ZOZO Inc

TSE:3092

Earnings Call Transcript 2022-Q2

[Operator]

It is now time to start the financial results announcement of ZOZO for the second quarter of FY 2022 ending in March. In order to prevent the spread of COVID-19, we would only be offering live streaming this time. And we plan to have the session until 5:35 p.m. After this, on a separate Zoom channel, we will have a Q&A session with institutional investors.

I would like to now introduce the participants. Representative Director, President and CEO, Kotaro Sawada.

[Kotaro Sawada, executive]

Hello.

[Operator]

Director, Executive Vice President and CFO, Koji Yanagisawa.

[Koji Yanagisawa, executive]

Hello.

[Operator]

Director and COO, Fuminori Hirose.

[Fuminori Hirose, executive]

Hello.

[Operator]

We have three presenters today. Our CFO, Yanagisawa, will take us through the business results.

[Koji Yanagisawa, executive]

Hello. I'm Yanagisawa. I'd like to walk you through the earnings results of the second quarter of FY '22 ending in March. The presentation document we will be using today has already been uploaded to the IR page of our website, so please take a look. And by the way, our wardrobe, we're all wearing hoodies today because it's trending right now. Let's jump right in. Here are the highlights. So once again we included a lot of manga, featuring [ Kuritaro ]. So that's the hero wearing the hoodie like us. So please enjoy that.

Here are the highlights of the second quarter. Our gross merchandise value, GMV, went up by 23.6% year-on-year, landing at JPY 229.5 billion. GMV, excluding the other GMV, went up by 12.7% year-on-year, landing at JPY 209 billion. Operating profit was up by 19.5%, landing at JPY 23.7 billion. Operating profit margin was 11.4%, improving by 0.7 point year-on-year. The progress rate against the full year target is: for GMV, 48.5%; OP, 49.8% against the plan. It is progressing steadily.

Next slide, please. This is Page 7 of the document. These are the quarterly changes of the business results. In the second quarter, GMV, excluding the other GMV, was up by 13.5% year-on-year. After the Tokyo Olympic Games, we temporarily experienced a decline of visitors to the site, but we sustained more than 10% of growth year-on-year, nevertheless, and it is doing quite well. Regarding operating profit, on top of GMV and the advertising business growth contributing to the increase of gross profit, we managed to reduce logistic costs and payment collection commission fee, which worked to improve OP by 18.1% year-on-year. With respect to OP margin, and this is due to the fashion industry seasonality, both retail price and order value tend to be low in the second quarter. And it's quite difficult to generate a high margin. However, we managed to land high at 10.9%.

Next, I'd like to touch on the highlights of the business results. And by the way, you see new characters appearing on this manga. This is Page 8. Let's look at the increase-decrease analysis of the operating profit. OP was JPY 19.9 billion in the second quarter last year, and this year, it was JPY 23.79 billion. It improved by JPY 3.89 billion. Factors attributable to the growth of the OP were -- there are 3: the increase of consignment shop commission due to the GMV growth, JPY 5.28 billion; the increase of sales from the advertising business, JPY 1.2 billion; the growth of shipping revenue and payment settlement revenue coming from the GMV expansion, JPY 2.15 billion.

On the other hand, factors that drove down the OP were -- and there were four of them: the increase in fixed costs, including the increase in the number of employees, logistic bases and outsourcing, minus JPY 1.86 billion; the increase in variable costs correlating to the GMV growth, minus JPY 2.21 billion; the increase in promotion expenses due to the active airing of TV commercial, minus JPY 650 million; and other expenses, minus JPY 20 million.

Next slide, please. This is Page 9 of your handout, the balance sheet. Compared to last year, cash and deposits shows a decline and treasury stock shows increase. And this is because, as we have explained in the first quarter financial results announcement, we acquired treasury stocks to adapt ourselves to the prime section. And for other points, there's really no major change.

Next, Page 10. This is our consolidated cash flows. For cash flows from operating activities, there was an increase in income taxes paid, so it came down. For cash flows from investing activities, there were expenses related to the new office and expansion of the logistics center and warehouses. So we do see a change here. For cash flows from financial -- financing activities, as I have explained, there were gains and losses from purchase and disposal of the treasury stock. So you do see a major change here.

Next slide, please. This is Page 17 of your handout, quarterly changes of GMV. During the second quarter, Z Holdings executed aggressive promotion, driving up the PayPay Mall GMV share by 3.5 points year-on-year. This now makes up for 8.3% of our GMV. That is a big jump. Also, the share of the other GMV, which started to be recorded from the second quarter of the previous year amounted to 9.2% this quarter.

Next slide, please. This is Page 21 of your handout. SG&A breakdown as of the quarter -- as of the second quarter of this year. SG&A against GMV for the second quarter was 23%, down by 0.4% year-on-year. The ratio decrease is attributed to these main reasons. One, the application of the new revenue standard point-related expenses recorded as an SG&A expense last year is now deducted from net sales. And this decrease -- the reward point-related expenses by 0.5 point. Improvement of the logistic basis efficiency resulted in a 0.3 point decline of logistics-related expenses under payroll and staff costs, that's the second point. And thirdly, improvement of the economic conditions coming from the change of the payment collection company for credit card payment resulted in 0.3 point decline in payment collection commission. This is the ratio of payment collection commission against the GMV. So that was 0.3 point change, and mainly due to the change of packing materials, others decreased by 0.3 points.

We changed our packing materials in the middle of the second quarter of the previous year. Factors that increased SG&A are -- there are 2 reasons. One, the advertising expenses related to TV commercial and other proactive measures. And free distribution of ZOZOGLASS, plus 0.6 points. The second factor is the rent expenses going up by 0.2 point coming from the increase of the logistics basis.

Next slide, please. Page 22. Let's look at the OP and OPM changes. In the second quarter, coupled with the GMV growth, we managed to improve gross profit, thanks to the advertising business growth and reduction of SG&A. And as a result, our OP margin improved by 0.4 point, landing at 10.9% year-on-year, which is at quite a high level.

Next slide, please. And moving on to the main KPIs of ZOZOTOWN, we'll start with the number of buyers. And by the way, these KPIs hereafter do not include the results of PayPay Mall or B2B business. The number of total buyers was up by 160,000 from the previous quarter, amounting to 9.89 million, of which active members was 8.5 million, increasing by 140,000 against the previous quarter, and guest buyers increased by 20,000, finishing at 1.38 million. Regarding active members, newly recruited members we acquired last year were retained successfully. And also, during ZOZOWEEK and summer sale, we aired TV commercials, and this were to attract customers. And guest buyers was at the same level as the first quarter.

Next please. This is Page 26 of your handout, number of shops on ZOZOTOWN. As of the end of the second quarter, the number of shops was 1,502 shops, which is the net increase of 14 shops from the end of the last quarter. In the second quarter, we were able to welcome 38 shops onto our platform. To name a few, we brought on Chanel, Albion and other cosmetic brands, and Rimowa and other luxury brands.

Next slide. The next slide, please. This is Page 31. With respect to average retail price, it was JPY 3,264, down by 3.5% year-on-year. Although we did not experience a big change of the markdown ratio, we saw an increase of users who prefer lower-priced items, and this pushed down the average retail price of the markdown products.

Next, please. This is Page 32. Now average order value. AOV was JPY 7,346, down by 0.3% year-on-year. The number of items per order saw a slight increase, but impacted by the decline of average retail price, or AOV decrease year-on-year.

Next slide, please. This is Page 35. Our full year consolidated business performance forecast and estimated dividends for FY '22. There is no change to the plan. We will progress keeping these targets in mind.

This brings me to the end of my part. Now I'd like to pass the microphone over to Sawada, our Representative Director, President and CEO.

[Kotaro Sawada, executive]

Hello. I'd like to offer you supplementary information. In April of this year, I do remember that I shared with you are 3 pillars to the strategy. One is to increase the traffic outside of just buying. And secondly, step into the production support. And three, try selling technology licenses. So these are going to be the 3 pillars for us going forward. And I have some news about these 3 pillars. So I would love to share them with you today.

Next slide. The first one, which is about increasing the traffic outside of just buying. So what it was basically is that, of course, we would like to continue to increase the traffic of the purchasers. But along with it, we also want to focus on those to come to our [indiscernible] to you without fashion, and we want to offer them useful information when they do come. And we want to increase that type of users, significantly. And there is ZOZOGLASS, which is the technology that we developed in-house. And when you use this ZOZOGLASS, we can give you insight about your complexion color, and you can choose the best matching shade of the foundation, and it's been well received as a service.

So it's not just about buying, but it's about offering fun experience to our users, and that is the objective of this technology. And brands have their own content and information, and we want to be able to utilize such information on our ZOZOTOWN platform more. So we are ready to share a little bit more about that today. So this is what it is. This is an OMO platform that ZOZO will be launching. It's titled ZOZOMO. We will start offering services under this brand name. This is not so much focused -- it's not geared so much towards the consumers, but this is more of a B2B service. And we do already offer several B2B services, and we'd like to group them together and operate them under the name ZOZOMO. And as the first step of this, as I mentioned, different brands have information that's usable -- that's useful for consumers, namely data of the physical stores and their staff -- the data that their staff have, and they are really positive about sharing their insight in this pandemic situation.

And we would like the brands to be able to use our platform to the fullest extent. Some users are not interested in making a purchase on ZOZOTOWN, but they want to make a purchase on -- elsewhere, for example, in physical stores. But they wanted to see how that item can be stylized with other items, other pieces of clothing, so they can come to our platform and check that out. We're not just receiving data and information from the brands. But let's say that a user shows interest in trying out an item or seeing the item with their own eyes. So we can send the customer over to the physical store. So that will be the first step of ZOZOMO.

And when we do that, what will be most important is this app called FAANS, which is indicated at the bottom of the screen. And I did talk about this a little bit in the previous briefing session. This application will help the staff of the brands working in physical stores. So we like for them to download this app into their smartphone. And when they use this app, the staff will be able to freely do promotions on the ZOZOTOWN platform. And in the future, maybe they can offer videos, for example.

Digital shift is progressing, and we've been saying that many times already. And finally, things are starting to change. But it's not like 2 physical stores and 8 online. It's finally coming to 50% ratio or so. And we are aiming to create a world where the boundary between physical stores and digital is erased. So we have an infrastructure that allows people to make a purchase online, but we also want to go into the physical world so that we can start to offer new values to the staff and the brands.

And this is how the actual screen will look like. Next, please. This is how it will look like on ZOZOTOWN. On the left, you see the picture of the product. And this lets you see which physical stores have this particular item so that can be indicated on the screen. And of course, there is a detailed description of the product that gets displayed here as well. And then there is a button that says, layover -- a layaway order. We don't want the user to be excited and go to the store and find out that the item has just been sold. So you can place in a lay order -- a layaway order. Many brands started to show support for this. And we'll be able to launch this from January, and we'll be able to welcome brands onto this in a phased manner.

And when an item is layawayed, then the staff can use FAANS, and the staff will be notified that a customer will come to pick up that item. And then the customer will come and then they will show the QR code to the staff. And then they'll be able to make a payment directly to the store, not through us. So they will be -- the customers will be making a payment to the cashier of the physical store directly. So that's it for FAANS and ZOZOMO.

Next, I want to talk a little bit about the step into the production support. As a matter of fact, I have already talked about this before. So we have been serving as an infrastructure, but we want to step it up and go into production. We've been doing B2B business. And we have also gone into production, and we learned the hardships, the difficulties of it. And we thought that there could be a way for us to support the brands with the production. And one way to make this happen that I can share with you today is that -- and this also incorporates physical stores into this, too. So together with Hankyu Department Store, we will set up a pop-up store of influencer brands in Hankyu for 2 weeks. There is the Umeda Hankyu, which is their flagship store. And in that department store, we will invite our influencer brands to come in and make the sales in this physical store.

Next, in these influencer brands, we help out with the planning. We also help out with the production management as well already, and we've been selling these brands on ZOZOTOWN. And Hankyu Umeda will come in as a place for sales. And when you go to Umeda Hankyu, you'll be able to meet these influencers in-person. And also on the e-commerce site of Hankyu Umeda, these brands will be sold as well. What it means is that these influencer brands can now be purchased anywhere.

And going back to what I just said, finally, we're seeing the ratio of digital versus physical stores being 50:50. And this is one of the initiatives that will basically endorse that. And this is the third pillar, the last pillar. We'd like to try selling technology licenses. So what are the types of technologies we have? We have measurement technologies. And how many users do we have? For ZOZOMAT, it's been about 18 months since the launch, and numbers of those who purchase -- who made the order, 1.83 million, and the number of people who measure themselves is 1.88 million. And for ZOZOGLASS, it's only been about 6 months. But 1.19 million people have placed in the order for it and 1.08 million have measured themselves with it. You can see that many people do measure. And for ZOZOMAT, you see more number of those who measured then the number of those who placed in the order because ZOZOMAT can be used by more than one person.

Sometimes when you develop a technology, you will launch it and you discover that not a lot of people use that technology to measure themselves. But fortunately, we've been able to have a lot of people who measure themselves. And in fact, ZOZOSUIT, too, has already been completed, and I believe it can be used in so many different ways. And so far, ZOZOSUIT has been used as the measurement tool by 2 million people. So these technologies should not just be used for ZOZOTOWN, but we'd like to share these technologies to external parties. And we've been able to create the first business case of this, and this is it.

I believe that I did talk a little bit about this before. Finally, ZOZOMAT for Hands was created. This -- and this might be familiar to you. So this is a technology for measurement that allows you to measure your hands. So you might think that it's very easy to come up with the technology to measure our hands if we already have something for the feet, but that's actually not the case because you have to be able to make the measurement very accurately to even the smallest areas. And this time, this is going to be a service on the web browser and not on the iOS and Android application. And this is quite a versatile technology.

And the first client of ZOZOMAT for Hands, and this is, a matter of fact, for the first time for us to share this information to you. We will be [indiscernible] BVLGARI to use ZOZOMAT for Hands and that this will start from the ninth of November. You might be able to imagine this very easily, but we can let the users measure their hands using ZOZOMAT. And based on the measurement data, the users can find out what will be the most recommended size of BVLGARI products are. And their items are quite expensive. But if you know your measurement, and if you know which ring sizes will work, then you can feel more ease about making purchase online. And it will be limited -- it will be offered as a service for a limited period of time as a trial. And if this proves to be successful, then we can start to offer this service longer.

Next, I want to talk about sustainability. So in April briefing session, we shared this with you. We define our sustainability statement. This has been made public already. We are a platformer. And as a platformer, we put a lot of importance on the word Tsunagaru or connection. And we have our eyes on the future. And this is just going back to what I have explained before. We declare that we will engage in 4 key actions for sustainability. This is very normal, but we'd like to offer, first, sustainable fashion choices to improve users' experience; and two, create a made-to-order platform that generates your waste; and three, we'd like to promote diversity and inclusion among everyone involved in fashion; and fourth, we have been focusing on community development but we want to contribute even further to the making of sustainable community.

And there are some initiatives that we are already engaging in. One, this is only a small step for us, but we open a page on ZOZOTOWN called Fashion and Sustainability. And it has basic information, for example, the relationship between fashion and sustainability, what does organic mean. We'd like to be able to answer to those basic questions on our platform. And it will be full of images. It is a very small step. But we believe that small steps are very important for an initiative like this.

Aside from that, for sustainability, we do have other news. One is that we renovated our corporate website. ESG and CSR were already on our corporate website, but we wanted to expand that. And we posted sustainability information on the corporate website. We didn't just organize the information on our corporate website, but we reviewed this page of the corporate website to see what sort of information should be communicated from us. So please do come and see this.

And for the governance as well, we do have quite a detailed information about, for example, the attendance of our Board members in the Board member meetings. And also we have the English version of this as well. It took some time for us to make the English version of this, but it is now ready.

And lastly, for the sustainability part, we published what was what is called sustainability report. This is not a consolidated version just yet, but we decided to first share with you qualitative information in the form of sustainability report. And in about 2 years or so, we'd like to create a consolidated sustainability report with statistics. And this has all the information you need to have about sustainability efforts. And you would see different people in this report answering the interviews as well. And you see the globe -- the initial globe. And we created the design using excess fabric. So we did put a lot of passion behind the making of this report.

That's it for the sustainability part. And the last part of my presentation is about ZOZO Championship 2021. Next slide, please. So it was only a few days ago that this championship ended. This time, we were able to have another great championship. And Hideki Matsuyama won the championship and it was well received in the media as well. And we are a sponsor of this championship. And that's why you see the name of ZOZO there, and we believe that we were able to have a wonderful championship.

Thank you. That is it from my side.

[Operator]

That concludes the financial results announcement of ZOZO for the second quarter of FY 2022. Thank you very much for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]