Zozo Earnings: Higher Top-Line Growth Can Ease Cost Pressures; Raise Fair Value to JPY 4,000

Zozo’s June-quarter total gross merchandise value and revenue were up 7.6% and 9.8% year on year, respectively, outperforming our expectations. However, the robust top-line growth did not translate into an improvement in operating income as incremental costs for a new warehouse, as well as shipping cost hikes weighed on profitability. The share price dipped after the results announcement, likely due to disappointment in the flat operating income. While we share investors’ concerns about heavier costs this year, we think the fact that June-quarter GMV grew by high single digits despite unstable weather in April and limited promotional spending should not be overlooked. We believe that over the longer term, growth in scale should largely offset increasing costs. As a result, we raise our fair value estimate to JPY 4,000 from JPY 3,400 previously. We think shares are currently fairly valued.