Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Just as fashion trends often surprise, so does Zalando SE.

The German online fashion retailer said in November that full-year sales growth would be towards the higher end of its 20-25 percent range. On Tuesday, as it reported results for the final three months of its financial year, it said the outcome is likely to be more around the middle, at about 23 percent.

XXL Sales
Zalando's forecast revenue in its 2016 financial year will dwarf that expected from rivals Asos and Boohoo
Source: Bloomberg

That might seem like nit-picking: it's still the sort of growth rate that most store-based retailers would kill for.

But smaller rivals Asos Plc and Boohoo.com Plc both recently upgraded their expectations for full-year sales growth, and both are projecting ranges that would put them ahead of Zalando. In comparison, its update looks distinctly disappointing.

Falling Behind
Zalando's forecast for sales growth in its latest financial year lags projections from its rivals
Source: Bloomberg
Boohoo excludes the acquisition of Pretty Little Things

With an already big sales base, it's hard to keep up heady absolute rates of growth. What's more, Zalando looks quite exposed to the trend of women falling out of love with new clothes, which is already affecting retailers from U.S. department stores to the British high street. Its European online competition still has plenty of low-hanging growth to go for.

No wonder Zalando was the worst performer on the Euro Stoxx 600 in early trading. 

Even the benefit of improved guidance on margins may prove short-lived. Zalando raised its projections to a 5.6 percent to 6.2 percent range on an earnings before interest and tax basis, a slight increase from previous forecasts and a big step up from 2015's 3.6 percent. The uplift reflects efficiencies it's been able to deliver from its past spending on marketing and technology. Neither Boohoo nor Asos were able to deliver margin upgrades, despite their faster sales growth.

Catching Up
Amazon's push into European fashion threatens Zalando's perch near the top.
Source: Euromonitor

But as Gadfly has argued, Zalando faces competition from Amazon.com Inc., which is trying to build up its fashion business. This is a particular risk because Zalando sells fewer own-label garments than Asos and Boohoo and relies more heavily on third-party brands, a similar model to that of the U.S. giant.

That means Zalando must keep investing to stay ahead of its muscular rival. Indeed, this is a challenge for all online-only retailers, as well as European store chains that are beefing up their internet-selling capabilities.

Cyber growth comes with a cost. Zalando said Tuesday that it would open a warehouse in Sweden in 2017. It has already opened a similar facility in France. At least it's not avoiding these necessary expenses, but it doesn't have much choice -- Asos said last week that it would be stepping up investment.

Out of Step
Zalando deserves its lower p/e ratio in part because more exposed to Amazon's threat
Source: Bloomberg

Even after today's fall, Zalando's shares are up an impressive 27 percent over the past year. But Asos is up 85 percent, while Boohoo has skyrocketed by almost 300 percent.

Consequently, Zalando's forward price to earnings ratio trades at a discount to both. That looks justified given the more muted growth outlook, and greater exposure to the threat from Amazon. This might not be the last surprise for investors.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net