European Regulations And Competition Will Hamper Growth Yet Spur Efficiency

Key Takeaways

• Ecosystem expansion, acquisitions, and tech investments aim to boost margins, but profit growth is curtailed by weak demand, integration risks, and high operational costs.
  
• New sustainability initiatives and B2B ventures diversify revenue, yet heavy regulatory burdens, high return rates, and geographic concentration threaten earnings resilience.
  
• Heavy reliance on Europe, high return rates, intensifying competition, regulatory pressures, and costly integrations threaten Zalando's margins, market share, and long-term profitability.

Catalysts

Operates an online platform for fashion and lifestyle products in Europe.

• While Zalando's ecosystem strategy and investments in AI-powered personalization, loyalty programs, and B2B platform expansion position the company to benefit from the ongoing migration of European shoppers toward online and mobile-first fashion retail-potentially expanding its revenue base and improving net margins-persistently muted consumer demand and ongoing price sensitivity across Europe threaten to limit that online growth, suppressing both top-line acceleration and order frequency in coming periods.
  
• Although Zalando is poised to capture efficiencies from its recently finalized ABOUT YOU acquisition, combining logistics, unified payments, and B2B SaaS offerings to unlock up to 100 million euros in annual EBIT synergies by 2029 and structurally boosting future profitability, the synergy realization timeline is heavily backloaded and subject to integration risk, while short-term costs from contract unwinding and integration will weigh on near
• to medium-term margins.
  
• Despite Zalando's growing focus on sustainability and eco-friendly fashion-which could reinforce customer loyalty and basket size in the long run-the company faces rising operational risks as EU and national regulations targeting packaging, returns, and carbon emissions become stricter. These regulatory headwinds will likely increase fulfillment and compliance costs, creating ongoing drag on net profit and cash flow even as the company scales.
  
• While expansion of B2B fulfillment and software services, partnerships such as the ZEOS-Shopify integration, and innovations in omnichannel and AI-based marketing are intended to diversify revenue streams and reduce dependence on pure-play retail margins, Zalando's profitability remains constrained by structurally high return rates, inventory build-up for new lifestyle segments, and cannibalization risks that put pressure on both gross margins and working capital discipline.
  
• Although Zalando's market position could strengthen over time due to industry consolidation and advances in last-mile delivery, the platform remains highly reliant on the European market. This geographic concentration exposes the company to outsized risk from regional economic stalls and heightened local competition from large global e-commerce players and emergent channel threats-challenges that could erode both share gains and long-term earnings potential.

Zalando Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Zalando compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Zalando's revenue will grow by 6.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.5% today to 3.2% in 3 years time.
• The bearish analysts expect earnings to reach €421.0 million (and earnings per share of €1.62) by about August 2028, up from €270.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.8x on those 2028 earnings, down from 22.4x today. This future PE is greater than the current PE for the GB Specialty Retail industry at 17.9x.
• Analysts expect the number of shares outstanding to grow by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.57%, as per the Simply Wall St company report.

Zalando Future Earnings Per Share Growth

Risks

• Zalando remains highly exposed to the European market, and any prolonged regional economic slowdown or muted consumer demand-already cited as an ongoing reality-could constrain top-line revenue growth and overall profitability in the years ahead.
  
• Persistent structural challenges such as high return rates and inventory build-up, especially as Zalando expands into new lifestyle segments, risk inflating logistics and fulfillment costs, ultimately compressing net margins and weighing on future earnings.
  
• Increasing competition from global e-commerce platforms (including Amazon and fast-fashion players like Shein) and a continued push by digitally native direct-to-consumer brands may put pressure on Zalando's market share, necessitating higher marketing expenses and promotional activities, which could erode margins and slow revenue growth.
  
• The fashion industry is facing growing regulatory pressure around sustainability, packaging waste, returns, and carbon emissions, and tighter EU policies are likely to increase operational costs for Zalando over time, directly hurting net profit.
  
• The integration of ABOUT YOU-while promising synergies in the long term-comes with near-term front-loaded integration expenses and uncertain execution risk, and any delays or misses in capturing the projected EBIT synergies could limit margin improvement, restricting growth in adjusted EBIT and overall group earnings.

Valuation

• The assumed bearish price target for Zalando is €26.18, which represents two standard deviations below the consensus price target of €38.3. This valuation is based on what can be assumed as the expectations of Zalando's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €47.0, and the most bearish reporting a price target of just €23.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €13.1 billion, earnings will come to €421.0 million, and it would be trading on a PE ratio of 19.8x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of €23.41, the bearish analyst price target of €26.18 is 10.6% 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.