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

[Interpreted] We would like will be beginning in about 30 seconds. So please give us for some time. Thank you. So we would like to begin. This is Kobayashi from ZOZO. So we would like to begin. This is Kobayashi from ZOZO. So thank you for taking part this evening and the FY 2022 Third Quarter Conference Call from ZOZO myself Kobayashi as well Executive Vice President and CFO Koji Yanagisawa, are taking part. We would like to jump right in and Mr. Koji Yanagisawa will take us through the results for this quarter.

[Interpreted] Good evening, anyone. I would like to take you through the FY 2020 third quarter results. The GMV this quarter was up 8.3% year-on-year, ending at JPY 406.4 billion. The GMV, excluding other GMV was up 8.9% year-on-year, ending at JPY 372.0 billion. The operating profit increased 15.1% year-on-year, landing at JPY 44.6 billion, and the operating profit margin was 12%, improving 0.6 points year-on-year. As was the case in the first half of the fiscal year, the GMV and operating profit trended very positively, especially with respect to the operating profit, we determined that we will overachieve our initial target. Thus, as of today, we have revised our forecast upward. And against this revised forecast, the GMV, excluding other GMV has achieved 75% and the operating profit has achieved 81.2%. On Page 7, you will find the quarterly trends in the consolidated performance. In the third quarter, the GMV, excluding other GMV increased by 9.1% year-on-year. Last fiscal year, in the fourth quarter, we saw a large brand lead our B2B business. Therefore, when we look at the overall performance, the growth remained below 10%. But if we look at ZOZOTOWN and Yahoo Shopping, these businesses grew 12.4% year-on-year, maintaining a double-digit growth. And we made great strides in both customer acquisition and sales promotion this quarter, thus in year-on-year terms, it became the best performing quarter this fiscal year. Although the customer acquisition and sales promotion costs increased in comparison to the previous fiscal year, gross profit increased in line with the growth in GMV and some costs, mainly variable costs decreased. Therefore, the OP was up by 16.3% year-on-year. Next on Page 8, you will find the increased decrease analysis of the operating profit for this quarter. The operating profit, which was JPY 38.7 billion in FY 2021 third quarter increased by approximately JPY 5.86 billion to JPY 44.63 billion. There are 3 key reasons why the operating profit has increased. It has increased by JPY 0.31 billion due to the increase in consignment sales resulting in rise in commissions and JPY 1.07 billion due to the increase in sales from the advertising business, and we also saw JPY 2.01 billion increase due to the increase in shipping income and payment settlement incomes. On the other hand, there are 4 reasons why the operating profit has decreased. It has decreased by JPY 1.51 billion as a result and an increase in the fixed costs, such as the increasing number of employees, logistical centers and consignment operations. It has also decreased by JPY 1.2 billion as a result in an increase in variable costs that fluctuate with the GMV, JPY 3.72 billion was -- we also saw a decision JPY 3.72 billion as a result of an increase in the act a promotion costs such as customer acquisition and point rewards. And there was also a JPY 1.1 billion decrease as a result of one-off costs related to the increase in logistics centers wise and telecommunication costs related to the increase in the cloud server usage, etcetera, which are classified as other costs. Next, on Page 15, you will find the quarterly trends in the GMV. The consignment sales, which comprises majority of the GMV has been trending well and its contribution to the total GMV increased by 2.2 points to 77.5%. Next, I would like to explain about the breakdown in the SG&A as of the end of the third quarter, which you will find a patient team. The cumulative SG&A against the GMV was 22.3%, decreasing 0.5 points year-on-year. And there are 2 key -- 2 key reasons why the SG&A has decreased. We saw improvements in operational efficiency in the logistics centers, which resulted in a 0.4 point reduction in the relevant payroll. And we also resized cardboard boxes, usage shipping and cost reductions also contributed to a 0.3-point reduction in shipping costs. However, the SG&A went up, as I explained earlier, due to the web commercials and other advertising initiatives resulting in a 0.2 point increase in advertising expenses. On Page 24, you will find the quarter SG&A by quarter. In the third quarter, the SG&A was 21.7% of the GMV decreasing by 0.7 points year-on-year. And this has decreased for the same reasons that I mentioned before in the previous section with respect to the cumulative SG&A. On Page 22, you will find the trends in actual promotion costs. This quarter, we used 5.4% on the GMV on active promotion costs, which includes average making and point rewards. And since our business loss has been performing well, we invested in more promotions than we initially had planned this quarter. And moreover, in the fourth quarter, we will continue to invest in promotions to maintain sustainable growth in the -- during the next fiscal year. And so although we had announced that we plan to use 3.5% of the GMV for promotions this fiscal year, this percentage will most probably be ending up a little bit higher. Next on Page 20, you'll find the trends in the operating profit and the operating profit margin. And as I mentioned, in the third quarter, promotion costs increased in comparison to the same quarter previous year. However, the gross profits increased in line with the growth in GMV and some costs, mainly variable costs have decreased. Thus, the operating profit margin improved by 0.8 points to 12.1%. From page 9 for all more, you'll find the KPI for STM. The annual buyers increased this quarter by $350,000 to $11.21 million. The outcome members increased by 390,000 to 9.93 million, and the number of gas buyers decreased by 40,000 to 1.27 million. he active members increased because new customers we acquired last year became regular customers, and we also strengthened our customer acquisition efforts by airing TV commercials and web advertising during the week and summer sales. And you will find a number of shops that trends in the number of shops on Page 25. As of the end of the third quarter, the number of shops was 1,554, which is a net increase of 22 shops since the end of the previous quarter. And we welcome 35 shops this quarter, which include the American Workwear brand Universal overall, French luxury bag brand own shop and the Australian skin care brand Isola by many around the world. On Page 30, you will find information about the average retail price. The average retail price was JPY 4,430, up 6.5% year-on-year. The average retail price improved due to the increase in prices of certain products and the decrease in the discount rate of products sold during the sales period. Next, on Page 35, you will find the average order value. The average order value was JPY 8,961 up 4.3% year-on-year. Although the number of items purchased per order has decreased. The average retail price increase surpassed this impact. Therefore, the average order value also increased year-on-year. Lastly, on Page 3, you will find the consolidated fiscal year forecast and dividends. As I mentioned before, we are making great progress towards the initial fiscal year forecast announced on April 27, 2022. And since it seems likely that we will be overachieving these targets, we have made upward revisions to the operating profit forecast as of today. And as I touched upon when I mentioned the promotional costs, we are planning to make upfront investments to sustain growth during the next fiscal year, and we are also considering providing our employees with a year-end bonus. The GM fee, in terms of our business performance forecast per GMV and growth GMV, excluding other GMV net sales at those remain the same, but the operating profit forecast is JPY 55 billion, which is 6.8% higher and the ordinary profit target is JPY 55.2 billion, which is 7.2% higher than our original plan. And we will maintain a 50% dividend payout ratio and thus, the estimated dividend per share has been revised to JPY 65. Next, I would like to cover the section that Sawada touched upon during the briefing session earlier in the day, we opened up a new store in which we don't sell products, which is called Niaulab in December, but I would like to take you through that at this time. And what it is, is that professional stylists as well as AI technology will find the style that is perfect for you and it's a free personal styling service. And although we couldn't play the video during the biking session earlier in the day, we can plan now. So please take a look and then we'll explain what kind of services this is. So our objective is to make sure that -- or how people explore their sell and make them delight them. And through the service, we will pursue the optimal most befitting style for each user. And this concludes my explanation. Thank you. Now we would like to begin the Q&A session. If you have a question, please raise your hand button.

I had a couple of but I guess just the first one is on PayPay Mall. Obviously, the growth this quarter was 4% year-over-year and a pretty meaningful deceleration. I don't think it's much of a surprise in the context of sort of the overall marketing promotion pullback that efficacy Holdings is doing on the overall sort of a shopping ecosystem. But I'm curious, I guess, in terms of your performance versus the overall, do you think that you were more sort of adversely impacted within the PayPay Mall young shopping ecosystem than sort of the overall slowdown in that property or ecosystem. Sorry, just make it clear, obviously, I'm asking whether sort of the slowdown that you saw the 4% is pretty much the same as the overall sort of PayPay Mall and Yahoo! Shopping ecosystem slowed out? Or do you feel like maybe you've got more adversely impacted through promotion spend pullback or anything else? Just curious on that slide.

[Interpreted] In terms of whether we were more adversely impacted in comparison to the rest of the Yahoo! Shopping market, we don't know because they're going to be disclosing their performance tomorrow onwards. So at this point in time, we would like to refrain from commenting on that. We just don't have the information.

Understood. And I know this is a very difficult question, I'm sure, given this is sort of early stages of that pullback in promotion. But any thoughts around sort of what you think is maybe sustainable growth rate for the Yahoo! Shopping channel for you guys going forward? Is this sort of a mid-single digit growth for the time being for the coming few quarters? Or do you expect growth to sort of change even off of what you delivered in the third quarter?

[Interpreted] No, apologies, but about what it may be like in the future, it's hard to say and comment on that at this point in time. This all depends on the Z Holdings promotional strategy. So it's quite difficult for us to forecast what our growth rate going forward might be. However, one thing that I can say is that for Z Holdings, the -- within Yahoo! Shopping, the promotional ROI for ZOZO is relatively high in comparison. So we believe that they will continue to invest a certain amount in our shock.

Understood, very helpful. Pivoting into your own promotional spend, as you've highlighted in the third quarter, I think you spent 5.4% of your GMV. You expect to exceed your 3.5% that you originally guided to for the year. I'm curious, I guess, what is the right sort of outlook now? What is embedded in your new guidance or your total promotional cost assumption for this year? And I guess, to the extent that you can comment, I guess, how do you think about sort of steady phase into next year as well, just given the changing dynamics of investing in your own channel versus the on shopping ecosystem.

[Interpreted] So just to clarify, we only used to spend our own promotional budget on our own channel in the past as well. But in terms of what percentage we're looking at spending based on our revised forecast at this moment in time, we -- it's hard for us to comment on that. The reason why I say that it's difficult to say exactly what percentage it will be at this moment in time is that we don't know how the GMV or other costs will trend going forward. And given that we would like to control the impact with -- by controlling our promotional spend. And as I mentioned earlier, we will be investing -- making upfront investment for the next fiscal year. So if we see that the GMV is dramatically decelerating for some reason or there is going to be some kind of cost pressure, and we will be controlling the promotional spend. And with respect to next fiscal year, next fiscal year, we're currently working on the plans at the moment. So we don't have a specific figure, but at least it will be the benchmark that you can keep in mind is the 3.5% that we originally had this fiscal year, we'll probably be spending more than that, but the benchmark for now is 3.5%.

Very clear, thank you. And I guess in terms of just the offset for those increasing costs. I think you highlighted in this quarter, you were able to reduce some key variable costs as part of an offset to maybe a higher promotional spend. But just as a framework, I guess, into next year, do you expect the higher promotional spend to be sort of fully offset by other cost reductions so that you're able to sort of keep those incremental costs neutral to your operating profit margins? Or is the cost increases higher than sort of the offset that you're able to make to reduce cost elsewhere.

[Interpreted] So this year, of course, we did have some cost savings, including variable costs. But next year, it's hard to say if the situation will be the same. But in order to spend more on promotions and also maintain the same operating profit margin, we will need to find some cost savings in order to be able to do that.

Got it. But to be clear, it seems like the intent is you look to make sort of operating margins stable or neutral by reducing cost elsewhere? Is that the right sort of understanding of strategy or intent?

[Interpreted] Yes, that's correct.

Understood. Okay. And my last question really quickly is just on the -- sorry, average order value. Obviously, that was up 4% year-over-year in the quarter, I think, helped by some of the price increases that the brands are making. I'm curious into sort of 4Q and into next year, especially as the sort of spring and summer cycle starts. Do you expect further price increases, similar kinds of price increases? And how do you think that manifests into your sort of average order value growth? Do you expect stable sort of 4% or 5% year-over-year growth to continue from here? Just curious what you're hearing from your brands as you sort of venture into the spring summer cycle.

[Interpreted] This is difficult to judge, but we believe that at least for the spring/summer season, we will see more brands who will be raising the retail prices in comparison to the previous year, which will have a positive impact on our AOV.

Understood. Very helpful.

You mentioned earlier that you're looking to pay potentially employee bonus in the fourth quarter. Is that just a conceptual -- is that about around a cost of what $1 billion to $2 billion or something like that? Or is it somewhere on the order of magnitude, please?