Zalando expects to increase sales by up to 35% in 2015

October 15, 2015 04:36 PM

(Bloomberg) -- Zalando SE cut its profitability forecast as the online fashion retailer hires more workers and pumps money into marketing, highlighting the growing pains it’s weathering in its second year as a public company.

Sales for 2015 will be higher than originally forecast, though the cost of achieving that will crimp profit margins, the company said. The shares fell as much as 13%, their biggest intraday drop in more than a year.

Zalando, the most prominent spinout from the Samwer Brothers’ Rocket Internet startup incubator, is stumbling in its quest for growth in a way that Inc. did at the turn of the millennium. Higher distribution costs and "significant technology investments” are weighing on profit, it said Thursday. Debt-collection rates have also faltered after some customers abused a bill-me-later plan.

“Zalando will continue to face a trade-off between accelerating the growth in top-line and expanding its operating margin," Claire Huff, an analyst at RBC Capital Markets, said in a note to clients. "It will be difficult to scale back costs too aggressively without slowing the top-line momentum."

The shares fell 5.3% to 28.87 euros at 12:38 p.m. in Frankfurt. The intraday decline was the biggest since Oct. 2, 2014, the second day of trading after the company’s initial public offering. The stock is up 34% from the IPO price.

Earnings before interest and tax will be 3% to 4% of sales this year, compared with an earlier forecast of 4.5%, the Berlin-based company said. Revenue will increase 33% to 35%, up from a previous range of 28% to 31%.

"For a company that is doing 3 billion euros ($3.4 billion) in revenue, growing 40% is a pretty unique growth profile," Managing Director Rubin Ritter said in an interview. "If you look internationally, there are only a handful of companies doing that."

Additional Workers

Higher costs, combined with discounted clearance of older merchandise during the summer, led to the lower margin guidance and a third-quarter loss, Ritter said. Earlier fall advertising compared with last year and buying billboard space in German cities to try to capitalize on mobile shopping added to Zalando’s marketing costs.

The company also hired several hundred additional warehouse workers in the quarter and is updating computer systems that coordinate its distribution centers, he said.

"We invested a lot in being able to cope with this additional growth," Ritter said, comparing spending on customers’ experience on his site to Amazon’s approach. "We’re talking about one quarter."

In addition, the company collected less on bad debts than it expected in the third quarter. Profit fell in the previous three months after an 18.5 million euro ($21.1 million) charge for fraudulent purchases on its site as part of the bill-me-later plan. The amount of debt recovered from those bad orders was a single- digit million-euro amount lower than expected.

Quarterly Loss

The third-quarter loss before interest and taxes was 18 million euros ($20.5 million) to 32 million euros ($36.4 million), adjusted for stock-based compensation, Zalando said in a preliminary report. That missed analysts’ estimates for 3.1 million euros in earnings.

Sales rose to between 707 million euros ($804.7 million) and 717 million euros ($816 million). That compares with 501.4 million euros a year ago and the average 636.8 million-euro estimate of analysts surveyed by Bloomberg.

Zalando is No. 8 in the 2015 Internet Retailer Europe 500.




Top Solution Providers