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Edited Transcript of 3092.T earnings conference call or presentation 28-Apr-20 8:00am GMT

Full Year 2020 ZOZO Inc Earnings Presentation

Chiba May 1, 2020 (Thomson StreetEvents) -- Edited Transcript of ZOZO Inc earnings conference call or presentation Tuesday, April 28, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Koji Yanagisawa

ZOZO, Inc. - CFO, Executive VP & Director

* Kotaro Sawada

ZOZO, Inc. - President, CEO & Representative Director

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Presentation

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Operator [1]

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It's time. So we would like to begin ZOZO's FY 2019 Consolidated Business Result Announcement. In order to prevent the spread of coronavirus, we changed the way we are organizing this briefing, and we will only be offering our live streaming.

Now if I can introduce the participants, Representative Director, President and CEO, Kotaro Sawada; and Director and Executive Vice President, Koji Yanagisawa. So we have 2 presenters today. CFO, Yanagisawa will take us through the business results.

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Koji Yanagisawa, ZOZO, Inc. - CFO, Executive VP & Director [2]

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Good afternoon. We are holding this briefing session online, but I will keep my mask on today, just in case. I'm the Director and Executive Vice President, Yanagisawa. And due to -- in order to prevent the spread of the coronavirus, today, we will only offer YouTube streaming of our presentation. The documents have already been uploaded to our website, the IR site, so please take a look. Moreover, in respect to the impact that the coronavirus has had on our business, I'm sure you're very interested, but Sawada will take us through that later on. But for myself, I would like to give you an overview of the consolidated business results for FY 2019.

So in terms of our highlights, the gross merchandise value was up 6% year-on-year, landing at JPY 345 billion. The operating profit was up by 8.7%, landing at JPY 27.8 billion. The operating profit margin was 8.1%, improving by 0.2 points year-on-year. On April 25, 2019, we announced our annual target, but against that target, we have fallen short, both in terms of GMV and OP. We've achieved 94% of our GMV target and 87.2% of the OP target. And the other day, April 22, 2020, we've disclosed the revised fiscal plan, but we have not made any major changes to that. The major factors as to why the GMV did not grow as we planned. Until the second quarter, we were progressing steadily, but third quarter onwards, we saw the tax hike and also record warm temperatures and a warm winter. And the economic situation became much worse. That is why the GMV finished short.

In terms of the fourth quarter, the GMV was up 3.2% year-on-year, landing at JPY 91.2 billion. OP was 69.3% up year-on-year, landing at JPY 8.5 billion and the OPM was 9.3%. OPM improved by 3.6 points year-on-year. The GMV slowed down due to the warm climate, which continued from the third quarter. And also the previous fiscal year, we had paid membership service, ZOZOARIGATO, but we've seen an impact from that. That is why we've seen a slower growth. And in the fourth quarter, the economic situation still remained sluggish, so we focused on efficiency and curtailed promotions intentionally. So that is why the GMV has slowed down as well. But on the other hand, the OP improved because we don't have the discounts from ZOZOARIGATO, and the valuation loss from the private business -- private brand business, we no longer are seeing that. That is why OP has significantly improved.

Next, just going -- taking you through the details of our performance, starting with the increase-decrease analysis of the operating profit. So OP went from JPY 25.6 billion to JPY 27.8 billion, up by JPY 2.2 billion. The reason why it improved, there's 4 major reasons. First one is the increase in sales from consignment shop commissions, which was JPY 4.6 billion. And from the third quarter last fiscal year, we started the advertising business, but this has improved the gross profit by JPY 1.3 billion. And other sales improved the gross profit by JPY 2.7 billion, and we also saw a decrease in other expenses, which improved the OP by JPY 0.02 billion.

There are 3 factors that decreased the operating profit. We've seen an increase in logistics centers as well as employees, so the fixed costs have gone up by JPY 1.9 billion, and the increase in variable costs against the gross merchandise value, which was JPY 4 billion, which is proportionate to GMV. And we also saw an increase in promotional costs from the PGA tournament, so the championship, which was JPY 0.6 billion.

In terms of the breakdown of the fixed and variable costs, please look at the document. This is the balance sheet. If you look at the current assets, the products have decreased because we booked the valuation loss for the private brand inventory. So it significantly decreased.

Next, consolidated cash flow. Here too, this fiscal year, the expenses related to the private brand decreased significantly. So the cash flow from operating activities improved significantly as well. On the other hand, cash flow from financing activities also improved in comparison to the previous fiscal year. Since last year, we bought back our treasury stocks, so this has also dramatically improved.

Moving on to the GMV. This is a breakdown by business. If you can look at the breakdown by business, in the earnings summary, but starting from December 17, 2019, we launched our ZOZO and PayPay Mall shop. And the GMV, so far, has been JPY 6.19 billion, so it has been doing well immediately after launch.

Next, moving on to the SG&A. This is the total for the fiscal year. The SG&A for this fiscal year was 24.9% against the GMV, up by 0.4% year-on-year. The reason why the percentage against the GMV has gone up, there's 3 major reasons. One is the increase in point promotions. So this was up by 0.5%. And the decrease in ARP, average retail price, as well as the increase in logistical costs from an increase in logistic centers was 0.3%. And the other one is -- the third factor is the rent from increasing logistics centers, which was also 0.3%. But the SG&A has also come down. There are 3 major reasons. First one is the ZOZOSUIT. The previous fiscal year, we distributed large quantities of ZOZOSUIT, but we are no longer doing that. So the advertising costs have come down by 0.5%. And last fiscal year, we saw provisions for accretive bonuses but this fiscal year, it has leveled out or normalized. So the payroll has come down by 0.1%. The third point is the high one-off expenses that we saw last fiscal year. But this fiscal year, we didn't see any of that. So that has brought down the SG&A by 0.1%.

Next, the operating profit and the operating profit margin has progressed, as you can see here. As I explained earlier, SG&A against the GMV has increased. However, the growth of the ad business, this is our revenue, it has grown. And also, any discount costs related to ZOZOARIGATO, we've seen a decrease in that this fiscal year. So these 2 factors has improved the gross profit. Therefore, the OPM has improved slightly from the previous fiscal year.

Now I would like to go over the ZOZOTOWN KPIs. From this stage onwards, the KPIs do not include the PayPay Mall performance. This is just the actual ZOZOTOWN -- original ZOZOTOWN shop only. The annual buyers was up by 120,000 people, landing at 8.27 million active members; increased by 40,000, landing at 6.83 million. And the guest buyers increased by 80,000, landing at 1.43 million. The number of active members increased slightly as a result of our initiatives for active members. But in terms of -- we had some difficulty acquiring new active members. But we saw an increase in guest buyers. So the total annual buyers have increased. So that's how the fourth quarter progressed.

Next number of shops on ZOZOTOWN. In the fourth -- as of the end of fourth quarter, we have 1,337 shops, which is decrease of 8 shops since the previous quarter. This -- during the sale period, in the fourth quarter, we usually do not see many shops joining our platform. And another factor is that due to the coronavirus, some shops delayed their plans to join the platform. That is why we've seen a decrease in the total number of shops. Having said that, in terms of the shops that have left their platform, have left due to poor performance or the closure of the brand, so we don't see any new trends in terms of the reasons why the shops have left. In this fiscal year, we saw 184 new shops, and we increased, a net increase of 92 shops. In the fourth quarter, we welcomed a couple major brands, BeAMS DOT, which is the BEAMS online-only shop, and also a famous athletic shoes brand, Asahi Shoes. So those are the types of shops that joined in the fourth quarter.

Next, the average retail price was JPY 3,909, down by 0.7% year-on-year. So I've mentioned the warm winter already, and also we saw a long sales season as well, so we saw more products being sold at a discount. That is why we -- and moreover, in the fourth quarter of the previous year, we had a major discount promotion as part of our ZOZOARIGATO program and pay members purchased more expensive product to take advantage of this promotion. So that is why, in comparison, the average retail price has come down -- fell by double digits. This has also increased the average order value, which was JPY 8,304, down by 12.5% year-on-year. This is also an impact from ZOZOARIGATO that has a significant impact.

So that was the business results for FY 2019, ending in March 2020. Now moving on to the business plan, business forecast for FY 2020. We -- the forecast for FY 2020 is yet to be determined due to the coronavirus. There are concerns that Japanese economy will also slow down alongside consumption. So our business environment, too, is changing quite a bit. And this may significantly impact our business performance. We -- the major reason is that we don't know when the corona situation will become under control -- be under control. So we cannot disclose our plans at this time. But once we know, once it seems like things are getting under control, and we can accurately and reasonably estimate the impact that this may have on our business, we will share without delay our forecast. So it's very difficult to forecast our business performance going forward. So we can't really talk about the dividend and payout ratio. But in terms of our policy, what we're looking at, we would like to aspire to keep the dividend payout ratio of 40% in FY 2020 as well.

That is it from myself. I would like to pass the microphone over to Sawada who will talk about our vision and our plans going forward.

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Kotaro Sawada, ZOZO, Inc. - President, CEO & Representative Director [3]

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Good afternoon. I'm Sawada, the President. And I would like to talk about the current situation and the future.

So the current situation, how we are operating our business at the moment, many of our business services that we offer, we have been able to operate them without any major issues. There are -- we have an impacted, but we are trying our best. But on the other hand, some -- our businesses have not stood still, but there are some inconveniences. So we have had to limit our operations quite a bit. In terms of the working from home, we've asked our employees to work from home mainly, and we have not foreseen any impact this has had on our business. It's going well. Having said that, logistics and customer centers, fulfillment and customer support, the employees working in these areas must come to work. And more concise, so as you can see on this slide, we have implemented countermeasures for them.

Having said that, we need to actually slightly change our services. So customer service, we are no longer taking calls -- phone calls. And in terms of fulfillment, we're actually asking our customers to give us more lead time. So the services are not -- in terms of quality, not the same, but we are still operating. And unless something major happens, if things go as it is now, then we will continue to offer our services. That is what we -- that's the current situation that we are facing.

But we would like to also give you an overview of what the impact that the fashion industry as a whole had seen. I'm sure you can imagine, but the fashion industry is facing a great crisis. The brick-and-mortar shops, so 2/3 of the shops in the metropolitan areas, probably the brands have to close their stores, many of their stores. Because fashion is not a necessity, so that is something that we have to expect. But the fashion industry, fashion products, still enriches people's lives, and we -- it helps people smile, so that we have greatest possibility the industry has, so we need to help protect the industry as well.

So there are things that we can do because we have been working in the fashion industry for a very long time. So we are trying to support the fashion industry as much as we can by offering a foundation. What we are doing in detail is that -- it's quite simple, but we are concentrating -- we are offering our full support to the industry by helping sell their products. Brands in this situation are -- selling online is a survival tactic for many brands now. So many brands have said if they can't sell in ZOZOTOWN, they are not going to be able to survive. So we know that they depend on us. And what we can do to answer their plea is that help themselves. So we want to sell all the inventory that they provided to us, so we can provide the proceeds to the brands. So that's our mission. And so we are fully concentrating on helping the brands sell product.

As we mentioned earlier, it's not -- we have not been able to offer the same quality as before, but we are doing the best we can to fully concentrate our support and resources. And ZOZO, in these type of situations, we often donate to various charities to help support the society and our consumers, and that's what we've done in the past. But now we want to -- at this moment in time, we want to fully support the fashion industry. That's our key focus at the moment.

On the other hand, going forward, the situation will probably -- will have to end. We'll see a light at the end of the tunnel. And when that happens, what we need to do is, as you can imagine, we need to -- I think that the shift to digital is going to accelerate, so we need to lead the shift to digital and help the industry recover as quickly as we can. So digital is a world that we've looked in for a very -- for -- from the beginning, so we hope to lead and help the industry recover. So that's to be expected of us. And we believe that many brands will shift from physical to digital as well. So we're thinking about what we can do to help them do that. And one thing that we should do and we can do is to provide support to the physical stores, providing our assets, our know-how. So we hope to help the brands and their brick-and-mortar stores to recover as quickly as they can from this situation.

And last fiscal year, we joined the Z Holdings Group. And we think that we have been able to fully leverage the synergies with Z Holdings. Now at the moment, the entire group, there -- we have many group companies. So we have been able to share crisis management best practices and information. So we have been able to receive and share best practices. And it has improved -- it has proven very worthwhile to be part of a big group. And we -- in terms of fully supporting our brands, we have the PayPay Mall, which is a great weapon for us. So we have been able to -- we will be able to fully support the brand this way as well. And then after COVID-19, we will help the industry recover.

At the end of March, Yamato, and we joined -- we announced the cross-shopping service. We will explain this more in detail, but this will also help the physical brick-and-mortar stores. Other than that, we have PayPay flea market in which -- where we will offer ZOZOTOWN products. So 1 click, 2 clicks of consumers, we'll be able to sell the products that they bought on ZOZOTOWN on PayPay flea market. And engineering resources, which is a major point, but there is a shortage of engineering resources. So we would like to share the engineering resources that we have. I think that this -- these are areas where we can expect great synergies.

So that is our current situation and the future plans or policies moving forward. Of course, this is depending -- this depends on when the corona situation will get under control. But 2020 is a year of ZOZO, so we -- this is what we would like to do going forward. First, at the beginning of the year, we announced, at the third quarter announcement as well, that we're going to focus on more fashion and fashion tech. These are 2 key words for us. And this is -- we will bear this in mind when we operate our business. And this policy hasn't changed. So we will bear this in mind as we operate our businesses.

And under this comp set, what we will be doing is these 3 things. These are our 3 key pillars. One, we've explained this at the beginning of the year, but we broke it down so that it's more straightforward. First one is to expand the selling space. Next is expanding products, product lineup. And then the third is expanding the revenue model. So we will expand in these 3 areas to grow the ZOZOTOWN business going forward.

So going into detail. First, how we've grown in the past, so this is a brief explanation. Until now ZOZOTOWN or ZOZO has drawn as a result of products. We have a lot of brands now, but in the very beginning, we only had a couple of brands. So we've amassed more and more products. So that is -- that's one of the reasons why we have been able to grow. And that's, of course, now it, we've -- before there were other players, we continued to make improvements to make our website user-friendly and as a -- to be attractive to our users, we have continued to make improvements. And we've also done -- tried various promotions when we didn't -- anybody -- no one understood what advertising online was about, but we conducted various promotions to attract customers. And as a result, ZOZOTOWN has grown due to these 3 efforts.

Now going forward, what we want to do is to expand the selling space and also product lineup, so we want to grow in both directions. What we mean by selling space expansion is we have about 830,000 items and a lot of brands, but we want to offer them on other shops. So PayPay Mall is one of these efforts. So that's a first step in this direction. And so we want to try to open many more shops like this. And on the other hand, product lineup expansion is another area that we would like to tackle. And I will go into this detail later. But ZOZOMAT, ZOZOSHOES is a category. It's an example of how we plan to do it, with ideas in engineering. So we want to propose a new way of selling. So that's what we mean by product expansion. And this will help us grow the gross merchandise value.

Now explaining each in more detail. First of all, starting with selling space expansion. So the first step was PayPay Mall. So looking back, what this has done so far, how this has done so far in examination of this performance earlier, but important contribution it has had is acquisition of new users. So black is the ZOZOTOWN. New user acquisition for ZOZOTOWN by rent is the -- for the PayPay Mall. The new users joined through PayPay Mall. Now this does not contain any overlap of people who have registered to both. So these are people who did not use ZOZOTOWN before. As you can see, 50% of ZOZOTOWN new user acquisition, we're gaining from PayPay Mall. So not just financial contribution, we're seeing contribution in new users, which is important.

Another good example is the gender -- or sorry, the age breakdown. As you can see, ZOZOTOWN, we have many users in their 20s and 30s, but PayPay Mall, we're seeing more users in their 40s. So this is complementary. So this is what we expected. However, we believe that these 2 shops are performing different roles as we planned. So we would like to continue to try new things to make sure and ensure that both are growing. So if we -- starting April, we have started offering brands, on PayPay Mall, we started on ZOZOTOWN. So -- and we also tried out new promotions on PayPay Mall, which we can also utilize on ZOZOTOWN as well. So we want to take advantage of the synergy between the 2 and take advantage of the snowball effect that this may have.

Next the second step to expanding selling space is -- one way to do that is ZOZO China. So January, February, due to corona, we weren't able to promote ZOZO China. But in March, we have been -- it's a little late, but we have been able to invest in promotions, and now we've seen a gradual increase in the GMV. And the last example for expanding selling space, we're going to add a cart button to WEAR. Currently, WEAR that we operate, MAU is 12 million at the moment. So the monthly active users, so 1 million from WEAR at the moment. And if our customers want to purchase anything, they will be taken to the ZOZOTOWN app. But there are many people who dropped out during this process. So we want to complete the purchase procedure on WEAR. That's something that we're working on right now. By doing so, it will be very stress-free for our WEAR customers to purchase products. So we have great expectations for the impact that this may have. So that was some of the initiatives that we are looking at to expand selling space.

Next focusing on product expansion. One example is ZOZOMAT and ZOZOSHOES, which we introduced last fiscal year. ZOZOMAT, as you can see here, is doing very well. We've already delivered 1.19 million ZOZOMATs. Our customers ordered the ZOZOMAT, and we delivered against this order. And 930,000 people have taken the measurements of their feet, so we will nearly hit 1 million. And the breakdown of 930,000, we can't really go into detail, but we've seen some users use one ID to measure the feet of their entire family that we've also accounted for that as well. So this is now 930 IDs -- 930,000 people. And as a result, we've seen new customers who order the ZOZOMAT, order purchase products for the first time. So in March, nearly 20% of -- we've seen 20% more new customers in March as a result of ZOZOMAT. So the product expansion strategy is not just selling more products, it's we want to utilize new ideas and new technologies for selling products. And of course, we hope that the GMV will improve, but we also hope that we will be able to welcome new customers who will be using our service for the first time. So this has grown also. We hope to apply this -- the learnings from these initiatives to other ideas.

And on SMSs many people have praised the ZOZOMAT for accuracy. And they -- many have -- people have said that the recommended products in ZOZOTOWN fit them perfectly. So this has given us great confidence. And we hope that in utilizing ZOZOMAT, we hope to improve the sales of our shoes category drastically.

Next idea is D2C. D2C is difficult to define, but we would like to define it first before we move on. What we mean by D2C is, say, a consumer plans or comes up with a product, and this will be sold directly to other consumers. That's what we mean by D2C. And this is what we would like to try this fiscal year. So as you can see here, we would like like to work with influencers and have them take part in product planning. In the manufacturing of this product, we have the know-how from PBM MSP. So we manufacture product ourselves, so we will utilize our capability to manufacture products planned by influencers. And this will be sold on ZOZOTOWN or the brands' EC -- own EC shops. And these will be provided on the social networks and by influencers. So that's something that we would like to try this year.

Luckily, we have many people on WEAR that are influencers, have potential to become influencers. And there are some people who may not realize that they have so much influence. But there are great potential influencers on WEAR. So we would like to have their help in trying to make sure that this business model works. This will -- this may change the way the apparel industry works as well because individuals are more important nowadays. So an individual can now produce products and so forth. So there's -- this may have great impact. So we want to make sure that we get in there and be one of the first to try.

Other than that, we're finding different -- various different things. So we've written here cosmetics. This too, the blue box right now say -- it's a question as to how we are going to sell. But we do have a prototype already to help sell cosmetics. So this is what we have for currently doing our best to develop technology -- a technology or solution to help sell cosmetics in an innovatively new way. Other than that, maybe luxury brands is another area that we would like to give another try. In business and casual wear, we want to do that in a way that helps companies -- contributes to company's welfare program. So we hope to also expand our product lineup in this way.

But so I covered the sales space -- selling space and product lineup expansion. Now last area that I would like to talk about is the revenue model expansion. What we will be doing first, for example, it's quite simple, and this will probably have -- although it's simple, it will have significant impact on ZOZOTOWN. This is the product inventory screen. And we would like to start showing where the inventory is available in the physical source, of course, we need the brand's approval to do so. But we would like to start sharing information about where -- in which shops the inventory is available. So we would like to include the brick-and-mortar stores and help the brands go digital. So this is the cross-shopping that we introduced -- announced at the end of March, which we will start with PayPay Mall, but we will also want to do something similar on ZOZOTOWN as well. So this is just only the first step in helping the physical stores.

And this is something else that we're also thinking about. On the far left is what we just talked about. So we can introduce the inventory and add a check-in function to the store. And once they enter the store, we have a lot of coordination, styling photos and data, so we can utilize that or the purchase history of the customer to enrich the type of customer service they receive in the store. So we can offer that kind of service and a signage or the eye -- that the staff might be using. But we are the only -- because we have so much data and knowhow, we are able to offer this type of service, unparalleled service, so that's something that we'd like to do. We have the PayPay cashless payment service as well. And if they were interested in the product -- and by the time they go home, they may receive a fashion -- a coupon for that product. So we want to make sure that we're helping the omnichannel efforts as well.

So we talked about 3 areas in which we want to expand. So we will -- ZOZOTOWN will be central, but we hope to expand the selling space, products and the revenue stream. Of course, it depends on when the coronavirus situation gets under control. But as we mentioned before, we want to do as much as we can to sell products to support the brands in the fashion industry, and we will undertake the necessary promotions to do so. And even in this situation, the brands want to sell on their platform -- maybe especially because of the situation, brands would like to sell on their platform, so we want to support them as well, make that possible. So we want to come up with various ideas to help in the areas that we can.

That is our policy for this fiscal year. So we hope to have your continued support. Thank you very much.

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Operator [4]

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That is it for the FY 2019 consolidated business result announcement. Thank you for watching and taking time out of your business schedule to watch. Thank you.

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