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

[Interpreted] It is time. So, we would like to begin. Good evening, good afternoon. This is Kobayashi from ZOZO. Thank you very much for taking part in the conference call for ZOZO's FY 2026 Second Quarter Earnings.

[Interpreted] From ZOZO, we have the Executive Vice President and CFO, Koji Yanagisawa, as well as myself, Kobayashi, taking part. We would like to jump right in and have Yanagisawa take you through the earnings results.

[Interpreted] Good evening, everyone. I would like to take you through our results for FY 2026 second quarter. Starting with an overview of the GMV for FY 2026 Q2 declined by 1% year-on-year, landing at JPY 309.4 billion. GMV excluding -- other GMV increased by 5.7% to JPY 309.2 billion. Adjusted EBITDA increased by 5.1% year-on-year to JPY 34.6 billion, and the adjusted EBITDA margin was relatively flat, landing 11.2%. We achieved 45.6% of our plan with respect to GMV, excluding other GMV, and 44.4% of our adjusted EBITDA. GMV decreased year-on-year, but this is because as of the end of September 2025, we ceased recognizing GMV generated by stores operating under ZOZO Option agreements on Yahoo! Shopping. GMV excluding other GMV fell slightly below plan for ZOZOTOWN, but LINE Yahoo! Commerce overachieved our plan. In total, our performance broadly in line with our expectations. On the other hand, regarding the adjusted EBITDA, we improved the efficiency of our shipping and logistics center operations, resulting in packing and shipping costs as well as logistic cost savings. Moreover, some actual promotion expenses planned for Q1 remain unconsumed, thus we are tracking slightly ahead of plans. Here are the quarterly trends in the consolidated results. Please refer to Page 9 of the presentation materials. GMV, excluding other GMV for this fiscal year second quarter increased by 6.3% year-on-year. The business was impacted by lower summer temperatures, which resulted in lower demand for summer products. Therefore, its performance fell short of plan. On the other hand, the GMV excluding other GMV for LINE Yahoo! Commerce was largely in line with expectations due to increased investment in promotional activities. The adjusted EBITDA increased 7.7% year-on-year and adjusted EBITDA margin was 10.4%. This surpassed our expectations due to cost savings in packing and shipping as well as logistics. Next, please refer to Page 5 of the presentation materials. I would like to explain about the initiatives we undertook in the second quarter towards achieving our midterm management plan. First starting with More Fashion, we took preorders of the T-shirt collection commemorating 30 years of Pokémon. Moreover, we began offering a new feature, niauroom by ZOZO, which helps us assess which finds the most suitable style out of 28 styles, and users can also virtually try on clothes using Gen AI. Next, with respect to Near Fashion in the second quarter, we accelerated our efforts to direct ZOZOTOWN users to HIGHLINK's key service, Coloria. We also opened Coloria shop on ZOZOTOWN where they sell their own private label products and selected perfumes. Lastly, regarding our global initiatives, the key initiative for this year was to add the checkout function on LYST, and we are continuing to onboard new partners. For ZOZOFIT, we started offering the B2B service ZOZOFIT Pro, which enables trainers, clinics, and other businesses to manage and use their customers' body measurement data. Now I would like to take you through some details about the business results. Please turn to Page 10. This is the year-on-year comparison of the increase, decrease analysis of the adjusted EBITDA. Four factors contributed to the increase in the adjusted EBITDA. First, ZOZOTOWN Business LINE Yahoo! Commerce grew, resulting in an increase of gross profit by JPY 3.75 billion. Second, the advertising business sales contributed JPY 0.31 billion. Third, longer LYST consolidation period and HIGHLINK consolidation resulted in an increase in gross profit by JPY 0.97 billion. And lastly, we have also successfully impacted shipping costs due to improved economic terms agreed with our logistic partners since the third quarter of last year, and we also improved the efficiency of our logistics center operations, thereby driving down logistics-related payroll, reducing the variable cost by JPY 0.53 billion. On the other hand, there were 3 factors that drove the adjusted EBITDA down. First, depreciation of material handling equipment began in existing logistics centers, and HIGHLINK consolidation added the number of consolidated employees, resulting in an increase in fixed cost by JPY 1.41 billion. Second, acquisition and promotional costs increased, and so the actual promotion expenses increased by JPY 1.58 billion. And thirdly, higher consumable expenses driven by rising packaging materials costs, along with communication expenses led to an increase in cost of JPY 0.88 billion. Moving on to Page 11 of the presentation material, I would like to take you through our balance sheet. Compared with the end of the previous fiscal year, cash and deposits under current assets decreased due to share repurchases, transfer of funds to a securities account in preparation for further share repurchase, and payments of dividends and corporate income taxes, among other factors. In addition, treasury stock increased within shareholders' equity because of the share repurchases. Regarding the share repurchase, we are making steady progress. And as of the end of September 2026, we have completed JPY 19.1 billion. Moving on to Page 12 of the presentation material. Here are the changes in cash flow. Cash flow for business activities increased by JPY 4.2 billion year-on-year, primarily due to an increase in profit before income taxes for the first half of the fiscal year. Cash flow from investing activities decreased by JPY 16.3 billion year-on-year since expenses related to the acquisition of HIGHLINK was relatively lower than that spent for LYST. And lastly, cash flow from financing activities increased by JPY 19.1 billion as we repurchased our shares. Next, turning to Page 23 of the presentation material, I would like to take you through the changes in the SG&A expenses. SG&A expenses as a percentage of GMV was 22.6%, decreasing by 0.4 points. There are 2 key reasons why. First, we improved our shipping efficiency that we were able to agree on more favorable economic terms with the logistics partner in October of last year. And we saw the ratio of smaller packages, Nekopos, increase as well as AOV, resulting in a 0.5 point decrease. Efficiency reducing logistics payroll. On the other hand, there are also 2 reasons why the SG&A expenses increased. First, in addition to the increase of web ad expenses for ZOZOTOWN, the longer LYST consolidation period and HIGHLINK consolidation led to an increase of 0.2 points. And secondly, goodwill amortization expenses increased by 0.2 points due to the longer LYST consolidation period and HIGHLINK consolidation. Moving on to Page 26 of the presentation material. Here are the trends in actual promotional expenses. Actual promotional spending in the second quarter, which includes advertising and promotional expenses as well as point-related costs and other incentives recorded as deductions from revenue, was 5% as a percentage of GMV. Year-on-year, this percentage rose by 0.3 points because of mainly 3 reasons. First, free shipping campaigns and strengthening of personalized discount initiatives on ZOZOTOWN. Second, increase in advertising for LYST; and third, recognition of HIGHLINK advertising expenses. The spending for the second quarter was largely in line with our plans, but we still have unspent budget from the first quarter. The spending in the first half fell slightly short of plans. We do plan to spend those funds in the third quarter onwards. So, the spending for the full fiscal year will be similar to that of last year, around 4.8% as a percentage of GMV. Next, moving on to Page 27, you will find the number of total buyers. The annual buyers increased by 130,000 to 13.5 million. If we break this down, active members increased by 120,000 to 12.84 million, and guest buyers increased by 10,000 to 710,000. We have seen steady acquisitions in the second quarter for ZOZOTOWN, and especially in September, ZOZOWEEK, which we did not organize the same period previous year, contributed to new acquisitions. Next, moving on to Page 32 of the presentation material, you will find our average retail price. The average retail price was JPY 3,640, increasing by 1.6% year-on-year. Although the prices of new fall/winter items increased slightly, overall price levels of new products remain largely unchanged year-on-year. We organized the campaign in September, thus the discounted sales ratio increased marginally. But as the average discount rate declined, the average retail price increased. Turning to Page 33. The average order value was JPY 8,388, up by 2.5% year-on-year. We conduct a more frequent free shipping campaigns, thus the number of items purchased per order increased. This, combined with the increase in average retail price, led to a higher increase in the average order value than the average retail price. Next, no change to the consolidated earnings forecast. And from here on, I would like to briefly take you through the content that Sawada explained earlier today. This slide explains our thoughts about the widespread of AI. We basically think that there will be 2 scenarios. The first scenario involves a consumer's AI agent directly communicating with the supplier to purchase products. This means that the traditional EC players' role will be more marginalized, but this usually will apply to generic products, products that are quite similar, so products such as sundries. Scenario 2 involves not only a consumer AI agent, but the AI agent on the supplier side. This will be applied to products where you would need supplier AI agents as well to be able to provide the optimal recommendation. So, in this case, the consumer AI agent and the supplier AI agents will be communicating with one another and thereby proposing optimal products. So, the main difference would be whether the information is very clear and also straightforward and whether this information will be -- a lot of this information will be publicly available. And in that case, scenario 1 would apply. But the scenario 2 would involve more complicated, complex, ambiguous information. And oftentimes, this information is not publicly available. Scenario 2 would most often apply to the fashion industry. And since ZOZO has a wealth of data, we will be well positioned to take advantage of scenario 2. And our initiative attempts to do just that. Traditionally, people would actually search for products or gather product information on social media, or we will conduct promotions and people who are exposed to that will come to our website to service to purchase. So, on top of that, we are trying to implement OMO initiatives so that we can improve our acquisition and retention through services such as those that you see on the right-hand side. For example, we have the niaulab TV on YouTube, and we also have WEAR and its coordinate service here. Lastly, this is a more detailed image of what I just described. Right now, we already offer niaulab TV on YouTube where you can find how-to videos for styling. And we also have WEAR where we are actually proposing different styling and outfits. On top of that, on ZOZO, we are trying to embed features such as having our AI learn about styling through machine learning, we are proposing the optimal styling as well as helping people select the products that would look best on them. And in the physical stores, we are currently developing, for example, a virtual mirror, which will enable people to virtually try on clothing. So, across all these touch points, we are implementing initiatives so that people can enter from various different touch points. That concludes my presentation. Apologies about the lengthiness.

[Operator Instructions] [Interpreted] Any questions?

[Interpreted] I have 2 questions. First question, thank you for your explanation about the first half. It was very clear where you are. But can you talk about your industry outlook for the second quarter or second half of the year?

[Interpreted] So, in terms of the second half, we believe that the climate will be the biggest impact. It's been discussed that El Niño will result in a warm winter this year. So, maybe brands are feeling a little bit anxious and cautious. Having said that, many brands have learned from the warm winters that they have experienced in the past. So, in terms of the inventory levels, we do not believe that many brands will overproduce and be left with a large quantity of inventory surplus.