Company Reports

We are maintaining our fair value estimate of EUR 41 per share for no-moat Zalando as the company delivered improving revenue and solid margin development in the second quarter. We see shares as deeply undervalued at current levels with almost 100% upside to our fair value estimate.

We maintain our fair value estimate for no-moat Zalando as the firm reported sluggish growth still, but improved profitability and ramped up marketing spending in the first quarter. We still see shares as undervalued with almost 60% upside to our fair value estimate.

Zalando is the leading European pure-play e-commerce fashion platform. We believe that through its wide reach (almost 50 million active customers or over 10% of the addressable population in markets where it is present and over 7,000 brands represented), it benefits from traces of network, cost, and intangible asset advantage. Although we don’t think these advantages are currently strong enough to warrant a moat, we think the intangible asset advantage should strengthen over time as more customer traffic data is accumulated and better analytics allow for improved conversion rates and customer loyalty.

We are maintaining our fair value estimate of EUR 53 for no-moat Zalando, with the company reporting full-year results above our expectations. Management provided an updated midterm strategy, and we think shares remain attractively priced. Zalando, as the most-scaled player with a strong balance sheet and room to invest, could emerge stronger in the current general online apparel market tumult.

Zalando is the leading European pure-play e-commerce fashion platform. We believe that through its wide reach (over 50 million active customers or over 10% of the addressable population in markets where it is present and over 7,000 brands represented), it benefits from traces of network, cost, and intangible asset advantage. Although we don’t think these advantages are currently strong enough to warrant a moat, we think the intangible asset advantage should strengthen over time as more customer traffic data is accumulated and better analytics allow for improved conversion rates and customer loyalty.

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).

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.

Zalando is the leading European pure-play e-commerce fashion platform. We believe that through its wide reach (over 50 million active customers or over 10% of the addressable population in markets where it is present and over 7,000 brands represented), it benefits from traces of network, cost, and intangible asset advantage. Although we don’t think these advantages are currently strong enough to warrant a moat, we think the intangible asset advantage should strengthen over time as more customer traffic data is accumulated and better analytics allow for improved conversion rates and customer loyalty, granting Zalando a positive moat trend.

We expect to reduce our fair value estimate for no-moat Zalando by a mid- to high-single-digit percentage to account for lower growth in 2023 and after continued weakness in quarterly sales figures. We still see shares as materially undervalued at current levels as we expect the online apparel industry to return to high-single-digit growth and Zalando to return to low-teens growth.

We don’t expect to make a material change to our EUR 65 fair value estimate for no-moat Zalando as we incorporate full-year 2022 results into our models. Despite more than doubling from last year’s lows, shares still present value, trading in 5-star territory at an almost 40% discount to our fair value estimate.

We are maintaining our fair value estimate of EUR 65 for no-moat Zalando as the company reported third-quarter revenue and stuck to the lower range of its prior full-year guidance. Its guidance implies gross merchandize value growth closer to 3%-7% versus 4% in our models, revenue growth of 0%-3% versus negative 0.8% in our models, and adjusted EBIT in the range of EUR 180 million-EUR 260 million versus EUR 220 million in our models. Since our assumptions were already mostly closer to the bottom range of the guidance, we don’t expect to significantly adjust our forecasts. Zalando is our top pick in the European online apparel segment and remains deeply undervalued.

Zalando is the leading European pure-play e-commerce fashion platform. We believe that through its wide reach (over 48 million active customers, or around 10% of the addressable population in markets where it is present and over 5,800 brands represented), it benefits from traces of network, cost, and intangible asset advantage. Although we don’t think these advantages are currently strong enough to warrant a moat, we think the intangible asset advantage should strengthen over time as more customer traffic data is accumulated and better analytics allow for improved conversion rates and customer loyalty, granting Zalando a positive moat trend.

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.

Zalando is the leading European pure-play e-commerce fashion platform. We believe that through its wide reach (over 48 million active customers, or around 10% of the addressable population in markets where it is present and over 5,800 brands represented), it benefits from traces of network, cost, and intangible asset advantage. Although we don’t think these advantages are currently strong enough to warrant a moat, we think the intangible asset advantage should strengthen over time as more customer traffic data is accumulated and better analytics allow for improved conversion rates and customer loyalty, granting Zalando a positive moat trend.

We do not expect to significantly alter our fair value estimate of EUR 65 for no-moat Zalando after the company reduced its outlook for gross merchandize value growth from 16% to 3%-7%, revenue growth from 12% to 0%-3% and adjusted EBIT to EUR 180 million-EUR 260 million from EUR 430 million previously targeted. While the reduction is meaningful, we don't think it changes the structural growth trajectory of the company. We see shares as undervalued, trading deep in 5-star territory, at a 65% discount to our fair value estimate.

Concerns about the impact of inflation on consumer spending, rising interest rates, Russia-Ukraine conflict and lockdowns in China have put pressure on shares across our luxury and apparel coverage. We see these changes as either manageable (the sector has limited exposure to Russia and Ukraine) or transitory (Chinese demand recovered quickly after previous lockdowns). Historically, the luxury industry grew prices ahead of the consumer price index and while it was not the case for general apparel the strongest firms, such as narrow-moat Inditex, are well placed to take market share under strenuous conditions (as the coronavirus experience has shown).

Zalando is the leading European pure-play e-commerce fashion platform. We believe that through its wide reach (over 48 million active customers, or around 10% of the addressable population in markets where it is present and over 5,800 brands represented), it benefits from traces of network, cost, and intangible asset advantage. Although we don’t think these advantages are currently strong enough to warrant a moat, we think the intangible asset advantage should strengthen over time as more customer traffic data is accumulated and better analytics allow for improved conversion rates and customer loyalty, granting Zalando a positive moat trend.

We don’t expect to materially change our EUR 59 fair value estimate for Zalando after it reported a weak first quarter as the benefits it enjoyed from coronavirus lockdowns unwind. The company kept its guidance for the full year (16%-23% growth in gross merchandize value, or GMV, 12%-19% growth in revenue and EUR 430 million to EUR 510 million in adjusted operating profit) but expects to reach its lower end, which is in line with our expectations for GMV and revenue but somewhat below our profit forecast. After the selloff over the past year (shares trading close to 2020 lows), we believe shares look attractive as our long-term thesis for increased e-commerce penetration of European apparel (to 50% from 30% in 2021) and scaling of profitability remains intact.

We are not making any changes to our fair value estimates for our luxury and apparel coverage list due to Russia-Ukraine armed conflict. The luxury industry’s exposure to the Russia and Ukraine is small, accounting for a low-single-digit percentage of revenue, by our estimates. We believe that the conflict is unlikely to dampen consumer confidence in China (primary long-term growth driver) or the U.S. (driver of growth in recent years). European consumer sentiment (low-20% of industry’s sales) may be affected, should energy-related inflation accelerate meaningfully as a result of conflict; however, Morningstar's view is that the likelihood of gas delivery disruption to Europe from Russia is low. That said, most luxury names in our coverage look expensive to us, and we would recommend investors await a wider margin of error for investment in the sector.

We maintain our fair value estimate of EUR 59 per share for no-moat Zalando as the company reported slightly better revenue growth than we expected (29.7% versus 28.8% in our models) and adjusted operating profit (which excludes stock-based compensation and one-off items) bang in line with our estimates. The company’s outlook for 2022 also matched our forecast with gross merchandize value, or GMV, expected to increase 16%-23% (17% in our models), revenue expected to grow 12%-19% (12% in our models) and adjusted operating profit to reach EUR 430 million-510 million (versus EUR 468 million in 2021 and EUR 503 million in our models). After a 35% decline over the past year, shares look fairly valued at current levels.