German e-retailer Zalando considers a tech spending boost

April 19, 2016 12:09 PM

(Bloomberg)—Zalando SE, the German online apparel retailer, signaled it may accelerate spending on marketing and technology in coming months, putting profit targets under pressure.

The company is keen to invest in opportunities to boost sales and improve the speed it can get goods to shoppers, managing director Rubin Ritter said by phone Tuesday. His comments came as Zalando, No. 8 in the Internet Retailer 2015 Europe 500, reported a steep drop in first-quarter profitability and sales that missed analysts’ estimates, sending the shares down as much as 5.3%.

Zalando will be hard-pressed to meet profit expectations while warding off competitors including Inc., No. 1 in the newly released Internet Retailer 2016 Top 500 Guide, whose Amazon Fashion site is expanding in Europe. Margins have narrowed and capital spending this year will increase to 200 million euros ($226 million), or about 5% of sales, compared with 60 million euros last year, or about 2% of revenue.

The drop in first-quarter earnings “is based on group’s investments in IT and the platform strategy,” Baader Bank analyst Volker Bosse said in a note.

Revenue miss

Zalando held back on technology and marketing spending in the first quarter but could increase those investments in coming months, Ritter said. “If there’s an opportunity to accelerate we’ll take it,” he said. “We kept our powder dry for the second quarter.”

The company reported an adjusted operating margin of 1.5% to 3.5% for the period ended in March, down from 4.5% in the year-earlier period. That’s also shy of Zalando’s full-year target of 3% to 4.5% margin.

Revenue was 788 million euros to 801 million euros, short of the 833 million-euro average estimate. Ritter blamed the sales miss in part on European shoppers’ Easter vacations that crimped orders—the holiday occurred in the second quarter last year.

Revenue has “picked up speed” in the current quarter, the company said, reiterating a forecast for sales growth this year at the high end of a 20% to 25% range.

Graham Renwick, an analyst at Exane BNP Paribas, said consensus estimates for EBIT margin this year are 4.1% and that the first quarter has historically been marked by a low margin.

“Their fiscal year guidance is very wide, so it’s difficult to ascertain at this stage where they will deliver in that range,” he said. The company plans to report full first-quarter results on May 12.




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