Zalando Earnings: Weak Demand Trends Persist as Company Focuses on Cost Efficiencies

We expect to reduce our fair value estimate for no-moat Zalando ZAL by a mid- to high-single-digit percentage to account for lower growth in 2023 and after continued weakness in quarterly sales figures. We still see shares as materially undervalued at current levels as we expect the online apparel industry to return to high-single-digit growth and Zalando to return to low-teens growth.

Gross merchandize value was up 2.8% in the quarter (1% in first-quarter 2022) as revenue increased by 2.3% fully driven by the off-price channel and other segments, which comprise marketing services and acquired Highsnobiety. Fashion store revenue was down by a low single digit. Active customer numbers still grew by 4.8%.

Despite weak revenue trends Zalando reached adjusted EBIT break-even, an improvement from the negative 2.4% margin in the same quarter of 2022. The improvement primarily came from more efficient fulfillment, with better order economics as the company introduced measures like minimum order value. The cash position of the company remains strong at EUR 1.8 billion, which gives the company room to invest countercyclically. That said, the company is delaying some logistics network buildup in response to less buoyant demand. We have previously argued that lower investments by online companies like Zalando in capacity and customer offerings (for example no minimum orders and free returns) could slow, but not permanently impair, channel adoption. Online penetration of apparel purchases should, in our view, primarily be driven by generational shifts and the flywheel effect, whereby more online purchases induces people to spend less in brick-and-mortar stores, leading to store closures and more conservative stocking, making brick-and-mortar channels less appealing and encouraging more people to shift online.