SRTTY (SRTTY) Q2 2027 Earnings Report, Transcript and Summary

[Foreign Language] [Interpreted] It is time. So, we would like to begin ZOZO's FY 2026 second quarter Q&A session for institutional investors. Sawada; Yanagisawa; as well as Fuminori Hirose, Director and COO; Yusaku Kobayashi, General Manager of Corporate Planning Office. These 4 will be responding to your questions today. We plan to finish this session at 6:10. [Operator Instructions]

Mr. Yamaoka from Nomura Securities. Please go ahead.

My name is Yamaoka from Nomura Securities. So, I have 3 questions. First, July, August, September, I would like to know about the sales environment. You mentioned that the summer demand was a little bit low. But on the other hand, when you think about last year, you mentioned that fall/winter products didn't sell as well in September. But when we compare the 2 quarters last fiscal year and this fiscal year, can you talk about the environment and how sales trended? Should I just ask you 3 questions at once?

Yes.

That's the first question. And the second question, at the very end, you mentioned the AI engine strategy. Until now, you have talked about keeping the platform's value. And I think you talked about -- you've been talking about a strategy that was a little bit more defensive. But if you have any initiatives that will, of course, help you achieve sales uplift a little bit more aggressive strategies, that will be great. And this is very detailed. Second quarter's SG&A, Others. When we look at the 3 months in the second quarter, it looks like the SG&A expenses increased for Others this quarter. So, can you talk about that?

The first question, Hirose will talk about.

So, let me take that first question. July to September, sales environment compared to last year. Last year, as you mentioned, last year was hot. This year was more moderate. And so, July, August, Y-o-Y wasn't that great this fiscal year. But as you mentioned before, we did ZOZOWEEK this year, but we didn't do it last year. September as well was colder. In September of last year, we saw mainly summer items. But this September, we sold more expensive products such as sweaters, heavier items. So, September was great this year. September was the best and then July and August was -- if you rank the growth rate, that would be the ranking. In terms of the GMV growth and AI strategy being more offensive, niaulab is an offline service that we offered. So, when people came there, a stylist was there to welcome you and would propose items that look best on you and people could physically try on clothes. ZOZO members who came to our niaulab, actually, their purchase amount doubles after coming to the lab. We also have a YouTube program as well. We see that many people who are viewing or watching that program are buying more on our site. But it's important that people actually recommend what looks great on you. We believe that if we can make the optimal accurate recommendations, purchase amount will increase. People have played a role until now, but we want to utilize technology and AI. We're trying to use AI and technology to make as accurate recommendations. We believe that if we can make that happen, then GMV will grow. The third question, Kobayashi, please go ahead.

I will take that. Others -- increase in Others is mainly 2 factors. The packing materials have increased from June of this year. The second reason is AWS and cloud server usage rate has also increased as well. So, those 2 factors contributed to the increase in Others. July, August, September, the first question. So, it's overall external factors didn't change drastically since last year. No. Of course, there were ups and downs. But if you average it, it's not very different from what we saw last year.

Next, Yoneshima.

My name is Yoneshima from Citigroup Securities. I also have 3 questions. First question is similar to what was already asked. Other expenses increased. And in terms of operating margin, it wasn't -- I felt like it wasn't that great last year, but it didn't grow as expected this fiscal year is my thought. So, you mentioned some prices going up and then you also consolidated LYST and HIGH LINK. So, those -- there are those factors. But in terms of cost increases, do you see any increase or decrease in cost that was outside of your expectations? So, that's the first question. And the second question is not really related to the earnings briefing, but GMO as well, security is an urgent matter and yourselves as well in the first half of the year, you experienced some impact from security. But AI, what kind of efforts are you implementing to ward off such cybersecurity attacks? That's the second question. And the third question, MUSINSA, you had a pop-up and -- pop-up with MUSINSA and Pokemon T-shirts as well. You mentioned that, that's doing very well. But in October, maybe not. Can you talk about October and tell us if you're doing better than you expected or you're broadly in line with your expectations? Please let me know.

First question, Yanagisawa, can you take that?

Yes. First question, in terms of margin increase, the second quarter, as Kobayashi mentioned, some factors and consolidation as well, we're seeing lower margins. But the second half, we don't foresee any factors that will drive the costs further up. We believe that we should see margins that are similar to the past. We're going to be using more advertising expenses in the second half. That's about it.

Then the second question, security. I will respond to that question. Globally, it's a urgent matter. For ourselves as well, we are putting all of our efforts into warding off such attacks, preparing. But last year or maybe 2 years ago, group company, ASKUL experienced some hardships. So, from that point, we have implemented security efforts until in the past. But unfortunately, learning from ASKUL's experience, we have put in a lot more effort into protecting ourselves. On top of -- we've employed extra efforts. I think it's impossible to say that we're completely fine, but we are doing our best to prepare. In the second half, there are no costs. We won't see anything in the second half that will impact the PO or impact cost due to cybersecurity initiatives. But third point, Hirose, can you take that question?

Yes, I will respond to your question. First, about MUSINSA pop-up, that is a POC for cross-border efforts in the future. We didn't really do that expecting huge sales. It's just a test, marketing effort. And Pokemon, we're going to be delivering in the third quarter, but it's doing extremely well. This is something that we didn't expect in the beginning. That's an upside. And October, it was much warmer than last year. That's an external factor. We can't really sit back and relax yet. However, November, we have ZOZOWEEK and Black Friday as well. Those are some main events that we will have. We're preparing for those main events now.

This is a follow-up question. Cross-border, can you talk about what that was like? And also, I'm sure you haven't decided on the timing, but when will you have another effort?

So, we did a pop-up in Korea, and we are selling Japanese brands in MUSINSA but the brand awareness is not as high yet. But going forward, MUSINSA's power as a platform in Korea is great. So, we want to utilize their power as a platform to see what kind of results we will see, and we'll decide what we will do next depending on those results, and we haven't decided on the schedule.

Moving on to Mr. Kazahaya.

This is Kazahaya. Sorry, I couldn't catch the company name. I couldn't hear him, but I have 3 questions. Two questions about numbers. First question, finishing the first half, you talked about GMV before, but ZOZOTOWN slightly fell short of plans, but LY did great. But first quarter, you implemented similar initiatives, but why was there such a gap in the performance of those 2 businesses in the second quarter? And the second question, it's a question about GMV as well, purchases, purchase stock is growing. And compared to the previous year, it seems like there's been a big change there. So, is there -- please ask now if there's anything worthy of mentioning there. And also third point, your -- from your point of view, fall/winter fashion industry, how is it trending? I'm sure you're converse with the brands. And when you look at the data, can you talk about the macro environment surrounding fashion?

Hirose, can you answer all 3?

Yes, I will do so. The first half GMV, ZOZOTOWN fell short, LY did well. The gap here, ZOZOTOWN fell short, but it's not a huge gap. We don't think that, that is a big problem. LINE Yahoo, LY Commerce, they actually had a lot more ZOZO Festivals. The frequency increased. Therefore, this wasn't included in the plan. Because they have more ZOZO Festivals, we saw greater sales. But Kobayashi, can you talk about the purchased stock, IP.

Are you talking about IP? Sorry about that. It's a collaboration with -- from Masuda san from news. So, we started shipment of those products, sorry. That's -- I have forgotten about that. That's why we've seen the increase. By the way, Pokemon as well, this is also purchase stock as well. The third quarter, we will see an increase of that. Lastly, fall/winter environment, as we mentioned before, October is hotter than usual. With El Nino, we're going to probably see a warmer winter this year. It's not a great environment for us. That's a lot of headwinds. But on the other hand, brands product lineup over the last 4, 5 years, it's been -- the winter has been warm. The brands have also adjusted their offering. Merchandising and inventory levels, we believe, will be quite appropriate.

One follow-up. Thank you, Mr. Hirose. The ZOZO Festival, the decision to do so, the frequency changed. It wasn't initially planned, but can you talk about the decision-making process there?

LINE Yahoo and us, we discuss and decide whether we should have a ZOZO Festival. In the beginning, we do have a frequency in mind, but it's quite flexible. We might have ZOZO Festival together with ZOZOWEEK to further drive sales. But in terms of ZOZOTOWN then, it is underachieved. However, it's broadly in line with your plans.

Mr. Kawano, please go ahead.

This is Kawano from Goldman Sachs. I have 3 quick questions. First question is about fall/winter environment. Brands continue to raise their prices. But when you look at the inventory that you're currently receiving, have you seen any changes in the average retail price? I'm sure the average retail price is positive, and it is impacted by the sales that you have discounts that you offer. But can you talk about the average retail price as well as the price of goods that you've received so far? That's the first question. Second question, ZOZOUSED, secondary market, there is a tailwind there, tailwind continues, but it is getting to a certain scale. So, can you talk about -- can you share your thoughts on the ZOZOUSED? And Mr. Sawada, you talked about AI. You talked about your plans for AI, and this is something that you need to do. But in the U.S. payments could become a barrier and could be an opportunity. So, in Japan and the U.S., payment regulations are different. But in -- of course, there's a lot of -- you already have members, but in terms of payment, any impact that payment can have on AI? Can you touch upon that? That's my third question.

So, I will answer all 3 questions. First, in terms of the fall/winter prices, when we look at the average, it's slightly higher, a few percentage points. That's the data. Sales price, we don't think that the retail -- average retail price has gone up dramatically. Therefore, we don't think that the demand should weaken and the average retail price, we don't think that it will drastically increase either. We don't see major movement -- major change this fall/winter season. When you look at each individual brand, it will vary by brand, but on average, no major change. Second, with respect to ZOZOUSED, it is growing faster than ZOZOTOWN. That's our plan, and it is doing well so far. And this, too, we want to strategically strengthen this. We've said we try to do so over the last couple of years. Because we sell mainly new items, we can purchase and we can resell these items in a unique original way. Usually, when in the used business, you need to rein in costs. That's very important. But we have the data because we're selling these products as a new product, and we can predict -- we understand very well how much we should be buying these products for. So, we have a unique service. And going forward, we want to create a used market around products that are not as expensive. That is a strategic theme that we want to continue to grow and address. And in terms of AI and payments, so that is the path splits there. So, from the EC -- with respect to payments, who should make the payment? Is it EC or agent? And of course, there's a payment collection impact, who's going to pay -- which will be better? Is it better if the EC players or the agents do it? Where -- who will benefit will be key. And it's very valuable data to know what people bought. Nowadays, this person who's 37 male living somewhere and to be able -- the typical marketing initiative we don't do, bearing in mind the people's attributes, we quick data such as, he bought this yesterday, so he's going to buy this tomorrow. Payment data, purchase data is very important. It will be a huge gap whether we have data about what they bought today, 2 days ago. But of course, we want to find a way where we can have our users make the purchase on our site. That's it.

Next, Ms. Kanamori. Please go ahead.

My name is Kanamori from Nikko. I have 2 simple questions. First, Pokemon T-shirt is my first question. In the past, you've done very -- you had a collaboration with Tsuyoshi Domoto, but that collaboration was great, but Y-o-Y, you didn't do as great because you didn't have another great collaboration. And I think that's a shame that you can't keep the momentum going. And so, you have the Pokemon collaboration this year. But when you keep in mind the Y-o-Y comparison, are you implementing some plans so that the collaborations can continue to generate positive impact? And second question is when you buy clothes, do they want to -- do people want to buy clothes that look great on you? Or -- because some people can feel aspirational, maybe they want to look like somebody else even if they -- it doesn't look great on them now. So, for women, I don't know about men, but for women, they actually try to -- try clothing that may not necessarily suit you, that's a little bit more aspirational. So, is there a market there in terms of aspirational dressing?

So, Hirose will answer the first question. Thank you.

So, I will respond to that question. Pokemon T-shirts are doing very well. Y-o-Y comparison-wise, might be tough next year like Tsuyoshi Domoto collaboration. But with respect to collaboration, we do have a team working on collaborations and sales teams as well as management team and production team. We have 3 different teams working on collaborations. We have a comprehensive team in place addressing this. Depending on the content, it might -- the positive uplift might be big or small, but we want to strengthen IPs as well as collaborations with different IPs. Content will impact the performance, but this is something that we want to continue to improve and enhance. The second question about what looks great on you, the definition -- it might be a definition issue, but what looks good on you? Maybe sometimes it's not the best word to use, but if you just look -- think about what looks good on you, you might think about a service that a stylist provides, but what we're thinking about in the algorithm, as you mentioned before, it does include the aspirational aspect. What's big here is that what looks good on you from your point of view as well as other people's point of view. The perception will differ depending on who's looking at the styling. It's important to know we will provide different patterns on how clothing looks great on you, and we're actually thinking about both or referring to both in -- with the word, what looks good on you, but we want to cover both aspirational as well as what looks good on you right now. There are people who love clothes and who don't love fashion as much. The balance between whether you think something looks good on you or what others think, you're trying to strike a different balance depending on their love for fashion. It's true for men, but men will be like we want to get recommendations about clothing where people won't diss you for wearing that. They don't know if it looks good on them, but they don't want to be dissed. So, it's a very wide ranging.

Thank you very much. Any other questions? So, it is a little bit early, but since there aren't any more questions, we would like to wrap up today's Q&A session. Thank you for joining us. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]