Why Europe's Clothing Retailers Won't Be Torn Apart by Amazon -- Heard on the Street
20 July 2016 - 2:36AM
Dow Jones News
By Stephen Wilmot
In a fast-growing sector, worrying about competition misses the
point. The ambitions of Amazon.com Inc. in clothing retail pose a
bigger threat to high-street fashion chains than they do to online
rivals Zalando and ASOS.
This is one lesson of an expectation-smashing second-quarter
update from Zalando. Since its 2008 foundation by Rocket Internet
as a European copy of Amazon's Zappos.com website, this
Berlin-based company has become Europe's largest online fashion
retailer after Amazon. But its shares have fallen this year as
investors have fretted about weak first-quarter margins and
Amazon's renewed push into fashion.
Those worries now look overblown. The company said Tuesday that
its second-quarter adjusted operating margin would be between 7.5%
and 9.5%. The consensus of analysts had expected 5%, so earnings
upgrades are inevitable. The shares jumped 17% in morning
trading.
Until the company releases full figures and holds a conference
call next month, the reasons for the profit beat will remain
somewhat mysterious. The company noted "operating leverage"--the
mathematical drop-through of strong sales growth to the bottom
line--but second-quarter sales growth in the 24-26% range was in
line with analyst forecasts. At the same time, management insisted
it was keeping its foot on the gas pedal with investments.
This muddy picture will do nothing to clear Zalando's reputation
for unpredictable financial performance, and the shares will
doubtless remain volatile. But even after Tuesday's jump, they look
cheap on 1.7 times prospective sales, relative to those of smaller
U.K. peer ASOS on over 2 times.
The two companies have slightly different focuses. ASOS targets
the market for 20-something fashionistas globally, whereas Zalando
pitches itself at a wider demographic, but only in Europe. ASOS
places more emphasis on fashion and curated content, Zalando on
cutting-edge logistics and web technology. Yet these differences
can be exaggerated: both are growing sales at about 25% a year as
they take market share from bricks-and-mortar retail, and both
should now make full-year margins of roughly 5%.
The key reason why ASOS might warrant a higher valuation is that
its focus on fast fashion and the millennial niche better protects
it from direct competition with Amazon. But focusing on the Amazon
threat is misleading. The U.S. giant already has a higher market
share in European fashion than its local peers, according to
research group Euromonitor, so the competition is nothing new.
There's a reason why most clothes are sold by specialist
retailers; the online world may be no different. As long as Zalando
and ASOS keep up with Amazon's logistics operation, and keep their
current edge in website design and function, they should be able to
grow at least as fast as more and more clothes shoppers move
online.
It is time to consign those Zalando shorts to the back of the
wardrobe. This is a market with growth for all.
Write to Stephen Wilmot at stephen.wilmot@wsj.com
(END) Dow Jones Newswires
July 19, 2016 12:21 ET (16:21 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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