Zalando Focuses on Profitability As Slower Revenue Bites; Shares Deeply Undervalued

We are maintaining our no moat rating and fair value estimate of EUR 65 for Zalando after the company reported deteriorating revenue and profit for the second quarter. The company maintained its previously downgraded guidance of 3%-7% growth in gross merchandize value, flat to 3% growth in revenue, and adjusted EBIT of EUR 180 million-EUR 260 million. The guidance is approximately in line with our forecasts. We still expect the current slowdown in growth to be transitory and is largely due to a tough comparable base from the previous two years, when competition from brick-and-mortar channels was vastly reduced. We expect online to gain share of apparel sales in the longer term driven by demographic shifts, brand investments, and the “flywheel effect”, which occurs when growth in online channels reduces offerings in brick-and-mortar channels and results in more consumers shifting online. We expect Zalando’s GMV growth to accelerate to a midteens percentage on average after 2022 and see shares as materially undervalued.