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 ZAL 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).

Active customer numbers remained largely flat year on year in the third quarter; an average order per customer was down low single digits, offset by larger basket sizes, likely a result of minimum order threshold implementation to support profitability. A resulting improvement in fulfillment costs of 290 basis points year on year drove profitability improvement in the quarter despite the gross margin pressure of 240 basis points. Lower marketing expenses (7% of revenue in the first nine months versus 7.6% in the same period of 2022) is a point of concern for us, given that lower investments in marketing and customer offering (with focus on more profitable orders) would damp the pace adoption of online channels for clothes buying. We believe it is already happening, with a second year of quite muted growth. In that sense, we take it positively that the company is planning to increase marketing spending in the last quarter of the year and in 2024.