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

[Interpreted] It's time. We would like to begin. My name is Kobayashi from ZOZO. Thank you for taking part in ZOZO's FY 2024 Full Year Earnings Conference Call. From ZOZO, we have the Executive Vice President and CFO, Yanagisawa as well as myself, Kobayashi, taking part. We would like to jump right in and have Koji Yanagisawa take you through our results.

[Interpreted] Good evening, everyone. I would like to take you through our results for the full year. First, starting with our highlights. The FY 2024 full year GMV increased by 7% year-on-year, landing at JPY 614.3 billion. The GMV, excluding other GMV, increased by 7% year-on-year, ending at JPY 574.6 billion. The OP increased by 7.8% to JPY 64.7 billion, and the OPM was 11.3%, up by 0.1 points year-on-year. Against our corporate plans, we achieved 100.4% of the GMV, excluding other GMV and 100.9% of the OP. Moving on to Page 8. Here are the consolidated results for the fourth quarter. The GMV, excluding other GMV for this quarter, increased by 3.9% year-on-year. Especially during the January, February sales period, many brands had a hard time faced with a lack of sales inventory, and we were likewise impacted by the situation, so the year-on-year growth rate was sluggish. Primarily due to an increase in provisions for year-end bonuses and proactive investment in promotional expenses aimed at achieving the full year GMV target, the OP resulted in a year-on-year profit decline by minus 9.6%. Moving on to Page 9. This is the increase, decrease analysis of the OP in comparison to the same period last fiscal year. From JPY 60.07 billion last fiscal year, the OP increased by JPY 4.68 billion to JPY 64.75 billion. Some of the factors that contributed to the OP increase include the GMV for the ZOZOTOWN business and LINE Yahoo! Commerce, which contributed to a gross profit increase of JPY 11.55 billion and the advertising business grew contributing to JPY 1.47 billion in revenue. On the other hand, the following factors drove the decrease in OP. Fixed costs rose by JPY 5.44 billion and variable costs increased by nearly JPY 4 billion. We would like to skip forward a couple of pages to Page 22 and talk to -- I would like to talk to you about the SG&A expenses. The SG&A expenses as a percentage of GMV was 23.2%, up by 0.3 points year-on-year. There are 2 main factors that contributed to the increase in the SG&A expenses. The AOV increased year-on-year. However, we accepted Yamato's price increase from April 1, 2024. The shipping expenses increased by 0.30 points. Second factor is due to an increase in provisions for year-end bonuses associated with achieving the initial targets for GMV and OP, the employee-related expenses within the payroll increased by 0.2 points. On the other hand, the SG&A decreased due to improved operational efficiency through inventory optimization at logistics centers and labor reduction via automation initiatives. Therefore, the logistic-related personnel costs decreased by 0.3 points. Next, moving on to Page 25, the actual promotion-related expenses. This quarter, we used 4.8% of the GMV as actual promotion-related expenses, which includes both advertising expenses and point-related costs. We proactively use the promotional budget we had not used by the end of the third quarter to help support sales. We ran more commercials and advertising on the web, and we also increased the frequency of free shipping campaigns for purchases over JPY 12,000. For the full year, the actual promotion-related expenses as a percentage of GMV was 4.4%, slightly higher than we had initially planned. Next, we would like to take you through the ZOZOTOWN's KPI starting with Page 26, the number of total buyers. The annual buyers increased by 150,000 from the previous quarter to 12.21 million. If we break this down, the active members increased by 190,000 to 11.4 million and guest buyers decreased by 30,000 to 810,000. This quarter, due to the impact from lack of sales inventory in January and February, we found it challenging to acquire new members. That said, we proactively ran acquisition campaigns such as web ads in March onwards. And because the spring/summer demand has increased, the recent new member acquisitions have been trending well. Moving on to the number of shops on Page 29. The number of shops as of the end of the fourth quarter was 1,649, a net increase of 7 shops since the end of the previous quarter. We welcomed 28 new shops this quarter, including SEKKISEI operated by KOSE and TOM FORD BEAUTY operated by Estée Lauder Companies. We have achieved our new shop targets this year, but since many brands left our platform due to brand closures, the number of shops have decreased quarter-on-quarter. Moving on to Page 31, the average retail price. The average retail price was JPY 4,038, up 0.9% year-on-year. As I have already mentioned, many brands suffered from lack of inventory during the sales period in January, February and possibly due to concerns about early stockouts, the discount rate declined compared to the same period last year. As a result, the average retail price was positively impacted, ending slightly higher year-on-year. Moving on to Page 32, the average order value. The average order value was JPY 8,980, up 2.8% year-on-year. The increase in the number of items purchased per order led to a higher growth rate in AOV compared to the growth rate in average retail price. This increase in items per order was primarily driven by a more frequent implementation of free shipping promotions for purchases over JPY 12,000 compared to the same period last year. As a result, the proportion of bundled purchases rose, particularly on days when the promotion was running. Next, I would like to share with you our plans for FY 2025. On Page 34, you will find our consolidated business forecast. With the acquisition of LYST, the amortization of goodwill and related expenses is expected to increase and impact operating profit. Thus, we will begin disclosing EBITDA and EBITDA margin. We expect the GMV to increase by 1.5% year-on-year to JPY 623.6 billion. GMV, excluding other GMV, is forecasted to increase by 5% to JPY 603.4 billion. Net sales is expected to increase by 5.1% to JPY 224.1 billion. OP is expected to increase by 7.8% to JPY 69.8 billion. The OPM is forecasted at 11.6%. EBITDA is expected to increase by 10.2% to JPY 76.9 billion, and the EBITDA margin is forecasted at 12.7%. The stand-alone business impact of LYST has not been included in this consolidated forecast as its impact is still being reviewed. Once the review is complete, we plan to promptly disclose any revisions to the forecast that we just introduced. Moving on to Page 15, the changes in the dividends per share. On April 1, 2025, we implemented a stock split at a ratio of 3 shares for each one existing share. The dividends indicated on this slide have been converted to reflect the stock split and the dividends per share for FY 2025 is as planned to be JPY 107. For the current fiscal year as well, we will continue to target a dividend payout ratio of 70% or higher with dividends per share of JPY 39. These are the targets by business segment that you can find on Page 35. Regarding ZOZOTOWN, we forecast the growth to be 5.5% year-on-year and LINE Yahoo! Commerce to grow at 10%. As for the B2B business, we estimate this to decrease by 35.2% year-on-year, but this takes into account the fact that our support for 2 high revenue brands will come to an end. As for the other GMV, we intend to seize recognition of GMV from ZOZO Option contract stores on Yahoo! JAPAN Shopping from the second half of the current fiscal year. This is expected to significantly decrease by 49.1%. That said, the GMV from ZOZO Option does not directly impact profitability. So ZOZO will continue to place importance on GMV, excluding other GMV. With respect to the advertising business, for the moment, we do not intend to increase the advertising space any further as this may negatively impact the UI/UX and increasing the price per click will likewise be difficult considering our relationship with the brands. Thus our plans to grow the advertising business by 2.6%, we believe, is quite realistic. While we have not yet discovered new advertising approaches that would notably accelerate growth, we will remain committed to ongoing exploration and testing. Lastly, we would like to go back to Page 5, but I would like to explain about the 2 announcements that we have made today. First, we announced our share buyback plans. The repurchase of the shares will be conducted through market purchases with an upper limit of either JPY 10 billion or 10 million shares. The scheduled repurchase period will be from May 1 of this year to September 1 of this year as well. Secondly, in addition to the share buyback, we have also decided to cancel a portion of the treasury shares we currently hold. We will be canceling 9,390,171 shares on May 9, 2025. From here forward, I would like to take you through some of the information that we, Sawada and myself shared, as supplemental information towards the end of the earnings briefing. We have shared this information with you from before, but we aspire to do JPY 800 billion in transaction in order to do so, we will need 15 million buyers and have them purchase not 20%, but 25%. And we shared this with you previously as well, but these are the 5 initiatives through which we intend to expand. And I would like to share with you some progress that we have made in this regard. So number one, attracting a broader range of customers. We have identified the younger audiences as target. And in 2024, we became the sponsors of a K-POP fan event called ASEA to attract more younger users. And this was extremely successful, so we plan to replicate the success in 2025. So we would like to continue to implement these kind of initiatives so that we can specifically target segments. This graph shows the #1 brand that people think of when they think of fashion, and this includes the physical apparel brands and shops as well. But when asked that question, this age group answered that ZOZOTOWN comes to their mind first. So we surpassed many of the physical brands and stores. Second, improvement of frequency of purchases per customer. As we have communicated before, we are operating the niaulab. And based on our discovery insights from that, we are developing an AI agent, and we would like to utilize that to our new customers and also utilize the agent to improve the frequency of purchases. So one channel is where our styling app, and we are starting fashion genre assessment or diagnostics, and we hope that to help people discover new fashion. We will also like to implement our AI agent to LINE and in the future to ZOZOTOWN as well. In terms of production support, we are expanding our impact. The number of sales produced increased by 119.4% year-over-year and the total number of items produced rose by 17.8%. In this fiscal year, as part of our Made by ZOZO efforts, we have started production of inclusive wear as well. Next, moving on to our strengthening of categories. First starting with cosmetics, we generated JPY 14.7 billion in GMV growing by 30% year-on-year. With cosmetics, we applied our apparel platform, but we wanted to find a way to encourage other partners to join more in a lightweight way or easier way. And so with this, we are going to be welcoming Musinsa, which is a Korean fashion EC platform. Once we have this lighter framework in place, we will be able to go beyond apparel categories into furniture, and we don't know if we'll do this or not, but food as well. So we can venture into nonfashion categories. Lastly, we would like to talk to you about the monetization of technologies, mainly around the acquisition of LYST. We would like to skip a couple of pages and introduce the evolution of ZOZO's overseas strategy, global strategy. In recent years, our overseas expansion has been driven by leveraging the business expertise and technological assets cultivated here in Japan with initiatives across both B2C and B2B domains. In addition to launching services such as ZOZOFIT and ZOZOMETRY, we have also begun providing technology licenses to international platform operators. Moving forward, we would like to go abroad with go global with the EC Media. And with LYST joining our fold, we will be able to address the Western market and fully enter into the luxury market as well. Skipping forward 2 pages, we would like to reintroduce LYST. This is a global fashion shopping platform with headquarters in London, U.K. with services currently available across the United States, United Kingdom and Germany as well as other markets. It has established an asset-light business model that operates from the U.K. as a central base while covering multiple countries. And going forward, by combining LYST operations with our technological and data assets, we aim to further unlock its growth potential and generate synergies across the entire group. So we would like to explain now the LYST's business model, it's basically an affiliate service. It aggregates and analyzes product data from over 27,000 brands and e-commerce sites, delivering a personalized user experience powered by AI. They basically receive a margin whenever they direct customers to the brands at EC site. Here are the core metrics for LYST. Currently, LYST partners with approximately 550 retailers and covers over 27,000 brands offering a product catalog of around 97 million SKUs. Through its strong relationship with major partners, primarily in Europe and North America, it provides access to an extensive range of product information. Moving on forward 2 pages. These are the expected synergies. LYST and ZOZO share many similarities in terms of business model structure and core values. These common foundations will enable us to generate tangible synergies quickly as we move forward with integration. There are 3 key areas where we expect to see synergies. First is geographical. They complement our geography on the sales front. Second, they complement our technology and expertise. Third is the pursuit of economies of scale. So with the collaboration with LYST, we want to overcome the challenges that the current global fashion e-commerce market faces. And by combining our strength, we want to help people become a destination where people can discover the joy of fashion and provide a better -- with our technology in UX, we want to help people rediscover the joy of fashion. In terms of the transactional structure, we acquired 100% of LYST shares through a newly established U.K. subsidiary at a total purchase price of approximately JPY 22.1 billion, and we paid cash. So that was a quick run-through of our earnings briefing. Thank you.

[Interpreted] So we would like to open the floor for questions. [Operator Instructions]

It's David Gibson from MST Financial. A couple of questions. You talked about in the results presentation about planning to have an AI agent on the LINE app. Can you elaborate when do you plan to launch that? Is that something for this fiscal year? Or is that something that's further out?

[Interpreted] Thank you for your question. We plan to implement that this fiscal year.

Okay. And then on LYST, a couple of questions. So you plan to revamp the UI/UX, reduce the common costs. How long will that take? Is that sort of something a 6-month process or a year? Like how do you -- long do you think that will take to implement the improvements there?

[Interpreted] That will be more mid-term. Of course, we need to continuously improve UI/UX.

Okay. And then are you looking to introduce a membership service for LYST.

[Interpreted] Yes, we would like to implement a membership service for LYST.

And for LYST, who do you view as the biggest competitors?

[Interpreted] At the moment, we don't think that there are large competitors for the LYST in terms of not many companies have the same exact business model. That said, for example, Farfetch is on LYST as well. But if LYST becomes more like an EC platform, they could -- Farfetch could be a competitor.

Okay. And final one, I know others will ask. On LYST, a few years ago, it was valued at $700 million. It was looking for an IPO under the existing management. It didn't happen, obviously. You obviously paid substantially below that valuation when they did a raising. What do you think went wrong for the business such that it's no longer worth $700 million, it's worth USD 160 million. What went wrong, do you think?

[Interpreted] So one would be the market environment. When they were aiming to go public at a valuation of $700 million, the market environment for ventures was quite good and welcoming. But since then, the market has actually become more sluggish. And also, they were actually -- there were a lot of operational inefficiencies and they were spending a lot in generating traffic. But since then, the market worsened and the former management was spending a lot of cost, but the management has changed since. And the new management started to focus more on restructure and they focused on cost cuts and streamlining the company as well. So they're more focused on growth. So they have been doing much better recently under the new management. And we also heard that many of their shareholders for venture capital and they were ending the -- their -- end of the contract for them, many of them, that is why we saw a change in shareholdership as well.

[Operator Instructions]

[Interpreted] This is Kazahaya from UBS Securities. I have 2 questions. The first question is about LYST or related to LYST. What is your current M&A philosophy?

[Interpreted] Thank you for your question. We have been sharing from previously that we want to actively look into M&A, especially in terms of category expansion, service expansion and global expansion. So this thinking has not changed.

[Interpreted] In that case, if a good opportunity arises, you might be moving forward with acquisitions, maybe sometimes multiple at a time.

[Interpreted] In terms of global expansion, we have to first focus on this to make sure that it's going to grow and we do the PMI quite correctly. Domestically, we would like to continue to consider various cases.

[Interpreted] The next question is about the business forecast. You forecasted that the consignment business will grow by 5% and the LINE Yahoo! business by 9%. But given the recent performance, it seems like these growth rates are a little bit conservative. But can you talk about the market environment and why you arrived at the budget?

[Interpreted] So the biggest reason is that we've seen a lot of climate fluctuations over the last 2 fiscal years. Two fiscal years ago, it was a very warm winter, and we couldn't sell a lot of the fall/winter items. We had a lot of inventory and the sell-through rate was very bad. So there was a lot of inventory that we couldn't sell. But this year, on the other hand, we ran out of inventory. We didn't have enough to sell. And the brands are actually having a very challenging time figuring out inventory control. And of course, this is going to impact us as well. So we believe that this year as well, this kind of confusion or payout situation will continue. So that is why we actually have come up with these forecast. Also going forward, if we want to maintain a single high-digit GMV growth, it's important that we acquire new users, reactivate dormant users and increase the frequency of purchases. And I mentioned some of the new approaches that we are taking to target the younger audience, but we will need to try such new things going forward to acquire new users. The approaches that we have taken in the past is -- if we utilize that, it's going to be harder to acquire new users. So this fiscal year, we want to test different initiatives. So it's a preparation period for us. That is why we want to test different things to see what works in terms of new user acquisitions and increasing frequency.

[Interpreted] [Operator Instructions] We have some time left, but since it doesn't seem like there are any more questions, we will wrap up today's conference call. Thank you for joining us.

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