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Zalando shares jump on return to profit in consumer gloom

FILE PHOTO: Zalando packaging from an online delivery

By Nadine Schimroszik and Riham Alkousaa

BERLIN (Reuters) - Zalando shares jumped on Thursday as Europe's biggest online fashion retailer returned to profit in the second quarter thanks to cost cuts, though another drop in sales showed the effects of squeezed consumer budgets.

After riding a surge in online shopping during the pandemic, Zalando shocked investors in May by reporting its first ever sales decline.

The German company made adjusted earnings before interest and tax (EBIT) of 77.4 million euros ($78.9 million) in the second quarter, down 58% year-on-year but up from a first-quarter loss of 52 million euros.

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Its gross merchandise volume was flat year-on-year at 3.8 billion euros ($3.9 billion), but the company predicted a better second half of the year.

"Our foundation is very strong. We expect a return to growth and profitability," co-CEO Robert Gentz said.

Zalando shares were up 8.1% at 0945 GMT.

Second-quarter sales fell 4% to 2.6 billion euros, however, with the company blaming lower consumer confidence, inflation and delivery bottleneck for individual products such as shoes.

"Life is becoming more expensive and consumers are reluctant to consume. We feel that," Gentz said.

Even with inflation, customers' basket size dropped to a 12-month average of 55.9 euros in the second quarter from 57.7 a year earlier.

The company said demand was still high for luxury and cheap clothes, but had weakened for mid-price items.

British rivals ASOS and Boohoo have also reported a fading of the pandemic era boost as shops reopened and consumer finances come under pressure.

To cut costs, Zalando said it had reduced marketing spending, introduced a minimum order value in all its 25 markets and was improving efficiency across its European logistics network.

After rapid staff expansion, the company does not expect to add to its current workforce of around 17,000, it said.

"We are focused on efficiency and margin improvement measures that will help us strengthen our profitability in the second half of the year," Chief Financial Officer Sandra Dembeck said in a statement.

Baader Helvea analyst Markus Mayer said Zalando was doing the right things to grow and win market share.

Asked about possible entering the U.S. market, the company said now was not the right time to expand outside Europe.

It confirmed full-year guidance, lowered in June, for sales growth of 0-3% and adjusted EBIT of 180-260 million euros.

($1 = 0.9841 euros)

(Reporting by Riham Alkousaa and Nadine Schimroszik; Editing by Jason Neely and Mark Potter)