Zozo Earnings: Plans to Improve Shareholder Returns Amid Slowing GMV Growth

For Zozo’s 3092 fiscal 2023, as we expect domestic inflation and the reopening of physical stores to dampen apparel e-commerce sales, we lower our gross merchandise value, or GMV, growth forecasts to 5.6%, below the firm’s guidance of 6.7%. We also lower our long-term outlook, based on a more conservative view of GMV growth as Zozo enters a more mature business stage. However, our fair value estimate for Zozo remains unchanged at JPY 3,400 after incorporating the impact of the new shareholder return policy, which aims to maintain a total payout ratio above 80% over the medium to long term. Specifically, for this fiscal year, Zozo will 1) raise the dividend payout ratio to 70% from 50% previously; 2) repurchase up to JPY 10 billion of its own shares; and 3) cancel 11.2 million treasury shares. Although Zozo’s share price reacted positively the next day after the earnings, we believe the stock is undervalued as the market is too concerned about the slowdown in GMV growth and overlooks Zozo’s solid dividend growth underpinned by its strong cash generation. We believe Zozo’s dividend yield of over 3% should be attractive to investors.

Despite the increase in promotion expenses to 3.8% of GMV from 3.3% last year, Zozotown consignment sales GMV grew 6.9% year over year in the September quarter, below our 8% forecast and last year’s growth of 10.6%, suggesting a decline in the effectiveness of promotional spending due to headwinds such as inflation, unfavorable weather conditions, and offline reopenings. While the shortfall is somewhat offset by higher-than-expected Yahoo Shopping sales and good sales of collaboration products produced by Zozo, we believe it will be difficult for the company to meet its total GMV growth target of 6.7% for this fiscal year. Nevertheless, we expect Zozo to be able to achieve its operating profit guidance of JPY 60 billion this fiscal year, thanks to shipping cost savings and a better product mix from upbeat advertisement/Yahoo Shopping sales.