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Zalando profit warning sends shares below 2014 listing price

Shares in Zalando fell nearly a fifth on Friday after Europe’s largest online fashion retailer lowered its outlook for the year as consumers cut spending amid mounting fears of a recession.

The Berlin-based company warned that revenues may not rise at all this year after a much weaker-than-expected second quarter, an abrupt reversal from just four months ago when Zalando forecast growth of 12 to 19 percent.

In a bleak warning issued after markets closed on Thursday, Zalando said “management now expects macroeconomic challenges to be longer and more intense than previously anticipated.” Hopes for a “short-term recovery in consumer confidence” had been dashed, the group added.

The acknowledgment of Zalando, who was among the beneficiaries as the pandemic forced more shoppers online over the past two years, is one of the clearest signs yet of the toll that higher inflation is taking on consumers.

While Zalando still expects to be profitable, its predicament stands in stark contrast to the benign background it has had since its IPO in Frankfurt in 2014.

Since its IPO in Frankfurt, Zalando has shown an annual turnover growth of 25 percent. Last year, buoyed by the pandemic, revenues rose 30 percent.

But even before Thursday’s warning, Zalando’s shares were under pressure, making it the worst-performing member of Germany’s Dax 40 blue-chip index, as investors expected the shopping habits adopted during the pandemic would not last long.

Friday’s fall brings the group’s shares below the 2014 IPO price of €21.50. After peaking at 26.4 billion euros in July 2021, the market capitalization has collapsed to around 6 billion euros. Shares fell a whopping 17 percent to $21.10 on Friday, before rebounding slightly and falling 15 percent.

Zalando's stock line chart has fallen sharply, showing Unfashionable

Zalando’s bleak outlook also hit the shares of UK-listed fashion retailers Asos and Boohoo, which were already hit by a combination of a return to pre-pandemic shopping habits, higher costs and pressured consumers.

Asos shares fell 4.5 percent and Boohoos were 3.6 percent weaker during early trading in London. Like Zalando, the companies have also faced increased competition, particularly from China’s Shein.

Zalando expects an operating profit of just €180 million to €260 million for the year, well below the forecast made earlier this year. However, that forecast is based on a “significant improvement in profitability in the second half of 2022,” the company said, adding that it had begun a cost-cutting plan. In the second quarter, it cut its marketing spend, cut back on infrastructure investments and introduced minimum order volumes in 15 countries.

According to analysts at Deutsche Bank, the company’s new forecast means full-year profits will be about 90 percent lower than previously expected.

Analysts remain positive on Zalando for the long term and are warning investors to “don’t throw the baby out with the bathwater”, as Zalando was “a quality stock with realistic earnings expectations at a cheap valuation”.

“While this new environment is negatively impacting our financial performance, our strategy and long-term goals remain unchanged,” said co-chief executive Robert Gentz.

With reporting by Jonathan Eley in London

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