On Thursday, Deutsche Bank (ETR:DBKGn) adjusted its outlook on Zalando (ZAL:GR) (OTC: ZLNDY), reducing the price target to EUR36.00 from the previous EUR40.00. Despite the lower price target, the firm maintained a Buy rating on the shares. The adjustment follows Zalando's third-quarter performance, which was bolstered by favorable weather conditions that benefited the launch of the autumn/winter season.
The analyst from Deutsche Bank highlighted that Zalando's recent earnings report might be misunderstood due to the IFRS 15 accounting treatment for loyalty programs. This accounting standard requires companies to recognize revenue from customer contracts and has affected the way Zalando's loyalty scheme earnings are reported.
Despite this, the analyst pointed to a strategic shift at Zalando towards reigniting sales growth, moving away from a strict focus on margins.
Zalando's strong balance sheet was cited as a key factor enabling the company to pivot its strategy. The firm's financial health allows for adjustments to the loyalty program, which is seen as an investment in content and customer experience. These areas have been identified by Zalando as priorities for medium-term focus, with the expectation that they will yield benefits in the medium to long term.
Although the analyst anticipates that the fourth-quarter sales growth may not match the 5% increase witnessed in the third quarter, the decision to revamp the loyalty program is viewed as a strategic investment. This move is expected to enhance Zalando's offerings and improve customer engagement over time.
In summary, Deutsche Bank's revised price target reflects a nuanced view of Zalando's recent earnings and strategic decisions. The firm's Buy rating remains in place, suggesting confidence in Zalando's potential for growth despite the short-term impact of accounting changes and investment in customer-focused initiatives.
InvestingPro Insights
Complementing Deutsche Bank's analysis, InvestingPro data offers additional insights into Zalando's financial position and market performance. The company's market capitalization stands at $7.39 billion, reflecting its significant presence in the e-commerce fashion sector. Zalando's revenue for the last twelve months as of Q3 2024 reached $11.5 billion, with a modest growth of 0.73% year-over-year, aligning with the analyst's observations on the company's strategic shift towards reigniting sales growth.
An InvestingPro Tip highlights that Zalando holds more cash than debt on its balance sheet, reinforcing Deutsche Bank's point about the company's strong financial position. This solid financial footing supports Zalando's ability to invest in its loyalty program and customer experience initiatives without compromising its financial stability.
Another InvestingPro Tip indicates that Zalando has shown a strong return over the last three months, with data confirming a 20.49% price total return over this period. This positive momentum could be attributed to the favorable weather conditions and successful autumn/winter season launch mentioned in the Deutsche Bank report.
For investors seeking a more comprehensive analysis, InvestingPro offers 5 additional tips that could provide further context to Zalando's financial health and market position. These insights, along with real-time metrics, can be valuable for understanding the full picture of Zalando's potential as an investment.
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