Bernstein moved Zalando SE's rating up to "market-perform" from "underperform" and increased its price target to €25 from €23, after the company's stock had declined by about 30% over the previous 12 months and consensus earnings projections weakened materially. The upgrade accompanied a market reaction that pushed shares higher by more than 6%.
"We upgrade Zalando to Market-Perform with a target price of €25 and now see the risk / reward as more balanced," Bernstein analysts said. " Our long-term bearishness on the quality of the business model remains."
Over the prior year the stock's next-twelve-month (NTM) price-to-earnings multiple compressed from 28x to roughly 14.5x, while consensus adjusted EPS expectations declined substantially - down 40% for FY26 and down 33% for FY27 over the same period.
Bernstein highlighted four specific factors that informed its revised view. First, the firm pointed to a €300 million share buyback, which it described as equivalent to roughly 5% of shares outstanding. Second, Bernstein cited a FY26 free cash flow projection of €576 million, which implies a 9.2% free cash flow yield. Third, the analysts said they saw manageable risk from artificial intelligence, stating they do not view "the risk of existential disintermediation from AI." Fourth, the firm noted contained capital expenditure plans, with its FY26 capex estimate of €257 million running 13.8% below the €299 million consensus.
Operational results for FY25 included gross merchandise volume (GMV) of €17.56 billion, up 14.8%, and total revenue of €12.35 billion, up 16.8%. Adjusted EBIT margin remained steady at 4.8%. On a quarterly basis, pro-forma GMV growth accelerated to 7.2% in Q4 from 6.7% in Q3. Free cash flow for FY25 was negative €3 million, reflecting €1.08 billion in investing outflows that were partially tied to the acquisition of About You.
Management's FY26 guidance called for adjusted EBIT (AEBIT) in a range of €660 million to €740 million, with the midpoint close to the €700 million consensus. Bernstein's own FY26 AEBIT forecast of €674 million sits 2.9% below a €695 million consensus; however, its FY26 diluted EPS projection of €1.37 is 3.1% above the €1.33 consensus. That EPS edge reflects Bernstein's modeling of continued buybacks that reduce the share count by more than 15% over several years.
The €25 price target is calculated from an average of three valuation approaches: 12x NTM P/E, 10x EV/EBIT and a discounted cash flow using an 11% weighted average cost of capital and a 2% terminal growth rate.
Despite the upgrade, Bernstein reiterated a preference for peers Inditex and Next, characterizing Zalando as "just a department store with limited differentiation" that "will remain a low margin and low ROIC distributor of apparel."
Market moves around the upgrade were notable: the stock rose 9.50% on March 12 to €22.02 and gained a further 6.18% on March 13 to €23.38, compared with a March 11 reference close of €20.37.
Key points
- Bernstein upgraded Zalando to market-perform and raised its target to €25, citing a more balanced risk/reward despite lingering model concerns.
- Four drivers underpinning the upgrade include a €300 million buyback (~5% of shares), FY26 FCF of €576 million (9.2% yield), manageable AI risk and FY26 capex estimated at €257 million (13.8% below consensus).
- FY25 results showed GMV of €17.56 billion (+14.8%), revenue of €12.35 billion (+16.8%), a flat adjusted EBIT margin of 4.8% and FY25 free cash flow of negative €3 million due to €1.08 billion in investing outflows.
Risks and uncertainties
- Persistent concerns about the quality of Zalando's business model and its low-margin, low-ROIC positioning in apparel distribution could limit long-term returns - a factor cited by Bernstein.
- Consensus earnings have moved sharply lower, with adjusted EPS expectations falling 40% for FY26 and 33% for FY27, creating uncertainty around future profitability and investor sentiment.
- FY25 free cash flow was essentially flat negative, in part because of large investing outflows tied to the About You acquisition, which highlights execution and integration risks that can affect cash generation.