Heavy investments in software, new systems and new distribution centers contributed to a decline in the operating margin to 3.2 percent last year from 4.8 percent, but the management expressed confidence that the margin will reach 13 percent sooner or later. It has set out an ambitious goal for the annual gross merchandising value (GMV) to grow to €20 billion by 2024, with its Partner Program with brands rising from 10 percent to 40 percent of the revenues.
Zalando's marketplace, which is meant to eliminate inventory risks and focuses more than that of Amazon on branded fashion products including active and casual sportswear, offers brands a window on its highly visited platform in exchange for a commission. The brands are able to control pricing and get data on customers' preferences. More than 250 partners participated in the program last year.
Zalando says it wants to be the “starting point” for fashion customers. For Amazon, which sells a lot of sporting goods in Europe, it has taken a long time to make a decent profit, but investors are probably betting that Zalando's stronger focus on fashion items will accelerate the process. Zalando's share price has risen by about 40 percent so far this year, reaching a very high price-earnings ratio, after losing nearly half of its value last year.
The share price went up by more than 17 percent after the company reported a jump of nearly 25 percent in GMV for the fourth quarter of 2018 to €2.05 billion. After a weak third quarter, where it booked a net loss, revenues increased by 24.6 percent to €1.66 billion, helping Zalando to meet its sales targets for the year. Annual revenues went up by 20 percent to €5.39 billion, with the GMV going up by 21.1 percent to €6.64 billion.
In the biggest quarterly increase in five years, the website attracted 1.4 million new active customers in the 17 European countries where Zalando operates, taking the total number up to 26.4 million. It had about one billion visits during the quarter, 81.6 percent of which were made with mobile devices.
However, the adjusted operating margin (Ebit) was down to 7.1 percent for the quarter from 8.4 percent in the year-earlier period. For the full year, it stood at 3.2 percent of revenues against 4.8 percent in 2017, driving the net profit down to €51.2 million from €101.6 million in the prior year.
In Germany, which still represents nearly 30 percent of Zalando's revenues, customers have been buying more frequently, but placing smaller orders. Margins continued to be depressed by ongoing promotions, generous delivery options and a return rate of around 50 percent for the merchandise shipped to them.
To help carry out its ambitious goals, Zalando is expanding its executive board from three to five members on April 1 with the promotion of David Schröder as chief financial officer and Jim Freeman as chief technology officer. Schröder has been with the company for more than eight years, starting off as senior vice president of operations and serving most recently as senior vice president of convenience (customer service, etc.). Freeman has been serving as senior vice president of engineering since September 2016, except for a pause of a little more than a year to last April at Amazon in Seattle, where he took care of the launch of Alexa in various countries and other initiatives.
On the board, Schröder and Freeman will join the company's two founders, David Schneider and Robert Gentz, as well as Rubin Ritter, who entered Zalando in 2010. All three will remain joint chief executives. Schneider will continue to work closely with brand partners and lead Zalando's fashion offer. Gentz will take on marketing and sales, while continuing to be responsible for human resources. Ritter will assume responsibility for strategy.