Zalando profit warning sends shares below 2014 listing price

Shares in Zalando plunged by almost a fifth on Friday after Europe’s largest online fashion retailer slashed its outlook for the year as consumers retrench amid deepening recession fears.

The Berlin-based company warned that revenues may not increase at all this year following a much weaker than expected second quarter, an abrupt reversal from just four months ago when Zalando forecast growth of 12 to 19 per cent.

In a bleak warning issued after markets closed on Thursday, Zalando said that “management now expects macroeconomic challenges to be longer lasting and more intense than previously anticipated.” Its hopes of a “rebound in consumer confidence in the short-term,” had been dashed, the group added.

The acknowledgment from Zalando, which was among the beneficiaries as the pandemic forced more shoppers online over the past two years, is one of the starkest signs yet of the toll higher inflation is taking on consumers.

While Zalando still expects to be profitable, its predicament is a sharp contrast to the benign backdrop it has enjoyed since going public in Frankfurt in 2014.

Since its listing in Frankfurt, Zalando had trumpeted its annual revenue growth of 25 per cent. Last year, buoyed by the pandemic, its revenues surged 30 per cent.

However, even before Thursday’s warning, Zalando’s shares been under pressure, making it the worst performing member of Germany’s Dax 40 blue-chip index, as investors anticipated that shopping habits adopted during the pandemic may not last.

Friday’s fall takes the group’s shares below its 2014 IPO price of €21.50. After peaking at €26.4bn in July 2021, its market capitalisation has collapsed to roughly €6bn. The shares fell as much as 17 per cent to €21.10 on Friday before recovering somewhat to trade down 15 per cent.

The darkening outlook from Zalando also hit the shares of UK-listed fashion retailers Asos and Boohoo, who have already been hit by a combination of a reversion to pre-pandemic shopping habits, higher costs and squeezed consumers.

Asos shares were down 4.5 per cent and Boohoo’s were 3.6 per cent weaker in early trading in London. Like Zalando, the companies have also had to grapple with more competition, notably from China’s Shein.

Zalando expects operating profits of just €180mn to €260mn for the year, well below its prediction from earlier in the year. However, that forecast is based on a “significant improvement in profitability in the second half of 2022”, the company said, adding that it had embarked on a cost-cutting plan. In the second quarter it lowered its marketing expenditure, cut infrastructure investments and introduced minimum order volumes in 15 countries.

According to analysts at Deutsche Bank, the company’s new guidance implies that its full-year earnings will be some 90 per cent lower than previously expected.

The analysts remain positive on Zalando in the long run, cautioning investors not to “throw the baby out with the bathwater” as Zalando was “a quality asset with realistic earnings expectations at a cheap valuation”.

“While this new environment is creating a negative impact on our financial performance, our strategy and long term goals are unchanged,” said co-chief executive Robert Gentz.

With reporting by Jonathan Eley in London