ZOZO, Inc. (3092) Earnings Call Transcript & Summary

[Interpreted] At this time, we would like to begin. Thank you for joining us as we share our FY 2021 third quarter consolidated business results. From ZOZO, we have Executive Vice President and CFO, Yanagisawa; as well as myself, Kobayashi, joining this conference. And we would like to hand the microphone over to Mr. Yanagisawa. Please go ahead.

[Interpreted] Good evening, everyone. I'm the Executive Vice President and CFO, Yanagisawa. I would like to share the third quarter consolidated business results with you. So the GMV, excluding other GMV, for this quarter increased by 13.6% year-on-year to JPY 341.5 billion and the OP increased by 14.8% year-on-year to JPY 38.7 billion. And looking at the fiscal year forecast we have announced, we have achieved 79.4% of the GMV and 81.1% of the OP, so we are making great progress. So if we exclude the other GMV from the GMV, the achievement rate for the GMV is 75.8%, sorry. And this is the quarterly overview of the consolidated business results. In the third quarter, the GMV, excluding other GMV, increased by 15% year-on-year. And the state of emergency had been lifted, and people's traffic had begun to recover. However, brands proactively provided us with inventory and our active promotional activities proved fruitful. So we have made great strides, growing over 10% year-on-year. And with respect to the OP, although we actively conducted promotions, our gross profit increased as a result of GMV growth and the growth of our advertising business. And we were also able to reduce logistical costs and payment collection costs. So our OP increased by 8% year-on-year. Next, moving on to Page 8 of the briefings document. This is the increase/decrease analysis of the OP. So from JPY 33.78 billion, we have increased our OP by approximately JPY 4.99 billion year-on-year to JPY 38.77 billion. The factors that contributed to the increase of the OP were increase in sales due to the increase in consignment shop commissions, which accounted for JPY 8.48 billion; growth of the advertising business, which contributed JPY 1.74 billion; and increase in shipping revenues and payment collection revenues associated with the increase in sales, which came out to be JPY 3.42 billion. And the OP decreased due to the increase in the number of employees in logistics centers, which amounted to JPY 2.72 billion in fixed costs. And variable costs also, which is proportionate to GMV growth, increased by JPY 3.78 billion. And increase in ad spend due to active implementation of TV commercials, which amounted to JPY 1.99 billion. And I ask if you can move to Page 10. As we explained previously, to join the prime market, we have acquired treasury stocks and issued new stock acquisition rights. And this enabled us to fulfill one of the listing requirements of tradable share ratio of at least 35%. And as a result, as announced on the TSE website on January 11, we have chosen to join the prime market. And if you go to Page 16, you will find the quarterly GMV. Active promotions undertaken by Z Holdings during the third quarter has resulted in a 2.3 point increase year-on-year of PayPay Mall share of the GMV, and its contribution is now at 8.5%. Although the second quarter is seen as though the PayPay Mall growth has slowed down a bit. It has recovered and significantly grown this quarter. Next, I would like to take you through the SG&A on Page 20. Against the GMV, SG&A was 22.8% and improved by 0.2% year-on-year. And we adopted this from last quarter, but we have implemented new revenue recognition centers, and therefore, the point-related expenses are now being deducted from sales. And therefore, the point-related expenses decreased by 0.5 points. And we also improved operational efficiency within our logistics centers, which has resulted in saving -- personnel expense savings by 0.3 points, and the financial terms with the new credit card payment collection company has -- is better. Therefore, the payment collection ratio decreased by 0.3 points. However, by actively undertaking promotions, such as TV commercials and web ads and also by distributing ZOZOGLASS for free, the advertising and promotional expenses has risen by 0.9 points. And here are the changes in OP and LPM found on Page 21. As mentioned, we did significantly increase ad spend. However, the advertising business grew and the operational efficiency in our logistics center also improved. So our OPM has come down by 0.7 points, landing at 11.3%. On Page 24 onwards, we would like to take you through the KPIs for ZOZOTOWN. First, the number of annual buyers increased by 210,000 this quarter to 10.1 million, surpassing the 10 million mark for the first time in our history. The active members increased by 200,000 from the last quarter to 8.71 million and the guest buyers fires increased by 10,000 to 1.39 million. We were able to drastically increase the number of active members because we invested quite a lot on the advertising promotions, as I mentioned before. Next, moving on to Page 25, the number of shops. The number of shops as of the end of the third quarter was 1,516 shops and a net increase of 14 shops since the second quarter. However, 30 new shops did join this -- our platform in the third quarter. Moving on to Page 30, the average retail price. And the ARP was JPY 4,167, down 3.1% year-on-year. Although the ratio of products sold at a discount did not change significantly, we did welcome more users who prefer lower-priced products, and the prices of goods sold at a discount also fell as well. On the other hand, on Page 31, you will find the AOV. But the AOV was JPY 8,592, up 0.9% year-on-year. And this is the first increase in a while, but this is because buyers purchased more products per order, therefore the AOV has increased year-on-year. On Page 33, you will find the consolidated business and dividend forecast, that we have not made any changes to this page. Next, I would like to take you through the content that our President and CEO, Sawada, went over in the briefing session earlier today. First, starting with the introduction of the newly appointed Executive Officer. So she is the Executive Officer of the EC business. Especially, she will be steering us through ZOZOVILLA as well as the cosmetics business. She did -- was involved in the launch of H&M Japan, she was the CEO for a long time there. And after that, she was also the CEO of Givenchy in Japan. She has a wealth of experience in the [ brand ] business and also as a CEO as well. So we would like to have her lead the way in terms of our ZOZOVILLA business. Next, I would like to describe the new base, ZOZOBASE Tsukuba 3. So this is going to be constructed in February 2023, and the operation will start in August of the same year. And we already have 2 logistics centers in the similar area, Tsukuba, and this would be the third. And at Tsukuba 3, we would like to implement various solutions that will help us automate our processes, and we have a video that describes what these are. So please take a look. [Presentation]

[Interpreted] thank you. And one of the ideas for automation that you saw in the video, the hanging conveyor-like device that is actually in the above area, that's the first -- we are going to be the first company in Japan that is implementing that solution. Lastly, moving on to ZOZOCOSME. We have been welcoming new Cosme buyers gradually and has been increasing steadily. So we do have -- we have accumulated a good number of new buyers. So compared to ZOZOTOWN, we do have more women in their -- of course, more women purchase cosmetics, but more women in their 20s and 30s as well, purchasing cosmetics on our platform. Having said that, we do have 7% men purchasing cosmetics on our platform, and these tend to be young men. And this is a sign that the interest for cosmetics among men in Japan is also on the rise. And when we look at the categories, a majority is makeup products. So usually in the cosmetics market, skin care products make up a higher share of sales. But in our case, it's makeup products. And this is because makeup has a high affinity with fashion. And when we look at the brands that we have been selling, more -- about half are luxury brands. And as mentioned before, we do have many people in their 20s and 30s, and the brands are able to reach this younger audience. So the brands have provided a great feedback. They're quite happy with that. And also, targeted sampling is something that we can do because we are an EC player. But what this means is that when a brand is launching a new product, as a promotional method, we would include a sample with the products that people have ordered. And in some cases, about 10% of the customers who receive this sample have visited the brand shops within 2 weeks. And this is another unique initiative to -- unique [ turn of apparel ] EC, but we can actually produce, for example, videos and introduce the latest brands, trends as well as introduce apparel and cosmetics together. So we can draw on our forte to promote both. And next is the number of brands. When we launched, we have 566 brands, but this has grown steadily. And currently, we have 677. And next is the -- a new function that we want to implement, release, hopefully, in the spring of this year. But this will enable users to utilize AR to apply makeup virtually. So that was a brief introduction of our activities and results. Thank you.

[Foreign Language] [Interpreted] [Operator Instructions] Sorry. we're having a hard time unmuting you, David. Could you unmute yourself, or are you having issues as well? [Technical Difficulty]

Yes, you joined me as a panelist. Hopefully, that's okay. Do you want me to ask -- I've a few questions. Do you want me to ask each one sequentially, or how would you prefer?

[Interpreted] If you could just ask one at a time, that will be great.

So I've got 4. First one is simple. The ZOZOBASE, the Tsukuba 3, in the video, it doesn't show how the items are packed. Is that using people or robots or some combination, please?

[Interpreted] All of that will be automated.

Okay. Second question, about the same facility, Tsukuba 3, what level of capacity does this take your GMV to because of this opening in 2023?

[Foreign Language] [ Kobaya-san ] [Foreign Language]

[Interpreted] Based on our calculations, we should be able to manage up to about JPY 600 billion in GMV.

Third question, on PayPay Mall, which obviously was very strong. Just wondering how you're seeing the promotion levels by Z Holdings now in the fourth quarter. Is that much different from what we saw in the third quarter just past, please?

[Interpreted] So in the third quarter, the standard point rewards that they were giving in the third quarter, they are doing the same in the fourth quarter as well. And also in the third quarter, they have this Super PayPay Festival. And they have told us that they're planning to do a similar festival in the fourth quarter as well. Having said that, the previous fiscal year, in the fourth quarter, we were able to grow PayPay Mall significantly. So the year-on-year hurdle is higher in the fourth quarter.

I have one last question. I should have said at the start, sorry, I'm David Gibson from MST Financial. Apologies, sorry.

[ Yes, I know. ]

Then my final question. No change in guidance. You said it earlier today, things are going well. Your OP for fourth quarter and your guidance implies down 13% year-on-year. Looks pretty easy to beat given you just delivered 9% growth year-on-year. So can you talk me through why no change in guidance, given the current guidance looks very conservative?

[Interpreted] So it's hard to say what will happen going forward. However, in terms of the OP guidance, we also believe that that's not going to be too tough to beat. However, when we can see where we're going to be landing at the end of the fiscal year, we want to start thinking about the next fiscal year, and we may consider doing promotions in preparation for the next fiscal year. And so that's -- those are some of the reasons why we haven't -- we're not going to change the guidance at this point in time.

Okay. To clarify then, can you say what sort of level of promotion as a percentage of GMV in this year? Do you think it is going to be, then, 2% or so? I think you previously had said.

[Interpreted] As we mentioned, we may start the promotions in preparation for the next fiscal year. So at this current point in time, it's hard to say where the promotion expenses as a percentage of GMV will end up being.

[Foreign Language]

My name is [ Arthur ] from [ Headline ] Asset Management. Maybe just 2 for me. I'll go one by one, though. First of all, I guess, just wanted to take stock of sort of the GMV growth this quarter, obviously, very, very strong. I think that sort of falls with the backdrop of a generally warmer winter, which tends to be a little bit of a headwind for many apparel businesses, including yourselves. Just wanted to, I guess, understand again, why you guys were able to grow through generally, I think, a bit of a headwind from an external conditions perspective. It's managed to grow very well. Just wanted to see if there's any more color around what were some of the major drivers of the strong GMV growth this quarter.

[Interpreted] So as you rightfully mentioned, in the early weeks of the third quarter, we didn't have a great start because it was warmer. Then back in November, the weather got quite cold. So from November, we started to see a lot of movement in the heavier items. And also, we have actively conducted promotions, which has fortunately, led to new users as well as more purchases. And the new users that we acquired in the last fiscal year, we have been able to retain them. And lastly, the purchase behavior of our buyers are changing. We have seen that, regardless of whether there's COVID or not, they're starting to get used to purchasing online, so it's becoming more standard to shop for apparel online.

And then my second question was around the average order value. You touched on this earlier, but it grew year-over-year a little bit, and for the first time, I think, in a long time. I think within that, you sort of talked about more units per order being the primary driver as we can see in the stats as well. Just wanted to see if that was sort of a result of something that you guys are doing differently, something that you guys are pushing to drive more units within an order, or if it was just sort of an output that just happened. And then going forward, do you expect to be able to maintain sort of stabilized year-over-year trends in average order value? Or do you expect it to grow a little bit more? Do you expect it to shrink? Anything around there would be helpful to understand.

[Interpreted] So the accurate reason is actually hard to grasp. But what we can say is that the prices of items sold during the sales season have become lower. And since the products are lower priced, when you take into consideration the shipping fee that the users have to pay, I think that psychologically encourages them to buy more items. Having said that, it's hard to say whether this kind of behavior will continue going forward, so we don't know if it's going to improve or not. It's too early to tell. [Foreign Language]

[Interpreted] So this is Kazahaya. My question is about ZOZOCOSME. You mentioned that it's doing well. But can you describe some of the specific -- share with me some of the specific feedback we have gotten from brands?

[Interpreted] I touched upon this as well. But they have expressed the surprise that makeup is doing so well. And also, luxury brands do not usually -- are unable to reach the consumers in their 20s and 30s. But by being offered on our platform, they are able to reach a younger audience and they're quite happy about that. And also, as I mentioned before, cosmetics seems to have a high affinity with apparel. So for example, we introduced apparel items together with cosmetics, the sales of such cosmetics dramatically increases. So they're quite interested in this kind of potential by multiplying fashion and cosmetics.

[Interpreted] And my second question is on China. You withdrew from China and you have losses. What are your thoughts on this, and also on expansion into other global markets?

[Interpreted] With respect to China, since we have entered the market and withdrew from the market before as well, we wanted to be a little bit cautious, start small and test different things. So we started with a cross-border EC. But in the end, it did not sell as much as we had hoped. First of all, the brands that we're willing to sell to China, of course, we had a certain number of these brands, but this didn't meet the expectation of Chinese consumers. We couldn't offer them the brands that they were hoping for. And also, the brand awareness or recognition of Japanese brands is not as -- is not high yet among Chinese consumers. So we can't just put it in the shop and they won't sell themselves. And if we only did a certain level of promotions, that wasn't enough either. So as a result, it didn't do as well as we had hoped. So of course, we believe that we could generate about JPY 1 billion to JPY 2 billion in GMV. However, we felt that it would be difficult to do JPY 10 billion or JPY 20 billion going forward. So that is why we decided to withdraw from this market.

[Foreign Language]

[Interpreted] And with respect to the global expansion, we are looking at taking our measurement business abroad and licensing our technology. [Operator Instructions] [Foreign Language]

Hey. Can you guys hear me okay?

Yes.

Okay. Congrats on the strong results. I guess, can you just give us a sense in terms of Cosme, how significant is that as a percentage of GMV or orders? And how significant do you think it will be by the time we get to this time next year?

[Interpreted] It's currently still very small. So we apologize, but we're not disclosing that information. But from the outset, we have said that we want to get the Cosme business to hit double-digit billions as soon as possible. So once we do hit that mark, we will be able to share some figures with you. So in terms of the next fiscal year, on the same time, we might be still a little shy from that mark. So...

Makes sense. And then just on the advertising sales, obviously, the advertising sales have been quite strong in terms of the year-over-year growth. I guess, can you just help us understand sort of what are some of the drivers of the strong growth there? Does any of it have to do with a closer integration or collaboration with Z Holdings? And just how we should think about growth on a longer-term basis in this segment.

[Interpreted] Our advertising business is doing very well, and the main revenue is coming from search results. So we have a preferred area where we display brands. And the demand for this search result product is very high. And with search ads, it's very important that the search results resonates with the user and we show them what they're looking for. And in terms of the algorithm necessary, Z Holdings has a lot of know-how and they have been sharing that know-how with us, so there has been some synergy there. And as those brands are supplying us with more funds to display their advertising through these search ads, we believe that we can have high expectations for this kind of business in the next fiscal year as well.

My last one, just as a follow-up is if you look at that advertising revenue, what percent of the advertising revenue is the search ads just roughly?

[Interpreted] More than 90%. Michael, please go ahead.

This is Michael Jacobs from T. Rowe Price. Just 2 quick questions since we're almost out of time. The first is about PayPay Mall. That has been a driver of GMV growth, but it's fundamentally depending on Z Holdings' decisions on promotions. So should we expect your GMV growth going forward to be just simply structurally more volatile quarter-to-quarter going forward? Is there any way to manage that?

[Interpreted] So as you mentioned, yes, the PayPay Mall is nearly dependent on Z Holdings promotions. So the level of promotions will impact that. However, the PayPay Mall, its growth is very important to Z Holdings as well. So it is important to their business operations. Therefore, we do not believe that they will suddenly stop conducting any promotions. And that will only happen if there is a major issue that happened with Z Holdings. And if that's not the case, we believe that they will continue to inject a stable supply of promotional costs.

And with 1 final question, the number of annual buyers surpassing 10 million is a big achievement, I think. What are your views -- or have your views about the number of buyers that you can achieve over the medium to long term, has that changed? Can you give some color about your ambitions there longer term?

[Interpreted] Thank you very much. Actually, the 10 million active buyers is only including ZOZOTOWN. If we also add PayPay Mall, it's a far larger number. But our target audience is widening year-on-year, and we haven't really clearly stated how many number of buyers we want to target. But if you consider that there are about 40 to 50 million people in Japan that are within our target age group, then we still believe that there is still a lot of room for growth. It is now at the end of the hour, but there is another question. If we can take another question, please us now if that's the case. Mr. David, please go ahead.

Sorry, me again. One question. You talked about in the Japanese call about Line being more effective than e-mail marketing. Could you say when you started to actively do that, to use Line as promotion for existing and new customers? And do you think that actually drove a material improvement in GMV in the quarter?

[Interpreted] So we started using Line 7, 8 years ago as a communication tool with our customers. With respect to how -- to what extent it contributed to GMV, it's hard to actually cut that piece out and explain, we apologize. So as I mentioned in the afternoon call, we do have a more comprehensive, holistic campaign now. And so it's not just the Line communication that contributed to the performance, it's multiple touch points. But Line is quite a good tool. It's very close to our users, so it's a good tool for communications. [Foreign Language] [Interpreted] We would like to take the last question from Mr. Kazahaya.

[Interpreted] We just want to make sure that we're aligned on the PayPay Mall expectations. On GMV, if you look at the ex GMV quarter-on-quarter account, tend to be volatile. But in the third quarter, you tend to have high-priced products, heavier items. So should we think that the third quarter GMV for PayPay Mall will be higher than the others?

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[Interpreted] It's hard to say still at this moment in time whether that will be the case. Because in the fourth quarter, Z Holding is planning to launch a Super PayPay Festival as well, so we don't know how much impact that will have. But we believe that the third quarter would probably be the highest. But if you look at the fourth quarter results, then it's slightly lower quarter-on-quarter, that could just be a seasonality issue. And not -- so we really do think that third quarter probably will end up being higher. So thank you, everyone, for joining us. And we would like to conclude our conference call for tonight. Thank you very much. [ Thank you very much. Have a good weekend. Thank you very much ] [Foreign Language] [Statements in English on this transcript were spoken by an interpreter present on the live call.]