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

It's time. We would like to begin. This is Kobayashi from ZOZO. Thank you for taking part in ZOZO's FY 2024 Third Quarter Conference Call. From ZOZO, we have the Executive Vice President and CFO, Yanagisawa as well as myself. Without further ado, we would like to ask that our CFO, Yanagisawa takes us through the earnings results.

Good evening, everyone. I would like to take you through our performance of FY 2024 third quarter. The results for the FY 2024 third quarter are as follows: GMV increased by 8% year-on-year to JPY 461.1 billion, the GMV, excluding other GMV increased by 8.1% year-on-year to JPY 431.9 billion, the OP increased by 13.3% year-on-year to JPY 51.7 billion and OPM was 12%, rising by 0.6 points. The achievement rate against our fiscal year plans for GMV, excluding other GMV was 75.5% and 80.6% for the operating profit. GMV for the early period during the third quarter was sluggish due to the even warmer winter we experienced in comparison to the previous year. But demand began to recover with a rather colder temperatures and so for the most of the quarter, we are on track. With respect to the operating profit, the efficiency within our warehouses have improved far quicker than we had anticipated. Thus, we have unused logistic expenses as well as fixed costs such as employee payroll and consignment fees. Thus OP has overachieved our plan. Now moving on to Page 7 of the presentation material. Here are the consolidated results for the quarter. The GMV, excluding other GMV increased by 8.4% year-on-year this quarter. As I have already explained, the remaining summer heat we experienced in October was more severe than last year. So demand remains sluggish, but with the return of colder temperatures, we saw favorable results in November and December. Regarding the operating profit, the gross profits increased due to the growth of GMV in the advertising business. We also saw a decrease in logistic expenses resulting from improved efficiency and warehouse operations, and decrease in other expenses associated with the reduction of one-off expenses as the OP decreased significantly by 26.9% year-on-year. Moving on to Page 8, the increase-decrease analysis of the OP for the quarter. The OP increased by JPY 6.07 billion from JPY 45.69 billion to JPY 51.76 billion. There are 4 main reasons why the operating profit increased. First, the gross profit increased by JPY 9.02 billion due to increase in GMV of the ZOZOTOWN and Ly Yahoo! Commerce. And second, we saw sales increase by JPY 1.47 billion due to the growth of the advertising business. Gross profit increased by JPY 3.27 billion due to the increase in shipping revenues resulting from a change in the shipping policy. And lastly, we did see increase in costs such as cloud server expenses, but one-off expenses for operational equipment for the ZOZOBASE TSUKUBA 3 that we incurred last fiscal year decrease. So other expenses decreased by JPY 0.27 billion. There are 3 major reasons why the operating profit has decreased. Firstly, we saw an increase in the number of employees in logistics center, which pushed up the fixed cost by JPY 3.11 billion. Secondly, variable costs are increased in proportion to the GMV and the price increase in shipping fees resulted in a JPY 3.2 billion increase in costs. Thirdly, actual PR expenses, including acquisition costs and PR expenses resulted in JPY 1.67 billion increase in costs. Moving forward to Page 20 of the presentation material, I would like to take you through our SG&A expenses. The SG&A expenses against the GMV was 22.8%, down by 0.1 points year-on-year. The expenses increased due to 3 major reasons. Firstly, we did see an increase in the average order value. However, the new price increase from Yamato kicked in on April 1 of 2024. Therefore, the shipping costs increased by 0.3 points. Secondly, depreciation of material handling equipment of the logistics center ZOZOBASE TSUKUBA 3 began resulting in an increase in depreciation and amortization cost of 0.2 points. There remain at least 4 ZOZOBASE TSUKUBA 3 and DPL Tsukuba Chuo began increasing the rent by 0.1 point. On the other hand, there are 2 major reasons why the SG&A expenses decreased. Firstly, the operational efficiency increase improved due to optimization of inventory levels in the warehouse, and automation has allowed for less labor, together decreasing the logistics related payroll by 0.5 points. And lastly, one-off expenses related to operational equipment in relation to the launch of ZOZOBASE TSUKUBA 3 that we incurred last fiscal year decrease, resulting in a 0.3 point decline of other expenses. Moving on to Page 23. Here are the trends in the actual promotional expenses. This quarter, the actual promotional expenses which is a total of advertising and promotional expenses and point costs were 5.3% of the GMV. The reason this percentage increased by 0.1 points year-on-year is because we increased the frequency of free shipping campaigns for purchases over JPY 12,000 in comparison to the previous year. In the third quarter, we used the remaining budget from the first half of the year for acquisition and promotions, but we saw improvement in the golf tournaments income and expenditures and we also had unused promotional budget for ZOZOFIT and other peripheral services, which resulted in the budget surplus for the third quarter. For the full fiscal year, we will be -- we plan to use a little over 4% against the GMV as we had initially planned. Page 24 onwards, I would like to talk about ZOZOTOWN's KPIs, and these figures do not include the performance of Ly Yahoo! Commerce and our BtoB business. First, the annual buyers increased by 180,000 from the previous quarter, landing at JPY 12.05 million. This can be broken down to active members, which increased Q-on-Q by 180,000 to 11.21 million, and guest buyers increased quarter-on-quarter by 3,000 to 840,000. This third quarter, the Black Friday sales as well as other sales events did well. Thus, we were able to steadily increase our active membership. Moving on to Page 27. These are the trends in the number of shops. As of the end of the third quarter, the number of shops was 1,656 which is a net increase of 35 shops quarter-on-quarter. We welcome 15 new shops this quarter, namely [indiscernible] as well as Gucci's makeup and fragrance brand, GUCCI Beauty. Next on Page 25, you will find our trends in the average retail price. The average retail price was JPY 4,369 up by 0.2%. Although the impact from several years of brands raising their fall/winter product prices has begun to settle down, the brands have also changed their merchandise strategy. So we have seen a shift towards lower price point products such as T-shirts, and this has resulted in the average retail price drop of 20% -- sorry, 2%. On the other hand, with the delay of the fall season, brands had delayed the start of the sales season. Therefore, the year-on-year ratio of products sold decreased. And as a result, the average retail price for the quarter ended up being nearly the same as the previous year. On Page 30, you will find the trends in the average order value. The average order value for this quarter was JPY 9,422, up by 3.3% year-on-year. The number of items purchased per order increased, thus the average order value increased more rapidly than the average retail price. The reason why we saw a rise in the number of items purchased was because we launched more free shipping for purchases over JPY 12,000 campaigns this quarter, as I mentioned before. Therefore, we saw many users buying more items together on the days of these campaigns. Lastly, on Page 32, you'll find our consolidated business forecast and dividend forecast and there has been no changes made to these forecasts. Though it was a brief, but that concludes my explanation of the earnings results.

So we would like to move on to the Q&A. [Operator Instructions]

[Operator Instructions] David, please go ahead.

David Gibson from MST Financial. That inventory. You mentioned you reduced your inventory in the quarter. So I just want to clarify that was your decision to do so? I'm just wondering how brands responded to that decision because for full hand, in other quarters, you talked about how brands wanted you to hold more inventory?

So this inventory optimization is about what we experienced last year. We -- the brands asked us to take out of inventory. So we had high volumes of inventory, but this resulted in various inefficiencies. And so this year, we negotiated with the brands to return the underperforming inventories to the brand.

Okay. And then the decision about having low inventory for winter items by the brands over December, January, that was their decision or [indiscernible] to do that?