Digital And Sustainable Trends Will Transform European Online Retail

Key Takeaways

• Expansion of loyalty programs, AI-driven personalization, and B2B services positions Zalando for faster revenue and margin growth than analysts anticipate.
  
• Strategic acquisitions and a focus on sustainability and circular fashion create new, defensible revenue streams and reinforce market leadership.
  
• Margin pressure, regulatory risks, shifting consumer values, growing competition, and demographic stagnation all threaten Zalando's growth, profitability, and long-term market position.

Catalysts

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

• Analyst consensus highlights the loyalty program as a moderate revenue and margin catalyst, but this could be a substantial underestimation: with over 10 million members already and strong evidence of increasing engagement and order frequency, the accelerating expansion into 17+ European markets and the clear ambition to reach a majority of Zalando's 52 million customers could ignite a transformative uplift in revenue per customer and structural improvements in net margins well ahead of consensus expectations.
  
• Analysts broadly expect ongoing efficiency gains from logistics and platform investments, but the ABOUT YOU acquisition and the integration of logistics, payments, and joint commercial operations could enable platform-wide cost synergies and margin expansion significantly faster than forecast, especially as the dual-brand ecosystem rapidly concentrates fashion e-commerce scale in one network, compounding EBIT growth beyond consensus views.
  
• The rollout of Zalando's new AI-powered discovery feed and the deepening of personalized, editorial, and social content is poised to sharply increase daily user engagement and basket size, positioning Zalando to fully capitalize on the growing digital-native demographic and increased European e-commerce adoption, driving an outsized long-term acceleration in top-line revenues.
  
• Zalando's B2B ecosystem-especially ZEOS fulfillment and the Shopify integration, alongside ABOUT YOU's Scayle platform-is only in its early innings but has a clear path to scale multi-channel service revenues rapidly, leveraging the ongoing shift to digital commerce among European brands and SMEs; this recurring, high-margin revenue stream could unlock higher-than-expected earnings growth and drive EBITDA multiples higher.
  
• The company's proactive strategy to expand exclusive and sustainable product lines, together with leadership in the resale/recommerce marketplace and circular fashion, leaves Zalando uniquely exposed to the long-term shift in consumer preferences for eco-friendly and differentiated offerings-creating new, defensible sources of revenue and margin expansion as regulatory, social, and generational tailwinds accelerate the transition online.

Zalando Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Zalando compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Zalando's revenue will grow by 16.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.5% today to 4.2% in 3 years time.
• The bullish analysts expect earnings to reach €720.1 million (and earnings per share of €2.77) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 20.8x on those 2028 earnings, down from 22.1x today. This future PE is greater than the current PE for the GB Specialty Retail industry at 14.3x.
• 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

• Margin pressure from logistics and returns remains persistent as high fulfillment and return costs continue to impact gross margin, with B2C gross margin holding only steady at around 43% and group gross margin down to 40.8%, signaling ongoing challenges to net earnings and profitability.
  
• Rising regulatory scrutiny and expanding digital taxes across the EU pose a material risk of increased compliance costs and operational complexity, which could weigh on future net margins as Zalando operates throughout the European market.
  
• Shift in consumer sentiment toward sustainability and the anti-fast fashion movement presents a long-term demand risk, potentially requiring costly supply chain transitions or reducing demand for core offerings over time, threatening both revenue growth and gross margins.
  
• Intensifying direct-to-consumer efforts from brands and mounting competition from large marketplaces like Amazon and emerging platforms such as TikTok Shop threaten to erode Zalando's partner revenues and share of wallet, putting a cap on revenue expansion and future take rates.
  
• Ongoing demographic trends of an aging and stagnating population in key European markets may limit long-term active customer growth, causing Zalando's recent customer acquisition momentum to stall and constrict future revenue growth prospects.

Valuation

• The assumed bullish price target for Zalando is €47.0, which is the highest price target estimate amongst analysts. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be €17.1 billion, earnings will come to €720.1 million, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of €23.09, the bullish analyst price target of €47.0 is 50.9% 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.