Company Reports

Zozo’s March-quarter results were largely in line with our expectations. Although gross merchandise value, or GMV, growth in the Zozotown business was lower than expected, the shortfall was mainly offset by higher-than-expected GMV growth in Line Yahoo Commerce (previously Yahoo Shopping). As well, tighter cost control helped Zozo achieve its full-year operating income guidance of JPY 60 billion. For the new fiscal year (ending March 2025), management guided for GMV growth of 7% for consignment sales and an operating margin of 11.2%. We previously forecast GMV growth of 8% and operating margin of 10.8%, assuming that the company would increase promotional spending to boost GMV growth. We believe that the company’s guidance indicates a more disciplined spending policy. Accordingly, we trimmed GMV growth assumptions for the next five years but kept operating margins at around 11% through the midterm, thus maintaining our fair value estimate of JPY 3,400. We think shares are currently fairly valued. We are changing Zozo’s Uncertainty Rating to Medium, from High previously, as we think the company’s strong foothold in the apparel e-commerce market, as well as cost discipline, should help maintain stable profitability for the next 5 to 10 years.

Zozo’s Zozotown is the largest pure-play fashion e-commerce platform in Japan, with over 9,000 brands and 11.7 million active users on the platform, both of which are the largest in Japan. Zozotown charges a high average take rate of 30%, because of the high value it provides to tenants, through 1) access to the largest pool of young fashion-conscious customers in Japan, and 2) fulfillment services tailored to fashion brands, which include measuring size, photographing, storage, picking and packing products, shipping, and returns. Through collecting large amounts of user traffic data over the past two decades, Zozo’s site algorithm generates highly sophisticated personalized recommendations, which translates to superior conversion rates of 14-%16%, compared with the industry average of 4%.

Zozo’s Zozotown is the largest pure-play fashion e-commerce platform in Japan, with over 8,000 brands and 9.5 million active users on the platform, both of which are the largest in Japan. Zozotown charges a high average take rate of 30%, because of the high value it provides to tenants, through 1) access to the largest pool of young fashion-conscious customers in Japan, and 2) fulfillment services tailored to fashion brands, which include measuring size, photographing, storage, picking and packing products, shipping, and returns. Through collecting large amounts of user traffic data over the past two decades, Zozo’s site algorithm generates highly sophisticated personalized recommendations, which translates to superior conversion rates of 14-%16%, compared with the industry average of 4%.

Zozo’s December-quarter 2023 total gross merchandise value year-on-year growth of 8.4% was commendable during a particularly difficult period due to a mild winter in Japan. Operating income of JPY 16.8 billion largely met our expectations, excluding one-off expenses of about JPY 1 billion for its new distribution center. We retain our view that Zozo should be able to meet its operating income guidance of JPY 60 billion for fiscal 2024. From 2025 onward, although shipping fee hikes and rental expenses for a new logistics center may pressure near-term margins, we believe that the company should be able to absorb cost increases gradually by improving operating efficiencies and passing on partial cost increases to brands and consumers. Therefore, we broadly maintain our midterm forecasts and maintain our fair value estimate of JPY 3,400. The stock is currently fairly valued.

Zozo’s Zozotown is the largest pure-play fashion e-commerce platform in Japan, with over 8,000 brands and 9.5 million active users on the platform, both of which are the largest in Japan. Zozotown charges a high average take rate of 30%, because of the high value it provides to tenants, through 1) access to the largest pool of young fashion-conscious customers in Japan, and 2) fulfillment services tailored to fashion brands, which include measuring size, photographing, storage, picking and packing products, shipping, and returns. Through collecting large amounts of user traffic data over the past two decades, Zozo’s site algorithm generates highly sophisticated personalized recommendations, which translates to superior conversion rates of 14-%16%, compared with the industry average of 4%.

For Zozo's 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.

Zozotown’s June-quarter gross merchandise value, or GMV, growth was weaker than expected, due to a later-than-usual change to summer wear in Japan because of a cooler April-May, as well as intensifying competition with both physical and e-commerce platforms amid declining customer spending motivation on durable goods. We are maintaining our GMV growth forecasts but lowering our operating margin projections to 31.7% from 33% previously, as we expect Zozo to have higher advertisement spending for the midterm as the company is keen on maintaining high GMV growth. As a result, our fair value estimate is lowered to JPY 3,400 from JPY 3,500 previously. Nonetheless, we still view Zozo as an attractive e-commerce stock as it is still generating much higher returns than its peers, because of its high take rate based on superior customer access and comprehensive brand service.

Zozo’s Zozotown is the largest pure-play fashion e-commerce platform in Japan, with over 8,000 brands and 9.5 million active users on the platform, both of which are the largest in Japan. Zozotown charges a high average take rate of 30%, because of the high value it provides to tenants, through 1) access to the largest pool of young fashion-conscious customers in Japan, and 2) fulfillment services tailored to fashion brands, which include measuring size, photographing, storage, picking and packing products, shipping, and returns. Through collecting large amounts of user traffic data over the past two decades, Zozo’s site algorithm generates highly sophisticated personalized recommendations, which translates to superior conversion rates of 14-%16%, compared with the industry average of 4%.

Zozo’s Zozotown is the largest pure-play fashion e-commerce platform in Japan, with over 8,000 brands and 9.5 million active users on the platform, both of which are the largest in Japan. Zozotown charges a high average take rate of 30%, because of the high value it provides to tenants, through 1) access to the largest pool of young fashion-conscious customers in Japan, and 2) fulfillment services tailored to fashion brands, which include measuring size, photographing, storage, picking and packing products, shipping, and returns. Through collecting large amounts of user traffic data over the past two decades, Zozo’s site algorithm generates highly sophisticated personalized recommendations, which translates to superior conversion rates of 14-%16%, compared with the industry average of 4%.

We maintain Zozo’s fair value estimate of JPY 3,500 after fine-tuning our fiscal year ending March 2024 and midterm projections. We believe that the share price decline following the announcement is likely due to concerns about the conservative gross merchandise value guidance from Yahoo Shopping (an online shopping mall on which Zozo is a merchant), that has been driving Zozo’s revenue growth recently. While we expect Yahoo Shopping’s GMV to be sluggish this year due to a reduction in promotion costs, we believe the impact on Zozo will be less than the market fears as Zozotown’s organic growth will offset some of the impact. Our view on the competitiveness of Zozo’s attractive platform remains unchanged and we think the stock is undervalued currently.

We initiate coverage of Japanese apparel e-commerce platform Zozo with a fair value estimate of JPY 3,500 and a narrow economic moat rating. With the company’s broad range of fashion brands and attractive customer base, as well as its extensive fashion fulfillment capabilities built over the past 20 years, we believe it is well-positioned to benefit from the growth in online penetration in fashion, driven by the shift in consumer habits and technological advancement in the next five years. We believe Zozo’s shares are moderately undervalued because we have more confidence than the market in Zozo's medium- to long-term growth.

Zozo’s Zozotown is the largest pure-play fashion e-commerce platform in Japan, with over 8,000 brands and 9.5 million active users on the platform, both of which are the largest in Japan. Zozotown charges a high average take rate of 30%, because of the high value it provides to tenants, through 1) access to the largest pool of young fashion-conscious customers in Japan, and 2) fulfillment services tailored to fashion brands, which include measuring size, photographing, storage, picking and packing products, shipping, and returns. Through collecting large amounts of user traffic data over the past two decades, Zozo’s site algorithm generates highly sophisticated personalized recommendations, which translates to superior conversion rates of 14-%16%, compared with the industry average of 4%.