Zozo Inc Ord

It is time. So we would like to begin Cezanne Inc's FY2023 second quarter earnings briefing. Today's session is only conducted online via live streaming. And the briefing session will take place until 5.35. And from 5.50, we will have a Q&A session for institutional investors on a separate Zoom channel. I would like to now introduce the participants. So we have the President and CEO Kotaro Sawada. Nice to meet you. Thank you for joining us. Executive Vice President and CFO Koji Yanagisawa. Thank you for your time today. So we have two presenters today. CFO Yanagisawa will pick it from here. Good evening. I'm the EVP and CFO, and I will take you through the financial results for the second quarter of the fiscal year ending March 31st, 2024. The presentation has already been uploaded to the IR site of our website, so please take a look. First, please turn to page six of the document. Let me explain about the three time need to close disclosures that we made today. With respect to our profit sharing with our shareholders, in principle, we take into consideration the trends in our business performance, financial situation, the future of our business investment plans, et cetera, as well as the internal reserve balance. On March 31st, 2023, Tokyo Stock Exchange published Action to Implement Management that is Conscious of Costs of Capital and Stock Price. In response, we have analyzed the current situation and the future forecast. At the moment, although our external ROE target is 30%, It's at minimum 30%. We have maintained a high ROE of 60.1% for the fiscal year ending March 2023. On the other hand, we have continued to accumulate internal reserves. Thus, our net assets have increased. Therefore, even if we take into consideration future business investment plans, indices that represent our return on capital, such as ROE, are expected to worsen. And if you turn to page seven, as such, we have determined that the improvement of our financial soundness beyond current levels would worsen the future capital efficiency. Hence, we will be giving back the surplus funds to our shareholders more actively than ever before. In addition to raising the consolidated dividend payout ratio, we will also bear in mind the liquidity of our shares and share prices to regularly consider the buyback of our shares. Going forward, we will aspire to achieve an average total return ratio of over 80%, including share buybacks over the next five years. Moreover, on top of increasing dividends and share buybacks, we will continue to achieve return on capital that surpasses cost of capital and also consider fundamental initiatives that will help us realize sustainable growth. On page eight, next, I would like to talk about the specific measures we will implement. First, we will be raising the dividend payout ratio. The consolidated dividend payout ratio target will be increased from 50% to 70%. As such, the dividend for the fiscal year ending in March 2024 will be 98 yen per share. Second is share buybacks. With an upper limit of 10 billion yen or 5 million shares, we will be buying back our shares. This will take place between November 1st, 2023 to March 1st, 2024. Third is cancellation of treasury stocks. We will be canceling 11,170,104 shares, on November 9, 2023. Should we buy back the maximum number of shares, the ROE for the fiscal year ending March 2024 will be 53.1%.

From here, I will take you through this quarter's highlights. During the second quarter of 2023, GMV grew 3% year-on-year to 258.7 billion.

GMV excluding other GMV increased 6.2% year-on-year to 241.6 billion. Operating profit increased by 6.3% year-on-year to 28.9 billion yen. And the operating profit margin remained the same at 12%. As was the case in the first quarter, GMV during the second quarter landed slightly behind plans due to impact from climate, but the cost decreased, so we overachieved on the operating profit. We have set new record highs both in terms of the GMV and OP in the first half of the year. In terms of our progress against plans, we have achieved 45.2% of our GMV excluding other GMV and 48.2% of the operating profit. Please turn to page 11. Here are the trends in consolidated business performance. During the second quarter, GMV excluding other GMV increased by 6.1% year on year. Due to the lingering summer heat, the sales during the launch of the fall winter season remains sluggish. However, like the first quarter, we have continued to receive higher levels of inventory. With respect to OP, We saw an increase in the acquisition costs and promotional costs in comparison to last year, and Scuba 3's costs have been reflected on the books. However, the growth of J&V and the advertising business resulted in higher gross profit. Therefore, the OP increased by 1.3% year on year. The operating profit margin for the quarter was 11%. Next, let me describe our business performance in detail. Please turn to page 12. Here is the increased decrease analysis of the OP. As of the end of the second quarter, when compared to last year's performance, the OP went from 27.21 billion to 28.93 billion, increasing by 1.72 billion. The factors that contributed to OPR. First, an increase in gross profits from increase in GMV of Zozotown and Yahoo shopping businesses, resulting in an additional $4.49 billion. advertising business resulting in an increase in sales of 0.78 billion, an increase in shipping income due to the rise in GMV resulting in additional 1.06 billion yen. Factors that decrease OP, there are four. First, higher fixed costs due to increase in number of employees in logistics centers resulting in minus 1.04 billion. increase in variable costs of fluctuate in proportion to GMV resulting in 10.1 billion yen or 1.01 billion, an increase in actual promotion related expenses due to acquisition and point related expenses resulting in 2.02 billion, increase in other expenses due to transfer of some outsourcing commissions to other accounts resulting in 0.53 billion. please turn to page 13 for the consolidated balance sheet. In comparison to last fiscal year, tangible fixed assets have increased, but this is due to the purchase of machinery, et cetera, for the new logistics center, Tsukuba 3. On page 14, you will find the trends in cash flow. Cash flow from operating activities included increasing expenses such as corporate taxes and prepaid expenses. So there's really no net increase in comparison to the previous fiscal year. Cash flow from investment activities included expenses we incurred this fiscal year and last to launch a new logistics center. And cash flow from financing activities included an increase in dividends paid. On page 24, here is a breakdown of the SG&A expenses. The SG&A expenses as a percentage of GMV was 22.9% increasing by 0.2 points year on year. The key reasons why SG&A expenses decreased are the average order value was higher in comparison to the same period previous fiscal year. So the packing and shipping expenses decreased by 0.4 points and we changed the accounting items for certain expenses. which brought the outsourcing fees down by 0.2 points. On the other hand, the SG&A expenses increased due to mainly three reasons. One, increase in web ads and advertising expenses for Zozofit, which we did not have previous year, and expenses related to Nihau Lab located in Omotesando, resulting in an increase in advertising expenses by 0.4 points. The second, rent increased by 0.1 points with the launch of the new logistics center. And thirdly, depreciation of material hunting equipment began with the launch of the new logistics center, increasing the depreciation and amortizing expenses by 0.1 points. Now turning to page 24, here are the trends in the actual promotion related expenses. In the second quarter, we spent 3.8% against the GMV for actual promotion expenses, which includes advertising and point-related expenses. As was the case in the first quarter, point initiatives and web advertising have increased in comparison to the same period previous year. On page 25, we have the operating profit and operating profit margin trends. In the second quarter, we tend to see lower average retail price and average order value. Thus, it's harder to secure operating profit margin. But this quarter, we have increased our spending on acquisitions and promotions in comparison to the same period last year. And we have also started to incur costs in relation to the new logistics center, Tsukuba III. Thus, the OPM was 0.6 points lower year-on-year, landing at 11%. Next, page 29. From here, I would like to take you through the KPIs for Zozotown. These results do not include Yahoo Shopping or the B2B business. The annual buyers increased by 80,000 to 11.55 million. of which active members increased by 160,000 to 10.51 million and the guest buyers decreased by 80,000 to 1.03 million since the last quarter. We have been continuously undertaking point reward campaigns for new members, thus we have seen a downward trend in guest buyers, but we have also seen a steady rise in active members of 160,000. Aside from new acquisition campaigns, we have strengthened our efforts targeting specific audience segments. On page 30, the number of shops in Zozotown As of the end of the second quarter, the number of shop was 1,581, a net increase of 17 shops since the last quarter. We welcomed 34 shops in the second quarter, including Muji, Versace, a luxury brand based in Milan, Italy, and Prada Beauty operated by Japan L'Oreal. So they have joined our fold. On page 35, This is the average retail price trends. The average retail price was 3,590 yen, up 3% year-on-year. The average retail price has trended up due to the rise in prices of some goods and the decrease in products sold at a discount, which pushed up the prices of both goods sold at full price and at a discount. However, the sales at the time of the fall winter season launch was weaker than the previous fiscal year. Therefore, the percentage rise in NRP is slightly lower than the previous few quarters. Next, on page 36, you will find the average order value, which was 7,894 yen, up 4.3% year-on-year. In addition to the rise in ARP, the number of items purchased per order has also increased, resulting in higher AOV year on year. The reason why the items purchased per order has increased is due to the year on year increase in the free shipping over 10,000 yen campaigns that we have conducted. This has resulted in more items being purchased together on the day of the campaign. Lastly, on page 38, here you will find the consolidated business forecast and dividends for FY2023. No changes to the business forecast, but the dividends will be 98 yen per share for the fiscal year. This concludes my presentation. President Sawada will take it from here. So from my end, I would like to discuss or introduce a couple of topics. First of all, at the beginning of this fiscal year, we introduced this slide. Of course, we'll have Zozotown and Yahoo Shopping. We will continue to sell products. And that's our main focal area, however, going forward. We want to also communicate and deliver apparel mainly to expand our portfolio. And if there are any progress, we have some progress to share with you and some news. So please introduce some of our key topics. First, starting with produce. So we have been take undertaking research through our subsidiary calls us on next and we have developed a textile that changes it's 10 temperature responsive and so it changes the way it looks depending on the temperature. And last month. At the total number we had an exhibition as well, and thank. and fortunately. It has gathered a lot of attention. We have not, we're not there yet in terms of manufacturing of clothing yet, but we have received a lot of interest. And we are working with Tokyo University, University of Tokyo and Hoso, who create Nishijin Fabrics. So we, it is a joint research project, and We're also developing fabric that creates sound, maybe not a speaker, but something that creates sound as well. We're not there yet in terms of creating a product out of this, but we are making progress to start introducing this to the market. Moving on to... This is another effort to produce, made by Zozo. This is a OEM for brands. And not only do we manufacture products for brands, this is made to, we manufacture after we receive orders. And we can ship within 10 days at the earliest after an order is placed. And we started this last fiscal year, last year. And in terms of the first half of this year, we actually multiply the number of production types to 1.9 times nearly doubled. And brands do not have to carry any inventory, so we have received positive impact from the brands, positive feedback from the brands, so we want to continue to grow in this area. Another effort is for produce is utilizing the Made by Zozo system to develop products. And this is just one example. So we can actually use PET bottles and other plastic collected and recycle them to create t-shirts. So we provide the t-shirts and the brands can actually add designs to this. So this is something that we've undertaken. Of course, we have multiple brands who took part, and we tried to live in this effort. And this has also received positive feedback. The T-shirts that we're all wearing today has been developed through the Made by Zozo system, We want to, of course, reduce environmental impact. And this is part of our sustainable efforts. And this is something that we want to continue to explore. We're very interested in continuing to exploring this. And of course, we want to continue to build in this after listening to the brand's feedback as well. And in terms of communicate, this is before we sell. But in terms of communicate, we are offering a service called Founds. So the shop staff can update their styling through their smartphones, and they can share that in their own EC site and where, as well as the town, and not only can you post, sorry, and where, And you can see how much it contributed to sales, how many people are looking at the styling as well. The number of accounts, we've actually, the number of accounts has multiplied by 1.5 times. So it is... has received great feedback from the brands as well, has been widely accepted by the brands. And in terms of selling, Yanagisa mentioned this earlier, but we have been long waiting for Muji to join our platform. And finally, we are able to sell Muji products on our Zozotan platform, of course. Now that they have joined, we want to try to live in this effort by changing the boxes in which we deliver Muji products. But we also want to continue to implement different initiatives to support this. And in terms of cosmetics, we are welcoming different brands steadily. And on Zozobilla, we welcome Versace. Moving on. to sell, another effort to sell is digital fashion. So a lot of, this has been covered by the media, but we don't have a clear business model yet, but for in this area, I think it's, we believe that it's important to just give it a go, just make an effort. So we want to explore this area, we launched a digital fashion brand called revinyl. And we are selling this in the digital fashion platform dress x in the US. So we don't have any concrete results to share with you yet. But this is another area that we want to try and learn more from. And next, This is the largest topic, but in terms of, this was covered in the media on news programs, but Tsukuba 3, so the base Tsukuba 3 is now up and running. We have a video that will explain this better, so please take a look.

It's about five minutes.

we started by imagining what kind of unique logistics base Zozo should realize as Japan's working population continues to decline rapidly. It was said that automation would be difficult for Zozo because we handle a wide variety of products such as clothes, shoes, and cosmetics. But as Zozo base took about three, we overturned such convention and achieved a 30% reduction in manpower. This is a robot called T-Sort. First, we carefully check products we see from brands one by one in the inspection area. And then they are sorted by ease of storage. Until now, staff used to sort the products by hand into a few dozen categories. But when there are so many different types of items to sort, it's hard to know where to put them. We wanted to make it easy for staff working there for the first time to be able to source simply by placing the items on the table. That is why we introduced T-Sort. Products sorted by T-Sort are automatically transported to the storage area on the conveyor. This conveyor connects all floors from the fifth to the first floor. Ordered items are picked up from the storage racks and transported together to the shuttle and server. The shuttle and server system can simultaneously store over 80,000 items temporarily and automatically supply them to the shipping area. The system then sorts the goods into various groups with the highest priority group being delivered to the shipping area. First, previously we had to manage shipping priorities manually, so this has made our work a lot easier.

This pocket sorter separates the products supplied by the shuttle and server into individual orders.

In fact, Zozo is the first company in Japan to introduce pocket sorters. Products delivered from the shuttle and server are put into pockets one by one. For example, if a customer purchased three items, the products are put into pockets one by one, and the order of the products will change as they travel along the rail. Finally, all three of the customer's items are delivered to the packing staff Because items are delivered as bundles to the packing staff, this reduces the workload considerably. This involved trial and error, but we are very happy that we were able to introduce this system. The final step is packing. Here, the system selects the most suitable material for each product. Then, while imagining the smiles on customers' faces, the products are carefully placed into the box by hand. The lid is automatically closed and shipping label attached.

The package is now ready to be shipped. Zozo Base Scuba 3 is our fifth logistics center.

The electricity used at all of our logistics bases, including at Tsukuba 3, is derived from renewable energy sources, making them environmentally friendly. We did not want to build a logistics base just to save manpower. The robustness system introduced at Tsukuba 3 will make our staff's work more enjoyable than ever before. And creating such a future will help put the biggest smiles on our customers' faces. By combining people and technology, we will be able to bring joy to a great number of people. So the base Tsukuba 3 is the crystallization of this vision.

Inspire the world, deliver joy every day. So that was an introduction of Zozobase SCOBA 3.

We also have a couple more topics we would like to introduce. This one utilizes Zozosuit.

It's a new way to use them. We have released information about this, but so scoliosis.

Oftentimes, people develop scoliosis during puberty. And during their growth spurts, their spine becomes a little bit distorted. So we can utilize those as a suit, apply the suit technology. to detect this early. And we have been conducting research with the University of Tokyo over the last couple of years. They came to the, we had subjects come to the studio and measure whether their spines are aligned or not. And this will help people developing sclerosis detect it early, remotely. And this is still in research stages, but we know now that it can be applied for this purpose. So going forward, this is a very accurate measurement of people's bodies. So going forward, we know that there are other ways to apply our technology. So based on this, we want to think of ways to develop new businesses outside of the fashion world. And with respect to ZZ Fit, it is doing well. This is something that we're only offering in the US at the moment, but in February this year, compared to February this year, the number of orders have tripled. So we are quite sure that the demand is there. We were able to confirm that. So we're not going to continue to invest heavily. We're going to invest efficiently, do a lot of trial and error, make sure that it's disciplined, but the situation is improving for sure. That concludes my portion of the presentation. I just wanted to introduce a couple of topics to you. Thank you. This concludes Zoso's FY 2023 second quarter earnings briefing. Thank you for joining us today.