ZOZO Inc

TSE:3092

Earnings Call Transcript 2021-Q2

[Unknown Executive]

It is time. So we would like to begin ZOZO's FY 2020 Second Quarter Consolidated Business Results Explanation. Introduction, in order to avoid the spread of COVID-19, we are conducting this session online, and this briefing session will be held until 5:30. And from 5:45, we have a different Zoom link available for a Q&A session.

I would like to now introduce the speakers today, President and CEO, Kotaro Sawada.

[Kotaro Sawada, executive]

Thank you very much.

[Unknown Executive]

Executive Vice President and CFO, Koji Yanagisawa.

[Koji Yanagisawa, executive]

Hello. Thank you.

[Unknown Executive]

Director and COO, Masahiro Ito.

[Masahiro Ito, executive]

Hello.

[Unknown Executive]

So we have 3 presenters today. Now I would like to pass the floor to our CFO, Yanagisawa.

[Koji Yanagisawa, executive]

I'm the Executive Vice President and CFO, Koji Yanagisawa. I will take you through the FY 2020 second quarter results.

Today's presentation material has been uploaded to our IR site already, so please take a look. I would like to jump right in. Here are the results for this quarter.

With respect to the second quarter, the gross merchandise volume was up by 16.3% year-on-year, landing at JPY 185.6 billion. The OP was up by 50.2% year-on-year, landing at 19.9%, and OP was 10.7%, up by 2.4 points year-on-year.

We have achieved 47.9% of our annual GMV target and 50.4% of the OP target. So we are on track in terms of our annual target. We have achieved the highest half term OP in our history.

This is on Page 7 of the presenting material, this is the consolidated business results by quarter. For the second quarter, the spread of COVID-19 acted as a tailwind, and our GMV landed at plus 13.1% year-on-year. Although the growth has settled down somewhat in comparison to the first quarter, digital shift is working -- still working in our favor and has had a stronger impact than the decline in demand in fashion.

With respect to the OP, the gross margin has increased due to the growth of GMV. And last fiscal year, we actively implemented discount campaigns, and there were some one-off high expenses. So year-on-year, the OP has increased significantly to 73.4%.

Since products in the second quarter tends to be lower in price due to seasonality, it is usually challenging to be profitable during this period, but the OP in this quarter was 10.5%.

Next, I will share with you the details of our performance. This is Page 8 of the presentation material. Here is the increase-decrease analysis for the OP in the second quarter. The OP increased by JPY 6.7 billion from JPY 13.2 billion last year same quarter, to JPY 19.9 billion. The OP increased by JPY 8.9 billion due to increase in consignment shop commissions attributed to increase in sales.

Gross profit from ad business contributed to JPY 0.5 billion. And other sales and decrease in PV valuation loss added to JPY 1.43 billion, and reduction of promotional expenses contributed to JPY 0.57 billion, and JPY 0.58 billion was added due to decrease in other expenses. OP has decreased -- increased, sorry, due to -- oh, decreased to JPY 1.15 billion due to increase in fixed costs for logistic centers and employees, and JPY 4.26 billion in variable costs, which fluctuates depending on the sales.

And here is the balance sheet on Page 9. There is no noteworthy information on the page.

On Page 10, you'll find our cash flow. And with respect to the cash flow from investing activities, we acquired shares for yutori this quarter, and we have increased a number of logistics centers. yutori has been consolidated as of August this quarter, and cash flow from investing financial activities has increased to the repayment of short-term borrowings.

Next, this is Page 15, the gross merchandise value shift. Please refer to the earnings summary with respect to the GMV breakdown for each business. But with the COVID, COVID has proven to be a tailwind, and our B2B business has contributed more to the overall GMV.

[indiscernible] presentation material. Here's a breakdown of the SG&A. The ratio of the SG&A against the GMV in the second quarter was 23.4%, coming down 1.1% year-on-year.

Reasons why this percentage has decreased, there are basically 3 key reasons. One is that from April 2020, we ended a 1% point reward, so the point-related expenses went down by 0.9% because of this. And the growth of GMV and the cancellation of leases for some of the logistics centers contributed to a decrease of 0.3%. And we also have one-off expenses the previous year and other expenses contributed to a 0.8% improvement. As SG&A has increased, however, due to -- shipping fees increase -- shipping fees increased by 0.5% due to the decrease in average order value.

Also, we began to pay commissions on sales for the PayPay Mall, and there are one-off expenses related to the PGA Golf Tournament, which was held last weekend, the championship. So part of those expenses were recorded in the second quarter. So the advertising expenses -- promotional expenses increased by 0.4%, and we have more employees as well, so payroll has increased by 0.1%.

Operating profit and operating profit margin, already covered earlier. But last year, we had ZOZOARIGATO and other discount campaigns. We aggressively implemented these discount campaigns. And as a result, the gross margin this year has improved.

And this is Page 24. I would like to come here and introduce the KPI for ZOZOTOWN. This -- the [ annual ] buyers increased by 140,000 this quarter, landing at 8.8 million active members. It was 7.43 million, increased by 210,000. And the number of guest buyers decreased by 50,000, ending up at 1.37 million.

With the digital shift, we have been able to acquire new active members. Having said that, we have seen a decrease in guest buyers. This is due to the [ annual ] services we have been offering to members over the last couple of years.

And this is the number of shops. As of the end of second quarter, we had 1,404. So there were 56 shops that were added as of the end of first quarter.

The key brands include: ZOZOTOWN, pop-up shop for Italian high-end jewelry, Bulgari, Marni, a luxury brand, American Outdoor brand, OB and [indiscernible] from Onward Holdings, which has rejoined, as well as other 11 other shops as well.

And on Page 30, this is the average retail price. This has come down by 3.8% year-on-year, landing at JPY 3,381. So the ERP has continued to come down, but not as drastically.

Next, average order value, impacted by the ARP decrease, AOV was down by 2.1% year-on-year. As I mentioned, this has been impacted by the decrease in ARP. Sorry, this was a brief introduction, but this concludes my explanation of the FY 2020 Q -- second quarter results.

In terms of the forecast on Page 33, we have not made any major changes to this plan. That's it for the results. Thank you very much.

[Unknown Executive]

Next, our President and CEO, Sawada would like to present.

[Kotaro Sawada, executive]

Good afternoon. I'm Sawada, the President of ZOZO. I would like to supplement some information about our performance.

First of all, in the first quarter, after the first quarter, we had a briefing session, and I believe I showed you this slide at that time how -- explained how the digital shift has -- is occurring, and that's becoming a tailwind for us. And, however, we've been impacted slightly by the sluggish demand for fashion. So I think that was covered last time. But in the second quarter, you may be quite interested in what's happening in respect to this.

But as Yanagisawa mentioned earlier, digital shift has been continuing. We have a couple of graphs to introduce to you today. First of all, this graph is the number of new daily changes in the new users or new buyers on ZOZO. So this is basically the daily shifts in the number of new buyers.

As you can see in April and May, during the state of emergency, it was quite irregular. It grew significantly. But after June, the red line graph is for this year, and yellow is last year, but we have actually surpassed 2019 by 110% to 120%.

So digital shift, in other words, people have realized that buying clothes online, fashion online, is okay. But many -- so many people are visiting our website.

And this is another graph. So many people are coming to our website. And when we look at their repeat rate, so we have on the Y-axis, total amount of purchases by a new user; and on the X-axis, elapsed days from the first purchase. So once the customer buys, how many -- how often do they repeat purchase, basically. So if they bought something on May 1 and then made another purchase on June 1 for JPY 30,000 So if their first purchase was JPY 5,000 and the second purchase JPY 3,000, then it will be marked as JPY 8,000. But as you can see from this graph, this is -- the red line graph is for 2020. And you can see that the consumers are behaving quite similarly. They come to our site, they like our site and they're continuing to purchase on our site.

So for the last year, we have been exploring how we recommend what products, when do we recommend to our customers. So once customers purchase on our website, they're quite satisfied, and it actually leads to second and third purchases.

[indiscernible] In terms of recognition, the great user experience, usability. We need to make sure that people are -- more people are aware of the high usability. So -- and that will help us gain more fans. So during the second half of the year, we would like to undertake some promotions to enhance our awareness. So maybe TV commercials would be one way of enhancing our awareness and recognition, but we're working on a strategy to help us improve our awareness.

And that was some supplementary information about our performance. And there are a couple of more new topics that I would like to introduce to you today.

First, the Your Brand Project. We have announced this in the spring and how we will be working with influencers to launch brands and sell those brands on ZOZOTOWN. So that this is a new way to manufacture and sell clothing or fashion. And there's another strategy is to -- so PV and MSP, those kind of businesses has enabled us to learn a lot about manufacturing, and we're working with many brands. So we can apply the learnings to the Your; Brand Project as well. So that one significant -- another significant reason why we're undertaking this project. And many influencers have collaborated with us, and so we have more than 23 -- we have 23 influencers who are working with us already.

And last -- just last week, we introduced or launched 9 brands. And the remaining brands, we have started sales today, actually. But in terms of the 9 brands, I would like to introduce how they're performing at the moment. In a nutshell, they're doing great. And so those -- they sold out quite quickly instantly, basically. They used to happen a lot in ZOZOTOWN, not so much before, not so much recently, but we are all excited because these items are selling instantly.

And we can't really talk about the actual sales. But some -- here is some of the indications. In terms of the #1 sales brand, the sales is 6x of a -- we have a lot of new shops that have joined our platform. And when we take the average sales within the first 5 days, these Your Brand Project is doing 6x more than the average sales during the first 5 days for other brands. And when a new shop opens, they have about 40 to 50 SKUs. But if we look at the sales per SKU for the Your Brand Project, it's -- we only have about 8 SKUs. But there's a lot of ideas for the influencers that go into each SKU. So we don't have that many SKUs. However, if we look at the sales by SKU. They're doing 200x the sales than usual SKUs. So it is doing very well already.

This is not something that's going to be temporary. This is going to be a business that we're going to undertake going forward as well. So second half of the year as well as next fiscal year, we will be making efforts to continue this project.

Next I would like to introduce synergies with Z Holding. First is the PayPay payment. We introduced PayPay payment. And of course, we're doing promotions well. But as a result, this is -- we have the #1 -- PayPay payment has #1 share in terms of all mobile payments. They have already 33 million users. So this new payment service is actually helping us to get new users as well. So we hope to focus our efforts in this area as well from now on.

And also another area is X Shopping. This was so users -- the store inventory as well, so it's -- they can buy something and go to the store to pick up. So we actually call it X Shopping. But this is available for some brands on ZOZOTOWN's PayPay Mall. Right now -- sorry, we're going to launch it in November. So we want to also direct traffic to ZOZOTOWN as well, but we would like to expand this effort as well.

We are thankful for the brands that are cooperating with us. So we hope that this cooperation will continue. And ZOZO Championship was held last week. Unfortunately, we weren't able to organize this in Japan this year, but it was very exciting in the U.S. There was a lot of excitement around this tournament, and as you may know, Patrick Cantlay won the championship.

So we did also do a lot of charitable activities. So we donated part of the proceeds from the official items as well as some -- donated some proceeds from the autographed items as well. But we have -- we did try to contribute in our own way.

Next, this is the last topic for myself. We are trying to promote ZOZO Work Style. Amid COVID, we're -- we have been discussing what kind of work we should be promoting. And I think many are interested in this area. But we -- this is the work style that we decided to promote. The current offices will be shrinking gradually, and employees will be coming to the office every 2 days a week.

So of course, new -- we need to champion new ideas and give it shape. So we need to be first movers. And in order to remain a first mover, we need -- it's important to also speak to each other face to face. So we can't really say everything can go online, but we don't need -- everybody doesn't have to come in every day. So we decided 2 days a week would be the right balance for us.

And at the same time, in 2021, January in West Chiba, a new office will be complete. So we want to blend into the local community as well and to create a new corporate culture and help invigorate the area. It's a little bit further from Tokyo from a car, but it is a very great area. So if you have an opportunity, please come visit us. But we do have customer centers and logistics centers, and it's hard to promote remote work for those centers. So we want to make working in these centers enjoyable.

So we're just discussing various initiatives we can implement to make sure the employees are having fun working in our logistic and customer -- logistic centers and customer centers.

Next, our Director and COO, Ito, will talk about some of the technologies we have in the pipeline.

[Masahiro Ito, executive]

Hello, this is Ito, the COO. I would like to talk about ZOZOSUIT today. I think it's been a while since you've heard us talk about ZOZOSUIT. But since we released in 2018, ZOZOSUIT, we have continued to develop this technology. We wanted to make share to alleviate concerns about not knowing the size and, therefore, not being able to shop online.

So today, we would like to introduce the ZOZOSUIT 2. We have created a short clip, so please take a look.

[Presentation]

[Masahiro Ito, executive]

ZOZOSUIT 2 has 50x more markers than before, and is using an image processing algorithm, a new algorithm, to improve the accuracy of measurements. So if you use ZOZOSUIT 2, you could even buy underwear, which is hard to purchase online because you don't know what size. And you can use it for dieting and to improve your health care posture, sports and even games. And of course, for fashion as well.

So ZOZO's measurement technology, we want to provide to more people and services as well. So we're looking for partners. So please contact us.

So ZOZOSUIT 2, as I mentioned, it's a measurement technology which we are introducing at this time. So we're not going to be thinking about distributing these suits and developing a service based on this, but it's a very great technology, and we want to use it for fashion, and we want to think about how we would be utilizing the new technology. But we also want to work with different industries to see if we can do something completely new, innovatively new.

So I would like to take you through some of the key features of ZOZOSUIT 2. So it is a measurement technology, and that means accuracy is key. The accuracy for the ZOZOSUIT 2 is close to even a laser scanner. So we put -- if you took a mannequin, measured it with a laser scanner and used the ZOZOSUIT, the average difference was only 3.7 million (sic) [ 3.7 millimeter ] .

So using ZOZOSUIT 2, you can actually get the same levels of efficacy of laser scanners even at home. The reason why this is possible is because of the markers. You remember the white markers on the blotched suit, which is quite iconic, and we only had about 400 markers for ZOZOSUIT 1, and we have 50x, or basically 20,000 markers. So every area is very covered. There is no gaps. So it enables us to measure very accurately, and the accuracy is 50x better.

And ZOZOSUIT, it can be used to measure at home, and a couple of million people have measured their bodies. And of course, some homes may be darker, there may be some shadows, and so there are a lot of different reasons for the accuracy being lower, but we wanted to improve the marker recognition. So the white markers in the past were quite big, but the smaller black dots were only about 2 millimeters. So if you lose one black dot, the computer cannot see that marker.

So we actually have 6-millimeter -- it's 3 times bigger, it's 6-millimeter markers all over this suit so the computer can recognize the marker even better with the new suit. So the marker recognition has improved significantly.

Of course, we have a dramatic improvement in the algorithm. We have many people trying the ZOZOSUIT, the first version, and we used the data and analyzed the data to come up with a superior algorithm. So the dramatic improvement and algorithm has led to the improvement in accuracy.

And so we would like to look for partners to do something quite interesting regardless of where -- what your industry might be. Actually, we already have -- we still have a couple of hundred people using ZOZOSUIT to measure their body. And they're actually using it to go on a diet or for health care, so there is that kind of potential demand. So of course, with apparel, we would like to work with apparel brands, and we want to use it on ZOZOTOWN as well, but it would probably be a good fit for AR/VR, health care and fitness.

Next is ZOZOMAT. So we launched ZOZOMAT on February 27 this year. So people can buy shoes that better fit them using ZOZOSUIT, but we had already 300,000 people who took measurements. And once you took a measurement, we only had, in February, about 100 models. It would be recommended based on your measurements, and so this is a new announcement. But as of today, we have 1,173 models that can be recommended based on your measurements.

And this, we have been able to dramatically increase the number of models quite recently. So you have a lot to choose from. And we will continue to add more models to the lineup.

And what effect has it provided? With respect to ZOZOMAT, you know what sizes fit you better. So that should mean that the return rate due to the wrong size should go down. But we've see the turn rate decrease by 36.9% in comparison to return rates -- the return rates. So a lower return rate means customers are happier. And new users, we've actually acquired -- about 130,000 people. And we saw that many people were purchasing shoes for the first time online. So it's a gradual increase, but they were seeing more and more people who are purchasing shoes for the very first time using ZOZOMAT. So we hope that this will become a new standard for buying shoes online.

And these are some of the feedback that we received from Twitter on the far right, upper right. "So my -- I bought a pair shoes and realized that ZOZOTOWN recommended a great, -- perfect size." and many people said that this has not recommended, a wrong -- different size than what they usually buy. But it turned out that the recommended size is more -- was a perfect size for them.

And with respect to ZOZOMAT as well, we're looking for partners, manufacturers, any companies who are in the sports industry, I don't know, maybe -- it can be an idea. If there's a company out there that wants to work together with us with the ZOZOMAT, please feel free to reach out to us. So we look forward to being contacted by you.

So we will continue to develop these technologies that can be used by our partners as well. So we want to collaborate with other partners and launch a new business. And as you can see in the background picture, we are planning something new, which we will introduce recent -- quite soon . So please look forward to what we have in the store. Thank you very much.

[Unknown Executive]

That's it for the FY 2020 second quarter business results announcement. Thank you very much for joining us today.