Zalando profit surprise cheers European fashion stocks

Shares in Zalando jumped on Tuesday after Europe’s biggest online-only fashion retailer said it expected to post an operating profit for the first quarter, when it usually makes a loss due to selling off remaining stock after Christmas at a discount.

The shares were up 11.7 percent by 0924 GMT, buoying other fashion firms like Asos, Zara-owner Inditex, Adidas and H&M.

The industry has been plagued in recent years by fierce competition and heavy discounting, while investment in logistics and technology to speed online delivery has also weighed on profitability, especially as Amazon expands in fashion.

Zalando said late on Monday it expected adjusted earnings before interest and taxes (EBIT) in the single-digit millions, while analysts had predicted an operating loss. It said sales growth should meet market expectations for about 23 percent.

Zalando said the results were in line with its full-year targets. It is due to report first-quarter results on May 2.

“This is clearly a positive short-term development,” said Liberum analyst Adam Tomlinson, who recently upgraded the stock to “buy”.

“Zalando has built an infrastructure that is uniquely placed to fend off competition and has a logistics network that is looking increasingly superior to Amazon,” Tomlinson added.

Last week, shares in British rival Asos jumped after it stuck to its full-year guidance even after it reported a drop in first-half pretax profit, hurt by poor Christmas trading and logistical hiccups as it entered the U.S. market.

Shares in both Asos and Zalando tumbled last year after they were forced to issue profit warnings, with Asos blaming a high level of discounting and Zalando saying sales had been hit by the unusually long, hot summer in Europe.

However, Zalando said in February it expected solid growth this year after sales rebounded in the fourth quarter and it won 1.3 million new customers, the biggest quarterly increase in five years.

Zalando has predicted its margins should be increasingly supported by a move to grow its partner programme, under which it charges fashion labels a commission to sell stock through its website rather than buying and selling them itself.

It is also taking steps to counter a fall in average order size, adding beauty products to its range, making size recommendations to reduce the likelihood of returns, and trialing a minimum order value of 25 euros ($28) in Italy.

“We are pleased with our performance in the first quarter, demonstrating that we are focused on strong execution,” Chief Financial Officer David Schroeder said in a statement.