November 6, 2018 / 10:35 AM / 12 days ago

Zalando seeks to counter return problems, smaller orders as sales slow

BERLIN (Reuters) - Zalando (ZALG.DE), Europe’s biggest online only fashion retailer, is working to counteract a fall in average order size and to ensure more returned goods are resold after it reported the slowest sales growth since it was launched a decade ago.

A Zalando label lies on an item of clothing in a showroom of the fashion retailer Zalando in Berlin October 14, 2014. REUTERS/Hannibal Hanschke/File Photo

Facing rising competition from e-commerce players like Amazon.com (AMZN.O) and chains like H&M (HMb.ST), Zalando cut its 2018 outlook for a second time in as many months in October due to the unusually long, hot summer, sending its shares tumbling.

Shares in Zalando, which have fallen by a quarter in the last year, were 6.4 percent lower at 32.19 euros by 1014 GMT, making them the biggest decliners on the German MDAX index .MDAXI.

“Weaker sales growth versus consensus and continued deterioration in basket economics will disappoint,” said UBS analyst Andrew Hughes, who rates Zalando “sell”.

Third-quarter sales rose 12 percent to 1.2 billion euros ($1.37 billion), missing average analyst forecasts for 1.22 billion euros, and well below the 20 to 25 percent annual growth it has targeted for years.

In contrast, British rival ASOS (ASOS.L) last month met its full-year sales growth forecasts and reported a 28 percent rise in pretax profit, flagging years of double-digit sales growth to come and propelling its shares higher.

Zalando reported a quarterly adjusted loss before interest and taxation of 39 million euros, which it blamed on a slow start to sales of colder weather clothing, as well as rising fulfilment costs and problems with how it handles returns.

RETURNS

About half of the products Zalando sells are returned, with most of them processed and resold.

Previous changes to the handling of returned goods that needed to be ironed or repaired resulted in fewer of them being refurbished, an issue that has since been resolved, co-CEO Rubin Ritter told journalists.

Zalando said profitability was also hit by a 7 percent fall in average order size to 57.50 euros, despite efforts to bolster orders by adding beauty products to its range in the hope that customers would add a lipstick when they buy a dress.

The company is taking steps to try to increase the profitability of smaller orders, including making size recommendations to reduce the likelihood of returns, and trialling a minimum order value of 25 euros in Italy, Ritter said.

He does not yet know if Zalando will extend that to other markets, as some analysts have recommended.

Higher transport costs and investments in logistics also weighed, although Zalando trimmed its expectation for capital expenditure for 2018 to 300 million euros, from a previous 350 million, as projects are spread over a longer period of time.

Ritter said Zalando planned a new centralised warehouse to process shipments of garments from brands before they are sent to regional centres for delivery to customers, as it seeks to increase the efficiency of its logistics network.

Reporting by Emma Thomasson; Editing by Maria Sheahan and Kirsten Donovan

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