Upgrade and Target Price Increase#
Bernstein has upgraded Zalando SE's stock rating from "underperform" to "market-perform". The analysts raised the target price from €23 to €25 after the German online fashion retailer's shares fell about 30% over the past year. Following this news, Zalando's stock increased by over 6%.
Business Model Concerns#
Despite the upgrade, Bernstein analysts expressed ongoing concerns about Zalando's business model, stating they still view it as having limited quality. They noted that the stock's price-to-earnings (P/E) ratio has decreased significantly from 28 times earnings to around 14.5 times over the last year. Additionally, earnings expectations for the fiscal years 2026 and 2027 have dropped sharply, with estimates falling by 40% and 33%, respectively.
Key Drivers for the Upgrade#
Bernstein identified several factors contributing to the upgrade: - Share Buyback: Zalando announced a €300 million share buyback, which represents about 5% of its outstanding shares. - Free Cash Flow: The company is projected to generate €576 million in free cash flow for fiscal year 2026, indicating a 9.2% yield. - AI Risk Management: Bernstein believes the risk of being negatively impacted by artificial intelligence is manageable for Zalando. - Capital Expenditure: The firm's estimate for capital spending in fiscal year 2026 is €257 million, which is lower than the consensus estimate of €299 million.
Financial Performance#
In its latest report, Zalando indicated a gross merchandise volume (GMV) of €17.56 billion for fiscal year 2025, reflecting a 14.8% increase, and total revenue of €12.35 billion, up 16.8%. The adjusted earnings before interest and taxes (EBIT) margin remained steady at 4.8%. However, free cash flow was negative €3 million due to significant investments, including the acquisition of About You.
For fiscal year 2026, Zalando's management has guided for adjusted EBIT between €660 million and €740 million, with Bernstein's estimate slightly below the consensus. The target price of €25 is based on various valuation methods, including price-to-earnings and discounted cash flow analyses. Bernstein continues to favor other retailers like Inditex and Next, describing Zalando as a low-margin distributor of apparel.