ZOZO, Inc. ($3092)

Good evening, everybody. This is Kobayashi from ZOZO. Welcome to ZOZO's conference call for the full year financial results of FY '25 ending March 2026. There will be 2 presenters from ZOZO today, Director, Executive Vice President and CFO, Koji Yanagisawa; and me, Kobayashi. First, CFO, Yanagisawa, will take you through the financial results.

Good evening, everybody. I'd like to walk you through the full year financial results for FY '25 ending March 2026 and also share our forecast for FY '26. So our handout is pretty dense. So I'd like to just briefly walk you through some of the pages. For the first one, we don't have a specific page, but I'd like to give you the results of the earnings. As for the full year, let's go to the second item. GMV, excluding other GMV increased by 12.4% year-over-year to JPY 64.1 billion. And if you go down to the third item, you have the total GMV for the ZOZOTOWN business, LINE Yahoo Commerce and B2B business all combined. This one increased by 5.1% year-over-year to JPY 603.9 billion. EBITDA increased by 10.2% year-on-year to JPY 76.9 billion and EBITDA margin was 11.9%, down 0.2 points from the same period last year. And the progress against the company plan announced is as follows: GMV, excluding other GMV, 98.8% and total GMV for ZOZOTOWN, LINE Yahoo Commerce and B2B business combined 100.1% EBITDA, 100.3%. Regarding GMV, strong performance during the winter sales in the fourth quarter enabled us to achieve growth that offset the shortfall from the end of the third quarter. And as a result, the combined total for ZOZOTOWN, LINE Yahoo Commerce and B2B businesses met our target. And for EBITDA, this one met its target primarily due to the reductions in logistics-related expenses and shipping costs. And as announced in today's press release, we have acquired all shares of HIGH LINK and made it our wholly owned subsidiary. HIGH LINK operates Coloria, a comrehensive fragrance platform and under the mission of enriching the world but fragrance And we have acquired all outstanding shares of HIGH LINK for JPY 4.95 billion funded entirely with our own capital. And let's now go to Page 8 of the handout. We will analyze the changes in EBITDA compared to the previous year's results at the end of the fourth quarter after the full year was completed. So there were mainly 4 factors attributable to the increase in EBITDA. First, gross profit increase due to higher GMV in XOXOTOWN business and LINE Commerce plus JPY 9.6 billion. And the second one was sales increased due to the growth in the advertising business of plus JPY 670 million. Thirdly, gross profit increased due to the consolidation of LYST and other businesses of plus JPY 6.86 billion. And fourthly, reduction in variable costs driven by containment of logistics-related personnel expenses resulting from the streamlining of logistics centers of plus JPY 290 million. And on the other hand, there were 3 factors that reduced EBITDA. First, increase in fixed costs due to a rise in consolidated headcount associated with the consolidation of LYST, the occurrence of onetime expenses related to M&A in the first quarter and others at minus JPY 3.5 billion. Second, increase in actual PR expenses to attract customers to promote sales and cover LYST as stand-alone expenses that's minus JPY 5.97 billion. And thirdly, increase in other expenses due to success fees paid to related to M&A and others. In the first quarter, that's minus JPY 920 million. Let's look at the cash flow trends. I'd like to highlight the big one. So cash flows from investing activities for the current period included expenditures associated with the acquisition of LYST and the replacement of equipment at existing logistics centers. and there was also cash flows from financing activities, which included expenditures related to the acquisition of treasury stock. Now let's go to Page 21 of the handout. This is the breakdown of SG&A.. The SG&A ratio relative to GMV was 22.2%, a decrease of 1.0 percentage points compared to the same period last year. There are mainly 2 factors that drove up the SG&A ratio. First, amortization of goodwill related to the acquisition of LYST, that's plus 0.4 points. And second, in addition to expenses recorded for LYST alone, there was increase in the advertising expenses due to higher web advertising spending for ZOZOTOWN that's plus 0.3 point. And the main factors contributing to the decrease in the SG&A ratio are mainly logistics related. First, lower shipping costs resulting from the improved economic terms with the delivery contractors driven by both expanded consolidation scope and delivery efficiency initiatives, that minus 0.6 points; and second, a decrease in logistics-related labor costs driven by improved operational efficiency including inventory optimization and logistics centers and labor savings coming from automation and also expanded scope of consolidation of minus 0.5. In addition, as we have achieved our full year target for operating profit and EBITDA, we have decided to pay year-end bonus. And consequently, we have recorded the relevant expenses in the fourth quarter under payroll costs for employees and logistics-related expenses. Let's now go to Page 24 of the handout. Here, we show our actual promotion-related expenses. So in Q4, actual promotion expenses amounted to 5.5% GMV. So the 0.7 point increase in the ratio of the actual promotion expenses to GMV compared to the same period last year was due to the following factors. So there are mainly 3 reasons for this. One, there was an increase in online advertising spending on ZOZOTOWN. And second, an increase in promotional expenses rose due to initiatives such as acquiring new members and reactivating dormant members. And thirdly, the recognition of expenses on a stand-alone basis for LYST, where advertising expenses account for a significant portion of SG&A expenses. And as a result, our actual promotion-related expenses for the full year amounted to 4.8% of the GMV, which is slightly more than our initial plan, and we expect the budget for the current fiscal year, FY '26 to remain at the same level as FY '25 at 4.8% of GMV. And from here on, I'd like to share ZOZOTOWN's KPIs. Let's first go to Page 25. This is the number of total buyers. The number of total buyers increased by 360,000 from the previous quarter to 13.17 million. And here's the breakdown of it. The number of active members increased by 350,000 from the previous quarter to 12.47 million, and the number of guest buyers decreased by 4,000 from the previous quarter to 690,000. So in FY '25, we continue to successfully acquire new members by increasing our web ad and friend referral campaign year-over-year. And during this fiscal year, new member acquisition remained strong in every quarter, resulting in a significant increase in the number of total buyers. Now let's look at the number of shops on ZOZOTOWN. At the end of the fourth quarter, the number of shops stood at 1,710, a net decrease of 2 shops from the previous quarter. And the number of new stores opened in the fourth quarter was 46. And we successfully achieved our full year target for new store openings for FY '25. Okay. Now I'd like to share ARP and AOV. Let's start with average retail price. ARP with respect to ARP it came to JPY 3,974, a 1.6% year-on-year decrease. The price increases for new fall and winter merchandise have moderated with prices now broadly in line with last year's levels, but the average retail price fell due to a higher proportion of sales items compared with the same period last year. Let's now look at our AOV. So our average order value stood at JPY 8,864, minus 1.3% year-over-year. So the number of items purchased per order rose supported by an improved cross-selling ratio, which was driven by a higher markdown ratio. However, the decline in average retail price outweighed these effects leading to a lower AOV. So that was the earnings briefing of FY '25 ending March 2026. And from here on, I'd like to share our business plan for FY '26. So I need to start off this part with an apology. There have been changes in our key disclosure indicators. From the perspective of presenting our group's underlying earnings power, we have adopted EBITDA as our management indicator that excludes the impact of amortization related to goodwill and other items arising from M&A. But in order to more appropriately reflect our group's underlying earnings power, we have decided to adopt adjusted EBITA. Under this metric, only amortization of goodwill and intangible assets arising from M&A as well as acquisition-related costs will be adjusted, while all other depreciation and amortization expenses will be reflected. And based on that, I'd like to share our full year consolidated earnings forecast for the current fiscal year, which is FY '26. GMV, excluding other GMV are expected to increase by 5.0% year-on-year to JPY 678.6 billion and our operating profit is expected to increase by 7.3% year-over-year to JPY 74.4 billion, and our adjusted EBITA is expected to increase by 7.2% year-over-year to JPY 77.9 billion. Regarding dividends, we continue to target a payout ratio of 70% or higher. And here are the targets by business segment. So for ZOZOTOWN, we aim to do the growth of 4.2%. And for LINE Yahoo Commerce, we aim to do JPY 86.6 billion, which is 9.7% year-over-year. And regarding ZOZO Ad, which accounts for majority of our advertising business, our plan is based on conservative assumptions. So you can see that our growth forecast is rather low. Next, let's go to Page 42. I'd like to share our logistics bases expansion plan. First, regarding DPl TSUKUBA CHUO, which we began leasing in April 2024 has been operational and the lease area will be expanded starting in May 2026. Furthermore, we will begin leasing ZOZOBASE NARASHINO 3 starting in March 2027 and operations are scheduled to begin in August of that year with full-scale operations planned for October of the same year. And consequently, let's go to Page 11 of the handout. This is about the trend in capital expenditures. Capital expenditures for FY '25 were largely in line with our plan. And for FY '26, which is our current fiscal year, due to the cash outflow related to ZOZOBASE NARASHINO 3, which I explained earlier, we're planning capital expenditures of JPY 11.5 billion. So that is our business plan for FY '26. And then for this timing, we have also disclosed our medium-term business plan. So I'd like to briefly go through that as well. So here is the overview of our medium-term business plan. So this is a 4-year plan, which ends in FY '29 ending March 2030, we plan to have adjusted EBIT of JPY 90 billion, and that will be 123.8% of FY '25. And then here's the background of this medium-term business plan. So of course, we're going to continue to grow our ZOZOTOWN, but at the same time, we'd like to expand into new markets. So what are those new markets that we might to branch out? So if you go to this slide, we have 3 domains. One is more fashion. So this is going to be the first revenue pillar that we'd like to strengthen. So this is inclusive of the existing ZOZOTOWN. We'd like to further grow this and aim for EBITA of JPY 80 billion from more fashion pillars. And we also have -- we also like to establish 2 more pillars of revenue. One is what we call newer fashion. So these are peripheral areas to fashion, and we'd like to do JPY 5 billion in EBITA with this. And we also would like to have another revenue pillar that we call global domain, and we also like to do JPY 5 billion EBITA with this one as well. So if you combine all of these 3 domains, it adds up to JPY 90 billion in EBITA. So I'd like to talk about each domain first, starting with the more fashion domain. So for this one, we really want to focus on new user acquisition by expanding into offline touch points to reach new users that we have not yet engaged with. So last year, we conducted ZOZOFES, which is actually a combination of fashion and music. We've done this already last year, and we also launched a pop-up store, ZOZOTOWN NAGOYA last year. So these are the types of things that we would like to do, so reaching out to new segments through physical stores and events. And not only would we like to increase the number of users, we also want to increase the number of brands. So last year, we were able to bring on board MUSINSA. And this has really enabled us to increase the number of fashion brands significantly. So we'd like to continue to engage in activities like this in order to increase the number of brands as well as category. And another thing that I would like to highlight that I have been mentioning previously is the launch of conversational AI. So I think it was just 2 days ago that we were able to adopt or implement this feature that allows us to propose WEAR styling or WEAR outlet through ChatGPT app. So we implemented a conversational AI so that we are able to propose new output to our users through ChatGPT app. So finally, we've been able to launch our conversational AI. And then this is our approach to newer fashion domain. So what we would like to do is to offer spending experiences, new spending experiences to our ZOZOTOWN users outside of ZOZOTOWN so that we can offer pleasant consumption experiences to them. And here are examples of some of the newer fashion domains that might resonate with ZOZOTOWN users. So we have been working in skin care and cosmetics area already. And aside from that, there are hair salons, there's fitness, there's aesthetic. So these are types of markets or areas that fashion lovers that we still have, as our user base, might resonate with. And we'd like to explore proactively our opportunities in these areas. And of course, the way to approach this is to, first of all, try to make our services and business from scratch in-house. And there's another way to approach this, which is through partnership. Which brings me back to the topic of HIGH LINK that I mentioned. So we acquired HIGH LINK as our subsidiary, hoping that we will be able to branch out into the fragrance area through the platform of Colaria so that we'll be able to drive traffic from ZOZOTOWN user base to them and also have the ZOZOTOWN users use their service, but at the same time, aim for positive impact to ZOZOTOWN cosmetics from them. So in terms of global domain, we want to further expand what we already do. So for ZOZOFIT, this is a business that we are already operating in the U.S. So we'd like to further grow this. And this is a company that we acquired in Europe, we'd like to achieve growth with LYST. So that was a very quick explanation of the earnings and also the forecast and our midterm business plan.

[Operator Instructions].

On DPL TSUKUBA CHUO expansion. So starting in May 2026, you are expanding the leased area at DPL TSUKUBA CHUO. So could you explain the reason for this expansion? And what positive effect do you expect from it going forward? And my second question is NARASHINO 3 expansion. So next year, in March 2027, the NARASHINO 3 will also be expanded. So what kind of positive impact do you expect from this? And my last question is this earnings outlook. So regarding this, is it fair to assume that there will be almost no profit contribution in fiscal year March 2027? And should we expect that profit contribution to come from next year, I mean, March 2028 onwards. So could you share your view on the earnings outlook for this?

Thank you, [indiscernible] for doing the questions in both English and Japanese. So to answer the first part of your question, this is due to the sheer volume of the handling of the merchandise. So in order to secure a certain level of operational efficiency, that we had some extra space at the warehouse and then we thought that this was an opportunity and timing for us to stand. I also want to answer the second part of your question, which is about NARASHINO 3. So first of all, we have, what we call NARASHINO 1 and where basically, is an outdated facility so we're renewing it into something that is similar to TSUKUBA 3. So we'd like to automate it to drive efficiency. So the difficulty, the biggest I have to say, NARASHINO 3 [indiscernible]. Correction, in Chiba area, NARASHINO 3 is going to be the biggest warehouse. But if you expand it into Ibaraki as well and TSUKUBA 3 will be slightly bigger. And to answer the third part of your question, which is about this business performance, we position FY '26 as investment. So we are going to continue seeing the loss and the amount of the loss is going to be slightly higher than the amount that we had in FY '25.

Over the past 1 to 2 years, your cost efficiency has improved, thanks to automation and labor savings in logistics. With new warehouses coming, should we expect logistics efficiency to improve further? Could you share your view on this?

Thank you very much for your question. So naturally, yes, we would like to aim for that, and we're hoping to drive more operational efficiency in TSUKUBA 3 as we [indiscernible].

So this is [indiscernible] from UBS. I have one question. So you just made the announcement of another M&A, and it seems like you're quite eager to branch out into new businesses. What is your investment policy?

So it is quite difficult to have discipline in investments. But in newer fashion domain and the M&A in that domain, I would like to acquire companies that are already making profit so that we don't have to start absorbing their loss right after consolidation. And in terms of the acquisition sizes of the companies, we don't have a specific idea in mind for that one, but we're not really intending to do large-scale acquisitions. So what I mean by that is that we want to be able to engage in M&A that we can pay with the current cash that we have. And I did briefly touch upon this during the earnings briefing. But for the M&A in the newer fashion domain, we are intending to tolerate up to JPY 2 billion loss on an annual basis. But that said, as I mentioned, when it comes to M&A in the newer fashion domain, we're aiming to acquire companies that are already making profit. So I don't think we will get to that level of loss. Kobayashi, do you have anything you'd like to add to what I said?

So Mr. Yanagisawa basically said everything that we need to say. But just kind of building on that, if we can anticipate growth in the market, then we could consider buying companies that are currently posting loss. Just to kind of add to what I said, not only is our approach going to be through M&A, but we can have an approach, which is to develop new services in-house. And then when we develop a new service, of course, we need to take time to bring up the awareness rate. So during that phase, we will naturally be in the loss. Okay. So we'd like to finish our conference call. Thank you very much to all of you for your participation.

Thank you very much, everybody.

Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]