Victor & Rolf's 'Recycle' Zalando

BERLIN Zalando generated strong sales growth in the first quarter of 2018, although earnings suffered from continued investments — and uncooperative weather.

Zalando booked a 15 million-euro net loss compared to a net profit of 5.1 million euros in the corresponding period last year. Adjusted earnings before interest and taxes (before expenses for equity-settled, share-based payments and effects from business transactions that do not recur regularly) plunged 98 percent to 400,000 euros, compared to 20.3 million euros last year.

Nonetheless, cochief executive officer Rubin Ritter put a positive spin on operating profits, stressing the company was still operating on a break-even basis. In a conference call Tuesday morning, he said the spring-summer season got off to a late start due to unseasonably cold weather throughout Europe in March.

This led to a higher level of markdowns “to sell off old merchandise as well as kick-start the new season,” he said.

Ritter added that the company continues to invest heavily in logistics, ramping up new warehouses in its current network of 15 European markets, and spending to improve the customer experience. “These were the major reasons” for the profit slump, he said, emphasizing that “investments into future growth” will continue unabated.

Sales for the quarter gained 22 percent, reaching 1.2 billion euros. Zalando said a strong increase in active customers, which grew by 16.7 percent to reach 3.5 million, as well as “record order frequency” drove the growth. Most customers accessed Zalando from mobile devices, with the mobile visitor share reaching 76.6 percent in the quarter.

The first quarter also saw the launch of Zalando Beauty in Germany.

This was the e-tailer’s first new category launch in four years, and Ritter said it was off to a “promising start.” Zalando Beauty features more than 4,000 products from 130 brands, and is initially focusing on women’s cosmetics and skin care.

Ritter said beauty is a big revenue opportunity, especially as the online penetration is currently only 5 percent versus 15 percent in fashion. He added that the category is “a smart cross-sell possibility” with customers now buying mixed baskets. Ritter said he could envision expanding beauty into men’s and other regional markets beyond Germany in the years to come.

As for Zalando’s plans to enter two additional European markets in 2018, the executive declined to go into further detail.

Zalando confirmed its full-year guidance, and is continuing to eye 20-25 percent sales growth for the full year, which could put the Berlin-based company over the 5 billion euro sales mark. The guidance also calls for adjusted earnings before interest and taxes of 220 million euros to 270 million euros in 2018. That represents an operative gain of about 15 percent at midrange.

Zalando has changed its reporting structure as of Jan. 1, 2018. Previously reporting on a consolidated basis, Zalando is now breaking out the figures of its main business, the Fashion Store and Other, which includes its off-price business via Zalando Lounge, outlet stores and overstock management, the group’s private label offerings under zLabels and various emerging businesses.

The other businesses currently generated 220.2 million euros in the quarter, representing a gain of 40.5 percent.

Ritter noted off-price motored growth here, and that while the other businesses represent a tiny portion of overall sales, “these businesses are smaller in scale, but can then show significant growth” as they develop. He expects this trend to continue in the years ahead.

Another shift that has been discernible in the recent past is a slight reduction in average basket size, which declined 4.4 percent in the quarter.

“We’ve seen this pattern in the last quarters, but it was more pronounced this Q1 because of the higher level of discounts. But we’ve also seen a move to more fast fashion for younger customers, and these are customers who come more frequently (to the site) but also spend less (per visit),” he commented.

“Overall our customers spend more, but when the basket gets smaller, it puts pressure on the bottom line because we have to ship more parcels,” he acknowledged.

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