Zalando profit warning sends shares below 2014 listing price

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

The Berlin-based company’s stock, however, finished the day only 2 per cent lower at €25.14, after it warned that revenues may not increase at all this year.

This followed a much weaker second quarter than expected, 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.”

Hopes of a “rebound in consumer confidence in the short-term” had been dashed, the group added.

The acknowledgment from Zalando, which had been among the beneficiaries of the Covid-19 lockdowns 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 after going public in Frankfurt in 2014.

Since its listing, Zalando had trumpeted 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 had been under pressure, making it the worst performing member of Germany’s Dax 40 blue-chip index, with investors anticipating that shopping habits adopted during the pandemic may not last.

Friday’s fall took the group’s shares below its 2014 IPO price of €21.50 before the late-afternoon revival.

After peaking at €26.4bn in July 2021, its market capitalisation collapsed to roughly €6bn during the day as the fell as much as 17 per cent shares to €21.10 at one point.

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 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.

Additional reporting by Jonathan Eley in London

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