ZOZO Inc

TSE:3092

Earnings Call Transcript 2018-Q3

[Operator]

We will like to now begin Start Today's Third Quarter explanation of the financial results for the third quarter this fiscal year. First, I would like to introduce the presenters, President, Yusaku Maezawa; VP and CFO, Koji Yanagisawa, as well as the manager -- General Manager of the Business Management division, [ Hironori Hiruzen ]. So we have 3 presenters today. The session will close at 6:00 p.m. Please refrain from taking any photographs or videos during the session. Mr. Yanagisawa, please take the stage.

[Koji Yanagisawa, executive]

Good evening. I would like to jump right in and explain the results for the third quarter of this fiscal year. So we have more announcements. So we would like to be brief. So as you can -- please look at the slide. So this is an overview of the results. The transaction value was up 33% year-on-year and landed at JPY 196.9 billion, operating profit was up 22% year-on-year landing at JPY 23.5 billion. The operating profit margin was 12%, which is down by 1 point year-on-year. The transaction value and operating profit were both -- they both slightly surpassed our corporate plans, which we have not disclosed, and therefore, we do not intend to revise our initial plans or budget. This is not included in the documents that you have but this is just the transaction value, the growth rate by quarter of the ZOZOTOWN business in the third quarter. The 2016 third quarter, we actually introduced in November fiscal year 2016, deferred payment and that actually created a boost so the transaction value grew quite rapidly. And as a result, we celebrate the anniversary of the deferred payment, so there is no longer the boost. So if we look at year-on-year, the growth rate is lower. However, having said that, I mentioned earlier that we -- the transaction value grew by 33%. And if we just look at this quarter, we actually -- the operating profit grew by 23%. And there are some growth factors. This is -- one, is more efficient operation of brand coupons. More specifically, starting from November, we started offering different coupons on a daily basis. So this started to offer our users more frequent opportunities to take advantage of coupons for the same shop. The second point is new shops. We aggressively welcomed new shops last year and this year. And the third point is the deferred payment, which we already celebrated the anniversary but for 1 month in October we benefited from its boost effect. So that is also included here and that is these 3 factors actually contributed to our growth this quarter. This is just -- this is the increase/decrease analysis of the operating profit. This is Page 5 in your documents that we passed out. So we started from -- with an OP from JPY 19.29 billion, it increased to JPY 23.55 billion. So in detail, transaction value increased by JPY 6.30 billion not JPY 6 billion, and fixed cost premium decreased by JPY 1.58 billion. Gross profit margin improved by JPY 840 million. And in terms of other sales costs, this also increased. We did end the premium membership service ZOZO Platinum, ZOZO Premium. We ended this service. So this is -- so other sales decreased because of this, but it also increased because of the deferred payment service as well as the shipping policy, which is now JPY 200. So as a result, overall, the other sales increased. But this is something we also mentioned in the second quarter -- at the second quarter session, the outsourcing costs increased by JPY 1.35 billion due to -- for the private brand and also the deferred payment is doing well. So -- and this is changing the payment option mix that has -- that is being used. So this is increasing the payment collection costs by JPY 1.43 billion. And also, the last point is that the amount of shipping fees has increased and this has contributed to the rise in the shipment by JPY 1.5 billion.

Next, going over to transaction value by quarter. This is in Page 9 in your documents.

The third quarter transaction value was JPY 77.3 billion, which increased by 25.5% year-on-year. So this is as we have planned. The breakdown of sales in ZOZOTOWN business was JPY 75 billion, up by 25.8% year-on-year, consignment business was JPY 70.2 billion, and ZOZOUSED was JPY 4.8 billion which -- and these went up 26.4% and 17% year-on-year, respectively. And BtoB business was JPY 2.2 billion, and this was up by 38.3% year-on-year.

Next, looking at the operating profit and operating profit margin for the quarter. This is Page 14. In the third quarter, the OP was up by 11.7% year-on-year, and landed at JPY 9.7 billion. The OP margin was, if we look at the third quarter only, it was 12.6%. If you compare to the previous year same quarter, it was down by 1.5%.

So this is -- I already mentioned this, but the amount of shipping fees have changed and this has impacted 3 months of this quarter. So as we mentioned, the -- or the shipping fee has increased by 40% to 50%, as we mentioned in the second quarter briefings. So we've seen this impact for 3 months this quarter and also the consignment fee for product development and research for the private label, private brand and lastly the changes in the payment option mix. More specifically, the payment collection fees for the deferred payment has come up.

So this is impacting the operating profit margin. Next, SG&A. This is Page 15. SG&A was JPY 16.4 billion. Against the transaction value, it increased from 18.4% to 21.3%. The reason that it has increased is as I already mentioned just now, the factors, the same factors have impacted the SG&A as well.

And next, I would like to go over the KPIs for ZOZOTOWN. It's page 17. So this is a number of total buyers. So we have 7.2 million annual active buyers. This is up by 240,000 buyers. Active members increased with 260,000 and we have 4.95 million now. Guest buyers decreased by 120,000 and we only had 2.24 million this quarter. The active members increased because of the brand coupons because you need to be a member to be able to take advantage of the brand coupons. So this is contributing to the increase in the number of active members. And for the same reason, guest buyers have come down as well.

On Page 18, you will find the number of shops. So therefore as of the end of third quarter, we had 1,094 shops. So in comparison to the end of the second quarter, we added 78 shops. So we are continuing to aggressively add new shops. More specifically, we added Nike's direct shop. In the past, Nike as a brand was offered through ABC. But now that we added Nike's direct shop, this is the first time for Nike to be on our platform as its own shop. And also, we've tried to recruit Tomorrowland for years now but they have also joined our platform. So we actually added 92 shops this quarter and we plan to welcome 150 shops this fiscal year but as of the third quarter, end of third quarter, we've added 183 shops already. So we will be -- we have already surpassed our annual target. So by the end of the fiscal year, we probably will have added around 210 shops in total.

Next, the annual purchase amount and pieces per active member. This is on Page 20. The annual purchase amount was JPY 46,707 and pieces were 11. The annual purchase amount decreased by approximately JPY 110, in comparison to the previous quarter but this -- because deferred payment and brand coupons are doing well, we actually saw a surge of active members who joined quite recently.

So these -- we have more members who have not been members for a long time and new joiners tend to spend less and buy less. So that is why the average purchase amount has been -- has decreased. But if you look at Page 20, the annual purchase amount for existing active members, this has also come down to JPY 62,761 and pieces was 14.5. The reason for this is that we actually acquired a lot of new members through different payment service and they actually shifted over to existing members now because it's been a year. And also, in December 2016, we gave away 3,000 points for new members, new registrants. So we actually added a lot of new members in December of 2016. In this third quarter, they've also become existing members. So these members who have only been members for a year, they are driving these KPIs down. So we have more younger or newer members. So this has -- that's why we're seeing a decrease in annual purchase amount and pieces. So in the future, it's hard to say what will happen in the future, so we will -- we probably think that it will either be flat or it might come down slightly going forward.

The average retail price is on Page 23. It was JPY 4,858, down 7.2% year-on-year. This is because we have welcomed lower price point shops. And on Page 24, you will find the average purchase amount per shipment. This was JPY 9,043, down 10.9% year-on-year. This is due to the fact that in October, we changed the shipping policy to choose your own shipping fee and then in November, we changed it to JPY 200 for all shipping.

So because we changed the shipping policy, in the past, people would buy an extra item to get free shipping to surpass the shipping threshold but we're not seeing that anymore. So the number of items per shipment has come down. So the number of items per shipment has come down, and therefore, the average purchase amount per shipment has also come down as well. So these are the factors affecting this decrease. So sorry, this was very quick and brief but this is it from myself. Thank you very much.

[Operator]

Next, we would like to ask Mr. Maezawa to take the stage.

[Yusuka Maezawa, executive]

Good evening. Thank you for coming today. I know you're very busy. Usually, I only come to the second quarter and the fourth quarter briefing session but today I have a very important announcement to make about the private brands. So that is why I have joined the session today. So first of all -- last, within last year, I wanted to actually launch this within the year last year. However, it has been pushed back and we apologize for the delay, sorry about that. We apologize deeply but today, January 31, we were able to launch the brand. So we have begun delivering ZOZOSUITs as well. So starting tomorrow, I think many people as early as tomorrow will get the ZOZOSUITs. And they will be able to start purchasing ZOZO, our private brand. So you already have the materials, the press materials, press releases. There is 3 that we passed out. And as you can see, there is 2 private brand announcements and also we just launched a new project team. So we have a press announcement about that. So I would like to describe those 3 press releases. First of all, starting with the private brand. What kind of products will we be creating? I think we've received a lot of questions in the past. But it's actually quite simple, denim and t-shirts. So that's where we're starting at right now. This is very basic. But what's important is the price. What we think -- of course, among the media, there were a lot of forecasts and they said it's custom-tailored, so it's going to be about $100 to $200. But because I also have said that it's going to be lower pricing -- and so with some people say they might be around JPY 5,000. So I think that we over -- we were able to offer it for a much, much lower, JPY 1,200 for t-shirts and JPY 3,800 for denims. This includes tax. So this is the prices at which we would like to start. So color variation is also quite basic. We can't get more basic than this. So with t-shirts, we have white, gray, navy, and black. For denim, from the left, we have One Wash, so that's just the denim without being washed actually; and then we have light indigo blue; and the indigo blue has been damaged slightly. So there's going to be 3 and it will be the same for men's and women's. So, of course, we talked about the price but why can we make it so cheaply? So as I mentioned in the past, we're not going to carry a lot of inventory so -- because it's going to be order-made, we will be only making when there is a purchase, so we don't need to actually carry a lot of inventory. That is why we can keep the prices low. So we don't have any stores. As you know, we don't have any store staff either. And because it's going to be order-made, we won't have excess textiles. So according to our survey, 60% of men actually go and take their pants to be altered, the length of their pants to be altered. So we don't need to do that anymore. So we actually can -- with ZOZO, they will no longer need to do that so that's why we can reduce costs significantly and that's one of the reasons why we can also keep the prices down. But because it's order-made, it should cost 2x or 3x more because if we're making each item in the factory, it's going to be more expensive. But when -- by announcing PB, we're not only measuring everyone's body with ZOZOSUITs, but the manufacturing itself as well. We actually made a lot of adjustments to manufacturing that won't be visible to you but we made a lot of efforts and that's why we have been able to realize at this price. Of course, some parts of it has been at factory -- there's some parts of the factory has been automated and we've also implemented new measures, innovative measures that nobody has ever done before. So are you all surprised? Can you raise your hand if you're surprised? Maybe only 1/3 of people are surprised. Did you think that it was going to be cheaper? Can you raise your hand? No one, I guess. So I wonder what people who -- oh, sorry, Yanagisawa did not explain but today we're wearing denim and t-shirts today. We're dressed very casual but we're wearing private brand items, black, white, what do you think? Do you think that we look good in our t-shirts? Can you raise your hand? Thank you very much. All our staffs in the back, they are also wearing denim and t-shirts as well, so please take a look. I think they look good in them, as we pass the white t-shirts and denim to all employees. So -- and it seems all our employees like them as well. And ZOZOSUITs, I mentioned, that we have started to ship them. Has everybody -- no one has touched or seen it actually and you're wondering if it actually exists. I'm sure many of you think that. So today, we will like to take some time to explain ZOZOSUITs to see if actually -- I would like to demonstrate if it actually can measure, so please bear with me. So we have an employee wearing the ZOZOSUITs, so I would like to call him in. This is [ Kishitani ], who is in charge of the Private brand manufacturing. Sorry, he's up on stage. But -- so we will be switching the screen to the smartphone screen. First of all, he is wearing ZOZOSUIT top and bottom. For those of you who may not know, pants and tops, you will be wearing both and then please wear pants first and then put the pants over -- the shirt over the pants. And it's a very stretchy material, and there's a lot of sensors all over the material. And if you can see -- if we look closely, there is 1 in the chest and 1 in the back, and on both thighs there are devices that will communicate via Bluetooth and this will receive all of the data from the sensors. So the suit is equipped with 4 sensors that will gather all of the sensor information and transmit via Bluetooth. And of course, there is people with different body types but we just look at Japanese people. This size that he's wearing and the smaller size, most of the Japanese people can wear those 2 sizes. So we didn't actually introduce that we had the ZOZOSUIT in 2 different sizes but this is the larger size and we have a smaller size as well. And let's try measuring right now. So you need to have a ZOZOTOWN app to be able to measure. So we've already launched this app a long time ago, years ago. And if you look at the right bottom, we added another measurement. It's another function that we added and if you click this, then you go to the screen. So you need to recalibrate or recalculate because we've already done it before. So it will show you how you would wear ZOZOSUITs. So let's skip that. So once you're ready, it will start communicate with -- it will ask you to communicate via Bluetooth so you will need to start your app and also have the Bluetooth turned on. And once it's connected, you can start measuring. So it would be better if you leave the smartphone on the table or something -- somewhere when you measure, and then it comes down and the indicator moves like this. And this is the -- the measurement is complete, so it's about 5 seconds. And when you see the result -- so internally, when I showed everybody, everybody was quite in awe, maybe not so much here. But if you look closely, it actually measures in millimeters even, it's very accurate. And if you have time, we can actually get a tailor and measure and we wanted to actually compare the accuracy with an actual tailor but we didn't have time today. But as you can see, it measures in centimeters and millimeters. The reason why we were -- this actually -- there was a delay is that we had wanted to get the accuracy right. Because we have various different -- we connect to various different tests, very small people, more larger person. And that's why we were working on the accuracy and that's resulted in the delay. But once you measure this, it will be very convenient to use ZOZO. So this is the screen that you will see later and it says that we know what the right size is for you. Sorry, please I'm not done talking yet. So please don't go forward with the app. I think you missed the screen before that, but it says we know your size, we measured the right size for you. And we will recommend a t-shirt and a denim here from our private brand. With the t-shirt, you will see that the width is 100 -- for chest area is 104, shoulders 44, the body length is 67 centimeters. And if you go to the denim part with waist is 88, and the length. So this is the recommendation we will make. And if you go towards the bottom, you can order, choose the different colors. Even if you buy both, it's only JPY 5,000. So why don't you give it a try is what the app suggests. And if you order, the optimal size for him will be delivered to him. And of course, if we have inventory, then it will arrive at his door the next day and even if we have to manufacture because of lot of the ingenuity that we put in. Even though it's custom-tailored and order-made, it will only take 2 weeks. That's a very short time for something that is order-made. Sorry, we didn't have a lot of time to go over the demonstrations. It's not going as smoothly as we'd like. But for example, if you've already made -- measured using ZOZOSUITs, and if you try to buy something, and if you put it in a cart, so it also proposes different specifications for this person. But it's fine that ZOZO is recommending these sizes, but I want something that's slightly bigger or maybe slightly shorter. You can actually customize here. Sorry, it's hard to see but for the waist, you can actually add 3 centimeters to the waist and hip as well, minus 3, plus 3, and then length, you can add or subtract 2 centimeters. That's -- so here, we recommend but then you can also custom-tailored to your liking. So this is also the same for the t-shirts as well. So we're not forcing people to buy -- wear our recommendation, you can also make your own adjustments. Can you do search? So people who have measured using the ZOZOSUIT, the search function will be very much, much more convenient for you. So the -- we will calculate the specifications and you'll be recommended clothing that fits the measurements that we've gotten through ZOZOSUITs. So I will go over that from using the slide later. Thank you.

Sorry about that. Thank you for sitting through the demonstration. Can you go back to the screen that we were on before. So this is where you make adjustments, so the chest area, the shoulder area, the length, you can make adjustments. So it's very difficult to find the perfect white t-shirt, it's also true for myself. And I've tried on very different -- various different t-shirts but finally, by creating the private label, private brand, I've found the perfect size for me so I'm sure everybody will find the perfect t-shirt for you. And if you don't like what we recommend after wearing it, you can actually adjust it by a couple of centimeters and so you will definitely be able to find the perfect size whether it's a t-shirt or denim. So we have various different images here, and we have some models, some part contributing as well, helping us. The concept is for -- it's for all young and old, is whether you're small or large. Maybe you have a special body type, but this will fit everyone. So we actually got the help of various different people. So on the left, we have 85-year-old [ Takira Kasiosa ]. She wore the denim and t-shirt for us, and she is wearing it very well. And then next to that, we have a celebrity. And so we've also had them help, and we also have [indiscernible] and also various sports athletes. And I took part as well as, as well as Keisuke Honda, who is standing next door. And we also have somebody that I used to be in the [ band ] with, so many different people wore this. And we did a lot of different tests with people with different body types. So we did a lot of trial and error, design and remade it. So all of these learning, we actually recorded that with machinery and we've also utilized machine learning as well. So that's why we actually spent a lot of time improving accuracy, even if the shoulder is 50 centimeters, from left to right, we don't recommend the 50-centimeter -- we don't recommend a t-shirt just for 50 centimeters. We actually take into account the bone structure, the muscle structure, or maybe you have a belly and we can actually recommend a t-shirt that will help you hide your belly. So the AI will be calculating the optimal fit depending on how your body is structured. This is a key visual. So this is also on the landing page for the private brand. So this is for old and young, for various different but diverse range of people. Everyone looks great. And this also reflects our brand theme to make everybody around the world look good and make them happy through fashion. And you will see Keisuke Honda in this key image and he's actually hiding between a person but we actually purposely put him behind somebody. Usually he would be the key star of a visual like this but we just wanted to make sure that everybody is -- to communicate that everybody is equal. So even myself and [indiscernible] were actually hiding behind other people as well. So that's another message that we wanted to communicate and this is what we wanted to show you earlier. So ZOZOTOWN's search function will also be more convenient. So there is going to be a blue button that says your size, so you can actually use that filter to actually show results that fits your size. So once you receive the suits, please give it a try. So the suits will be delivered? I think somebody will ask later so I will just tell you. People who have already applied for the suit, I'm sure you've already gotten the e-mail today. So in November, we already had a couple hundred thousand requests. And people who have ordered in November, you might have to wait -- even if you actually requested the suit in November, 6 months; and then after December, then you might have to wait 8 months. There is a possibility that you will have to wait 8 months, please bear that in mind. But that's the maximum waiting time. So we will be working with the production management team to deliver the suits to you as soon as possible. But we have a lot of questions about the delivery day so please just bear in mind, they might take a while. And ZOZOSUITs will start being delivered starting today. And this is actually something new in history and we will be able to acquire data about people's body types as big data. So for us, the data is like treasure. And of course, we're not going to just use this data for our private brand. Therefore, we launched this team, which is all Start Today Research. So Start Today Research is the name of the team that we started. So by operating ZOZOTOWN up to now, we have a lot of product information and also information from our clients and clients' customers information and also by operating where we have a lot of coordinates data, what is popular. So we have a wealth of data, big data. In addition to that, we will have data about people's body sizes. So using all of the diverse range of data, we can analyze and interpret the data. We can simply go beyond just making clothes to contributing to society some way. So this is a research institution, a research entity, that will do that. Sorry, it might be too small to read but the press release will also have the mission statement here. First of all, we want to look at fashion. Of course, fashion, we talk about it being beautiful, cool, and cute, but we want to actually express that quantitatively. So if you look at a image and you look at the coordinate, we can actually -- if there is a picture, we may be able to judge the coordinate or styling as either cool or beautiful and give them points, assign points for that. And as I mentioned, we have a lot of data and we will also have a look at body data. So maybe we can use that data for health care, in the medical field and maybe for fitness. So there's a lot of talk about that. So we would like to also address those needs as well. So if any of you are interested in that kind of research, please let us know. We would -- we are welcome to research together, so we're very open and welcoming. Having said that, the body data that we get from our customers, we're not going to be disclosing that easily. So we will safeguard your data. So then this is the concept and this is also included in the press release. Anyway, sorry, that was a brief description but this is -- that was the announcement about the Private brand and the Start Today Research Center.

[Operator]

So we will end the live streaming.