Zalando (ZAL GY) ... five observations

Tuesday 11th August 2015

Zalando (ZAL GY, mkt cap €7.7 billion), arrived on the Frankfurt stock exchange in October 2014. Founded in 2008, Zalando is an online clothing, shoes and accessories company. 

It is seemingly very much alike to UK listed ASOS (ASC LN, mkt cap £2.8 billion). However, whereas it took ASOS sixteen years to arrive at £1 billion in sales, Zalando, marked its €1 billion sales card in under four years, and went on to double this within the next two years through to 2014. 

Zalando - share price
Source: Bloomberg

Zalando was founded by the same team behind Rocket Internet (RKET GY, mkt cap €5.4 billion) and each of these promotions (ZAL & RKET) largely share the same major holders on their registers. Indeed in late 2013, Rocket Internet sold and transferred nearly its entire stake in Zalando, to its then existing shareholders, which included the Global Founders and affiliates of Kinnevik (KINVB SS, mkt cap SEK 76 billion). The Zalando spin-off. 

The Zalando spin-off by Rocket
Source: Rocket Internet prospectus

The brief background over, here are 5 observations which prompted me to open a short:

1. Astounding operational leverage

The phenomenal growth in revenue in such a relatively short period of time aside, on my estimates:

Zalando reported a €59 million EBIT loss in 2011, followed by an €84 million EBIT loss in 2012, then a €114 million EBIT loss in 2013. The group then reported a €62 million EBIT profit in 2014, the year of its IPO. This is an astounding €176 million swing in one year.  

Zalando revenue, € million
Source: Zalando prospectus and accounts

Zalando EBIT, € million
Source: My estimates from Zalando prospectus and accounts

As shown in the above charts, Zalando's revenue rose by €452 million in 2014, to €2,214 million. This €452 million increase in revenue was accompanied by the fore-mentioned €176 million swing in EBIT.

The operating leverage is especially strong when considering that €274 million, or 61% of the increase in sales came from outside DACH (Germany, Austria, Switzerland), where - one presumes - greater distribution and marketing costs would have been incurred.

Zalando segment reporting - 2013-14
Source: Zalando annual report

2. Recent trends in site visits

With the use of Similarweb.com, a web traffic data analytic site, I've monitored the monthly desktop visits to Zalando's country* sites as estimated by Similarweb, during the period September 2014 to July 2015.
* zalando.de, zalando.fr, zalando.nl, zalando.pl, zalando.it, zalando.be, zalando.co.uk, zalando.es, zalando.ch, zalando.se

These estimates by Similarweb appear to show that while total monthly site visits rose in the period September 2014 to a peak in January 2015, they have fallen sharply since.

Zalando total monthly site visits according to www.similarweb.com
The total includes combined visits to the sites: zalando.de, zalando.fr, zalando.nl,
zalando.pl, zalando.it, zalando.be, zalando.co.uk, zalando.es, zalando.ch, zalando.se
Source: www.similarweb.com

A few things to consider:

1. I cannot qualify the accuracy of Similarweb's estimates.
2. There may well be some seasonal influence on monthly site visits, notably greater visits in the run up to Christmas and the January sales. 

However, using the same source (Similarweb) here is the trend of monthly desktop site visits to the ASOS sites^.
^ asos.com, asos.de, asos.fr, us.asos.com

Asos total monthly site visits according to www.similarweb.com
The total includes combined visits to the sites: asos.com, asos.de, asos.fr, us.asos.com
Source: www.similarweb.com

As can be seen - presumably under the same methodology - whereas Similarweb's estimates show a sizeable decline in Zalando's monthly site traffic since September 2014, there has been a significant increase in monthly site traffic to ASOS's sites.

Further, the monthly site traffic to ASOS's sites would appear to have risen even though there may be seasonal headwinds.

Zalando and ASOS monthly site visits according to www.similarweb.com
The total includes combined visits to the sites: zalando.de, zalando.fr, zalando.nl,
zalando.pl, zalando.it, zalando.be, zalando.co.uk, zalando.es, zalando.ch, zalando.se
and
asos.com, asos.de, asos.fr, us.asos.com
Source: www.similarweb.com

In fact, Similarweb's estimates suggest that monthly traffic to Zalando's sites has fallen by 16% on July 2015's data as compared to September 2014's count. This compares to a 32% increase in monthly traffic to ASOS's sites on the same basis.

Zalando and ASOS percentage change in site visits according to www.similarweb.com
The total includes combined visits to the sites: zalando.de, zalando.fr, zalando.nl,
zalando.pl, zalando.it, zalando.be, zalando.co.uk, zalando.es, zalando.ch, zalando.se
and
asos.com, asos.de, asos.fr, us.asos.com
Source: www.similarweb.com

Here is Similarweb's data on a country site specific basis.

Zalando and ASOS percentage change in site visits according to www.similarweb.com
Sites: zalando.de, zalando.fr, zalando.nl, 
zalando.pl, zalando.it, zalando.be, zalando.co.uk, zalando.es, zalando.ch, zalando.se
and
asos.com, asos.de, asos.fr, us.asos.com
Source: www.similarweb.com

As a whole, these would not appear to be encouraging trends for Zalando.

3. Reverse factoring

Zalando would appear to use a third party to engage in reverse factoring; whereby this is likely to mean that the third party will have paid Zalando's suppliers in advance of the normal payment terms. While this is not altogether unusual, nonetheless, there was a marked increase in the value of supplier payables transferred to the factor. These rose from €37.6 million in 2013, to €90.5 million in 2014.

Reverse factoring can help the buyer to improve the efficiency of its invoice management. But the generosity on the part of the buyer in assisting its suppliers to collect payments early can also come at a price. It can help the buyer to strengthen its terms of contract, which in some cases can result in a discount in its cost of goods.

Increase in reverse factoring during 2014
Source: Zalando 2014 annual report

4. Increase in related party transactions

In addition to a rise in reverse factoring, Zalando also reported a not insignificant level of goods purchased from related parties.

Goods purchased from related parties totaled €75.7 million during 2014, up from just €1.9 million during 2013. However, it should be noted that it is not clear when the party became related during 2013.

Increase in goods purchased from related parties during 2014
Source: Zalando 2014 annual report

And another thing ...

I've always found insider selling proves a pretty good steer.

The founders and insiders sold c. €434 million worth of stock in March last.

Key shareholders selling
Source: Bloomberg  

This was shortly followed by a further €244 million sale of stock by two holders in July last.

Further initial investor selling
Source: Reuters

I sold short at just shy of €32.

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.