ZOZO, Inc. (SRTTY) Q3 FY2026 Earnings Call Transcript & Summary

Good evening, everyone. My name is Kobayashi, Yusaku. Thank you very much for joining in ZOZO's conference call for the third quarter of FY '25 ending in March 2026. And today, we have on the call from ZOZO Director, Executive Vice President and CFO, Koji Yanagisawa and me, and it will be the two of us who will be answering to your questions tonight. First, CFO, Yanagisawa, will take you through the financial results.

Good evening, everyone. I'd like to walk you through the third quarter financial results for FY '25 ending in March 2026. First, I'd like to walk you through the highlights of the third quarter of FY '25. As for the third quarter, GMV increased by 9.1% year-on-year to JPY 502.9 billion. GMV, excluding other GMV increased by 11.9% year-on-year to JPY 483.1 billion. EBITDA increased by 9.5% year-on-year to JPY 60.6 billion, and EBITDA margin was 12.6%, down 0.2 percentage points from the same period last year. And progress against the revised company plan announced on July 31 is as follows: GMV, excluding other GMV, 73.9% and EBITDA 79.1%. And regarding GMV, we were affected by lower demand due to persistently high temperatures in the second quarter. Furthermore, while we implemented aggressive promotions against a high base from the same period last year, the effect of some sales events fell short of expectations in the third quarter, resulting in a slight shortfall against plan. On the other hand, EBITDA exceeded the progress plan, benefiting from lower logistics and shipping costs and lower-than-budgeted promotional expenses. And next, this is the quarterly trend in consolidated performance. For the third quarter accounting period, GMV, excluding other GMV, increased by 11.3% compared to the same period last year. And this overlaps partially with the early explanation of the third quarter cumulative results, but ZOZOTOWN's business fell slightly short of its plan as sales fall and winter products showed limited growth. Meanwhile, LINE Yahoo Commerce exceeded our plan for having more days of [indiscernible]. And as for LYST, we fell short of our plan due to factors, including industry headwinds and changes to the U.S. tariff system. And EBITDA increased 14.9% year-on-year with the EBITDA margin reaching 13.6%. While GMV and gross margin were below plan, EBITDA improved faster than expected, primarily driven by shipping and logistics-related cost reductions. Next, I'd like to share the main topics of the third quarter. The first one is about the termination of our production business. Our production business was designed around a made-to-order model to address chronic inventory problem in the apparel industry; however, demand from brands fell short of expectations, and we faced challenges in achieving profitability. And after a comprehensive review of the business' future viability, we have decided to discontinue this operation. In connection with this business liquidation, we recorded an extraordinary loss of JPY [ 700 ] million in the third fiscal -- in the third quarter. And we have also suspended accepting new orders effective October 20, 2025, and we will continue to sell the existing inventory and plan to see sales once it is fully depleted. And next is about the K-Fashion Zone, which opened on November 6. On the same day, we also welcome the opening of MUSINSA, a leading Korean fashion platform. And at launch, it featured approximately 140 brands. And by the end of December, the set expanded to 2,015 brands with around 200,000 listed SKUs and further expansion is planned going forward. And sales got off to a strong start, broadly in line with our initial expectations, and it's been gaining traction primarily among women in their early 20s with Korean brands known for their strong trend sensitivity showing particularly strong performance. And next, I'd like to present an overview of the key performance details. Let's go to Page 9 of the handout. So first, we will analyze the changes in EBITDA compared to the previous year's results at the end of the third quarter. EBITDA increased by approximately JPY 5.25 billion from JPY [ 55.42 ] billion in the previous year to JPY 60.67 billion in the current quarter. And there are mainly 4 factors attributable to the increase in EBITDA. First, gross profit increased due to higher GMV in the ZOZOTOWN business and LINE Yahoo Commerce, plus JPY 6.68 billion. Second, sales increased due to growth in the advertising business, plus JPY 400 million. Gross profit increased due to the consolidation of LYST and other businesses, plus JPY 4.97 billion. And fourth, the reduction in variable costs driven by the containment of logistics-related personnel expenses resulting from the streamlining of logistics centers, plus JPY 420 million. And on the other hand, there are mainly three factors that reduced EBITDA. First, an 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, minus JPY 2.59 billion, an increase in actual PR expenses to attract customers, promote sales and cover LYST stand-alone expenses, approximately minus JPY 3.9 billion. And there was an increase in other expenses due to success fees paid to FA related to M&A and others in the first quarter, and this was minus JPY 730 million. And next, I'd like to go to Page 21 of the handout. This is the breakdown of SG&A. So the SG&A to GMV ratio was 21.8%, a decrease of 1.0 point from the same period of last year. While GMV increased due to consolidation of LYST, incremental SG&A expenses were either zero or minimal for certain items related to LYST alone, and this contributed to a decrease in the SG&A expense ratio. Mainly, there are two factors that drove up the SG&A ratio. First, amortization of goodwill related to the acquisition of LYST, that's plus 0.3 points. And second, in addition to expenses recorded for LYST alone, advertising expenses increased due to higher web advertising spending for ZOZOTOWN, and that's plus 0.2 points. On the other hand, there are mainly four factors contributing to the decrease in the SG&A ratio. First, lower shipping costs resulting from improved economic terms with the delivery contractor starting October 2025, driven by both expanded consolidation scope and delivery efficiency initiatives. That's minus 0.7 points. And second, a decrease in logistics-related labor costs driven by improved operational efficiency, including inventory optimization and logistics centers and labor savings from automation initiatives as well as an expanded scope of consolidation, and that's minus 0.5 points. And the other two are the following: one, a decrease in payment collection commission due to the expansion of the consolidation scope, minus 0.2 points and a decrease in rent expense due to the expansion of the consolidation scope, [ minus 0.2. ] Next is Page 24 of the handout. Here, we show the actual promotion-related expenses. In Q3, actual promotion expenses amounted to 4.9% of GMV and the actual promotion-related expenses include advertising costs and point-related expenses that are deducted from sales. The increase was driven mainly by three factors. First, we increased web advertising for ZOZOTOWN and second, promotional expenses rose due to initiatives such as acquiring new members and reactivating dormant members. And third, we recognized expenses solely for LYST with advertising accounting for a large portion of SG&A. The aforementioned three factors worked to increase the actual promotion expenses. The elimination of PGA Tour sponsorship expenses from prior fiscal years had a greater impact. And as a result, the SG&A ratio decreased by 0.4 points compared to the same period last year. Please note that the actual promotion expenses for the third quarter were largely used as planned; however, as mentioned in the opening slide of the earnings summary, the cumulative amount for the first three quarters remains below plan. And the remaining budget will be utilized in the fourth quarter. So on a full year basis, we expect to use the budget as planned. And the following are ZOZOTOWN's KPIs, and please note that the following indicators do not include results from LINE Yahoo Commerce LYST or B2B businesses. Let's first go to Page 25 of the handout. This is the number of buyers. The number of total buyers increased by 280,000 from the previous quarter to 12.8 million. And here's the back -- and then this is the breakdown. The number of active members increased by 310,000 from the previous quarter to 12.11 million and the number of guest buyers decreased by 30,000 from the previous quarter to 680,000. In Q3, we continued to successfully acquire new members by increasing our web ad and friend referral campaigns year-over-year. In addition, reengagement initiatives for dormant members have delivered positive results with the impact of reactivation now becoming visible. And moving on to Page 28 of the handout. This is the number of shops on ZOZOTOWN. At the end of the third quarter, the number of shops stood at 1,712, a net increase of 26 from the previous quarter. The number of new stores opened in the third quarter was 46, including stores like MUSINSA, which is the one that I mentioned earlier. This is Korea's leading fashion platform. And there are "Toys "R" Us" and "Babies "R" Us" comprehensive specialty stores for toys and baby products and an apparel brand popular mainly among young consumers and more. Let's now go to Page 30 and 31 of the handout average retail price and average order value, starting with the average retail price. With respect to average retail price, it came to JPY 4,277, a 2.1% year-on-year decrease. Price increases for new fall and winter merchandise have moderated from the brands 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. On the other hand, if you can kindly turn to Page 31, we have information about our average order value. Average order value stood at JPY 9,328, minus 1.0% year-over-year. 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 lower average order value. And also the volume of promotions offering free shipping on purchases of JPY 12,000 or more remained at the same level as the previous year. And the effect of this promotion on increasing the number of items purchased per order was limited. Lastly, this is the full year consolidated earnings and dividend forecast for the current fiscal year. There are no changes to the earnings forecast. This concludes our presentation for today.

[Operator Instructions] It seems like there are no questions. And what we'd like to do is to go ahead and end this conference call. Thank you very much for your participation.

Thank you very much.

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