ZOZO, Inc. (SRTTY) Q1 FY2026 Earnings Call Transcript & Summary

[Interpreted] It is time to start ZOZO's conference call. Good evening. This is Kobayashi from ZOZO. And thank you very much for participating in the conference call for the first quarter of FY 2025 ending in March 2026 for ZOZO. There will be 2 participants joining from ZOZO, Director, Executive Vice President and CFO, Koji Yanagisawa; and me, Yusaku Kobayashi. First, CFO, Yanagisawa will take you through the financial results.

[Interpreted] Good evening, everyone. I am Yanagisawa. I'd like to walk you through the first quarter financial results for the fiscal year ending in March 2026. So the concept for this year's financial statement is design that makes people who work at the company the heroes and heroines. Believing that a company's true uniqueness comes from its people, we focused on each employee's individuality, portraying them life size and expressive cocky style line drawings. The cover opening illustration will change each quarter and showing different people working at ZOZO, reflecting our desire to make the report not just about the numbers, but also about the people behind them. We hope you will enjoy noticing these little changes and feeling more connected to the people behind the report as the year goes on. First, I will explain the details of the revision to the earnings forecast announced today. And this is Page 33 of the handout. With respect to LYST, which has been consolidated since May 2025, we have disclosed revised performance forecast that incorporate the effects of the consolidation of business plans and the allocation of acquisition costs following the progress of these procedures. Revised forecast includes the following: GMV plus 9.7% year-on-year at JPY 673.9 billion; GMV, excluding other GMV, plus 13.8% year-on-year at JPY 653.7 billion. Net sales plus 8.6% year-on-year at JPY 231.5 billion. Operating profit, plus 6.9% year-on-year at JPY 69.2 billion. Operating margin 10.6% and EBITDA plus 9.9% year-on-year at JPY 76.7 billion and EBITDA margin 11.7%. Compared to the performance forecast announced on April 30, GMV, GMV excluding other GMV, and net sales increased, while OP and EBITDA decreased. And on Page 34 of the handout, you have the targets for each segment -- each business segment. Starting this fiscal year, we have added a new business segment LYST, and the GMV target for the current fiscal year is JPY 50.3 billion, and there are no changes to the forecast for other business segments from those announced on April 30. And let's now go to Page 14 of the handout. Next is the trends of dividends per share and payout ratio. And there are no changes to the annual dividend announced on April 30, and we will continue to plan to pay a dividend of JPY 39 per share. The dividend payout ratio is expected to be 72.7%. Go to Page 11 of the handout, this illustrates the trend in capital expenditures. With further progress made in the consolidation of LYST business plan and in the allocation of acquisition costs, we have revised the projected figures for depreciation and goodwill amortization previously disclosed on April 30. And as a result, depreciation increased from JPY 4.72 billion to JPY 5.16 billion, while goodwill amortization decreased slightly from JPY 2.1 billion to JPY 2.05 billion. Next are the highlights of the first quarter of the fiscal year ending in March 2026. For the first quarter, GMV increased by 12.2% year-on-year to JPY 159.2 billion, GMV excluding other GMV increased by 12.4% year-on-year to JPY 149.1 billion. EBITDA increased by 8.9% year-on-year to JPY 18.5 billion. EBITDA margin was 12.5%, which is a decrease of 0.4 points compared to the same period last year. And progress against the revised company plan is as follows: GMV excluding other GMV 22.8% and EBITDA 24.2%. And the current fashion demand remains robust and GMV is progressing largely in line with the plans. When looking at it by business segment, ZOZOTOWN business is slightly below the plan, while LINE Yahoo! Commerce is above the plan. And additionally, EBITDA surpassed the plan driven by factors, including unrecognized promotion expenses, logistics-related and shipping costs. Next I will present an overview of the key performance details. Let's go to Page 9. First, we will analyze the increase and decrease in EBITDA compared to the previous year's results at the end of the first quarter. EBITDA increased by approximately JPY 1.51 billion from JPY 17.06 billion in the previous quarter to JPY 18.57 billion in the current quarter. There are 4 factors attributable to the increase of EBITDA. First, gross profit increase of JPY 3.13 billion due to higher GMV in ZOZOTOWN business and LINE Yahoo! Commerce. Second, a sales increase of JPY 240 million due to the growth in the advertising business. Third, gross profit increase due to the consolidation of LYST and others, plus JPY 1.36 billion. And fourthly, decrease in variable costs due to improvements in the efficiency of logistics centers and a decrease in the ratio of packing and shipping costs due to an increase in average order value, JPY 50 million. On the other hand, factors that reduced EBITDA are as follows, and there are mainly 3 factors: One, increase in fixed costs due to an increase in the number of consolidated employees and the occurrence of onetime expenses related to the M&A, minus JPY 0.77 billion. Second, increase in actual PR expenses, promotion expenses to attract customers, promote sales and cover LYST stand-alone expenses, minus JPY 1.95 billion. And third, increase in other expenses due to success fees paid to FA related to the M&A and others, minus JPY 0.55 billion. Okay. Now let's go to Page 10 of the handout. This is the balance sheet. So first, with respect to cash and cash deposits under current assets, payments related to the acquisition of LYST shares, payment of the year-end dividends and disbursement for the acquisition of treasury shares have impacted the balance, resulting in a decrease of approximately JPY 55.2 billion year-on-year. And next, under the noncurrent assets, intangible assets have increased by approximately JPY 24.9 billion compared to the previous fiscal year-end, primarily due to the recognition of goodwill related to the acquisition of the shares. Additionally, within the shareholders' equity of assets, treasury stock decreased by approximately JPY 3.8 billion, primarily due to the cancellation of treasury stock in May and the ongoing acquisition of treasury stock. Let's now go to Page 21 of the handout. This is the breakdown of SG&A expenses. The SG&A to GMV ratio turned out to be 22.7%, a decrease of 0.7 points from the same period of last year. While GMV increased due to the consolidation of LYST, incremental SG&A expenses were 0 or minimal for some items for LYST alone. This contributed to a decrease in the SG&A expense ratio. And there are mainly 2 factors that drove up the SG&A ratio. First, in addition to expenses recorded for LYST alone, advertising expenses increased by 0.5 points due to an increase in web advertising spent on for ZOZOTOWN. And secondly, amortization of goodwill related to the acquisition of LYST led to 0.3 point increase. And also, there are 2 factors, once again, contributing now to the decrease in the SG&A ratio. First, the expansion of the consolidated scope, along with improvements in operational efficiencies such as optimizing inventory levels at logistics centers and labor savings through automation resulted in a 0.6 point decrease in logistics-related labor costs. And second, the expansion of the consolidated scope and higher AOV compared to the previous period led to a 0.6 point decrease in shipping costs. Let's now go to Page 24 of the handout. The actual promotion expenses are as follows. In the first -- in this first quarter, we used 4.2% of GMV as the actual promotion expenses, which is the sum of the advertising and point-related expenses that are deducted from net sales. Compared to the same period of the previous year, the actual promotion-related expenses ratio increased by 0.9 points due to the following 3 factors: First, increased spending on web advertising for ZOZOTOWN. And two, increased promotional expenses such as free shipping campaigns and point promotions. And three, LYST reported expenses separately with advertising and promotion expenses accounting for a large portion of SG&A expenses. And additionally, due to the consolidation of LYST, we have revised the full year budget and increased the actual promotion-related expenses to GMV ratio to 4.7%. And with respect to the actual promotion expenses for the ZOZOTOWN business, excluding LYST, as explained at the beginning of this fiscal period, the ratio to GMV remains unchanged at 4.4%. Let's now go to Page 25. And here onward are ZOZOTOWN's KPIs. And please note that the following indicators do not include results from LINE Yahoo! Commerce, LYST, or B-to-B businesses. The number of total buyers increased by 150,000 from the previous quarter to 12.36 million. And out of them, the number of active members increased by 180,000 from the previous quarter to 11.58 million. The number of guest buyers decreased by 40,000 from the previous quarter of 770,000. And in the first quarter, we acquired new members through a range of initiatives, leveraging web advertisement and ZOZOTOWN's platform. We increased our web advertising budget year-over-year to enhance customer acquisition and improved targeting drove a higher return on investment compared to last year. And let's now go to Page 28. This is the number of shops on ZOZOTOWN. At the end of the first quarter, the number of shops stood at 1,681, representing a net increase of 32 shops from the end of the previous quarter. The number of new stores opened in this first quarter was 43, and this is inclusive of a store like the New York-based makeup brand, Maybelline New York and more. Go to Page 30. With respect to the average retail price, it turned out to be JPY 3,744, an increase of 1.2% compared to the same period last year. The main factors contributing to the increase were an increase in the sales mix of spring outerwear and other items with higher unit prices compared to the same period last year and a decrease in the average discount rate for sales items. And additionally, price increases on new spring and summer items across various brands have leveled off and are now in line with last year. Let's go to Page 31 of the handout. This is the average order value. AOV was JPY 8,543, up by 2.4% compared to the same period last year. The increase in the average number of items purchased per order drove up the AOV rate to exceed the ARP growth rate. And this was primarily due to greater use of the free shipping policy for orders of JPY 12,000 or more compared to the same period last year, which led to higher proportion of combined purchases around the policy's implementation date. Lastly, I'd like to briefly share ZOZO's first matching service released on June 30, 2025. So ZOZOMATCH is a service that has been in the works for about 3 years, and it was brought to fruition through the dedicated efforts of our staff. So this concept stemmed from a hypothesis formed during the COVID period. Reduced opportunities for going out and social interaction led to a contraction in the apparel market, underscoring the close link between meeting people and fashion demand. So we thought that by offering a service like ZOZOMATCH, we could foster new connections, broaden motivations and opportunities for people to enjoy fashion more and ultimately help revitalize the entire fashion industry. In fact, the results of our survey also confirmed a correlation between romance and fashion. When asked, do you ever intuitively judge whether someone is a potential romantic interest based on their overall style and appearance, including their fashion, 97.5% answered yes. And when asked, do you feel like buying clothes when you're in a romantic relationship, whopping 89.9% answered yes. These results suggest a tendency to intuitively perceive a person's personality and charm through their overall style, including fashion, when meeting someone. It also indicates that many people place importance on fashion in romantic relationships and that their awareness of fashion increases when they're in a relationship. And finally, here's the overview of ZOZOMATCH service. ZOZOMATCH is a matching app powered by ZOZO's proprietary AI, which introduces users to people who share their preferred style and profiles are designed to be easily understood at a glance using full body photos that highlight each user's personality and style. And this approach enables more intuitive connections compared to competitor services. So that is all from me. Thank you.

[Interpreted] So let's move on to the Q&A session. [Operator Instructions] Mr. David Gibson, please go ahead with your questions.

Yes, David Gibson from MST Financial. My questions are all about LYST, in fact. The first one, what is the LYST gross margin? I haven't seen anything sort of said or indicated what that is.

[Interpreted] I'd like to answer that. So compared to the consignment business that we have been engaged with, gross margin against GMV tends to be lower. So I think it's safe for you to think that approximately the gross margin is about 15% of GMV.

A follow-up. So did the business lose money last fiscal year, in fiscal year 2025? Because you haven't really said, did it lose money? Or was it breakeven? What happened?

[Interpreted] So we do not disclose the numerics around last year's profit of LYST. And then, but for this fiscal year, we are kind of disclosing it. When you look at our revised forecast, the amount of the gap or the variance from the original forecast is the indication of how much loss LYST is making, which is about JPY 600 million.

Can you clarify, why not disclose last year's P&L? What's the thinking behind that?

[Interpreted] Well, there's really no specific reason for it.

By not disclosing, you're implying you don't want to tell people you're hiding it. So it's not normally a positive thing. Okay. Just to clarify, in your own filings the LYST for fiscal year 2024, you said that there were GBP 50 million in revenue. You're guiding for [ 3/26 ] just under GBP 40 million. So it looks like that business has lost 20% of its revenues in 2 years. Am I understanding correct?

[Interpreted] Are you talking about profit or GMV?

Sales. Sales. Sales.

[Interpreted] Sales, not GMV?

Correct.

[Interpreted] So the amount of the change is not that much actually. But there is disclosure of sales from 2 years ago. And then if you compare it to the numbers from this fiscal year, although the amount of the difference is not much, it's mostly coming from the ForEx impact. And then in terms of the sales for this fiscal period, you can sort of calculate how much that will be for LYST business through the revised business plan of ours, our revised forecast. And then another reason that I can add to what I have just said is that it's only been consolidated, not for the full year. So the impact is not on an annual basis, but it's only for 11 months. So we're losing a month there. So that's another reason for the difference.

I was just trying to understand the outlook. Is this revenue is going to expect it to continue to decline going forward?

[Interpreted] If the revenue was going to continue to go down, then we wouldn't have bought this business. So we are aiming to increase this in the medium term.

Medium term is what, 2 years, 3 years, like how far are you talking about?

[Interpreted] Relatively longer for this particular business, when we say medium term, we're thinking of 5 years down the road and 10 years down the road. So it's 5 to 10 years. Thank you, David, for your questions. Let's move on to Ms. [ Nancy Xu ].

This is [ Nancy Xu ] from [ Sora ] Investors. I have a couple of questions on the top line. So it looks like the LY channel and also your ads revenue were well above your target. So I wanted to understand the drivers. And also, is there any reason that this strong trend won't continue into the future quarters?

[Interpreted] So with respect to LY, it's mostly thanks to their effort that their promotions worked quite well, especially the point promotions. And with respect to our ad business, we decided to create our annual budget to be relatively lower, but we have had quite a lot of placements of the ads from our brands. And the conversion also ended up being quite nice as well. So we ended up, thankfully, with better results. And I believe that your question is, is this momentum sustainable? It's quite hard to say that at this stage.

And on GMV, ZOZOTOWN had a good growth this quarter. Could you talk about what was the external environment like? Were there tailwinds or headwinds? And also heading into the new quarter, July, for example, any changes in the external environment?

[Interpreted] So for the current quarter, the first quarter, which includes April, May, and June. So in April, it was a bit cooler as a month, but we had a pretty good season that was -- that became warmer right after that and then we were able to enjoy the spring time. And then the spring and summer demand grew strong. So that had a positive impact on us in Q1. So we didn't have any major headwind. And most currently, we're in the middle of the sales season right now. The sales during the sales period is going quite well, and it's very hot right now in Japan. And then during the hot season, the demand for hot season grows. So we're not really experiencing any big problem in the most current period either. And we're most concerned right now about how long this hot weather will prolong because that can delay the demand for AW season. So we're praying that the autumn and winter come as planned and as we expect.

Just one last question on the cost side. Could you remind us when do you start the free shipping promotion? And how long will it last?

[Interpreted] I'd like to answer that. So actually, for last fiscal year and this fiscal year, we were running this free shipping promotion throughout the quarter actually. But the number of times we conducted this was quite different between the first quarter last year and then the first quarter this year. So last year, in the first quarter, we conducted this 10 times. And then for this year, we conducted this 23 times. So the frequency was quite different. To just kind of elaborate with my answer to answer to your question, Nancy. So in terms of free shipping promotion that we've been conducting with the purchase of a certain level of amount. As a matter of fact, we've been doing this for 4 to 5 years already. And we're -- and every time we kind of monitor the situation of our business and the demand to make decisions on how many times and how we conduct this.

So the frequency change this year. So I guess because this year, there's the termination of the PGA sponsorship, so you have some savings that you can spend in other areas. So I guess you have the ability to continue this higher frequency for the rest of the year. Is that correct?

[Interpreted] Yes. I'd like to answer that. Yes, it is true that the frequency has risen. So would the frequency increase more? So actually, the frequency has started to increase from the third quarter of FY '24. And on a year-on-year basis, the number of dates that we conduct this free shipping have been kind of staying at a high level. And then I think that trend is going to stop sometime in the second quarter. Nancy, thank you for your questions. Does anybody else have questions? [Operator Instructions] Okay. So I'd like to wait for 30 seconds for people to think about the questions you'd like to ask. Okay. [ Michaelson ] please go ahead with your questions.

And my first question is about GMV in the September quarter. Japan is currently experiencing extremely hot weather. Would it be reasonable to assume this has a positive impact on the ZOZOTOWN business? Or is it more likely that lower average selling prices are diluting this effect, making it difficult for the heat to actually lift the GMV? So this is my first question. [Foreign Language].

[Interpreted] Thank you for your question. So relatively speaking, during summer, first of all, ARP is low to begin with during summer. So it doesn't like significantly push down the AOV when the weather is hot. And I won't really call it the tailwind for us, but it doesn't have such a strong negative impact, let's put it that way. And what happened in the past was that when summer became longer than we expected, by the time we hit September, we were selling down all of the T-shirts and we were going out of stock of the T-shirts and then we had nothing to sell in September. But nowadays, the brands are anticipating long summer and then they're producing more summer clothes. So we do get clothes and T-shirts and things like that to sell for a longer period of time.

And my second question is about advertising revenue. That was strong this quarter. Since ad unit prices were raised last year, we believe the situation has now normalized. But we understand that the strength this time was driven by improved click-through rates. So do you expect this positive momentum to continue in following quarters? [Foreign Language].

[Interpreted] Thank you for your question. The way I could put this is that we can't be that proactive yet. I think we should continue to be a little prudent on that one.

And my third question is about LINE Yahoo!'s GMV, as Nancy-san asked this question earlier, but I would just like to get more sense about that GMV growth. So LINE Yahoo! GMV posted a solid about 20% Y-o-Y increase, well above the full year growth guidance of 9%. So do you see this strong performance continuing? Or should we remain cautious depending on whether it was largely driven by promotional activities by Yahoo!? Could you share your thoughts on the sustainability of this growth and your outlook going forward? [Foreign Language].

[Interpreted] So in summary, we can't be optimistic. So Kobayashi-san, do you have any quarters that we expect like a big plunge? [Interpreted] So the way we forecasted this was that in the first quarter, the growth was going to be stronger and in the second quarter, a little weaker. And then when you converge them, it will be a little shy of 10%. Okay. So we're coming close to the ending time, and this will be the last question. Nancy, go ahead with your question, please.

Just one more question. Just reading some of the broker notes, it seems like there were some cost delay from this quarter. Could you please further elaborate on that?

[Interpreted] So that is about our promotion costs. We didn't use as much as we forecasted or budgeted. But the deferred promotion costs from the first quarter, we plan to use this in the second quarter and onward. So on an annual basis, it's going to be at the same level as what we have budgeted originally. Just to further elaborate on the cost that we were able to save, there is the labor cost that's related to logistics. So more than we expected, the operational efficiency at the warehouses turned out to be high. So in order to generate the same amount of GMV, we were able to suppress the labor cost incurred for that. So unlike the promotion costs that we just mentioned that we will use in the second quarter or onward, this decrease in the logistics-related labor cost is going to have a positive impact on our P&L. And Nancy, thank you very much for asking the questions. And now we'd like to end the conference call. Thank you very much for your participation and attention.

Thank you very much.

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