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Zalando SE - Equity Analysis

Updated: May 20


Zalando SE stands as a significant player in the online fashion sector, headquartered in Berlin, Germany. Founded in 2008 by David Schneider and Robert Gentz, the company swiftly attained a prestigious position, emerging as one of the leading fashion and lifestyle retailers through digital platforms in Europe.

The platform is renowned for its extensive range of products, encompassing clothing, footwear, accessories, and home goods sourced from a selecIon of internaIonally renowned brands and designers. Zalando's primary mission is to provide a seamless and diversified online shopping experience, aiming to grant users easy access to an eclecIc assortment of fashion products.

Zalando's extensive presence in various European countries solidifies its leadership posiIon in fashion e-commerce. Advanced return management has been a key element of the company's success, allowing free returns within 100 days of purchase, with the opIon to schedule home pickups. Additionally, in Italy, Zalando has entered into a strategic agreement with Poste Italiane, facilitaIng returns at over 12,000 authorized post offices and an extensive network of lockers and affiliated points.

It is evident that in the course of 2022, Zalando, in harmony with compeItors in the e-commerce landscape, experienced a contracIon in demand. This trend can be attributed to several key variables:

1. The lifting of lockdown-related restricIons has prompted people to resume shopping in physical stores, consequently reducing the preference for the online environment.

2. Consumer confidence has significantly decreased due to factors such as inflaIon and geopoliIcal tensions, especially related to the conflict in Ukraine.

These factors have impacted demand more markedly than initially forecasted, inevitably affecting profit margins, despite Zalando's efforts in cost control. It is essenIal to consider that the comparison with the years 2020 and 2021 presents unique challenges, as during those periods, physical retailers experienced a significant reducIon in acIvity due to lockdowns, a benefit that significantly favored online players like Zalando. The resulIng deceleraIon was, therefore, somewhat predictable.

Despite adverse circumstances, we believe that the long-term trend towards the transiIon to online channels remains robust, supported by demographic factors, corporate investments, and the flywheel effect. The growth in the number of acIve customers, in this more challenging context, reflects consumers' persistent interest in the online channel and the distincIve offering provided by Zalando.



In this secIon of the analysis, we will undertake a thorough evaluaIon of Zalando's financial statements and performance metrics. This detailed examinaIon will enable a comprehensive assessment of the company's historical and recent performance, thereby providing a solid foundation for acquiring profound insights into its future prospects and investment potential.


The indices considered for the liquidity analysis are the Current Ratio and the Quick Ratio.

The Current RaIo is used to assess when a company is able to finance its short-term needs through cash generated from operaIons. It is calculated as the ratio of current assets to current liabiliIes. Generally, the higher the liquidity raIo, the greater the company's ability to meet its obligaIons, as it has a higher proporIon of short-term equity value compared to the value of its short-term liabilities.

The Quick RaIo is a financial index that indicates the liquidity rate of a company by measuring the raIo between liquid or easily liquidable current assets and current liabilities. The Quick Ratio, also known as the Acid Test, expresses a company's ability to meet its short-term obligations using liquid or quickly liquidable resources (cash, trade receivables, etc.), excluding inventory. It is one of the most common indices in financial analysis to assess a company's liquidity condiIons and its financial health in the short term.

Considering Zalando's indices, it can be observed that since 2016, the values of both indices have been decreasing. However, the values assumed in 2022 are respecIvely 1.44 for the Current Ratio and 0.95 for the Quick Ratio. Consequently, the liquidity situaIon appears to be rather stable, and it can be affirmed that Zalando seems to be able to meet its future commitments with adequate liquidity, as indicated by the positive values of both liquidity indices. It is important to conInue monitoring these indices in the context of the overall financial performance to assess future liquidity prospects.


In examining Zalando's profitability, we employ three indices that we consider highly informative. Specifically, we consider Return on Equity (ROE), Return on Invested Capital(ROIC), and Net ProfitMargin. ROE (Return On Equity): This index measures the profitability of equity by relating net income to equity (ROE = Net Income/Equity*100). The index is used to assess the rate of remuneration of shareholders' risk capital and is fundamental because it expresses the profitability of equity in relation to characteristic, financial, and asset management. Referring to Zalando's annual financial statements, we observe how this index has evolved overtime:

  • 2018: The company's profit experienced a significant decline compared to the previous two years, remaining nonetheless consistently profitable. The index settled at 3.32% (compared to the more pronounced 6.71%of 2017).

  • 2019: A strong recovery in profit, bringing it back to pre-2018 levels, positively reflects on ROE, which increases significantly to 5.92%.

  • 2020–2021:The pandemic years have a very positive effect on the online fashion business; during this biennium, profit growssteeply, yielding indices of 10.51%and 10.57%,respectively.

  • 2022: The end of the pandemic reverses the upward trend in profitability. Despite this, Zalando remains profitable, and ROE settles at amodest 0.76%.

ROIC (Return on Invested Capital): This index expresses the return achieved by the company on the total invested capital, serving as an indicator of efficiency in allocating resources to investments. It is obtained by comparing NOPAT with invested capital (ROIC = Net Operating Profit After Tax / Invested Capital * 100).

In continued reference to Zalando's annual financial statements, let us now examine how ROIC has changed over the past 5 years:

2018: Consistent with the discussion on ROE, 2018 was a more modest year for the company compared to the previous two. The ROIC was 5.5% (significantly lower than the 8.7% of 2017).

2019: The recovery of Net Operating Profit marks an increase in the examined index, bringing it to 6.5%.

2020 – 2021: As mentioned during the analysis of ROE, the pandemic years yielded significantly higher profitability from investments and, consequently, higher efficiency in them. Zalando's ROIC in 2020 is 8.2%, and in 2021, it is 7.6%.

2022: We witness a sharp contraction of the index in 2022. The ROIC settles at 1.4%.

Net Profit Margin: This indicator measures the net margin relative to revenues, allowing for the evaluation of the percentage of profit generated from revenues after deducting all expenses.

Zalando's annual financial statements reveal a movement in the margin consistent with what has already been described for ROE and ROIC.


Zalando is acIvely engaged in providing comprehensive informaIon on its Environmental, Social, and Governance (ESG) performance to the capital markets through parIcipaIon in various ESG raIngs. Here's a summary of Zalando's involvement with different rating agencies:

CDP (Climate Disclosure Project):

  • Zalando has parIcipated in CDP's Climate Change Report since 2018.

  • In the 2022 report, Zalando received an A- rating, placing it among the top 25% in the DiscreIonary Retail sector.

  • Zalando was also recognized in the CDP Supplier Engagement Leaderboard for addressing Scope 3 emissions through supplier engagement.

MSCI ESG Ratings:

  • Zalando improved its MSCI ESG raIng to AA in 2022, posiIoning it among the top 20% globally in the Retail – Consumer DiscreIonary category.

  • MSCI ESG RaIngs assess a company's resilience to long-term, industry material ESG risks.

FTSE Russell ESG Ratings:

  • Zalando achieved an absolute ESG raIng score of 3.7 in 2023 according to FTSE Russell.

  • FTSE Russell ESG RaIngs provide a mulI-dimensional measure of environmental, social, and governance exposure and pracIce, aiding porJolio design and corporate engagement.

Sustainalytics' ESG Risk Ratings:

  • Zalando maintained its "Low Risk" status in SustainalyIcs' 2023 raIng update, scoring 12.8 points.

  • Sustainalytics' ESG Risk RaIngs help investors idenIfy financially material ESG risks in their portfolio companies.

In summary, Zalando's acIve parIcipaIon in mulIple ESG raIngs showcases its commitment to transparency and comparability in reporIng its sustainability efforts. The company has received posiIve recogniIon across various dimensions, indicaIng its leadership in addressing climate-related issues, ESG risks, and engagement with suppliers.


Zalando operates in various markets and is a significant player in the online fashion industry. However, like any other business, it is not immune to risks. The specific risks the company faces may change over Ime based on shifts in market condiIons, compeIIon, and other factors. Some potenIal risks include the following:

  1. Competition and Innovation: The online fashion industry is highly competitive, with new competitors emerging and rapid changes in consumer preferences. Zalando must constantly innovate to maintain its market position and customer loyalty.

  2. Logistics and Delivery: Zalando relies on an efficient logistics network to ensure timely deliveries and meet customer expectations. Issues related to logistics, delivery delays, or product damage during transportaIon can negatively impact the company's reputaIon.

  3. Market Trends and Economic Cycles: Evolving market trends and economic cycles can influence the demand for fashion products. Current inflation, geopoliIcal issues, monetary policy of central banks that are increasing interest rate and other factors are consideraIons that could negatively affect Zalando's demand.

  4. Data Protection: The company handles large amounts of customer personal information, including sensiIve data such as payment details. Cybersecurity issues, data breaches, or privacy concerns can damage customer trust.

  5. Legal and Regulatory Issues: Zalando operates in various jurisdicIons and must comply with local laws and regulations. Changes in regulations, such as those related to consumer protecIon or taxation, could impact the company's operaIons and profitability.

  6. Currency Fluctuations: OperaIng in internaIonal markets exposes Zalando to fluctuaIons in exchange rates, which can affect profitability and price compeIIveness.

  7. Technological Disruptions: Any interruption in Zalando's online services, whether due to technical issues, cyber-attacks other causes, could lead to financial losses and harm the brand's reputation.

Furthermore, it is worth noting that analysts have revised earnings expectaIons downward over the past year due to the company's insufficient profitability levels and relaIvely narrow margins as a percentage of revenue (excluding capex and amortizaIon).


For the company valuation, we have employed the Discounted Cash Flow (DCF) method with the aim of determining the intrinsic value of the company. In the initial phase of this process, we defined the revenue and cost growth rates, considering various key factors.

Historical Growth Rate

During the determinaIon phase, we examined a five-fiscal-year period, noIng a clear halt in Zalando's revenue growth between 2021 and 2022. This significant deviation from the previously favorable trend represents a noteworthy historical event. Additionally, it can be observed that Zalando's historical cost growth pattern closely mirrors that of its revenues.

Zalando reaffirms itself as a company with an ambitious future vision, as evidenced by its continuous investments in infrastructure and logisIcs, parIcularly highlighted by Zalando Fulfillment Solutions. Following the significant post-pandemic crisis, in order to ensure profitable growth in 2024 and beyond, the company has acIvely committed to improving its margin, streamlining the organizaIon, and selecIvely investing to capitalize on growth opportunities. In February 2023, the company initiated a program aimed at reducing complexity and embracing principles of simplicity, pragmaIsm, and frugality, resulting in the reduction of several positions across various teams within the company. AddiIonally, the number of active customers increased by 6%, surpassing 51 million last year, while the Zalando Plus loyalty program more than doubled its members, exceeding 2 million compared to the previous year. The interpretation of these data, coupled with a pronounced bearish trend that Zalando has experienced since the end of the pandemic, underscores that the company operates in one of the sectors most affected by the reopening of physical stores. However, considering the company's constant investments and the strengthening of its customer base, we esImate a slightly higher revenue growth rate than that of costs, maintaining a strongly conservative approach and a much more moderate growth compared to the historical standards of the company. Using a revenue growth rate of 4% and a cost growth rate of 3.5%, we present the forecasts for future cash flows over the next five years.

WACC Estimation

The Weighted Average Cost of Capital (WACC) serves as the discount rate for Free Cash Flows to the Firm (FCFF) and is derived as the weighted average of the cost of equity and the cost of debt, accounting for their respective proporIons in Zalando's capital structure. The cost of debt is adjusted to account for the tax benefit arising from debt utilizaIon, given the deducIbility of interest expenses from taxes (with a fixed tax rate of 30%).

To ascertain the cost of equity, we employed the Capital Asset Pricing Model (CAPM) using a Risk-Free rate of 4.5%, represenIng the principal refinancing rate applied by the ECB in November 2023. This rate is a consequence of multiple interest rate hikes stemming from the restrictive monetary policy initiated in July 2022. IdenIfying key comparable companies such as Amazon, Alibaba, JD Sport, Nordstrom, Farfetch, Asos, and Yoox, we normalized the results by eliminaIng two outliers based on R-squared and Debt to Equity. Subsequently, we computed the unlevered Betas (excluding the effect of capital structures of various firms) and determined an industry-average Beta. Incorporating Zalando's financial structure into this industry-average Beta, we applied a 5% risk premium by comparing credit ratings of comparable companies. This process resulted in a cost of equity of 11.14%. For the cost of debt, we estimated a value of 7% based on the risk-free rate, assuming a risk premium of 250 basis points. In our analysis, we initially considered interest expenses paid before the interest rate hike, subsequently adjusIng them to account for the current monetary policy landscape.

Enterprise Value

Once the cash flows and the various discount factors have been defined, we concluded the valuation process by initially calculating the Net Present Value (NPV) of the cash flows and subsequently incorporating the discounted terminal value at time zero.

Two sensiIvity analyses were conducted to illustrate how the leveraged Equity Value (EV) varies with changes in the growth rates of costs and revenues, as well as with variaIons in the Weighted Average Cost of Capital (WACC).


The DCF model, under the described assumptions, returns an intrinsic value per share of €26.28. The stock price had decreased during 2018, settling by the end of the year at levels similar to today's. The price then followed a growth trend, peaking with the widespread outbreak of the Covid-19 pandemic, which initially had a negative impact on the stock price. Since March 2020, the stock embarked on a steep growth path, likely justified by the populaIon's inability to visit physical stores. The stock reached a price slightly above €100, nearly five Imes higher than the year-end 2018 value. The second half of 2021 and 2022 witnessed a downsizing of the company's growth expectations. After the rapid growth in 2020-2021, the price dropped just as swiftly with the easing of the pandemic. As of November 2023, the stock price hovers around €21 to €22. We believe the company was highly overvalued during the pandemic biennium, but its decline has also been too severe. We state this considering its sIll healthy financials and the stock price it had reached in the pre-pandemic period. Therefore, we consider Zalando to be slightly undervalued at present, and we believe a target price of €26.28 is reasonable.


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