The group has sent a strong encouraging sign by updating its FY20 outlook.
The group is expecting its revenue to grow by 10-20%, and adjusted EBIT to reach €100-€200m for FY20, both are largely above the market’s current expectations.
The worldwide spread of COVID-19 has not only massively hit the fashion retail industry, but also accelerated the industry transformation from offline to online, and Zalando has been well prepared.
Zalando has beaten estimates in H1 and raised its full-year guidance. Sales were up 20.1% at CER in Q2 and GMV up 23.7%. Guidance for the adjusted EBIT is now at the upper half of the range of €175-225m. Capex was maintained at €300m.
Group revenue was up 15.2% and GMV edged up 23.1%. The number of active customers increased by 14.1% and the average orders per active customer was up 11.5%. The adjusted EBIT jumped to €6.4m while the operating profit was down 21% to €-18.4m. Guidance was maintained.
Zalando accelerated in Q4 (+24.6%) and closed the year with a 20% sales growth. The adjusted EBIT margin dropped 160bp to 3.2% and adjusted EBIT was down 19.4% to €173.4m. Operating profit dropped 36.5% to reach €119.2m vs. €125m estimated.
Zalando came into existence in 2008 and over its decade of life, it became the leading European online platform for fashion-related goods and one of the top 10 fastest-growing retailers worldwide. The platform offers an extensive selection of fashion and beauty products to 17 markets in Europe. The company has gained a market share of around 1.1% of the overall European fashion retail market and 8% of the online fashion sector. Its customer base has expanded rapidly to reach 25.1m active customers across Europe in 2018. Zalando is consolidating basics to become a marketplace in the long term.
Zalando is building the key assets for a performing online business. Fulfilment capacities are being raised across Europe and automation has been upgraded through AI tools across the entire value chain. This expansion is crucial as it allows for a competitive mix of offers and flexible logistics. However, there are still plenty of issues to be tackled. Returns and margins are foremost. Zalando still has a high rate of returned garments (around 50%), mainly in low established online markets. This adds a substantial risk to the common challenge of excess inventories. The shopping club and physical outlets enable it to dispose of excess stock but at discounted prices and this adds pressure on margins. The latter are already squeezed by high opex and costly e-commerce services. These issues would be eased by AI algorithms being developed by the company to optimise the purchasing process and reduce returns. Efficient logistics are another challenge in both upstream and downstream and this is why distribution will be limited to Europe for the time being. There is no aim to knock on markets’ doors outside Europe.
Entry barriers in the online retail are tiny and competition is escalating with pure e-tailers raising their capacities and lifting their offer. Operational processes are being upgraded through advanced technologies which has become a key factor for operational efficiency and competitiveness. Zalando has leapt ahead of European peers on warehousing capacities and market share, but much work still needs to be done on the technological side.
Growth perspectives are considerable for Zalando given the expected development of e-commerce penetration in Europe (estimated at 16% in 2018 and expected to reach 25% by 2023). Zalando is well armed to conquer a higher market share of the European online retail market. However, the path is not straightforward and is full of challenges.
Recommendation and upside
We are initiating coverage of the German Zalando (a market cap of €6.5bn and a free float of 58.7%) with a REDUCE recommendation and a target price of €26.8 per share, leading to a poor upside potential of 1.7%. Our upside is driven by: 1/ a top-line expansion at a double-digit rate in the long term thanks to the fast development of e-commerce; 2/ growing investments in assets supporting a competitive offer; 3/ a slow margin improvement due to the costly online offer. We are sceptical about the company’s earnings development compared to the huge capital employed invested. The online customer is increasingly demanding costly and sophisticated services which put retailers in a dilemma with competitiveness/profitability.
Zalando is moving forward in expanding its business and building up the basics for a performing online offer. The strategy is focused on investing on warehousing and technology to move to an infrastructure provider in the long term. However, pressures on margins are intensifying and room for margin expansion is thin in the mid term.
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FY20 results – All Focus on Resuming Operations
Companies: Dart Group
Independent review launched: The Boohoo Group has announced the launch of an immediate independent review of its UK supply chain, intended to identify any areas of risk and non-compliance and to further strengthen the Group’s compliance procedures to ensure similar allegations will not recur in the future. The review is to be led by Alison Levitt QC, a highly experienced advocate who has previously reported on complex issues, including safeguarding enquiries. Boohoo has also announced an initial additional £10m investment in ensuring any supply chain malpractice is eradicated and is accelerating its independent third-party supply chain review with ethical audit and compliance specialists Verismo and Bureau Veritas.
Companies: Boohoo Group Plc
Today’s statement reveals incredibly robust Q1 trading across the Group’s brands and regions, with a positive outlook and guidance reinstated for the remainder of the financial year and beyond. In addition, the Group has announced the acquisitions of Oasis & Warehouse, bringing two well-recognised and complementary brands onto its platform. We believe the unprecedented disruption resulting from the COVID-19 pandemic has accelerated the channel shift to online where we see BOO as the clear winner, with an established and leading model positioned to consolidate the market.
DWF has issued a trading update showing positive momentum during the first two months of the new financial year. We are re-instating our financial forecasts assuming modest organic growth of 2% in 2021E.
Companies: DWF Group
Whilst Arena delivered FY20E results in line with our expectations, this has inevitably been overshadowed by the challenges posed by COVID-19 to the industry. Arena acted swiftly to cut costs and preserve cash, such that it currently has a c£23.5m cash balance. This is enough to see the company through into 2021, even if the global event market remains heavily disrupted for the rest of the year.
Companies: Arena Events
In this note and following the SMMT June data released earlier this week, we look at the key dynamics of the sector during H1 2020, and the prospects for the rest of the calendar year. While no direct stimulus for the sector was announced in the recent summer statement, customers who were considering their purchasing options now have the clarity to move ahead with buying decisions that were potentially on hold.
Companies: CAMB LOOK MMH PDG VTU
Gaming Realms is a creator and licensor of innovative games for mobile, with operations in the UK, U.S. and Canada. Through its unique IP and brands, Gaming Realms brings together media, entertainment and gaming assets in new game formats.
Companies: Gaming Realms
We note this morning’s announcement from Boohoo Group strongly refuting several allegations made in a short-selling note published yesterday afternoon. In our opinion arguments made in the short selling note are flawed and do not disclose any new or unexpected information about the Group. The unprecedented market backdrop resulting from the COVID-19 crisis has only acted to highlight the strengths of Boohoo’s agile, pure play, e-commerce model and we see current share price weakness as offering an attractive entry point.
Edison Investment Research is terminating coverage on ADMIE Holdings (ADMIE), AJ Lucas Group (AJL), Australis Capital (AUSA), Elbit Medical Technologies (EMTC), Focusrite (TUNE) and PPHE Hotel Group (PPH). Please note you should no longer rely on any previous research or estimates for this company. All forecasts should now be considered redundant.
Previously published reports can still be accessed via our website.
Companies: PPHE Hotel Group
Warren Buffett once said that as an investor, it is wise to be ‘fearful when others are greedy and greedy when others are fearful’. Fear is not in short supply right now.
Companies: OPM ALU ANCR BLV CONN CRC STU GATC HAT LEK MMH MCB MWE NXR NTBR NOG PAF PEG RFX SRC TEF TEG TPT VTU WYN XLM
What’s new. This morning Purplebricks UK has provided an “update regarding current trading and the potential impact of COVID-19 and Govt guidance on the UK housing market.” Key points are:
1. Purplebricks first priority is health of people and customers: its online business model includes “video valuations, virtual viewings, connecting customers with potential purchasers via Purplebricks online platform.”
2. Govt restrictions on movement are weakening vendor and purchaser activity; deferral of completions would have a further negative impact.
3. Immediate cost-saving measures will materially reduce cash burn including suspending TV and radio advertising, reducing online marketing, taking advantage of the Government Job Retention Scheme.
4. Purplebricks currently has net cash of £35m and no debt.
Companies: Purplebricks Group
AFC Energy is a global leader in the fuel cell sector. It has a proven fuel cell technology which it is commercialising through its H-Power™ product, an off-grid electric vehicle charging system which is run on hydrogen and produces no emissions. The company's core fuel cell technology is a liquid alkaline fuel cell called HydroX-Cell(L)™. The company is also developing a solid alkaline fuel cell called HydroX-Cell(S)™ , the critical component of which is a is a solid electrolyte which upon validation will be marketed under the AlkaMem™ trademark. We expect the AlkaMem™ product to have multiple electro-chemical applications outside of fuel cells. The purpose of this note is to compare AFC Energy's products, markets and business strategy against its listed peers Ceres Power and ITM Power. The note also assesses the state and outlook of the hydrogen market in addition to the proton exchange membrane market, which is relevant for AFC Energy's AlkaMem™ product. As a reminder, we believe AFC Energy has a fair value of 27p/sh.
Companies: AFC AFC AFC
The final results revealed adjusted PBT up 99% year-on-year, which was 10% better than forecast despite four upgrades during the financial year. This strong performance reflects the financial benefits that have accrued following the shift in the business model to online only, as well as management’s strategic decision to significantly increase marketing spend. A second special dividend for the 2020 financial year has also been announced, reflecting the strong cash flow characteristics of the business model. Our 2021 profit forecast implies continuing momentum and a year-on-year increase in PBT of 86%. We raise our target price to 1050p.
Companies: Best Of The Best
Air Partner has issued a further shareholder update, confirming PBT of at least £10m in the first five months of the year to June, an increase of £2.5m since the last update to May. The Group continues to deliver impressive results despite a challenging market backdrop. As has been the case throughout the COVID-19 crisis, performance has been driven by strong activity in the Freight and Group Charter divisions. Crisis driven activity is expected to reduce in H2, with an anticipated recovery in the Group’s core activities, where the update reports positive early indications across the Group’s divisions. The balance sheet is very well supported, with net cash at 30th June standing at £13m post the recent £7.5m fund raise. The Group continues to have access to total debt facilities of £14.5m. Whilst visibility for H2 remains limited, we believe the Group is well placed to deliver a strongly profitable FY21 result.
Companies: Air Partner
Gaming Realms’ 2015 final results show a business that continues to build momentum, as revenues more than doubled to £21.2m (2014 pro forma: £9.8m). Growth is being driven by its real money and social gaming (including licensing) verticals, which were up 362% and 294%, respectively. Gaming Realms also recently announced that it has extended its licensing deal with Scientific Games to land-based gaming machines as part of its strategy of taking the Slingo brand into adjacent markets. 2015 adjusted EBITDA losses fell by 30% to £4.1m and the Q1 trading update (revenues up 100% y-o-y) supports our view that the company can break even at the EBITDA level this year.