To start ZOZO's third quarter financial results Q&A session for institutional investors for FY 2023, ending in March 2024. We have on the call, Director, Executive Vice President, and CFO, Koji Yanagisawa, who presented today during the announcements session. We also have Director and COO, Fuminori Hirose, and VP of Strategic Planning and Development Department, Yusuke Kobayashi. These three members will be taking your questions today. The session will last until 6:10 P.M. If you have questions, please raise your hand with the button at the bottom. When you're appointed, please unmute, inform us of your company, your name, followed by your questions. Mr. Kawan0, go ahead.
Do you hear me okay?
Yes.
Hello, this is Kawano from Goldman Sachs. I'd like to ask two questions. One is more for confirmation.
Yanagisawa-san, you talked about the OP, and then you trended higher than the plan, and I believe that you said the same for the first half. But if you just look at the third quarter, GMV and how much costs are incurred for this, and would you be able to sort of, you know, put that into perspective once again, please?
Sure. So GMV and OP of the third quarter, how do they look like against the plan? Is that your question?
Yes, and then I also want to know about the cost. Because, there's logistics related costs, and you said that that was factored in, so I, I believe that, that is in plan. But now, the operating efficiency of the inventory probably worsened.
The first impression I had when I was listening to you speak about this is that maybe this was not as planned.
Okay. So GMV, for this third quarter only, if you just look at the third quarter, it was in a favorable state. And then for OP, it is generally as planned. And then for the advertising expenses that are generally as planned as well. And then, what was inspected is that, as you mentioned, the excess—the, there was more, there was more inventory, and then slightly the operating efficiency came down. But at the moment, it's not a major gap that we're seeing. I guess that's how I would put it.
Got it. Thank you. So, so if you just look at the third quarter only, would you say that the OP, OP was in a favorable state?
Slightly.
Well, I guess I think it was okay. Wasn't too good, though. Okay.
My second question is that for the third quarter, you were impacted negatively by the warm winter, and the profits were a bit sluggish. But I have a feeling that your GMV was pretty good. So what worked this time for you to generate that level of sales? And do you think that this is sustainable?
So, Hirose-san, would you be able to take that?
Sure. Thank you for your question. For the third quarter, in November, for main ZOZOTOWN platform, we had Black Friday promotion, and that really contributed to the increase of the sales. And I'm talking about the orders.
So, we had Black Friday promotion in the latter half of November, and then the orders for that was in December, so that was positive. And then, the orders for November was okay level.
So when you... Okay, so I understand about the orders, but outerwear was a bit difficult to sell, I believe. And then, how the brands are moving, I want to hear more about that. And, may I ask why you were able to get this much GMV?
So, autumn and winter clothes, the heavy garments, were a little bit slow, but the brands also struggled with the warm winter. But they decided to issue coupons and also engage in more active promotions.
Okay, and then my third question... I'm sorry, I said I was going to ask two questions, but this is my third.
So I want to ask about Yamato Transport. So previously, you talked about in-house efforts, and then this time around, you also talked about that, and also you talked about slow delivery, and then you also talked about the price change. I believe that that was mentioned before as well. So are you thinking of changing them in an agile manner so that you'll be able to sustain the profitability? What do you mean? So there are 1, 2, and 3 measures. So are you going to, is it correct for me to understand that you're going to implement all of the 3 measures so that you'll be able to sustain profitability?
Right. So we're going to engage in those 3, mainly, so that we can sustain profitability.
So in case you can't do number one, for example, would you implement the second and the third measure?
If we cannot do so much of number one measure. Right. Right. So the balance, we haven't really thought of the balance between the three measures yet?
Okay, I understand. Thank you.
Thank you.
Well, thank you very much for your question. Let's go to Yamaoka-san.
Hello, Yamaoka from Nomura Securities. Hello. So I, I do have a couple of questions. My first question is about GMV. I wanted to get more perspective on that. So when you look at the first half, the actual promotion expenses, percentage-wise, came up, and the absolute value also came up for it. And then when it comes to momentum of sales, the ratio of promotional expenses didn't come up for the third quarter.
But in terms of the momentum for GMV, I believe that the third quarter was quite good compared to the first half. So in the first half, you were using quite a lot of promotion expenses, but it was kind of lackluster, and then maybe for the third quarter, you did better. Would you be able to comment on that?
Right. So, first and the second semesters, I think that is impacted by the average order value, because for the second half, that's autumn and winter, so the average order value naturally goes up. So the cost ratio will be naturally higher for the first half, because the average order value will be lower for the first half. We didn't do anything different, majorly.
So you're not saying that the promotion efficiency has risen or anything for the third quarter?
So points for the new registration, we've had it in the first half as well, so we didn't make changes there.
So in the explanation by Yanagisawa-san, he mentioned... Is it safe for me to say that multiple measures are really adding up to fruition?
Right. So the number of members has come up, and then we've decided to give points to those that were dormant. So the active members has become more dynamic as well.
So I have two more detailed questions. They're about SG&A. So there's logistics-related costs under payroll, and then with lowering operating efficiency, this came down. And then, is it safe for me to think that this is only for this seasonality? Because, you know, you're handling more heavy garments, or is it going to continue?
So, we have more inventory coming in. It's actually more than we expected from our past experience, and that led to lowering of inventory turnover. And then this is not going to be better dramatically in a short period of time. So I wouldn't say this is a one-off thing for a short period of time. I think this is going to stay a bit longer. So that's why we decided to have another logistic base for inventory storage.
But I have a feeling that that was also excess inventory was coming from a warm winter as well. Am I right?
Yes, I think so.
But some parts of it are more fundamental?
I think so.
And then I have another question about SG&A. It's others.
So for the third quarter, I feel like that has risen comparatively more than other periods. And then you talked about purchasing of equipment. Is it? May I ask the impact of that, the size of the impact? And is it safe for me to think that this is only for this quarter?
I'd like to answer that. So in the third quarter, this was the expense that we incurred for a sizable site. So it's safe for you to think that this will not last, or this will not go into the following periods. And it's about several billion JPY, and then that pushed down our profitability, and it pushed up the costs.
I'm sorry, just how, how much? Go ahead. You said billions. How, how much is that?
It's about 1 billion JPY, a little over 1 billion JPY.
Okay, clear. Thank you.
Yamaoka-san, thank you.
Next, Kazahaya-san, go ahead.
Hello. Two questions. First, until the third quarter for profitability, I think you progressed steadily, and I feel like you've been able to sustain the momentum from the first half, and then maybe you can utilize this profitability that was higher than the trend. Is there anything you'd like to do with this higher profitability? In terms of measures you can take with it?
So we do have the savings, but as you all know, from January and onward, we expect warm winter to continue on. So I believe that continued promotions are going to be necessary for us. So I don't know how to put this in words, but so it's not like we have a lot of money in our wallet that you can use for new things.
We're not that optimistic.
So in the first quarter, you talked about the light users, and you may be able to relatively speaking, stimulate those light users by way of implementing different types of measures. Are you going to do something about them?
So actually, in the third quarter, we did implement promotions for light users, and the result of that is that we've been able to recover the number of active members. So I believe that we're starting to see the result of that.
Thank you. My second question is kind of building on the questions from Kono-san and Yamaoka-san. So I just wanted to organize my thought about the increased inventory. So the brands have given you more inventory, and as a result, that led to higher GMV for you.
So when you think about the relationship, the correlation, maybe in the past, is it?
I feel like we can say that the efficiency was too good in the past. So you're using the word aka, deteriorate or worsen. I'm not really sure if that word, because that word in itself has a negative connotation, so it may be taken negatively.
And the reason why I'm saying this is because, Yanagisawa-san, you talked about Tsukuba logistic base, and then I believe that, you know, Yamaoka-san's intention is that, you know, you have strength of your channels, and then because of the strength of the channels you have, you're able to gather more inventory, and then, of course, that's going to push up the cost.
But if that leads to higher GMV on the net, on that basis, you're able to turn that into profitability. So that's one way to think about it. But you're Yanagisawa-san, you were talking about Tsukuba base. There's going to be more volume, and then if you try to have a certain efficiency for the medium term, you probably need to have a base. So I feel like these could be, like, separated as topics. Was my interpretation right?
So I'm sorry, I chattered away, but that was my second point. So when we opened Tsukuba 3, we could cover JPY 700 billion worth of inventory. You may wonder why, why are we building Tsukuba 4? Well, the background of this is that...
So the volume was coming up dramatically, and then because the heavy garments were building up, and then the inventory turnover was worsening. And then this is, relatively speaking, a short-term, more of a short-term issue. And then there's another thing, which is probably more fundamental. So the brands have given us inventory that are called carry inventory, and then we've had that in the past, but the volume of so-called carry inventory is coming up. So I talked about increasing the or enhancing the consignment inventory quality. That was what I was referring to. So the inventory turnover rate of Tsukuba 3 is not at such a good state, so that's why we decided to add on Tsukuba 4.
To follow up on that, the rent will start from 2024.
How much is that cost, annually speaking? Would you be able to answer my follow-up question, please?
Sure. I'd like to give a range therefore, to answer that question. For the rent expense, it's about JPY 800 million-JPY 1 billion. That is the range that we're expecting. And then for the depreciation, unlike Tsukuba 3, this new base is going to specialize in inventory storage. So what it means is that we don't have to have expensive material handling equipment in there. So I'm looking at a little, less than JPY 100 million.
Did you say JPY 100 million per quarter?
No, no, no, annually.
Got it. Thank you. That's all from my side.
Kazahaya-san, thank you very much for your questions.
Next, Kanamori-san, go ahead.
Hello, Kanamori from SMBC Nikko. I have two questions.
My first question is like a continuation of Kazahaya-san's question. I wanted to ask more about the inventory turnover rate. So the amount that comes into the inventory, is that? That's decided based on the dialogue you have with the brands, so that I thought that the logistic base, logistic-related expenses does not worsen because of it. But for the carry inventory, would it be possible for you to return the carry inventory? Or, is there, like, extra work that your staff need to do because there's too much carry inventory that just stays in your storage, and then therefore you can't really work with the new inventory coming in? I just couldn't really visualize what sort of work goes down in your bases.
I'm sorry, we're harping on this issue, but would you be able to answer that?
So, when the inventory level goes up, the efficiency of the operation will go down naturally at the bases. Because, when you have more inventory, then you have to go up the shelf and then get stuff from the higher racks, or you have to, you know, sort of find your inventory from lots of inventory. So when there is more inventory, then naturally the number of staff will increase. So that's the fundamental agenda or issue. So that's why the number of staff at the bases has come up. And then, the increase in the number of bases is to improve the situation, meaning we're not going to have such a high level of inventory.
So we decided to have another base just to store inventory in Ibaraki, so that it wouldn't be too full. So we wanna sort of reallocate and dilute the level of inventory. So rather than to increase the number of staff, what we want to do is to sustain a certain level of efficiency, operating efficiency, by bringing down the inventory level of the bases. And we believe that that's going to be lower in cost, based on the simulation we've done.
Got it. Thank you. So the brands give you the inventory, and then the volume of the inventory that they give you, that's based on the dialogue you have with them. So... that's something you can expect, but when the sales come down, would it start to look a little bit different than what you expect?
Actually, no.
So of course, we speak to the brands, and have discussion on how much inventory they give us. But once again, this is consignment business, so naturally, we're going to have brands that decide to give us more. So this is unexpected inventory on our end, we've always had this type of inventory. And then we are planning with that as the premise. But yeah, the level of that is becoming more than what we expected.
And then those that stay in the storage as inventory, we call, you know, carryover or carry inventory. Maybe the brands are sort of using your bases as their warehouses. How do you decide on how to return them?
So that's based on the dialogue we have with the brands.
Of course, we have the decision power to a certain degree, and then, you know, we, we have a conversation, we discuss this with the brands.
But the amount of the inventory coming in from the brands and the carryover inventory and the volume of it, rather than to have a dialogue with the brands about these topics, you decided to focus on having more bases and improving the efficiency of the operation?
We need to do both. So we cannot accept further deterioration of operating efficiency. So yes, we'd like to have continue to have that dialogue with the brands.
Okay, next is Yahoo Shopping. In the third quarter, the sales really had a momentum. What sort of campaigns work for you? And then for regular campaigns, I believe that you only have one campaign in one semester.
Is this the type of momentum we can expect going forward?
Thank you. Yahoo Shopping has been in a good state. We implemented promotion called Honki no ZOZOMATSURI, or Serious ZOZO Festival.
And then this Honki no ZOZOMATSURI, are we going to hold this on a regular basis?
I believe that's the question. So I think that's going to be in balance with the promotions, promotional strategy of Yahoo.
Okay. Are you planning to talk about holding it again in the fourth quarter? Is this something you can talk about?
That all depends on Yahoo Shop, that all depends on Yahoo Shopping.
Thank you.
Kanamori-san, thank you very much.
Next, Murata-san, go ahead.
Hello, do you hear me okay?
Yes, we can hear you just fine. Thank you.
Thank you very much for detailed explanation.
My name is Murata from JP Morgan. I just have, like, a couple of questions. I have three. The first one, I'm sorry, we're really success on this one, but this is about the inventory. So, based on the explanation you offered us before, the brands are becoming a little bit prudent about the first orders. So it seems like they control the amount of inventory that they gave you, and they, you know, were deciding to give you less inventory. But are the dynamics changing? Is it because your presence has enhanced, and then that's why? Is that the reason why you're getting more inventory?
Well, thank you for your question. So, the brands were quite careful not to manufacture too many items.
But this time around, we were hit with the warm winter, and then even the physical stores or brands are a bit sluggish, and that's why they're giving more inventory to us. And then, on ZOZOTOWN side, we struggled to sell heavy garments for autumn and for winter. So, that's probably more seasonal factor that's more short term. But going forward, you just mentioned that a high level of carryover inventory is going, is likely to continue. That's regardless of seasonality. I'm sorry, could you repeat your question?
So, so you mentioned that the inventory level is at. So you mentioned that there's a possibility that the inventory level is going to remain high, and that's why you decided to have another base for storage.
Then what you said, Hirose-san, is that, you know, the reason why this is happening is because of warm winter, because the brands are a bit struggling to sell in physical stores, and they're, that's why they're giving you more inventory. I felt it seems to me like that's more seasonal. Would you say that in the long term, you're expecting to have high, or you're expecting to continue to have higher level of inventory?
Yes, I think I referred to that already. So the physical stores are a little bit sluggish, so the balance of, you know, the physical stores and online stores for the brands is something that, you know, they're looking into. So going...
Then, you know, we can have a dialogue with the brands to have better efficiency to, you know, maybe they can have markdowns or maybe they can, you know, start to sell more on the physical in the physical stores or run promotions.
I want to ask about SG&A compared to last year. You mentioned that the items are more expensive for the second half.
Naturally, you know, the ratio comes down for the second half. But if you compare ourselves to the same period of last year, the ratio has been better.
Is that because the Black Friday promotion did well and other promotions did well? Is that the reason why that ratio is in a better state than the same period of the last year?
Yes, I think it's correct to interpret it that way.
And then PGA, did that contribute positively than last year?
No.
So it's the same compared to last year for PGA?
Yes.
And I'm sorry, my third question is this: cosmetics. I wanted to get a comment on the progress of cosmetics. So, from November, if I remember correctly, the review feature came in, and then lots of brands have come on to the platform as well. So, you know, what are some of the responses you've got so far after that?
So ZOZOCOSME, against the budget, it, we are kind of struggling. Last year we had points and promotions that we're saving up this year. So that's why, with the onboarding of new brands, we are trying to grow with that. And then the users are responding favorably to the review feature.
I see comments saying, "Finally, there is the review feature on the town." So I think that's going to be a tailwind for us. We don't have enough reviews, though. So what we're trying to implement are to give points to people that review. And then we also want to, like, give numerics to the effects of the reviews as well.
Got it. Thank you.
Murata-san, thank you for your question. It's past the ending time, so I'd like to ask one last person to ask questions. Oliver, go ahead.
Hi. Hi. Thank you, Oliver Matthew from CLSA. I have two questions. First, to follow up on the cosmetics. Could you comment on how many brands you have added or how many you're expecting to add, say, in the next year or two?
Hi. Okay. Thank you. Second question. AI, could you comment, maybe at the high level and more detailed levels, what impact you hope this could have to help your business, in the future? And, maybe some concrete steps you're currently taking. Thank you.
Hi. Thanks. Just to follow up, I mean, in terms of magnitude, you know, do you think this can really cause a step change to your business growth when you are properly implementing AI as far as you know about it so far?