Lyst Integration And AI Agents Will Transform E-commerce And Cosmetics

Key Takeaways

• AI-driven personalization and strategic acquisitions like Lyst are expected to enhance user experience and drive sales, supporting revenue growth for ZOZO.
  
• Focusing on cosmetics expansion and ZOZOTOWN over B2B reallocates resources, potentially boosting earnings and market share.
  
• The uncertain integration of Lyst and rising costs may risk profits, while competition and reduced client retention hinder market share and revenue growth.

Catalysts

Operates online shopping Websites in Japan and internationally.

• The acquisition of Lyst and its integration with ZOZO could provide significant synergies and enhance the company's value proposition, particularly as AI agents become more prevalent in e-commerce. This could lead to increased revenue by expanding their user base and improving customer experience.
  
• ZOZO's focus on AI agents to personalize shopping experiences could enhance consumer engagement and drive sales growth, positively impacting the company's GMV and revenue.
  
• The expansion of the ZOZO Cosmetics line with new drugstore brands and targeted promotions is expected to increase traffic and sales, potentially boosting revenue and market share in the cosmetics segment.
  
• The development of new advertising products and fine-tuning existing ones can potentially lead to a significant increase in advertising revenues, although it's currently conservative due to UI/UX concerns. If successful, this could positively impact net margins through higher-margin advertising income.
  
• The strategic direction to focus on ZOZOTOWN rather than the underperforming B2B segment indicates a reallocation of resources to more profitable areas, which could lead to improved earnings performance moving forward.

ZOZO Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ZOZO's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.7% today to 23.1% in 3 years time.
• Analysts expect earnings to reach ¥60.0 billion (and earnings per share of ¥67.54) by about May 2028, up from ¥47.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥52.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.0x on those 2028 earnings, down from 27.1x today. This future PE is greater than the current PE for the JP Specialty Retail industry at 14.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.06%, as per the Simply Wall St company report.

ZOZO Future Earnings Per Share Growth

Risks

• The uncertain impact of integrating Lyst into ZOZO’s operations, with no clear synergies or profitability defined, may present financial risks impacting future earnings or operational profits.
  
• Rising outsourcing costs linked to acquisitions, such as the Lyst deal, could increase operational expenses, potentially squeezing net margins.
  
• Increasing competition from new market entrants like TikTok Mall could impact ZOZO's market share and revenue growth, particularly if collaborations are not successful.
  
• The decline in outsourcing B2B GMV due to larger brands leaving ZOZO’s platform suggests a potential decrease in revenue and raises concerns about ZOZO's ability to retain important clients.
  
• Saturation of advertising revenue, with current growth outpaced by GMV expansion, could limit future profit growth if the balance between user experience and advertising volume is not effectively managed.

Valuation

• The analysts have a consensus price target of ¥1526.294 for ZOZO 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 ¥2100.0, and the most bearish reporting a price target of just ¥1166.67.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥259.4 billion, earnings will come to ¥60.0 billion, and it would be trading on a PE ratio of 27.0x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of ¥1454.0, the analyst price target of ¥1526.29 is 4.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.