Zalando Signals Spending Increase as Profit Comes Under Pressure

  • Shares drop as much as 5.3% in Frankfurt, most in two months
  • Easter's fall during first quarter hurt revenue, MD says

Zalando SE, the German online apparel retailer, signaled it may accelerate spending on marketing and technology in coming months, putting profit targets under pressure.

The company is keen to invest in opportunities to boost sales and improve the speed it can get goods to shoppers, Managing Director Rubin Ritter said by phone Tuesday. His comments came as Zalando reported a steep drop in first-quarter profitability and sales that missed analysts’ estimates, sending the shares down as much as 5.3 percent.

Zalando will be hard-pressed to meet profit expectations while warding off competitors including Inc., whose Amazon Fashion site is expanding in Europe. Margins have narrowed and capital spending this year will increase to 200 million euros ($226 million), or about 5 percent of sales, compared with 60 million euros last year, or about 2 percent of revenue.

The drop in first-quarter earnings “is based on group’s investments in IT and the platform strategy,” Baader Bank analyst Volker Bosse said in a note.

Revenue Miss

Zalando held back on technology and marketing spending in the first quarter, but could increase those investments in coming months, Ritter said.

“If there’s an opportunity to accelerate we’ll take it,” he said. “We kept our powder dry for the second quarter.”

The company reported an adjusted operating margin of 1.5 percent to 3.5 percent for the period ended in March, down from 4.5 percent in the year-earlier period. That’s also shy of Zalando’s full-year target of 3 percent to 4.5 percent margin.

Revenue was 788 million euros to 801 million euros, short of the 833 million-euro average estimate. Shares of Zalando were down 2.4 percent at 29.28 euros at 12:17 p.m. in Frankfurt.

Ritter blamed the sales miss in part on European shoppers’ Easter vacations that crimped orders -- the holiday occurred in the second quarter last year.

Revenue has “picked up speed” in the current quarter, the company said, reiterating a forecast for sales growth this year at the high end of a 20 percent to 25 percent range.

Graham Renwick, an analyst at Exane BNP Paribas, said consensus estimates for EBIT margin this year are 4.1 percent and that the first quarter has historically been marked by a low margin.

“Their fiscal year guidance is very wide, so it’s difficult to ascertain at this stage where they will deliver in that range,” he said.

The company plans to report full first-quarter results on May 12.

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