Zozo Earnings: Competition Intensifies but Stock Still Attractive

Zozotown’s 3092 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.

Despite spending more on advertisements (3.3% of GMV versus 3.1% of GMV last year) Zozotown’s GMV growth was weaker than expected in the June quarter. We believe that it was due to a combination of factors: 1) cooler-than-usual temperatures in April-May, which led to slower sales of summer clothing during the quarter; 2) since reopening in April, more people are shopping at physical stores instead of online stores; 3) customers are prioritizing spending on necessities amid inflation; and 4) large e-commerce sites such as Rakuten and Amazon have been increasing advertisement spending, which intensifies competition. Management admitted that it is now more difficult than before to grow GMV and monthly active users without spending more on advertisements. We expect the competition in the apparel e-commerce market to continue to build, and Zozo is prioritizing growth at this stage, so we believe the increase in advertisement expenditure will stick for the time being.