Financial Summary

Recent Updates

Highlights

On January 27, 2012, Start Today released Q3 FY03/12 results: click here to go direct to Q3 FY03/12 results section.

(For original Japanese-language only release, please click here.)

On January 10, 2012, the company released sales and membership figures for December: click here to go direct to monthly sales data.

(For original English-language release, please click here)

On December 6, 2011, the company released sales and membership figures for November.

On November 7, 2011, the company released sales and membership figures for October.

For corporate releases and developments more than three months old please refer to the News & Topics section.

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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

Q3 FY03/12 Results (Announced on January 27, 2012; please refer to tables above.)

The company maintained its FY03/12 forecast.

Key Quarterly Metrics

• Total Shops: 356 shops (38 in Store Planning & Development, 318 in Store Operation Administration)
• Manufacturer E-commerce Support Business Client Numbers: 19
• Total Members: 4,173,754 (vs. Q3 FY03/11 +1,400,778; +1,040,663 since end-FY03/11)
• Active Members: 1,719,418 (vs. Q3 FY03/11 +621,933; +502,720 since end-FY03/11)
• Annual Purchase Value Per Active Member: 38,933 yen (vs. Q3 FY03/11 44,659 yen)
• Transaction Value: cumulative Q3 was 57.7 billion yen (+43.6% YoY)

Cumulative Q3 sales were up 33.9% YoY at 22.8 billion yen. New measures for FY03/12, such as, the start of accepting returned goods, the implementation of various point system campaigns, introduction of its guest member system for purchases and its first TV commercial featuring celebrities; plus new store openings, and an increase in active members drove a 43.6% rise in transaction value to 57.7 billion yen. Operating profit was up 35.4% YoY at 5.4 billion yen. SG&A expenses were up 58.8% YoY owing to factors such as costs associated with the company’s points promotion scheme. The SG&A to transaction value ratio came in at 20.2% for cumulative Q3 FY03/12 vs. 18.4% a year earlier. The company logged a 213 million yen extraordinary profit, however, 208 million yen of this was related to gains related to the acquisition of additional shares in fashion auction site Crown Jewels Inc. in June 2011 (making the company a wholly owned subsidiary).

According to the company, while average spend per member fell short of company expectations, the number of new active member came in significantly above forecast and thus transaction value came in 250 million yen above plan.

1H/Q2 FY03/12 Results (Announced on October 28, 2011; please refer to tables above.)

Key Quarterly Metrics

• Total Shops: 321 shops (41 in Store Planning & Development, 280 in Store Operation Administration)
• Manufacturer E-commerce Support Business Client Numbers: 19
• Total Members: 3,698,962 (vs. Q2 FY03/11 +1,256,706; +565,871since end-FY03/11)
• Active Members: 1,515,500 (vs. Q2 FY03/11 +541,515; +298,802 since end-FY03/11)
• Annual Purchase Value Per Active Member: 40,344 yen (vs. Q2 FY03/11 44,936 yen)
• Transaction Value: Q2 was 17.2 billion yen (+41.4% YoY), for 1H 34.1 billion yen (+41.4% YoY)

1H sales were up 34.5% YoY at 13.8 billion yen. New measures for FY03/12, such as, the start of accepting returned goods, an increase in its points promotion system to 3.0% from 1.0% of an item’s purchase price and introduction of its guest member system for purchases; plus new store openings, and an increase in active members drove a 46.1% rise in transaction value to 34.1 billion yen. SG&A expenses increased 62.9% YoY due to factors such as costs associated with the company’s points promotion scheme. The SG&A to transaction value ratio came in at 19.8% for 1H FY03/12 vs. 17.7% in 1H FY03/11. Nonetheless, higher revenues lifted operating profit for the period: operating profit rose 36.4% YoY to 3.4 billion yen. The company posted 213 million yen in extraordinary profits, but 208 million yen of this was related to gains stemming from the acquisition of additional shares in fashion auction site Crown Jewels Inc. in June 2011 (making the company a wholly owned subsidiary).

According to the company, while average spend per member fell short of company projections, active member numbers – both existing and new – came in well above forecast and thus transaction value came in 250 million yen above plan.

Looking at Q1 and Q2 transaction value, Q1 beat company forecasts while Q2 came in below forecast. While this appears to be a negative development the company explained the reason behind lower-than-expected Q2 figures was that strong Q1 sales meant a shortage of merchandise available for Q2 sales, suggesting the actual sales situation is actually more favorable than the results imply. Indeed, the company upwardly revised its sales and operating profit forecast on 14 October, 2011.

October 2011 transaction value came in slightly below plan, possibly because of the comparatively warm weather that had a negative impact on sales of winter apparel, according to the company.

The company left its full-year forecasts intact; the company remarked it considers the full-year forecast to be appropriate given its 1H achievement of 43% of the full-year sales forecast, which was in line with FY03/11’s performance.

Results Meeting

At the 1H FY03/12 results meeting held on October 30, 2010, President Yusaku Maezawa discussed the following three areas:

(Note – these topics are supplemented with additional information and are not meant to be taken as ad verbatim quotes)

1. Existing businesses; ZOZOTOWN

There was an increase of 82 shops being handled by the Store Operation Administration segment since the start of FY03/12 and the company is intent on attracting more stores to the site going forwards. By attracting a diverse range of brands to ZOZOTOWN (which, according to Maezawa, will range from Louis Vuitton through to Uniqlo), the company intends to use these brands to open up new markets and thus attract new customers. A prime example of this is the addition of the Coach brand to the line-up of ZOZOTOWN brands from October 2011.

In conjunction with this expansion, the company is not only increasing personnel numbers but also working to upgrade its warehouse facility (ZOZOBASE). The company has set a medium-to-long-term transaction value target of 500 billion yen and is working to expand its distribution capacity, such as creating a warehouse space capable of dealing with distribution volumes for 300 billion yen’s worth of transactions.

Purchases made via smartphones are increasing and constitute 15-20% of sales. In the near future the company will probably release an app for Android smartphones as well for the latest iPhone. The company intends for mobile apps not only to serve as sales channels, but also to function as an advertising platform by designing the apps to look like magazines (it considers apps to be effective as an advertising medium, as mobile-phone users can easily access them whenever they have free time).

From December 2011, the company will launch a major TV campaign to increase customer numbers. Looking beyond FY03/13, it has stated that it may carry out promotional offers in Q4 FY03/12.

2. Overseas Expansion

Since the start of FY03/12, the company has begun fully fledged efforts to develop its overseas businesses. On October 31, 2011, it opened ZOZOTOWN in China, which includes a presence on China’s largest shopping website, Taobao Mall, and opening its own e-commerce ZOZOTOWN site on the Taobao platform. The company debuted with about 40 brands on its site; payments are settled using Alipay, while logistics and customer support services are outsourced. The company bears inventory risk for its China business, therefore, it decided to initially limit the number of brands it offers while it attempts to identify customer preferences by handling merchandise in a variety of genres. It then plans to increase the number of brands it offers once it has identified local tastes.

On November 1, 2011, the company also opened ZOZOTOWN sites on South Korea’s largest shopping websites: Gmarket and eBay Auction. These two sites opened with around 110 brands.

While the company is developing its Chinese and South Korean sites with a focus on Japanese brands, it has indicated it intends to increase the number of local brands that it will offer on these in the future.

3. Crown Jewels Inc. (Second-Hand/Used distribution operations)

ZOZOTOWN customers were polled when making new purchases to gauge their opinions on a trade-in service. Feedback was positive and the company stated it intends to roll out a trade-in service. The goal is to grow the transaction value of second-hand distribution operations to around 20% of that of the primary distribution business.

Q1 FY03/12 Results

Start Today released Q1 FY03/12 results on July 28, 2011 (see table above).

Key Quarterly Metrics

Total Shops: 254 shops (42 in Store Planning & Development, 212 in Store Operation Administration)

Manufacturer E-commerce Support Business Client Numbers: 17

Total Members: 3,390,827 (vs. Q1 FY03/11 +1,193,680; +257,736 since end-FY03/11)

Active Members: 1,370,295 (vs. Q1 FY03/11 +498,979; +153,597 since end-FY03/11)

Annual Purchase Value Per Active Member: 41,478 yen (vs. Q1 FY03/11 45,412 yen)

Transaction Value: 17.0 billion yen (+51.1% YoY)

Sales were up 38.0% YoY at 6.8 billion yen. The number of both members and active members increased as the company worked on new measures going into FY03/12 it had implemented from FY03/11, such as, the start of accepting returned goods and an increase in its points promotion system to 3.0% from 1.0% of an item’s purchase price. All of which contributed to the 51.1% rise in transaction value for the period.

Operating profit was up 53.0% YoY. SG&A expenses increased 73.8% YoY due to factors such as costs associated with the company’s points promotion scheme. The SG&A to transaction value ratio came in at 19.2% for Q1 FY03/12 vs. 16.7% in Q1 FY03/11. However, higher revenues contributed to the increase in operating profit. The company posted 213 million yen in extraordinary profits, but 208 million yen of this was related to gains stemming from the acquisition of additional shares in fashion auction site Crown Jewels Inc. in June 2011 (making the company a wholly owned subsidiary).

According to the company, while average spend per member fell short of company projections, active member numbers – both existing and new – came in well above forecast and thus transaction value came in 800 million yen above plan. Given transaction value exceeded forecasts, sales also beat expectations by 300 million yen and operating income exceeded the forecast by 500 million yen. The better-than-expected operating profit figures were also helped by SG&A expenses coming in below plan due to labor and outsourcing costs. With regards to the new returned goods policy, the company noted it had expected returns of around 10% of turnover but in reality returns had remained capped around the 5% mark.

The company maintained its 1H and full-year FY03/12 forecast.

Active members increased 53.1% in July 2011 and transaction value remained strong up 39.2% YoY. In late June 2011 the company introduced “guest membership” for ZOZOTOWN, which allows users to make purchases on the site without registering first. Guest member purchase figures for July 2011 were 59,242 persons (vs. 9,939 people in June) and accounted for 4.1% of active member numbers. Active member figures for July were up 58,887 people month-on-month, with guest members accounting for the bulk of this.

The company began to lay the groundwork for overseas operations in earnest during FY03/12. In May 2011 it opened its global site for overseas customers, ZOZOTOWN.com, and in June 2011 it set up its Hong Kong subsidiary ZOZOTOWN HONGKONG Co. In late August 2011 it will begin operating on South Korea's largest shopping sites - Gmarket and eBay Auction - and in September 2011 it will open its e-commerce fashion site in China.

Regarding the South Korean business the company will handle product and inventory information, as well as delivery to customers while its partners will be responsible for marketing and payment settlements. As SR Inc. understands it , the big difference between the Korean and Japanese ZOZOTOWN sites (apart from the Korean site being in Korean) is the company’s partners’ involvement is limited to marketing and payment settlement. Around 130 brands are expected to be offered when the site opens.

Regarding the Chinese operations, while full details have yet to be released, the company will own local distribution centers and this will be part of the outlay for initial costs involved with the business.

FY03/12 Outlook

The company released the following targets (Key Metrics) for its FY03/12 plan:

• Transaction Volume: 84 billion yen (vs. 57.1 billion yen in FY03/11)
• Existing Active Members: 904,800 (vs. 562,684 people in FY03/11)
• Average purchased price per existing active member: 66,313 yen (vs. 62,536 yen in FY03/11)
• New active members: 660,000 people (vs. 662,570 in FY03/11)
• Average purchased price per new active member: 25,000 yen (vs. 25,715 yen in FY03/11)

The company has forecast transaction volume of 84 billion yen (+47.0 % YoY) for FY03/12. Breaking this figure down, the company was expecting transaction volume of 60 billion yen from existing active members, of 16.5 billion yen from new active members, and of 7.5 billion yen from its e-commerce support business (e-commerce consulting).

The projected 60 billion yen in transaction volume from existing active members was based off a forecast 904,800 existing active members for the period multiplied by the average annual purchase price per existing active member of 66,313 yen. Total member numbers as of end-March 2011 was 3.1 million, thus, the company estimates were for approximately 29% of its members to be active. The 29% active member rate compares to a 27% active member rate during FY03/11. SR Inc. believes this slight increase in active member penetration is a reasonable assumption.

The company also was forecasting a 6% YoY increase in average annual purchase amounts per existing active member to 66,313 yen vs. 62,536 yen in FY03/11. The company said it expects an increase in the average number of annual purchases made by active members due to the launch of its policy to accept returned goods and the changes to its points promotion scheme.

Until April 2011 the company only accepted returned goods if merchandise was defective or it had dispatched the wrong item to customers. Since April 1, 2011, the company said it would accept returned goods other than defective or wrongly sent products under certain conditions. Additionally, the company increased the percentage of points-earned from purchases to 3% of purchase price from 1% in its promotion points campaigns (and to 4% from 2% for ZOZO card members).

The company's brand recognition rate for the company was already considered to be sufficiently high, due to television commercials it broadcast during FY03/11 and other marketing campaigns. Based off the company's independently commissioned survey targeting customers aged 18 to 33 years old ZOZOTOWN's brand recognition rate was 77% in December 2010 (vs. 49% in December 2009).

However, from FY03/12 onwards a key issue for the company will be how to translate its high level of recognition into actual customer purchases. Two measures it has adopted to realize this are changes to its policy on returning goods and an increase in the percentage of points credited from purchases.

Transaction values of 16.5 billion yen from new active members are based on a projected 660,000 new active members multiplied by an average purchase price per new active member of 25,000 yen. The company forecasted both new active member numbers and average purchase price per new active member will stay at roughly the same level as FY03/11.

Following on from the increase in transaction values, the company was anticipating an increase in sales of 35.3% YoY, to 32.2 billion yen. However, it also expects SG&A expenses to rise 61% YoY to approximately 17 billion yen. The reason for the increase in SG&A expenses is that although advertising costs will decline YoY, other variable costs were forecast to increase, such as, costs incurred from a new policy of providing a higher percentage of points to purchase prices and also personnel expenses relating to a new logistics center.

The company is thus forecasting an increase in operating profit of 46.3% YoY, to 8.6 billion yen.

Future Outlook

The company has a goal of achieving a total transaction value of 500 billion yen in the mid to long-term, while generating at least 50 billion yen in recurring profit. These targets are for domestic operations only, and based on assumptions of 10 million active members (implying from the total 20 million members it has forecast that 50% will be active) and an average purchase price of 50,000 yen. The 500 billion yen transaction value target was based off assumptions that 20% of Japan’s 5 trillion yen apparel market will migrate to e-commerce and the company will capture half of this market.

Therefore, 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 expansion in trendy fashion retail locations (even if it is virtual), is a business imperative, not a fad. In the foreseeable future, “going ZOZO” might become a strategic choice for most apparel firms.

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Business

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 loosely fall into three categories: Store Planning and Development business (sales generated by the company’s own inventory), Store Operation and Administration (consignment sales) and Manufacturers' E-commerce Support business (e-commerce consulting). Store Operation and Administration is the main driver of overall profitability.

Store Planning and Development business (11.7 billion yen sales in FY03/11; 49.1% weight)

Start Today’s Store Planning and Development is essentially an online version of a multi-label retail store where products are selected by the company’s own product buyers. At the end of FY03/11, the company operated 50 storefronts, a mix of established and incubation labels.

The Store Planning and Development business has been important in the company’s development; indeed, it is the main reason ZOZOTOWN is a well-recognized fashion shopping site in Japan. However, the company has suggested the key to future growth will not only be its Store Planning and Development business but also its Store Operation and Administration segment too.

Store Operation & Administration business (10.6 billion in FY03/11; 44.7% weight)

This segment is involved in attracting apparel manufacturers to open e-commerce stores on ZOZOTOWN (the company’s own website) and then operating and administering these online shops. The company designs these online stores for each brand, keeps the products shown on the relevant store’s website as consignment stock, and carries out e-commerce fulfillment operations (which includes product delivery, photography, storage, packaging, delivery, and payment settlements). However, the company leaves the systems for merchandise management and selection (product lineup, inventory levels, prices etc.) to the discretion of apparel brands.

The major difference between this segment and the Store Planning & Development segment is that apparel brands decide on their own product lineup, inventory levels, and prices. Consequently, the company bears zero inventory risk for this division (this is instead shouldered by the apparel brands). Sales in this segment are provided by the revenues collected from apparel manufacturers as consignment sales commissions (merchandise sales multiplied by consignment commission rates).

Gross profit margin for this segment is 100%, as the company only records consignment sales commissions as sales, not the stores’ merchandise sales. At the end of FY03/11, the company managed 198 stores in this segment.

Manufacturers' E-commerce Support business (e-commerce consulting) (1.7 billion yen in FY03/11; 4.5% weight) The operations in this segment are conducted by subsidiary Start Today Consulting Co. established in May 2008. Leveraging the systems and logistics infrastructure constructed for the management of ZOZOTOWN itself, the business provides support for the company’s e-commerce fulfillment-related businesses, such as systems development for e-commerce sites independently managed by manufacturers, design and production, distribution outsourcing, and marketing support.

At end-FY03/11, the company provided support for e-commerce websites of 14 companies, including Isetan (part of Isetan Mitsukoshi Holdings (TSE 3099)), Beams (unlisted), United Arrows Ltd. (TSE 7606), and Onward Kashiyama (subsidiary of Onward Holdings (TSE 8016)). The unit’s sales are calculated according to each websites’ merchandise sales multiplied by a commission rate. The company, therefore, bears no inventory risk either for this business. There only real difference between the operations of the company’s Store Operation and Administration segment and its Manufacturers E-commerce Support (e-commerce consulting) unit is for Store Operation and Administration merchandise is sold via ZOZOTOWN, while in Manufacturers E-commerce Support it is sold via the manufacturers’ own e-commerce sites.

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 FY03/11 end, the site had 249 shops, offering products from 1,555 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.

The company provides an additional dimension of membership growth: the number of new members added resulting from purchase activity. Of the total 1,104,384 new members added in FY03/11, approximately 60% were new active members (members who joined and made a purchase), a marked increase from 57% in FY03/10.

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 (around 25% in FY03/11). 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.

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, Manufacturers' E-commerce Support 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 32.4-44.0% from FY03/03 through FY03/11). 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 FY03/11, 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.

Strengths, Weaknesses

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 Weaknesses 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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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 2011 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 FY03/11 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 FY03/11 end)

• Average Age: 29.8 years
• Male / Female ratio: 44%/56%
• 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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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 249 fully treat their ZOZO stores as strategically important (FY03/11). Raising that number to 70-80 could mean explosive growth for both sides. Currently (as the end of FY03/11), 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

SR Inc. believes the following could become potential future growth drivers:

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.

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.

At the Q2 FY03/11 results meeting held on October 30,2010, president Maezawa discussed the following new strategic initiatives:

1) Fashion Database Open Platform Strategy (FDP Strategy)

• A multiyear initiative;
• Start Today will provide its product database to external e-commerce sites, search engines, media sites, and social networking sites (as long it has permission from the underlying brand ).
• The goal is to build up an apparel distribution platform, eventually consolidating the inventory information and enabling sophisticated logistics and retailing management solutions.
• The company assessed the market opportunity to be about 800 billion yen, assuming long term ratio of online sales of 20% of the company’s estimated 4 trillion yen domestic branded fashion apparel market.
• A business alliance with Yahoo Japan (TSE 4698), announced October 2010, is an example of this model.

2) Overseas Growth

• The company is trying to develop business in overseas markets two ways: creating a global site (multi-language version of “ZOZOTOWN”) and operating country-specific fashion sites by partnering with a dominant local partner.
• Due to the influence of Japanese fashion on other Asian consumers, Asia is seen as a promising possible first step.
• The company announced in April 2011 that it would establish a joint venture with SOFTBANK Corp. to develop ZOZOTOWN in China.

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Historical Financial Statements

Summary

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

FY03/11 Results

The company announced FY03/11 results on April 26, 2011.

Key Quarterly Metrics

• Total Shops: 248 (50 in Store Planning & Development, 198 in Store Operation & Administration)
• Total Members: 3,133,091 (vs.FY03/11：+1,104,384)
• Active Members: 1,216,698 (vs.FY03/11：+415,212 )
• Transaction Value: 57.13 billion yen (YoY+54.2%)

Total sales increased 38.7% YoY to 23.8 billion. Total and active member numbers grew significantly driven by increased shop numbers off the back of an aggressive advertising campaign, site renewals and a tie up with Yahoo Japan Corp. (TSE 4689). Transaction value was up 54.2% YoY although SG&A expenses also rose by 46.8% due to advertising campaigns. Operating income rose 80.8% YoY to 5.9 billion yen.

In April, 2011, the company announced that it intended to:

• Launch a global site in late May 2011

• Establish a joint venture with SOFTBANK Corp. (TSE 9984) to develop ZOZOTOWN in China.

At the company’s April 28, 2011, FY03/11 results meeting President Maezawa made the following comments on these developments:

Creation of a global site

• The company will establish a multi-lingual site supporting five languages (Japanese, traditional & simplified Chinese, Korean, and English) using a translation engine to render content between languages.

• Brands will retain the ability to set the breadth of merchandise they choose to offer to customers; the company had already gained permission to sell products from approximately 700 brands.

• Paypal was to be the sole payment method; the site will deliver globally to 82 countries with delivery costs borne by the customer.

• ZOZOTOWN‘s FY03/11 overseas sales were approximately 100 million yen.

SOFTBANK Corp. JV for the development of ZOZOTOWN in China

• Start Today Hong Kong (tentative name) will initially be 52.7% owned by the company and SOFTBANK will hold the remaining 47.3% stake. However, following its establishment new share subscription rights will be allocated to Alibaba.com Ltd. (Hong Kong 1688) giving Alibaba a 5% stake and taking the company’s position down to 50.1% and Softbank’s holding to 44.9%.

• The company will launch operations in China at the end of September 2011 through a wholly owned subsidiary of the above-mentioned JV, tentatively named Start Today Shanghai. Initially, the company will use the Alibaba Group's Taobao platform to develop ZOZOTOWN in China, during the next stage it will open ZOZOTOWN in Taobao Mall (China's largest Internet shopping website) thus establishing two sales channels.

• A logistics center will be established in China and products will be shipped locally.

• The company was not able to announce details about e-commerce fulfillment operations as of April 2011.

• Domestic (Chinese) brand manufacturers will pay commissions to the company and to Taobao.

(A video presentation by Softbank President Masayoshi Son was shown at the results meeting and while expressing his optimism for this JV, he also stated that he expected it take one or two years for it to gain traction.)

Q3 (Cumulative) FY03/11 Results

On January 28, 2011, the company released FY03/11 Q3 results. At the same time, the company released an upward revision to its FY03/11 earnings forecasts and expected dividend payment.

Key Quarterly Metrics

• Total Shops: 226 (50 in Store Planning & Development, 176 in Store Operation & Administration)
• Active Members: 1,097,485 ( 2,772,976 total)
• Annual transaction volume per active member: 44,659 yen

Transaction volume increased significantly due to the combination of higher average value per shipment (i.e. spend per transaction) and more shipments. The average spend rose 8.5% YoY influenced by the termination of the free shipping campaign at the end of FY03/10. The average commission rate for consignment sales rose 1.4% to 25.5% in 3Q vs. 24.1% in 3Q FY03/10, pushing up gross profit margin to 66.7% vs. 59.4% in 3Q FY03/10. OP margin improved by 5.4% to 23.5%, while the SG&A to sales ratio increased by 1.9% to 43.2% vs. 41.3% in Q3 FY03/10, driven by advertizing costs.

The revised FY03/11 forecast was as follows:

• Sales: 23.5 billion yen (previous forecast: 23.0 billion yen)
• Operating profit: 5.2 billion yen (previous forecast: 4.6 billion yen)
• Recurring profit: 5.2 billion yen (previous forecast: 4.6 billion yen)
• Net income: 2.9 billion yen (previous forecast: 2.6 billion yen)

The company explained that the sales forecast was revised up slightly due to strong transaction volume, following the combination of aggressive television advertising and an increase in the number of brands on the company’s website. The company revised operating profit up, commenting that the change was due to higher average commissions vs. earlier estimates.

In light of the full year revision, the company increased its expected FY03/11 dividend to 7.0 yen per share (vs. an earlier estimate of 6.0 yen per share).

President Maezawa made the following comments at the results meeting on January 31, 2011:

• The number of new members was short of the plan, however the per-user spend amount for new active members and existing members exceeded the plan, so they weren't pessimistic.
• As a result of their business partnership with Yahoo (TSE 4689), 350 million yen (5.3% of total) of merchandise sales came from Yahoo! Japan. Additionally, the average age of members acquired in December was 29.5. The average age of registered customers from Yahoo! Japan was 33.4, and 40% of the traffic to their site was from Yahoo! Japan (22% before the partnership).
• Downloads of the iPhone application (released early November 2010) were favorable at 530,000 (as of January 27, 2011). They plan to release applications for Android and other smartphones in the future.
• ZOZOTOWN’s brand recognition rate was 77% (from the company's independent survey targeting ages 18 to 33) in December 2010, compared to 49% in December 2009. They have no need to increase the recognition rate further than this, and plan to discontinue advertisement for the sake of increasing the recognition rate after FY03/12. Instead, they will emphasize the value of using ZOZOTOWN through sales promotions.
• They plan to conduct a new campaign using a point system starting in February 2011.
• They plan to begin global expansion in FY03/12, to “astonish the world”.

Their point system campaign started February 1st, 2011 and ran until February 14th. The promotion provided points worth 5% of the purchase price including tax (vs. 1% normally) for purchases less than 21,000 yen. The company said that it would set the sales promotion plan for FY03/12 based on the results of this campaign.

According to the company, the recognition rate from TV commercials was high, and turning recognition into new active members would be a focus for FY03/12 promotion efforts. Concerning the future, the “astonishing” FY03/12 measures are noteworthy, however other than “global expansion,” specific steps remain unclear. SR Inc. thought that the company was going to try to increase the proportion of accessory sales to total sales (around 4% as of February 2011) as a way to boost total sales, but it seems that this might not be the case. SR Inc. notes that the company did not include possible impacts from the “Fashion Database Open Platform Strategy” or “global expansion” in their midterm targets of 100 billion yen of transaction value and recurring profit of 10 billion yen (through FY03/13).

Q2 Results

The company released Q2 FY03/11 results on October 28, 2010. As a percentage of the FY company estimate, 1H numbers were as follows:

• Sales: 44.5% (vs. FY estimate of 23 billion yen )
• Operating profit: 53.7% (vs. FY estimate of 4.6 billion yen)
• Recurring profit: 53.5% (vs. FY estimate of 4.6 billion yen)
• Net income: 52.9% (vs. FY estimate of 2.6 billion yen)

Key Quarterly Metrics

• Total Shops: 166 (46 in Store Planning & Development, 121 in Store Operation & Administration)
• Active Members: 973,985 ( 2,442,256 total)
• Annual transaction volume per active member: 44,936 yen

Transaction volume increased significantly due to the combination of higher average value per shipment (i.e. spend per transaction) and more shipments. The average spend rose 9.8% YoY influenced by the termination of the free shipping campaign at the end of FY03/10. As there are no plans to offer free shipping on a large scale in FY03/11, it appears likely that the value per shipment should also increase for the full year, as originally estimated by the company. The average commission rate for consignment sales rose 1.2% to 25.2% in 1H vs. 24.0% in 1H FY03/10, pushing up 1H gross profit margin to 64.6% vs. 59.5% in 1H FY03/10. The SG&A to sales ratio decreased by 0.8% to 40.5% in Q1 vs. 41.3% in 1H FY03/10, driven by fixed costs leverage of such items as rent. In addition, the end of free shipping campaign mentioned before meant that the ratio of customers buying more than one item increased, which reduced packing and shipping costs, contributing to profitability.

New memberships were below the company expectations. The company started from June 25th a new TV commercial campaign at the same time as its seasonal summer sale but the new campaign had not produced results as dramatic as those achieved by the first one (ran from January 2009). However, the company has indicated that even if the number of new members did not increase as planned, the probability of achieving the full year financial targets was very high. The main reason is better than expected transaction volumes by the existing members.

Although the 1H results exceeded the initial company projections, there was no change in the full year forecast, at least partly due to a likely higher TV advertising spending in the 2H.

Other Updates from The Result Meeting (October 30, 2010)

President Maezawa discussed new strategic initiatives such as Fashion Database Open Platform Strategy and Global Growth (see Strategy for details of both initiatives). He also mentioned that the company slated to open on November 24, 2010 the ZOZOOUTLET, an online discount outlet mall. This is an interesting development as in the past that company had repeatedly stated that outlet-style stores were not something Start Today would consider doing. SR Inc. understands that this does not (at least officially) represent a change in long-term strategy of focusing on higher end full price items. At the same time SR Inc. feels somewhat skeptical about the company comments that the outlet initiative is for a limited period only and would be scrapped eventually. The logic of the fashion business probably dictates having a discount outlet mall if the company wants to push for more tenant risk inventory on its site.

Additionally, the company announced that it would open on November 15, 2010 an official “limited period” online FENDI shop at “ZOZOVILLA”, Start Today’s luxury brand site.

Q1 Results

The company released Q1 FY03/11 results on July 29, 2010. 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 (46 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).

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 were 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 were 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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Income Statement

Start Today’s sales have shown rapid growth from FY03/03 to FY03/11 (65.8% CAGR).

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 FY03/11.

The company’s actual tax rate has averaged 42.8% from FY03/03 through FY03/11.

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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 FY03/11). 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 FY03/11 end, the company’s cash position (including marketable securities) was 58.8% 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.

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 13.0% in FY03/11), whereas YoY sales growth has been moderating.

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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 FY03/11 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 FY03/11 the ratio of net income to operating cash flow has been 71.2%, and increasing (55.6% in FY03/06 to 78.8% in FY03/11). 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 FY03/11 have been related to tangible asset investments (guarantee deposits or fixed asset expenditures). The company’s depreciable assets are mostly buildings (49.7% of FY03/11 tangible fixed assets), along with equipment and supplies (35.2% of FY03/11 tangible fixed assets). Equipment and supplies are depreciated faster, which drives the reinvestment cycle.

Future investment cash flows needs related to Capex could be relatively minor in comparison to cash generated from operations.

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).

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Other Information

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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News & Topics

October 2011

On October 28, 2011, the company released 1H/Q2 FY03/12 results: click here to go direct to 1H/Q2 FY03/12 results section.

(For original Japanese-language only release, please click here.)

On October 14, 2011, the company announced an upward revision to its 1H FY03/12 forecast.

The upward revision was as follows:

• Sales: 13.8 billion yen (vs. previous forecast of 13.5 billion yen)
• Operating profit: 3.3 billion yen (vs. previous forecast of 2.9 billion yen)
• Recurring profit: 3.3 billion yen (vs. previous forecast of 3.0 billion yen)
• Net income: 2.1 billion yen (vs. previous forecast of 1.7 billion yen )

According to the company the upward revision was driven by:

• Transaction volume increasing, due to the company starting to accept returned goods, an increase in its points promotion system to 3.0% from 1.0%, the introduction of its “guest membership” for its ZOZOTOWN website and the opening of new shops on its site.
• Regarding SG&A expenses, there were increased costs associated with the revision of its points promotion system but the company managed to keep personnel expenses in check, it noted.

The company commented its full-year FY03/12 forecast remained unchanged due to uncertainty over current consumption trends.

(For original, Japanese language only release in PDF format, please click here.)

August 2011

As previously outlined in an April 26, 2011, release, on August 23, 2011, the company and Softbank Corp.’s (TSE 9984) joint venture, ZOZOTOWN HONGKONG, established a wholly owned subsidiary in Shanghai, China.

Name: ZOZOTOWN (Shanghai) E-Commerce Co.

Capital: 40 million Hong Kong dollars

Shareholders: a wholly owned subsidiary of ZOZOTOWN HONGKONG Co.

The impact on the company's financial results for FY03/12 was yet to be determined but if a significant impact on performance going forwards was determined this would be promptly disclosed, the company noted.

(For original Japanese-language only release, please click here)

July 2011

On July 28, 2011, the company released Q1 FY03/12 results: click here to go direct to Q1 FY03/12 results section.

(For original Japanese-language only release, please click here)

June 2011

The company announced on June 23, 2011, it had reached a basic agreement for a business tie-up with eBay Gmarket Co. and eBay Auction Co. (both South Korean subsidiaries of eBay Inc. (USA EBAY)).

eBay Gmarket runs eBay Gmarket - Korea’s largest online shopping website - while eBay Auction runs eBay Auction. Together the two sites are Korea’s largest shopping websites focused mainly on B-to-C.

Gmarket and eBay Auction, and the company have reached an agreement in principle to add a new category of “Japanese Brands” (the category name was yet to be decided as of the release date) onto their sites under which Start Today’s ZOZOTOWN Japanese fashion online shopping website will operate. The launch date of this is scheduled for mid-August 2011.

(For original English language release in PDF format, please click here)

On June 20, 2011, the company announced it had completed the establishment of its Hong Kong joint venture.

• Company Name: ZOZOTOWN HONGKONG Co. Ltd.

• Capital: 46 million Hong Kong dollars

• Ownership: 52.7% held by Start Today; 47.3% by SOFTBANK Corp. (TSE 9984)

(New share subscription rights have been allocated to Alibaba.com Ltd. (Hong Kong 1688) after exercise of these rights Alibaba will have an expected 5% stake, taking the company’s position down to 50.1% and Softbank’s holding to 44.9%.)

As of the time of the announcement the company was calculating any impact on earnings for FY03/12, if it becomes clear there would be a significant effect on performance the company said it would promptly disclose any impact.

(For original Japanese-language only release, please click here)

May 2011

On May 27, 2011, the company announced it had turned Crown Jewel Inc. into a fully owned subsidiary from an equity affiliate after acquiring additional shares in the company.

(For original PDF announcement in Japanese-language only click here)

On May 18, 2011, the company began operating its global site "ZOZOTOWN.com". ZOZOTOWN.com supports five languages: Chinese, Korean and English, while delivering to 82 nations globally such as the United States, and in Asia this includes Hong Kong, Taiwan while in Europe the site covers England and France among others, the company said.

(For original PDF announcement in Japanese-language only please click here)

April 2011

On April 26, 2011, Start Today released FY03/11 results.

On April 26, 2011, the company announced a Hong Kong-based joint venture with SOFTBANK Corp. (TSE 9984) for the purpose of developing a China-focused subsidiary e-commerce site. Start Today Hong Kong (the JV’s tentative name) will be 52.7% owned by the company and SOFTBANK will hold the remaining 47.3% stake. The company will be established in July 2011 and scheduled to begin business in September 2011.

On April 15, 2011, the company announced it had upwardly revised its full-year FY03/11 forecast. The breakdown of the revised full-year FY03/11 forecast was as follows:

• Sales: 23.8 billion yen (vs. previous forecast of 23.5 billion yen)
• Operating profit: 5.9 billion yen (vs. previous forecast of 5.2 billion yen)
• Recurring profit: 5.9 billion yen (vs. previous forecast of 5.2 billion yen)
• Net income: 3.1 billion yen (vs. previous forecast of 2.9 billion yen)

Sales were upwardly revised owing to strong transaction volumes. Its operating profit forecast, similarly, was hiked mainly due to the company not spending all of its allotted advertising and promotion budget for March. However, the company posted a fresh extraordinary loss of 353 million yen which capped the amount it revised its net income projections higher by. This extraordinary loss was due to the company donating all 353 million yen in sales for T-Shirts to support the rebuilding of areas destroyed by the March 11 Tohoku earthquake to charity.

March 2011

On March 23, 2011, the company made an announcement regarding its recovery from the March 11 Tohoku earthquake.

Damage situation report:

• ZOZOBASE, the company's logistics center, had recovered. The center resumed operations on March 22.
• The delivery of some merchandise was delayed due to road conditions, gasoline shortages affecting delivery vehicles, and scheduled electricity outages in eastern Japan.

Impact on financial performance:

The company thinks that any effects on earnings would be minor.

Note: The company has a dedicated support page for disaster victims on its website.

On March 14 2011, the company made an announcement regarding the March 11 Tohoku earthquake.

Damage situation report:

• In ZOZOBASE, the company's logistics center, some merchandise and equipment fell to the floor and were damaged. Receipt and shipping of merchandise was temporarily suspended.
• Regarding recovery prospects, the company was currently assessing the situation and said it would make a new announcement when details emerged.

Impact on financial performance:

The company thinks that any effects on earnings would be minor. However, the company said it would release details as needed.

December 2010

On December 14, 2010, the company announced that its Board of Directors had approved a 300-for-1 split of its common stock. The stock split was scheduled for January 31, 2011 (the date for determining shareholders of record).

Sales and membership figures for November were released on December 6, 2010.

October 2010

On October 28, 2010, the company released FY03/11 Q2 results.

On the same day, the company announced that it signed a basic agreement with Yahoo Japan Corporation (“Yahoo! Japan”; TSE 4689) regarding cooperation in fashion related services.

The release mentioned cooperation in the following areas:

• Business related to the database of fashion products

Enhance Yahoo! Japan’s fashion-related services using the fashion product database developed by Start Today.

• E-Commerce

Enable use of Yahoo! Japan’s Yahoo! Japan ID, Yahoo! Wallet and Yahoo! Points on StartToday’s ZOZOTOWN e-commerce site.

The company commented that it expected the alliance with Yahoo! Japan to help it attract new members and increase the volume of transactions by existing active members.

On October 15, 2010, the company announced a revision to its 1H FY03/11 forecasts. The revised figures were as follows:

• Sales: 10.2 billion yen (previous forecast: 9.7 billion yen)
• Operating profit: 2.5 billion yen (previous forecast: 1.6 billion yen)
• Recurring profit: 2.5 billion yen (previous forecast: 1.6 billion yen)
• Net income: 1.4 billion yen (previous forecast: 9 billion yen)

The company mentioned that the combination of higher than expected transaction value and lower than expected SG&A costs were the basis for the revision. Transaction value increased due to aggressive advertising and increased variety of brands. The company commented that it would increase advertising expenses in 2H. There was no change in the full year forecast.

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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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Employees

The company employed 284 full-time employees as of FY03/11. Key statistics:

• Average age: 27.7 years old
• Average length of employment with the company: 3.3
• Average salary: 4.4 million yen
• Not unionized

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Dividends and Shareholder Benefits

The indicated payout policy ratio is 25% of earnings.

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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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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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Latest Q&A

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