Online Fashion Retailer Zalando Warns It May Have Had Loss

BERLIN (Capital Markets in Africa) – Zalando SE, Europe’s largest online retailer, warned it may have become unprofitable in the third quarter after spending more to gain market share as Amazon.com Inc. encroaches into its territory.

Zalando may have had a loss before interest and taxes of as much as 5 million euros ($6 million) on an adjusted basis, according to a preliminary calculation, the Berlin-based company said Wednesday. The company gave a range for results where the top end would be profit on the same basis of 5 million euros. The stock fell 1.3 percent in morning trading, after earlier dropping as much as 4.8 percent.

Revenue rose 28 percent to 30 percent, Zalando said. Analysts expected sales growth of 27 percent and operating profit of 10 million euros, according to estimates compiled by Bloomberg. Co-Chief Executive Officer Rubin Ritter said the company will be “clearly profitable” for the full year and that the company is “very happy” with the balance between sales and profit growth.

Zalando and other online specialists are sacrificing some profit to fortify their position as Amazon pushes into fashion, and traditional retailers ramp up their e-commerce presence. The German company is building its distribution network to speed deliveries across Europe, adding order-fulfillment capabilities in Poland and Italy. It also plans an online clothing wholesale market for other retailers to buy in bulk.

The slightly better sales aren’t enough to offset the miss on Ebit, Richard Chamberlain, an analyst at RBC, wrote in a note. He added the company benefited from a relatively easy comparison as revenue climbed 10 percent in the year-earlier period.

In August, Zalando forecast profitability this year will be in the lower half of its guided 5 percent to 6 percent range, due to more spending on technology and distribution. The company said at the time that sales growth in 2017 will probably be at the upper half of its forecast range of 20 percent to 25 percent.

“The third quarter is less significant for us, and it is perfectly fine for us to be around break-even,” Ritter said in a phone interview. “We are in a very attractive market, so competition evolves fast and we will always have to deal with that. Asos and Amazon are also investing heavily to try and build market share.”

Smaller rival Boohoo.com Plc said last month that while sales will grow faster than previously expected, its investments in marketing to establish new brands are holding back profitability.

Zalando is scheduled to report full third-quarter results on Nov. 7.

The company will start selling beauty merchandise such as cosmetics, skin-care products and fragrances in spring 2018, starting in Germany.

“The highlight of today’s statement is that Zalando is entering the beauty market,” said Volker Bosse, an analyst at Baader Bank. “It’s a completely new layer of growth opportunities for Zalando, as there’s no dominant player in that market.”

Source: Bloomberg Business News