May 9, 2014
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Zalando closer to breakeven as it eyes $5 billion listing

May 9, 2014

BERLIN, Germany - Europe's biggest online fashion retailer Zalando, considering a possible flotation later this year, is getting closer to making a profit after it improved the efficiency of its warehouses and marketing and saw good sales of spring/summer collections.

Zalando outlet store in Berlin

Zalando said sales rose 35 percent to 501 million euros ($694.53 million) in the first quarter, slightly down from a 36 percent growth rate in the previous quarter, while the group's core margin improved significantly in the period.

Zalando should take a significant step towards breaking even in 2014, even if it does not quite reach it, said Rubin Ritter, a member of the management board. On a media conference call, he declined to say when Zalando might turn a profit. The company did not state its net loss for the first quarter.

Mimicking the business model of e-commerce giants like Amazon, Zalando has been loss-making since launching in 2008 as it spends heavily on marketing to win customers, but is keen to show potential shareholders it can make money soon.

Ritter said an initial public offering was a possibility but declined to comment on reports that Zalando could be planning to list in the third quarter, telling Reuters: "Let's see what the future brings. We are focused on building the business."

Zalando, which changed its legal structure in December to one typically used by German listed companies, has picked banks to organize what could be Europe's biggest technology offering since 2000, people familiar with the plans said on Wednesday.

Figures from Zalando's biggest investor, Swedish firm Kinnevik, value the company at more than $5 billion, but analysts suggest it could be worth as much at $9 billion.

Buoyant capital markets have encouraged a flurry of e-commerce floatations this year, with Chinese juggernaut Alibaba the latest to announce listing plans even though high-flying tech stocks have faced a sell-off in recent weeks.

Shares in investor jump

Shares in Kinnevik, which have tumbled by a fifth this year in part due to worries over Zalando's slowing growth, jumped 7.1 percent by 0830 GMT.

Kepler Cheuvreux analyst Bjorn Gustafsson said Zalando's sales growth was better than expected, although he was slightly disappointed that the firm did not expect to break even in 2014.

"It's positive to hear that EBIT margin is improved significantly year on year and that it was due to factors such as higher fulfillment productivity," he said.

Gustafsson said he still expected a Zalando IPO to take place in the second half of the year and kept his valuation estimate for the company of 6.2 billion euros ($8.59 billion).

The Berlin-based retailer, whose rivals include Britain's Asos, started selling shoes in Germany in 2008 and now ships 1,500 different brands to customers in 15 countries.

Online sales of clothing and footware are growing fast, rising to about 9.9 percent of the European market in 2013 from 8.6 percent in 2012, according to market research firm Mintel.

However, pure online retailers like Asos and Zalando are facing increasing competition as big brands like H&M and Inditex expand their own e-commerce offerings.

Zalando said active customers rose to 13.5 million at the end of the quarter from 10.3 million at the end of 2013, while mobile devices now account for over 38 percent of traffic, with the international roll-out of a new app planned for the summer.

Zalando said the quarterly improvement in its earnings before interest and taxation (EBIT) margin - minus 6.5 percent in 2013 - was driven by higher productivity, increased marketing efficiency and a good start to the spring/summer season.

Supporting more efficient deliveries was the completion of extensions to a warehouse in Erfurt in Germany that Zalando said is now the largest e-commerce facility in Europe, while it is also ramping up operations at another new centre.

Zalando rejected criticism last month of its working conditions by a German television report, pressing charges against an undercover journalist who got a job at one of its warehouses for disclosure of company secrets.

Ritter said Zalando had made changes in response to the TV report, including providing seats for its logistic workers.

$1 = 0.7214 Euros

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