Company Name: Zalando SE
Entry Price: €85.8
Target Price: €115
Projected Yield: 34%
Time Line: 3 to 6 months
Position Size: 2%
About Zalando SE
Zalando SE (ZAL.EU) is an online store company based in Germany. It markets various clothing, footwear, accessories, cosmetics, and sportswear by 2,500 brands, including zLabels. Zalando SE also offers free shipping and 100-day refund. The online store works in 17 EU countries, targeting two major locations: DACH (Germany, Austria, and Switzerland) and the rest of Europe.
What's the Idea?
This is an opportunity to capitalize on a stock that may rise with the new buyer sentiment, stable financial performance, and expansion to other EU countries.
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Why Trade Zalando?
Reason 1: Expansion to Other EU Countries and Positive Outlook for 2021
Last year proved to be good for Zalando, as both operating and financial figures went up against the lockdown. The number of active customers rose to 38.70M, which is 46% more than in 2019, while the number of platform visits over the year reached 5.40B, or +72%.
Over 2020, Zalando increased its gross merchandise volume (GMV) by 30.50% to €10.70B, which boosted its market share in the EU to 3%.
With the COVID-19 vaccines coming in, the lockdowns are not as harsh as before, and offline shopping gets gradually back. Zalando's management, however, is not planning to stop just there: By 2025, the company wants to reach a 10% EU market share, while, as Euromonitor International reports, the clothing market may rise to €450B. The new GMV target is meanwhile at €30B. If all this comes true, the annual growth is expected at 20% to 25%. In the meantime, this outlook is quite likely to turn into reality, both with the changing buyer sentiment and the company's successful strategy.
During the lockdown, almost everyone used an online platform to buy garments at least once, and thus everyone discovered the advantages of online shopping. This means that, with the pandemic, the retail customers already brought in a new trend, which is not going to fade out anytime soon, and this is good for all online shopping platforms, such as Zalando.
As for the new company's strategy, it includes the following:
- Expanding to Croatia, Estonia, Latvia, Lithuania, Slovakia, and Slovenia in 2021, with the total population of around 100M people. In 2022, Zalando is also planning to actively expand to Hungary and Romania.
- Optimizing and improving the platform.
- Expanding the partner network: In Q4 2020, the companies in Zalando's Connected Retail network accounted for 24% of the total GMV. Over last year, more than 2,400 stores joined, and, by Feb 2021, the number already reached 3,400. More will be joining soon, as per Zalando's strategy.
Zalando's management expects the company to grow even more in the nearest term, this is why the outlook for the rest of 2021 is positive, with the earnings expected at +24% to +29%, and the GMV, at +27% to +32%. Meanwhile, Adj EBIT may reach €350M to €425M, with the margin at 3.50% to 4,10% compared to 5.30% in 2020. The free cash flow (FCF) will be here to stay.
In summary, adjusting to the new circumstances helped Zalanda not only to have a successful 2020, but also get good opportunities for the midterm.
Reason 2: Confident Financial Position
As noted above, 2020 was quite a successful year for Zalando, as the earnings rose by 23% to reach €7.98B, and the Adj EBIT went up from 3.50% to 5.30%. The net profit changed from €99.70 to a massive €226.10M, with a margin of 2.80%.
With a stable financial position, Zalando also has low debt burden, as the debt liabilities are €1.77B and the amount of liquid funds is at €2.68B. Over last year, the FCF reached €284.50M, while the CFO cash flow amounted to €527.40M, meaning the company has no liquidity issues whatsoever.
The EV/S is currently at 2.6х, a number, which is much lower compared to many competitors. On the other hand, the PE is at 96.8x, which is quite high, but fine in case the earnings and margin continue rising. Finally, the EV/EBITDA is at 33х, which is quite in line with the competition.
In March, various investment institutions and banks raised their target price outlook for Zalando as follows:
- UBS Group: €117
- Sanford C. Bernstein: €130
- Independent Research: €108
- Credit Suisse Group: €98
- Deutsche Bank Aktiengesellschaft: €112
- Royal Bank of Canada: €119
- The Goldman Sachs Group: €111
- Barclays: €110
In summary, Zalando is going to get successful results at least in the nearest term with more market share, better growth rate, and positive financial performance.
How to Use the Idea
- Buy the stock at €85,8.
- Allocate no more than 2% of your portfolio for the transaction. To build a balanced portfolio, you can use the recommendations by our analysts.
- Sell the stock when the price reaches €115.
How to Buy Zalando SE?
If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.
After opening an account, you can buy shares in either of the following ways:
Freedom24 Web Platform: In the Web Terminal section, type ZAL.EU (Zalando SE ticker in the NASDAQ) in the search box, and select Zalando SE in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.
Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type ZAL.EU (Zalando SE ticker in the NASDAQ) and select Zalando SE in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.
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