Zalando Raises 2016 Forecast After Turning Surprise Profit

  • Online retailer sees operating margin of 5% to 6% this year
  • Profitability target raised second time amid reins on costs

German online apparel retailer Zalando SE raised its profitability forecast for a second time this year after it turned an unexpected third-quarter profit amid tough weather conditions in Europe by managing delivery and marketing costs.

Operating margin this year will be 5 percent to 6 percent, Zalando said in a statement late Tuesday, upping a prior range of 4 percent to 5.5 percent. Third-quarter earnings before interest and tax were 8 million euros ($8.8 million) to 25 million euros -- a surprise for analysts who expected a 12 million-euro loss. The shares rose as much as 4.3 percent in Frankfurt.

“We’ve been able to get more efficient across our different cost lines despite the heavy investments we’re making,” co-CEO Rubin Ritter said. “The fashion retail market was really weak in September” with German sales in the sector down more than 15 percent, he said.

Berlin-based Zalando used short lead-time purchasing, partly enabled by software that can signal when to order goods and when to hold off, which led to less discounting amid unseasonably warm late-summer weather in Europe, according to Ritter. The company has also been investing in warehouse capacity, fashion shows and technology designed to get apparel into shoppers’ hands more quickly, including an initiative in Berlin to ship goods from an Adidas AG store directly to customers who order from the online retailer’s site.

Third-quarter sales rose 16 percent to 18 percent to a range of 827 million euros to 841 million euros, slowing from the second quarter’s 25 percent growth rate. The retailer reiterated its forecast for full-year sales growth at the upper end of a 20 percent to 25 percent range.

“Strong operating leverage continued even if sales growth was lower than in the second quarter,” wrote Claire Huff, an analyst at RBC Capital Markets. She said the fourth quarter probably has had a stronger start as Zalando added new brands such as Abercrombie & Fitch and new marketing campaigns in markets including the U.K.

Zalando plans to report full third-quarter results on Nov. 10.

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