Description

Investment Overview:

•zooplus has 50% market share of online pet food sales in Europe, vastly ahead of peers

•zooplus is one of the few companies that competes effectively against Amazon

•Online is only 7% - 8% of total European pet sales and is structurally taking share from Brick and Mortar (B&M)

•Aligned management team is focused on long-term value creation over maximizing short-term earnings

•Valuation is very reasonable compared to peers and potential earnings power

Business Model:

zooplus buys pet products directly from manufacturers, stores it in distribution centers, and sells it to consumers through country-specific websites

•8,000+ SKUs offered across 30 European countries

•Zero brick & mortar locations, all sales online

Sales mix: 84% food | 16% non-food

•47% dog focused | 48% cat focused | 5% other pets

•10% private-label brands

Packages are delivered to consumers throughout Europe by 3rd party couriers

•Free shipping on orders over €19 - €39

•Delivery within 1 – 2 days

Purchasing pet food online is great for all stakeholders

Very convenient for customers:

•Massive selection online with lower prices

•Not an item you need to “try on”

•No longer requires carrying a bulky bag to the car

Recurring, predictable sales for zooplus:

•94% customer retention rate in constant currency (1)

•<2% of all orders are returned

Pan-European exposure for manufacturers:

•zooplus provides access to a loyal customer base across 30 countries

Competitive Advantage:

zooplus has dominant 50% European online pet supplies market share

•zooplus European online market share has been at least 40% every year since 2009

•zooplus is 10x bigger than the #2 online specialist in Europe

Amazon has ~11% online share despite selling pet products in Europe since 2005

•Zooplus growing 18% - 29% YoY in DE, GB, FR - Amazon’s strongest European markets

Brick & Mortar incumbents have limited online presence and structurally higher gross margins

•97%+ of Pets at Home (GB) and Fressnapf (DE) sales are offline

•Pets at Home sells at 54% gross margin compared to zooplus at 28%

I conducted an in-depth pricing comparison, below are the notes/takeaways:

Note: Price comparisons based on proprietary research based on using Google Translate to “shop” a basket of 50 SKUs comparing zooplus vs. leading B&M vs. Amazon websites item by item in top 5 European countries. Basket roughly matches zooplus sales mix: 80% food, 45% dogs, mix of generic and niche brands, etc. Top 5 markets represent 67% of zooplus overall sales. Prices and shipping terms subject to change.

zooplus Crushes B&M

zooplus averages 17% lower prices than Pets at Home (PaH)

Fressnapf is undercut by zooplus on 1/3rd of SKUs by an average of 14%

•zooplus has superior selection and shipping:

•26% - 34% of SKUs in my basket not carried at B&M, but in stock at zooplus

•zooplus offering free delivery over €19

•Brick & Mortar remains 90%+ of pet supplies market, representing a great opportunity for zooplus

The question becomes: can zooplus fend off Amazon along the way….

zooplus averages 8% - 17% lower prices compared to Amazon

•~40% of Amazon SKUs are only offered by 3rd party marketplace sellers

•Typically specialty/premium SKUs

•Within these niche SKUs zooplus dominates with 10% - 30% lower prices

How? zooplus started earlier, stayed focused, and now has ~5x the scale of Amazon in this niche market

Long Runway:

zooplus benefits from two structural tailwinds:

•Humanization of pets

•Shift from offline to online purchases

Result: overall pet market is growing, and online is rapidly taking share

European Pet Supplies market: €26Bn and growing 3% p.a.

Online Pet Supplies market penetration trails comparable categories….for now:

•China/Korea online penetration of pet food: ~30%

•European online penetration for electronics: >25%

Widening Moat:

Scale Economies Shared is a powerful concept first outlined by Nick Sleep of Nomad Investment Partnership:

•When a business gains purchasing scale, rather than selling goods at a higher margin, companies can chose to lower prices – effectively sharing scale economies with customers

•By sharing efficiency gains with customers in the form of lower prices, the company can increase demand, leading to further scale advantages

Once this virtuous cycle is in motion, it becomes exceptionally difficult for competitors to catch up

•Very few companies opt for this strategy because it requires long-term commitment and patient investors

EBIT margins at all-time highs despite gross margin decreases of 1,000 basis points over five years

•Optimal strategy for maintaining the lead in a long-term game

Industry Source: “zooplus is the only company currently able to sell pet food online profitably”

KPIs are following suit:

Management Team:

Founder/CEO: Dr. Cornelius Patt

•Management team collectively owns 5% of shares

Strategy is to prioritize growth, but self-finance along the way by remaining free cash flow positive

•“We will consciously decide in favor of growth over short-term profit maximization when given a choice”  

Another zooplus co-founder left in 2013 to start an investing firm, Maxburg Capital. zooplus is currently the firm’s largest position.

This is not a VC-backed land grab, this is a company executing a simple plan with extraordinary focus

Zooplus is under-earning today:

LTM EBIT margins are 1.9%, but that doesn’t tell the full story

•In mature markets zooplus has significantly higher margins

•Logistics costs are 13% - 15% of sales vs. 20% - 22% in newer markets

Customer Acquisition Costs are strong long-term investments, but put pressure on current margins

•Repeat customers have margins 600–700 bps higher (1)

As the company continues to mature and scale fixed costs, EBIT margin should trend towards ≥ 5%

Return on Capital Employed is 37% today due to zooplus turning over capital 20x a year(2)

•At 5% EBIT margin with 20x turnover = ~100% ROCE

Reasonable Valuation:

Chewy.com is an almost  identical business model to zooplus, but U.S. focused

•Similar online market share

•Competes well against Amazon

•Not currently profitable

•Recently acquired by PetSmart owners for $3.35Bn+ - a massive valuation premium to zooplus

• 3.7x LTM sales and 2.2x Est. 2017 sales

Zooplus currently trades for 1.08x LTM sales and ~0.9x forward sales

•Apply Chewy’s forward revenue multiple to zooplus 2017E revenue = +100% upside

Longer-term: zooplus sales of ≥€2bn by 2020

•At a 5% EBIT margin: 10% yield on today’s Ent. Value

•At a 10% EBIT margin: 19% yield on today’s Ent. Value

Both very reasonable for a dominant eCommerce business growing ~20%

zooplus is under-followed in U.S. Markets:

zooplus is essentially unknown in the U.S. public markets:

•Not on SumZero or Value Investors Club (previously)

•Never discussed in the Wall Street Journal or on CNBC

•Only one U.S. investment bank covers zooplus, and they only initiated last month

Limited liquidity: trades roughly €1mm - €4mm per day

Investor calls/presentations are in English, but often ≤ 5am EST, with inconsistent transcripts

•Hope you are a morning person!

zooplus is an excellent business with little coverage, low liquidity, and is difficult to follow - exactly what I am looking for

Disclaimer: The information provided herein is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities in Investors Management Corporation ("IMC") or any related or associated company.  None of the information or analyses presented are intended to form the basis for any investment decision, and no specific recommendations are intended. Accordingly this information does not constitute investment advice or counsel or solicitation for investment in any security. This information does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or any invitation to offer to buy or subscribe for, any securities, nor should it or any part of it form the basis of, or be relied on in any connection with, any contract or commitment whatsoever. IMC expressly disclaims any and all responsibility for any direct or consequential loss or damage of any kind whatsoever arising directly or indirectly from: (i) reliance on any information contained in the information, (ii) any error, omission or inaccuracy in any such information or (iii) any action resulting therefrom.

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Catalyst

- Operating leverage

- Continued growth

- Increased awareness in U.S. markets