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

Thank you very much for your question. So I can take that question as well. Of course, we can't just talk about the weather all the time, but we are still seeing significant impact from the weather and from my point of view. So fall is coming or came one month later this year. And last year, it was late too, but it's even -- it was even one month later this year. So September -- so in August, people buy summer fashion, but this September was similar to August, especially brands. Of course, based on their experience last year, they did, of course, adjust their merchandising. So they weren't really launching a lot of their fall/winter products in September. Right now, we're finally starting to catch up on the fall/winter inventory now. So that's a situation that we've encountered. So the ZOZOTOWN second quarter was slightly weaker, but it's mainly just from September -- impact from September. But October, November, December, we need to focus on how we can make up for the shortage. We want to make sure that the inventory -- we can move a lot of the inventory because when it comes to February in the next year, it's going to be harder to sell fall/winter inventory in February.

So you have implemented the initiatives that you actually talked about in the past, but it was just hotter than you expected. Is that right?

Yes.

And second question, in the earnings briefing, you talked about costs, variable costs. You have variable cost savings in terms of ad-spend as well as payroll. Can you talk about how much surpluses you have now that you'll be spending in the second half?

Kobayashi can take that question.

In terms of variable costs, as we mentioned, we didn't spend a lot of the promotion, and we also saved on payroll as well as the shipping expenses. And we can't talk about the exact costs, but in terms of promotion-related expenses, we are looking at the annual costs. So whatever savings that we have in the first and second quarter, we will be spending in the third and fourth quarter. So in that sense, annually it won't have impact. And Kanamori-san asked the question earlier about logistics, but we did improve productivity. But the improvement in productivity was higher than we expected, that's why we have seen savings in that respect. And in terms of shipping fees, we thought that the AOV was going to be flat year-on-year. But in the first half, we've seen higher AOVs. That is why we didn't spend as much on shipping as we expected. And in terms of fixed costs, it's a consignment and employee payroll. But we didn't see much fluctuation in terms of fixed costs. Fixed cost payroll, we didn't hire as many people as we thought we would. So it's slightly lower. And we also didn't have to pay as much on outsourcing. That's the background.

So in that respect, so if the external factors didn't change, it's promotional fees, you're going to spend whatever surplus in the second half, correct? So annually, it won't change.

Yes.

Next, Murata-san, please ask your question.

JPMorgan, Murata. I have 2 questions as well. First one is about the promotional initiatives. First quarter and second quarter, I believe you had ZOZOWEEK and also shipping -- free shipping campaigns as well, which resulted in very cost-effective or efficient promotions. You saw AOVs increase as well as a result. But on the other hand, these initiatives, if you do too much, people may wait for those campaigns to happen. So of course, you mentioned before that you can't do too much of those campaigns. But I guess right now, it's probably the most efficient frequency. Is that right? And going forward, even if you don't do a lot of free shipping campaigns, you have other promotional initiatives, advertising as well, to further grow your GMV. Do you have any other initiatives in mind?

I can take that question. In terms of promotional costs, of course we're on track in terms of spending. We wanted to improve our efficiency further. But basically, in terms of efficiency, it's on track. If we did too much, of course, the effectiveness may worsen slightly. So we've stepped on the accelerator around 70%, 80% basically. That's the right way to put it, I believe. And in terms of new promotion activities -- initiatives, we are thinking every day about new initiatives, trying to develop new initiatives. We can have sales per customer segmentation. This summer or fall, we've implemented that and we're testing segmented sales and also personalized promotions as well, we've put a lot of effort into. On the other hand, there are customers who bought maybe 2 years ago, but have not bought anything since. We also are sending out direct mail as well, so we're also testing primitive methods as well. So we're trying to test different methods. So we develop new initiatives, test them as well. But whether -- at the moment, we don't have any initiative that will enable us to explosively capture new users, but it's just really a lot of grassroots activities. Within the -- you mentioned ZOZOTOWN GMV. The climate change impact, you've seen that going forward. Of course, we may be experiencing extremely warm winters going forward. But within those harsh conditions, I think the key would be to undertake very efficient promotions to overcome the climate change, right? I did mention in my presentation to implement recommendations per region based on the weather report. So there are unique initiatives that we can implement because we're selling clothing on the Internet. So we can try to implement those initiatives to overcome climate change.

And the second point is about category expansion. You mentioned cosmetics earlier. And you're on track, you mentioned. But I'm sure you want to help it grow even more. But are there any challenges or anything that you think is working well? And also over the mid to long term, around apparel, other miscellaneous goods, interior may be possibilities, but what other categories are you thinking about adding? Are you preparing for them? Do you have a schedule? Please share updates in that respect.

At the full year earnings briefing, we want to share our thoughts around there. Right now, we're still planning at the moment. So if they say that, that works or if we decide that that's going to work, then we can -- 6 months later, we'll be able to share something.

So I look forward to your announcement 6 months from now.

Kawano-san, please ask your question.

This is Kawano. I think many questions have already been asked, but you talked about AI today, during the earnings briefing. And in one year, it seems like you've developed like 22 or 23 AI tools. I think I saw some news about that, but personalized recommendations, apparel brands have their own style. So since you have a wide range of products, you are well equipped to offer AI personalization. But you mentioned different case examples. But how can you measure the impact? Or can you share with us the impact that we can see immediately and how much impact, and personalized recommendations as well? How many people are trying to do that? So it's a little bit of a vague question, but I wanted to know a little bit more about AI.

First of all, in terms of the impact, it's -- we have a lot of very detailed numbers. So this is unique to an Internet company, but we talked about the personalization modules, and we changed it, and we did A/B testing, and we looked at the conversion rate to see if it goes up. And if it -- so we look at those KPIs and GMV is quite significant already for us. So if the conversion rate improves by a couple of percentage points, of course, it does have a dramatic impact on our GMV. So we've seen significant results actually. And it's not just the top screen search results or -- so let's say you search for tops and what order we showed the products in. On a daily basis, we are customizing and personalizing that. Version 20-something is our personalized logic right now. So we're not saying let's develop something and starting, we are fine-tuning and it's an ongoing process. And of course, we're using machine learning as well to do recommendations. So there's -- it's embedded in many places within ZOZOTOWN. So with all of those adding up, we can't say exactly, but we see double-digit billions of impact due to machine learning and AI. And you asked about another thing, other companies using AI. Of course, we want to do something other companies cannot. So we have a lot of different brands and different products. And we can't -- of course, it's valuable to have so many products and so many customers. So we are uniquely positioned. And we also have data that only we have. So that's very important to us. So even if data that other customers have, we can -- depending on how you cook the data, of course, you can utilize it for different purposes. But we're focused more on -- our strength is actually focusing on the data that only we have. For example, you talked about weather, news, changing what you show based on the climate or the location. So if you're at the golf course -- if I'm at the golf course and you recommend something, I might buy something as well.

So what you talked about today, you've already implemented or this is something you're going to do.

We have implemented already. This started in the summer already, but it's still just being tested right now. So, of course, we're discussing whether we should embed this into the core logic or not.

Next, Nagao-san, please ask your question.

BofA Nagao. First question is about the first half. LY Commerce GMV, I believe that you have far surpassed the plan. But for the second half, if you know how it will trend, please let us know what will happen in the second half.

Hirose can answer that question.

LY Commerce, as Yahoo Shopping, they are continuing -- they're going to continue the promotions. So we believe that we can make steady progress or growth, but they haven't decided exactly what kind of promotions. But we will collaborate closely with LY so that we can achieve our plans.

Second question, maybe more for Sawada-san, I believe, but WEAR traffic. I'm looking at the external data, but it seems like the WEAR traffic has come back significantly. And this will contribute to advertising and user acquisition and also sales via WEAR. But can you talk about the WEAR growth strategy that you're thinking of now?

As you mentioned, with respect to WEAR, it's been 10 years since we released it, and we did renovate the app on that occasion, and it's come back significantly. [indiscernible] was dropping until then, but right now, it's made a comeback. How to utilize WEAR? First, of course, directing traffic to ZOZOTOWN. After the renewal -- during the renewal, we focus on ID integration or -- so we wanted to make sure that we have -- people can use ZOZO ID to enter where using ZOZO ID. We improved the UI to encourage people to do so. So we wanted to direct traffic from WEAR to ZOZOTOWN and have people make purchases on ZOZOTOWN, and that is actually happening. So we've seen an increase in that respect. And over the midterm, of course, we talked about the niaulab or niau from your best style, but we want to call -- transform into something that we could call a niau app. So I am aware, sometimes people don't know what to wear and it's hard to describe. They want to wear something that looks great on them, but they don't know what the problem is either. So we want to be able to address people's concerns and develop or transform WARE into -- ultimately transform WARE into a fashion agent. And we've only done like 10%, 20% of that. So we want to continue to update on a daily basis. And it's mainly going to be the back-end data and technology update. So with those -- through those updates, we want to create something that will enable people to experience what looks best for them. And oftentimes, we're asked that maybe we can do that on ZOZOTOWN, we should do that on ZOZOTOWN. Of course, we want to implement something similar for ZOZOTOWN, but we talked about machine learning and AI earlier as well. It's complicated. And we already have a huge engine, and we can't really make tweaks here and there. So we want WEAR to become an app that will offer people or recommend people their best looks and then also apply the same changes to ZOZOTOWN. We believe that is a new growth engine that's not available in the market, so I have high expectations.

And lastly, there are BNPL regulation issues now. So BNPL ratio and also in the media, they're talking about issues with a younger audience, younger buyers. So can you talk about any risk in that respect that you're aware of at the moment?

Of course, we are aware of that and trying to identify the risk at the moment, but there's nothing that we can talk about right now at the moment.

And also thank you very much for your question. So it's past time. So I would like to conclude today's Q&A session. Thank you very much for joining us. [Statements in English on this transcript were spoken by an interpreter present on the live call.]