The state of emergency had been lifted and people's traffic had begun to recover. However, brands proactively provided us with inventory, and our active promotional activities proved fruitful, so we have made great strides growing over 10% year-over-year. With respect to the OP, although we actively conducted promotions, our gross profit increased as a result of GMV growth and the growth of our advertising business. We were also able to reduce logistical costs and payment collection costs, so our OP increased by 8% year-over-year. Next, moving on to page 8 of the briefings document. This is the increase/decrease analysis of the OP. From JPY 33.778 billion, we have increased our OP by approximately JPY 4.99 billion year-over-year to JPY 38.77 billion.
The factors that contributed to the increase of the OP were increase in sales due to the increase in consignment shop commissions, which accounted for JPY 8.48 billion, growth of the advertising business, which contributed JPY 1.74 billion, and increase in shipping revenues and payment collection revenues associated with the increase in sales, which came out to be JPY 3.42 billion. The OP decreased due to the increase in the number of employees and logistics centers, which amounted to JPY 2.72 billion in fixed costs. Variable costs, also, which is proportionate to GMV growth, increased by JPY 3.78 billion. Increase in ad spend due to active implementation of TV commercials, which amounted to JPY 1.99 billion. So if you can move to page 10.
As we explained previously, to join the Prime Market, we have acquired treasury stocks and issued new stock acquisition rights. This enabled us to fulfill one of the listing requirements of tradable share ratio of at least 35%. As a result, as announced on the TSE website on January eleventh, we have chosen to join the Prime Market. If you go to page 16, you'll find the quarterly GMV. Active promotions undertaken by Z Holdings during the third quarter has resulted in a 2.3-point increase year-on-year of PayPay Mall's share of the GMV, and its contribution is now at 8.5%. Although in the second quarter it seemed as though the PayPay Mall growth has slowed down a bit, it has recovered and significantly grown this quarter.
Next, I would like to take you through the SG&A on page 20. Against the GMV, SG&A was 22.8% and improved by 0.2% year-on-year. We adopted this from last quarter, but we have implemented new revenue recognition standards, and therefore the point related expenses are now being deducted from sales. Therefore the point related expenses decreased by 0.5 points.
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We also improve operational efficiency within our logistics centers, which has resulted in personnel expense savings by 0.3 points. The financial terms with the new credit card payment collection company are better. Therefore, the payment collection ratio decreased by 0.3 points.
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However, by actively undertaking promotions such as TV commercials and web ads, and also by distributing those ZOZOGLASS for free, the advertising and promotional expenses have risen by 0.9 points.
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Here are the changes in OP and OPM found on page 21.
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As mentioned, we did significantly increase ad spend. However, the advertising business grew and the operational efficiency in our logistics center also improved. Our OPM has come down by 0.7 points landing at 11.3%.
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On page 24 onward, we would like to take you through the KPIs for ZOZOTOWN.
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First, the number of annual buyers increased by 210,000 this quarter to 10.1 million, surpassing the 10 million mark for the first time in our history.
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The active members increased by 200,000 from the last quarter to 8.71 million, and the guest buyers increased by 10,000 to 1.39 million.
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We were able to drastically increase the number of active members because we invested quite a lot on the advertising promotions. As I mentioned before.
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Next, moving on to page 25. The number of shops.
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The number of shops as of the end of the third quarter was 1,516 shops and a net increase of 14 shops since the second quarter. However, 30 new shops did join our platform in the third quarter.
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Moving on to page 30. The average retail price.
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The ARP was JPY 4,167, down 3.1% year-on-year. Although the ratio of products sold at a discount did not change significantly, we did welcome more users who prefer lower priced products, and the prices of goods sold at a discount also fell as well.
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On the other hand, on page 31 you will find the AOV, but the AOV was JPY 8,592, up 0.9% year-on-year.
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This is the first increase in a while. This is because buyers purchase more products per order. Therefore, the AOV has increased year-on-year.
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On page 33, you will find the consolidated business and dividend forecast that we have not made any changes to this page.
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Next, I would like to take you through the content that our President and CEO, Sawada, went over in the briefing session earlier today.
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First, starting with the introduction of the newly appointed Executive Officer.
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She is the Executive Officer of the EC business, especially, she will be steering us through ZOZOVILLA as well as the cosmetics business.
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She was involved in the launch of H&M Japan, and she was a CEO for a long time there. After that, she was also the CEO of GIVENCHY in Japan.
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She has a wealth of experience in the brand business and also as a CEO as well. We would like to have her lead the way in terms of our ZOZOVILLA business.
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Next, I would like to describe the new ZOZOBASE Tsukuba 3.
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This is going to be constructed in February 2023, and the operation will start in August 2023.
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We already have two logistics centers in the similar area, Tsukuba, and this will be the third.
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At Tsukuba 3, we would like to implement various solutions that will help us automate our processes. We have a video that describes what these are. Please take a look.
You can never sell clothes online. ZOZOTOWN changed such common sense. We've been creating various innovations ever since, and our next challenge is to create ZOZOBASE Tsukuba 3, a new distribution base which is now under construction. We will automate it with the latest technologies. The merchandise from the brand is received from trucks to conveyor, then routed to our automated warehouse. Merchandise is automatically sorted based on first in, first out, and carried to the inspection area. In this inspection area, merchandise is carefully taken out from the box and checked. A unique barcode sticker is placed on the merchandise, and it is put into a tray-type sorting robot called tSort. tSort automatically carries merchandise to the appropriate destination according to its shape or the corresponding storage location. Sorted merchandise is put on the conveyor and routed to the lower floor.
Once merchandise is carefully stowed, we just wait for your order. This customer ordered three items: lipstick, pumps, and a red dress. Let's see how ZOZOBASE handles the order. The merchandise picked from the shelf is routed to the shipment area on the first floor. This area is equipped with the latest sorting system that was introduced by ZOZO for the first time in Japan. Merchandise is put in this pocket one by one and temporarily kept in the buffer area. The lipstick and pumps have arrived a little later. Now we have all the merchandise the customer ordered. Finally, it is time for packaging. Packaging and shipping labels are also, of course, processed automatically. By enhancing the operational efficiency with the latest technology, we can focus more on creating the future. ZOZOBASE will help us make it happen.
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Thank you. One of the ideas for automation that you saw in the video. The hanging conveyor like device that is actually in the buffer area. That's the first. We are going to be the first company in Japan that is implementing that solution.
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Lastly, moving on to ZOZOCOSME.
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We have been welcoming a new cosme buyers gradually and has been increasing steadily. We do have accumulated a good number of new buyers.
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The comparisons of ZOZOTOWN. We do have more women in there. Of course, more women purchase cosmetics, but more women in their twenties and thirties as well, purchasing cosmetics on our platform.
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Having said that, we do have 7% men purchasing cosmetics on our platform, and these tend to be young men, and this is a sign that the interest for cosmetics among men in Japan is also on the rise.
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When we look at the categories, a majority is makeup products.
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Usually in the cosmetics market, skincare products make up a higher share of sales. In our case, it's makeup products. This is because makeup has a higher affinity with fashion.
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When we look at the brands that we have been selling, more about half are luxury brands.
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As mentioned before, we do have many people in their twenties and thirties, and the brands are able to reach this younger audience. The brands have provided great feedback. They're quite happy with that.
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Also on targeted sampling is something that we can do because we are an EC player. What this means is that when a brand is launching a new product as a promotional method, we would include a sample with the products that people have ordered.
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In some cases, about 10% of the customers who receive the sample have visited the brand shops within two weeks.
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This is another unique initiative to unique to an apparel EC. We can actually produce, for example, videos and introduce the latest brands trends as well as introduce apparel and cosmetics together so we can draw on our forte to promote both.
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Next is the number of brands. When we launched, we have 566 brands, but this has grown steadily and currently we have 677.
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Next is a new function that we want to implement, release hopefully in the spring of this year. This will enable users to utilize AR to apply makeup virtually.
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That was a brief introduction of our activities and results. Thank you.
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Thank you. We would like to move on to the Q&A, and if you have a question, please use the Raise Your Hand icon.
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When we say your name, please remember to unmute yourself and also state your company and name as well before you begin your question.
David Gibson.
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Sorry, we're having a hard time unmuting you, David. Could you unmute yourself, or are you having issues as well?
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Sorry. There might have been a setup mix-up. We're having a difficult time unmuting.
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Hello.
Oh, yes.
Hi.
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Okay.
Sorry. Okay. Thank you.
Yeah, you've joined me as a panelist. Hopefully that's okay.
Yeah.
Do you want me to ask? I've got a few questions. Do you want me to ask each one sequentially or how would you prefer?
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If you can just ask one at a time, that'd be great.
Okay. I've got four. First one's simple. The ZOZOBASE Tsukuba 3. In the video, it doesn't show how the items are packed. Is that using people or robots or some combination, please?
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All of that will be automated.
Okay. Thank you. Second question, about the same facility, Tsukuba 3. What level of capacity does this take your GMV to because of this opening in 2023?
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Based on our calculations, we should be able to manage up to about JPY 600 billion in GMV.
Okay. Thank you. Third question on PayPay Mall, which obviously was very strong. Just wondering how you're seeing the promotion levels by Z Holdings now in the fourth quarter. Is that much different from what we saw in the third quarter just passed, please?
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In the third quarter, the standard point rewards that they were giving in the third quarter, they're doing the same in the fourth quarter as well. Also in the third quarter, they had this Super PayPay Festival, and they have told us that they're planning to do a similar festival in the fourth quarter as well.
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Having said that, the previous fiscal year in the fourth quarter, we were able to grow PayPay Mall significantly, so the year-on-year hurdle is higher in the fourth quarter.
Okay. Thank you. I have one last question. I should have said at the start. Sorry. I'm David Gibson from MST Financial. Apologies. Sorry. My final question, no change in guidance. You said it earlier today. Things are going well. Your OP for fourth quarter on your guidance implies down 13% year-on-year. Looks pretty easy to beat given you just delivered 9% growth year-on-year. Can you talk me through why no change in guidance given the current guidance looks very conservative? Thank you.
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It's hard to say what will happen going forward. However, in terms of the OP guidance, we also believe that that's not going to be too tough to beat.
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However, when we can see where we're going to be landing, at the end of the fiscal year, we want to start thinking about the next fiscal year, and we may consider doing promotions in preparations for the next fiscal year. Those are some of the reasons why we haven't or we're not going to change the guidance at this point in time.
Okay. To clarify then, can you say what sort of level of promotion as percentage of GMV in this year? Do you think it is going to be then 2% or so? I think you previously had said.
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As we mentioned, we may start doing promotions in preparation for the next fiscal year. At this current point in time, it's hard to say where the promotion expenses as a percentage of GMV will end up being.
Okay, thanks very much. Appreciate the time.
Thank you.
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Thank you.
Thank you for the opportunity to ask questions. My name is Arthur from Metal Cast Management. Maybe just two for me. I'll go one by one, though. First of all, I guess I just wanted to take stock of sort of the GMV growth this quarter. Obviously very, very strong. I think that sort of falls within the backdrop of, you know, a generally warmer winter, which tends to be, you know, a little bit of a headwind for many apparel businesses, including yourselves. Just wanted to, I guess, understand again why you guys were able to grow through generally, I guess, you know, a bit of a headwind from an external conditions perspective. It's managed to grow very well.
Just wanted to see if there was any more color around what were some of the, you know, major drivers of the strong GMV growth this quarter.
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As you rightfully mentioned, in the early weeks of the third quarter, we didn't have a great start because it was warmer then. In November, the weather got quite cold. From November we started to see a lot of movement in the heavier items.
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Also we have actively conducted promotions which has fortunately led to new users as well as more purchases. The new users that we acquired in the last fiscal year, we have been able to retain them. Lastly, the purchase behavior of our buyers are changing. We have seen that regardless of whether there's COVID or not, they're starting to get used to purchasing online, so it's becoming more standard to shop for apparel online.
Very helpful. Thank you. My second question was around the average order value. You touched on this earlier, but it grew year-over-year a little bit. For the first time, I think in a long time, I think within that you sort of talked about, you know, more units per order being the primary driver as we can see in the stats as well. Just wanted to see if that was sort of, you know, a result of something that you guys were doing differently, something that you guys were pushing to drive more units within an order, or if it was just sort of an output that just happened.
Going forward, do you expect to be able to maintain sort of, you know, stabilize year-over-year trends in average order value, or do you expect it to grow a little bit more? Do you expect to shrink? Anything around there would be helpful to understand. Thank you.
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The accurate reason is actually hard to grasp, but what we can say is that the prices of items sold during the sales season have become lower. Since the products are lower priced, when you can take into consideration the shipping fee that the users have to pay, I think that psychologically encourages them to buy more items.
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Having said that, it's hard to say whether this kind of behavior will continue going forward, so we don't know if it's going to improve or not. It's too early to tell.
Understood. Thank you.
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This is Kazahaya. My question is about ZOZOCOSME. You mentioned that it's doing well, but can you describe, share some of the specific feedback you have gotten from brands?
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I touched upon this earlier as well, but they have expressed the surprise that makeup is doing so well and also luxury brands do not usually are unable to reach the consumers in their twenties and thirties. By being offered on our platform, they are able to reach a younger audience and they're quite happy about that.
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As I mentioned before, Cosmetics seems to have a high affinity with apparel. For example, when we introduce apparel items together with cosmetics, the sales of such cosmetics dramatically increases. They're quite interested in this kind of potential by multiplying fashion and cosmetics.
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My second question is on China. We withdrew from China and you have booked some losses. What are your thoughts on this and also on expansion into other global markets?
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With respect to China, since we have entered the market and withdrew some from the market before as well, we wanted to be a little bit cautious and start small and test different things. We started with a cross-border EC. In the end it did not sell as much as we had hoped.
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First of all, the brands that were willing to sell to China, of course, we had a certain number of these brands, but this didn't meet the expectation of Chinese consumers. We couldn't offer them the brands that they were hoping for. Also the brand awareness or recognition of Japanese brands is not high yet among Chinese consumers. We can't just put it in the shop and they won't sell themselves. If we only did a certain level of promotions, that wasn't enough either. As a result, it didn't do as well as we had hoped.
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Of course, we believe that we could generate about JPY 1 billion-JPY 2 billion in GMV. However, we felt that it would be difficult to do JPY 10 billion or JPY 20 billion going forward. That is why we decided to withdraw from this market.
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With respect to the global expansion, we are looking at taking our measurement business abroad and licensing our technology.
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Thank you very much. That's it from me.
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Thank you very much. If anybody else has a question, please use your hand raiser button at the bottom.
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Eddie-san, please go ahead.
Hey there. Can you guys hear me okay?
Yes.
Yes.
Okay. Yeah. Congrats on the strong results. I guess can you just give us a sense in terms of ZOZOCOSME, how significant is that as a percentage of GMV or orders? How significant do you think it'll be by the time we get, you know, to this time next year?
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It's currently still very small, so we apologize, but we're not disclosing that information.
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From the onset, we have said that we want to get the Cosme business to hit double-digit billions as soon as possible. Once we do hit that mark, we will be able to share some figures with you.
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in terms of the next fiscal year, around the same time, we might be still a little shy from that mark.
Makes sense. Okay. Just on the advertising sales, obviously the advertising sales have been quite strong, in terms of the year-over-year growth. I guess, can you just help us understand sort of, what are some of the drivers of the strong growth there? Does any of it have to do with a closer integration or collaboration, with Z Holdings and just how we should think about growth on a longer term basis in this segment?
Our advertising business is doing very well, and the main revenue is coming from search results. We have a preferred area where we display brands, and the demand for this search result product is very high. With search ads, it's very important that the search results resonates with the user, and we show them what they're looking for. In terms of the algorithm necessary, Z Holdings has a lot of know-how, and they have been sharing that know-how with us, so there has been some synergy there. As brands are supplying us with more funds to display their advertising through the search ads. We believe that we can have high expectations for this kind of business in the next fiscal year as well.
Okay. My last one, just as a follow-up is, if you look at that advertising revenue, what % of the advertising revenue is the search ads, just roughly?
More than 90%.
Okay. Awesome. Thanks again. Congrats on the results.
Thank you for your question, Michael. Please go ahead.
Hi, this is Michael Jacobs from Tiger Global. Thank you very much. Just two quick questions since we're almost out of time. The first is about PayPay Mall. That has been a driver of GMV growth, but it's fundamentally depending on Z Holdings decisions on promotions. Should we expect your GMV growth going forward to be just simply structurally more volatile quarter to quarter going forward? Is there any way to manage that?
As you mentioned, yes, the PayPay Mall is nearly dependent on Z Holdings promotions. The level of promotions will impact that. However, the PayPay Mall's own shop, its growth is very important to Z Holdings as well. It is important to their business operations. Therefore, we do not believe that they will suddenly stop conducting any promotions. That will only happen if there is a major issue that happened with Z Holdings. If that's not the case, we believe that they will continue to inject a stable supply of promotional costs.
Thank you very much. With one final question, the number of annual buyers surpassing 10 million is a big achievement, I think. What are your views or have your views about the number of buyers that you can achieve over the medium to long term? Has that changed? Can you give some color about your ambitions there longer term?
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Thank you very much. Actually, the 10 million active buyers is only including ZOZOTOWN. If we also add PayPay Mall, it is far large, it is a far larger number. Our target audience is widening year-on-year, and we haven't really clearly stated how many number of buyers we want to target. If you consider that there are about 40-50 million people in Japan that are within our target age group, then we still believe that there is still a lot of room for growth.
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It is at the end of the hour, but there is another question. We can take another question. Please let us know if that's the case.
Mr. David Gibson, go ahead.
Sorry. Me again. One question. You talked about in the Japanese call about LINE being more effective than email marketing. Could you say when you started to actively do that to use LINE as promotion for existing and new customers? And do you think that actually drove a material improvement in GMV in the quarter? Thank you.
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We started using LINE 7-8 years ago as a communication tool with our customers.
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With respect to to what extent it contributes to the GMV, it's hard to actually cut that piece out and explain. We apologize.
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As Sawada mentioned in the afternoon call, we do have a more comprehensive holistic campaign now. It's not just the LINE communication that contributed to the performance. It's multiple touch points, but LINE is quite a good tool. It's very close to our users, so it's a good tool for communications.
Thank you very much.
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Sorry.
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We would like to take the last question from Mr. Kazahaya.
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We just want to make sure that we're aligned on the PayPay Mall expectations. GMV, if you look at the GMV quarter on quarter, it can tend to be volatile. In the third quarter, you tend to have high priced products, heavier items. Should we think that the third quarter GMV for PayPay Mall will be higher than the others?
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It's hard to say still at this moment in time whether that will be the case, because in the fourth quarter Z Holdings is planning to launch a Super PayPay Festival as well. We don't know how much impact that will have, but we believe that the third quarter would probably be the highest. If you look at the fourth quarter results, and if it's slightly lower quarter on quarter, that could just be a seasonality issue. We really do think that third quarter probably will end up being higher.