was JPY 3,655, which came down by 0.2% year-on-year. So it only came down slightly, although we are seeing more lower-priced shops, but we have seen -- we are starting to see that they are bottoming out. And it turns out the average purchase amount per shipment -- this is on Page 26, the average purchase amount per shipment was JPY 7,777, so all sevens. It's just coincidentally was all sevens, which came down by 5% year-on-year. This actually has decreased more than the ARP. This is because we changed the shipping policy to a flat rate of JPY 200 last November. So before you used to see additional purchases when we had a minimum basket size for free shipping. But we're no longer seeing these additional purchases. And also as we mentioned previously, we're seeing an increase in proportion of preorders as well. And preorders are shipped as a single item. So this is also driving the average purchase amount per shipment. So these are the key factors why this KPI has come down.

This is the last page that I will go into for myself. But these are the business forecasts for this fiscal year. We do not intend to revise these plans. So we will continue to do our best to meet these targets.

Next, Maezawa will describe the private brand business.

[Yusuka Maezawa, executive]

Good afternoon. Thank you for coming. I know you're all very busy. My name is Maezawa. So I'm sorry, there's been a lot of news about me, but it's all for my company -- for the company. So I don't want to go into detail about every news that's been out, but today, I would like to focus on ZOZOSUIT and the private brand.

First of all, for the private brand, this is -- these are the results for second quarter. The plan was to do JPY 1.5 billion, but as Yanagisawa mentioned, we've only been able to ship JPY 0.54 billion. Having said that, if you look at the orders, we received JPY 1.54 billion. So just the shipping and that manufacturing is lagging behind.

So especially the business suit, July 3, we had a press conference to launch the business suits, and we started taking orders at that time. But the business suit manufacturing and shipping has been quite delayed. We apologize for that. And because of that, although we received JPY 1.54 billion orders, we've only been able to ship JPY 0.54 billion.

And in terms of the manufacturing and shipping, it's -- as you can see at the bottom, it's quite small, but there has been a problem with the manufacturing process, but we've resolved those issues. So the delivery delays are expected to be resolved by the end of the year. So within a year, we will be able to deliver your purchases within 2 weeks, as promised in the beginning.

Maybe some of you here today have purchased business suits, many of you may have ordered business suits, and we apologize that we have caused the delay. And there are some people who are waiting a maximum 2, 3 months. So we're doing our best, the whole entire company is doing our best to resolve these issues. So we appreciate your patience. It should be resolved by the end of the year.

So to avoid the same thing happening again, we're actually manufacturing outsourcing to China and also Southeast Asian factories, but we're actually trying to do something very unique. So we want to be able to do more in-house to make sure that we can establish a production line internally. And unless we can do that, we don't want to announce anything or ask anybody to do it for us.

So we created the ZOZO smart factory and we started to do R&D for that. And what we're going to be doing here, it's not a mass production, this is just an experiential -- experimental line. And we can't tell you exactly where it is, but near our headquarters in Chiba. It's a secret location. But we have some equipment and employees there. And we are going to test the quality as well as the production processes. And we will not be releasing any products unless we test it here.

So we started the private brand 6 months ago, a year ago, and the quality and the production is still uncertain, unstable. So we want to have our -- establish our own smart factory to make sure that everything will be in order. And once we can confirm, we will work with factories in China, for example, and mass-produce new product categories. So that's what we would like to do going forward. So we will no longer see a huge delay or any troubleshooting that we saw with the ZOZO -- the business suits. And with the smart factory, we want to try to reduce manpower as much as possible from cutting, packagings, manufacturing. We want to automate the factory as much as possible. No one has ever done this before, so of course we want to do this ourselves because we don't want to leave it up to other people. So that's why we want to test it ourselves and make sure that it's going to go well.

Next, this is something that we want to explain in detail today. It's about the ZOZOSUIT. So we have a new development for the ZOZOSUIT. On the left, this is the ZOZOSUIT that you're used to seeing now. But now it's in dotted lines. And what we mean by that is that going forward, we want to make it possible for people to purchase without the ZOZOSUIT. Then you might be wondering what we have been doing so far. But some products you can already buy without the ZOZOSUIT. For example, this is very small, so it may be hard to see, but I'll explain. On the far left, slim tapered denim. This is one of our regular products. This product may be purchased by people who haven't taken measurements, who don't have ZOZOSUITs. But if you go to the second screen, they would need to input these fields: height, weight, age -- it says 30s here as a example -- and then also the gender.

And then this will take you to the next screen and we would propose the optimal size for you, so with just 4 -- with just 4 data inputs, we will be able to propose the optimal size for you. And as we have explained from the past, we have a couple of thousand [ sizes ] for the slim tapered denim and we can actually propose the best size just through these steps. So if you can do that, you didn't -- you might be wondering why we even had the ZOZOSUIT from the beginning, we didn't need it. So if I can explain.

ZOZO, or PB, was based on the fact that you would need to measure and you had to take 12 photographs, take [ 3 to 4 ] minutes to take 12 photographs with that ZOZOSUIT. So you might be wondering, but with the adoption of new technologies, we've already mentioned from the past that we're going to no longer have ZOZOSUIT, potentially. So we have mentioned that occasionally. And of course, because the reason that I say that -- I was saying that, it was because we were doing R&D in the back end. We won't be able to realize that quite soon. And using some of those technologies, we are -- we have started to sell the denim without the ZOZOSUIT.

Of course, we are still facing challenges, so we're still making -- doing a lot of R&D behind the scenes. But this is confidential information, so we can't really go into detail, but there are -- with respect to the new technology, we are actually using 3 key data. One is the measurement data we have gotten from ZOZOSUIT. So we've actually distributed 6 million ZOZOSUITs already and we're getting measurements every day. So we're -- have quite a sizable big data now. So we're using that data. And the second set of data is the basic user information that you provide: height, weight, age and sex.

And the third set of data is feedback from people who are actually using ZOZOSUIT, whether it was too tight or too short. So detailed feedback are actually inputted and we're applying machine learning and this actually enables us to predict extremely precisely measurements without ZOZOSUIT.

When this becomes a reality, we will no longer need ZOZOSUITs. And you will no longer need to take 12 photographs wearing the ZOZOSUIT. And that would mean that you wouldn't -- you don't need to -- that will mean that you don't need to download the app either. So you can actually access from the web or the smartphone and some people may still have feature phones, but you can still purchase from the feature phone as well.

Right now, we are making denim and T-shirts available without ZOZOSUIT measurements. But if the accuracy improves, we will be able to apply this technology to more and more items. And in the future, we believe that we can apply this new technology to all items, including even business suits. So you will be able to make -- order bespoke business suits without the ZOZOSUIT. This is our expectations and we're actually planning to make this a reality.

So what we would like to enunciate to the investors here today is that ZOZOSUIT delivery plan will be revised drastically. So before, we mentioned that we will be distributing 6 million to 10 million ZOZOSUITs this year, and the cost expectation was JPY 7 billion. So we've mentioned that quite often. But this is going to change to maximum 3 million ZOZOSUITs being passed out within the year and cost expectations will be at maximum JPY 4 billion. So this will mean a cost reduction of JPY 3 billion. So ZOZOSUIT distribution costs, I'm sure you were quite concerned about that, but this will be -- these costs will be significantly reduced. So it will have a large impact on our budget as well.

We're not going to get rid of the ZOZOSUIT completely, though. On July 3, we've actually gone abroad as well. So Japanese people, their size variations are quite similar, whereas people overseas have different -- are of many different sizes. So the size prediction technology is only applicable to Japan so far. So we want to actually start collecting more accurate data for people living in other countries. And ZOZOSUIT will be useful to collect sample measurement data, to collect measurement data that will be the foundation of the new technology.

So these data, or measurements, will be very close to a tailor actually taking these measurements. So we will be using ZOZOSUITs to collect sample measurements, but soon, we probably will stop distributing ZOZOSUITs for free.

And with respect to the private brand, we will continue to add new items: black denim pants, chinos, zip parkers and more shirt variations. And we haven't -- it's not here, but we're going to be launching new products as well that's not on the list.

So it's a brand, so of course, there should be more focus on the clothes itself, but there's been a lot more focus -- spotlight, on ZOZOSUIT. And people, the media, everybody's been talking about the measuring portion, but we hope that people will start focusing on the products. So we will continue to do our best in developing new products.

So we will be able to predict your measurements just from some basic data, height, weight or gender, age, and we want to deliver these products to users and we want to surprise and delight them. So that's it for the ZOZOSUIT and the private brand.

And lastly, we would -- I would like to mention about foot measurement and sales of shoes. We're actually planning this, and we've already mentioned that we're going to be doing this in the future, but we're nearly successful in terms of foot measurements. So we'll be able to measure your right foot, left foot and we actually have video. It's a very short one, but please take a look.

[Presentation]

[Yusuka Maezawa, executive]

That's all that we can show you at this point. But as you can see -- as you just saw, we can actually create a 3D polygon of your foot measurement. My left foot is 24.7 centimeters. I thought my foot was 25.5 centimeters until now and so I kept measuring, but it was 24.7. But to this day, or until I took measurements, I thought it was 25.5 centimeters. And many people have a different -- the sizes for the right foot and left foot differ by 1 centimeter, 2 centimeters. So we want to actually start measuring people's feet and start selling shoes. And there are no brands in the world that are selling different sizes for your right and left foot. And we're seeing the changes in when people actually walk or when people wear leather or when there are heels, so we need to create shoes as well. We can't really go into -- delve into detail yet, but we are making arrangements and doing R&D to be able to sell shoes ourselves. So when the time comes, we would like to make that announcement to you. So that's it from myself. Thank you very much.

[Unknown Executive]

That concludes the end of our live streaming.