Integration With ABOUT YOU Will Create Long-term Synergies

Key Takeaways

• Expansion of the loyalty program and marketing efforts are expected to boost customer engagement, spending, and revenue growth.
  
• Strategic initiatives, improved efficiencies, and ABOUT YOU integration aim to enhance profitability and boost earnings with positive impacts on margins and revenue.
  
• Uncertainty in strategic execution, increased marketing costs, and competitive pressures could limit profitability and market share growth for Zalando.

Catalysts

Operates an online platform for fashion and lifestyle products.

• Expansion of the loyalty program to more countries and increased marketing within existing countries is expected to drive customer engagement and spending per customer, impacting revenue growth positively.
  
• Strategic initiatives, including the continued expansion into new lifestyle areas and improvements in logistics and software, are projected to enhance operational efficiencies and drive top-line growth. This is likely to impact net margins positively.
  
• The rollout and enhancement of the loyalty program are anticipated to reduce marketing costs over time by fostering organic customer engagement, thereby potentially improving net margins and bottom line results.
  
• Growth in the Zalando Marketing Services (ZMS) business is expected to continue in double digits with the introduction of new and enhanced products, contributing positively to revenue growth.
  
• The integration of ABOUT YOU is expected to generate significant EBIT synergies in the long term, reinforcing profitability and potentially boosting earnings.

Zalando Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zalando's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 3.6% in 3 years time.
• Analysts expect earnings to reach €470.0 million (and earnings per share of €1.87) by about March 2028, up from €251.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €562.3 million in earnings, and the most bearish expecting €290.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, down from 31.4x today. This future PE is greater than the current PE for the GB Specialty Retail industry at 17.7x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.19%, as per the Simply Wall St company report.

Zalando Future Earnings Per Share Growth

Risks

• The company's wide revenue and GMV guidance range of 4% to 9% suggests uncertainty in market conditions and execution of strategic initiatives, which may lead to unpredictability in revenue growth.
  
• Increased marketing costs reaching 10% of revenues in Q4 could strain net margins if such levels are maintained over the medium term, potentially reducing profitability.
  
• The need for continued investment in strategic areas to drive growth, while beneficial for long-term strategy, could limit immediate improvements in earnings if not carefully managed.
  
• Temporary accounting effects related to the loyalty program may defer a mid-double-digit million amount in revenue, impacting reported earnings in the short term.
  
• Competitive pressures from emerging e-commerce trends, like those from Chinese manufacturers and platforms such as TikTok, could impact Zalando's market share and overall revenues if not effectively countered.

Valuation

• The analysts have a consensus price target of €38.763 for Zalando based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €50.0, and the most bearish reporting a price target of just €23.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €12.9 billion, earnings will come to €470.0 million, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of €30.68, the analyst price target of €38.76 is 20.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.