This Online Retailer Wants to Be the Amazon of Fashion. Watch the Stock.
In Europe, Zalando (ticker: ZAL.Germany) is trying to do for fashion what Amazon AMZN –1.65% . com did for books more than two decades ago—crack the code for selling to the masses online.
Clothes are a little trickier to sell online. People still like to buy them in person because the feel, the fit, and the small details matter so much. Returns from online purchases are more frequent, especially when you can’t try things on before you buy.
Zalando’s answer is to become the go-to platform between consumers, retailers, and fashion brands. Zalando works with more than 6,500 international brands in 25 European countries. Like Amazon, it shares logistics with partners. It also offers its own private-label clothes.
In fiscal 2024, “the online apparel market in Europe could once again grow faster than the physical stores market,” said Anne Critchlow, an analyst at Societe Generale. “Moreover, we think Zalando could take online market share in the future as it has in the past, helped by the breadth of its platform and free shipping and returns proposition.”
Zalando has the potential to build bigger margins than competitors because it doesn’t attempt to undercut others on prices. But it is “market-disruptive in its breadth of choice, one-stop-shop convenience and superior online service,” Critchlow said.
Berlin-based Zalando, with a market value of €10 billion, sells shoes, apparel and accessories. The company fetches 60 times this year’s expected earnings and is valued at a 60% premium to its peers. Clement Genelot, an analyst at Bryan Garnier in Paris, said Zalando’s high price-to-earnings ratio is because of its low margins so far and its willingness to reinvest profit for future growth.
The shares are up 22% over the past three months to €38.33. The average target price among those collected by FactSet is €45.29, implying a nearly 20% upside. Thirteen analysts rate the shares the equivalent of Buy, seven have it as a Hold and one analyst gives it an Underweight rating.
Founded in 2008, Zalando had a crazy ride through the pandemic. Demand boomed during lockdowns, along with its share price. Things cooled off dramatically in 2022 as economies opened up to physical interactions. Shares climbed as high as €100 in mid-2021 and fell as low as €20 last September.
Last month, Zalando announced that it will be cutting jobs to keep a lid on costs. “Zalando’s 5% layoff plan, the first in its history, is surprising but outlines the group’s willingness to pivot from ‘growth-at-all-costs’ to profitability,” said Clement Genelot, an analyst at Bryan Garnier in Paris, who rates the shares a Buy with a price target of €50. “This welcome shift is key to our investment case.”
The outlook for Zalando will depend on European consumers. Just like in the U.S., shoppers are dealing with the fastest inflation in 40 years and higher energy costs. Consumer confidence plummeted through most of 2022, but started to recover at the end of the year. The worst case scenario for winter—energy shortages and rolling blackouts because of the supplies lost from Russia after it invaded Ukraine–haven’t come to pass, and unemployment has remained low.
The European Central Bank may be raising interest rates faster than the Federal Reserve now, but the economy has held up better than expected so far.
Zalando reported a 60% drop in earnings in 2022. But CEO Robert Gentz on March 7 painted a bright picture for the future. The company expects to get to the top end of its 3% to 6% target range for profit margin by 2025 and sees double-digit margins in the longer term.