UPDATE 2-Zalando to launch beauty range as investment dents profits

* Q3 sales growth 27.5-29.5 pct vs analyst consensus for 27 pct

* EBIT seen between +5 mln euros and -5 mln euros

* Full year guidance confirmed (Adds analyst comments, background)

BERLIN, Oct 18 (Reuters) - German online fashion retailer Zalando said it planned to sell beauty products but its shares were dented as it indicated third-quarter profits would miss analyst expectations.

Zalando, which is already investing heavily in logistics and technology as Amazon makes a big push into fashion, said it would start selling third-party cosmetics, skin care and fragrance brands at a range of prices in Germany in spring 2018.

Major investment in new warehouses and ever-faster delivery has already been eating into Zalando’s profitability despite rapidly increasing revenue.

The fashion and beauty industries have been converging of late, with retailers such as H&M and Inditex’s Bershka and Oysho all rolling out their own cosmetics lines.

British rival ASOS, which last month launched the sale of more than 100 beauty brands on its site plus its own line of cosmetics, said on Tuesday initial reaction had been very positive as it raised its sales forecast.

“This step opens a complete new layer of incremental growth for Zalando,” said Baader Helvea analyst Volker Bosse. “Beauty care products are by nature high-margin items and also the return rate of these products should be lower.”

Zalando’s move into beauty would involve spending across its supply chain, including in logistics and the presentation of the new brands on its website, co-chief executive Rubin Ritter told Reuters, but he declined to specify a figure.

“We will try to reach a similar market share as we have in fashion. It could be quite sizeable in the long-term,” Ritter said, noting that the European market for beauty products is worth around 80 billion euros ($94 billion).

On Wednesday, the company said it expected third-quarter earnings before interest and taxation (EBIT) of between a 5 million euro loss and a profit of 5 million euros. That would miss average analyst forecasts for EBIT of 8 million euros.


Zalando expects sales to come in at 1.064-1.081 billion euros, a rise of between 27.5 and 29.5 percent, a big acceleration from 20 percent growth in the second quarter.

Zalando reports full quarterly results on Nov. 7.

Zalando shares were down 1.4 percent at 0835 GMT, while ASOS, which trades at a slight discount to Zalando, also dipped 0.8 percent.

“Profits were a bit weaker than the market was expecting. The challenging thing for Zalando is meeting the full-year guidance they have set,” said Berenberg analyst Michelle Wilson.

Zalando stuck to the guidance it gave in August for full-year sales growth in the upper half of the 20-25 percent range and for an EBIT margin in the lower half of a 5-6 percent range.

Ritter said he was pleased that sales growth was above that target range in the period but noted that the third-quarter was traditionally the weakest in terms of profitability for Zalando as it discounts end-of-summer season garments.

On Tuesday, ASOS raised its sales growth forecast for the financial year from Sept. 1 to 25-30 percent, from a previous 20-25 percent, and said it expected a stable operating profit margin of 4 percent. ($1 = 0.8501 euros) (Reporting by Emma Thomasson; Editing by Jane Merriman and Keith Weir)