Executive summary

Business overview

Primary businesses: Locondo operates an e-commerce business that centers on LOCONDO.jp, an online shopping site that sells shoes and fashion goods. (The E-commerce business accounted for 83.0% of sales in FY02/21.) Much like Zappos.com LLC (currently a subsidiary of Amazon.com, Inc.) in the US and Zalando SE in Europe, Locondo focuses on footwear, which accounts for about 70% of gross merchandise value (GMV; as of January 2021). The company also runs the Platform business that leverages the IT and logistics infrastructures it built in the E-commerce business. In FY02/21, the company’s gross merchandise value (GMV) after returns was JPY20.6bn (+12.7% YoY), and sales (mostly commissions) were JPY10.3bn (+19.8% YoY).

Unique merchandise characteristics of shoes and the added value the company provides: Shoes pose unique and difficult inventory-related challenges. Sellers must maintain large inventories of different sizes in increments of 0.5cm, and inventory turnover is low, so rent and other fixed costs are higher than on apparel and other similar goods. Consequently, working capital and fixed costs tend to pose management issues for shoe vendors (brands). To address such industry issues, Locondo aims to raise inventory turnover by enlarging the online segment of the shoe market and having a centralized inventory that can be used by various sales channels. The company has been proposing this mechanism to shoe brands. Consignment sales account for about 85–90% (excluding D2C merchandise) of GMV in the E-commerce business. The company stores inventory for these sales in its own warehouses, but does not incur inventory risk.

Customers: Locondo’s customers can be separated into two broad categories: brands that utilize its platform to sell goods (or wholesale them to Locondo), and consumers who purchase goods. Women’s shoes, such as pumps and boots, make up a high proportion of sales, and women account for more than 90% of orders through LOCONDO.jp. Women aged 35–54 are a particularly large customer group, accounting for some 60% of orders. LOCONDO.jp allows customers to try on items and easily return them if they wish. The company says this feature is popular among women in dual-income households who are also raising children, as they have financial leeway but little time for shopping. D2C customers are primarily the younger demographic (under 30 years old), in contrast to the company’s traditional base.

Earnings structure: Reducing the level of GMV (after returns) required to break even means lowering the rate of merchandise returns, raising the contribution margin ratio, and reducing fixed costs. For the FY02/22, the company forecasts a return rate at about 20%, a contribution margin-to-GMV ratio of 15.4–16.0% (after returns), and fixed costs of about JPY2.5–3.0bn. Taking these factors into account, the company estimates it will require about JPY15.5–19.5bn in GMV (after returns) to achieve breakeven. According to data released by the company with year-end FY02/21 results, about 70–80% of orders by value since around 2015 were from repeat users (customers who had previously made at least one order through LOCONDO.jp). The company added that some 13–14% of new members purchase again through LOCONDO.jp within three months, and roughly 20% of new members place an order through LOCONDO.jp within six months, as a result of the company’s reward point system (valid for six months; FY02/21).

Growth drivers: The two long-term drivers of the company’s GMV growth are: increasing penetration of online sales in Japan (from 15% to 30%) and a growing market share of the Japanese online fashion market (from about 1.2% to 3%). Locondo also expects its product mix when it reaches GMV of JPY100bn to comprise about JPY50bn each for shoes and other merchandise.

Competitors and Locondo’s distinguishing features: The company has many competitors if we include e-commerce sites that deal in fashion merchandise broadly. Zozo, Inc. (TSE1: 3092) operates the Zozotown site, which sells both shoes and apparel. In FY03/21, Zozo’s GMV was around JPY419.4bn, about 20x Locondo’s (FY02/21). That said, Locondo says it distinguishes itself from competitors through its service offerings in the Platform business. Notably, these include third-party logistics (e-3PL), where it handles all logistics warehouse operations for its customers. Under the e-3PL arrangement, Locondo can use the inventory as consignment sale inventory for LOCONDO.jp as well, enabling it to extend the site’s merchandise lineup. For the customers, e-3PL not only centralizes the stock for an online shopping site (namely LOCONDO.jp) and the stock to replenish their offline stores, a common practice in third-party logistics, but it also allows customers to pool together their inventory for other online shopping sites, for department stores, and for wholesaling. For this reason, Locondo’s e-3PL raises inventory turnover rates more easily than the third-party logistics services offered by other companies.

Trends and outlook

FY02/21 results: In FY02/21, GMV (after returns) finished up 12.7% YoY at JPY20.6bn, with sales up 19.8% YoY at JPY10.3bn. Increased GMV at the company’s proprietary marketplace (including the effect of increased GMV at the acquired Fashionwalker), and increased BOEM GMV (after returns) drove results. The company booked FY02/21 SG&A expenses of JPY6.3bn (-3.8% YoY), EBITDA of JPY1.6bn, operating profit of JPY1.4bn (versus a loss of JPY83mn in FY02/20), recurring profit of JPY1.4bn (versus a loss of JPY78mn), and net income attributable to owners of the parent of JPY1.3bn (versus a loss of JPY256mn). The contribution margin ratio in FY02/21 was 17.2%, 0.3pp below the full-year forecast. Advertising expenses as a percent of GMV declined 4.5pp YoY to 5.9%. Stricter ROAS management led to the variable cost (for online advertising and award points) ratio dropping 1.4pp YoY while the fixed cost (e.g., TV advertising) ratio declined 3.0pp YoY on a shift from TV advertising to online (YouTube) advertising. Shipping and freight costs as a share of GMV improved by 0.5pp YoY to 7.8%, due to lower returns and improved warehousing costs. The warehouse relocation and expansion expenses resulted in rent as a percentage of full-year GMV increasing 0.5pp YoY to 3.3%.

FY02/22 company forecast: The company revised its full-year FY02/22 forecast on October 14, 2021. The company now forecasts GMV (after returns) of JPY21.5bn (previously JPY25.0bn), sales of JPY10.3bn (JPY12.0–12.5bn), operating profit of JPY1.0bn (JPY850mn–1.5bn), recurring profit of JPY1.0bn (JPY850mn–1.5bn), and net income attributable to owners of the parent of JPY700mn (JPY567mn–1.0bn).
The company lowered its GMV forecast and dropped its sales forecast to a level below the lower limit of its previous forecast, factoring in the state of emergency announced on April 25, 2021 lasting longer than expected and demand for shoes, the company's mainstay product, being sharply impacted by consumers refraining from going out until September 30, 2021, when the state of emergency was lifted. On the other hand, the revised forecasts for operating profit, recurring profit, and net income were within the range of the prior forecasts, thanks largely to the positive effects from measures to control fixed costs and contribution margin ratio. With the state of emergency coming to an end and uncertainties regarding the outlook for business fading, the company elected to present its revised forecasts as fixed-value forecasts rather than ranged forecasts. 

Long-term vision: On April 20, 2021, Locondo, Inc. announced its long-term vision for FY02/31. It set a GMV target of JPY100bn (10-year CAGR of 17%) and an operating profit target of JPY10bn.The company forecasts operating profit of JPY10.0bn when GMV reaches JPY100bn. It expects a contribution margin of JPY16.0bn (contribution margin ratio of 16.0%) and fixed expenses of JPY6.0bn.

Strengths and weaknesses

Shared Research has identified three strengths at Locondo: concentrated efforts in footwear sales (the combination of services, shoe category, price range, and customer base the company targets has helped to set it apart from competition); a mechanism where an increase in customer inventory in the Platform business bolsters the company’s consignment sale inventory in the E-commerce business; and accumulated expertise that enables collaboration with prominent influencers on the sale of direct-to-consumer (D2C) merchandise.

Shared Research also believes Locondo has three weaknesses: the sales pitch of “home try-ons and easy returns” that results in high return rates (around 20–25%); presence of many fashion goods shopping site operators with superior capital strength and brand awareness; and difficulty differentiating itself with the “easy returns” concept, which competitors can imitate. (See the “Strengths and weaknesses” section for more details.)

Key financial data

Recent updates

1H FY02/22 Report Update

Shared Research updated the report following interviews with Locondo, Inc.    

1H FY02/22 flash update and revision to full-year forecast

Locondo, Inc. announced earnings results for 1H FY02/22.

On the same day, the company announced revisions to its full-year FY02/22 forecasts. 

Locondo, Inc. revised its full-year FY02/22 forecasts on October 14, 2021. The company now forecasts GMV (after returns) of JPY21.5bn (previously JPY25.0bn), sales of JPY10.3bn (JPY12.0–12.5bn), operating profit of JPY1.0bn (JPY850mn–1.5bn), recurring profit of JPY1.0bn (JPY850mn–1.5bn), and net income attributable to owners of the parent of JPY700mn (JPY567mn–1.0bn).
The company lowered its GMV forecast and dropped its sales forecast to a level below the lower limit of its previous forecast, factoring in the state of emergency announced on April 25, 2021 lasting longer than expected and demand for shoes, the company's mainstay product, being sharply impacted by consumers refraining from going out until September 30, 2021, when the state of emergency was lifted. On the other hand, the revised forecasts for operating profit, recurring profit, and net income were within the range of the prior forecasts, thanks largely to the positive effects from measures to control fixed costs and contribution profit margins. With the state of emergency coming to an end and uncertainties regarding the outlook for business fading, the company elected to present its revised forecasts as fixed-value forecasts rather than ranged forecasts.  

Q1 FY02/22 report update

Shared Research updated the report following interviews with Locondo, Inc.    

Completion of acquisition of treasury shares

On July 30, 2021, Locondo, Inc. announced the completion of acquisition of treasury shares.

The company completed the share buyback announced on July 29, 2021. The total amount of acquisition was JPY143mn for 100,000 shares.  

Acquisition of treasury shares

Locondo, Inc. announced the acquisition of treasury shares.

On the same day, the company decided to buy back its treasury shares to enhance capital efficiency and allow for flexible capital policies in response to changes in the operating environment.

Details of share buyback

• Type of shares to be acquired: Common shares
• Number of shares to be acquired: 100,000 (upper limit; 0.87% of shares outstanding [excluding treasury shares])
• Total acquisition amount: JPY150mn (upper limit)
• Acquisition period: July 30, 2021 to December 31, 2021
• Acquisition method: Market purchases on the Tokyo Stock Exchange 
  

Trends and outlook

Quarterly trends and results

Seasonality

Unit prices for shoes, the company’s main merchandise, and apparel tend to be higher for winter lineups than for summer lineups. Consequently, GMV and sales tend to be stronger during Q3 and Q4, when the company handles winter items.

According to Locondo, seasonal items sell better when summers are hotter and winters colder, so more intense weather during these seasons has a positive effect on results.

Return rates tend to be low in summer and high in winter. This is because sandals and other summer merchandise are easier to fit than boots and other winter merchandise.

The company conducts inventory valuation at the end of Q2 and Q4, so the cost ratio rises insofar as it incurs inventory valuation losses.

Quarterly financial indicators

Variables affecting sales

The number of active members and the average annual customer spend are both variables that affect sales.

The number of active members (disclosed) can be broken down into the ratio of active members (can be inversely calculated) × the total member count (disclosed).

The (estimated) average customer spend can be broken down into average value per shipment (before returns [disclosed]) × (1– return rate [disclosed]) × order frequency (estimated). However, estimating average customer spend and order frequency from the outside requires making some assumptions. Consequently, average customer spend is perhaps best viewed as a reference for understanding trends.

The company does not necessarily position these metrics as key performance indicators (KPIs) for managing its businesses. According to Locondo, this is because it encountered difficulty incorporating sales management based on these metrics into its PDCA cycle. Employees are often unable to gain a solid sense of the short-term correlation between these metrics and the actions leading to improvement. Locondo says it is easier to understand the effects of these actions in relation to the changes in sales amounts at each brand the company handles.

Companywide figures

GMV

Locondo’s sales are affected by changes in the ratio of consignment sales and outright purchase arrangements in the E-commerce business, as the former generate commission revenue whereas in the latter case the company is selling merchandise it holds as inventory. Consequently, analyses based on GMV, which is not impacted by changes in consignment and outright purchase ratios, provide a better understanding of actual conditions.

The company does not include e-3PL shipments in the GMV it discloses, but includes corresponding costs under various expense items. It is important to note that a significant increase or decrease in e-3PL shipments will have an impact on GMV-based analyses.

GMV fell YoY in Q1 FY02/21 on lower footwear demand as people stayed at home due to the COVID-19 pandemic.

Variable costs (advertising expenses)

Also included in variable costs (advertising expenses) are the incentives paid to D2C merchandise related influencers.

Fixed costs (rent)

In Q1 FY02/21, the company incurred JPY122mn in expenses associated with warehouse relocations (rent at two locations and moving costs), which temporarily reduced operating profit. The company made incremental additions to its warehouse capacity in Q1 FY02/20 and Q1 FY02/21.

Fixed costs (TV commercials)

In FY02/19, fixed costs for TV commercials increased sharply as the company ran television ads. In line with changes in advertising strategies, these had largely finished in 1H FY02/20, and the company is shifting to YouTube.

E-commerce business

The attributes of proprietary marketplace and external marketplace customers differ, so it is important to analyze the data of these two channels separately.

The ratio of consignment sales items declines when the GMV of D2C merchandise increases since D2C merchandise are outright purchase arrangements.

In Q2 FY02/20, the number of members rose substantially and the ratio of active members fell. This change was due to the merging of Mobacolle into LOCONDO.jp.

Thanks to D2C merchandise, the company gained 67,000 new active members in Q2 FY02/21. The decline in active users in Q2 FY02/22 can be attributed to the absence of this special factor and an extended replacement cycle for shoes during the state of emergency. 

Return rates for its proprietary marketplace are affected by GMV of D2C merchandise. In Q2 FY02/21, thanks to the contribution from non-cancellable D2C brands, the rate of sales returns for the company’s proprietary marketplace improved to 18%, from 22% in Q1.

Figures for the acquired Fashionwalker Co., Ltd., have been included from Q3 FY02/21 onward. Only those customers who made purchases at the FASHIONWALKER website after Fashionwalker was consolidated in September 2020 are included in the active member count. For this reason, although the member count rose substantially at one point, the active member count is growing at a more gradual pace.

Platform business and Other business (retail stores, wholesale, etc.)

BOEM

Alpen account transactions were suspended in Q1 FY02/20 as GMV had continued to fall since Q3 FY02/19 due to changes in management policy at Alpen.

e-3PL

e-3PL traffic increases in March and September when brands start shipping new goods. e-3PL shipments are affected by seasonality, with the number of shipment pieces typically rising in Q1 and Q3.

In Q2 FY02/20, the number of shipments decreased due to an operational change affecting one major account (Ogitsu, Co., Ltd.). The change was made after discussions between Ogitsu and Locondo that were aimed at improving the balance between Ogitsu’s in-store and warehouse inventories and improving the efficiency of shipments to Ogitsu stores.

In Q1 FY02/21, shipment numbers declined YoY as brands curtailed their shipments to stores due to COVID-19.

1H FY02/22 results

Summary

GMV: In 1H FY02/22, GMV (after returns) finished up 6.6% YoY at JPY9.9bn, with sales down 2.6% YoY at JPY4.7bn. Shoe demand dropped sharply following the government declaring a third state of emergency on April 22 in line with a resurgence in COVID-19 cases. GMV was also impacted in reaction to the strong D2C contribution in 1H FY02/21.

Profits/losses: The company booked 1H FY02/22 SG&A expenses of JPY3.3bn (+1.2% YoY), EBITDA of JPY467mn (-31.1% YoY), operating profit of JPY407mn (-35.5% YoY), recurring profit of JPY409mn (-36.0% YoY), and net income attributable to owners of the parent of JPY306mn (-30.1% YoY).  The reaction to the D2C contribution (from the first series of ReZARD goods) in 1H FY02/21 pushed operating profit down JPY130mn YoY. The contribution margin ratio in 1H FY02/22 was 15.9%, in line with the initial full-year forecast range of 15.4–16.0%. Advertising expenses as a percentage of GMV increased 0.2pp YoY to 6.1% in 1H FY02/22. Rent as a percentage of GMV increased 0.6pp YoY to 4.4% in 1H FY02/22 due to the warehouse expansion. 

FY02/22 company forecast: The company revised its full-year FY02/22 forecast on October 14, 2021. The company now forecasts GMV (after returns) of JPY21.5bn (previously JPY25.0bn), sales of JPY10.3bn (JPY12.0–12.5bn), operating profit of JPY1.0bn (JPY850mn–1.5bn), recurring profit of JPY1.0bn (JPY850mn–1.5bn), and net income attributable to owners of the parent of JPY700mn (JPY567mn–1.0bn). The company lowered its GMV forecast and dropped its sales forecast to a level below the lower limit of its previous forecast, factoring in the state of emergency announced on April 25, 2021 lasting longer than expected and demand for shoes, the company's mainstay product, being sharply impacted by consumers refraining from going out until September 30, 2021, when the state of emergency was lifted. On the other hand, the revised forecasts for operating profit, recurring profit, and net income were within the range of the prior forecasts, thanks largely to the positive effects from measures to control fixed costs and contribution margin ratio. With the state of emergency coming to an end and uncertainties regarding the outlook for business declining, the company elected to present its revised forecasts as fixed-value forecasts rather than ranged forecasts. For details of assumptions underlying the company's forecasts, please refer to the "FY02/22 company forecast" page.

Progress: The company achieved 45.9% of full-year forecast for GMV (after returns), 45.5% for sales, 40.7% operating profit, 40.9% for recurring profit, and 43.8% for net income. 

The company on October 14, 2021 announced the selection of Growth Market as its new market segment on the Tokyo Stock Exchange. The transition is scheduled for April 4, 2022. 

Overview by business

E-commerce business

The company’s E-commerce business reported 1H FY02/22 sales of JPY3.7bn (-6.0% YoY) on GMV (after returns) of JPY7.9bn (+6.4% YoY). Figures for the acquired Fashionwalker have been included in the E-commerce business (proprietary marketplace) from Q3 FY02/21 onward. As a result, the company has changed from the conventional categories of LOCONDO.jp and LOCOMALL to the new categories of proprietary marketplace (LOCONDO.jp and FASHIONWALKER) and external marketplace (LOCOMALL).

In Q2, proprietary marketplace GMV (after returns) was down 13% YoY. Shoe demand contracted sharply since the third state of emergency declaration on April 22, 2021 amid the surge in COVID-19 infections, and GMV also was squeezed by supply constraints on imported brands for sale through outright purchase (excluding D2C). Performance was also impacted by the reaction to the strong D2C contribution (from the first series of ReZARD goods) at the same point last year. External marketplace GMV (after returns) increased 8% YoY.

Shipment volume in 1H FY02/22 reached 1.1mn units, while the number of brands with stores on Locondo’s shopping sites expanded steadily, rising to 3,838 at end-Q2 (3,676 at end-Q1).

In Q2, the company saw its active user count reach 1,140,000 (1,155,000 at end-Q1). Defined as users ordering at least once a year, the number of active users reached 792,000 for the proprietary marketplace (833,000 at end-Q1) and 348,000 for the external marketplace (322,000 at end-Q1). The number of active users at the proprietary marketplace dropped QoQ due to effects stemming from the government declaring a state of emergency, as the replacement cycle for shoes extended and some users did not make a purchase after their D2C purchases (from the first series of ReZARD goods), meant that there were users who did not meet the company's definition of an active user (one who makes at least one purchase a year). 

In Q2, the average value per order was JPY9,000 at the proprietary marketplace (JPY9,400 in Q2 FY02/21) and JPY5,800 at the external marketplace (JPY6,700). 
Average value per order at the proprietary marketplace was impacted by a decline in GMV for D2C brands, while average value per order at the external marketplace was impacted by an increased share of items with low unit prices (sports brand t-shirts and other similar items).

In Q2, the return rate at the proprietary marketplace (excluding D2C brands) stood at 20% (22% in Q1) and at the external marketplace 5% (6% in Q1). 

Platform business

In 1H FY02/22, the platform business reported sales of JPY746mn (+34.5% YoY) on GMV (after returns) of JPY1.8bn (+14.3% YoY). 

As of the end of 1H FY02/22, the number of brands using BOEM was up to 34. Q2 BOEM GMV was up 8% YoY.

In Q2, e-3PL (note: not counted in GMV) shipments were up 14% YoY, boosted by the warehouse expansion.

According to the company, monthly revenue had grown to around JPY300mn annually as of August 2021 (such revenue is not tied to either sales or shipments and therefore is fixed).

Acquisition of customer for ALL IN ONE Package

In August 2021, Locondo said that it had secured a customer (fitfit Inc.) for its ALL IN ONE package encompassing all platform services offered by the company.

Other business (store, wholesale; formerly the Brand business)

The Other business reported 1H sales of JPY205mn (-27.5% YoY) on GMV (after returns) of JPY205mn (-29.4% YoY).

Anticipated mix when GMV reaches JPY100.0bn

Locondo aims to reach GMV of JPY100.0bn in FY02/31, at which point it expects sales to break down as follows. The company assumes that its e-commerce sales weighting will double in that time. Of the average annual growth forecast for each category, it expects about 7% to come from growth in the broader market, with any increment above that figure attributable to expansion in the company's market share. The below figures are not actual numbers, but estimates used by the company in its explanation.   

For LOCONDO.jp, the company assumes GMV of JPY36bn, for an average annual growth rate of 12% from the GMV of JPY12.0bn reported for FY02/21.

For LOCOMALL, the company assumes GMV of JPY4.0bn, for an average annual growth rate of 7% from the GMV of JPY2.0bn reported for FY02/21. The company also assumes GMV of JPY5.0bn for FASHIONWALKER, for an average annual growth rate of 10% from JPY2.0bn in FY02/21, and JPY5.0bn for SPORTS WEB SHOPPERS, for average annual growth of 17% from JPY1.0bn.

Through M&A and PMI, the company also aims to have five websites that are targeted at niche markets and have GMV of around JPY5.0bn. Unlike LOCONDO.jp, it envisions that these sites will have a relatively high weighting of merchandise other than shoes. However, it expects these sites to share systems and logistics with LOCONDO.jp. 

The company anticipates GMV of JPY15.0bn for BOEM, for an average annual growth rate of 17% from the GMV of JPY3.0bn reported for FY02/21. It aims to have 100 consignment sale sites, up from 34 as at end-Q2 FY02/22. 

For the Brand business, the company envisions GMV of JPY10.0bn, for average annual growth of 21% from JPY1.5bn in FY02/21. It aims to be handling 10 D2C or agency brands, each with GMV of around JPY1.0bn.

For e-3PL, which is not included in the above GMV, the company aims to grow shipments from 2mn units in FY02/21 to 10mn units in FY02/31, for an average annual growth rate of 17%.

Other topics

In February 2022, the company plans to switch SWS (SPORTS WEB SHOPPERS; shares acquired in September 2021) over to its proprietary systems, also expanding the scope of this dedicated sporting goods site to include sports other than soccer. As of October 2021, the company is in discussions with specialist retailers of running, basketball, and outdoor goods.  

In October 2021, the company signed a basic agreement to buy a fourth e-commerce mall following SWS, and is conducting further negotiations with a view to completing PMI by March 2022. The company also is negotiating an exclusive agency agreement with an overseas D2C brand that has sales of around JPY10.0bn. It is following a business model whereby D2C brands are not built in-house but rather acquired. 

Company forecast for FY02/22

Revised full-year FY02/22 forecasts (out October 14, 2021)

The company revised its full-year FY02/22 forecasts.  The company now forecasts GMV (after returns) of JPY21.5bn (previously JPY25.0bn), sales of JPY10.3bn (JPY12.0–12.5bn), operating profit of JPY1.0bn (JPY850mn–1.5bn), recurring profit of JPY1.0bn (JPY850mn–1.5bn), and net income attributable to owners of the parent of JPY700mn (JPY567mn–1.0bn).  

The company lowered its GMV forecast and dropped its sales forecast to a level below the lower limit of its previous forecast, factoring in the state of emergency announced on April 25, 2021 lasting longer than expected and demand for shoes, the company's mainstay product, being sharply impacted by consumers refraining from going out until September 30, 2021, when the state of emergency was lifted. On the other hand, the revised forecasts for operating profit, recurring profit, and net income were within the range of the prior forecasts, thanks largely to the positive effects from measures to control fixed costs and contribution margin ratio. 

With the state of emergency coming to an end and uncertainties regarding the outlook for business fading, the company elected to present its revised forecasts as fixed-value forecasts rather than ranged forecasts.

The company believes there is still risk from the COVID-19 pandemic and is not ruling out the possibility that COVID-19 infection numbers could rise again in 2H FY02/22. On the other hand, the company does not expect a state of emergency to be re-imposed any time soon, and even in that event it does not see the situation dragging on for months. Moreover, the company has observed a recovery trend in GMV since September 30, 2021, when the state of emergency was lifted, despite some adverse effects from unseasonably high temperatures persisting in early October. 

In the fashion field, the supply of merchandise at some companies has been affected by the spread of COVID-19 overseas and accompanying disruption to overseas logistics. Locondo sees a possibility of some impact on supply in 2H FY02/22, but not to the extent seen in 1H. 

Supplementary information as of Q1 FY02/22 results announcement (July 14, 2021)

The company made no changes to its initial forecast for FY02/22.

Progress: The company achieved 20.2% of full-year forecast for GMV (after returns), 18.5–19.3% for sales, 20.8–21.3% for gross profit, 22.3–23.1% for contribution margin, 21.3–37.6% for operating profit, 21.5–37.9% for recurring profit, 21.0–34.7% of EBITDA, and 23.8–42.0% for net income. Shoe demand has contracted sharply since the third state of emergency declaration on April 22 made in response to the surge in COVID-19 infections. As of July 14, 2021, with the Japanese government having now issued a fourth state of emergency declaration lasting through August 22, the company expects demand to remain depressed through at least the end of Q2 (June–August 2021). Notwithstanding, the company says it will continue to tackle the challenges that the market faces, because it has seen many changes in the market that are positive in the longer term. Profit was strong in Q1, because contribution margin was above the full-year forecast.

Impact of government’s state of emergency declarations: Prior to the issuance of the government’s third state of emergency declaration in April, the GMV handled by company’s proprietary marketplace (excluding the boost from its acquisition of Fashionwalker) was running 10% to 20% above year-earlier levels. After the third state of emergency declaration, the GMV was down 10–20% YoY. According to the company’s calculations, the recent state of emergency declarations have reduced the GMV at its proprietary marketplace by some 20% to 40%. In addition to a drop in the number of people accessing its proprietary marketplace, deteriorating consumer sentiment had also led to lower conversion rates. Demand temporarily returned after the government lifted its third state of emergency declaration in June, but the subsequent issuing of a fourth state of emergency declaration on July 12 knocked down demand again. In Q1 FY02/22, the decline in the GMV was larger than in Q1 FY02/21 when the first state of emergency declaration was issued. The company thinks there are three major factors behind this. First, even though there a drag resulting from the temporary closures of many brick-and-mortar stores during Q1 FY02/21, the company benefited from a shift in demand to online stores. However, it did not see a similar boost from this same factor in Q1 FY02/22. Second, the drop in demand in FY02/21 left many shoe brands sitting on unsold inventories (based on the regular orders they had placed roughly one year prior to that), and these high inventory levels forced them to cut back orders in FY02/22 to bring inventory levels back into line. And third, in Q1 FY02/21 the rollout of its D2C brands (which began shipping in June and July 2020) boosted the number of people visiting the company’s proprietary marketplace, stimulating purchase of other products as well. In Q1 FY02/22, however, the GMV dropped in the absence of such new initiatives.

Initial company forecast for FY02/22 (out April 14, 2021)

For FY02/22, the company forecasts GMV (after returns) of JPY25.0bn (+21.6 YoY), sales of JPY12.0–12.5bn (+16.8–21.7% YoY), operating profit of JPY850mn–1.5bn (-40.9% to +4.3% YoY), recurring profit of JPY850mn–1.5bn (-41.3% to +3.5% YoY), and net income attributable to owners of the parent of JPY567mn–1.0bn (-54.6% to -20.0% YoY).

Implication of forecast figures/ranges: The company has a specific forecast for GMV (after returns) rather than a range, which it aims to reach as its most important benchmark. Meanwhile, the figures for sales and profit are expected ranges which would enable it to reach its forecast of GMV (after returns) of JPY25.0bn. The company calculated its operating profit range as the maximum contribution margin minus minimum fixed costs for the upper end, and minimum contribution margin minus maximum fixed costs for the lower end. The company assumes the maximum for contribution margin and fixed costs occurring under a normal scenario, and the minimum under a pessimistic scenario. The company has not included figures for an optimistic scenario (contribution margin ratio of 17.0% and fixed costs of JPY2.5bn) in its ranges. It disclosed a range based on normal and pessimistic scenarios and excluded the optimistic scenario because of external factors, including reduced shoe demand and weak economy from restraint on going out amid the pandemic, and the internal factor regarding growth of D2C merchandise launched in FY02/21, which represented sources of uncertainty.

Preliminary March 2021 figures (unaudited): GMV at e-commerce marketplaces (proprietary and others) was up 35.5% YoY (including impact of Fashionwalker acquisition), above 22.2% YoY forecast (also including Fashionwalker). Excluding the acquisition, GMV at e-commerce marketplaces (proprietary and others) was up 17.1% YoY. GMV at BOEM was +43.5% YoY, about the +30.0% YoY forecast. The company said that 30% of the GMV growth at BOEM was from new stores opened since March 2020 and 70% from existing stores. Due to the company’s select and focus strategy, the contribution margin ratio was 17.4% (+1.8pp YoY), exceeding its optimistic scenario for the full year. Operating profit was JPY114mn (JPY76mn in March 2020). Significant impact from the COVID-19 pandemic emerged from April 2020 onward, so March 2020 operating conditions were largely normal, according to the company.

GMV

Forecast GMV (after returns): JPY18.3bn for proprietary marketplace (including D2C) (+25% YoY, roughly +20% YoY excluding the Fashionwalker acquisition) and JPY3.6bn for BOEM (+30% YoY). The company’s three focuses are proprietary marketplace (including D2C), BOEM, and e-3PL (note: not counted in GMV). The company expects growth at its proprietary marketplace to come mainly from an increased number of active users. Because the D2C business has many elements of uncertainty, the company forecasts a marginal YoY increase. It assumes a return rate of about 20%, roughly in line with 2H FY02/21. It expects growth at BOEM to come in equal measure from new stores and existing stores. It looks for shipment volume growth of at least 20% in the e-3PL business. The forecast breakdown by business is as of April 2021, and the company states that it plans to revise this in consideration of the circumstances facing each business in future.

Prioritizing GMV growth: The company’s top priority is growth in GMV (after returns). If there is a growth opportunity to exceed the forecast GMV of JPY25.0bn, the company said it would embrace the challenge. In this case, even if operating profits drop, Locondo says it might invest an amount greater than the above contribution margin and fixed costs, provided that GMV (after returns) may potentially grow 10 times the fall in operating profit.

M&A: The company has a proactive stance, but has not included any acquisitions or associated costs in its forecast.

Expenses and margins

Fixed cost increase: The company’s primary objective is to achieve GMV of JPY25.0bn, and it will invest proactively to achieve that target. Fixed costs are expected to be JPY2.5–3.0bn (JPY2.1bn in FY02/21). Compared to FY02/21, the company plans for warehouse expansion expenses (partial operation of Locoport 3) of JPY210m, expenses relating to salary increases and bonuses of JPY120mn (about 10% of net income in FY02/21), expenses relating to an increased number of contracts with YouTubers (advertising expenses) of JPY80mn, and other expenses of JPY110mn. The company anticipates an increase in e-3PL demand from summer 2021, and will begin partial operation of Locoport 3 in June 2021. In addition, the company expects that YouTuber contract and planning expenses will increase by JPY0–500mn, as another area of additional investment. The company forecasts depreciation of approximately JPY150mn for the year.

Margins: The company expects gross profit of JPY9.1–9.4bn (GPM of 36.5–37.5% of GMV; 37.5% in FY02/21), contribution margin of JPY3.9–4.0bn (contribution margin ratio of 15.4–16.0% of GMV; 17.2% in FY02/21), fixed costs of JPY2.5–3.0bn (JPY2.1bn in FY02/21), and EBITDA of JPY1.0–1.7bn (JPY1.6bn in FY02/21). The company considered the possibility that the sales mix of outright purchase (including D2C) may decrease YoY when creating its sales and GPM forecasts. With outright purchases, gross profit margin on GMV (after returns) tends to be high because the company bears inventory risk, so if the outright purchase weighting falls, the associated GPM will also fall. The 37.5% upper end of the GPM range assumes the share of outright purchase is unchanged YoY. While the company expects its contribution margin ratio to fall by 1.2—1.8 pp YoY, it also stated that its contribution margin forecast has accounted for increased online advertising expenses, as well as the impact of a decreased sales mix of outright purchases. The company is prioritizing achievement of its GMV growth targets, so is willing to accept a slight decline in return on advertising spend (ROAS), and said it expected a slight increase in the ratio of (variable) advertising expenses to GMV.

Effective tax rate: The company forecasts a tax rate of 33–34%, with net income to be roughly two thirds of recurring profit.

Additional commentary on D2C

Significance of company investment in D2C

As a general rule, when a company does not take on inventory risk in an e-commerce marketplace, it can have trouble making its merchandise stand out and the larger the marketplace, the more advantage it has. However, when a company does take on inventory risk, it can more easily make its merchandise stand out but requires more working capital to grow. To counter such tendencies, Locondo is working to sell D2C merchandise that sets it apart from the competition while minimizing inventory risk. In addition to offering striking merchandise, the company expects to attract more members via prominent influencers (in particular, those under 35, whose presence has been traditionally lacking), increase average order value (D2C merchandise is typically priced higher), and reduce the return rate (for example, through pre-order sales).

D2C is meaningful in complementing the company’s customers with the young demographic, whose presence has been traditionally lacking. D2C’s customer base is mainly young age group (under 30), and thus differs from the company’s traditional demographic of women aged 35–54. Looking at the share of under 30 in the company’s active users, those who registered by end-March 2020 when the company launched the D2C business (defined as existing) and those who joined from April 2020 onward after the launch (defined as new), young age group accounted for just 12% of existing users at LOCONDO.jp but 28% of new users, and at FASHIONWALKER, they made up just 28% of existing users and 41% of new users. Through D2C, the company is rejuvenating its customer base, which had previously been gradually aging.

Strategy in FY02/22

In FY02/22, the company plans to continue its ReZARD brand shoe collaboration, which posted GMV of JPY1.0bn in FY02/21. It is planning a YouTube version of its mail order programs. It also announced that it has three deals underway with YouTubers (each of whom has over 1mn subscribers).

Long-term vision

On April 20, 2021, Locondo, Inc. announced its long-term vision for FY02/31. It set a GMV target of JPY100bn (10-year CAGR of 17%) and an operating profit target of JPY10bn.

Long-term growth drivers

GMV

The company’s long-term vision is to have 3% share of the Japanese e-commerce fashion market in 2030, and GMV of JPY100bn (10-year CAGR of 17%) in FY02/31. The two long-term drivers of the company’s GMV growth are: increasing penetration of online sales in Japan (from 15% to 30%) and a growing market share of the Japanese online fashion market (from about 1.2% to 3%). Locondo also expects its product mix when it reaches GMV of JPY100bn to comprise about JPY50bn each for shoes and other merchandise.

Increasing penetration of online sales

The company thinks that the share of fashion items sold online in Japan will rise from about 15% in 2020 (according to a 2019 METI survey, 14% of apparel and accessories were sold online) to about 30% in 2030, comparable to the 30% penetration in the US in 2020.

Locondo thinks penetration of 30% is realistic as numerous major Japanese apparel companies are targeting online sales of roughly that amount.

The company explained that it forecast a rise in penetration of about 15pp over 10 years based on the pre-pandemic experience of annual growth of roughly 1.5pp in the 10 years to 2019. Figures for 2020 are not out yet, but the company estimates that online sales penetration accelerated amid the pandemic.

Changes in product sales mix

When it reaches GMV of JPY100bn, the company expects its product mix to comprise about JPY50bn for shoes and JPY50bn for other fashion merchandise. Locondo reasoned that the product mix for a similar company in Europe, Zalando SE (ZALG.DE), was about JPY50bn for shoes and JPY50bn for other merchandise when it reached GMV of JPY100bn.

Because shoes comprised about 70% of merchandise handled as of January 2021, the company is expecting a CAGR of about 13–14% for shoes and 23–24% for handbags and other fashion items.

Growing share of Japanese online fashion market

The company estimates the FY2019 Japanese fashion market (apparel, shoes, and handbags) at JPY11.8tn. It assumes that the market will be about the same size as FY2019 in FY2030, and for online penetration of about 30%, or JPY3.5tn. In FY02/21, Locondo’s GMV (after returns) was JPY20.6bn, meaning that it had a share of about 1.2% of a domestic online fashion market worth JPY1.8tn (JPY11.8tn x 15%). It aims to grow its market share by about 2.5x the FY02/21 levels to 3% in FY02/31.

The company estimates the FY2019 Japanese fashion market (apparel, shoes, and handbags) at JPY11.8tn, which breaks down into apparel JPY9.2tn, shoes JPY1.4tn, and handbags JPY1.2tn. Given the lack of growth in the Japanese fashion market over the past 10 years, the company assumes that the market will be about the same as FY2019 in FY2030 in terms of size and mix.

As of January 2021, shoes comprised about 70% of merchandise, giving the company an estimated share of the Japanese online shoe market of roughly 6–7% in February 2021. The company aims to grow its market share to about 12% by 2030.

As of FY02/21 the company had an estimated share in the domestic fashion market excluding shoes of about 0.4%. Based on its projections, its 2030 market share will rise to about 1.6%.

The factors driving the company’s market share growth are unlikely to change. They are potential acquisitions aimed at business synergies and competitive advantages discussed later. Locondo’s GMV (after returns) grew at a CAGR of 27% over the five years to FY02/21, outpacing the market. The company said that it would be able to continue growing faster than the market and boost market share going forward.

Anticipated mix when GMV reaches JPY100.0bn (announced at time of Q1 FY02/22 results release)

Locondo aims to reach GMV of JPY100.0bn in FY02/31, at which point it expects sales to break down as follows. The company assumes that its e-commerce sales weighting will double in that time. Of the average annual growth forecast for each category, it expects about 7% to come from growth in the broader market, with any increment above that figure attributable to expansion in the company's market share. The below figures are not actual numbers, but calculations used by the company in its explanation. 

For LOCONDO.jp, the company assumes GMV of JPY36.0bn, for an average annual growth rate of 12% from the GMV of JPY12.0bn reported for FY02/21.

For LOCOMALL, the company assumes GMV of JPY4.0bn, for an average annual growth rate of 7% from the GMV of JPY2.0bn reported for FY02/21. The company also assumes GMV of JPY5.0bn for FASHIONWALKER, for an average annual growth rate of 10% from JPY2.0bn in FY02/21, and JPY5.0bn for SPORTS WEB SHOPPERS, for average annual growth of 17% from JPY1.0bn.

Through M&A and PMI, the company also aims to have five websites that are targeted at niche markets and have GMV of around JPY5.0bn. Unlike LOCONDO.jp, it envisions that these sites will have a relatively high weighting of merchandise other than shoes. However, it expects these sites to share systems and logistics with LOCONDO.jp. 

The company anticipates GMV of JPY15.0bn for BOEM, for an average annual growth rate of 17% from the GMV of JPY3.0bn reported for FY02/21. It aims to have 100 consignment sale sites, up from 34 as at end-Q2 FY02/22.

For the Brand business, the company envisions GMV of JPY10.0bn, for average annual growth of 21% from JPY1.5bn in FY02/21. It aims to be handling 10 D2C or agency brands, each with GMV of around JPY1.0bn.

For e-3PL, which is not included in the above GMV, the company aims to grow shipments from 2mn units in FY02/21 to 10mn units in FY02/31, for an average annual growth rate of 17%.

Operating profit

The company forecasts operating profit of JPY10.0bn when GMV reaches JPY100bn. It expects a contribution margin of JPY16.0bn (contribution margin ratio of 16.0%) and fixed expenses of JPY6.0bn.

Contribution margin ratio on GMV (after returns)

The company expects a contribution margin ratio of 16.0%, roughly in line with its normal scenario forecast for FY02/22. It expects to maintain the ratio at around 16% as an increase due to changed business mix and a decrease due to merchandise mix changes offset each other.

Contribution margin ratios are higher than the company average in the company’s focus area of e-commerce (proprietary marketplace) and BOEM. Accordingly, assuming no changes in merchandise mix, growth in these two areas would push up the contribution margin ratio for the company overall.

Meanwhile, Locondo expects the share of merchandise other than shoes to account for about 50% of GMV. There are many online competitors in apparel, and it is likely that the contribution margin ratio will decline below 16% in apparel due to competition. A growing share of merchandise other than shoes tend to push down the companywide contribution margin ratio.

Fixed expenses

The company forecasts fixed expenses of JPY6.0bn. Despite forecasting a rise of about four-fold in GMV from the JPY25.0bn FY02/22 forecast, the company expects to cap expenses growth at under 2x from its FY02/22 forecast figure of JPY2.5–3.0bn.

Locoport 3 rental space will open in stages, starting in June 2021, and be fully operational by May 2022. Full operations in FY02/23 will increase fixed expenses by JPY400–500mn versus the FY02/22 forecast figure.

Locondo deems it unnecessary to expand warehouses further until FY02/26, and expects that a staged increase in floor space will be necessary from around FY02/27 when GMV reaches about JPY60bn (3X FY02/21 figures). It assumes the same warehouse efficiencies as when it put together its long-term vision.

The company expects fixed advertising and personnel expenses to gradually increase along with GMV.

Locondo’s views on synergy between each of its businesses and competitive advantage

The factors driving the company’s market share growth are unlikely to change. In its core E-commerce business, it has a profile of being synonymous with try-at-home mail order services. The company thinks that this and its strong lineup of women's shoes give it competitive advantages. However, other companies are capable of imitating Locondo’s home try-on service, so the company does not believe that this service will give it a competitive advantage in the medium to long term. Furthermore, the company acknowledges that reaching its long-term vision targets using only its E-commerce business will be difficult as online marketplaces that focus on fashion are multiplying. Locondo views its Platform and Other (store, wholesale) businesses as a means to establish medium-to-long-term competitive advantage in the E-commerce business and secure high overall GMV and a generally stable earnings base.

The company thinks that its competitive advantage in its platform service stems from maintaining enough speed to ship on the same day, while still being able to handle department stores and wholesalers. It also enables small and medium-sized shoe retailers to manage all upstream and downstream processes digitally by using the company's logistics and systems, spanning the range of e-commerce, stores, and wholesale operations. Locondo intends to expand the platform service, not just to strengthen its Platform business, but to further enhance its overall business portfolio. To do so, it will boost the volume of inventory (mainly consignment sale inventory) it handles, taking advantage of the inventory sharing between its E-commerce and Platform businesses.

The company has implemented various initiatives, including efforts to raise brand recognition through television commercials in FY02/19 and FY02/20; the FY02/19 acquisition of Misuzu & Co., which provided production support; and the acquisition of Mobacolle in FY02/20, which strengthened the company’s base of young members. The respective benefits provided by these initiatives have made the full-scale expansion of the D2C business planned for FY02/21 possible.

Business

Business model

Locondo operates an e-commerce business centered on LOCONDO.jp, an online shopping site that specializes in shoes and other fashion items. True to its management philosophy of “innovation to the industry and freedom to the customer,” Locondo offers a system where customers can try on the merchandise they buy online in the comfort of their homes and return it with ease if they so wish. The company also runs a platform business that leverages the IT and logistics infrastructures it built in the e-commerce business, and a brand business through which it manages brands including their brick-and-mortar stores. The company also operates the Other (store, wholesale) business, which primarily uses inventory purchased by Locondo which it sells to brick-and-mortar stores and retailers.

The company has only one reportable segment, which covers sales, design, and procurement of fashion goods centering on shoes. It discloses financial indicators such as gross merchandise value (GMV) for each of its businesses (E-commerce, Platform, and Brand) on a quarterly basis.

The company’s customers can be separated into two broad categories: brands that utilize its platform to sell goods (or wholesale them to Locondo), and consumers who purchase goods. The former category usually comprises companies and the latter, individuals.

Locondo has a policy of conducting all processes, from receiving orders to shipment, internally. Many online retailers outsource operations such as telephone inquiry support, logistics, website development, and merchandise photography, but the company has aimed to expedite services by performing all of these operations in-house. Locondo emphasizes speed as a strategy for competing with major competitors.

As of FY02/21, the company has not expanded overseas, and all of its sales are generated within Japan.

Shoe categories

Shoes handled by Locondo can be broadly divided into women’s footwear, men’s footwear, and sneakers.

Women’s footwear: The company is strong in this category in which its business concepts deliver the most conspicuous advantages. Also, around the time of Locondo’s inception, shoes in the medium-to-high price range and targeting women aged 35–54 were the easiest for the company to secure inventory, and this played a part in the company’s strength in this category.

Men’s footwear: According to the company, men and women think about shoe consumption differently. For example, men tend to buy the same types of shoes over and over. Demonstrating the advantages of the company’s concept of “home try-ons and easy returns” is thus difficult in this category.

Sneakers: In this category, major sneaker brands do well and consumers tend to stick with their preferred brands. Consequently, it is difficult for the company to push its concept of “view many options, try on, then purchase.” Furthermore, the company faces difficulty raising its presence in this category because many brands already sell their goods through competitor Zozotown.