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(Alliance News) - The profit warning from fashion company Zalando SE was indicative of the challenging backdrop online retailers are facing as consumers scale back on discretionary spending, according to analysts.
Late on Thursday, the Berlin-based firm warned that market conditions have worsened in the second quarter, as it expects growth in gross merchandise volume, revenue, and adjusted earnings before interest and tax to fall short of market estimates.
"While Zalando's share price is already down 64% [in the year to date] partly in anticipation of such a cut, we would expect the guidance cut to further weigh on the share price," said Liberum analysts.
The stock was trading 4.6% lower at EUR24.36 in Frankfurt on Friday afternoon, having hit a low of EUR21.10 earlier in the day.
The retailer had previously expected GMV growth at the lower end of a 16% to 23% range, now slashed to a 3% to 7% range. Revenue guidance, which had been guided between 12% and 19% growth is now forecast to come in flat or grow by 3%.
The firm now expects an adjusted Ebit between EUR180 million to EUR260 million, cut from a range of EUR430 million to EUR510 million.
This would be a 53% decrease at the midpoint from the adjusted Ebit of EUR468.4 million in 2021.
"We definitely think the new GMV guidance is much more realistic, but trends are volatile and the Ebit range still leaves a decent profit improvement in [the second half], which isn't a guarantee," commented Barclays.
Having booked a first-quarter adjusted loss before interest and tax of EUR51.8 million, the fashion company expects an adjusted Ebit "significantly below" analyst consensus of EUR104 million in the second quarter.
It does expect the quarter to be profitable, having seen the benefits of new efficiency measures, such as reducing marketing, and introducing minimum order values for free shipping in more countries.
The weaker earnings in the first half heaps pressure on Zalando to recover profit in the remainder of the year to meet the new guidance.
However, the retailer warned it no longer expects to see a short-term bounce in consumer confidence in the months ahead, as inflation continues to ramp up.
Zalando's pessimistic outlook was compounded by gloomy economic data from its home country on Friday. According to the latest data from the Ifo Institute for Economic Research, business expectations in Germany fell to 86.8 points in June from 86.9 points in May.
In trade, the business climate plunged and expectations hit the lowest level since April of 2020. In particular, wholesalers and retailers were downcast about the outlook for the coming months, in light of rising energy prices and the threat of gas shortages.
Analysts on Friday were also looking to UK online fashion brands Asos PLC and boohoo PLC for the read-across from their German counterpart.
"Given the reporting from the rest of the pure-play online fashion market, Zalando's guidance cut does not come as a major surprise and reflects a very weak consumer demand outlook," noted Liberum analysts.
Bleak news came for UK businesses as well, as consumer confidence hit its lowest level since records began in 1974. GfK's long-running Consumer Confidence Index dropped one point to minus 41 in June, setting a new record low for a second successive month.
Last week, Asos also slashed annual guidance, citing "market volatility and an increased returns rate", as inflation wreaks havoc on household budgets.
The firm now expects revenue growth between 4% and 7%, with an adjusted pretax profit between GBP20 million and GBP60 million. This is compared to previous guidance of revenue growth between 10% and 15%, with adjusted pretax profit between GBP110 million to GBP140 million.
"With two months to go (August-year end) and considering the magnitude of Zalando's downgrade after only two months, we think [financial 2022 adjusted pretax profit] could be towards the lower end of the guided range, with our estimates already 30% lower than consensus," said Shore Capital analysts.
Last Thursday, boohoo also shared a disappointing performance in its first-quarter ending May 31. The brand said revenue declined 8.3% year-on-year to GBP445.7 million, due to the effects of inflation and high clothing returns.
However, it backed its annual guidance for revenue grow in the low-single digits, and adjusted Ebitda margin between 4% and 7%.
On Thursday, boohoo also announced new financial leadership, as Trainline PLC Chief Financial Officer Shaun McCabe will step down to join the same role at the fashion retailer. McCabe was previously international director at Asos, as well as CFO at Amazon Europe.
Asos shares were down 2.1% to 869.00 pence each in London on Friday afternoon, and boohoo shares were 2.1% lower at 58.08p.
The stocks have both lost 82% in the past 12 months.
The heightened pressures on Zalando have led to analysts taking a more cautious view on the short-term outlook for the stock, but more positive sentiments can be heard for the longer-term.
"We continue to believe that Zalando offers the best way to play the European fashion market and its gradual shift to a product and service company will lead to a sustainable profitable business. The current share price offers a great entry point for shareholders that can take a slightly longer view," according to Liberum, which reiterated its 'buy' rating with a target price of EUR82.
"Our take remains that e-commerce penetration probably resumes an upward trajectory into 2023 and, over time, macro headwinds will ease. But we feel the market needs to see evidence of an underlying growth acceleration back well into double digits to be convinced - this inflection point is key for the stock," concluded Barclays.
The bank left the stock at 'equal weight' but cut the target price 38% to EUR30 from EUR48.
By Elizabeth Winter; elizabethwinter@alliancenews.com
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