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

[Interpreted] It's now 10 p.m. I would like to start the session. My name is Kobayashi from ZOZO. Thank you for joining us. Thank you very much for joining this conference call, which is going to be a place where we announce FY '22 financial results ending in March 2023. Joining us, Mr. Yanagisawa, Director, Executive Vice President and CFO; and me, Kobayashi, will be joining. And now, CFO Yanagisawa, will take the floor in these results.

[Interpreted] Good evening, everyone. I am Yanagisawa. I'd like to walk you through the full year earnings results of FY '22 ending in March of 2023. As for FY '22 full year, our gross merchandise value, GMV, went up by 7.0% year-on-year, landing at JPY 544.3 billion. GMV, excluding other GMV, went up 8.4% year-on-year, landing at JPY 501.1 billion. Operating profit was up by 13.6%, landing at JPY 56.4 billion. Operating profit margin, OPM, was 11.3%, improving by 0.6 points year-on-year. Both GMV and operating profit exceeded the revised company plan. The achievement rate against the revised plan for GMV, excluding other GMV, was 101.1% and 102.6% for our operating profit. Let's go to Page 7 of the document. These are the quarterly trend of consolidated business results. In the fourth quarter, GMV, excluding other GMV, was up by 7.0% year-on-year, and it was 9.5% ZOZOTOWN and Yahoo! Shopping combined. And as for OP, although expenses for attracting customers and sales promotion increased compared to the same period of the previous year, thanks to the gross profit increase coming from the GMV growth and some cost reductions, mainly of the variable, operating profit increased by 8.4% year-on-year. Let's now go to Page 8 of the handout and look at the increase and decrease analysis of the operating profit. Our OP was JPY 49.65 billion in FY 2021. And in FY '22, it amounted to JPY 56.42 billion, up by approximately JPY 6.79 billion. Factors attributable to the growth of the OP were: JPY 13.11 billion from the increase in consignment sales commission from the GMV growth; JPY 1.47 billion from the sale of -- JPY 1.47 billion from the sales decrease generated by the advertising business; and JPY 2.8 billion from the growth of shipping revenue and payment service revenue from GMV growth. And on the other hand, there are 4 factors that drove down the OP, and these are: one, minus JPY 2.43 billion from the increase in fixed costs, impacted the increase in the number of logistics bases and outsourcing [indiscernible]. Minus JPY 1.86 billion in computing variable costs and quarterly GMV. Minus JPY 4.65 billion from the increase of the actual promotion-related associated mainly with the customers and point-related expenses. And minus JPY 1.68 billion other expenses, such as the one-off expenses incurred in connection with the increase of a number of logistic bases and whatnot. Go to Page 16 of the document. This is the quarterly GMV trend. As we explained before, in the BB business, that used to make a large contribution to our GMV, left our B2B business in the fourth quarter of the previous fiscal year. Therefore, the ratio of B2B business against GMV decreased by 1.9 points from year to 2-point percent. On the other hand, our consignment sales, which comprises the majority of the overall GMV, has been trending very well. And the component ratio grew 3.8 points, becoming 76.7% of GMV. Let's go to Page 20, and this is the breakdown of SG&A on a full year basis. The SG&A to GMV ratio was 22.9%, down 0.1 point from the same period last year. Mainly, there are 2 factors that drove down the SG&A ratio. First, the operational efficiency of the logistics space has improved, resulting in a 0.3 point decline of the logistics-related expenses under payroll and staff costs. And two, resizing of the cardboard boxes used for delivery, and cost reductions resulting from higher order value resulted in a 0.3 point reduction of the shipping cost. On the other hand, there are, once again, 2 factors attributed to dry up the SG&A ratio. One, increase in customer acquisition costs. And then this resulted in a 0.4 point increase in advertising expenses; and others increased by 0.2 points due to an increase in cloud survey usage versus the replacement as well as equipment purchases associated with the increased logistics centers. Let's go to Page 24. This is the breakdown of SG&A expenses by quarter. The ratio of SG&A to GMV was 24.7%, up 0.9 points from the same period of the previous fiscal year. So we have been seeing this trend from the third quarter. There is the rising order value that has kept the shipping cost to GMV ratio quite low, and there is also the ratio of payroll cost for employees. And with the bonus provision, the payroll and staff cost to GMV rose 0.3 point. And we actively aired more TV commercial and web ads. So this resulted in 0.7 point increase in advertisement and expenses. Let's move on to Page 23 of the handout. And this is the actual promotion-related expenses trend. So as I have been explaining, in this fourth quarter, our actual promotion-related expenses turned out to be 5.0% of GMV. Because our business performance was trending positively, we actively implement ads such as TV commercials, web ads and other measures to attract customers. And here is the trend of the operating profit in OPM. As we have been saying for the aforementioned reasons, the operating profit margin exceeded the one -- the same period as last year by 0.1 point, now at 9.1%. Now I'd like to move on to share with you the main KPIs of ZOZOTOWN, starting from Page 25. The number of total buyers was up by 200,000 from the previous quarter amounting to 11.41 million, of which active members was 10.19 million, increasing by 260,000 against the previous quarter and guest buyers decreased by 60,000, finishing at 1.21 million. As for the increase of the active members, we managed to retain the newly recruited members from last year. Also active TV commercial airing and web ad implementation during the main winter sale and the [ cosmetics ] campaign period worked to attract customers. Moving on to Page 26. This is the number of shops on ZOZOTOWN. As of the end of the fourth quarter, the number of shops was 1,562, a net increase of 8 shops from the end of the previous quarter. We welcomed 31 shop store platform this quarter. So one of them being Forever 21, a fast fashion brand from the U.S. that has relaunched into Japan. With respect to the average retail price, it turned out to be JPY 3,987, up by 6.3% year-on-year. The increase is attributed to the retail price increases of certain products and decrease in the discount rate of products sold during the sales period. The factors pushed up -- these factors pushed up the retail prices of merchandise sold, both at original prices and discounted prices. Let's now go to Page 32, average order value. AOV was JPY 8,300, up 4.1% year-on-year. Although the number of items per shipment decreased, the impact of the retail price increases was greater, and this led to higher AOV compared to the same period of the previous year. Now I'd like to share the company's plan for FY 2023, ending in March 2024, which is the ongoing period. Let's turn to Page 34. And here are the full year consolidated earnings forecast. GMV, plus 6.7% from the previous year, JPY 580.8 billion; GMV, excluding other GMV, plus 6.8%, JPY 535.2 billion; net sales, plus 9.4% from the previous year, JPY 200.7 billion; OP, plus 6.3%, JPY 60 billion; and OPM projected to be 11.2% or higher. And as for the dividends, we will continue to target a dividend payout ratio of 50% or more. And the dividend per share is expected to be JPY 71. And if you can kindly turn to Page 35 of the handouts. Here are the targets by business for the current fiscal period. For the ZOZOTOWN business, we aim to achieve successive growth by continuing to implement measures to attract customers. And as for Yahoo! Shopping, we're currently expecting to remain flat due to the impact of changes in sales promotion policy. So therefore, we have been saying that we aim for the growth rate of plus 10% with ZOZOTOWN business and Yahoo! Shopping ZOZOTOWN combined. But due to this change, we foresee that this figure will be below 10%. And lastly, I'd like to go to Page 11. This is our capital investment. So in terms of the capital investment, we plan to make capital investment totaling JPY 8 billion in the ongoing fiscal year. The breakdown is as follows: JPY 6 billion for the new logistics center, which will start operation in August 2024; JPY 1.2 billion for existing logistics centers and offices; and JPY 0.8 billion for system-related investments.

[Interpreted] Correction. There has been some typo in the memo. So the JPY 6 billion for the new logistics center, and this logistics center will start its operation in August 2023.

[Interpreted] And now I'd like to briefly walk you through what Mr. Sawada talked about during the briefing session today. Let's first look at the current market share in the fashion retail market. So with ZOZOTOWN and Yahoo! Shopping combined, our GMV amounts to approximately JPY 500 billion. And the number of active members is around 11 million. And when you look at the share of ZOZOTOWN purchases, among the purchases made by those members, it amounts to about 20% of the share. And going forward, we'd like to aim for a GMV of JPY 800 billion, with active members totaling to 15 million. And we also want to increase the purchase frequency of those active members to 25%. What it means is that out of the 4 purchases that they make for fashion, we want one of those occasions -- one of the occasions to be from us. So this is how we envision the expansion of ZOZOTOWN, and we also want to share with you how we see the strategy and expansion strategy of ZOZO as a corporation. So currently, when you look at our expansion plans, we're already focusing on #1 and #2 for ZOZOTOWN expansion and then 3, 4 and 5, or what we have announced as our 3 strategic pillars. So we have #3, which is the production support. We also have #4, which is the expansion into new categories in order to increase the purchase frequency of our customers and also to increase the purchase amount of our customers. And then we also have #5, which is monetization of fashion technologies, mainly outside of Japan. So I'd like to talk about each of this panel one by one. First, let's start off with the attracting of the broader range of customers. So as you can see, we've been able to actively and steadily increase the number of active members. And the main factor of this is the steady acquisition of new members, which also reached a record high in FY 2022. And then in relation to that, if you do a segment analysis, we can see that there is still more ample room for growth, especially in the segment of the people in their 40s and 50s. As you can see, the active member ratio is quite low for these segments. So we believe that there is a lot more potential for us to grow in these segments. And in terms of raising the purchase frequency, we're helping people find their own style. And we really want to pursue this route. And for those initiatives, we have initiatives such as [indiscernible], which is a physical touch point that we have set up, and we also have OMO as well. And through these initiatives, what we'd like to do is to further increase the purchase frequency per customer. And also the expansion into new categories will, we believe, work to drive up the purchase amount per customer as well. And number three is the production support in order for us to add a new source of revenue. We have been talking about this for quite some time already. We have initiatives such as Made by ZOZO and MSP. And we're being outsourced as a [ brand ] manufacturer. And at the moment for the -- as the results of FY '22 number production types amounted to 461, the number of pieces that we produced amounted to 120,000. And there are 8 brands that participate in Made by ZOZO initiative. And we believe that will be -- it will be to increase steadily. And let's look at our expansion into new categories and centering around the cosmetic category. So the results of FY '22 for our cosmetic category in terms of GMV amounted to JPY 9.1 billion. And we mentioned that we were aiming for JPY 10 billion in terms of GMV side. We were a little bit shy of that. Although we did not achieve the JPY 10 billion level, we have been able to grow ourselves to become one of the largest cosmetics EC players. And what we'd like to do is to further increase our cosmetic GMV. And another thing that we would like to do is to apply the category development expertise we've been able to gain from our operations in cosmetics category to explore new categories. And lastly, this is the monetization in fashion technologies. The number of those ZOZO made pieces that we have been able to sold amounted to 8,300. And they were sold at the unit price of $95. And although that the amount is still small, we're obviously seeing growth by little. So that brings me to the end of my long explanation of the financial results. Thank you.

[Interpreted] Let's go into the Q&A. [Operator Instructions]. Go ahead.

Okay. Great. Thank you very much for your briefing. I was wondering, is it possible to explain a bit more about the policy change at Z Holdings? And why you think this will mean that your sales are essentially flat this year? And what do you see beyond this year over the medium term for your Z Holding -- or sorry, your Yahoo! Shopping business?

[Interpreted] So thank you very much for your question. This has a lot to do with Z Holdings strategy. And as a matter of fact, they are having their own results briefing tomorrow. So it's quite difficult for us to answer that question. But that said, for this ongoing fiscal year, this is their strategy. So I think you can ask questions to Z Holdings directly. And when it comes to how we see this going forward. We don't think that this will continue forever.

Okay. I understand. And then another thing, you're mentioning how -- obviously, your customer acquisition is still very strong, and you want to up the number of sales per customer or up to 25% of people shopping. And if I look sort of on average over the last 5 years, so going back to 2019, if I divide your sort of consignment sales by the average number of active customers you have, that number basically hasn't changed for 5 years. So why has it not changed for 5 years? Is that to do with the cohort mix changing or other factors? And do you see a sort of -- is there an obvious reason why it should change or start going up in the next year or 2?

[Interpreted] I'm not really sure where you're getting that number. So how did you come up with the number of active members within consignment sales?

Well, perhaps the number you quote is just for consignment sales. That might be a mistake or anything. I just -- another way of looking at it is if you look at the rate of growth of the active members in GMV and then you compare it to the rate of growth of the number of buyers, it's basically the same, again in growth from as sort of people buying more. But maybe that's -- maybe the total number of buyers like you have on Page 25, maybe that's not just consignment. Just to give you the exact numbers. So if I look at this year's consignment sales, it's -- sorry, consignment GMV, it's basically about JPY 38,000, I think, per customer. And that's almost exactly the same, JPY 38,000 as it was 5 years ago, if I divide 5 years ago GMV by the number of buyers.

[Interpreted] Now I get it. Thank you for that explanation. So you're perfectly right for saying that. So the purchase amount per active member has been pretty much same for the past several years. It's been flat. And then that's because it was mainly apparel merchandise. And what we'd like to do going forward is, as I have mentioned, increase the number of new categories that we carry on our platform so that we can use that to drive the purchase amount per active member. And another thing that I want to mention is that before COVID, the main channel for the users or the main channel for the consumers was, of course, the offline outlet. And at that time, the online purchase rate was maybe 1 out of 5x of their purchases. And we experienced COVID, and now the online penetration in fashion is going up. And what we'd like to do is to further increase the online penetration, including apparel business. So that's something we'd like to try out.

Okay. And sorry, just the last question is overall your payroll costs went up as a percentage of your sales, as you touched on earlier. And I was wondering, for the outlook for sort of payroll, growth in headcount and salaries this year, what should we expect? And you have a sort of segment in your SG&A called Other, which, I think, includes point permission. I was wondering, does it include any other tailing cost?

[Interpreted] So in terms of the personnel costs, on a year-on-year basis, it's actually flat. But if you just look at the fourth quarter only, it looks as though the personnel cost ratio is going up significantly. But that's because we paid out the bonus at the year. But this is not going to deliver into, for example, the first quarter or the second quarter. And just to answer to your second part of your question, which is what is included in the other costs. So this Others do not include personnel costs or staffing costs. It's mainly things like, for example, telecommunication expenses or receivables expenses and such and such.

[Interpreted] Thank you. And then [ Ravi-san ], you're next.

My first question is on the midterm plan and a bit of a quick follow-up to that. I guess I wanted to understand sort of the term or the duration that you're thinking about in terms of getting to this JPY 800 billion GMV target. Just on rough math if you sort of continue this high single-digits CAGR rate, I would say it probably takes, call it, 6 to 7 years to sort of get you to the JPY 800 billion. But I'm wondering if you guys have an image of sort of how long it would take to get to that JPY 800 million. And then I guess -- sorry, on that basis as well, do you expect sort of current margin structure? I think your operating margin is at about 11% of GMV today. Do you expect to maintain that as you make your trajectory towards this JPY 800 billion?

[Interpreted] So in terms of at what timing do we foresee to achieve JPY 800 billion, we're not in the stage to communicate that exactly. If you ask whether we'll be able to achieve that in the next couple of years, I don't think so. And then if you ask whether we aim to achieve that in 10 years' time or 15 years' time, that's not the case either. So it's kind of in between those. And to answer your second part of the question, which is the margin ratio, how we foresee that in the future. So I did touch upon really briefly in Sawada's part of the presentation. So what we'd like to do is to add on incremental profit, that's not just coming from ZOZOTOWN. So what we'd like to do is to either sustain the OP against GMV ratio or increase it a little bit.

Got it. Very helpful. Second question is on just the guidance this year. I think for your [ segment ] growth, you're looking for about 8% of GMV growth this year. Can you just dissect that in between growth of shipments versus average order value growth? How are you thinking about that? Obviously, average order value has been growing pretty nicely over the last 12 months and due to continue.

[Interpreted] So in terms of AOV, in our budgets are such that AOV will invade. To what extent, how much of that, it's hard to say. But we are expecting to see growth level from last year, and we believe that we may be able to sustain that level into this year as well.

Got it. So you would expect a 3% to 4% year-over-year growth sort of continue in the near term as well as for the year roughly?

[Interpreted] Well, of course, we're crossing our fingers that we'll achieve that range, but we won't be able to make a commitment to that clearly with a statement. But yes, we're hoping that we'll be able to hit that level.

Understood. And my last question is just on the Yahoo! Shopping GMV. I understand the forward trajectory is difficult to comment. But I guess the one thing that I noticed in the fourth quarter is that your growth rate has sort of reaccelerated again. I guess is that a function of sort of Z Holdings may be ramping up promotions in the fourth quarter? Or is it something else? Just sort of wanted to understand the reacceleration of the growth in the fourth quarter.

[Interpreted] So for the fourth quarter, I wouldn't really articulate it in such a way that they actively promoted promotion in the fourth quarter.

[Interpreted] So Mr. Gibson, the floor is yours.

First question, in the core comment earlier, the management, [ Yanagisawa ] said that the brand were discounting less in the fourth quarter. I wonder if you could compare the amount of discounting in the fourth quarter versus the third quarter? Was it similar amount or percentage conceptually? Or was it actually less discounting in fourth quarter versus the third quarter. I'm just wondering whether as we go through the quarters, things continue to improve in that regard.

[Interpreted] So I believe that you referred to the discount rate during the sales period. And if that's the case, our fourth quarter really falls in sales period for winter. And then the actual amount of the discount was made by our merchants and the promotion of that became a more lenient or it decrease. And then we saw same testing for the summer sale, which plays in the second quarter, so if we see it on an annual basis, the discount rate and the amount of our markdown, which to place, became lower.

Okay. And then sort of related inventory, how did you see inventory availability from the brands in the fourth quarter versus previous periods? Is that still improving and hence, that's helping to drive improved GMV for consignment business?

[Interpreted] So as far as the inventory level is concerned, for the full FY '22 year, it was at a sufficient level. So it's not just for the fourth quarter, we had quite a high level of inventory.

That hasn't changed in terms of availability by the brands?

[Interpreted] You're right. So there was no availability of the merchandise from the brands.

Okay. Right. Okay. And finally, because of the new logistics centers, you've said that you've got higher rent to about JPY 1.2 billion. This fiscal year, you've got increased depreciation by about JPY 1.3 billion. Just wondering, during the year, will that increase? Will that be sort of jump up in August? Is that -- I think I'm just wondering during the course of the 4 quarters how that -- those increased depreciation and increased rent might occur?

[Interpreted] So yes, there is a logistics spend for the -- which will be in operation from August. And as a matter of fact, we are already starting to pay rent. But the space that we're renting out is [ cited ]. So for the first quarter and for June and July, we're only paying approximately JPY 20 million on a monthly basis. So it's quite a small amount. And that said, this logistics center will be in full operation from August, and then it's from August that large amount of rent will start to be recognized and that is the same for the depreciation costs as well. So I think you can anticipate to see much more significant costs coming in from August.

Okay. So then that means next year, we'll have a full year impact? So the actual depreciation of rent will go up even further, correct?

[Interpreted] Yes. I think you have the right understanding of that.

[Interpreted] Kim-san, I'm really sorry to have to waiting. Please go ahead and ask your question.

No problem. I have a couple of questions. The first one is you're guiding to advertising sales next year of up 21% or JPY 9.4 billion, which is a nice acceleration. Can you describe any changes in your advertising strategy that you're making to lead to the acceleration?

[Interpreted] So there's not going to be a big strategic change on our advertising business. I think it has to be quite a challenging figure for us to achieve, and we need to make effort. And then as we are turning out a new ad menu this year, so yes, we are taking on any challenge on that front.

Okay. Great. And then my second question is in regards to the total amount of points and advertising that you expect to send in the new year. I think last year, you began with an initial at 3.5% of GMV. It ended up being just over 4% of GMV. How do you think about the overall point promotion and advertising this fiscal year?

[Interpreted] So for this year, we plan to do -- to spend 4% of GMV for the total ad costs. And then in terms of [indiscernible] those expenses were the point-related initiatives and advertisement, like what we did best are we want to make those decisions in an agile and nimble manner.

Understood. And will there be any -- do you expect a change in the mix between the points and the advertising, maybe based on what you're seeing in terms of brand advertising versus sales promotion?

[Interpreted] So I think that goes back to the answer that I gave you earlier. So in terms of that mix as well, we don't have a clear rule on that. So what we'd like to do is to make decisions in a nimble manner as we go through the year.

[Interpreted] Does anyone else have other questions? And if so, please raise your hand. Okay. So it seems like you have no further questions. We'd like to close the conference call, and thank you very much for your participation.

Thank you very much.

Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]