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

[Interpreted] It is time. We would like to begin. Good evening, everyone. My name is Kobayashi. Thank you for taking part in the ZOZO's FY 2022 Second Quarter Conference Call. From ZOZO, we have the Executive Vice President and CFO, Yanagisawa as well as myself, are taking part today. We would like to jump right in and have Mr. Yanagisawa takes through the results.

[Interpreted] Good evening, everyone. This is Yanagisawa. I would like to take you through the FY '22 second quarter results. First, I would like to start with the GMV for FY 2022 second quarter. It was JPY 251.1 billion, up 9.4% year-on-year. The GMV, excluding other GMV was JPY 227.4 billion, up 8.8% year-on-year. The OP increased by 14.4% and landed at JPY 27.2 billion, and the OPM was 12%. Against the fiscal year forecast we have disclosed, we have achieved 46% of the GMV and 52.8% of the OP. So we are making good progress. Next, moving on to the Page 7 of the document, earnings briefing document. Here is the consolidated performance overview. The GMV, excluding other GMV in the second quarter increased by 9% year-on-year. In the fourth quarter last year, a large brands left our B2B business. So in total, the growth rate was less than 10%. But if we include the ZOZOTOWN and PayPay Mall businesses, we grew by 12.2% year-on-year, continue to grow double digits. In the second quarter, we saw warmer temperatures in the month of September, so sales temporarily decreased, but our inventory recovered from the lockdown in Shanghai that was experienced in the first quarter. And so we saw a great increase in both the number of visitors and purchases, which we set to appeal. The customer acquisition cost and promotion costs increased compared to the same quarter previous year. The gross margin increased due to growth in GMV and some costs, mainly variable cost decrease. So the OP ended increasing by 15.2% year-on-year. Next slide, please turn to Page 8 for the increase-decrease analysis of the operating profit. The OP increased by JPY 3.42 billion from JPY 23.79 billion same quarter last year to JPY 27.21 billion. The OP increased due to 3 reasons. The first was the increased commissions from consignment business as a result of an increase in GMV, which resulted in JPY 6.46 billion and also JPY 0.64 billion coming from the increase in sales from the ad business and JPY 1.04 billion was due to increase in shipping income and payment commissions. And the OP decreased due to 4 key reasons: Decreased by JPY 1.16 billion due to the increase in fixed costs attributable to the increase in the number of employees, logistic centers and consignment operation. It also decreased by JPY 0.7 billion due to increase in variable costs, increase in proportion to GMV and JPY 1.72 billion decrease was due to the increase in actual promotional costs such as customer acquisition [Technical Difficulty]. And JPY 1.1 billion decrease was attributable to one-off costs from increasing logistics centers and telecommunication costs. And now we would like to skip a few pages to Page 16, here are the quarterly trends in the GMV. As I have already mentioned in the fourth quarter last fiscal year, large brands have left our B2B business. So the B2B portion of the GMV decreased to 2.9%, but as a result, the composition of other brand businesses increased. Next, if you turn to Page 20, I would like to talk about the SG&A as of the end of the second quarter. The SG&A against GMV decreased to 22.7%. So it decreased by 0.3 points year-on-year. There are 2 key reasons why. The first 1 is the improvement of operational efficiency in the logistics [Technical Difficulty] which helped reduce the logistical labor cost by [ 0.4 ] points. And the second reason is the increase in AOV in comparison to the last fiscal year, pushing a shipping cost down by 0.3 points. And the SG&A increase, especially the other SG&A increased by 0.4 points. This includes one-off costs, purchase equipment for the new logistic centers that we added in the first quarter as well as system replacement and increased our cloud usage, therefore, telecommunication costs. And so we saw an increase in others. And if you turn to Page 24, you will see the SG&A by each quarter. In the second quarter, the SG&A against the GMV was 23.9%, down 0.3 points year-on-year. As it was the case in the first quarter, the shipping cost has remained low, although shipping costs rose in July. The AOV has also increased. So the shipping cost to GMV ratio has not been impacted significantly. So the rise in AOV has offset or absorbed the rise in shipping costs. If you turn to Page 23, you will see the actual promotion-related expenses. The actual promotion cost for the second quarter, which includes both advertising and point-related expenses was 3.1% against the GMV. And there are no changes in the direction that we announced in the beginning of the fiscal year that we will be using 3.5% of the GMV for promotions. The latter half of the year tends to be our peak sales period, so we plan to actively undertake promotions going forward. And if you turn to Page 21, you'll find the operating profit and operating profit margin. And in the second quarter we saw rise in promotional costs, which includes promotions but the [Technical Difficulty]. The annual active buyers increased by 230,000 to [ JPY 2.85 million ] and the [indiscernible] rose by 270,000 to [ JPY 9.54 million ] and [indiscernible] decreased by 30,000 to JPY 1.31 million. The number of active buyers has increased because new customers that we acquired last fiscal year have become regular customers. And we also strengthened our customer acquisition efforts with active TV commercials and web ads launched during ZOZOWeek and the main summer sales period. Next on Page 26, you will see the trends in the number of shops. As of the end of the second quarter, the number of shops was 1,532 and we added a net of 9 shops since the last quarter. In the second quarter, we added 24 shops, which include ANNA SUI COSMETICS, luxury outdoor brand, Barbour from the U.K. and the famous U.S. footwear brand, Skechers known for their sneakers. On Page 31 and 32, you will see the average retail price and average order value. First starting with average retail price, it was JPY 3,487, up by 6.8% year-on-year. The average retail price increased due to less products being sold out at a discount in comparison to the same quarter previous year and perhaps also did not offer as a big discount as they did the year before. And on Page 32, the average order value was JPY 7,566, up 3.0% year-on-year. The average retail price significantly increased, the AOV also increased quite a lot. And on Page 34, the consolidated business forecast and dividend forecast, there are no major changes to these figures. And from here on, I would like to briefly take either some of the material that our CEO has a lot of covered in the earnings briefing. First, starting with the barriers in retail prices, we have seen that the retail prices are trending up, especially for the fall following winter apparel category and on average, these categories, retail prices are going up by 3% to 5%. And as I mentioned earlier, the average order value has increased by 3%. And so we're seeing rise in retail prices as well as AOV, but we're also seeing rights in the number of shipments as well. So we have not seen any negative impact from the rise in retail prices. That is for now, which is important because we don't know if this positive trend will continue going forward. Next, moving on to the 3 key pillars of our strategy, which we have been sharing with you from the beginning of the fiscal year but we wanted to give you some updates. Just as a reminder, the 3 key pillars of our strategy includes: number one, diversifying or fixed other than buying and also secondly, to increase our revenue stream from EC to production support as well; and three, to expand Oracle Global by licensing technology. So in terms of the first one, diversifying traffic, ZOZO has been a place or a platform that focuses on being a place to buy fashion. But going forward, we want to become replaced for fashion by addressing the needs in the upper funnel before people actually contemplate purchasing with -- by offering various added value. And in order to diversify our traffic to become the place fashion, we have added another statement to our management strategy. And in addition to the management strategy in the past has been more fast and fashion tech, but now we've added the phrase translated as explorers, and we would directly in the process to this management strategy. So cash is very important to fashion, but it's also very attracted things that look on new or that need to [indiscernible]. Since it is very important to fashion, we will like to thoroughly conduct research and development in this area. So we want to help people explore their styles, and we would like to do that thoroughly. So 1 way of doing that is the brick-and-mortar store -- 1 store that we plan on opening. [Technical Difficulty] but we have gained manufacturing from a private brand business, that will be very -- risk for the fashion industry to 0. So we will do this to remain by stand still by offering these orders that are reduced. And this may shorten business fee for this service we've already started, but it does tend -- the retail tends to be longer early days and of course, we do have products that are -- where the lead time is even longer than 10 days and we initially don't make perhaps -- longer lead time may become a bottleneck. Since launching the service, we have seen that, that is not the case. So if consumers really wanted the product, they're willing to wait even the lead time is longer. Lastly, as licensing of technology we started -- we launched ZOZOBASE in the U.S. in August of this year. As such facing the service, we have received great feedback from the users. [Technical Difficulty] when we launched the private brand. We did give [Technical Difficulty] but we found that some people were actually using it to measure their body and the changes in their measurements. And so we utilize this insight to launch the fit. And although the base is still small, we have seen that the response has been quite positive. So we want to expand its strategy . And lastly, in October, we organized these -- the championship and [indiscernible] championship, but we have great feedback on the organization of this tournament. So that was the complete introduction of the earnings briefing to you.

[Interpreted] [Operator Instructions] Mr. Bradley, go ahead.

Maybe firstly on just the average order value and sort of the price increase dynamics that you've talked about. I know you've highlighted the retail prices are well we going up 3% to 5% year-over-year for the autumn winter seasonal items. I guess I wanted to just clarify, was that already detailed in average growth in the second quarter. Or is that more of a third quarter sort of accelerant to growth here. And maybe you could to an extent, maybe share just what growth when exiting the September quarter. So in the month of September, I assume maybe there is little bit more of an autumn winter apparel environment, just curious if the growth in that month was different to the overall quarter.

[Interpreted] A 3% to 5% increase in the retail price for the autumn-winter is 60%, is based on the inventory that we have received so far for this season. And so we don't -- we're not certain if the same time will continue in terms of the products that we will start to be using going forward. And in terms of the second quarter, the average retail price has risen by 6.8% as highlighted in the earnings briefing document.

I guess just to clarify, because in the second quarter, the 7% year-over-year increase in average retail price, you highlighted this was more of a function of lower discounts year-over-year. And so all I'm trying to understand is just the 3% to 5% retail price increase already included in the second quarter number. Or is this more sort of [Technical Difficulty] third quarter?

[Interpreted] So the 3% to 5% increase in terms of the autumn-winter season, it's something that is actually experienced more recently than before the second quarter summer -- spring/summer season, we don't really see a significant increase in the average retail price.

Understood. Very great. So then I guess as a follow-up to that, do you expect sort of average order value to then accelerate into the second half as you get more of the 3% to 5% retail price increase? Is that very simplistically, I don't know, 3 to 5 points of year-over-year growth acceleration for AOV in the back half of the year?

[Interpreted] So this is a little bit misleading, but the rise in the retail price of 3% to 5% that I mentioned earlier is the rise in prices that we're seeing in term of the products that we have received in the -- in our warehouse, whereas the average order value is based on the price at which people will actually buy the product. So these prices may not necessarily be equivalent.

Understood. And then lastly on this topic, I guess, just very simplistically, if I look at your retail price being up year-over-year by 7%, but your items per shipment is down, call it, 3% to 4% year-over-year. I guess just very simplistically, it looks like what's happening if sort of the prices are going up but people are maybe just trading off by buying less items. But I don't know if that's the right way to look at it. Do you see that happening right now just in terms of consumer behavior in response to price increases?

[Interpreted] So of course, it is a fact that the number of -- number of items per shipment has come down, but having said that, we have been able to maintain the GMV, but as you mentioned, in the second quarter, the products have not been sold at a large discount in comparison to the past. And as a result of this as well as the rising retail prices, the users may psychologically have opted to purchase a fewer items than before.

Understood. And then my last question is just in terms of your overall GMV growth, excluding other has been obviously quite -- growth has been quite strong so far this year growing around 9% year-over-year, but is your sort of guidance for 7% for the year. It seems like there's a fair bit of tailwinds, I guess, from an AOV perspective or an ASP perspective into the back half. What is your sort of confidence in terms of being able to maintain this 9% growth or maybe even accelerate further into the backup, just thoughts around there would be great.

[Interpreted] At the moment, we have not changed our business forecast. So we -- that is basically how we feel about what may come in the future.

[Foreign Language] Mr. David Gibson.

From MST Financial. Two questions. You mentioned in the earlier call in the presentation of plans to have a physical store in Tokyo. Could you give us some sense of scale that you plan this to be in the sense of this 1 store? Is it likely to be 10 stores in the future? Just can you give a sense of how many you're thinking about longer term?

[Interpreted] We can't disclose the details at this moment in time, but we will be first starting with 1 store and see how that is received by our users and decide then whether we want to build more or less.

Okay. And then talking about inventory given by the brands to you, I think you said at 1Q that this was improving. Is it right to say that the second quarter you saw less of an improvement than you expected? And further, is that improving even further now as we move into third quarter?

[Interpreted] Just to clarify, in the first quarter was when we experienced the lockdown in Shanghai so we had less inventory in the first quarter. And in the second quarter because the lockdown was alleviated, the situation for the inventory improved. And for the third quarter, the level of inventory that we have received so far is on par with our expectations.