Zalando started out selling flip flops. It would have flourished in a heatwave. Ten years on — and now Europe’s largest online fashion retailer — it is visibly wilting. As Berlin sweltered, Zalando said profits would be hit by the “long and hot” summer, its second such warning in six weeks. Shares dropped by a fifth on Tuesday morning. Excuses about weather may mask worse problems.
Nobody disputes that sunshine makes a difference to the retail rag trade. Last week, German clothing sales were 17 per cent down on a year ago. And while online retailers have an edge over bricks-and-mortar counterparts when it is too hot to schlep to the shops, their customers are no more willing to buy coats when they are wearing shorts and T-shirts. A longer period selling old-season clothes means higher discounts.
Just how much can be blamed on that? It seems reasonable for Zalando to predict that sales will be at the bottom end of the predicted 20-25 per cent range. But the severity of the projected fall in operating profit margin seems suspicious. In March, Zalando forecast it would be about 4-5 per cent. Now it looks unlikely to be much over 3 per cent. That is below the margin for Asos and well below that of Boohoo, another UK rival.
Shares in Zalando, set up by Rocket Internet, Berlin’s famous start-up factory, are extravagantly priced at nearly 70 times next year’s earnings. That shows it is still significantly outperforming the overall fashion market. It remains on course to double its business by 2020. But it would struggle to keep its rating if profit margins remain depressed. Optimists think they are masked by investment — €350m this year alone — as it ramps up its distribution network. Margins are also likely to benefit from its tie-ups with brands, which can sell directly to consumers on its platform.
Sceptics are less confident margins will bounce back. They think the fall could be an early sign of growing pressure from rivals. There is no hard evidence. But if competition is hotting up, the impact will leave any heatwave in the shade, however record-breaking temperatures are.
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