Fundamental Equity Valuation of Zalando SE

Details

Supervisors

Grégoire, Philippe

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion, à finalité spécialisée

Abstract

The objective of this report was to determine whether Zalando is currently undervalued, overvalued or correctly valued on the stock exchange. To do so, we provided you with our personal approach in estimating Zalando’s intrinsic value. Upon delving into the study of Zalando SE, the company immediately emerged as a fascinating entity, being the European leader in the online fashion market and having known extraordinary growth since its creation in 2008, with a tremendous acceleration during the pandemic followed by a dramatic downturn in early 2022. Our historical analysis of Zalando's last annual reports in the European online fashion market allowed us to pinpoint the key drivers of its revenues and costs. Understanding Zalando's fundamentals enabled us to identify relevant peers for our subsequent work. By studying market tendencies and risks, we developed our SWOT analysis. Subsequently, we adopted a top-down approach to determine Zalando's Gross Merchandise Volume (GMV), derived from European online fashion market growth statistics. Forecasting the cost structure of various business segments led us to our projected Free Cash Flow to the Firm (FCFF). With this framework in place, we initiated the valuation exercise, where the key determinant was the Weighted Average Cost of Capital (WACC) at 8.53%, utilized in the two Discounted Cash Flow (DCF) analyses: one based on the Gordon Growth Method (GGM) and the other on a carefully selected Exit Multiple of 9.4x EV/EBITDA. We opted for the second approach, leading to an implied share price of 37.22€. To rigorously challenge the results of this financial calculation, we conducted an exhaustive ESG and reputation investigation, which confirmed the found value. Building on this foundation and considering our SWOT analysis, we identified four critical factors to drive our sensitivity analysis. The fluctuations in market share would impact scale advantages, pricing power, and service optimizations. The implementation of the Partner Business Model and variations in the take rate would influence sustainable cash position, expansion, and potential share of wallet. Additionally, we considered inflation effects to highlight exposure to the macroeconomic environment. By assigning equal weight to each factor, we arrived at an average target price of 37.04 EUR. Based on that, we consider Zalando's current share price to be undervalued and, therefore, provide a BUY recommendation. Our target share price of 37.04 EUR indicates an upside of 17.95% compared to the company’s closing price of 31.40 EUR on July 31, 2023.