Zalando sees end-year clothing demand staying weak

By Helen Reid

LONDON (Reuters) -Europe's biggest online fashion retailer, Zalando, sees continued pressure on demand for the rest of the year and now expects 2023 sales to decline, the company said on Thursday as it reported weaker than expected third-quarter revenue.

Zalando, a multi-brand platform that sells clothes, shoes, and accessories, has been hurt by a pullback in online shopping after a COVID-19 pandemic-era boom, a trend that has also bruised smaller online-only retailers like ASOS (LON:ASOS) and Boohoo (LON:BOOH).

Zalando now expects 2023 revenue to fall by between 0.5% and 3%, having previously guided to a 1% decline at worst. Third-quarter sales of 2.275 billion euros ($2.41 billion) missed analysts' estimates and were down 3.2% from the same quarter last year.

Group earnings before interest and tax (EBIT) increased to 23.2 million euros from 13.5 million euros a year ago because of lower logistics costs.

"If sales don't show any sign of improving in the last months of this year, investors will start to worry about the trend for 2024," said Clément Génelot, analyst at Bryan Garnier in Paris.

Zalando's shares fell 1% in early trading.

An unusually warm September weighed on sales of autumn and winter clothes, Zalando said, exacerbating the impact of weak consumer sentiment.

Zalando, which says it is focused on growing profits, stuck to its operating profit outlook for the year, but gross margin for the third quarter fell to 36.7% from 39.1% a year ago due to discounting.

"Because of that warm September season start there was a clear need to early on start discounting the fall/winter merchandise in order not to end up with a lot of overstock," chief financial officer Sandra Dembeck said.

The Germany, Austria, and Switzerland region, which accounts for nearly half of Zalando's sales, was the worst-performing, with revenue down 5.6% over the quarter.

Apparel was one of the weakest segments for online retailers in Germany in the third quarter, according to ecommerce industry association BEVH.

Gross merchandise volume - a measure of sales on the platform by Zalando and partner brands - fell by 2.4% from a year ago. The company lowered its 2023 forecast for gross merchandise volume to between a 2% decline and 1% increase, down from an outlook for the lower half of the 1% to 7% range.

Faced with tougher competition at lower price levels from players like Shein, Zalando is trying to grow its luxury brand offering, rolling out a new "boutique-style" space for designer brands.

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Zalando shares have lost a third of their value so far this year. The company's market value has dropped over the past two years as shoppers, freed from pandemic restrictions, returned to stores and ordered fewer clothes online.

($1 = 0.9438 euros)