[edit] Financial Summary

[edit] Recent Updates

[edit] Summary

Sales and membership figures for July were released on August 5, 2010.

The company announced Q1 FY03/11 results on July 29, 2010.

Sales and membership figures for June were released on July 6, 2010.

Sales and membership figures for May were released on June 4, 2010.

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[edit] Trends & Outlook

Monthly Trends

Note: Transaction value represents total sales in E-commerce business (includes direct and consignment sales). Transaction value is not equivalent to accounting sales. See Business Description for additional clarification.

Quarterly Trends

（Source: Company Data Processed by SR Inc.）

（Source: Company Data Processed by SR Inc.）

Q1 Results

The company released Q1 FY03/11 results on July 29, 2010 (see the table above). As a percentage of the 1H company estimate, Q1 numbers were as follows:

• Sales: 50.5% (vs. 1H estimate of 9.7 billion yen )
• Operating profit: 72.2% (vs. 1H estimate of 1.6 billion yen)
• Recurring profit: 71.9% (vs. 1H estimate of 1.6 billion yen)
• Net income: 70.5% (vs. 1H estimate of 870 million yen)

Key Quarterly Metrics

• Total Shops: 166 (45 in Store Planning & Development, 121 in Store Operation & Administration)
• Active Members: 871,316 (2,197,147total)
• Average purchased price per active member: 45,412 yen

In Store Planning and Development, merchandise sales grew steadily due to 5 new store openings including “BAPY® (reprise)” and a higher average purchase price. In manufacturers’ e-commerce support business (e-commerce consulting), the company won business from SHIPS, an established brand in Japan. As a result, both transaction value and total sales exceeded the company plan and the company achieved a record high quarterly operating profit margin. The number of new members added during the quarter was slightly below company plan, however, and the company will increase advertising from Q2 to grow membership.

The average shipping price rose following the end of the free shipping promotion in FY03/10, which increased the average annual purchase price (SR Inc. estimates about a 10% impact on the average price). No large free shipping promotion is scheduled in FY03/11, and the company expects the purchase price to be higher YoY for the rest of the year. The average commission rate for consignment sales rose 0.7% to 25.1% in Q1 vs. 24.4% in FY03/10, pushing up Q1 gross profit margin to 61.3% vs. 60.4% in FY03/10. The SG&A to sales ratio decreased by 3.9% to 38.3% in Q1 vs. 42.2% in FY03/10. Following the end of the shipping promotion, the ratio of customers buying more than one item increased, which reduced shipping costs and helped improve profitability.

The company achieved its target for new member additions in April and May but the quarterly total was slightly below its plan due to a shortfall in June. The company had expected a boost in June from TV commercials (it had earlier success in January 2009) scheduled to air when the summer sale began (June 25). Due to differences in seasons and other factors, results were below expectations. The company will increase advertising from Q2 to grow membership (planning another TV commercial in September). However, the company indicated that the FY03/11 results estimate remains in reach even if the number of new members is less than initially expected.

Although Q1 results exceeded the company’s plan, there was no change to 1H and full year forecasts. The company expects rent to increase (it will expand and improve the layout of its distribution center) and higher advertising costs (namely TV commercials) beginning in Q2.

Start Today also announced that in the e-commerce support business, it began service for two Japanese apparel manufacturers’ shopping sites: PAL Co., Ltd. (TSE 2726) and Melrose Co., Ltd in Q2 FY03/11. The sites will open in Q3.

At the Q1 results meeting, President Maezawa also offered hints on the redesign of the company’s website. Details were few, but improvements in search and social shopping (users share shopping and fashion ideas) functions seem to be key elements. SR Inc. speculates that the redesign will be finished in or after Fall 2010, probably coinciding with the start of FY03/12.

Full Year FY03/10 Results

The company announced FY03/10 Q4 and full year results on April 27, 2010.

Sales were 17,159 million yen (+60.4% YoY), operating profit 3,236 million yen (+47.0% YoY), recurring profit 3,247 million yen (+46.2% YoY), net income 1,859 million yen (+46.3% YoY).

As a percentage of the company forecast (revised on October 15, 2009), the results were as follows:

• Sales: 105.3% (vs. forecast of 16.3 billion yen)
• Operating profit: 103.7% (vs. full year forecast of 3.1 billion yen)
• Recurring profit: 103.7% (vs. full year forecast of 3.1 billion yen)
• Net income: 106.2% (vs. full year forecast of 1.8 billion yen)

FY03/10 Results Report Card

Revenues

Target: about 9 billion yen (+37% YoY) contribution from Store Planning and Development (direct sales)

Result: 10.4 billion yen (+50% YoY)

Target: 26 billion yen (+75% YoY) transaction value of in Store Operation and Administration (consignment sales).

Result: 26.7 billion yen (+78.3% YoY)

Target: active membership between 700,000 to 750,000.

Result: 801,486 active members

Gross Profit

SR Inc. estimated GPM of approximately 64%

Result: 60.5%

SG&A, Operating Profit

Target: The FY03/10 forecast for operating profit margin was 19.1%

Result: 18.9%

SR Inc. estimated total SG&A expenses was estimated by SR Inc. to be around 7.3 billion yen

Result: 7.1 billion yen

The strong results in FY03/10 were driven by the substantial increase in the number of new members, particularly in Q3 and Q4 when the company ran TV commercials for the first time in its history. Notable highlights:

• The average commission rate for the consignment sales business (Store Operation and Administration) has been increasing every quarter from Q1 through Q4 – 23.7%, 24.2%, 24.4%, and 24.8%.
• The operating margin of 18.9% was lower than in FY03/09 (20.6%) due to higher promotional spending but in line with the estimates, according to the company.
• Advertising spending has increased to 1,021 million yen from 388 million yen in FY03/09. FY03/10 was the first year when TV advertising was used.
• A jump in the number of active users and the introduction of the free shipping led to lower average spend per member. However, the company commented that from April 2010 when the free shipping practice was abolished, the average spend started increasing (most likely simply due to customers combining their purchases to take advantage of free shipping for purchases of 10,000 yen or larger).

FY03/11 Outlook

The FY03/11 forecast is as shown above. Important highlights:

Sales

Start Today’s FY03/11 sales forecast of 23 billion yen is based on following broad assumptions:

• Store Planning and Development (direct sales) 11 billion yen in merchandise sales (+9.8% YoY); the total sales of 11.9 billion yen (+14.5% YoY).
• Store Operation and Administration (consignment sales) 40.9 billion yen in transaction value (+62.0% YoY); the total sales of 10.9 billion yen including e-commerce support business (+67.8%).
• Manufacturers’ e-commerce support (e-commerce consulting) 3.6 billion yen in transaction value (+154.9%).

These 3 components of the total transaction value add up to 55.5 billion yen defining the Theme of the Year for the company – 555 Revolution (see additional comments at the end of the FY03/11 forecast section).

• The implied commission rate for the combined direct sales and e-commerce support is 24.5% or similar to the levels seen in Q3 and Q4 of FY03/10. SR Inc. wonders if this might be somewhat conservative given that new contracts have higher (about 30%) commission rates.

The company target the net increase of 1.5 million members (see below) compared to 763,229 in FY03/10.

Furthermore, the company published a detailed breakdown of the revenue assumptions for FY03/11 explained below (Note: all the assumptions discussed in the tables that follow exclude the sales generated on manufacturers’ own e-commerce websites, or so called B2B related sales).

Assumed Transaction Value from Existing Active Members – 33.5 Billion Yen

(576,813 existing active members x 58,075 yen in annual spend per existing active member)

Read slowly! The set of table above looks at the number of members acquired since the company’s inception (A), then at the actual percentage of active members in each year (C) and the average annual spend by those active members (D). Then, for FY03/11 the percentage of members who are still active is estimated for each year set when the members joined (F), using the data [1] from the table below – the historic retention rate or how many members stayed active in each year following their joining. After that the company looked at similarly derived estimated spend by the active members in FY03/11 – multiply actual spend D by the historic spend change pattern [2] from the table below. The resulting estimated spend for each group of active members (active since 1, 2, 3 etc. years ago), shown in H, is multiplied by the likely number of active existing members G to arrive at the total spend I, where all columns are added up. The final number 33,498 million yen in the bottom right number cell above is the estimated total spend, or total transaction value from the existing active members.

Assumed Transaction Value from newly Acquired Members – 18.4 Billion Yen

(1.5 million new members x estimated ratio of active members of 44% x 28,000 yen in annual spend per new active member)

Read this one even slower! Trying to estimate the contribution from the new members in FY03/11, the company first looked at the number of members acquired in the month of April in 2008, 2009, and 2010 (through April 20th). It then divided those numbers by the amount of advertising and promotional expenses incurred in respective month, to arrive at an estimated member acquisition cost. This exercise was also repeated for the annual figures of FY03/08, FY03/09, and FY03/10. Using the resulting figures as a benchmark, the company estimated the annual number of new members for FY03/11 (1.5 million) by plugging in the annual advertising budget of 2.1 billion yen and dividing it by the member acquisition cost of 1,400 yen (the company called the figure “conservative”, comparing it to the previous years’ figures as shown above). Then, taking a similarly derived “conservative” ratio of active members of 44%, the company arrived at the average spend per active member, producing the total of 18.4 billion yen in transaction value.

Gross Profit

Margins in Store Planning and Development were somewhat lower in FY03/10, estimated by SR Inc. at 34.7% (about 39.3% in FY03/09). This was due to markdowns – inventory markdown (valuation) loss in FY03/10 was 216.2 million yen vs. 117.9 million in FY03/10. The company commented at the results meeting that it expected lower inventory valuation losses (higher GPM) in FY03/11 partly due to initiatives discussed below. Given that Store Operation and Administration is 100% margin, assuming 36%-38% GPM for Store Planning and Development, SR Inc. estimates a gross profit of 15.4-15.6 billion yen (assuming that Other revenues of 200 million yen are also 100% GPM).

SG&A, Operating Profit

The FY03/11 forecast for operating profit margin is 20.0%, up slightly YoY. SR Inc. estimates implied SG&A expenses of about 10.8-11.0 billion yen. Advertising expenses are slated to more than double (2.1 vs. 1.0 billion yen in FY03/10), underlining the drive to increase membership. SR Inc. estimated that FY03/10 TV advertising spend was approximately 300 million yen. While the TV spend for FY03/11 is not disclosed, the company commented that advertising time slots will “increase approximately 5-fold”. It therefore appears that the FY03/11 advertising budget increase is mostly due to higher TV spending.

Net Income

No notable items.

Selected comments made during the results meeting on April 28, 2010 are summarized below:

• Apparel manufacturers are getting more interested in and serious about e-commerce.
• Consumers started understanding that it’s possible to safely buy apparel online. TV commercials helped a lot.
• This year’s theme is ‘cost controls’ (SR Inc. notes that advertising doesn’t appear to be part of costs to be controlled).
• In its Store Operation and Administration segment the company started operating an ordering and inventory management system linked to overall inventory at each manufacturer. It allows looking at manufacturer’s entire inventory in warehouses and physical stores. Manufacturers will be able to leverage their entire network inventory, bringing product from the physical store shelves if necessary.
• Some of the directly sold brands will shift to consignment, becoming tenants of ZOZOTOWN. This is one reason why the direct sales growth is expected to slow. The fact that Start Today had to take inventory risk prevented it and supplying manufacturers from bolder merchandising, creating “opportunity losses” (merchandise could have been sold if it was available). At the same time the company will be working to bring more original brands to its direct network and increase the number of overseas brands.
• A minor push into “secondary distribution” (auctions and second-hand) will start in FY03/11 after Start Today took a 30% stake in Crown Jewel (subsidiary of CyberAgent), which specializes in the field.
• About the same number of new stores will be set up in FY03/11 vs. FY03/10 - 65 storefronts.
• Discontinuing free shipping had no impact whatsoever.

Future Outlook

The company has a goal of achieving total transaction value of 100 billion yen by FY03/13, while generating at least 10 billion yen in recurring profit. SR Inc. estimates that assuming roughly 30% commission rate in Store Operation and Administration business this would translate into approximately 40 billion in total revenues (if 15 billion were generated by Store Planning and Development and about 25 billion yen in Store Operation and Administration). This would mean 25% headline operating profit margin. Furthermore, assuming gross profit margins discussed in the Business Model section, the total gross profit would be roughly 30 billion yen (75% margin) implying 20 billion yen in SG&A.

SR Inc. notes that such an increase in SG&A costs would be to a large degree discretionary. This further suggests that should the total transaction value increase to 100 billion yen the company will enjoy substantial degree of control over the amount of operating profit it generates, from the officially stated 10 billion yen to possibly 15-20 billion yen. (Operating profit margins of 50% are not unheard of among the internet businesses).

The growth in revenues appears to be to a large degree a function of how many mainstream apparel manufacturers embrace the internet, and more specifically ZOZOTOWN, as a mainstream retail location. It seems logical to assume that they would. Other domestic retail channels are saturated and expanding in the new trendy fashion neighborhood (even it is virtual), is a business imperative, not a fad. 2010-2011 might be the years when “going ZOZO” becomes a strategic choice for most apparel firms.

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[edit] Business

[edit] Business Description

Start Today is an online retailer of apparel and accessories. Apparel carried on ZOZOTOWN (the company’s website) target fashion conscious young adults (early 20s to mid 30s). The company’s business shares similarities with a physical shopping mall. The website is its real estate; its tenant stores are mostly operated on a consignment basis for apparel manufacturers, although some stores are the company’s own (brand shops and multiple-brand “select” shops). ZOZOTOWN is a one-stop-shop for customers looking for fashionable apparel, and a targeted marketplace for clothing manufacturers. In addition to online stores, Start Today offers order fulfillment for manufacturers.

The company is organized in two business units: E-Commerce Business (98.4% of FY03/10 sales) and Other (advertisement sales and co-branded credit card revenues).

Main Business Segments

The E-Commerce business unit reports sales in two categories: Store Planning and Development business (sales of the company’s own risk inventory) and Store Operation and Administration (consignment sales). Store Operation and Administration is the main driver of overall profitability.

Store Operation and Administration business (6.5 billion yen sales in FY03/10; 37.8% weight)

Operation of online stores for apparel manufacturers (on the company’s website) and e-commerce consulting (operation of manufacturers’ own sites). The bulk of segment sales are consignment fees for apparel manufacturers. Only consignment fees and not apparel sales are booked by Start Today, meaning that gross profit margins are 100%. Apparel manufacturers make the product selection and pricing decisions; Start Today provides the place and technology (website) for them to sell. At the end of FY03/10, the company operated 116 shops.

Store Planning and Development business (10.4 billion yen sales in FY03/10; 60.6% weight)

Start Today’s Store Planning and Development is essentially an online version of a multi-label retail store (the company purchases merchandise from apparel manufacturers, normally smaller ones, and sells it). The company operates both single branded storefronts as well as “select shops”. In both cases the products are selected by buyers from Start Today. As of FY03/10, the company operated 46 storefronts, a mix of established and incubation labels.

The Store Planning and Development business has been important in the company’s development; it’s the reason that ZOZOTOWN is a well recognized fashion shopping site in Japan. However, the company suggests that scalable and highly profitable consignment sales will be the key to future growth.

Website Concept

The company’s website, ZOZORESORT, provides a single shopping destination for fashion-conscious consumers. At the core of the site is ZOZOTOWN, the e-commerce shopping site. The look and feel of the website, rich in graphics and animation, aims to create a unique and cool shopping experience. On a more technical side, along with the standard shopping cart functionality, ZOZOTOWN has membership accounts, a basic recommendation engine, and restocking email notification. Membership accounts allow users to customize website services and save preferences. The recommendation engine collects and analyzes purchasing data and makes product suggestions. The restocking email notification alerts users when an out of stock item becomes available. Although these services are beneficial to website users, they also allow the company to collect purchasing data and provide indications of demand to tenant stores. (See By The Way for more details about the site.)

As of FY03/10 end, the site had 162 shops, offering products from 1,178 fashion brands. The company indicated that approximately 90% of the items sold on the site are apparel (the remainder are accessories). Brands available on the site range from major labels (such as United Arrows, Beams, Ships) to those from smaller boutiques. Having both well-recognized and emerging brands sends a message, “this site is cool, cutting edge, and sells fashionable and ‘in’ clothing”. At the same time, less adventurous shoppers can find “safer” alternatives of the mainstream labels and trends.

The company provides membership data to illustrate the website’s appeal and effectiveness with the target audience: total members and active members (members who have made a purchase within the previous year). Total membership data includes users who sign up for non-revenue generating services on the site, but is still useful to assess site popularity.

（Source: Company Data Processed by SR Inc.）

（Source: Company Data Processed by SR Inc.）

The company provides an additional dimension of membership growth: the number of new members added resulting from purchase activity. Of the total 763,229 new members added in FY03/10, approximately 57% were new active members (members who joined and made a purchase), a marked increase from 47% in FY03/09.

Main Facilities

The company’s main physical facility is ZOZOBASE, a logistics center in Chiba, with approximately 5,750 tsubo (19,000 sq. meters) of floor space. ZOZOBASE handles the company fulfillment.

Business Model

The ZOZOTOWN shopping site is relatively straightforward. Customers browse by product categories (tops, dresses, jeans, etc.), brands, price ranges, or color. Items are added to the shopping cart. At the checkout, payment details are processed by a settlement agency, which then pays Start Today. At completion of the checkout process, the order enters fulfillment. The company processes and fills orders at ZOZOBASE (logistics center), and uses a third-party for final delivery.

The company’s sales are based on the mix of consignment and direct sales. In direct sales, the company takes on the inventory risk, selecting and purchasing apparel from manufacturers. SR Inc. thinks that this conventional model is probably necessary for the company to both stay relevant with most fashion conscious consumers and to be able to guide less internet savvy apparel manufacturers in their merchandising and marketing choices.

Revenues for consignment sales are fees assessed on total transaction value (24.4% in FY03/10). As a business, this model is substantially superior to direct sales. Start Today makes suggestions regarding merchandising decisions and helps with online presentation (taking pictures etc.) and fulfillment. However the business risk lies fully with the manufacturers. Furthermore, because the company deals with multiple manufacturers, it effectively diversifies and can lower the volatility of sales. In that respect, consignment sales make the business more similar to a shopping mall operation than an apparel retail operation. The difference between ZOZOTOWN and a brick-and-mortar mall is that for Start Today there is no real estate development or ownership risk. At the same time, the fees that the company is charging are comparable to rents charged by the brick-and-mortar malls and fashion buildings. From apparel manufacturers’ perspective, they pay a fair price (and in some cases get off cheaply – department store variable rents can exceed 40% of sales). They can also exercise more control over what and how much they sell (no physical constraints on store size) in addition to getting a new popular retail location (and in the mature Japanese market, good physical locations are hard and expensive to secure).

The company suggests that prices on its website are similar to those in physical stores, so increasing total sales requires increasing either the number of shipments or the spending amount. The number of shipments has been on an increasing trend from Q1 FY03/08 (promotions in FY03/10 helped); amount per shipment has been relatively flat (note that the shipment value includes shipping fees, which were waived during a promotion in FY03/10).

（Source: Company Data Processed by SR Inc.）

Another metric to understand shopper’s repetition frequency is the purchase rate of existing active members. This measure (number of existing active members who purchased in the quarter / number of existing active members) separates the impact of new active members (members who have not purchased before) from repeat customers.

（Source: Company Data Processed by SR Inc.）

The increase in the purchase rate of existing members appears to have been on a slight downward trend into FY03/08, but dramatically increased in FY03/10. The company attributes the increase in repeating customers partially to free shipping promotion offered during the year.

Cost Structure

The company indicates that gross margins for individual sales segments are stable; total gross profit is driven by changes in the sales mix. The gross profit margin for consignment sales (Store Operation and Administration business) is 100%. The gross profit margin for non-consignment sales (Store Planning and Development) is approximately 40%, before inventory valuation and similar losses, and is typical for an apparel retailer.

Many of SG&A costs are variable (SG&A / sales range 32.4-41.6% from FY03/03 through FY03/10). Because of the company’s consignment model, these costs change with the transaction volume (shipping and payment collection). The company has also been aggressively investing in people and, from FY03/10, advertising. This meant that normally fixed costs have been increasing in-line with sales. SR Inc. sees this as essentially discretionary, albeit necessary, spending – as it grows, the company is still looking for the right mix and quantity of advertising spending and staff. At some point however, the web-based nature of the business model should start making impact, i.e. incremental revenues require fewer incremental costs.

Advertising is an important expense for Start Today. One of the growth constraints for the company has been building awareness with users outside of its core (highly fashion-conscious internet savvy shoppers). The company has historically advertised mostly on the Internet (approximately 70% of previous advertising budgets) but added television to its mix in late FY03/10 to reach a wider audience. The company noted that the TV commercials were success, and the TV advertising spending would likely to grow to expand the customer base from the current niche into the mainstream.

Profitability Snapshot, Financial Ratios

Start Today’s operating ratios appear robust: both gross profit and operating profit margins have been trending strongly and the absolute levels are very high for a company that retails apparel (although lower than for some pure internet mall operators).

The company’s total asset turnover appears to be declining, which appears to be the result of accumulating cash. The cash on the balance sheet has an obvious negative impact on ROA and ROE and those performance metrics could be further improved if the company could invest cash profitably to expand the business or distribute cash to shareholders. SR Inc. notes however that the company is still very young and in the expansion phase. This makes large cash distributions somewhat premature. At the same time, while young companies normally need the cash to invest, Start Today is generating such substantial cash flows that there seems to be no immediate need to use its growing reserves.

SWOT Analysis

Strengths

• Understands fashion, web, and business in equal measures. While a "soft" argument that is hard to support with facts, SR Inc. feels that this is the most important intangible asset that other strengths derive from. From unlikely beginnings when a high school rocker started selling indie CDs online, the company has focused on three factors: staying relevant in fashion, developing a unique e-commerce signature, and making money. There are lots of companies that can do one of those things. A few can get two right. But so far only Start Today seems to have managed to balance all three. Continuing to do so is the key to maintaining success.
• Strong support from mainstream upscale SPA brands. Success breeds success, and some of the leading Japanese apparel manufacturers and retailers committed themselves to a comprehensive partnership with Start Today when they saw the young company successfully selling street brands online. It can be argued that the early partnership with United Arrows defined the company business today. Drawing power of such brands as United Arrows, SHIPS, and Beams has been instrumental in taking ZOZOTOWN from a pure niche into a universal fashion mall. The relationships are truly symbiotic and have become another defining strength of Start Today’s business.
• Direct sales + consignment = right business mix. In SR Inc.’s view, the ability to pick brands and select apparel that fashion conscious customers would buy is a major factor in establishing credibility with both consumers and apparel manufacturers. However, it is the consignment sales that make Start Today business so profitable and scalable. Mixing the two produces an attractive and hard to replicate business model.

Weaknesses

Normally, SR Inc. looks for 3 Strengths and 3 Weakness for client reports. In Start Today’s case, identifying weaknesses was challenging. The first one is a real potential weakness and longer term risk factor. The final two are not so much immediate weaknesses (after all, the company business model is about fashion), but they may becomes so under certain circumstances. Readers are invited to submit other suggestions.

• Lack of experience with failure. The company has been very successful since inception, doing the right things at the right time. Because it is being built on uninterrupted and unquestioned success, it might find it difficult to adjust to unexpected competitive and other challenges. Success breeds complacency and the company needs to stay aware of potential vulnerabilities. Winners are often fearless when they move forward. That helps them achieve greatness, but also often becomes their downfall.
• Narrow focus exclusively on fashion. The company seems to have found the right formula in terms of managing growth and business risk. However from a more general perspective, all-inclusive platforms such as Yahoo! and Rakuten in Japan, or Amazon and eBay in the US are more visible and could have more staying power as businesses. Selling only fashion could create risks to the business, especially when the market matures or the economy slows.
• Exclusive domestic focus. While the Japanese market is one of the biggest apparel markets in the world (which creates ample growth opportunities for young companies like Start Today), it’s also stagnant in terms of overall sales trends. When the current honeymoon of online retailing comes to an end, the company may find it substantially harder to grow. Furthermore, once a certain level of maturity is reached, it’s an open question whether the early advantage proves sustainable. Manufacturers cannot ignore a growing platform but once growth stalls, they may be aggressively pursuing a larger part of the value pie, emphasizing their own websites and alternative platforms. At that time, many large firms will have grown in both size and understanding of e-commerce, making large individual initiatives more likely (incrementally at the expense of Start Today).

Group Companies

The company has one minor subsidiary, Start Today Consulting, Ltd.

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[edit] Market & Value Chain

Given the company size, discussing the overall market size (“Japan apparel market is 9-10 trillion yen”, “the internet mail order market is 4 trillion yen” etc.) seems irrelevant to SR Inc. For Start Today, the question of whether the apparel market shrinks to 6-7 trillion yen or whether the online sales would reach 15% or 20% of that market may become relevant as its transaction volume passes above 100 billion yen mark, a stated target. As of 2010 it is probably sufficient to state that the market size and trends support the company’s growth aspirations. As a general statement, the apparel market in Japan has been shrinking (link here) and the online mail order market growing (link here) in the past few years. While apparel sales shrank due to demographic trends, poor economy, and fashion trends favoring fast fashion, online shopping has become a part of standard consumer behavior.

Mobile phones have not been a major channel of selling apparel online. However, SR Inc. believes that the growing popularity of smartphones and the shift to LTE (Long Term Evolution, or 3.9G/4G) among carriers should cause that to change. A few factors have been historically a constraint to growth in apparel e-commerce: display resolution (hard to see details), bandwidth (pictures are slow to load), delayed satisfaction (speed of fulfillment and delivery), and payments. In case of the PCs, pretty much all of these challenges are now gone leading to rapid growth in online shopping. It seems apparent that with high resolution larger screens of smartphones, faster connection speeds, and electronic money settlements, buying apparel on a mobile phone while commuting on a train will be become as common as doing it from a PC in the living room.

Customers

The company’s customers are young adults with keen interest in fashion. They mostly work and therefore have independent income. The acceleration of growth in the number of members of the site in FY03/10 seems to suggest to SR Inc. that the company may have started attracting the mainstream as opposed to early fashion adopters. This generally could mean an opportunity for accelerated multi-year growth. The company will have to tread carefully however not to alienate its original core “trendsetter” consumer as it may hurt and dilute the image of the website. The typical current members are profiled below:

Profile of average Member (as of FY03/10 end)

• Average Age: 28.8 years
• Male / Female ratio: 46%/54%
• Geographic location: Kanto (41%), Kinki/Tokai (27%)

Suppliers

The company’s main suppliers are apparel manufacturers. The relative power question here is difficult to answer. Start Today is arguably more powerful because it provides manufacturers with a unique channel that allows them to sell more product faster than they can on their own websites. However, unlike Rakuten Ichiba or Yahoo! Japan shopping mall models, Start Today is relatively more dependent on few larger manufacturers. The company model of focusing exclusively on fashion apparel and staying ‘cool’, one of its main strengths, also introduces some degree of vulnerability in this power relationship. Narrow focus is by definition riskier. However, the relationship with the main suppliers is symbiotic and becoming increasingly balanced. That is, for any manufacturer selling on the site, leaving it would be as or more painful financially as it would be for Start Today (in terms of lost revenues and earnings). If Start Today grows from a highly successful niche site into a default fashion retailing destination for the mainstream young consumer, the relationship will shift irrevocably in the company’s favor.

Barriers to Entry

It is very easy to build a website and put apparel for sale there. It is relatively easy to build a cool site. It is very hard in the current oversaturated internet environment to get noticed and generate substantial traffic (hence popularity of the mainstream shopping aggregators such as Yahoo!, Rakuten, and Amazon). In that respect the barriers to entry in building a popular fashion related website are quite high. To build traffic nowadays, one has to spend a lot of money and that does not guarantee success.

However, pertaining specifically to what Start Today has achieved so far, the barriers to entry are much higher. The company managed to build an increasingly popular web destination (one of the top 100 sites in Japan, according to Alexa.com data from Q4 FY03/10) and a powerful cash-generative business with a low risk profile.

Competition

The company suggests that it currently has very little direct competition. This statement can be viewed in two ways. One, there is a large number of relatively visible specialty websites on the web, examples being fashionwalker.com, megaseek.com, style-life.jp, and girlswalker.com. Also, the major sites such as Yahoo! Japan (yahoo.co.jp) and Rakuten Ichiba (rakuten.co.jp) sell apparel. These sites clearly compete with what ZOZOTOWN offers. At the same time, Start Today claims to offer an entirely different experience – that of coolness and style, i.e. true ‘fashion’ as opposed to ‘clothing’. Whether or not the majority of consumers would see ZOZORESORT as fundamentally different experience when choosing a BEAMS “cutsew” (available on ZOZO) or Untitled one (available on Yahoo!), is an open question. However, simply looking at growth rates that the company has been experiencing, it appears to SR Inc. that the question of competition is secondary to the issues of website recognition and general growth of the internet retailing. In other words, the question of competition is relevant but not yet.

Substitutes

There are multiple substitutes to shopping online and more specifically, ZOZOTOWN. The brands are available in numerous brick-and-mortar stores and on manufacturers’ own e-commerce websites (although some are run by Start Today). On a broader level the apparel brands are largely substitutes to each other given relatively limited differentiation typical for modern labels. Furthermore, in developed economies, purchasing apparel is part of discretionary spending, so in the broadest sense substitute goods include entertainment, travel, services etc. Weak consumption and deflation are often blamed for declining retail sales in Japan, but it could be argued that in a mature post-industrial society such as Japan, the multitude of choices leads to dispersion of consumption of both money and time. The latter is a very important point as consumers nowadays have more choices to spend time without spending money which is a negative from an average retailer’s perspective. At the same time, the same phenomenon can be a positive factor for likes of Start Today that offers its visitors a low stress “time consumption” environment helping to grow traffic.

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[edit] Strategy

Expanding the Depth of Consignment Relationships

Probably one of the most important topics for the company is to convince more apparel manufacturers to truly embrace what it has to offer. According to the company, despite the impressive growth in numbers, only 7-8 tenants out of 150 fully treat their ZOZO stores as strategically important (FY03/10). Raising that number to 70-80 could mean explosive growth for both sides. Currently (FY03/10), many tenants are apprehensive of committing too much inventory to ZOZO resulting in stock-outs and lower customer satisfaction. Also, more can be done in terms of channel analysis and aggressively developing products specifically for it.

Strategy and Growth Opportunities

As of 2010 the company stated that it was committed to developing its core area of expertise, selling fashion apparel to consumers online. This means that the B2C angle should remain the key business to analyze the company (at least through FY03/13). Furthermore, Start Today will likely continue to be largely domestic Japanese company during this period. However, SR Inc. lists some potential future growth venues in random order here:

In B2C

• Increasing non-apparel. Fashion accessories, bags, and shoes seem to be a logical extension.
• Going upscale. Attracting up-market internationally recognized brands would be a significant event in terms of lifting the clout of ZOZO platform.
• Going downscale. Probably one of their riskier but potentially lucrative steps. While risking some potential image dilution, introducing mass-market fast fashion brands could mean substantial growth acceleration and financial rewards. Selling both expensive high fashion and mass market H&M-like apparel on one site may seem like an unwise choice, but SR Inc. notes that people shopping in Ginza don’t seem to mind going from a Prada boutique straight to UNIQLO a few hundred meters away.
• Selling non-fashion related merchandise. This option does not appear to be on company’s agenda but it is not too hard to imagine cosmetics or select interior goods sold on a much larger and mature ZOZORESORT site in the future.
• Overseas expansion. Offering the brands available on the ZOZO site internationally, particularly in Asia but possibly worldwide, appears to be an intriguing medium-term opportunity. While most of the brands offered on the site at the beginning of 2010 were Japanese, the popularity of Japanese fashion among young Asian consumers should mean that success in Japan should be possible to translate into foreign markets with relatively low costs.

In B2B

• The current B2B is really about enabling the apparel manufacturers’ own online shopping websites using Start Today’s know-how and infrastructure. It seems to be complimentary to the core business of selling on ZOZO sites and can become a substantial additional growth driver if the company manages to sign up clients for its comprehensive support model essentially identical to the consignment sales model.

In C2C

• As of the beginning of 2010 the company had been skeptical about trying to monetize any C2C services. For example, in interviews with SR Inc. the company indicated that it was not considering taking its real fashion offering into virtual reality (e.g. creating communities of fashion junkies buying virtual clothing for real yen). While many companies in Japan and worldwide have discovered that pleasing the avatar consumer is profitable and inexpensive, Start Today admits to believing that this to be somewhat of a fad and maintains the belief that sticking to its core business of dressing the real people is the best management choice around.

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[edit] Historical Financial Statements

[edit] Summary

Strong YoY growth in sales.

Large cash position, no debt.

Highly cash generative.

Earnings Results Discussion for the Year Preceding Current Fiscal Year (For Reference Purposes)

Q3 Results

Start Today announced Q3 FY03/10 results on January 28, 2010. As a percentage of the full year company forecast (revised on October 15, 2009), the cumulative Q3 numbers were as follows:

• Sales: 71.3% (vs. full year forecast of 16.3 billion yen)
• Operating profit: 67.3% (vs. full year forecast of 3.1 billion yen)
• Recurring profit: 67.5% (vs. full year forecast of 3.1 billion yen)
• Net Income: 68.7% (vs. full year forecast of 1.8 billion yen)

Key Quarterly Metrics

Total Shops: 146 (41 in Store Planning & Development, 105 in Store Operation & Administration)

Active Members: 648,932 (1,761,951 total)

Average purchased price per active member: 45,390 yen

Purchase rate of existing active members: 41.2%

Q2 (1H) Results

Start Today announced Q2 (1H) results on October 29, 2009. As a percentage of the 1H company forecast (revised on October 15, 2009), the cumulative 1H numbers are as follows:

• Sales: 100.0% (vs. 1H forecast of 6.7 billion yen)
• Operating profit: 100.1% (vs. 1H forecast of 1.2 billion yen)
• Recurring profit: 100.1% (vs. 1H forecast of 1.2 billion yen)
• Net income: 100.1% (vs. 1H forecast of 698 million yen)

Key Quarterly Metrics

Total Shops: 128 (39 in Store Planning & Development, 89 in Store Operation & Administration)

Active Members: 545,284 (1,519,877 total)

Average purchased price per active member: 46,393 yen

Purchase rate of existing active members: 41.5%

Q1 Results

Start Today announced Q1 results on July 30, 2009. As a percentage of the 1H company forecast, Q1 numbers are as follows:

• Sales: 49.0% (vs. 1H forecast of 6.3 billion yen)
• Operating profit: 59.9% (vs. 1H forecast of 885 million yen)
• Recurring profit: 60.0% (vs. 1H forecast of 890 million yen)
• Net income: 60.8% (vs. 1H forecast of 497 million yen)

Key Quarterly Metrics

Total Shops: 106 (34 in Store Planning & Development, 72 in Store Operation & Administration)

Active Members: 483,504 (1,381,574 total)

Average purchased price per active member: 47,993 yen

Purchase rate of existing active members: 40.6%

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[edit] Income Statement

Start Today’s sales have shown rapid growth from FY03/03 to FY03/10 (70.1% CAGR), with a relative slowdown (+24.6% YoY) in FY03/09 and subsequent reacceleration in FY03/10. The company suggests that sales levels in FY03/10 represent an inflection point in marketing efforts. The company had historically promoted its website online and in fashion magazines, which were effective in reaching the target audience: fashion-conscious young adults comfortable with buying online. To regain sales growth momentum, the company needed to reach a larger audience. The company began adding television commercials in late FY03/10 (December-January 2010).

The total gross profit margins are impacted by the mix between Store Planning and Development business and Store Operation and Administration business (consignment sales). Gross margins for consignment sales are 100% and as consignment sales grow the overall margins are likely to increase assuming stable direct sales gross profit margins.

SG&A/sales ratio has been stable (see Cost Structure discussion for cost analysis); changes in sales mix have driven operating profit margins.

Start Today has historically recognized minimal non-operating income and expenses. Recurring profit margins have been mostly equal from FY03/03 to FY03/10.

The company’s actual tax rate has averaged 42.9% from FY03/03 through FY03/10. It was 42.8% in FY03/10, greater than the statutory 40.4%. The somewhat higher tax rate has been mostly due to the so-called accumulated earnings tax levied on companies with a dominant single individual shareholder.

The company has recognized negligible non-operating and extraordinary items; net profit has basically been recurring profit, net taxes.

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[edit] Balance Sheet

The company’s balance sheet has been net cash (total interest bearing debt – cash) since FY03/06, and dominated by current accounts, reflecting the liquid nature of the business model. Due to the short-term nature of the company’s transaction cycle, working capital accounts are relatively more important to the business than fixed accounts.

Working Capital Analysis

Considering the company’s working capital requirements through a narrow definition (accounts receivable + inventories – accounts payable), accounts receivable have been the key determinant of the total needs (FY03/06 through FY03/10). Specific changes for working capital accounts are shown below:

Accounts receivable approximately doubled in FY03/07, driven by higher sales. The AR turnover ratio (sales / average accounts receivable) also increased, indicating that on average the company was being paid faster by customers. This could be considered beneficial for the company because cash used in higher AR could result in higher future free cash flow (higher turnover of a larger AR creates cash more quickly).

The timing of the improvement in the accounts receivable turnover ratio corresponds to an increase in the consignment sales business (see Business Model for description). Higher revenues were collected from consignment sales, without a proportional growth in receivables. The company has suggested that this business could be an area of future growth; therefore working capital trends should include the impact of consignment sales. Consignment sales impact the liabilities side of the balance sheet (the liability due to the consignor), and to capture the effect the Consignment Fees Payable should be included in working capital.

Higher consignment sales lead to higher Consignment Fees Payable, reducing total working capital. Considering the risk comparison between consignment and non-consignment sales (see Business Model), not only does the consignment business reduce business risk through lower inventory, but it also provides a source of cash through consignment fees payable.

Comparing the working capital turnover ratio (sales / working capital) adjusted for consignment and without can illustrate the impact of the consignment on working capital efficiency.

When adjusted for consignment payables, the sales generation capacity of working capital improves dramatically (higher sales per investment in working capital). The negative working capital value in FY03/08 is a result of a negative working capital requirement; essentially consignment fees payable provided financing for the company.

Assets

Start Today’s assets are mostly cash and equivalents. At FY03/10 end, the company’s cash position (including marketable securities) was 58.2% of total assets. The company’s business model is highly cash generative, due in part to the scalability of the technology platform that operates the business. From a shareholder’s perspective, however, retaining large amounts of cash actually dilutes returns on the capital because when cash isn’t invested it earns no return.

The company’s revenue-generating fixed assets are a mix of tangible and intangible assets. Tangible assets are obvious on the balance sheet (plant and equipment related to the ZOZOBASE logistics center). Intangible assets include software and systems for the company’s website and logistics center, and the company’s brand. Evaluating the efficiency of the company’s fixed asset base is subjective due to the reliance on intangible assets to generate sales.

Liabilities

The company’s liabilities mirror the liquidity of assets (mostly current). Current liabilities have typically been accounts payable and consignment fees payable (cash collected from a consignment sale which is due to the apparel manufacturer).

The point reserve account represents expectations of the merchandise value that ZOZO members will receive redemption of ZOZO points.

Net Assets

The FY03/07 net asset increase was the result of a third party issuance (approximately 1.0 billion yen). The FY03/08 IPO increased net asset by 1.6 billion yen. Changes in FY03/08-FY03/10 reflected net income and payment of dividends.

The company had minimal dilutive potential from options as of FY03/10 end (less than 1% of total shares outstanding).

Per Share Data

Adjusting for splits and dilution, the company’s EPS growth has been substantial from FY03/03 through FY03/07, reflecting early-stage explosive sales growth. Improvement in EPS has reflected the increasing net margin (from 0.7% in FY03/04 to 10.8% in FY03/10), whereas YoY sales growth has been moderating.

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[edit] Cash Flow Statement

The key source of cash for the company has increasingly been from operations. The IPO in FY03/08 increased cash by 1.6 billion yen, which was nearly overshadowed by the combination of cash from operations and investment. Strong operating cash flow levels mean that the company does not have to rely on outside sources of capital to grow.

Operating Cash Flow

Large operating cash flows in FY03/08 and FY03/10 were largely the result of increases in net income due to higher sales levels. Net income has typically defined operating cash flows (i.e. minimal non-cash and other adjustments). From FY03/06 through FY03/10 the ratio of net income to operating cash flow has been 66.9%, and increasing (55.6% in FY03/06 to 75.5% in FY03/10). Considering that the increase in net income has been driven by higher sales, this means that as sales levels have been growing, so has the operating cash yield per sale.

Investment Cash Flow

Major investment cash flows from FY03/06 through FY03/10 have been related to tangible asset investments (guarantee deposits or fixed asset expenditures). The company’s depreciable assets are mostly buildings (37.5% of FY03/10 tangible fixed assets), along with equipment and supplies (42.5% of FY03/10 tangible fixed assets). Equipment and supplies are depreciated faster, which drives the reinvestment cycle. The net equipment and supplies balance at FY03/10 end was 171 million yen, and estimating an average useful life of 6.5 years, were approximately 4 years old, suggesting that the company was in the middle of the Capex reinvestment cycle (FY03/10).

Future investment cash flows needs related to Capex could be relatively minor in comparison to cash generated from operations. As of FY03/10 end, the total cost of the company’s depreciable asset base was about 650 million yen; which was approximately 26% of FY03/10 operating cash flow.

Financial Cash Flow

The financial cash flows in FY03/07 and FY03/08 were the result of share issuances (third party offering in FY03/07; IPO in FY03/08). Considering the strong cash generation characteristics of the Start Today’s business model, estimating future financing needs is speculative (appearing frankly unnecessary for the current business model). As long as the company’s operations generate strong levels of cash, it appears likely that financial cash flows will be determined by dividend payments (see Dividends & Shareholder Benefits).

Simple Free Cash Flow

The company’s simple free cash flow has typically been determined by net income and changes in working capital (fixed assets are minor compared to net income). Simple free cash flow was negative in FY03/06 partially due to low net income. Working capital changes in FY03/07 were largely due to an increase in accounts receivable driven by higher sales (see Working Capital Analysis for more).

Start Today’s simple free cash flow yield (simple free cash flow / equity) was negative in FY03/06 and FY03/07. The simple free cash flow yield was 3.3% in FY03/10.

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[edit] Other Information

[edit] History

Corporate Timeline

May 1998 Start Today Ltd. established to sell imported CDs and records

January 2000 Started STMOnline (CD and records import) business

April 2000 Start Today Corporation incorporated

October 2000 EPROZE online select apparel shop opened

December 2004 ZOZOTOWN launched with 17 stores and other shops

September 2005 ZOZOCARD launched in tie-up with Pocket Card Co.

August 2006 Opened ZOZOBASE distribution center in Chiba prefecture

January 2007 Launched ZOZONAVI – a search portal for Japan fashion boutiques

October 2007 Launched ZOZORESORT, a fashion portal site combining the entire company services offering

December 2007 listed on TSE Mothers

March 2009 BEAMS Online shop, the official EC site of BEAMS Co., Ltd. launched. The first project of the EC support business for apparel manufacturers.

The company beginnings can be traced to the time when Yusaku Maezawa, Start Today’s founder was trying to make a living as a punk rock musician and leader of the band that he formed while in high school. The band would sell rare indie label CDs at its live gigs alongside own records. Noticing demand, Maezawa started an imported indie label mail order business in 1995. He started his company, the predecessor of Start Today Corporation, in 1998. The company first began using the Internet to reach customers in January 2000 when STMOnline, an online mail order imported CD and records website, was launched (spun off in 2006). The same year Start Today opened the 1st online ‘select shop’ EPROZE, selling niche street brands normally found in back streets of Harajuku in Tokyo (known as Ura-Hara, or “back of Harajuku” among young Japanese). The company was noticed by the major ‘select shop’ retailers (who later evolved into SPA manufacturers) such as United Arrows, BEAMS, and SHIPS who were impressed by the fact that the cool street brands would agree to be on the website. The interest led to Start Today selling minor experimental brands for them. Later, all three firms put all of their brands on ZOZOTOWN, the online shopping mall launched in December 2004. Capitalizing on its success, Start Today listed on TSE Mothers market in December 2007.

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[edit] News & Topics

Company News & Topics

Industry News & Topics

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[edit] Top Management

Yusaku Maezawa is the President and founder of the Start Today. His message to investors and other readers of this report: "we are growing fast but you are still underestimating what we can and will become".

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[edit] Employees

The company employed 245 full-time employees as of FY03/10. Key statistics:

• Average age: 27.1 years old
• Average length of employment with the company: 3.0
• Average salary: N/A
• Not unionized

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[edit] Major Shareholders

Start Today's largest shareholder is Yusaku Maezawa, who effectively controls 55.19% of company stock.

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[edit] Dividends and Shareholder Benefits

The indicated payout policy ratio is 25% of earnings. Past dividends were 2,020 yen per share in FY03/08 (payout ratio of 21.5%), 850 yen per share in FY03/09 (payout ratio of 24.1%), and 1,270 in FY03/10 (payout ratio of 24.9%).

As of FY03/10, there were no other shareholder benefits.

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[edit] Investor Relations

The company holds quarterly results meetings and maintains a web page with IR information: here (information available only in Japanese).

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[edit] By the Way

The company’s name, Start Today, comes from an album name of an American hardcore punk band called the Gorilla Biscuits. Start Today was released in 1989, and is considered by many of the genre’s fans as a definitive album of the music style.

The name of the company’s shopping website, ZOZOTOWN, is based on two Japanese characters (both including the “zo” sound) which mean imagination and creativity.

ZOZORESORT Services:

ZOZOTOWN – Internet Shopping

ZOZOPEOPLE – a social networking type service trying to fill the gap between the closeness of social networking services (SNS) or as disconnected as a blogging service

ZOZOQ&A – a bulletin board system for information exchange between users

ZOZONAVI – a search service which allows users to find fashion boutiques across Japan

ZOZOARIGATO – a message posting service where users can post “Thank you” messages

ZOZOGALLERY – a site with free computer wallpaper and mobile phone standby screen images related to fashion

Along with the main website, the company has mobile phone versions available for major carrier networks.

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[edit] Latest Q&A

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