ZOZO Inc

TSE:3092

Earnings Call Transcript 2020-Q2

[Operator]

We would like to begin to today's briefing session for the Consolidated Business FY 2019 Second Quarter for ZOZO, Inc. [Operator Instructions] Please refrain from utilizing any recordings without prior consent.

Now if we could introduce today's participants, President and CEO, Kotaro Sawada; Executive Vice President and CFO, Koji Yanagisawa; Executive Officer and COO, Masahiro Ito; and Officer and GM of business -- General Manager of Business Administrative Division, Fuminori Hirose. We will have 4 presenters today. We are going to be finishing at 6 p.m. today.

CFO, Mr. Yanagisawa will now take the floor.

[Koji Yanagisawa, executive]

Good evening. I would like to jump right in and give you a briefing of the consolidated business results for FY 2019 second quarter. But before we get into that, this fall, our home prefecture, Chiba as well as many other areas in Japan, was severely impacted by typhoons and torrential rains, natural disasters. So we just wanted to take this opportunity to express our heartfelt sympathy and deepest condolences to everyone who has been affected.

To be of service as much as possible to areas afflicted, we have undertaken numerous activities to help these areas. So let me briefly introduce our activities at this time. So typhoon #15, Faxai, which landed in the country on September 9, mainly affected the Chiba region. So following the disaster, we launched the Chiba disaster relief project from September 15 to the 20th. So we sold our original T-shirts, Let's Start Today, on ZOZOTOWN. The T-shirts were JPY 2,020 each, and we donate 100% of the proceeds from these T-shirts as well as 1% of our sales during the aforementioned period amounting to a total of JPY 70.5 million we presented to Chiba prefecture.

Another activity, as you can see, all of us are wearing the metal badges to -- then to help afflicted areas after typhoon 19 Hagibis. We created ZOZO CHAMPIONSHIP disaster relief charity metal badges and sold them from October 24. So ZOZO CHAMPIONSHIP, the golf tournament, was also started on the 24th as well, and we sold these badges at the championship as well and on ZOZOTOWN. They were sold for JPY 500 each and 100% of the proceeds will be donated to afflicted areas. These badges, we sold -- this was worn by all the players at the ZOZO CHAMPIONSHIP as well, and many visitors, spectators also purchased the badges during the tournament -- at the tournament as well. So we will continue our efforts to help afflicted areas across Japan going forward as well.

Now we would like to give you an overview of our FY 2019 second quarter results. So the gross merchandise value for this period was -- Page 3 and 4 of your document. The GMV was up by 11.8% year-on-year, landing at JPY 157.9 billion. The OP was up by 31.8% year-on-year, landing at JPY 13.2 billion. The OPM was 8.4%, up by 1.3%. Both the GMV and the operating profit are performing well against our fiscal year targets.

Now we would like to give you an overview of the business results on Page 10. So the increase/decrease analysis of the operating profit. So the operating profit went up by JPY 3.2 billion from JPY 10.5 billion to JPY 13.2 billion. The OP went up due to 5 reasons, mainly. So the increase in sales from consignment shop commissions contributed to JPY 2.48 billion. And in the third quarter of last year, the ad business kicked into full gear, and this added to JPY 0.86 billion and other factors accounted to JPY 0.09 billion. And we also are not distributing as many ZOZOSUITs, so this contributed to JPY 2.6 billion.

And the other decrease -- decrease in other expenses amounted to JPY 0.2 billion. Now the operating profit decreased due to the increase in fixed costs, namely the logistics centers, which accounted to JPY 0.88 billion; and also variable costs increased by JPY 2.1 billion. So these negatively impacted the operating profit. So the variable and fixed costs, please refer to the document for details regarding those 2 costs.

Now on Page 11, this is the consolidated balance sheet. This as well, there's no major change. So I would like to skip this page, if you could just look at it on your -- during your free time.

On Page 12, you'll see the changes in cash flow. The cash flow from operating activities, the decrease in expenditures related to the private business -- private brand business impact -- positively impacted the cash flow from operating activities and also cash flows from investing activities due to the construction of the new office and logistics centers. This has added to the cost in terms of investments, so investments has grown.

Now on Page 15. This is the quarterly change in the gross merchandise value. For the second quarter this fiscal year, the GMV was JPY 78.6 billion, up by 11.1% year-on-year. So during -- we also started the MSP business this quarter as well. Now giving you a breakdown, the consignment business contributed to JPY 72.9 billion, up by 12.6%. The purchase stock was JPY 0.03 billion, down by 22.3%. ZOZOUSED was JPY 3.49 billion minus -- down by 3.1%. The PB business was JPY 0.23 billion, down by 56.1%. The MSP business is a new business and was JPY 0.03 billion, and B2B business was JPY 1.93 billion, up by 3.9%. So that is a results for the GMV.

Next, on Page 20, you'll find the quarterly changes in the operating profit. The OP for this quarter was up by 30.8%, landing at JPY 5.4 billion. The OPM was 6.9%. So compared to the previous year same quarter, it has improved by 1%.

And that is related to this but the SG&A quarterly changes on Page 21. So the second quarter, the SG&A was JPY 20.6 billion. I guess with merchandise GMV, it was 26.3%, which is down by 2.7% [ over point ] year-on-year.

The promotion cost against the GMV was 2.5%. As we have mentioned before from the beginning of the fiscal year, the promotion cost for this fiscal year will be set at 2.9% against the GMV. So when ZOZO conducts discount campaigns out of our own pocket, this fee is not recorded as SG&A. This is the same explanation we give every time, but that is also taken out of the sales. That's how we treat the discounts. So for internal purposes, internal management purposes, we treat the discounted amount as PR expenses of 2.9% in the promotion budget as we have mentioned before, but the breakdown of that is -- that is the breakdown -- that is the promotional expenses and also the discounted amount is also included in the 2.9%.

And with respect to the second quarter, we actively conducted personalized campaigns for members. So although the PR expenses recorded as SG&A was 1.9% against the GMV, the actual PR expenses was close to the PR expenses budgeted for the entire fiscal year. So it's more than 1.9% is basically what we're trying to say.

And on Page 19, so it's going back a few pages, apologies for that, the breakdown of SG&A. So the second quarter SG&A total -- so the -- against the GMV, it was 24.8%. So year-on-year, it was down by 2.8%. The reason why the percentage against the GMV has come down, there are 4 key reasons. One is the impact from change in bonus payment policy, but that has normalized within this quarter. So the payroll for employees came down by 0.4%.

Second reason is that since we're not distributing ZOZOSUITs as much, the shipping and packaging costs have come down by 0.2%. Last fiscal year, we spent a lot of cost distributing ZOZOSUITs and that was considered advertising or PR costs, but this has come down by 2.5% this quarter. And we also have high one-off expenses in the previous fiscal year, but we don't have that anymore, which contributed to 0.4%.

And there are a few reasons why this SG&A have come up as well. One is the decreases in the average retail price and also the increase in logistics centers have pushed the payroll -- logistic-related expenses up by 0.2% and more rewards have been given away, which pushed SG&A up by 0.5%, and rent has increased because of the logistics center increase. And this was -- this went up by 0.3%.

Next, I would like to give you an overview of the KPIs for ZOZO. So starting with the annual number of buyers, it increased by 100,000 compared to the previous quarter, landing at 8.22 million; 190,000 increase in active members, amounting at 6.74 million; and guest buyers, so this is compared to the previous quarter, but the guest buyers came down by 90,000, landing at 1.47 million. The guest buyers are continuing to come down, but the active members are growing faster than the decrease in guest buyers. In order to get more people to become active members, we have conducted personalized campaigns utilizing each member's purchase histories. So we have seen an increase in annual buyers due to these campaigns.

Next on Page 24, the number of shops. As of the end of the second quarter, we had 1,312 shops. This is an increase of 15 shops in comparison to the previous quarter. We are planning to add 100 to 150 shops this fiscal year, which I mentioned at the beginning of the year. But as of the end of the second quarter, we've added a total of 116 shops to date, so we have been able to add shops steadily.

In the second quarter, we saw MACKINTOSH, which is a British outerwear brand. And also, BURTON, a snowboard brand, and also shoe -- large-scale shoe brand, Shoe Plaza, run by Chiyoda. So 48 shops have opened on ZOZO this quarter.

Next, on Page 26. This is the annual purchase amount and pieces per active member. So purchase amount was JPY 47,506 and pieces were 11.6. So the purchase amount have gone up by JPY 572 and items have increased by 0.3%. So in comparison to the previous quarter, this has -- both of these KPIs have increased. The reason why it has come up slightly is that -- so this is a little bit ironic. But we have actually slowed down in terms of acquiring new members. So we're actually seeing more active members, actually, a more ratio of active members, which is pushing the average up because new members' annual purchase amount, this was the first year so it's not as high. So if the ratio of new members and their purchase amount comes down, then the overall average tends to come up.

So -- and we also talked about the annual purchase amount and pieces for existing active members, which is on Page 27, and we tend to see the reverse impact, but this is for distant members who have been members for more than 1 year. So this was JPY 54,750, and they purchased 13.4 items. So the purchase amount came down by JPY 299 and purchase items came up by 0.1%. The reason, as we've explained in the past, is because we're seeing more members who have not been members for that long, maybe they've been members 2, 3 years, so -- and these members tend to purchase less than members who have been members for a very long time. So -- and the factors are the same. But as we mentioned before, in comparison to the past, the new members, actually, we're seeing less and less members joining right now. The speed is slowing down, so this should be bottoming out -- these 2 figures should be bottoming out soon.

On Page 29, you see the average retail price. The average retail price is JPY 3,463. Year-on-year, it came down by 5.2%. From October 1, the tax hike -- the consumption tax rates changed. And so before the tax hike, we had a sales event. So that is why the ARP, average retail price, has come down due to the discount period. But the tax -- we have conducted a 10-day sales event as ZOZOWEEK before the tax hike.

Now the average order value on Page 30. The average order value was JPY 7,416, down by 4.6% year-on-year. This as well has been mainly impacted by the decrease in average retail price, and the items have come up slightly, but the average order value has come down.

And on Page 32, you'll see that this is forecast. We do not -- this has not changed. So this is still the target that we are -- we have in mind. That's it from myself.

From now, we would like the President and CEO, Sawada, to take the floor.

[Kotaro Sawada, executive]

Good afternoon, ladies and gentlemen. I have been to these briefing sessions sometimes, but I'm very happy that I'm here again to meet you all. Thank you very much for your time today.

First of all, I think what you may be most concerned about is probably who is Kotaro Sawada, so this is where I would like to begin. So of course, the former President was very charismatic. So you might be -- I have heard often, who is taking over? So today, I would like to begin by introducing myself briefly.

As you can see here, I was born in 1970, so I'm a little bit older than Mr. Yanagisawa. So unfortunately, the company's leadership hasn't become younger. And I was raised in Yokohama as well. Now me being born in Yokohama doesn't have anything to do with share prices, but I just wanted to let you know. And my hobby is watching baseball, and of course, I do go to ZOZO Marine Stadium quite often. Last week, also, I went to the ZOZO CHAMPIONSHIP as you may be aware, and many, many people asked me why I don't play golf in English and Japanese as well. So I also would like to add golf here as one of my hobbies next year.

And in terms of my career, I joined NTT DATA Corporation straight out of college, and then I was working in 3 consulting firms afterwards. And in 2008, I joined Start Today Consulting Co. as the Representative Director, and that's when I first became involved with Start Today. The Start Today Consulting Co. was the first 100% subsidiary for Start Today, and what we were doing then is that current B2B business, actually. So we help brands operate their own EC, and we help with their fulfillment. So this is a business that we launched at that time. And the B2B business, we started from scratch, and this is one of the key reasons why I'm standing here today. By helping brands run their own EC sites and providing fulfillment, it's like watching mini ZOZOTOWNs. So that's my experience, and that's how I feel.

Though, at the time, so having run apparel EC site, there's a lot of small operations and everything is linked to -- linked and from logistics to IT, front-end customer service, all of that is included within the brand's EC site as well. And I have launched 17 sites, so I learned fashion EC from end-to-end. And I understand it very well from end-to-end, so it was a very good experience for myself.

And this subsidiary when it first launched, it was a subsidiary. But afterwards, there wasn't really a reason for it to be a stand-alone company or a subsidiary, so -- and it was better for that company to become part of the headquarters.

So in 2013, the company became part of the Start Today. And then at that time, I became the Director of the parent company. So since I have experienced and understood at the fashion e-commerce to the end-to-end, they treated me like a joker. So when they wanted to try something new, they would include me in the discussions, maybe not just business development, but strategic planning, but more hands-on as well. I was involved in many projects. And after experiencing the marketing division for a couple of years, in June of this year, I began managing the entire ZOZOTOWN business. So that is my career path.

Then moving on, it's only been a month or so since the leadership change, but we're not going to change our direction 180 degrees. So of course, in terms of strategy going forward, we still would like some time to work out the details. But having said that, as you are all here today, I would like to share, as much as possible, the direction in which we are heading in the future.

As you can see here, in terms of the strategy and process, business processes in 3 is resources. The fourth point is organization. So there are 4 key areas that we will be addressing. And first of all, starting with strategy, we will be working with Yahoo. So our business partnership with Yahoo will help us expand our market share, and we would like to accelerate our efforts in this regard.

Of course, there's other things that we will be addressing, but this is where we would like to start. And when we do so, what will happen at ZOZOTOWN is the concern that's brands and also our shareholders, investors have asked us that ZOZOTOWN will continue to be operated as it has been operated before. And of course, we want to -- we are discussing how we can make it more and more fashionable, but with respect to Yahoo, I will explain this later, but we want to work together in terms of new domains. So Z Holdings, I have been -- I'm not -- I haven't -- I'm not really familiar with it yet, but Z Holdings means Yahoo. So that's the overall strategy.

And in terms of the operational processes, the strength of ZOZO in the past, we will continue to reach that path. And our strength has been DIY, the DIY spirit. Most of the operations and processes, we created ourselves and operated ourselves. That had helped us improve quality, and we believe that our processes can be a role model for other EC. And this experience and know-how is something that you can't purchase, so doing lots of things ourselves is a very competitive advantage. That's what we've learned from our success, so that's something that we will continue to do. And also, become -- being able to react very -- or act very quickly is going to be important. So we need to ensure that we're making decisions quickly in order to create our own processes and systems, so that's something that we always tell our employees as well.

The third point is about resources. So when you think about human resources, what we take pride in is that we have the most number of fashion lovers, fashion-loving employees in Japan. And they understand how the customers feel, and this is a really big strength. So we want to continue to utilize our employees' insight. And so we hope to reflect the insights into how the website is designed and many other areas as well.

And it's actually related to the DIY spirit, but one of the assets that we have is the fashion-related data. As you know, fashion data is all over the place, and many companies are trying to track their data, but it's not really -- there's not a big database for that. So -- but luckily, we centrally manage this large volume of fashion-related data and the WEAR service is also continuing to grow. But we have a lot of styling data as well, and there's a lot of tasks, and it can be categorized and easily dispersed. There's a lot of data that we have that hasn't been utilized yet. There's a lot of potential. So that is going to be a forte that we can continue to exploit.

So the second and third point is how we take and manage our strength; and fourth point is actually how we need to change. So organization-wise, we've done the top-down management since we first launched. So we want to make sure that it's more -- because of more organizations, so after September, when we change leadership, we said the employees are our leading players as the slogan. And to make sure that this becomes more widespread, we're trying to -- we're having discussions as to how we can change HR and other areas of our organization.

So although we can't -- we haven't gone into detail, I think -- I hope this gave you a better idea of how our management team -- what our management team is thinking about right now.

Next, moving on to the tender offer for ZOZO shares by Z Holdings Corporation. As you can see here, the tender offer period will begin on -- began on September 30, and it will end at the end of 30 business days, November 13, 2019.

The shareholding ratio, the minimum will be 33.4%, maximum, 50.1%. The tender offer price per share is JPY 2,620, and Mr. Maezawa is planning to -- held 36.8% shares before, but now he's planning to tender 30.4%. So this -- as of the November 13th, this is how the shareholdings should look like. This is something that you may -- already may know because we've announced it at our press announcement as well.

And in terms of capital, that was our capital, but what about business alliance? So that's something that I would like to explain now. In terms of the alliance, there's a lot of different things that we can do in a lot of different areas. And so this is something that we have been discussing with Z Holdings, but we think that these are the low-bearing fruit, and this is something that we should be working on right away. So please just bear in mind that this is where we will be starting.

First, PayPay Mall is already open. But starting tomorrow, they have announced that they will be promoting the service starting tomorrow, and Z Holdings is a very important business for them as well. And ZOZOTOWN will open its store in the PayPay Mall, so that's the first alliance, visible alliance that we will be working on. It will be sometime in December. We are thinking of opening our store in PayPay Mall sometime in December.

So the brands are already on ZOZOTOWN. We are asking them if they're interested in also joining PayPay Mall. If the brands say that they don't want to join, that's fine. They can continue to just remain on ZOZOTOWN, so it's up to them. So the brands will have a choice as to whether they also want to join PayPay Mall or not.

The brands, so far, have responded positively. So -- and because one of the key reasons why they're open to it is because it's very easy. So on this, if they are on ZOZOTOWN mall already, we will just feed the data to PayPay Mall, so it's very easy for them to join PayPay Mall. So we can't really go into details, but the commission as well for the brands, it's not a big concern for them. So bearing all of that in mind, ourselves, in terms of brands joining PayPay Mall, it's going well.

And not just joining PayPay Mall, but in terms of fashion category, the Z Holdings is actually asking us for feedback or know-how sharing. So since we will become their consolidated subsidiary, we want to make sure that there's a benefit for us joining their group. So we actually have -- are able to have frank, open discussions about what benefits, potential benefits, there are.

Another alliance is adding PayPay as a payment option to ZOZOTOWN. It is gaining momentum, and the media is talking about which payment service will win after all. But for us as well, we have high expectations for PayPay as a payment method.

In terms of payment options -- adding payment options, it does require some system development and testing. So we don't think that we can add it within the end of the year, but we hope to add it as soon as we can.

The third point, as we already mentioned, ZOZOTOWN will continue to be operated. Some people may be concerned that ZOZOTOWN will become like Z Holdings, where we're just offering discount products, but that's not true at all. Z Holding as well, they want ZOZOTOWN be -- still remain a cool place, and they want us to continue to make decisions autonomously to operate our service. So please, rest assured that ZOZOTOWN will continue to operate its service, its own service. So autonomy is very important.

So of course, there were issues with [ ASCO ] but there were learnings from that. So Z Holdings have learned from us, their experience at [ ASCO ]. And of course, we will continue to remain a public company, so we will need to have our own autonomy.

In terms of benefits, I've already mentioned this, but from Z Holdings' point of view, they can strengthen their fashion e-commerce business, and they can introduce PayPay to ZOZOTOWN and accelerate PayPay's penetration.

And we didn't mention this earlier, but user traffic from Z Holdings and SoftBank Group to ZOZOTOWN is something that we hope, we expect. As you may know, our -- as you know, 20s, 30s and women are our key customers. But Yahoo, the website, that is for men in their 30s, 40s. And in terms of gender ratio, they have more male customers. So if you add the 2, then we absolutely fill each other's gap, so complement each other. So we hope that traffic will be directed towards ZOZOTOWN, and how we intend to do that, we're actually discussing logically. And also, there's a lot of fine-tuning involved with that. We're doing that right now.

But if you go to Yahoo's top page, on the far left corner, starting yesterday -- it started yesterday, but the ZOZOTOWN icon is already shown on the Yahoo top page. So the EC implementation has already been undertaken. What was difficult at the search, so we need to still work on the logic for that.

Next, after the business alliance with Z Holdings starts, we will -- the structure in the future will include 2 directors who will be seconded from Z Holdings. So at the special general meetings of shareholders in January 2020, 1 director will join; and in June 2020, another director will join.

And in case Z Holdings Corporation will make a shareholder proposal, it will require prior consultation with ZOZO. And sorry, we're running out of time, so I would like to quicken the pace. So that's basically the partnership with Z Holdings.

And this is what I wanted to talk to you about today, but I just will be brief. I'm sure many of you saw this on TV, but it was a huge success. A lot of our customers are super happy. I think that this is one of the most successful tournaments, and I think the media did -- there was a lot of media coverage as well, so it was a huge success. And it was a very dramatic championship as well, so we were very lucky as well. So advance tickets were sold out.

A number of visitors was impacted by the rain, but we saw 55,000 spectators. And we -- Tiger Woods, of course, has had a great start and continued to have a great round in one. So we really appreciate Tiger Woods for his efforts, and it was a very successful tournament. So these are some sponsors. So we had a lot of participation as well.

And then the MSP business, Multi Size Platform is a concept. On September 6, we started taking preorders for some brands, so we had 83 items total. So men's 34 items; women's 49 items. And a lot of the sales figures, because it's preorders, some will be delivered in October as well. So not all of the sales will reflect -- has been reflected in the second quarter, but these brands have participated in our MSP concept, and so they gave us the license to use their brand name and design products for us as well.

Do you remember what the MSP is about? It's the year-to-year gender, age, your height and weight, and we will guess your size, the optimal size for you. That's the service, basically.

So what's happening now is that there's still some trial and error that needs to be done, but there has been a lot -- some products that have performed very well from the beginning. For example, Slobe Iena, side-pocket skirt, for example, has done very well. As women would know that midi skirts, the length is very important, and if it's too long or too short, depending on your height or weight, that it no longer becomes a midi skirt. So I think multi-size, the concept did very well with the midi skirts. Of course, the product has to be a well-designed product to start with, but the multi-sized concept fit very well, particularly with this item.

Next moving onto ZOZOMAT. So you can measure your feet size, we've already shown the demo before. We just wanted to give you a demonstration of how you will like be able to purchase products based on this. So this is after measurements have been taken. So once you measure your feet, the width behind, you will see that your feet size measured in different -- from different angles. And you might just say, "Yes, so?" But we need to -- we want to -- we wanted to have something that's interesting. So this is -- we thought that this might be interesting for you. So it's a standard or your feet is great style, for example. So different features of your -- characteristics of your feet. So we have here some interesting content, and we don't want to just stop there.

So the objective of this really to buy shoes that fit you well. So if you look at the match or the accuracy in terms of the sizing, you can see that it's 93% or 95%. So that's the UI that we're planning to offer, and this is the search results. So if it was an adidas Campus shoes, you'd click on one. You will see that your size is 26 centimeters. It's not just about the length of your feet, your height -- and so we can recommend the optimal size for the user. The accuracy, it's pretty accurate and pretty precise.

And what about matching? How do we measure the accuracy in terms of mat and how the sizes fit? And we've already decided on the direction, and we're actually trying to improve the [ FC ] right now, and we can't really go into details at the moment.

Right now, we're working on improving accuracy, and we're almost there. And we've started taking preorders already, and we believe that we will be able to launch this service, and people will be able to purchase products based on that starting this winter.

Other than that, we're running out of time, but our China business, we are working on. So a little bit less than 300 brands have raised their hands. So it will be remotely -- the products will be sent from Japan. So there will be no inventory held in China and FBC as well. We have welcomed a large brand for our fulfillment in ZOZO business as well.

So sorry I took a lot of your time, but that's it from myself.

[Unknown Executive]

We will finish the live streaming of the briefing session.

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