Zalando Earnings: Profitability Resilient but Sales Weak; Boost to Marketing Spend Is a Positive

We are maintaining our fair value estimate for no-moat Zalando as the company reported declines in third-quarter gross merchandise value and revenue in the low single digits but a strong improvement in adjusted EBIT. The company lowered its full year GMV and revenue guidance (to negative 2% to 1% and to negative 3% to negative 0.5%, respectively, from 1%-7% and negative 1% to 4%). Our forecast calls for a 0.5% revenue decline in 2023. The company maintained operating profit guidance despite weaker growth on strong cost controls. Zalando attributed weakness in the third quarter partially to adverse weather conditions (slow start of autumn in Europe), which was also mentioned by peers, like H&M. We see Zalando shares as undervalued, and it is our preferred name in European online apparel thanks to its scale (more than 10% of the addressable European population in active customers) and financial resources (EUR 1.9 billion in cash and equivalents).