By Ritsuko Ando
TOKYO (Reuters) - Japanese online fashion retailer Zozo Inc said it expects its profit to recover in the current fiscal year, after booking its first-ever annual drop in earnings on a failed experiment with bespoke tailoring and clashes with fashion brands.
But Zozo's results also showed its liabilities mounting and cash position dwindling, underscoring worries about the finances of the company that runs the popular Zozotown online mall.
Zozo has captured nearly half of Japan's online sales of mid- to high-end clothes by setting up a website catering to fashion-forward, higher-income customers.
It sought to transform itself in recent years from an e-commerce site into a tech-retail hybrid by starting a private brand and launching a made-to-measure service using a bodysuit that allowed users to upload measurements online.
The bodysuit, along with billionaire CEO Yusaku Maezawa's plans for a lunar flyby as the first private passenger on Elon Musk's SpaceX mission, had helped spread Zozo's name globally.
But many who ordered the bodysuit did not use it to buy clothes, leaving Zozo saddled with the huge cost of distributing the suits without seeing returns. It also struggled to cope with orders that did come in, forcing some customers to wait several months for delivery.
"We started this with the belief that it's not good enough to have just three sizes of S, M or L. But as you know, it did not go as we had hoped," Maezawa told analysts.
Zozo's operating profit for the year ended March fell 21.5 percent to 25.7 billion yen ($229 million). That was worse than its most recent forecast of 26.5 billion, which had been marked down from an initial projection of 40 billion yen.
Maezawa also announced an end to the company's controversial "Zozoarigato" membership service, which charged users fixed fees in return for discounts throughout the website.
Fashion brands had complained of what they saw as excessive discounting under the service, driving some including Onward Holdings Co to leave the site. Zozo has been trying to regain momentum by adding more mass-market retailers such as Shimamura, but some analysts say this has hurt its initial, fashion-focused image.
Maezawa said the membership service did not turn out to be as profitable as he had hoped, and that he wanted to mend the site's relationship with brands.
Shares of Zozo have nearly halved in the past year on fears that its popularity may be waning, and that its cash position looked weak. The company secured a 15 billion yen commitment line from banks in late March.
Thursday's results show Zozo's cash and cash equivalents fell to 21.6 billion yen by end-March, versus 24.6 billion a year earlier, while total liabilities jumped to 56.3 billion from 29.9 billion.
But the company said it expects business to pick up as Japanese consumers were just beginning to buy clothes online. It forecast a 24.7 percent rise in operating profit to 32 billion yen for the current financial year.
Maezawa said he was preparing to expand Zozotown in China, citing the surge in disposable income among the younger generation.
He also said the company had not given up on an online made-to-measure service, and was planning to work with other brands to keep the idea alive.
"I'm actually more certain than ever that there's a need for that," he said.
(Reporting by Ritsuko Ando; Editing by Himani Sarkar and Christopher Cushing)