background background background

Zalando in shock guidance cut, equities are lifted from yield plunge

Equities 8 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Zalando shares are down 13% today hitting levels not seen since 2014 as revenue growth is taking a massive hit as the European consumer is hurting from elevated energy and food prices. High logistics costs are also still hurting margins and because Zalando is not controlling the entire value chain they are squeezed as a retailer. Our e-commerce theme basket is down 65% over the past year only marginally surpassed by our crypto & blockchain basket. We also take a look at the historic move in the German 2-year yield yesterday which is helping equities to rebound further.


The never ending pain in e-commerce

We recently wrote about the guidance cut from Asos driven by the cost of living crisis causing higher recall rates than normal. Yesterday after the market close, Zalando issued a guidance cut indicating that Q2 revenue growth would be significantly below analyst estimates and that revenue growth for the fiscal year is now expected to be 0-3% down from previously 12-19% suggesting an unanticipated decline in consumer activity driven by weakening macroeconomic conditions also reflected in consumer confidence. Zalando is also revising down its fiscal year EBIT guidance range to €180-260mn significantly below estimates of €361mn. Zalando shares are down 13% in today’s trading session hitting the lowest levels since late 2014 just after its IPO. In its first quarter, Zalando swung back into negative free cash flow on a 12-month trailing basis.

E-commerce is hit hard from elevated logistics costs and higher wage pressures from a tight labour market, but being a retailer is also extremely difficult because you are controlling the entire value chain and thus the room for maneuvering is small. If we look across of theme baskets, e-commerce is now close to being the worst theme basket over the past year only marginally surpassed by the crypto & blockchain theme. With expectations being rock-bottom the question is increasingly when we hit the floor in e-commerce stocks.

24_PG_1
Zalando weekly share price | Source: Saxo Group
24_PG_2
Saxo's theme basket performance overview

When bad is good

Yesterday’s session was historic with a massive decline in the German 2-year yield falling 25 basis points, the second largest drop since 2005, and the US 2-year yield was down as much as 18 basis points during the session before rebounding again. Interest rates had already rolled over somewhat responding to the decline in commodities signaling a worsening economic outlook. But yesterday’s unusual move in interest rates was likely caused by safe-haven flows as preliminary PMI figures in the US and Europe suggest a much faster slowdown than anticipated. The US PMI composite index hit 51.2 vs est. 53.0 down from 53.6 in May and Europe’s composite PMI figure in June was 51.9 vs est. 54.0 and down from 54.8. The surprising factor was the services sector which is arguably being hit by weak consumer confidence also reflected in today’s surprise guidance cut from Zalando.

Lower interest rates and falling commodity prices are doing two good things to equities. Lower interest rates mean lower cost of capital which is positive for the present value of future free cash flows, and falling commodities are easing the margin pressure which lifts free cash flows or else being equal. So right now, bad figures are good for equities. If we look at forward estimates for earnings consensus is way too optimistic and equities have for the most part only priced in higher than expected inflation and not a recession, which is why we expect a lower leg down in equities when the recession becomes clear to all market participants.

24_PG_3
1-day difference in German 2-year yield

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.