Zalando’s first quarter hit by the cold, but beauty product launches make up for it
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Zalando’s first quarter hit by the cold, but beauty product launches make up for it

Europe’s biggest online fashion retailer, Zalando, reported first quarter earnings in May. It was a mixed bag: on the one hand, a slow start to spring and un-seasonally cold weather hit profitability, but the company’s launch of beauty products in Germany made a “promising start” and its number of active customers jumped.

Zalando’s share price has risen 12% in as many months

graph 2305 zalando

SOURCE: Yahoo Finance

The worst news in the company’s latest earnings report was this: adjusted earnings before interest and tax (EBIT) fell dramatically from €20.3 million a year ago to just €400,000 this time around. Analysts had hoped to see this metric come in at €11.5 million, so saying Zalando missed the target is somewhat of an understatement. However, it is only fair to Zalando to note that this performance is not as bad as it looks on paper.

There are two contributory factors to consider when it comes to Zalando’s EBIT miss: first, the extended cold snap that pushed back sales of spring / summer season clothing made a massive dent in Zalando’s earnings, for obvious reasons (discounting out of season stock, etc.). And second, the company is committed to an ambitious reinvestment program – so ambitious, in fact, that it courted investors’ displeasure on the previous earnings call by waning of a hit to near-term financials.

If that’s the bad news, here is the good: Zalando outperformed on sales growth, seeing it rise 22% from the year-ago quarter to €1.2 billion. It also hit a new high when it came to users on its platform (24 million) thanks to adding an unexpectedly large number in the first quarter of this year (3.5 million). Perhaps best of all, this horde of internet-savvy fashionistas are spending more than ever before with the company.

Beyond these metrics, Zalando also saw a strong positive response from users in regards to its new plan to add cosmetics to its platforms. The company’s CEO, Rubin Ritter, said that Zalando sees “an opportunity to build the leading beauty destination” online, and is selling 4,000 beauty products from 130 skin care brands in order to capitalize on it.

So, a mixed quarter – but, it is worth noting that everything negative in the above is a short-term problem, relating to specific instances of high investment, or poor weather cycles, whereas everything positive points towards longer-term trends. For that reason, it’s worth taking Ritter at his word when he says: “Growth is our top priority and that’s exactly what we have focused on in the first quarter, despite a challenging market environment.” Did they sacrifice short-term wins to do it? Definitely. But if the move pays off, it will be more than worth it.

Disclosure

Dominion holds Zalando in its Global Trends Ecommerce Fund.


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