ZOZO Inc

TSE:3092

Earnings Call Analysis

ZOZO Reports Q3 Growth, OP Rises Amid Challenges

ZOZO's Q3 reflected a strong performance despite challenges. Operating profit (OP) rose by 2.4% to JPY 45.6 billion, with Gross Merchandise Value (GMV) soaring 9.2% year-on-year. Warm winter weather led to a mixed impact on sales, with ZOZOTOWN's GMV slightly under expectations, but Yahoo! Shopping outperformed due to robust promotions. New logistics expenses, higher variable costs, and increased promotional spending pushed operating profit margin (OPM) down to 10.6%. The company is set for further growth, planning a new logistics base and testing a slow delivery system to manage higher shipping fees and improve profitability.

Steady Growth Despite Weather Challenges

In the third quarter of FY '23, the company experienced a 5.1% year-over-year increase in gross merchandise value (GMV), reaching JPY 427.1 billion. The GMV, excluding other activities, also rose by 7.4% to JPY 399.4 billion. This growth occurred despite unseasonably warm weather, which slightly inhibited the GMV of the ZOZOTOWN business; however, active promotions boosted Yahoo! Shopping GMV, with overall business progress in line with plans. Notably, Operating Profit (OP) and GMV achieved record highs for a third quarter.

Operating Profit and Profit Margins

The company saw an operating profit increase of 2.4% to JPY 45.6 billion. Nevertheless, the Operating Profit Margin (OPM) witnessed a minor decline of 0.6 percentage points year-over-year to 11.4%. One noteworthy factor is the recognition of expenses related to a new logistics base, which, while affecting profitability (decreasing by 3.8% year-on-year), was anticipated and integrated into the company's financial planning.

Sales and Marketing Efficiency

Given the warm winter and its impact on winter apparel sales, the SG&A to GMV ratio increased by 0.6 percentage points from the same period last year to 22.9%. This increase was due to several factors, including expenses from the commencement of the new logistics base, and an uptick in cloud server costs. Nonetheless, specific costs, such as outsourcing commissions, saw a decrease due to expense reallocations, contributing positively to the company's cost management efforts.

Buyer Metrics and Retail Dynamics

The company boosted its total buyer count by 130,000 from the previous quarter, arriving at 11.69 million, indicative of strong customer growth. The introduction of reward points for member registration has effectively converted guest buyers into active members, with the latter group increasing substantially and expected to continue its expansion. Moreover, the average order value increased by 1.8% to JPY 9,119, even as the average retail price dropped by 1.7%, an outcome attributed to promotional activities and an increase in the number items per purchase.

Expansion Plans and Forecasts

To address operational efficiency challenges due to growing volumes and prepare for future GMV growth, the company announced plans to rent a new logistics base, IBARAKI 5, starting April 2024. This strategic move is designed to optimize inventory management and enhance the quality of consigned stock. Also, there are no changes to the full-year consolidated earnings forecasts and dividends, maintaining stability in the company's fiscal projections.

Earnings Call Transcript 2024-Q3

[Operator]

It is time to start the third quarter financial results announcement of ZOZO for FY '23 ending in March 2024. We will only be offering live streaming this time. We plan to have the session until 5:30 p.m. After that, we will have a Q&A session with the institutional investors on a separate Zoom channel from 5:40 p.m.I'd like to introduce the presenter, Director, Executive Vice President and CFO, Koji Yanagisawa. Now CFO Yanagisawa will take us through the business results.

[Koji Yanagisawa, executive]

Hello, everyone. I'd like to walk you through the financial results for the third quarter of the fiscal year ending in March 2024. The presentation document we will be using today has already been uploaded to the IR page of our website, so please take a look. So let's jump right in. Here are the highlights of this quarter.As for the third quarter FY '23, our gross merchandise value, GMV, rose by 5.1% year-on-year, amounting to JPY 427.1 billion. Our GMV excluding other GMV went up 7.4% year-on-year, landing at JPY 399.4 billion. Operating profit rose by 2.4%, landing at JPY 45.6 billion. Operating profit margin, OPM, was 11.4%, decreasing by 0.6 point year-on-year.GMV for ZOZOTOWN business trended slightly lower than the plan, impacted by the abnormal weather, including warm winter. But GMV for Yahoo! Shopping, thanks to the effective active promotions, trended higher than the plan. And the GMV of the total business is generally progressing as planned.OP continues to trend higher than the plan. Both GMV and OP are at record highs for the third quarter. The progress rate against the company plan is 74.6% for GMV excluding other GMV and 76.2% for OP.Here are the quarterly consolidated financial results on Page 10. In the third quarter accounting period, GMV excluding other GMV increased 9.2% year-on-year. Although the impact of the abnormal weather was strong, we managed to implement promotions at the right time when demand was rising, and this proved to be effective.Our operating profit, mainly because the expenses related to the new logistics base are now fully recognized, decreased by 3.8% year-on-year, but this was factored in during the planning phase. OPM turned out to be 10.6% for this quarter.Next, I'd like to share the details of our business results. This is Page 11. Let's look at the increase, decrease analysis of the operating profit as of the end of the third quarter. OP was JPY 44.63 billion in the previous FY. In FY '23, it amounted to JPY 45.69 billion, up by approximately JPY 1.06 billion.Factors attributable to the growth of the OP were -- the main factors: JPY 8.28 billion coming from the gross profit growth, which is the result of ZOZOTOWN and Yahoo! Shopping GMV expansions; the second one is JPY 1.34 billion from the sales increase generated by the advertising business; and JPY 1.55 billion from the growth of shipping revenue and others coming mainly from the GMV growth.On the other hand, factors that drove down the OP are the following 4 factors. First, JPY 2.23 billion from the increase in fixed costs impacted by the rise in the number of employees and logistics bases, JPY 3.16 billion from the increase in variable cost that rose in correlation to the GMV, JPY 2.46 billion from the increase of the actual promotion-related expenses associated mainly with expenses to attract customers and point-related expenses, and lastly, JPY 2.26 billion from other expenses, such as the purchase of equipment to start the operation of the new logistic base, increase in cloud server expenses and transferring of some outsourcing commissions to other accounts.Next, this is Page 12 of the handout, balance sheet -- consolidated balance sheet. Treasury stock was partially cancelled in November 2023 as it was announced. As for the purchases that began in the same month, they are progressing steadily.Next, this is Page 18 of the handout, quarterly GMV trend. Total GMV excluding other businesses increased by 9.2% year-on-year. Due to the warm winter, sales of outerwear and other winter apparel were sluggish, but the growth rate turned out to be the highest within this period.Next, this is Page 22, the breakdown of SG&A. The SG&A to GMV ratio was 22.9%, up 0.6 points from the same period last year. The main factors that drove down the SG&A ratio are the following. First, the outsourcing commission decreased by 0.2 points due to the transfer of some expenses that had been included in outsourcing commissions in the previous fiscal year to other accounts. Second, the order value turned out to be higher than in the same period of the previous year, and this resulted in a 0.2 point shipping cost decline.On the other hand, key factors that drove up the SG&A ratio are the following 4 factors. One, increased inventory supply and the warm winter deteriorated the stock turnover ratio and led to the lowering of operating efficiency, resulting in a 0.3 point increase in logistics-related expenses under payroll and staff costs. Second, new logistics base started its operation, and thus, the rent expense increased by 0.2 point.Third, depreciation rose by 0.2 point as the depreciation of the material handling equipment kicked off with the start of the new logistics base operation. And lastly, others increased 0.4 points mainly due to the purchase of equipment for the new logistics base operation, an increase in cloud service -- cloud server expenses and a change in how to recognize the outsourcing commissions.Next, this is Page 25, the actual promotion-related expenses trend. In this third quarter, our actual promotion-related expenses, which is the sum of the advertising expenses and point-related expenses, turned out to be 5.2% of total GMV. As of the end of this quarter, the YTD ratio of promotion expenses to GMV was 4.2%, which is generally as planned.Next, this is Page 23 of the handout, OP and OPM trends. We started to recognize the expenses related to the new logistics base fully this period, we also experienced a worsening of the operating efficiency due to the volume increase, and they led to higher costs, which pushed down the OPM by 1.5 points, landing it at 10.6%.Now, moving on to Page 27 and onward, main KPIs of ZOZOTOWN. By the way, the KPIs hereafter do not include the results of our Yahoo! Shopping or B2B business. It's only for the main ZOZOTOWN.The number of total buyers was up by 130,000 from the previous quarter, amounting to 11.69 million, of which active members was 10.73 million, increasing by 220,000. Guest buyers decreased by 80,000, finishing at 950,000. Guest buyers continue to be on a downward trend as we continued to give points to those who newly register as members. Also, the promotion enhancement for the active members is coming to fruition and the number is steadily growing.Next, this is Page 28, the number of shops on ZOZOTOWN. As of the end of the third quarter, the number of shops was 1,605, a net increase of 24 shops from the end of the previous quarter. We welcomed 48 new shops to our platform this quarter. To name a few, we now have luxury brands Mulberry and Valextra and footwear brand Dr. Martens and Yves Saint Laurent Beaute and Shu Uemura from Nihon L'Oreal.Let's go to Page 33 of the handout. With respect to the average retail price, it was JYP 4,360, down by 1.7% year-on-year. The brands continue to increase their list prices for this fall and winter season, but the average retail price showed a decrease in the third quarter. The main factors are that outerwear and other expensive items did not sell as much because of the warred (sic) [ warm ] winter, and also the markdown ratio increased.Let's go to the next page, Page 34. On the other hand, the average order value was up 1.8% year-on-year, landing at JPY 9,119. Although the average retail price decreased, the number of items purchased per order increased, pushing the average order value higher than in the same period of last year. The number of items per order increased because we gave more days to free shipping on purchases over certain amount promotions than last year. And the ratio of combined purchases rose on Sundays when multiple brands issue their coupons.Next, let's go to Page 34. Here are the full-year consolidated earnings forecasts and dividends for the ongoing fiscal year. There is no change to the plan.Let's go to Page 44. I want to add my explanation here. This is our logistics base expansion plan. To resolve the current operating efficiency deterioration driven by the volume increase and to address the anticipated GMV growth, we plan to start renting IBARAKI 5 in April 2024. We will continue improving operating efficiency through in-house efforts while strengthening dialogue with the brands to enhance consignment inventory quality. And this IBARAKI 5 will be a base specializing in inventory storage.And this is the last section. There is no page for this. Lastly, I'd like to talk about the anticipated shipping fee increases. In light of the current international situation, depreciating yen, cost increases caused by labor force shortage and the so-called 2024 problem, the need to offer a better working environment to the truck drivers while sustaining and strengthening transportation and shipping networks, we decided to accept a request from Yamato Transport to increase shipping fees. The price increase will come into effect from April 2024, and the extent of the increase will not be disclosed.For us to maintain our profitability, ZOZO is considering mainly the following measures: one, reduction of other costs through in-house efforts; two, introduction of slow delivery in which multiple orders are combined into one delivery; and third, policy change of the shipping fee we receive from our customers.The slow delivery service is intended to mitigate the impact of higher delivery costs by consolidating multiple orders into a single shipment, and is scheduled to begin its test operation in March 2024.So we are finishing a little bit earlier than scheduled, but that will be all from me. Thank you.

[Operator]

This concludes ZOZO's financial results announcement for the third quarter of the fiscal year ending in March 2024. Thank you for your time and attention.