ZOZO Inc

TSE:3092

Earnings Call Transcript 2019-Q3

[Unknown Executive]

It is time, so we would like to begin the announcement of FY 2018 third quarter consolidated business results.

Please refrain from taking any photographs or video during the announcement. Thank you very much for your cooperation. And the presentation document, which will be shared from Mr. Maezawa, will be provided to you on the top page of the IR Consolidated Business Results document. And please refrain from taking photographs of the screen.

Now I would like to start by introducing the presenters: CEO, Mr. Yusaku Maezawa; Executive Vice President and CFO, Mr. Koji Yanagisawa; Executive Officer, Business Administration Division, Mr. Fuminori Hirose. These 3 will be your presenters today, and we plan to finish at 6.

Mr. Yanagisawa, the floor is yours.

[Koji Yanagisawa, executive]

Good evening. If we can jump right in, we would like to give you an overview of the FY 2018 third quarter results. And also, I would like to make the presentation based on this deck. And this is going to be on the first page of your handout. This is the FY 2018 third quarter results. Our GMV, gross merchandise value, landed at JPY 235 billion, up by 9.3% year-on-year. And our OP was down by 12.4% at JPY 20.6 billion. OP margin was 8.8%, which decreased by 3.2 points year-on-year. Both GMV and OP have undershot the target from the beginning of this year. And today, on the 31st of January 2019, we have revised our annual business result forecast as well as dividend forecast.

And in terms of the revision -- I'm sorry about skipping to Page 28. That's our consolidated business forecast, along with dividend forecast after revision is on this page. GMV, JPY 327 billion, with growth rate of 20.9%; net sales, JPY 118 billion with growth rate of 19.9%; OP, JPY 26.5 billion with growth rate of minus 18.9%; OP margin, 8.1%; recurring profit, JPY 26.5 billion, with growth rate of minus 19.1%; profit attributable to owners of parent, JPY 17.8 billion; and earnings per share, JPY 58.1. So the estimated dividend per share is set at JPY 24.0. I apologize for the inconvenience.

With regard to the reasons for the revision of consolidated business result forecast, details will be shared with you from Mr. Maezawa.

And next, please turn to Page 2 of the handout. We're coming back to Page 2 now. Next, I would like to quickly walk you through ZOZOARIGATO membership, which we have just started. Well, on December 25 last year, we launched a new paid membership service on ZOZOTOWN, and it is called ZOZOARIGATO. With monthly payment of JPY 500 or annual payment of JPY 3,000, after registration, we bear 10% of their product purchase amount, and our customers can choose the returned amount to be used as discount for their own purchases or donations to designated NPOs or give back to the shops they have purchased from. So they will be able to use it for 3 purposes, and they will be able to choose among those purposes. And as the first-time registration campaign, which is only applicable to those who are registering to ZOZOTOWN for the first time, 30% will be given back for their purchases made during the first month after registration.

With the introduction of ZOZOARIGATO, I just wanted to quickly walk you through the numbers. So GMV is shown in the amount before deduction of discounts attributable to the paid membership service. On the other hand, net sales, the amount is after the abovementioned deduction. And paid membership income is booked in the other segment of net sales on a pro rata basis by period. And this ARIGATO service, the background will be shared with you in detail from Mr. Maezawa.

Next, this is the announcement as usual. Please turn to Page 6 of the handout. Next is the increase/decrease analysis of the OP. OP decreased from JPY 23,550,000,000 last year to JPY 20,630,000,000 this year. It is down by JPY 2.92 billion. To give you the breakdown, GMV went up by JPY 4.54 billion. Gross profit margin improved and contributed JPY 2.81 billion, thanks to the increase of other revenues and also increase in shipping revenue due to the change in shipping policy. And there was also growth of ad sales with start of advertising business. And there was decrease in the rate of payment collection commission due to changes in the composition of settlement matters. This added JPY 0.88 billion. And there was increase in promotional expenses related to ZOZOSUIT distribution and such, and this resulted in JPY 4.01 billion cost increase. And there was increase in shipping cost, and this brought up the cost by JPY 3.64 billion. We also increased the number of employees as well as the number of logistic centers. So this resulted in the increase of JPY 1.64 billion for payroll rate. Other costs increased by JPY 1.87 billion.

Next is the consolidated balance sheet. Not much change here, so I would like to skip this page.

Please refer to Page 10 of your handout. Next, our quarterly evolution of GMV. Our GMV for the third quarter was JPY 93.8 billion, up by 21.3% year-on-year. And if you look at the growth factors, we grew 10% from organic growth and 7.5% from opening the new shops. In November, we conducted a sales event for 2 weeks, and this resulted in 2% increase, this was called ZOZOWEEK, and 1.5% from the effect of more efficient use of brand coupons.

And if you break it down by each business, ZOZOTOWN business makes up JPY 89.3 billion. This is on an increase of 19.1% year-on-year, of which JPY 84.3 billion comes from consignment sales, which was up by 20.1%; and JPY 5 billion came from ZOZOUSED, which was up by 4.6% year-on-year. And private brand business generated JPY 1.6 billion, and B2B business increased by 25.3%, landing at JPY 2.8 billion.

Moving on, this is on Page 15 of your handout. This is the quarterly changes of OP. Our OP for the third quarter went up by 8.8% year-on-year, landing at JPY 10.5 billion. Our OP margin was 11.3%. And the key factor to the decrease is the costs relating to private brand business. And these costs include free distribution of ZOZOSUIT, which goes into the advertisement expense and personnel expenses of staff involved in the private brand business, including overseas staff and engineers.

If you compare the third quarter to the first and the second quarter, our OP of just the private brand has come up to minus JPY 2.8 billion. And that is thanks to the cost reduction attributable to the change of ZOZOSUIT distribution policy. So we are seeing a slight improvement here.

And OP, excluding our private brand, so this is mainly ZOZOTOWN business, the OP from ZOZOTOWN business was JPY 13.4 billion with OP margin of 14.6%. So it's going quite well.

So if you look at the OP, it's quite good. And with the contribution coming from the ad business we started this year, we have been able to exceed the actual of the same period of last year. So that is why we're doing well.

Let's go to Page 16. Next, quarterly evolution of SG&A. SG&A was JPY 21.4 billion. SG&A against GMV, last year, it was 21.3% and has come up to 22.9%. So that is increase of 1.6%. And there are some key factors to this increase. And as we have announced several times before, there was increase of ad spend related to ZOZOSUIT distribution, increase of shipping costs, increase of payroll rate and increase of other costs.

And the breakdown of SG&A is on Page 14. So most of the factors have been explained to you just now. So please refer to the comments in the chart for increase and decrease factors.

From here forward, we would like to cover our key KPIs. Let's start from Page 18. So here, you find the number of total buyers. The number of total buyers was 8.07 million, which went up by 310,000 from the previous quarter. Active members went up by 370,000, recording 6.15 million. And guest buyers decreased by 70,000, landing at 1.91 million. So we have been able to grow our number of total buyers.

And last October, we enriched our membership service, and as a result of it, we've seen an increase of active members. Mainly what we did was to change the coupon system to allow each shop to issue one brand coupon. So we have been able to efficiently issue brand coupons. And as a result of it, we have been able to see more people register as active members. And as a result of it, the number of guest buyers is on decline. And these indexes do not include users who have only purchased ZOZOSUIT.

Next is the number of shops as of the end of third quarter, which is on Page 19. So as of the end of third quarter, the number of shops amounted to 1,255 shops. Compared to the previous quarter, we have been able to increase by 72 shops. And we'd like to continue to actively open new shops. Specific brands that have newly opened include American luxury brand, Michael Kors; prominent watch brand, Citizen; or -- this is a fashion brand that has a producer, Sae Murase from NMB48. This fashion brand is ANDGEEBEE, and then this is operated by BUNNY apartment. So these are just to name a few of the new 79 shops.

For this year, we were planning on opening 150 shops. And as of the end of the third quarter, already 171 shops have been opened. So we're progressing faster than the plan.

Next, on Page 21 of your handout. We have the annual purchase amount and pieces per active member. Annual purchase amount per active member was JPY 46,009, and the number of pieces they bought was 11.1 pieces. So it's quite flat. For annual purchase amount, it went down by JPY 111, and the number of pieces went down by 0.1 piece. So with the increase of light users, both annual purchase amount and pieces per active members have come down.

And the reason is on the next page, Page 22. We have the annual purchase amount and pieces per existing active member. This is coming down for the same reason as we have announced before. So the purchase -- the annual purchase amount was JPY 56,304, and annual pieces was 13.6 pieces. And this is because we introduced deferred payment, and they're into their second year now. So what it means is that they are now shifting to become existing active members. So therefore, the ratio of new joiners within the existing active members has come up, and we have talked about this during the previous announcement. And our members tend to purchase more when they are with us longer. So due to the increase -- sudden increase of the new joiners within the existing active member segment, this is the result you get for the annual purchase amount and pieces.

Please refer to Page 24, which is ARP, average retail price. ARP was JPY 4,759, slightly -- slight decrease. And it seems as though we're starting to see that the ARP is bottoming out.

And for Page 25, we have the average purchase amount per shipment. So it was JPY 9,569 (sic) [ JPY 9,560 ], up by 5.7% year-on-year. Actually, in the third quarter last year, I don't know if you remember this, but we introduced "free to decide your shipping fee" measure in October and later revised to flat rate of JPY 200 in November. And as a result of it, pieces per order came down, and we saw a big drop in the previous year. And that is why we're seeing improvement. And a certain period of time has passed since the revision of the shipping policy, and this policy has become widely known among the users.

That was a quick overview from my side, and I would like to now give the mic to Mr. Maezawa.

[Yusuka Maezawa, executive]

Hello. Thank you for coming. I know that you're all busy, so thank you. And unfortunately, we have just made an announcement that we will revise our consolidated business results forecast. I apologize.

In the past 1 year, we -- this was a 20th anniversary year for us, and then we also changed our name from Start Today to ZOZO. And including me, the entire group of employees have been working very hard, and it's been a year of trials and errors. But the policies and the measures that we introduced could not be all successful, and then this is the result that we got. But through these measures, we have learned a lot. And we're planning on posting JPY 12.5 billion deficit from PB. And we have paid a very expensive learning lesson, and we would like to be able to make the best out of that learning experience to move forward.

So from my side, I would like to explain why we decided to make a downward revision. And I'm sure you're very concerned, so I would also like to talk about the measures that we would like to take after that explanation.

Please refer to your handout. There is positive news, though, however. So in the third quarter FY 2018, we have been able to post the highest operating profit ever in the company's history. In the 20 years of history, this was the record high. And this is all thanks to our partners and stakeholders.

And from here onward, I'm going to talk about the downward revision. So our GMV, for original target, we were expecting JPY 360 billion, but we have revised it to full year forecast of JPY 327 billion. And also for operating profit, for the original target, we were expecting JPY 40 billion, but we expect this to be JPY 26.5 billion. And mainly, there are 4 reasons behind this. As I said, we are celebrating the 20th anniversary of the company, and we have full fledgedly launched our private brand. And then we did our R&D, and we've invested in our R&D. And then the deficit from that is going to be JPY 12.5 billion. And then ZOZOSUIT was really the focal point, and we thought that if we could distribute this at a massive scale, there will be a pushup effect to the whole business of ZOZOTOWN. However, the private brand was not selling so well. And we also said that we will be able to find another way to do the measurement, and we decided to bring down the number of distribution of ZOZOSUIT. And then the pushup effect to the whole business from ZOZOSUIT became weak, and this cannot be denied.

And thirdly, as Mr. Yanagisawa mentioned, from the 25th of December, we started a new service called ZOZOARIGATO, and we have been able to have a good start. And I'm going to explain it in more detail later.

And lastly, we started the advertising business. But there have been a slight delay in the development of this, and I don't think we will be able to achieve the JPY 3 billion target. So I will talk about that later in more detail.

So let's now talk about the deficit from PB business, which will amount to JPY 12.5 billion. So the original target for GMV was JPY 20 billion, but it seems as though we can only achieve JPY 3 billion. And also, our initial plan was to distribute ZOZOSUIT in a massive number. And for the original target, we were forecasting to distribute 6 million to 10 million pieces. This has been revised, and it's going to be 2.3 million pieces approximately.

And why did we make that change? Well, actually, as it's written here, the measurement -- and so even if we do distribute, there were only few number of people who did the measurement. So the conversion of measurement and purchase from ZOZOSUIT fell below the expectation, and we started to review the distribution policy of ZOZOSUIT.

And on top of it, the negative factor of PB business is that we have experienced problems with manufacturing process. In July, we made the announcement of the launch of business suits, and there have been a significant delay. And we -- this was the first time for us to make business suits, and then we visited the Chinese factory many times. But unfortunately, we needed to have our customers wait for 3, 4, even 5 months for the business suit to arrive. And we had some issues in terms of quality. So some of the business suits that we delivered to some people of some body shapes, that we had some issues with the quality of it, for example, the sewing quality. And that is why we are going to land at the deficit of JPY 12.5 billion for PB business. Moving on to ZOZOTOWN business. We thought that if we could distribute ZOZOSUIT massively, that would have a pushup effect to ZOZOTOWN. But we started to slow down the distribution of ZOZOSUIT during the fiscal year. So it didn't have a pushup effect to the ZOZOTOWN. And if you could -- if you look at the chart, I think you can understand.

So for the first quarter, we were able to achieve the target at 17.8%. But for the second and the third quarter, we undershot the budget. And then even if you look at the year-on-year growth rate of cumulative third quarter, our target was 22.4%, but the actual result was 18.5%. So what it means is that the pushup effect from the ZOZOSUIT was not visible.

But I want to share with you a positive news. And so right before the fourth quarter, on the 25th of December, we started the membership service of ZOZOARIGATO. And we were able to forecast -- we were able to now forecast a little bit less than 26% of growth from ZOZOTOWN, thanks to this membership service. So I believe that we will be able to come back to around 26% level for ZOZOTOWN.

And for our advertising business, our original target was JPY 3 billion, but due to the delay of development, we now forecast that to be JPY 1.7 billion. But most of this will come directly to our profit. So I believe that this will serve as an engine for us in the future.

So that was the summary of the downward revision that we have made. So what are we going to do in the future? I would like to explain that to you. So we would like to review our PB business, and I would like to explain to you detail what we would like to do.

For ZOZOSUIT, seems like some people are saying that we're going to get rid of ZOZOSUIT entirely, but that will -- that is not going to be the case. We're going to continue to use ZOZOSUIT. So we launched our business suits in July, and business suits will require measurement with ZOZOSUIT. And as you know, business suits require very accurate measurement of your body. And we will not be able to make business suits just with the measurement estimation engine. So we would like to continue to use ZOZOSUIT for business suits.

And next, this is body measurement data acquisition in new markets. So when we go abroad to overseas markets, we need to acquire body measurement data. And in order to acquire body measurement data, we would like to effectively use ZOZOSUIT.

And thirdly, we have not been able to release this yet, but we are receiving a lot of requests for kid's size. So this is something that we are interested in engaging in.

And next, utilization of body measurement estimation engine for casual items. So we're going to just use ZOZOSUIT for formal items. And most of our items are casual items, so for our casual items that do not require body measurement with ZOZOSUIT. So what it means is that casual items can be purchased without the measurement by ZOZOSUIT. But what it means is that we have to be able to make an estimation of their body shapes and body measurement. And we're planning to implement this engine around the end of this fiscal year. So after this implementation, most of the casual items will be purchased without ZOZOSUIT.

And also, in order to realize this measurement estimation engine, we have more than 1 million worth of body measurement data. So we would like to utilize it as big data in order to create this engine. We cannot make this engine without that big data. So this business that started with ZOZOSUIT is on track because we're utilizing that big engine that we have gained from ZOZOSUIT measurement. But the casual items will be purchasable without ZOZOSUIT measurement in the future.

And also, we're going to review the product lineup. So for this fiscal year, we decided to really narrow down the number of items so that we can have hits. And not only just hits, but we were trying to make a grand slam. So we were quite hungry here, and you cannot deny that. And we looked into this once again, and we decided to widen our portfolio. Our hit items now are denim jeans. Maybe we can have wider jeans, slimmer jeans. So we would like to respond to such feedback from our users and expand our breadth of items. But it doesn't mean that we're going to randomly launch new items one after another. We're going to stick to basic items, but we're going to have different shapes for each season. But every item will be basic item.

So if you summarize that in a chart, our PB business will look something like this. Up until now, we started as high-risk, high-return business. As I said, this resulted in JPY 12.5 billion deficit. And this was high risk, high return, and we have not been able to gain the return of that high risk. And we have been aiming at massive hits for products, so we were aiming for a grand slam. And we also tried to do everything on our own inside the factory. And even the machines, we have purchased the machines on our own. So we tried to stick to the principle to do everything in-house, but maybe it was too early of a stage. And then that resulted in big deficit. And based on this experience going forward, we would like to lower the risk as much as possible.

But of course, our PB business has high gross margin. So we would like to continue to aim for mid-return, and we would start to aim for hits and not grand slam. And from the principle of doing everything in-house, we want to shift that to gaining knowledge, experiences of others. And we would like to borrow this so that we will be able to lower the risk by doing so. And at least, we want to realize breakeven. And starting from next fiscal year, we would like to gain profit if possible with PB business. And in the future, I believe that there are many things that we can gain from our PB business. And then maybe we started by aiming for grand slam, but we're going to aim for hits now. And then maybe we can have better hits, and maybe we can have home runs.

So we would like to go through the steps to start to invest more. So our risk level will be mid-risk so that we can aim for higher return in the future. And then we talked about this in the previous announcements, that we would like to start to invest in shoes and women's underwear. And actually, we have been doing this in the back already. And for shoes, we have already pretty much finished the technologies that we need for the shoes. So that is -- the R&D is already in progress. So we would like to become high-profitability business in the future. But we just -- so that objective remains the same, but we have just changed the order of how we go about doing this.

Next, so ZOZOARIGATO started on the 25th of December last year. And some media have been saying that maybe some of the brands are drawing away from ZOZO. I have been seeing some articles in the media saying that. And we have seen specific names of the companies. And I think that became a concern for you. So I wanted to share with you numbers today.

So first of all, there are 1,255 shops that are on our platform. And the number of shops that have refrained sales of all of their products, that amounts up to 42 shops. And of -- and then in those 42 shops onward, which was in the media, is also included. As a matter of fact, if you look at the number against the number of shops, it's only 3.3%. And then if you see it against GMV, it's 1.1%. A lot of the media are saying that the apparel brands are drawing away from ZOZO, but as a matter of fact, the effect of this is quite minimal. And the effect of onward is approximately about 0.5%.

But with that said, we have been working in close relationship. Our EC division and the brands have been working very hard together. So we don't want to lose those partners. So in consideration of feedback from partnering brands, they'll be able to choose whether to display ARIGATO price or not, starting in February. So we would like to, of course, continue to have dialogue with partnering brands.

And ZOZOARIGATO, this started very suddenly, and I'm sure this has garnered a lot of attention. And as you may speculate, this is subscription service, so we get either monthly payment or annual payment so that we can create core fans of ZOZO. And not only are we going to let them be prioritized for the sales and other services, we would like to plan to add various member benefits to those members. And we also want to lower the bar of the first purchase to incentivize new customers to use the service. So for those who join in the ARIGATO service, we offer 30% return of the purchase amount for the first month. And I believe that this will serve us to acquire more members. And it's only been about a month since we've launched it, but already we're seeing increase in purchase frequency and purchase amount. And I think this is going to be a great opportunity in the next fiscal year.

So this is the summary, lastly. For PB business, this has truly been the year of trials and errors. So we had some issues with ZOZOSUIT from the very beginning of the fiscal year, and I believe that our dear investors have been concerned with this. And there was expensive learning costs that was worth JPY 12.5 billion, but we were able to learn a lot from this. We were able to gain a lot of discoveries and insights. And now the company is even more united than before because we want to make improvements somehow, and the motivation level within the company is very high now. And at least, we want to achieve breakeven in profitability so that we will be able to nurture this as a high-return business.

Moving on to ZOZOTOWN business. It's going very well. But with ZOZOARIGATO, we have caused concerns, and I have just shared with you the numbers. But we'll be okay because with the introduction of ZOZOARIGATO, I believe that we will be able to accelerate the business with ZOZOTOWN business.

And next, this is the enhancement of other sales. So we get subscription revenue from the members of ZOZOARIGATO. And our initial plan was JPY 3 billion, but I think it's going to be reduced to JPY 1.7 billion. But yet we would have the advertising revenue, and I believe that we can expect other revenues as well. And this is something that we would like to think about going forward.

So that is it from my side, and I would like to open up for questions now. Thank you.

[Unknown Executive]

This brings us to the end of [Audio Gap]