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

[Interpreted] It is time to start the call conference. Hello, and good evening. My name is Yusaku Kobayashi from ZOZO. Thank you very much for joining us on the first quarter financial results call conference of ZOZO for FY 2023 ending in March 2024. There will be 2 of us on the call today: Director, Executive Vice President and CFO, Koji Yanagisawa; and me, Yusaku Kobayashi; and the IR department joining. Now I'd like to have Mr. Yanagisawa walk you through the business results.

[Interpreted] Good evening. I am Yanagisawa, I'd like to walk you through the first quarter earnings results for FY '23 ending in March 2024. So under the theme of easy to understand and approachable, what we did was to simplify the documents as much as possible compared to last year. Okay. Let's jump right in, I would like to walk you through the numbers. So first of all, our gross merchandise value, GMV, rose by 3.1%, amounting to JPY 131.9 billion. Our GMV, excluding other GMV went up 6.4% year-on-year, landing at JPY 123.3 billion, and our operating profit rose by 10.8% landing at JPY 15.8 billion, or OPM was 12.9%, improving by 0.6 point year-on-year. With reopening, off-line sales gained momentum as people started to go out more, yet our GMV and operating profit both reached record highs for the first quarter. The progress rate of GMV, excluding other GMV against the company plan was 23.0% and 26.4% for OP. Let's now turn to Page 8 of your document, and here are the consolidated quarterly financial results. In the first quarter accounting period, GMV, excluding other GMV increased 6.4% year-on-year. In general, all businesses are progressing as planned, the inventory supply to ZOZO is increasing amid brisk sales at the brand's brick-and-mortar stores and it contributed to our sales. Although expenses for tracking customers and sales promotion increased compared to the same period of the previous year, gross profit increased, thanks to the GMV and the ad business growth and the shipping costs decreased due to the rise in order values. And for these reasons, our operating profit grew by 10.8% year-on-year. Let's now go to Page 9, and this is the increase and decrease analysis of the operating profit. Our OP was JPY 14.31 billion in FY '22 and in FY '23 it amounted to JPY 15.86 billion, up by approximately JPY 1.55 billion. And there are 3 factors attributable to the growth of the OP. First 1 is JPY 2.16 billion coming from the gross profit growth, which is the result of ZOZOTOWN and Yahoo! Shopping business expansions. And the second factor is JPY 420 million from the sales increase generated by the advertising business. And the third one is JPY 660 million from the growth of shipping revenues and payment service revenues as a result of the GMV growth. On the other hand, there were 4 factors that drove down the OP. The first one is minus JPY 290 million from the increase in fixed costs impacted by the rise in the number of employees and logistic basis, And the second one is minus JPY 300 million from the increase in variable costs that rose in correlation to the GMV. And the third one is minus JPY 1 billion from the increase of the actual promotion-related expenses associated mainly with expenses to attract customers and point-related expenses, and the fourth one is minus 100 million from other expenses such as transferring of some outsourcing commissions to other accounts. Let's go to Page 16. This is the quarterly GMV trend. Although the summer sale had a slightly slow start, we are on track against our original plan. And our consignment sales, which comprises the majority of the overall GMV increased by 2.7 points landing at 78.3%. Next, let's go to Page 20. This is the breakdown of our SG&A. The SG&A to GMV ratio was 22.0%, down 0.4 points from the same period last year. And a factor that drove down the SG&A ratio is that the order value turned out to be higher in the same period of the -- than in the same period of the previous year, and this resulted in a 0.5 point shipping cost decline. And on the other hand, what drove up the SG&A ratio was the web ad increase and recording of ad costs related to ZOZOFIT and niaulab expenses resulting in a 0.3 point increase in advertising expenses. Let's now turn to Page 23. Here is the actual promotion-related expenses trend. As I have mentioned in the first quarter, our actual promotion-related expenses, which is the sum of the advertising expenses and the point-related expenses turned out to be 3.3% of our GMV. Let's go to Page 21, and this is the OP and OPM trends. As I mentioned, although expenses for attracting customers and sales promotion increased compared to the same period of the previous year quite significantly, gross profit increased due to the growth in GMV and advertising business and the shipping costs decreased as a consequence of higher order value. And as a result, our OPM increased 0.6 point year-on-year landing at 12.9%. Moving on to the main KPIs of ZOZOTOWN and this will start from Page 25. And now let's look at the number of total buyers. First, it was up by 60,000 from the previous quarter, amounting to 11.47 million. Of which active members was 10.35 million increased -- increasing by 160,000 and guest buyers decreased by 100,000 finishing at 1.11 million. And 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 ZOZOWEEK and the main summer sale worked to attract more customers. And on the other hand, with respect to the guest buyers, they continue to be on a downward trend as we enrich services for the members. Let's go to Page 26. This is the number of shops on ZOZOTOWN. So as of the end of the first quarter, the number of shops was 1,564, a net increase of 2 shops from the end of the previous quarter. And then within this first quarter, we welcomed 19 new shops. Moving on to Page 32 and -- sorry, Page 31 and 32, average retail price and average order value. With respect to the average retail price, first, it was JPY 3,726 up by 4.9% year-on-year. And the growth is mainly attributed to the price increases of certain products and decrease in the discount rate of products sold during the sales period. These factors pushed up the retail prices of merchandise, both sold and original and discounted prices. Now average order value. The average order value was JPY 8,177, up 6.2% year-on-year. Well, actually, the number of items per shipment increased along with the average retail price, and this worked up to bring up the average order value from the same period of the previous year. Last but not least, I'd like to walk you through our governance activities, which is on Page 5 of the handout. On June 28, 2023, we transitioned from a company with an Audit and Supervisory Board to one with an Audit and Supervisory Committee. At the same time, some directors and corporate auditors resigned and new ones were appointed. And as a result, the ratio of outside directors increased from 37.5% to 54.5 % and the percentage of female directors increased from 18.1% to 45.4%, both showed significant increases. That was a brief explanation from my side. Thank you very much.

[Interpreted] Let's now go into the Q&A session. [Operator Instructions]

Mr. Tim, please go ahead.

It's Tom here from Alma Capital. Can you hear me?

Yes.

Okay. Great. Thank you very much for your briefing and I have a few questions. I was wondering, firstly, is it possible to comment on the number of total buyers, which obviously kept increasing but at a slower rate than the last few quarters or last year, the quarterly rate is down a bit. And I'm looking at the number of -- the total number of buyers, including guest.

[Interpreted] Thank you for your question. So when you look at the quarterly changes, it is true that the total number of buyers started to slow down this quarter. And this is mainly due to the fact that some of the light users, meaning people that are spending less with us, they are spending less time with us as well. From the fourth quarter of last year to this first quarter, some of them decided to leave the platform. So that's why in the first quarter, because these were light users, it didn't have too much impact on our GMV, but it's not really preferable that our light users are leaving from our platform. So therefore, from the second quarter and onward, what we'd like to do is to implement initiatives to start retaining those light users.

Okay. What are your plans to do that? Will you ramp up marketing? Or will you change any initiatives? And similarly, even your -- well, I don't know if you would call them light users, but the pieces per active member also is continuing the sort of very slight decline. So I'm basically wondering this negative momentum, which I can understand from reopening from COVID. First of all, when will it naturally end? And then second of all, what are the initiatives that you have or the ideas you have to try and reverse it.

[Interpreted] So regarding the initiatives we plan to execute of course, some of that requires money, so we may reallocate some of the existing budget to the initiatives for the light users. And another thing that I want to mention is that, once again, these are light users -- so we simply have to make them remember about us once again. So for this, we can send out e-mails to them or we can send our recommendations to them. So what we'd like to do is to increase touch points with them. So these are some of the initiatives that we'd like to execute. In terms of the decrease in the number of pieces, that's actually coming, I believe, from the increase of the average retail values and there's a limited amount they can spend and there's a limited amount of money that they have in their wallet. So they will decide to purchase things with higher value and therefore, the pieces will go down. And this is not a trend that we're seeing only in e-commerce. But with the reopening happening, I believe that the same tendency is happening in brick-and-mortar stores as well. And then just to elaborate on that, the annual purchase amount remains the same. It's basically sustained, and it's only the pieces per purchase that's going down. So we don't really see this. We don't really recognize this as a significant problem.

Okay. Sorry, just my final follow-up because you said you'd like to increase the touch points in e-mails, recommendations and things to drive more user activity on the platform. But it's my impression that you already do a lot of that, you're a well-run e-commerce business, and you've done this kind of stuff before. So how much room is there to actually improve or do something new through that?

[Interpreted] So relatively speaking, our promotions were targeted more towards segments that have a tendency to buy from us and then also promotions were addressed to new acquisitions. So we didn't really actively implement promotions for light users. We had a tendency to de-prioritize that. And then we started to see the light users impacting us in a negative way this time around. So we are deciding to increase the priority of that segment now.

Okay, I understand. Thank you very much.

[Interpreted] Thank you. Gibson-san, go ahead.

David Gibson from MST Financial. Can you talk about your hiring. It looks like you hired 107 people in the quarter. Last year, you did 55. So almost double the number. Is that related to logistics? And I presume that expense will go up in the coming quarters because of that hiring?

[Interpreted] So in the first quarter, we had April month and then April in Japan is when the new graduates join the companies, and we had a little less than 50 persons joining us as new graduates. And we plan to hire on an annual base, about 300 people.

Okay. Just the number looks like you hired a lot more people than normal, more than the new grads. You hired another 57 people in the quarter. It just seemed to be out of the seasonal trends that you would normally do.

[Interpreted] It's seasonal, actually because for many of the companies here in Japan, April is starting a month of the financial year for us. And then we welcome more mid-career people as well in April.

Okay. Can you clarify just generally speaking for 2Q, is hotter weather good or bad for your sales?

[Interpreted] So hot weather, cold weather in Japan, not just for the hot and cold weather, having appropriate timing for the seasons to arrive is going to have a positive impact for us. And then in July and August, if it becomes harder as we expect because that's the summer season for us, and that would have a positive impact on our business.

Okay. And then on the total provision was what, some 3.3% of GMV in 1Q. Can you talk about where you expect that number to be in the rest of the year, please?

[Interpreted] On an annual base, we plan to have 4% of our GMV allocated to promotion-related expenses.

Okay. And sorry, final question. when you set the guidance and communicated last quarter, it was implied, I think, said that you thought the guidance was conservative. Do you still think that's the case, given the 1Q performance?

[Interpreted] Yes. So there will be no change. Thank you for your question. Moving on to Arthur-san.

This is Arthur from Hidden Lake Asset Management. I guess the first question is just a follow-up on the promotion costs. As you said, your plan is for 4%, which is for the full year this year as a percentage of GMV, which is slightly less than last year. But in the first quarter this year, you're spending about 70 basis points more of promotion costs year-over-year. And so I guess, in order for you to be still spending 4% on a full year basis, you're going to have to be spending less promotion cost year-over-year for the remaining 3 quarters in some quarterly fashion. And so I guess I'm just curious like why was the first quarter so high relative to sort of normal seasonality and then as you sort of maybe potentially start to spend less maybe into the back half of the year, is there a risk that your GMV growth might suffer a little bit from the lack of sort of promotional budget that you have in the back half since you've spent so much in Q1? That's my first question.