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UPDATE 2-Zalando lowers 2017 profit guidance after weak October
November 7, 2017 / 8:33 AM / 15 days ago

UPDATE 2-Zalando lowers 2017 profit guidance after weak October

* Online retailer cuts profit margin forecast

* Sales growth has priority over margin in 2018-co-CEO

* Has more customers, but average spend dips (Adds comments from analyst call)

By Emma Thomasson

BERLIN, Nov 7 (Reuters) - German online fashion retailer Zalando warned on Tuesday that its full-year operating profit margin would be lower than expected after trading in October was weaker than forecast and it kept up heavy investment in logistics.

Shares in Zalando, which dipped last month when it reported weak preliminary third-quarter profit figures, were down 4.8 percent by 1055 GMT, the biggest faller on the European retail sector index, which was off 0.4 percent.

Zalando blamed weak sales in October on unseasonally mild weather, which also dampened quarterly sales at British clothing retailer Next last week.

Zalando has seen its profitability dented this year by spending on new warehouses around Europe as Amazon makes a big push into fashion, with the U.S. firm making a advertising drive for clothes in Zalando’s home market Germany.

The company, which sells some 2,000 brands in 15 European countries, offers a wider range of the latest styles than Amazon, which is focused on basic garments, but could be exposed as the U.S. ecommerce giant improves its fashion credentials.

Zalando said third-quarter sales rose 29 percent to 1.075 billion euros ($1.25 billion). Adjusted earnings before interest and taxation (EBIT) came in at 0.4 million euros, missing average analyst expectations for 2.3 million.

SALES TAKE PRIORITY

Zalando still expects full-year revenue growth in the upper half of a 20 to 25 percent range, but forecast its adjusted EBIT margin would come in slightly below 5 percent, under its previous forecast for the lower end of a 5 to 6 percent range.

Whether Zalando compensates for the disappointing October by increasing discounts or spending more on marketing depends on trading in November and December, co-Chief Executive Rubin Ritter told a conference call for analysts.

He said Zalando would focus on maximising sales growth in the fourth quarter rather than its margin, adding that this focus will continue in 2018, when Zalando should grow sales by 20-25 percent but does not expect to increase its margin.

British rival ASOS last month raised its sales growth forecast for the financial year from Sept. 1 to 25-30 percent, from a previous 20-25 percent, and said it expected a stable operating profit margin of 4 percent.

Zalando had 22.2 million active customers at the end of the quarter, a rise of 15.7 percent since the same period last year and the strongest growth in more than two years.

Average annual orders per active customer rose to an all-time high of 3.8 from 3.4 a year ago, but average basket size after returns dipped slightly to 62 euros from 63 euros a year ago, which Ritter said fed through to higher logistic costs.

Ritter noted that Zalando was now ramping up six new warehouse projects at the same time, including sites in Sweden and Poland, and reiterated that it expects about 250 million euros in capital expenditure in 2017, including acquisitions. ($1 = 0.8624 euros) (Reporting by Emma Thomasson; Editing by Maria Sheahan and Keith Weir)

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