Zalando Tech Team Plans for Boom as Banks Said to Pitch IPO

Zalando GmbH, the German online clothing retailer that’s said to have been contacted by banks about the possibility of an initial public offering, plans to relocate its technology staff for a second time in a year to provide scope for a 10-fold increase in sales volume.

Workers at premises near Berlin’s Treptower Park will move before the end of the year to an office more than twice the size near the city’s Alexanderplatz, Chief Product Officer Christoph Lange said in an interview. Zalando plans to add about 150 programmers to the current 350 through the end of 2014, he said.

“This is getting too small,” Lange said as he toured the floor where a team of programmers wearing jeans and sneakers works on processes such as improved tracking of packages. “In the new office, we will have more space and will have more areas with sofas where people can sit together and exchange ideas.”

The company’s technology infrastructure has to be able to support transactions that are 10 times the current level, said Chief Information Officer Philipp Erler. Revenue at the Berlin-based business more than doubled last year to 1.15 billion euros ($1.5 billion), making Zalando the biggest online fashion retailer in Europe, ahead of London-based Asos Plc.

The planned expansion “is something that makes us quite confident about our growth strategy,” Erler said.

No Plans

Founded in 2008 by David Schneider and Robert Gentz with the backing of the German Samwer brothers, Zalando has been regularly touted by the media as an IPO candidate, even though it has yet to become profitable.

Banks have been reaching out to the company regarding such a possibility, according to two people familiar with the matter, who declined to be identified because the matter is private.

Still, the online retailer currently has no plans for an IPO, spokesman Steffen Heinzelmann said.

The company may go public in the next one-to-three years, according to Christian Schulze, assistant professor of marketing at the Frankfurt School of Finance and Management. The business model is attractive for investors as it’s a high-margin business, the company is doing “a good job” at building a brand and the technology “will be on their side too,” he said.

Zalando co-Chief Executive Officer Rubin Ritter said in an interview in February that the retailer isn’t for sale and its shareholders are “very happy” with their investment.

Kinnevik Option

Those investors include Investment AB Kinnevik, DST Global LP, JPMorgan Chase & Co. and Quadrant Capital. Kinnevik said today that it exercised an option to acquire an additional 3.5 percent for 100 million euros, boosting its stake to 38 percent and implying a valuation for Zalando of about 2.9 billion euros.

Asos, the U.K.’s largest online-only fashion retailer, has a market value of about 3.3 billion pounds ($5 billion), more than six times its last-reported annual sales of 552.9 million pounds. The shares have more than doubled in the past year. Asos, which made a pretax profit of 41 million pounds in fiscal 2012, targets 1 billion pounds of annual sales by 2015.

Zalando’s operations in Germany, Austria and Switzerland broke even before interest and tax last year, though the company posted a group Ebit margin of minus 8 percent of sales because of the cost of opening business in additional countries.

The company will focus on countries where it’s already present this year, Ritter said in February.

Customers returning about 50 percent of the products they order will be the main challenge for Zalando’s profitability in future, according to Schulze.

Facebook, Twitter

“Handling returns in a smart way and trying to convince customers to behave in a way that is still profitable for the company is going to be the main thing that Zalando has to focus on in the future,” Schulze said. “Getting better at managing returns is also a good way to improve profitability. We haven’t reached the end of what is possible yet.”

The online retailer is seeking to increase the ratio of shoppers that return to its website by improving the customer interface, suggesting more suitable products and enabling faster processing of transactions, the Zalando executives said.

The company also intends to integrate social media information from Facebook Inc. and Twitter Inc. to better tailor offers to people visiting the site, Lange said.

Zalando, which sells designer clothing from labels including Michael Kors and Patrizia Pepe as well as Ray-Ban sunglasses, plans to offer a mobile application in the 13 markets it serves outside Germany in coming months, Lange said. Those include the U.K., France, Switzerland, Spain and Poland.

(Updates with Kinnevik stake option in 11th paragraph.)
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