(Bloomberg Gadfly)—Spending looks like it will never go out of style at Zalando SE.
The online-only fashion retailer said on Thursday that sales growth would be in the upper half of the 20-25%t forecast for this year. In contrast, the profit margin, on an adjusted earnings before interest and tax basis, would be in the lower half of its 5-6% range.
Investment in new facilities as well as speeding up delivery and returns is weighing on profitability for the retailer, No. 7 in the Internet Retailer 2017 Europe 500.
As Gadfly has argued, although online fashion sales growth is outstripping that in stores—bricks-and-mortar fashion retailers would kill for more than 20% expansion—that sort of momentum comes at a cost.
And Zalando is not alone in having to dig deep into its pockets. ASOS Plc (No. 21) said earlier this week it had agreed to open a new U.S. warehouse, while even fast-growing Boohoo.com Plc (No. 187) will almost double capital expenditure this year.
For the second quarter ended June 30, Zalando reported:
- Revenue increased 20.0% to 1.10 billion euro ($1.29 billion) from 916.4 million euro in Q2 2016.
- Net income of 47.4 million euro ($55.8 million), compared with 50.9 million.
- Active customers increased 12.8% to 21.2 million from 18.8 million. An active customer is one who has placed at least one order in the past 12 months.
- Site visits increased 23.9% to 595.2 million from 480.2 million.
- Mobile accounted for 69.7% of site visits, up from 64.7%.
For the first six months of the year, the retailer reported:
- Revenue was up 21.6% to 2.08 billion euro ($2.45 billion) from 1.71 billion in the year-ago period.
- Net income of 52.6 million euro ($61.92 million) compared with 55.5 million euro.
- Site visits increased 26.1% to 1.21 billion from 959.7 million.
- Mobile accounted for 69.3% of site visits, up from 63.5%.
With Amazon.com Inc. (No. 1) encroaching ever further into fashion, existing apparel retailers have little choice but to fight back. Zalando deserves credit for trying to defend itself.
The latest initiative is breaking into the wholesale market, where fashion labels sell their garments to third-party retailers. According to co-CEO Rubin Ritter, this segment is ripe for digital disruption. The company is already working with Danish fast-fashion retailer Bestseller, and this business-to-business division could become another revenue stream for Zalando.
And Zalando said that after a pause, it’s looking at expanding into new geographies and categories of products.
But all this adds to the future need for investment in systems and infrastructure.
Indeed, Zalando has already increased its forecast for full-year capital expenditure from 200 million euros ($234.4 million) to 250 million euros, excluding acquisitions. And it announced fresh projects on Thursday: two large fulfillment centers in Poland and Italy.
Ritter believes online growth will be significant enough to justify the investment.
Investors however are taking a dimmer view. Zalando trades at a discount to both ASOS and Boohoo on an enterprise value to forecast sales basis. That looks deserved given the threat from Amazon and pressures on profitability.
The shares are up 10% so far this year, but short interest has also increased since January.
Ritter may well turn out to be right about the brighter prospects in the long term. But battling to stay one step ahead of online adversaries will come at a hefty price. To ensure profit doesn’t get squeezed any further, Zalando needs to make sure its execution is as on-trend as its big spending.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Internet Retailer staff contributed.