September 03, 2009

Zappos Profit And Loss Statement: 2007 - 2008

Thanks to a tweet from @manross on Twitter, I found the Zappos 2007-2008 profit and loss statement buried deep within documentation from Amazon.com.


Highlights:

Net Sales of $635 million in 2008. If quoted gross sales of a billion are accurate, then the return rate is more than thirty percent, pretty typical for footwear, but crippling to a profit and loss statement.

Gross Profit percentage is about 35%.

Advertising Expense was $72 million in 2008, about 11.4% of net sales. For my catalog audience, pay close attention to this number --- it is far greater than your typical online marketing / advertising percentage, but is far less than the percentage of sales you're spending on catalog marketing. Long-term, the catalog industry will have to become significantly more efficient.

Profit Flow-Through, after backing out advertising and G&A expense is 19%. You can run a profitable business with a 10% or 15% flow-through, but you need tremendous volume and a high level of operational efficiency. Conversely, most businesses I work with (many selling the same product that Zappos sells) generate 25% to 40% flow-through rates. Because Zappos has a comparatively low gross margin rate, they must generate significant sales volume without the aid of any advertising in order to cover this very low flow-through rate. To me, this one metric is the most disappointing thing I've seen in the Zappos business model.

Pre-Tax Profit is 4%, and was 3% the year prior, far lower than what would be posted by a healthy shoe and/or apparel business. Granted, Zappos is early in the life of their business. The low flow-through rate destines Zappos to have mediocre pre-tax profit rates.

All that being said, Zappos is still clearly a success. Because of Amazon's purchase, we finally get to see the warts, and all of our businesses have warts, don't they?

Time for your thoughts. How does the Zappos p&l stack up against your business?