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

[Foreign Language]

[Interpreted] It is now time. So let's begin. My name is Kobayashi from ZOZO. We'd like to start the Full Year Financial Results Conference Call of ZOZO for FY 2021 ending in March of 2022.

[Foreign Language]

[Interpreted] And from ZOZO side, we have 2 participants, Director, Executive Vice President and CFO, Koji Yanagisawa; and me, Kobayashi. And now we would like to have CFO, Yanagisawa, take us through the business results.

[Foreign Language]

[Interpreted] Good evening, everyone. Now I'd like to walk you through the full year earnings results of FY '21 ending in March of 2022.

[Foreign Language]

[Interpreted] Let's jump right in. Here are the highlights of FY '21. In this year, our gross merchandise value GMV went up by 21.3% year-on-year, landing at JPY508.8 billion. Our GMV excluding other GMV went up by 13.3% year-on-year, landing at JPY462.1 billion. Our operating profit was up by 12.5%, landing at JPY49.6 billion. Both GMV and OP exceeded the plan, and we were able to finish the year strongly.

[Foreign Language]

[Interpreted] Moving on to Page 7 of the document, these are the quarterly changes of the business results.

[Foreign Language]

[Interpreted] In the fourth quarter, GMV excluding other GMV was up by 12.7% year-on-year and unaffected by the changes in the number of COVID infections and the degree of the traffic recovery, the brands continued to proactively provide us with their inventory and our vigorous promotional activities have proven to be fruitful. And as a result, our GMV grew steadily, maintaining more than 10% growth year-on-year.

[Foreign Language]

[Interpreted] And regarding our operating profit, we have proactively air TV commercials in order to attract new customers. And we also made donations through the sales of the charity T-shirts in support of Ukraine, which is exactly the T-shirt I'm wearing right now. So those were the cost increase that we saw. On the other hand, our gross profit increased, thanks to the GMV growth in the advertising business, and we managed to reduce logistic-related costs and payment collection fees as well. And these factors drove up the profit by 5.0% year-on-year, and our OPM landed at 9.0%.

[Foreign Language]

[Interpreted] And now I'd like to move on to Page 8 of our deck. This is the increase decrease analysis of our operating profit.

[Foreign Language]

[Interpreted] In this year, our operating profit was JPY49.65 billion, up by JPY5.5 billion from the previous year.

[Foreign Language]

[Interpreted] And there were 3 factors attributable to the growth of the OP. First, a JPY 10.17 billion from the increase in consignment shop commission coming from GMV growth. and second, JPY2.17 billion from the sales increase generated by the advertising business; and third, a JPY 3.78 billion from the growth of shipping revenue and payment service revenue coming from the GMV increase.

[Foreign Language]

[Interpreted] And on the other hand, there were mainly 3 factors that drove down the OP. First, JPY 3.37 billion from the increase in fixed costs impacted by the increase in employees logistics basis and the outsourcing expenses; two, JPY 4.87 billion from the increase in variable costs that rose in correlation to the GMV. And third is JPY 1.77 billion from the increase of promotion expenses associated mainly with the active airing of TV commercial.

[Foreign Language]

[Interpreted] And now let's go to Page 9, which is the consolidated balance sheet.

[Foreign Language]

[Interpreted] So here, we're comparing ourselves to the figures that we had on the 31st of March in the previous fiscal year. And basically, acquired treasury stock in order to meet the criteria for the prime section and consequently, had an effect on our cash and deposits and treasury stock items. And aside from these, there are no major changes.

[Foreign Language]

[Interpreted] Let's skip one slide and go to Page 16 of the deck.

[Foreign Language]

[Interpreted] So this is the quarterly GMV trend. The shares didn't change that much, but the ratio comprised by other GMV that we started to record from the second quarter of the last fiscal year, went up by 2.5 points year-on-year, finishing at 9.6% this quarter.

[Foreign Language]

[Interpreted] Okay, let's go to Page 22. This is the SG&A trend.

[Foreign Language]

[Interpreted] In the fourth quarter, we aggressively implemented advertising activities such as TV commercials in order to attract customers. And as a result, the ratio of promotion-related expenses recorded in SG&A became 2.3%.

[Foreign Language]

[Interpreted] And also this is not written on this page, on an annual basis, if you include the promotional/advertising expenses with -- and also expenses for discount and also expenses for sales promotions. All in all, that amounts to approximately 3.5% against the GMV. [Foreign Language] [Interpreted] Let's now go to Page 21. This is the OP and OPM changes.

[Foreign Language]

[Interpreted] In the fourth quarter of this year, OPM increased with the advertising business growth and improvement in operational efficiency in the distribution centers. However, regarding the promotional cost, we saw an increase due to active recruitment and sales promotions.

[Foreign Language]

[Interpreted] And on top of that, we decided to sell this charity T-shirts in support for Ukraine in the wake of the incident taking place in Ukraine. And also, we paid out the bonus to our employees. And at the end, we landed our OPM at 9.0%.

[Foreign Language]

[Interpreted] And next, we have the SG&A breakdown for the full year.

[Foreign Language]

[Interpreted] Our SG&A against total GMV finished at 23.0%, decreasing by 0.5% year-on-year.

[Foreign Language]

[Interpreted] So earlier, I touched upon the point-related expenses. With the new revenue standard application, point-related expenses recorded as an SG&A expense last year are now deducted from net sales instead. And this brought down the point-related expense by 0.5 points.

[Foreign Language]

[Interpreted] And another big factor is the efficiency of the logistics basis. This improved resulting in a 0.3 point decline of logistic-related expenses under payroll and staff costs. And the third one is the payment collection fee. This one decreased by another 0.3 points due to the fact that we changed our payment collection company.

[Foreign Language]

[Interpreted] And factors that drove up the SG&A is promotion or advertising here.

[Foreign Language]

[Interpreted] Please go to Page 24 of the deck. I'd like to move on to the main KPIs of ZOZOTOWN.

[Foreign Language]

[Interpreted] And these KPIs hereafter do not include the results of PayPay Mall. It's strictly just about ZOZOTOWN.

[Foreign Language]

[Interpreted] The number of total buyers was up by 310,000 from the previous quarter, amounting to 10.41 million, of which active members was 9.04 million, increasing by 330,000 against the previous quarter.

[Foreign Language]

[Interpreted] In the fourth quarter, not only did we focus on the new member recruitment, but we also implemented promotional initiatives to help prevent customer defection and also drive upsell. And as a result, we could grow the number of active members by about 100,000 more than how we did in the previous quarter.

[Foreign Language]

[Interpreted] Let's go to Page 25. This is the number of shops.

[Foreign Language]

[Interpreted] As of the end of the fourth quarter, the number of shops was 1,510, which is a net decrease of 6 shops from the end of the last quarter.

[Foreign Language]

[Interpreted] So as I have mentioned, we are experiencing a net decrease. And this is because this was the end of the fiscal year. And some of the brands no longer exist because they decided to close these brands or some of the brands decided to pull out from ZOZOTOWN because their sales in ZOZOTOWN is not as good as they had hoped. But with that said, we were able to welcome 23 new shops to our platform. So the performance in terms of the number of shops has been quite good.

[Foreign Language]

[Interpreted] Now let's go to Page 30 and 39, which is about the average retail price and average order value.

[Foreign Language]

[Interpreted] So regarding the average retail price, it was up by 0.1% year-on-year. And regarding average order value, it was down by 0.2% year-on-year. So both are rather flat.

[Foreign Language]

[Interpreted] And I want to elaborate on average order value. It's been rather flat for pretty much the entire year. So it seems as though our average order value has already bottomed out.

[Foreign Language]

[Interpreted] So up until this point, these were the business results of FY '21. And next, I'd like to share our business plan for FY 2022.

[Foreign Language]

[Interpreted] The full year consolidated earnings forecast for the ongoing fiscal year are as follows: We target to increase GMV by 6.9% year-on-year to JPY 543.8 billion, and our GMV, excluding other GMV targeted to increase by 7.3% year-on-year to JPY 495.8 billion and net sales, plus 9.1% year-on-year, JPY 181.3 billion and OPM at 10.4%.

[Foreign Language]

[Interpreted] And as far as our dividend is concerned, we will continue to target a payout ratio of 50% or more and plan to pay a dividend of JPY 60 per share.

[Foreign Language]

[Interpreted] And also, the dividend for fiscal 2021 ending in March 2022 has been raised to JPY 58 per share from the initial plan of JPY 55 per share. And as a matter of fact, we disclose this information today.

[Foreign Language]

[Interpreted] Okay. And let's move on to the next page. These are our targets by business for this fiscal year.

[Foreign Language]

[Interpreted] So these are what we have in mind for the ongoing fiscal year, we plan to maintain double-digit growth in GMV for the combined total of ZOZOTOWN and PayPay Mall businesses.

[Foreign Language]

[Interpreted] And regarding our B2B business, we are expecting to have minus 40% growth. And this is because the long planned termination of the United Arrows took place. There was a departure of United Arrows from our B2B business. And this will hurt the overall growth rate for GMV, but this slowdown will only be temporary.

[Foreign Language]

[Interpreted] And it seems as though our OP growth rate looks low, but there are 2 factors around this.

[Foreign Language]

[Interpreted] So in August of 2023, we plan to launch the operation of a new logistics center. And until then, the volume that needs to be handled by existing logistics centers will be greater, and this will push down the work efficiency somewhat. Another factor is that we need to make upfront investment in recruitment of the staff to work in this new logistics center, and this will drive up the cost while pushing down the work efficiency.

[Foreign Language]

[Interpreted] And another factor, which is the second point that I'd like to mention is the system-related investment. Amid COVID, what we have been doing is to suppress the amount of business investments and that goes through recruitment efforts and also business-related efforts as well. And moving forward, we'd like to start accelerating our development. And this, of course, will include upfront investment as well, but basically, the amount of investment will be greater going forward.

[Foreign Language]

[Interpreted] So what it means in summary is that our existing business profitability is not going to experience a major decline. But basically in the next fiscal year, we plan to make upfront investments on several fronts.

[Foreign Language]

[Interpreted] And this is our capital investment information. A total of JPY 10 billion in CapEx is planned for FY 2022. And the breakdown is as follows. The biggest one that we have in the plan is JPY 6.5 billion for the new logistic base that's going to be leased from next year in February. And there is JPY2.5 billion for the purchase of equipment for existing distribution centers and another JPY 1.0 billion for system and system-related investments.

[Foreign Language]

[Interpreted] And from here onwards, these are the slides that were covered by Sawada, our CEO, and our time is limited, so I'd like to just really briefly touch upon the highlights of his presentation.

[Foreign Language]

[Interpreted] So this page is about the awareness rate of ZOZO to be more specific, top of mind share of ZOZO that we've been conducting the survey on for the past 18 months. And if you calculate the target population size, those who would think of ZOZO as a top of mind player amounts to approximately 1.67 million in population.

[Foreign Language]

[Interpreted] And the next page is our growth of new buyers. You can see that we were able to grow at a similar level as other previous years. And we have been able to create that positive cycle of increasing the top of mind share and also increasing the number of new buyers.

[Foreign Language]

[Interpreted] Let's skip 2 pages and move on to talk about the impact of the raw material cost increase. So as you know, the raw material costs are on the rise, and we handle faster merchandise. And we haven't really witnessed a hike in prices of the merchandise that we carry. And there's also indirect materials. And we cannot say anything definitive at this stage. We might experience future price hikes. But at the moment, the negative impact of the raw material cost increase is rather limited.

[Foreign Language]

[Interpreted] Let's move on to talk about ZOZOCOSME. Our monthly GMV has been growing steadily for ZOZOCOSME, especially when we celebrated our first anniversary in February and March, our numbers were very good.

[Foreign Language]

[Interpreted] In FY 2021, we were able to generate JPY 5.7 billion in sales. And for this fiscal year, FY 2022, we're aiming to do JPY 10 billion in sales for ZOZOCOSME alone.

[Foreign Language]

[Interpreted] You may have remembered this from our previous sessions, but we've been saying that we'd like to implement an easy function to our wear. And unfortunately, we couldn't make this happen in the last fiscal year, but this is what we'd like to do in this fiscal year, so that we can create a fashion-oriented social commerce using our wear.

[Foreign Language]

[Interpreted] And the type of EC that we would like to bring to life on WEAR is what we call offering type C2C marketplace. What it means is that on WEAR, we have fashion forward people that we call WEARISTAs, and let's say that they will post photos of them in a wardrobe or in a certain look. And if the viewers will be interested in buying that outfit, they will be able to reach out to that WEARISTA and mention that they want to buy the wardrobe and if the WEARISTA agrees to sell, then there could be monetary transaction between the 2 parties. So that's what we mean by offering types in different marketplace.

[Foreign Language]

[Interpreted] I'm sorry. My presentation is becoming very long, but I'd like to also share with you another service that we have in plan, which is called [ ZOZOSUIT ], and which is something that we'd like to launch in summer of this year in the United States. So this is a technology that fully utilizes ZOZOSUIT's second version, and this will be strictly focused on body measurement.

[Foreign Language]

[Interpreted] That will be all for my presentation.

[Foreign Language]

[Interpreted] Let's open up for questions. If you have a question, please raise your hand.

[Foreign Language]

[Interpreted] And when you're pointed, we very much appreciate if you can kindly provide your name and the company you work for before stating your question.

Mr. David. Please go ahead.

Yes. David Gibson, MST Financial. First question is actually on the consignment take rate. Could you talk about why that was down in the quarter. I think it was 27.6%, down from 28.4% in the third quarter. Why is that happening? And then what is the outlook for the take rate for the consignment business, please?

[Foreign Language] [Foreign Language]

[Interpreted] So that's mainly due to the points that's related to personalized or customized discount that we provide.

[Foreign Language]

[Interpreted] So just to elaborate on that. Before, we used to record that under SG&A point-related costs, but we decided to directly deduct that amount from net sales. And that's why the take rate looks as if it has gone down on the outset.

[Foreign Language]

[Interpreted] And we'd like to sustain this new rule application. And depending on the amount of discount or the frequency of the discount that we implement, the take rate will look as though it fluctuates by one quarter to another.

[Foreign Language]

[Interpreted] So what it means is that the take rate that we receive from the brands or we call it the commission that we received from their brands is not changing that much.

Okay. Could you clarify and give just an overall view on the guidance for next fiscal year for 323. Would you view it as conservative, middle of the road or aggressive? How would you view your guidance, please?

[Foreign Language]

[Foreign Language]

[Interpreted] So regarding OP, I could say that we are rather conservative for operating profit guidance and for GMV, I believe that it's rather neutral.

Just on the -- for the guidance, the SG&A expenses, in particular, the promotion expense. Can you talk about what your expectations are for that line item for next fiscal year, please?

[Foreign Language]

[Interpreted] What I would like to say is that we plan to use about 3.5% of the GMV for expenses, inclusive of advertising costs and also costs related to those points that we give out.

So should we expect that expense in absolute terms to be up year-on-year?

[Foreign Language]

[Foreign Language]

[Interpreted] In absolute figures, yes, because it's -- we've planned for 3.5% of GMV, and it was also 3.5% for the last fiscal year as well. So if you look at the absolute number and do a comparison, yes, it will be greater.

Sorry, final question. I promise this is it. On the logistics slide, which is Page 42 of the larger presentation, it shows that Chiba 3 that the lease will be restarted now in April. Could you just talk about why is it necessary to bring that back on as well as the new center in 2023?

[Foreign Language]

[Foreign Language]

[Interpreted] So in a nutshell, we're using Chiba 3 strictly as a storage because we were run out of the store space before this new logistics center will be in operation.

[Foreign Language]

[Interpreted] Mr. [ Brandley ], the floor is yours.

It’s [ Arthur from Hedonic Asset Management ]. I wanted to dig in a little bit deeper on the consignment take rate. I understood that, that was the personalized discounts manifesting in a more pronounced way in the fourth quarter. I guess if we took a more sort of like a 12-month view, do you expect to be able to maintain around the same consignment take rate that you did in fiscal year '22 at 28.4% or -- and obviously, the quarterly sort of trends may volatile, but the year may shake out around there? Or do you expect that to maybe compress a little bit more as you sort of ramp up more promotional personalized discounts?

[Foreign Language]

[Foreign Language]

[Interpreted] At the moment, if I may summarize my answer to you. We cannot make a statement clearly, whether it's going to be less or more than how we did in the previous year. And the reason why we say that is because even during the term, we will sort of flexibly decide whether we're going to focus more on the points promotions or focus more on other types of advertisements in order to attract new customers. So we're constantly sort of exploring what sort of the promotional activities we can engage in.

Understood. And as a follow-up to that, I wanted to sort of understand your total cost of advertising and point promotion costs combined. You called out earlier was 3.5%. I believe traditionally, when we sort of spoke over the last few quarters, your guideline for this was probably between 2.5% and 3% of SEM. So it seems like you've sort of invested above what you had initially planned for the year on the points and advertising costs combined. Can you just help me understand, I guess, where the incremental spend is going? And what led to that decision? What are the channels that are being spent? Is it personalized discounts mainly or on the other channels -- and then I guess, bigger picture, it seems like just this cost line continues to go up. The year 2021 was more towards 2%. This year, it was 3.5%. You're expecting fiscal year '22 to be 3.5%. But is there a potential where this sort of cost item continues to maybe go up as a percentage of GMV as you invest more in the future?

[Foreign Language]

[Foreign Language]

[Interpreted] So regarding our advertising costs, especially in the fourth quarter, we aired rather actively TV commercials, and we also implemented web advertisements. [Foreign Language] [Interpreted] And this is because for our business operation, we were able to manage our costs. We were able to do a good cost control. And we started to gain an outlook on our operating profit. And we thought we were able to see that our operating profit will actually be even better than the guidance. And that's when we decided to implement upfront promotions and increase the amount of the expense ratio from 2.5% to 3% to 3.5%. [Foreign Language] [Interpreted] And for this fiscal year, in order for us to achieve double-digit growth for GMV with the total combined GMV of ZOZOTOWN and PayPay Mall. we believe that it will be very tough to achieve this unless we invest in promotional costs because we will probably go into after-COVID or post-COVID type of phase, we need to be mindful of the environment that we will operate in. And also our GMV base is really expanding. So in order for us to have double-digit growth of our GMV, we believe that making up for an investment in promotional cost and advertisement will be indispensable. And that's why we decided to plan for 3.5% worth of promotion costs.

Understood. Very great. And my last question is just on PayPay Mall. The fourth quarter growth rate was sort of closer to flattish year-over-year was up 2% year-over-year. I believe in your new fiscal year guidance, you're targeting 29% year-over-year growth off of this sort of baseline. Can you just help me understand sort of that bridge of why fourth quarter growth was pretty muted and then why you expect pretty healthy growth into next fiscal year off of a larger base.

[Foreign Language]

[Foreign Language]

[Interpreted] So about the fourth quarter of FY '21, it's just that the fourth quarter of fiscal year '20, in that fourth quarter, there was a very large promotion activities that was implemented that really drove up the GMV. And it doesn't mean that in the last fiscal year's fourth quarter, the promotion was not there, but -- and it was there. But it's just that the -- just that 2 years ago, the scale of the promotion was so great that it looks as though the growth rate has slowed down for FY '21.

[Foreign Language]

[Interpreted] So what it means is that we expect to go back to normal phase for FY '22, it's just that FY '21 was a rather extraordinary.

[Foreign Language]

[Interpreted] If you have any further questions, please do raise your hand.

[Foreign Language]

[Interpreted] So, Mr. Chambers, floor is yours.

I'd like to just ask about the logistics center again. So from my understanding, you've got Ibaraki -- or sorry, Chiba 3 per storage only, Ibaraki is coming online. But I wonder how many months will it take to be fully operational? And in that interim of Chiba 3 being online for storage, how much of a margin impact are we going to see?

[Foreign Language]

[Foreign Language]

[Interpreted] So regarding Ibaraki 4 operation, that will start in August, that we kick off in August. And I don't exactly understand maybe the definition of what you mean by full operation or fully in operation. Basically, it will be up and running in August. And -- but it doesn't mean that the storage will be filled 100% from day 1. It will gradually sort of fill up.

[Foreign Language]

[Interpreted] And regarding Chiba 3, the cost impact is rather limited and that's because the floor space is small and in terms of the rent it will only cost us about JPY 40 million per quarter.

[Foreign Language]

[Interpreted] Did that answer all your questions, sir?

Yes, thanks very much.

[Foreign Language]

[Interpreted] Thank you for your questions. Mr. Brandley.

Sorry, one more for me. Of course, is my last one. The average order value, as you alluded to earlier, has been pretty much flattish year-over-year for the last few quarters, and you sort of alluded to this trend bottoming out. Is the go-forward expectation that you sort of continue to maintain this year-over-year lapse level? Or are there other sort of drivers starting to manifest maybe the cosmetics business starting to wrap a lot more, maybe has an impact on the average order value? Just trying to help me understand some of the moving part pieces there, if any.

[Foreign Language]

[Foreign Language]

[Interpreted] So it is true that I just mentioned that it is likely to start to bottom out, but if you look at our plan for this fiscal year, we still believe that it's going to continue to [indiscernible] bit more.

[Foreign Language]

[Interpreted] And that's because it's very difficult to anticipate how our AOV develops. And you can never be really certain whether we're at the bottom or not. And it is a hopeful outlook that it has bottomed out, but we don't know yet what's going to happen. So that's why we are expecting a further slight but further decline in our plan.

[Foreign Language]

[Interpreted] Thank you very much. It is now time to close the session. If there are no further questions, we'd like to say goodbye and close the session.

[Foreign Language]

Thank you very much and thank you for your participation. Bye-bye.

Thank you very much.