Aging Demographics And Rising Costs Will Undercut Japan's E-Commerce Landscape

Key Takeaways

• Heavy reliance on Japan's shrinking population, rising costs, and growing competition threaten long-term growth and profitability.
  
• Increasing customer acquisition and promotion expenses bring margin pressure, while sustainability trends may disadvantage ZOZO's mass-market positioning.
  
• Effective customer growth, tech-driven engagement, global expansion, category diversification, and operational efficiency collectively position ZOZO for resilient, long-term revenue and margin improvement.

Catalysts

Operates online shopping Websites in Japan and internationally.

• User growth is likely to decelerate over the long term due to Japan's aging, shrinking population and the company's heavy reliance on its domestic market, which threatens to limit the addressable market and drive flat or declining GMV and revenue over time.
  
• Competition from global e-commerce giants and specialized D2C brands is intensifying, which will likely erode ZOZO's market share, suppress its pricing power, and pressure both revenue and net margins in the coming years.
  
• Rising logistics costs, including ongoing increases in shipping and labor expenses within Japan, will continue to compress net margins and operating income, especially as fixed and variable costs have already shown an upward trajectory in recent results.
  
• ZOZO's platform is increasingly at risk of becoming undifferentiated and saturated, while promotional and advertising expenses are rising without a clear ability to expand ad inventory or increase click prices, implying higher customer acquisition costs and potential long-term margin erosion.
  
• A persistent shift in consumer sentiment toward sustainable and ethical fashion may increasingly disadvantage mass-market and fast fashion online platforms like ZOZO, leading to lower customer retention and weaker revenue growth as shoppers opt for more transparent competitors.

ZOZO Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on ZOZO compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ZOZO's revenue will grow by 5.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 21.3% today to 21.7% in 3 years time.
• The bearish analysts expect earnings to reach ¥53.8 billion (and earnings per share of ¥59.83) by about July 2028, up from ¥45.3 billion 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 19.7x on those 2028 earnings, down from 30.5x today. This future PE is greater than the current PE for the JP Specialty Retail industry at 13.9x.
• Analysts expect the number of shares outstanding to decline by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.18%, as per the Simply Wall St company report.

ZOZO Future Earnings Per Share Growth

Risks

• The ongoing growth in the number of active buyers, the increase in average order value, and the company's ability to attract and retain younger demographics indicate ZOZO is effectively expanding its customer base and engagement, suggesting long-term revenue and gross merchandise volume could keep rising.
  
• Strategic steps to leverage data analytics, AI-personalization (such as AI agents on LINE and styling apps), and proactive use of promotional campaigns are supporting improved customer experience and frequency of purchases, which could further strengthen revenue growth and improve customer retention rates over time.
  
• Synergies from the LYST acquisition, including access to Western and luxury markets, a scalable asset-light business model, and potential for combined technology and data assets, could accelerate international expansion and diversify revenue streams, ultimately enhancing topline earnings and mitigating Japan-specific demographic risks.
  
• Expansion into higher-growth categories like cosmetics-with 30% year-on-year GMV growth-and plans to tap into new non-fashion categories signal that ZOZO is actively broadening its addressable market, which may drive sustained gross merchandise volume growth and increased net sales.
  
• The company's commitment to operational efficiency through automation, logistics optimization, and reduction in logistics-related personnel costs is helping offset SG&A increases; this focus on cost control can safeguard or gradually improve operating margins and profitability, even as the company invests in future growth initiatives.

Valuation

• The assumed bearish price target for ZOZO is ¥1009.77, which represents two standard deviations below the consensus price target of ¥1495.88. This valuation is based on what can be assumed as the expectations of ZOZO'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 ¥2100.0, and the most bearish reporting a price target of just ¥1000.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥248.3 billion, earnings will come to ¥53.8 billion, and it would be trading on a PE ratio of 19.7x, assuming you use a discount rate of 6.2%.
• Given the current share price of ¥1560.5, the bearish analyst price target of ¥1009.77 is 54.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.