This Online Retailer Found New Customers in the Pandemic. Sephora Could Help It Keep Them.
Europe’s biggest online-only fashion retailer Zalando has had a tough year, as shoppers returned to physical shops after pandemic lockdown restrictions eased.
The Berlin-based e-commerce player mainly sells clothes, beauty products, and footwear from third-party vendors to customers in 23 countries. It also makes some of its own branded items.
Zalando (ticker: ZAL.Germany) saw its shares tumble 23%, to 69.96 euros ($78), over the past 12 months. It increased its marketing cost ratio by 4.6 percentage points to 9.8% in the second quarter to gain new customers and retain those who discovered it during the pandemic.
By November, Zalando was cutting prices for the same reasons. Third-quarter adjusted earnings before interest, and taxes, or Ebit, fell to €9.8 million from €118 million in the same period the previous year. However, things are looking up, with Zalando saying that the fourth quarter started strongly and was buoyed by a cold snap that drove full-price sales of winter clothes.
There are other catalysts for growth that could see the stock rebound. Its scale is key—it has 46 million active consumers, making it an attractive platform for brands to showcase their products. The company also handles payment processing, fulfillment, and customer service through its Zalando Partner Program, resulting in cost savings for its partners.
Adam Cochrane, an analyst at Deutsche Bank, estimates that the stock could leap 71.5%, to €120, because Zalando’s scale helps it stay relevant with big global brands. He says the company is capable of reaching its goals of gaining about 10% market share for European apparel and expanding long-term profit margins.
“Valuation has come down off its recent highs, but still warrants a justifiable premium to the European peer group,” he wrote in a client note. “We believe the move to become more of a platform model where it acts like a marketplace for retailers hoping to get the reach that Zalando brings to the table...is the right one.”
Another growth driver is the potential to expand through partnerships. Sephora, the cosmetics retailer owned by LVMH Moet Hennessy Louis Vuitton (MC.France), said in June that it had agreed to sell high-end beauty products on Zalando’s platform.
Sherri Malek, an analyst at RBC Capital Markets, has a €115 price target on the stock, and estimates that adjusted earnings could reach €641.9 million by 2023 from the €420.7 million seen in 2020. “Share-price weakness on near-term headwinds creates an opportunity to buy into a high-quality, long-term growth story at a more attractive price,” she wrote in a note.
Founded in 2008, Zalando has a market value of €18 billion and employs about 16,000 staff. It fetches a steep multiple of 64.3 times this year’s expected earnings and is valued at a 10% premium to its peers. For 2020, Zalando posted adjusted earnings of €421 million, up from €225 million the prior year. Revenue was €8 billion in 2020, up from €6.5 billion.
Zalando has tried to differentiate itself from other fashion peers on sustainability initiatives. The company is aiming to reduce its total carbon footprint by 80% by 2025, according to RBC’s Malek.
For the third quarter, adjusted earnings were €9.8 million on revenue of €2.3 billion. Last month, the company said that revenue for 2021 is expected to increase 26% to 31%, to €10.1 billion to €10.5 billion.
Co-CEO Robert Gentz told Barron’s in a statement that “we are looking confidently ahead into 2022, with several strategic initiatives in the pipeline that will excite customers and partners alike and push our sustainability agenda further forward.”