ZOZO Inc

TSE:3092

Earnings Call Transcript 2023-Q2

[Unknown Executive]

It is time. So we would like to begin ZOZO's FY 2022 Second Quarter Earnings Briefing. Due to COVID-19 -- to prevent the spread of COVID-19, we will only be live streaming this session. And this session will end at 5:35. And from 5:50, we have another Zoom channel where we will be conducting Q&A session for institutional investors.

Now I would like to present the presenters today, the Representative Director, President and CEO, Kotaro Sawada.

[Kotaro Sawada, executive]

Good afternoon.

[Unknown Executive]

And also, Director, Executive Vice President and CFO, Takayoshi Sakaizawa.

[Takayoshi Sakaizawa, executive]

Thank you very much.

[Unknown Executive]

So we have 2 presenters today. Now I would like to ask CFO Sakaizawa to take over.

[Takayoshi Sakaizawa, executive]

This is -- I will be introducing the FY '22 second quarter results. The presentation has been uploaded on our home page, IR section, so please take a look.

Let us jump right into the quarterly results. FY '22 second quarter GMV was JPY 251.1 billion, up 9.4% Y-o-Y. The GMV, excluding other GMV, was JPY 227.4 billion, up 8.8% year-on-year. The OP increased by 14.4% and landed at JPY 27.2 billion, and the OPM was 12%, improving by 0.6% year-on-year. Against the fiscal year forecasts that we have disclosed, we have achieved 46% of the GMV and 52.8% of the planned OP, so we are making good progress.

This is Page 7 in the documents. Here is the consolidated performance overview. The GMV, excluding other GMV, in the second quarter increased by 9% year-on-year. In the last fourth quarter, large brands left our BtoB business, the largest brand in our B&B business left. So in total, it was less than 10%. But if we include the ZOZOTOWN and PayPay Mall businesses, we grew by 12.2% year-on-year, continuing to grow by double digits.

In the second quarter, we saw warmer temperatures in the month of September, so sales temporarily decreased. But our inventory recovered from the lockdown in Shanghai we experienced in the first quarter. And so we saw a great increase in the number of visitors and purchases.

With respect to OP, although the customer acquisition costs and SG&A increased compared to the same quarter previous year, the gross margin increased due to the growth in GMV. And some costs, mainly variable cost, decreased. So the OP ended up increasing by 15.2% year-on-year. The fashion trend shifted towards lower price point, but in the second quarter -- so the second quarter was a hard quarter to secure profitability, but the OPM trended high at 11.6%.

Now I would like to take you through some of the results in more detail. Please turn to Page 8. Here is an increase-decrease analysis of our OP this quarter. The OP increased by JPY 34.2 billion from JPY 23.79 billion same quarter last year to JPY 27.21 billion.

The OP increased by JPY 6.46 billion due to increase in commissions from the Consignment business as a result of an increase in GMV and also increased by JPY 0.64 billion due to increase in sales from the ad business. And due to the increase in shipping income and payment commissions, the OP increased by JPY 1.04 billion.

The OP, however, decreased due to the increase in fixed costs attributable to the increase in the number of employees, logistic centers and consignment operations, which amounted to JPY 1.16 billion, and also variable cost increase in proportion to the GMV by JPY 0.7 billion. And the actual PR costs such as customer acquisition point rewards increased by JPY 1.72 billion. And one-off costs from the increase in logistic centers and telecommunication costs arising from the increase in number of cost servers amounted to JPY 1.14 billion decrease in OP.

Please turn to Page 9, consolidated balance sheet. In comparison to the end of the last fiscal year, tangible assets have increased, but this is -- this includes investments for the new logistics center, which we will begin leasing in February of this fiscal year, so next February.

Moving on to Page 10, the cash flow, consolidated cash flow. Compared to the end of the last fiscal year, tangible assets have -- the cash flow, the investment activities has increased, but this is due to the expansion in the logistic centers.

On Page 16, here are the quarterly trends in the GMV. As I mentioned earlier, in the last quarter last -- fourth quarter last year, we assessed the brands that comprise a large portion of the GMV in leaving our BtoB business. So the BtoB portion of the GMV decreased by 2.6 points to 2.9%. As a result, the composition of other businesses has increased.

On Page 20, you'll find our SG&A as of the end of the second quarter. The SG&A against the GMV was 22.7%, decreasing by 0.3 points. The reasons why this ratio has decreased is, firstly, improvement of operations in the logistics centers, which helped reduce logistical labor cost by 0.4 points. And the second reason is the AOV, AOV increased in comparison to the last fiscal year, pushing the shipping cost down by 0.3 points.

On the other hand, SG&A increased due to the one-off cost to purchase equipment for the logistic center we added in the first quarter as well as system replacement and increase in cloud server usage, which increased in proportion to the increase in transaction, therefore, SG&A increased by 0.4 points.

On Page 24, you'll find the SG&A by quarter. In the second quarter, the SG&A against the GMV was 23.9%, down 0.3 points year-on-year. As it was the case in the first quarter, the shipping costs against the GMV has remained low. Moreover, although shipping costs rose in July, the AOV also increased, so we have not seen a significant impact in terms of the shipping cost to GMV ratio. So it's basically remained flat.

Next on Page 23, here are the trends in the actual promotion costs. The second quarter -- the actual promo costs for the second quarter, which includes both advertising and point-related expenses, were 3.1% against the GMV. We announced at the beginning of the fiscal year that we will be using 3.5% of the GMV for promotions, and there are no changes in this direction. So the latter half of the year tends to be our peak sales period, and we plan to actively undertake promotions during this period in comparison to the first half.

On Page 21, here are the trends in OP and OPM. In the second quarter, as I mentioned, in comparison to the same period previous year, we saw a rise in promotional costs, including point promotions, but the GMV grew. And as a result, the gross profit and some costs, mainly variable costs, decreased. So the OPM rose by 0.7 points and ending at 11.6%.

Next on Page 25 onwards. Page 25 onwards, you will find the KPIs for ZOZOTOWN. These figures do not include the performance of PayPay Mall or BtoB business. The annual active buyers, first of all, increased by 230,000 to 10.85 million. Active members rose by 270,000 to 9.54 million. And guest buyers decreased by 30,000 to 1.31 million.

The number of active buyers have increased because new customers we acquired last fiscal year have become regular customers. And we also strengthened our customer acquisition efforts with TVC and then web ads launched -- that we launched during ZOZOWEEK in the main summer sales period.

On Page 26, you will see the trends in the number of shops. As of the end of the second quarter, the number of shops was 1,532 shops, and we added a net of 9 shops since the last quarter. In the second quarter, we added 24 shops, which include the cosmetics line, ANNA SUI COSMETICS, offered by the global fashion brand, ANNA SUI; as well as luxury outdoor brand, Barbour, from the U.K.; and a famous U.S. footwear brand, SKECHERS, known for their sneakers.

Next on Page 31 and 32, you will find the average retail price and average order value. First starting with the average retail price, it was JPY 3,487, up by 6.8% year-on-year. The ARP increased due to less products sold at a discount in comparison to the same quarter previous year, and brands did not offer a bigger discount as the year before. Moreover, Sawada will explain this more in detail later, but the retail price of our winter products have gone up, the impact of which we only partially experienced in the second quarter.

On Page 32, you will find the average order value, and it was JPY 7,566, up by 3% year-on-year. Although the number of items per order slightly decreased, we saw an increase in ARP and the AOV also increased year-on-year as well.

On Page 34, this is a full year forecast and dividends. There are no changes to our plans for the fiscal year.

That is it from myself. Next, our CEO, Sawada, will take it from here.

[Kotaro Sawada, executive]

So I just wanted to add a few things. First of all, the retail price, I just wanted to describe what's happening there in more detail. The apparel products, of course, not many products are sold throughout the year. Of course, they changed with each season. So it's very difficult to compare prices. It's not an apple-to-apple comparison. But we have a lot of various data, so we have been analyzing the trends. And we've seen the rise in retail prices in this fall/winter season.

When we look at the launch of the fall/winter season, of course, it depends by category, but it's -- the prices have risen by 3% to 5%. So the retail price has risen. It's not the price that we bought, it's just the prices that we are selling our products, the retail prices. So of course, if we add all the other categories, it's a little bit lower. But if we just look at apparel, it's rising by around 3% to 5%.

On the other hand, what's the average order value, what's happening there? As Sakaizawa just explained, the average order value has been increasing as well, as well as the number of shipments. As we already mentioned, it is growing steadily. So the -- of course, ARP is rising slightly, but users are still purchasing. So we've seen that happening in the market. Therefore, we handle a lot of the products offered in the Japanese market. And so we -- it's a majority of the market. So it is -- we believe that we can generalize and say that the retail prices are rising.

But in terms of the AOV and the number of shipments, I don't know what's happening with the other competitors, but our staff are seeing that we have been able to keep up pace with the trends. So that was about the retail price increase.

And this is the 3 pillars of the strategy that we have been talking about since the previous year. And we have a couple of updates. So I would like to share them with you. So the -- a reminder of the 3 key pillars: one is to diversify our traffic, and the second one is production support and the third one is licensing -- technology license sales.

First one, starting with the diversification of traffic. Why we want to get traffic from people who aren't just interested in buying fashion, and maybe this you already noticed, but we are an EC platform, and we've grown to this size. But going forward, we don't want people to come to ZOZO just as a place to buy fashion. We want them to see ZOZO as a place for fashion. So that's the first pillar of business. So we want to get traffic that's not just about buying. So we want people to come if there's -- for example, simply interested in a product or they just want to know more.

So ZOZOTOWN, we want to be a place where people turn to regardless of what they want to know about fashion. And by doing so, we want to ultimately increase sales and also enhance our advertising business as well. So that's what we're aspiring to do with the first strategy. The first key step actually, in the second quarter, we have already taken that very important first step.

So if you look on our home page, you maybe have seen this before, More Fashion, Fashion Tech is the 2 axes. Of course, we've already talked about this. This will be our key focal points, but we added explore yourself and delight -- and make you delighted. And we haven't communicated this and emphasized this yet, but it's not really just a tagline, but this is actually a purpose or where we're heading as a company.

So of course, we want to evolve from a place to buy fashion and a place that's all about fashion, but we want to deliver clothing that people can get excited about and that look great on people. And looking great on somebody is actually a little bit abstract. So when you buy consumer electronics, you look at the specifications, functionality, sizes. So that's what you will look for with the appliance, but fashion is a little bit different. So that's what makes it interesting as well.

So for example, you might want to buy some piece of clothing. Then you might ask your friend if you -- they would think that you will look good in it and the friend might say, well, I think the other one might look better on you, and then you would hesitate to make that purchase. But with consumer appliances, you decide to buy something. And if somebody says, well, I don't think that's a good idea, you still think, well, that's what you need.

So something that you wear, it's how people see or -- and what the trends are, it's actually very intercompany-related. And what we mean by looking great on somebody, the definition then really changes. There is not really a service that says -- or solves that issue. So we want to take on that challenge and go a little bit upstream from just making a purchase.

So delivering items of clothing that people can get excited about and then that looks good on them actually embodies the explanation that I just shared with you. So your style is -- we're just defining what is your style, what looks good on you. So -- and the more you dig, it's very abstract and it changes by person. So because it is abstract, there are abstract needs as well, and it's -- we need to unravel that too. That's what ZOZO is trying to do going forward.

But it just seems like we just created a mission statement. So we want to launch a Your Style service in November, and we will be announcing Your Style service in November. I think an off-line brick-and-mortar store is the idea and ZOZO will maybe -- ZOZO will be taking a step forward in that direction. So please stay tuned for what we will be doing. It is very exciting.

Next, production support, we've already issued a lot of press releases. And so we actually call it MTO, made-to-order, but we want to reduce inventory risk for the fashion industry. So we have the production know-how, and we want to share that with the other brands. So we want to provide back-end support to the brands. It's only been a couple of months that we've launched this service.

But what we found so far is that once we -- the delivery time, the lead time is actually the shortest is 10 days, and it might take even longer than that, depending. But we know that this -- we thought that this would be a bottleneck, and we were a little bit worried. But actually, offering these products, we're seeing made-to-order products sell 1.5x better. So we believe that consumers don't mind waiting.

This is the actual performance of a brand. But in the similar categories, let's say, pants, the sales for a brand's pants, those that are made by ZOZO and pants that are not made by ZOZO, if we compare the sales, of course, there are differences in design as well, but we have our own sales platform, and we promote these products on ZOZOTOWN actively. And we've seen this kind of gap between Made by ZOZO and items that are not Made by ZOZO.

So we believe that we can actually make up for the longer lead time, and we can -- we have the strength because we have the sales platform, and we can do active promotions. So we believe that we want to continue to focus more on offering production support and made-to-order products.

And the third key pillar, we've already talked about what we were going to be doing, licensing our technology, and we did release a service. It's the service launched in the U.S. So you can't download the app in Japan. So you probably haven't been able to test it out, but wait for it.

From our consumers, here are some of the feedback that we've received so far. So as you can see, it's very -- people are very passionate about it, and they love it. This service utilizes ZOZOSUIT. We created that for the private brand, and we sold our -- gave away ZOZOSUIT as a tool for our private brand. But people can -- people were actually using it to measure the changes in their body. So this service helps people keep track of their bodily changes.

And a lot of people are happy that we're back and it's back and happy that it's a service of great value so that they're happy we're providing that service. So we will be promoting this service going forward. So of course, it's not a major hit yet, but we were going to go abroad with technology as our third key pillar, and we believe that we've been able to make a great step forward.

And lastly, ZOZO CHAMPIONSHIP was held again this year. This year, we didn't have a cap in terms of the spectatorship. So it was a full-scale championship. So the first time, we had the typhoon, and the second time was in the U.S. And last year, we had to cap the number of spectators that we have. So it was actually the first time that we have been able to open the doors to as many people as possible. And it went -- all went smoothly, and Keegan Bradley won. So he won for the first time in a while. And the championship was very well supported, and it was very -- there was a lot of momentum behind it.

That's it from myself. Thank you very much.

[Unknown Executive]

That concludes ZOZO's FY 2022 Second Quarter Earnings Briefing. Thank you for joining us today.

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