Zalando share: Weak margins at Zalando – how the mail order company is tackling its biggest weakness

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• Zalando convinces with growth
• Margin development rather low
• This is how experts evaluate the focus on profitability

The DAX group Zalando regularly delights investors with its growth. Although the increase in sales, which could be seen in the last balance sheets, was increasingly smaller, the company was nevertheless able to increase its revenues even in times of high inflation rates – despite sluggish consumption and reluctance to buy. In the third quarter of 2022, the company had sales of 13.5 million euros – a strong increase compared to the previous year, but less than the market had expected. But the company scored elsewhere: with increased cost discipline. The fact that Zalando tightened its belt on spending had a positive effect on one of the most criticized business figures: the EBIT margin. This improved from 0.4 to 0.6 percent, even if the bottom line was a massive loss of EUR 35.4 million.

Profit margin is one of Zalando’s biggest problems

The fact that Zalando earns relatively little despite strong sales figures is not only clear when looking at the third-quarter figures and is due to the business model of the DAX group. In the early years, the management focused on growth instead of making a profit and aligned the company accordingly.

Zalando takes care of all the logistics itself – in view of the high return rates in Germany, this is an expensive undertaking. In no other country in the world is the return rate as high as in Germany, according to the Cologne retail research institute EHI. In the case of fashion, at least every second package is returned.

The fashion retailer maintains twelve logistics centers in Europe, logistics is “an essential part of the Zalando DNA”, can be read on the company’s website. Zalando operates three of the twelve logistics centers itself. At the locations outside of Germany, the mail order company uses partners and thus keeps everything in its own hands, from ordering to packaging and preparation for transport.

At least Zalando no longer processes the returns itself: The processing and preparation of the returns has been taken over by the company’s own logistics locations in Erfurt, Lahr and Mönchengladbach and is now being taken over by specialized third-party providers.

Logistics is expensive

Nevertheless, having your own logistics is associated with high costs, which in turn put pressure on the margin. Nevertheless, this should be between three and six percent by 2025, the company had announced in 2021. However, the mail order company has now admitted that it is “less likely” to achieve this goal. At least the upper end of the range no longer seems realistic.

It is all the more important for the DAX company to act in a strictly disciplined manner when it comes to costs. Appropriate measures have already been taken: Shipping is no longer free in all cases. Only those who place an order for at least EUR 29.90 will be exempted from the flat-rate shipping fee of EUR 4.90.

With the Zalando Plus program, the company also wants to retain premium customers – they hope to get a higher margin from frequent buyers than from occasional customers. For a membership fee of 15 euros per year, Zalando offers unlimited early access to new goods or items that are available again as part of the premium program, personal style advice, preferential treatment from customer service and, in particular, unlimited premium deliveries, which should be with the customer in one to two working days at the latest . The fashion retailer can guarantee the latter thanks to the cost-intensive logistics business.

In the returns business, however, Zalando does not leverage the entire savings potential: Customers are reimbursed the delivery fee for a complete return – even if the order value of the goods was less than 29.90 euros. A practice that is not common among many fashion retailers and that weighs on margins.

Analysts optimistic

The figures for the 2022 financial year, which the DAX group will publish at the beginning of March, should show how close Zalando has already come to its margin target. In the run-up to the presentation of the balance sheet, analysts were already optimistic. The investment house Bryan Garnier has thoroughly reconsidered its assessment of the Zalando share and upgraded the share certificate from “Sell” to “Buy”. The previous price target of EUR 24 was more than doubled to EUR 50. For analyst Clement Genelot, it is in particular the continued focus on profitability that has led to the more positive assessment of the Zalando share. According to the expert, the promising path to a 6 percent operating margin in 2025 has so far been underestimated on the market.

Deutsche Bank Research also sees the Zalando share at over 50 euros, specifically the target price of analyst Adam Cochrane is 53 euros and thus significantly higher than the previous estimate (33 euros). Even if 2023 will probably not be a great year for consumers, the prospects are no longer quite so sobering, emphasized the expert, who counts fashion retailers among his preferred values.

For analyst Volker Boss from Baader Bank, the Zalando share is also a buy, he raised the price target from 30 to 50 euros. For 2023, he lowered his expectations for the online fashion retailer’s gross merchandise volume in view of still justified recession fears and subdued consumer sentiment, but increased his estimate for the adjusted operating profit margin (EBIT margin), he wrote.

The Canadian bank RBC expects Zalando shares to outperform and has raised its price target from 35 to 52 euros. The company is well positioned with its platform strategy, analyst Sherri Malek recently wrote.

Editorial office finanzen.net

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