Morningstar | Zalando 1Q Results Solid as the Business Shifts Toward Platform Model; Shares Fairly Priced
We are maintaining our no-moat rating and raising our fair value estimate for Zalando from EUR 37.50 to EUR 39 as the company reported solid first-quarter results. After a strong share rally we see shares trading somewhat above our fair value estimate in 3-star territory and would recommend waiting for a better entry point into the stock.Active customer numbers grew by 14% in the quarter and number of orders increased by 23.6%, average orders by active customer were up 11.5% to 4.5, suggesting improving customer loyalty. Revenue growth was significantly below gross merchandse value growth (15.2% and 23.1% respectively) as the company shifts from wholesale business model to platform business model and because of differences in booking of revenue and GMV, which are expected to reverse over the next quarters.
Gross margins in the quarter were positively impacted by lower discounting compared to the prior year, while administrative expenses and fulfillment costs continued to increase as percentage of sales (both up by 0.5 percentage points) as the company continued to invest in logistics infrastructure (out of 11 fulfillment centers, five are still in ramp-up mode) and incurred some restructuring costs related to private-label business. Zalando is reducing its private-label business, focusing more on third-party brands and platform business rather than its own fashion brand development.
The company maintained its full-year guidance for GMV growth of 20%-25% with revenue growth at the lower end of this range and adjusted EBIT between EUR 175 million and EUR 225 million. This compares with our forecasts for 22% GMV, 18% revenue growth and EUR 209 million in EBIT. We continue to expect margins to improve over the long term through improving scale of warehousing costs, improving route densities and higher share of partner program, which takes longer to scale but can be more profitable down the road.
Zalando is an e-commerce group based in Germany. Co. is engaged in the online retailing of clothing, shoes and accessories for women, men and children. Co.'s product offering include more than 1,500 brands, including global and local brands, as well as private labels, including shoes, clothing and accessores as well as sportswear and homeware designed especially for the Co. The Co.'s product offering is complimented by the Zalando Lounge and Zalon apps, which provides registered members special offers at discounted prices. Co. also provides a combination of services that include free delivery and returns.
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