Additional comments

For FY2016 Q3, the Total transaction value resulted as 148,090 million yen (+32.3% increase Y/y), Net sales resulted as 53,694 million yen (+42.2% increase Y/y), Operating profit resulted as 19,291 million yen (+64.3% increase Y/y), Recurring profit was 19,433 million yen (+63.3% increase Y/y), and Net profit was 14,117 million yen (+78.1% increase Y/y).

We could maintain the growth momentum from the second half of the last fiscal year supported by our successful measures for transaction growth, and could overachieve our original corporate plan (undisclosed).

Breaking down each business segment, the ZOZOTOWN business resulted as 142,901 million yen in the total transaction value (+41.0% increase Y/y), the BtoB business was 4,522 million yen (-57.3% decrease Y/y), the Flea Market business was 666 million yen (No comparison because of newly established business). Within the ZOZOTOWN business, consignment sales resulted as 133,485 million yen (+39.7% increase Y/y), the purchased stock business resulted as 145 million yen (-71.9% decrease Y/y), and ZOZOUSED business was 9,270 million yen (+76.8% increase Y/y)

Behind the maintenance of such a high growth of ZOZOTOWN business from the latter half of the last fiscal year, new shop opening in this quarter, sales contributions from 280 shops opened in the last fiscal year, and coupon campaigns with the brands started aggressively from October 2015 can be cited as possible reasons. By utilizing our newly-replaced CRM system which have been implemented in order since September 2015, we communicated with our users proactively and it also contributed to the expansion of the total transaction value.

In addition, we started offering “deferred payment services” (payment deadline is 2 months after the order settlement) in November 2016 which contributed to the transaction growth for this third quarter as well. The transaction is actually expanding by the implementation of the deferred payment services, however, a long-term effect of the transaction growth from this services is still unknown and difficult to evaluate in a short time. Next, we will explain about KPI performances of ZOZOTOWN Business.

<Number of new shop openings>
By the end of December 2016, we ended with 934 shops and 3,821 brands (872 shops and 3,608 brands as of September 2016). We have welcomed 78 new shops while 16 shops closed on ZOZOTOWN during this third quarter. To deal with diversified customer needs, we open new shops aggressively in this fiscal year.

<Number of total annual buyers>
The number of total buyers resulted as 5,783,381 during January 2016 to December 2016 period (Y/y +1,748,639, Q/q +530,840). For active members, the number reached 3,421,440 (Y/y +898,940, Q/q +361,449). The high increase of the number was supported by an organic growth effect from the rise of unique users as well as by the aggressive new shop opening, effective promotion activities including the coupon campaigns with our brands, and diversified payment methods. For guest members, the number resulted as 2,361,941 (Y/y +849,699, Q/q +169,391) by adjusting the usability of the guest accounts in order to become even more friendly.

<Annual purchase amount, annual purchase pieces, and number of shipments>
The annual purchase amount per active member was 48,275 Yen (+2.4% increase Y/y, -0.6% decrease Q/q), and the annual purchase pieces resulted as 10.5 pieces (+17.0% increase Y/y, +0.5% increase Q/q). Similar to the explanation above, the aggressive coupon campaigns and the replacement of our CRM system led to the increase in purchase frequency of our users that making them purchase more items.

The annual purchase amount showed the slight decrease on a Q/q basis due to the increase in the proportion of new users among active members. This is because increased proportion of such new users are inclined to spend lesser annual purchase amount than existing users. This always happens when acquiring new users at a good rate, so when it is limited to the existing users only, the annual purchase amount is still growing on a Q/q basis.

Explaining about the guest members, the annual purchase amount and annual purchase pieces were 8,834 Yen (-0.4% decrease Q/q) and 1.8 pieces (+1.3% increase Q/q), respectively. The number of shipments in the third quarter was 5,886,580 (+50.9% increase Y/y).

<Average retail price and average purchase amount>
For FY2016 Q3, the average retail price resulted as 5,236 yen, which was 11.8% decrease Y/y. And the average purchase amount resulted as 10,143 yen, which was 4.8% decrease on a Y/y basis. Since FY 2015 Q3, we have seen a double-digit based decrease of the average retail price on a Y/y basis. The main factors causing such decrease were the increasing sales proportion of discounted sales as well as ZOZOUSED sales, also the drop in the average retail price of non-discounted items due to successive opening of new shops that had relatively low price points. We are opening many new shops in the latter half, though some of them would be relatively lower price point ones, hence we are expecting the further decrease in the average retail price for a while. In terms of the average purchase amount per shipment, we have seen the similar trend of the average retail price movement which has a direct impact on the purchase amount.

For ZOZOUSED which is included in the ZOZOTOWN business, we were able to grow at a good level which was 76.8% growth Y/y. Similar to the first half, we have actually prioritized refreshing the fulfillment structure including purchase operations of second hand clothing. This is not only for the growth in this fiscal year, but also to establish an effective operational structure to deal with a larger volume for our next stage while also securing for firm profitability starting now.

We also started offering “replacement purchase service” in November, 2016. To be specific, this service enables users to put trade-in value earned by selling their own fashion goods, when purchasing new items on ZOZOTOWN. The trade-in suggestion appears on the order confirmation page where users can choose items to trade-in based on their purchase history on ZOZOTOWN. By doing so, we are aiming to expand new item purchases as well as secondhand item inventory by offering a unique service utilizing our ZOZOTOWN database.

For the BtoB business which resulted as minus growth on Y/y basis, but this is in line with our original corporate plan (undisclosed). We are shifting to the new model where our consolidated subsidiary aratana inc will be in charge of operations, therefore, FY2015~FY2016 will be the off-crops season as we have already announced. While we shift towards our new business model, some of the brands will move on to different partners, or decide to do it on their own websites, resulting the changes in the transaction volume according to such transition schedules. We will focus on developing websites for brands which will partner with the aratana model for the time being.

Let us move on to the ZOZOFURIMA business. This service was launched in December, 2015, and transaction volume resulted as 666 million yen for this third quarter consolidated accounting period. We pursue to develop secondhand market by cooperating with assets of ZOZOFURIMA and ZOZOUSED which will lead to the expansion of fashion e-commerce market and user base.

In order to revitalize the entire fashion market on our fashion platform WEAR, we are continuously operating to expand both the user base as well as the content volume. We have seen a steady growth in the service, including over 8 million App downloads as of December 2016. The transaction amount on ZOZOTOWN coming from WEAR remains to stay strong, and therefore rushing into monetization in another way does not seem necessary at the moment.

Net sales resulted as 53,694 million yen (+42.2% increase Y/y), and Gross profit resulted as 48,659 million yen (+39.7% increase Y/y). Gross profit margin (to the total transaction value) resulted as 32.9%, increased by +1.8% from 31.1% in the year-earlier period. The main factors of such a rise would be a revision of our shipping policy in May, 2016 as well as launching the paid membership system in November, 2015 together led to a higher growth in other revenues, and the rise in the sales revenue ratio of ZOZOUSED towards the total transaction volume.

The SG&A ratio towards the transaction volume decreased by +0.8p from 20.6% to 19.8% on a Y/y basis. HR cost ratio towards the transaction volume resulted in 5.3% which was +0.2p increase on a Y/y basis arising from the growth of ZOZOUSED which has relatively higher HR cost burden. On the one hand, the ratio of promotion spending toward the total transaction value (including both advertisement and rewards points promotion expenses) resulted in 1.9% which was -0.9p decrease on a Y/y basis. Remarkable promotion activities held so far in this fiscal year were re-targeting ad and promotion campaigns for WEAR overseas development.

Also, we are planning to provide shipping revenues (other revenue segment) arising from the change in our shipping policy for promotion purposes. As a result, we estimate the promotion cost ratio towards the transaction volume would become around 2.5%-3.0% in this full business year. The Unused portion of promotion-related expenses initially allocated for the third quarter will be spent in the fourth quarter period.

As a result, Operating profit was 19,291 million yen (+64.3% increase Y/y), and Operating profit margin (to the total transaction value) was 13.0%, improved by 2.5p from 10.5% in the year-earlier period.

Guidance for FY2016

The corporate plan for FY2016 is, 195,000 million yen for Total Transaction Value (+22.3% Y/y), 69,030 million yen for Net Sales (+26.8% Y/y), 22,140 million yen for Operating Profit (+24.7% Y/y), 22,150million yen for Recurring Profit (+23.9% Y/y), and 15,260 million yen for Net Profit (+27.3% Y/y). No change from our original guidance. The payout ratio for each dividend is planned to be 40%, at 20.7 yen (at the price after share split).