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

[Interpreted] It's now time to start the Third Quarter Financial Results Q&A session, and hello, everyone. My name is Kobayashi from ZOZO. Thank you very much for joining us for the conference call of the third quarter financial results for ZOZO. We have on the call Director, Executive Vice President and CFO, Koji Yanagisawa; and me Kobayashi. There will be 2 of us joining for this call. So first, CFO, Yanagisawa, will take you through the financial results.

[Interpreted] Good evening, everyone. I'd like to take you through the financial results for the third quarter of the fiscal year ending in March 2024. As for the third quarter FY 2023, our gross merchandise value GMV rose by 5.1% year-on-year, amounting to JPY 427.1 billion. Our GMV, excluding other GMV went up 7.4% year-on-year, landing at JPY 399.4 billion. Our operating profit rose by 2.4%, landing at JPY 45.6 billion, and our operating profit margin OPM was 11.4%, decreasing by 0.6 points year-on-year. GMV for ZOZOTOWN business trended slightly lower than the plan impacted by the abnormal weather, including warm winter. But GMV for Yahoo! Shopping, thanks to the effect of active promotions trended higher than the plan, and the GMV of the total business is generally progressing as planned. As for the OP, OP continues to trend higher than the plan, both GMV and OP are at record highs for the third quarter. The achievement rate against the company plan is at 74.6% for GMV, excluding other GMV and 76.2% for OPs. Let's go to Page 10. Here are the quarterly consolidated financial results. In the third quarter accounting period, GMV, excluding other GMV increased 9.2% year-on-year. Although the impact of the abnormal weather was strong, we managed to implement promotions at the right time when demand was rising, and this proved to be effective. Our operating profit, mainly because the expenses related to the new logistics space are now fully recognized decreased by 3.8% year-over-year, but this was factored in during the planning phase. Next, I'd like to share the details of our business results. Let's go to Page 11. Let's look at the increased decrease analysis of the operating profit as of the end of the third quarter. ROP was JPY 44.63 billion in the previous FI and in FY '23, it amounted to JPY 45.69 billion, up by approximately JPY 1.06 billion. There are 3 factors attributable to the growth of the OP. First, JPY 8.28 billion coming from the gross profit growth, which is the result of ZOZOTOWN and Yahoo! Shopping GMV expansions; second, JPY 1.34 billion from the sales increase generated by the advertising business; and third, JPY 1.55 billion from the growth of shipping revenue and others coming mainly from the GMV growth. And there are mainly 4 factors that drove down the OP. First, JPY 2.23 billion from the increase in fixed costs impacted by the rise in the number of employees and logistic basis; and second, JPY 3.16 billion from the increase in variable costs that rose in correlation to the GMV. And third, minus JPY 2.46 billion from the increase of the actual promotion-related expenses associated mainly with expenses to attract customers and point related expenses. And fourth, minus JPY 2.26 billion from other expenses, such as the purchase of equipment to start the operation of the new logistic base, increase in cloud server expenses and transferring of some outsourcing commissions to other accounts. Let's go to Page 12. This is the consolidated balance sheet. Treasury stock was partially canceled in November 2023. And as for the purchases that began in the same month, they are progressing steadily. Next is Page 18 of the handout. This is the quarterly GMV trend. The total GMV, excluding other businesses increased by 9.2% year-over-year due to the warm winter sales of outerwear and other winter apparel were sluggish, but the growth rate turned out to be the highest within this period. Now I'd like to explain Page 22 of the handout. This is the breakdown of SG&A. The SG&A to GMV ratio was 22.9%, up 0.6 points from the same period last year. And there are 2 main factors that drove down the SG&A ratio. First, the outsourcing commission decreased by 0.2 points due to the transfer of some expenses that have been included in outsourcing commissions in the previous fiscal year to other accounts. And second, the order value tend to be higher than in the same period of the previous year, and this resulted in a 0.2 point shipping cost decline. On the other hand, there are 4 key factors that drove up the SG&A ratio. First, increased inventory supply and the warm winter deteriorated the stock turnover ratio and led to lowering of operating efficiency, resulting in a 0.3 point increase in logistics-related expenses under payroll and staff costs. And second, new logistics base started its operation, and thus, the rent expense increased by 0.2 points. And third, depreciation rose by 0.2 point as the depreciation of the material handling equipment kicked off with the start of the new logistics base operation. And fourth, this is the last one. Others increased 0.4 point mainly due to the purchase of equipment for the new logistics base operation and increase in cloud server expenses. Let's go to Page 25 of the handout. Here is the actual promotion-related expenses trend. In the third quarter, our actual promotion-related expenses, which is the sum of the advertising expenses and the point-related expenses turned out to be 5.2% of GMV -- and as of this -- as of the end of this quarter, the YTD ratio of promotion expenses to GMV was 4.2%, which is generally as planned. Let's go to Page 23. Here are the OP and OPM trends. We started to recognize the expenses related to the new logistics base fully, this period, we also experienced a worsening of the operating efficiency due to the volume increase, and they led to higher costs, which pushed down the OPM by 1.5 points, landing it at 10.6%. Moving on to the main KPIs of ZOZOTOWN. And by the way, the KPIs hereafter, starting from Page 27, do not include the results of our Yahoo! Shopping or B2B business. The number of total buyers was up by JPY 130,000 from the previous quarter, amounting to JPY 11.69 million, of which active members was JPY 10.73 million, increasing by JPY 220,000. Guest buyers decreased by JPY 80,000 finishing at JPY 950,000. Gas buyers continue to be on a downward trend as we continue to give points to those who newly registered as members. The promotion enhancement for the active members is coming to fruition and the number is steadily growing. Let's go to Page 28. This is the number of shops on ZOZOTOWN. As of the end of the third quarter, the number of shops was 1,605, a net increase of 24 shops from the end of the previous quarter. We welcomed 48 new shops to our platform this quarter. To name a few, we now have luxury brands, Mulberry and Valextra, footwear brand, Dr. Martens and Yves Saint Laurent Beaute and Shu Uemura from NIHON L'ORÉAL. Let's go to Page 33 and 34 of the handout, starting from Page 33. This is the average retail price. So our average retail price turned out to be JPY 4,360 down by 1.7% year-over-year. The brands continue to increase their list prices for this fall and winter season, but the average retail price showed a decrease in the third quarter. The main factors are that outerwear and other expensive items did not sell as much because of the warm winter and also the markdown ratio increased. Let's now go to Page 34. This is the average order value. The average order value was JPY 9,119, up 1.8% year-on-year. Although the average retail price decreased, the number of items purchased per order increased, pushing the average order value higher than in the same period of last year. The number of items per order increased mainly because we gave more days to free shipping on purchases over certain mount promotions than last year, and the ratio of combined purchases rose on Sundays when multiple brands issue their coupons. And next, are the full year consolidated earnings forecast and the dividends for the ongoing fiscal year. There is no change to the plan. And please go to Page 44. I'd like to explain our logistics-based expansion plan. To resolve the current operating efficiency deterioration driven by the volume increase and to address the anticipated GMV growth, we plan to start renting Ibaraki 5 in April 2024. We continue improving operating efficiency through in-house efforts while strengthening dialogue with brands to enhance consignment inventory quality. And by the way, Ibaraki 5 will be a base specializing inventory storage. Lastly, although it's not included in the handout. I'd like to share the anticipated shipping fee increases with you. In light of the current international situation, depreciating yen, cost decreases caused by labor force shortage and the so-called 2024 problem, the need to offer a better working environment to the truck drivers while sustaining and strengthening transportation and shipping networks, we decided to accept a request for Mama to transport to increase the shipping fees. The price increase will come into effect from April 2024 and the extent of the increase will not be disclosed. To maintain profitability, ZOZO is considering mainly the following measures: reduction of other costs through in-house efforts, introduction of slow delivery in which multiple orders are combined into one delivery and policy change of the shipping fee we received from our customers. The slow delivery service is intended to mitigate the impact of higher delivery costs by consolidating multiple orders into a single shipment and is scheduled to begin its test operation in March 2024. That would be all for me.

[Interpreted] Let's go into the Q&A part.

[Interpreted] [Operator Instructions] It will be great if you can kindly raise your hands if you have a question or questions. [indiscernible] go ahead.

My question is, you commented that the retail price went down due to the warmer weather and the AOV was up a little bit, but decelerating. And yet shipments were quite strong. And I guess there was some campaigns in the quarter as well, which led to the higher promotional costs that you mentioned. Can you comment on those campaigns? I believe there was one around Black Friday. Can you comment on how successful they were in your view, whether you plan to continue that next year and maybe the magnitude or contribution to GMV in the quarter?

[Interpreted] So with respect to the promotion, as you mentioned, in general, the cost that we use for our promotions are in line with what we planned. And then what contributed to our GMV are mass media ad like the regular commercial and personalized discount? And then the one that you mentioned, which is the Black Friday that we conducted this period. So they actually trended higher than what we expected. And just to give you some perspective on what we did for the Black Friday promotion because it's Black Friday promotion. We limited the period and basically offered a markdown during that period. And basically, we work with the brands so that we'll be able to reduce the prices of the products. But these promotions that we conducted in the third quarter, especially the Black Friday, if you ask what sort of contribution you had in respect to our GMV ratio, as I mentioned, the peer was quite limited. So if you ask whether it had a dramatic significant contribution to the GMV that may not be the case. So if I may summarize, in the third quarter, yes, we implemented the Black Friday promotion together with other promotions, and then they contributed altogether.

Understood. And my other question is, at the start of the year, you roughly guided for AOV growth in this somewhat inflationary period for Japan at between 4% and 5%. And then in Q3, the AOV grew about 1.8%. It seems to be tracking below what you originally guided. Is -- what's your expectation for the fourth quarter as the winter continues? And do you think that now it looks like the full year AOV may come in below the 4 closer to 3 or 3.5.

[Interpreted] Yes. So these numbers deviate from what we expected in the beginning of this period. And then this is not coming from the -- from AOV, but it's actually coming from ARP, average retail price that I just spoke about. And then in the third -- starting from the third quarter, our ARP is in the negative. And that's because we're impacted negatively by the warm winter, as I mentioned. And we believe that this trend will continue. And of course, we need to close the fourth quarter to see the actual results. But we believe that the chances of our ARP being weak is quite high.

[Interpreted] Thank you for your question. And moving on to Tsusaka.

[Interpreted] When you were talking about the cost and expenses, you talked about the operating efficiency. So I believe that you were impacted negatively by the warm winter had it not been the case, would you say that the operating efficiency will normalize? Or would you say that because the volume is coming up, you need to implement new measures in order to raise the operating efficiency?

[Interpreted] Yes. So first of all, we believe that the warm winter will continue into this winter. And then this had a negative impact on our fall and winter turnover rate. And then in order to cope with this, we decided to do markdowns and then we've been able to sell down our inventory. But the sell down of the inventory is only to a certain level. So we believe that this deterioration of the turnover is going to continue that. And secondly, there are more brands that are relying on us as their sales channels. And this is not just limited to this warm winter, but now more and more brands are giving us their inventory. So that's why our inventory level is going up. And I believe that, that is good news. But when you look at the other side of this, the flip side of this, they're also giving us what's called a carryover inventory. So what carryover inventory is, is that there's going to be items remaining after the season is over. And then more brands are starting to keep this remaining inventory for the next season to come. And then that amount of the inventory was slightly higher than what we expected. This agenda is more fundamental than just a one-off warm winter. So in order to tackle this, we are having discussion with the brands to decide what to do with the carryover inventory. And that's the backdrop. And we thought that this will take a little bit of time for us to resolve it. So that's why we decided to create and invent a new logistic base for storage.

[Interpreted] And then when looking at the cost and the others is coming up, and then this is because you purchased equipment for the new base, and you also mentioned the transferring of some account items. So in terms of the one-off expenses, you mentioned that you bought -- you purchased a large amount of equipment in order to run this new base? And how much should I think of this to be?

[Interpreted] Yes. So for the third quarter, others amounted to JPY 4.3 billion in total. And -- in terms of the one-off expense was a little short of JPY 1 billion, which was used for the purchase of equipment for the new logistics base.

[Interpreted] Is it correct for me to understand that in the fourth quarter, there will be absolutely no such expense of JPY 1 billion? Or would it be a little bit of that effect coming into the fourth quarter?

[Interpreted] Right. So for Ibaraki 4, the -- as you mentioned, we expect no recording of purchases of such equipment in the fourth quarter and onward in the fourth quarter. But for Ibaraki 5, which is going to be starting from April, the spring, we believe that there's going to be several millions of equipment purchasing expenses coming in, in the first and the second quarter.

[Interpreted] Does anyone else have questions? If you do, please raise your hand using the button.

[Interpreted] I have two questions. My name is Yamamura from the Citigroup. The first question is about the turnover rate deterioration. So would you say that by renting this new distribution center, you will not -- we will not have to consider a factor in the risk of going over the capacity. And another part of my first question is just to confirm, would it be possible for us to sort of--to address the structural problem of carryover increases by renting this new spaces.

[Interpreted] Thank you for your question. So for a certain period to come, this capacity excess -- this going over the capacity problem will be resolved with this new advent of the distribution center. What it means is that we'll be able to accept new meter coming in from the brands. But if you ask the question whether this is going to be able to fundamentally resolve this problem of the carryover inventory? The answer is absolutely not. That's why we need to continue to have communication with the brands so that because some of the brands are starting to use this sort of as their warehouses. So we need to come up with some kind of a solution. Otherwise, the inventory level will just continue to add up forever. In order to resolve this problem, we need this -- we need to require time. So this is something that we'd like to tackle.

[Interpreted] This brings me to my second question. You talked about the price hikes of Yamato Transport. And you mentioned that you're going to -- you're planning to introduce slow delivery in order to suppress the number of deliveries. Should we expect some kind of impact on the field operation? I believe that the impact on the profitability is something that we can find out later as we get to have more visibility on this on the results of it. But should we expect and simulate some kind of an impact on the operation.

[Interpreted] So in terms of this slow delivery, it wouldn't have a major impact on the operation. What it means is that this is -- we believe that this is not going to be problematic in terms of the cost.