German Web Fashion Retailer Zalando Turns Profit Before IPO

Zalando SE, Europe’s largest online shoe and fashion retailer, reported a second-quarter profit of 35 million euros ($46 million), giving investors more evidence the company is controlling costs ahead of a potential initial public offering.

Earnings before interest and taxes broke into the black compared with a loss of 31 million euros in the year-earlier period, boosted by more returning customers and lower marketing costs. Sales rose 25 percent to 546 million euros.

“We made a very, very big advance in margin,” and took a “big step” toward eventually breaking even, management board member Rubin Ritter said in an interview. “We improved all our cost positions.”

Zalando has had “a very good season-start” in the third quarter and had correctly predicted trends, management board member David Schneider said at a press event in Berlin. The seller of garments ranging from from $2,000 designer dresses to Adidas AG German soccer jerseys may list between 10 percent and 15 percent of its shares in an IPO that could value it at 4 billion euros to 5 billion euros, people with knowledge of the matter have said. Management declined to comment on the timing of a share sale.

The profit “makes the IPO much more smooth,” said Bjoern Gustafsson, an analyst at Kepler Cheuvreux in Stockholm. Zalando may post full-year sales of 2.4 billion euros, he estimates.

Apple Parody

Zalando is introducing clothing from Top Shop and American Apparel Inc., and remodeling its site to include a “fashion feed” of recommendations based on what customers have bought. It also previewed today a new TV commercial parodying Apple Inc.’s 30-year-old “1984” spot, showing a model throwing a Zalando box through a screen.

As the company increases the rate of sales coming from mobile phone use, it’s giving German customers the ability to use photos taken on their own Apple devices -- say of an admired top -- to initiate a search of Zalando’s catalog and find one for themselves. Mobile accounted for 41 percent of traffic in the second quarter as its app was downloaded 3.8 million times.

In a bid to lower costs related to customer returns -- about half of goods sold come back -- Zalando ran a test in Germany, making returns less convenient for some customers and found that sales and profit from those buyers sunk, said Ritter. E-commerce companies “have to live with” high return rates as shoppers expect the convenience, he said.

The company, created from the Berlin-based Samwer brothers’ Rocket Internet Rocket Internet incubator, has picked Credit Suisse Group AG, Goldman Sachs Group Inc. and Morgan Stanley to manage the IPO, people familiar with the matter have said. Its investors include Sweden’s Investment AB Kinnevik and the Samwers.

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