Morningstar | Zalando's Margins Under Pressure From Discounting, Adverse Fulfillment Economics; FVE Maintained
We are maintaining our EUR 37.50 fair value estimate for Zalando as the company reported rather weak third-quarter results affected by adverse weather conditions. The company continues to expect full-year revenue growth at the low end of the 20%-25% range and EBIT at EUR 150 million-190 million, in line with what was communicated in September and our expectations.Revenue in the quarter increased 11.7% despite 23% growth in number of orders, as customers opted for lower-priced summerwear versus higher-priced sweaters and jackets. Gross merchandise value grew 16.6% with the strong development of the partner program. Conversion rates improved to 3.8% from 3.65% a year ago. The Zalando platform reached 6% of the European population in active customers, being an important wholesale or platform partner for brands aiming to establish themselves in European markets.
Active customer numbers increased 13%, and average orders per customer grew to 4.3 versus 3.8 a year ago, suggesting deepening platform usage. However, this also highlights customer preference for frequent purchases of smaller baskets, which negatively affects delivery costs (average basket size was EUR 59.40 in the first nine months of the year versus EUR 63.20 last year). The shift towards fast fashion items and decrease in average basket size has been a point of concern for the company for some time, as average basket size declined from the peak of EUR 68 in 2015 to below EUR 60 in 2018.  As we argued previously, free delivery does not encourage customers to purchase more items per basket. Zalando is trying to address the issue by introducing pay per delivery for baskets under EUR 25 in the Italian market. It remains to be seen whether the initiative brings desired customer discipline and doesn’t hurt demand, though most bigger peers, such as ASOS, have delivery charges for small baskets.
Gross margin in the quarter declined 130 basis points, pressured by a higher level of discounting and some operational faults, while fulfillment costs as a share of sales increased to 38.3% from 35.7% through continuing warehouse investments (warehousing is around one fourth of fulfillment costs, and 8 out of 11 distribution centres are in ramp-up mode), less favorable fulfillment economics for lower-priced summer apparel items, and increased carrier prices.
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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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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