Zalando Earnings: Profitability Improves Starkly but May Be Coming at Cost of Growth; Shares Cheap

We are maintaining our fair value estimate for no-moat Zalando as the company reported still-sluggish sales but strong improvement in profitability in the second quarter. For the full year, management slightly increased its outlook for EBIT but expects to be toward the lower end of guidance on gross merchandise value and revenue, both of which are already similar to our forecasts. We continue to view the shares as materially undervalued, trading in 5-star territory with over 70% upside to our fair value estimate. We believe Zalando is well positioned to invest countercyclically and take market share in a more challenging demand environment.