ZOZO Inc

TSE:3092

Earnings Call Transcript 2020-Q3

[Operator]

It is time. So we would like to begin the FY 2019 Third Quarter Consolidated Business Result Announcement for ZOZO, Inc. [Operator Instructions] And Please refrain from utilizing without permission any recordings.

Let us now introduce the attendees: Representative Director, President and CEO, Kotaro Sawada, thank you for coming today; Director, Executive Vice President and CFO; Koji Yanagisawa; Director, COO, Masahiro Ito; Executive Officer, Fuminori Hirose; Director of the Business Administration Division, [ Yusaka Goyashi ].

We have 5 presenters today. We plan to finish at 6 p.m. today. The CFO Yanagisawa will take us through the brief consolidated business results.

[Koji Yanagisawa, executive]

Good evening, everyone. I would like to jump right in and take you through the FY 2019 third quarter results from myself. I would like to start with a technical issue. With respect to the GMV, I would like to introduce changes in the way the GMV will now be shown until the second quarter, except for ZOZOARIGATO. With respect to the discount initiatives that we undertook at our cost and expense, we subtracted a discounted amount from the retail price before counting that towards the GMV. However, from the third quarter, the retail price, the discounts offered at our cost and expense, such as personalized discounts, with respect to these discounts, we have -- or not showing -- we are not accruing the retail price before discount is accrued.

And we just actually standardized the way the GMV is defined because we -- when we first created our plans, we have not accounted for the impact this may have, and it has appeared to be misleading to our investors. So from the third quarter, we have made changes so that the retail price before discount is accrued to the GMV. And we've also recalculated the GMV for the last 4 quarters to also reflect this change. We did not make any changes to net sales, however, so it is still equivalent to the amount after discount.

And now I would like to take you through the third quarter results. First of all, I need to apologize to everyone here with regards to 2 points. One is that until now, I used to explain that the tax hike did not really impact our performance. But in the third quarter, we saw an impact from the tax hike and also seasonality or climate. We didn't really see any impact from the climate before, but we have started to see an impact from climate. So those 2 factors have approved to be the biggest problems that we faced in the third quarter, and we hope to do better going forward.

But keeping that in mind, I would like to take you through the highlights for the third quarter. Can we not forward the documentation? It's working. The GMV managed at JPY 253.8 billion or 7.8% year-on-year. The OP was down 6% year-on-year and landed at JPY 19.3 billion. The OP margin was 7.6%, down by 1.2 points year-on-year. We didn't disclosed the quarterly target, but both the GMV and OP fell short of the target this quarter. This can be attributed to the fact that both the growth rates of the GMV and OP slowed down in the third quarter, and they fell quite short. And I will go into the reasons in detail later.

Now moving on to the -- a closer look at the quarter. The GMV was JPY 94.2 billion, down 0.3% year-on-year. The OP was down 42%, landing at JPY 6.1 billion. And the OP margin was 6.5%, down 4.8 points year-on-year.

Factors that continue to a slower GMV growth, as I already mentioned, was the tax hike that we saw and also the warm winter we have been experiencing. So this has slowed down the market overall. And with these bad market conditions in mind, we also intentionally created promotional initiatives as to -- as well to focus on improving efficiency. Because if it's not selling well, it doesn't really make sense to continue to do promotions. So we did curtail our promotional initiatives.

We talked about the weather, about the climate but it also impacted OP. Because of the shortfall in the GMV, of course, that contributed to our shortfall in the overall results. But we organized the PGA TOUR and ZOZO CHAMPIONSHIP in October last year, and we didn't -- for 2 days, we couldn't let any spectators since, so we didn't see any ticket revenues for those 2 days. So we had to bear more cost than we initially estimated. So that's also impacting the results as well. Those are the major factors that impacted the third quarter results: so warm winter and also the tax hike.

And I already covered most of this. But the -- I would like to talk about the increase/decrease analysis of the operating profit. It's on Page 10 of the document that you have. The OP decreased by JPY 1.25 billion from JPY 20.63 billion to JPY 19.38 billion. So factors that contributed to the increase in OP were the increase in sales from consignment shop commissions, which contributed to JPY 2 billion; and increase in gross profits from the advertising business, which kicked into full gear in the third quarter last fiscal year, which contributed to JPY 1 billion; and decrease of other expenses by JPY 0.08 billion.

Factors that negatively impacted OP are: decrease in gross profit, which amounted to JPY 0.2 billion; increase in fixed costs due to the increase in the number of logistic centers and employees, which amounted to JPY 1.4 billion; and variable costs that fluctuate in direct proportion to sales, which amounted to JPY 2.6 billion; and increase in promotional expenses for the PGA TOUR, which amounted to JPY 0.1 billion.

On Page 8 -- Page 11, please take a look at the balance sheet later. There has not been any major changes to the balance sheet.

Moving on to the quarterly changes in the GMV. This I already covered. But this quarter -- starting this quarter, in December of the third quarter, the ZOZOTOWN shop has opened on the PayPay Mall. So we'll cover this in detail later. But we have started to offer a breakdown of the GMV. So if you look at #4, you will see the contribution to the GMV by PayPay Mall.

Now if you will turn to Page 20, the SG&A -- the quarterly changes in SG&A. The third quarter was JPY 25.3 billion. Against the GMV, the promotional costs came out to be 5.2%. So in the third quarter, we've already mentioned from a long time ago that the promotional costs will be higher. But as I mentioned before, the ZOZO CHAMPIONSHIP costs were estimated, but it was larger than we expected. And also we -- sponsorship fees for the Basquiat exhibition is also included here. Having said that, the increase in SG&A in the third quarter is in line with our initial estimation, and we knew that the OP will -- would come down this quarter. Having said that, the GMV slowed down, and that is why we're far short of the target than we expected.

Now turning to Page 18. This is a breakdown of the year-to-date's SG&A for FY 2019. The SG&A against the GMV came down -- came out to be 25.4%, down 0.3% year-on-year. Reason why the cumulative SG&A has come down are the bonus payout now has normalized this year, bringing down the payroll by 0.1%. And we stopped distributing ZOZOSUITs, which brought shipping down by 0.1%. And we also distributed large quantity of ZOZOSUITs, so the advertising cost came -- and we stopped doing that. So the advertising costs came down by 0.6%.

Reasons why the SG&A increased are: increasing logistical cost due to the falling retail prices, which increased by 0.3%; and we also saw an increase in cost for the point rewards by 0.5%. And lastly, we saw a 0.3% increase due to rent from the increase in logistical centers.

Now moving on to the KPIs, if you turn to Page 22. These KPIs do not include the performance on PayPay Mall, so this is just for ZOZOTOWN. Annual number of buyers decreased by [ 7,000 ] from the previous quarter, landing at 8.15 million. The number of active members increased by 50,000, and the number of guest buyers decreased by 120,000. This is already I covered. But in the third quarter, we hardly did any promotions. So the growth in the number of buyers slowed down.

Next, Page 23, the number of shops on ZOZOTOWN. As of the end of third quarter, the number of shops was 1,345 shops. So this is an increase of 33 shops from the previous quarter. A cumulative number of shops added as of the third quarter was 169 shops. So the number of shops have increased ahead of schedule. In the third quarter, we welcomed East Boy, Hunter and Moleskine. So those brands joined, so a total of 53 shops joined. So we have been successful in inviting more shops to the platform.

Now moving on to Page 28, the average retail price. The average retail price was JPY 4,501, down by 5.6% year-on-year. This kind of product sold well. However, due to a warm winter, the sales of full-price products did not grow as estimated. Therefore, the average retail price is lower as well. And we've lost like time sales in ZOZOWEEK in November. And we -- so we did have active sales events, which actually increased the percentage of products sold at a discount as well.

Next, the average order value on Page 29. So the average order value was JPY 8,973, down by JPY 6.3 year-on-year -- at 6.3% year-on-year. And this is mainly due to the fall in the average retail price. So the warm winter contributed to more products being sold at a discount, driving the average retail price down and as a result, driving the average order value down as well.

And lastly, about the forecast. As you probably can happen can tell, it will be very difficult to reach our targets, but in the third quarter. Sawada will mention in detail, but the PayPay Mall is doing very, very well. So we will continue to do our best to catch up. That is all from myself.

Next, the President Sawada will take the floor.

[Kotaro Sawada, executive]

Good evening. Thank you very much for taking the time to be here today. As Yanagisawa just explained, the market environment and the performance was very difficult. So that we -- having said that, we were able to plant some seeds, and we are -- have started to see some of these seeds bear fruit. So I would like to explain -- take you through some of those initiatives.

We believe 2020 has just kicked off. As you can see, 2020, it looks similar to something. Doesn't it not? It looks similar to ZOZO, a better ZOZO. So 2020, we would like to position that as a ZOZO year, and we have a new top management team as well. So we just had a very good start, and we're very motivated. So you understand that we're passionate, and you're wondering what we're going to be doing. But since we have a new management team, what will -- we will be focusing on are really important. We would like to share that with you today.

First of all, we would like to focus on more fashion. So that is going to be key to our strategy. You might think that is normal. You expect that of us, but there's a deeper meaning to this. Our forte, strength, when we thought about this is we arrived at the conclusion that it's more fashion. If you look across the world, we have the most expertise, and we love fashion. We have a lot of know-how. Our employees have a lot of know-how about fashion. So that should be our strength -- our core strength. So 2020 onwards, we will focus on doing more fashion.

And there's another area we will focus on: fashion tech. You might be like, so okay. But this is also -- has a deep meaning as well. In terms of fashion, we have a lot of data, and we have accumulated a lot of data over the years. And we have experts, staff internally that can actually look at the data and utilize the data. So we have a team of experts on data -- fashion data, which will enable us to release more fashion technology. So more fashion and fashion tech, utilizing the strength, we would like to invigorate the fashion industry. So 2020, the ZOZO year, this is what we will focus on. And for the midterm as well, we will continue to focus on these 2 key pillars: fashion tech and more fashion.

And what we will be doing is within the ZOZO year, we have identified 3 things that we need to do in order to achieve what we just mentioned. As you can see here, first one is to clarify the target. Second one is to enhance our category offering, and the third is enhance our B2B offering. So we will focus on these 3 areas, is our current objective. This might not be clear, just reading these 3 areas. So this includes PayPay Mall and ZOZO China, so I would like to explain that more in detail.

First of all, clarifying the target. To talk about this, we need to talk about the PayPay Mall. PayPay Mall, the ZOZO shop on PayPay Mall, is the first initiative and very high-priority initiative with the Z Holdings. So we make sure that we could quickly launch our shop. And due to those efforts, December 17, we were able to open the ZOZO

[ ZOZOTOWN ] shop and shop on PayPay Mall. And you might be wondering how it's performing. GMV is actually growing very steadily. And since we joined right afterwards, we see that our daily sales surpassed JPY 100 million. So we've seen very good performance.

On the left -- the graph on the left, this is within the PayPay Mall fashion category, and it will show you that ZOZOTOWN is actually #1. So this is actually sales in comparison to other merchants. But you can see that ZOZOTOWN is -- far surpasses the other competitors. So the future is bright. And we see there is a lot of the area for improvement.

And this is a little bit embarrassing, but we only launched with a bare minimum of functionality. So the UI and UX to try to search for fashion, it's not perfect. It's hard to look for clothing, and so people drop off because it's not very user-friendly. So on PayPay Mall, we haven't been able to reflect all of the UI/UX expertise so we cultivated to date. So UI/UX is only 30%, 40% complete. So we will work together with Z Holdings to make improvements in terms of UI and UX.

And another point is that brands can actually enter both PayPay Mall and Yahoo Shopping as well just by a click of the button. It's very easy. So some brands have elected to be on Yahoo Shopping. And of course, they have to agree to want to be on the Yahoo Shopping as well. But if we can offer more and more brands on Yahoo Shopping as well, we think that PayPay Mall will do even better. And most -- more recently, we had a new sale. And at that time, new sales began. We were #1, not just in fashion, but PayPay Mall overall.

So GMV is doing well, so there may be some things that you might be interested in knowing. We're starting with the graph -- pie chart on the left. How many of our brands on ZOZOTOWN are also available on PayPay Mall? So if you look at the pie chart on the left, you can see that -- on the right, you can see that 90% of shops are participating on ZOZOTOWN on PayPay Mall. So we are trying to make this 100% at the moment. So it is very great for us. We are very appreciative. And we are working very closely with the brands, and we need their cooperation. And we understand from these efforts as well that trust is very important. Trust -- our -- for the brands to trust us as well. So we need to work together more -- even more closely with the fashion brands.

And another point that you may be interested in knowing is about cannibalization. So as you can see, out of the people who are shopping on ZOZOTOWN shop on the PayPay Mall, 60% are completely new customers. So this is very important strategically to us. So of course, we were worried about cannibalization as well. But seeing these results, we can see that we feel that there is high potential here.

And these new customers, we didn't -- we were wondering if we should go more mass in trying to acquire new customers. But being on PayPay Mall, we saw that they're actually bringing in a lot of new customers. And what segment do they belong to? We -- if we look at the brands that are selling well, we know what kind of customers are attracted. But it is as we had forecasted, so they're a little bit older, and there are more men, and the pricing is around the middle range. So these are the customers that we wanted. So this is as we had expected. And so this has actually given us more confidence.

And then we would like to talk about clarifying the target. We -- that with fashion lovers, and we also try to approach more people who are less fashion-sensitive. But going forward, ZOZOTOWN will focus more on just fashion lovers and people who are sort of or not very fashion-sensitive and interested in fashion, PayPay Mall will address their needs. So by just being able to clarify the target audience in this way, this is very meaningful.

Internally, we used to argue what if we should cater towards the fashion lovers or also to the mass, but now we can focus content -- create content and provide content that's going to resonate with just fashion lovers and focus on ZOZOTOWN that way. But with PayPay Mall, we can apply our know-how, for example, UI and UX to the PayPay Mall. And by doing so this is where we will arrive at. So ZOZOTOWN will continue to implement new things, new initiatives and new technologies, new content. And we will try -- and if it goes well on ZOZOTOWN, we can apply that to PayPay Mall. And of course, there may be some things that we try on the PayPay Mall for the first time. And if it does well, then we can actually try that on ZOZOTOWN as well, so it's going to be creating a very good ecosystem.

That's it for the PayPay Mall. Other than that, with Z Holdings, we are embarking on new efforts. We don't have very much time to this so we can't go into details, but we hope to talk about this in detail sometime in the future.

And we just talked about what we're doing in Japan for now, but China is a big topic. So what are we trying to do in China? In December -- on December 10, we opened the ZOZO China, so it's an app. And in Japan, you probably can't see this. I don't think you have seen it either, but UI and UX, we wanted to show you what it looks like. So we don't want to like to highlight the detail here. But what we want to say here is as we explained, before, we wanted to make this a media commerce and also make sure the people know it's from Japan. They love to test how that resonates with the Chinese audience. And the results that we've seen -- this hasn't launched yet, so it's a soft launch. And we haven't promoted this yet, and we're just seeing how the -- how well we can operate this. So after February, we will do promotions to see what potential this will have. But it is already launched. It's a soft launch, but it's already launched.

So we've received user feedback already, but we've received favorable reviews so far from the users. They actually particularly like the fact that it's a good deal. It's not as expensive as they thought. 7 years ago, we did try to go into China, and they found out the products were expensive at that time. But now, Chinese consumers feel as though the Japanese brands are not that expensive. So before the pricing, high prices were an obstacle, but they are no longer an obstacle. And they also might be high quality of shipping, so we will focus on Japan's -- Japanese quality and Japanese fashion. And as a media commerce, if it becomes successful, we can actually apply the know-how to ZOZOTOWN. And if it launches following China, we can actually try to replicate the success in other Asian markets as well. So for us, this is a very important project.

And how it will contribute to GMV? We won't know until the fourth quarter. It is closed. In any case, that's how we will clarify the target. So that is one of the key strategies that we will be implementing.

Going forward, next, our second strategy is to enhance the category. What we need to talk about first is ZOZOMAT. Finally, we thank you for your patience. But finally, it's almost ready for you to experience as well. We have a video to show you today. So please take a look.

[Presentation]

[Kotaro Sawada, executive]

So I think it was clear from the video, but you can measure your feet very accurately. And that's something we've already talked about from the past, but the movie explained how just accurate it is and how easy. It may have been hard to see, but you can match the size, and it will show you the compatibility. And it will tell you which shoes are the most compatible. By the way, this is my foot. Based on my feet measurements, they -- this is the size-matching compatibility chart. I usually buy 26. However, if you can see here, the green is the highly compatible shoes. Yellow is not ZOZO; and red, they don't recommend. But 26 centimeter, that's for the leather shoes and the sneakers. I would buy -- I can buy 26 centimeters. But the short boots, for example, 27 will be the best size for me. So based on the shoe manufacturer and the design, you need to buy different sizes, and you don't notice when you buy it online. So when you buy, you find that -- and the shoes come to your house, you find that they don't fit. So we want to get rid of this obstacle by implementing this technology, by proposing the best size beforehand.

In terms of compatibility, it may look simple, but there is a complex logic that goes into it. And we're not measuring just the length but the width of your feet and the arch -- the height of your arch. So we created a 3D model, 3D scan to propose the type of shoe that fits you best. So -- and we also are using AI as well and the -- it's extremely accurate. So this is one of the fashion tech that we've -- we're using a lot of fashion tech here. But we are an EC company, so we want to make sure that people can buy online without having to try on the shoes or clothes or whatever. But by doing so we would like to improve the shoe sales significantly. So we want -- we don't want people to come just for clothes and buy shoes as an add-on. We want people to think of ZOZOTOWN first when they want to buy shoes online, that's the first stop for them. And so we can't just offer a wide range, so we want to offer technologies, such as ZOZOMAT, to drive sales for this category. So this is an example of the strategy that we have for specific categories.

So eyewear, for example, is another category that we could apply the same thinking to. And this doesn't only mean that we are going to be adding product lineup. We want to utilize technology like ZOZOMAT and remove the psychological hurdle in purchasing certain items online. So those are the kind -- types of strategies that we would like to implement to enhance the category offering.

And we couldn't fix on a date yet, but towards the end of February, we will be launching the service. So please look forward to the ZOZOMAT launch.

And lastly, enhancing the B2B offering. We can't really talk about this in detail. There's a lot of things that still are being considered. But if I can talk about one thing here, we're trying to think of a service offering that will enable us to help the brick-and-mortar stores. We've been focusing on a world at EC for a while, about fashion and fashion category. A lot of brick-and-mortar stores aren't doing very well, but we want to help revitalize their business, energize their business. So there are a few ideas that we have in mind. And we think that in the near future, we can propose something that's very innovative. So within the year -- not fiscal year, but within the year, so we hope to introduce a few ideas by the end of 2020.

That's it from myself. So it's about -- it's going to be about more fashion and fashion tech going forward. And we will focus on these 3 areas: clarifying the target and expanding the categories -- enhancing the categories and also enhancing the B2B offering. Those will be our key pillars. Thank you very much.

[Operator]

That is going to be it for the live streaming.

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