Zalando blames the sun as forecasts for further cuts remain uncertain

By Emma Thomasson

BERLIN (Reuters) – Zalando (ZALG.DE), Europe’s largest online fashion retailer, cut its forecast for 2018 for the second time in as many months, saying the long, hot summer had taken its toll and caused a decline of as much as 20 percent his shares.

Co-CEO Rubin Ritter said the delayed start to fall meant fewer sales of more expensive cold-weather clothing and more discounts. He noted that German fashion sales fell 17 percent last week year-on-year, according to industry publication Textilwirtschaft.

Zalando said higher order fulfillment costs are another factor affecting profitability.

“We don’t know when the season will start and when fall/winter will actually start. It’s a problem for the entire industry,” co-CEO Rubin Ritter told reporters, noting that it’s expected to be a pleasant 28 degrees Celsius in Berlin on Tuesday.

Zalando has started selling beauty products online and is investing heavily in logistics and technology as competition from e-commerce players such as Amazon.com (AMZN.O) and big chains such as H&M (HMb.ST) intensifies.

H&M, the world’s second-largest clothing retailer, said Monday that its sales rebounded in the third quarter thanks to a new logistics system, as a modernization to meet growing online and budget competition paid off.

British rival ASOS (ASOS.L) also missed analysts’ forecasts for sales growth in the latest fiscal period, saying it had scaled back marketing efforts to focus on expanding warehouse space in Germany and the United States.

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The hot summer prompted Zalando, a company that has been operating in Berlin since 2008, to scale back its forecasts on August 7, when it announced that traditional price cuts at the end of the summer season were likely to be more visible than usual due to the weather.

In a statement on Monday, Zalando said it now expects revenue growth around the lower end of its target corridor of 20-25 percent, compared with its previous forecast for values ​​in the lower half of the range.

Adjusted earnings before interest and taxes (EBIT) are expected to be between 150 million euros and 190 million euros (175 million euros and 222 million dollar), down from the previous guidance of a lower range of 220 million euros to 270 million euros.

It expects revenue growth and adjusted EBIT to be well below analyst consensus estimates of 19.8 percent and minus 2 million euros, respectively, for the third quarter, which ends on September 30.

Zalando shares, which had already fallen in value last month, fell 20 percent this time to their lowest level in more than two years.

At 10:00 GMT, the stock was down 11.7 percent at 36.99 euros.

“The combination of disappointing sales growth and weak margins is new for Zalando,” said Warburg analyst Joerg Philipp Frey.

“The only good news is that structural factors such as customer growth and participation in affiliate programs are believed to have developed positively,” he added.

However, analysts at Raymond James were not overly concerned and reaffirmed their “buy” rating on the stock.

“We expected sub-par profitability to continue into 2020 as it would be another two years before Zalando would be able to fully leverage its pan-European order fulfillment capabilities,” they wrote.

Ritter said Zalando will continue to work on being more flexible to respond to unpredictable weather, stating that Zalando’s growth prospects remain unchanged and it still expects sales to double by 2020.

Zalando is scheduled to release its full third-quarter financial results on November 6.

(Reporting by Maria Sheahan, Christoph Steitz and Emma Thomasson; Additional reporting by Nadine Schimroszik; Editing by Thomas Seythal/Keith Weir)