[The Crisis of e-Commerce]⑨ 73 Shareholders... 'Accumulated Deficit' Zigzag, Generous Stock Options

Stock Options Granted This Year Total 570 Million KRW... Reached 8.5 Billion KRW in 2022
Sales Surge Annually but Operating Losses Continue
Performance and User Numbers Lag Behind Competitors

Kakao Style, which operates the women's fashion specialized platform 'Zigzag,' grants large-scale stock options (stock purchase rights) every year. This strategy aims to attract top talent for high growth, but it is hindering profitability improvement.

According to the Financial Supervisory Service's electronic disclosure system on the 12th, Kakao Style issued stock options worth 300 million KRW (1,000 shares) to employee A through a paid-in capital increase on the 5th of this month.

Zigzag BI. Provided by Zigzag

Stock options refer to a system where a company grants its executives and employees the right to purchase the company's shares at a predetermined price within a certain period. It is a type of employee compensation that allows them to gain profits if the company grows or gets listed on the stock market, increasing the stock value. Since stock options can yield profits when the company's value rises, startups or venture companies with high growth potential mainly use them as a means to recruit talent or motivate employees.

Stock Options Granted Twice Annually

So far this year, Kakao Style has decided on paid-in capital increases worth a total of 570 million KRW to grant stock options to its executives and employees.

Kakao Style has granted stock options 16 times since its establishment, including about 8.5 billion KRW worth in 2022 and 5.5 billion KRW worth last year through paid-in capital increases. A Kakao Style official explained, "Stock options are regularly reviewed and granted to employees to recruit and retain top talent," adding, "We conduct stock option grants once or twice a year."

Zigzag, launched in 2015, has grown annually by gaining popularity with its personalized features that recommend users' preferred products and shopping malls using artificial intelligence (AI). It analyzes products purchased or frequently viewed by users through AI and recommends products or shopping malls that might interest each individual. Later, in 2021, Croquis.com, the operator of Zigzag, was acquired by Kakao, and the company name was changed to Kakao Style. Besides Zigzag, Kakao Style currently operates 'Posty,' a fashion platform for people in their 40s and 50s, and 'Fashion by Kakao,' a curation service.

Kakao Style is the largest shareholder with a 50.94% stake held by Kakao, but with the annual large-scale stock option grants, there are as many as 73 minority shareholders, including CEO Seo Jeong-hoon.

Rapid Growth Achieved but Four Consecutive Years of Losses

Kakao Style has continued external growth every year. Last year, Kakao Style recorded sales of 165 billion KRW, a 62% increase compared to the previous year. Its sales have been growing annually. Until 2020, sales were 31.2 billion KRW, but due to the rapid growth of the online fashion market caused by COVID-19 in 2021, sales surged to 65.2 billion KRW. In 2022, sales reached 101.8 billion KRW, surpassing the 100 billion KRW mark.

However, in terms of profitability, the company has posted losses every year. Last year, Kakao Style recorded an operating loss of 19.8 billion KRW. Although it significantly reduced the operating loss compared to the 51.8 billion KRW loss recorded in 2022, it has not escaped four consecutive years of losses. While achieving external growth, the company increased employment by triple digits annually, causing labor costs to surge, and payment fees increased sharply due to the rise in credit card payments. Stock compensation costs from stock option exercises also exceeded 300 million KRW annually.

The accumulated losses have led to financial burdens. As of the end of last year, the company's current assets available within one year were 58 billion KRW, down more than 10 billion KRW from 69 billion KRW a year earlier. Meanwhile, unpaid liabilities from issued but unpaid coupons surged from 48.1 billion KRW in 2022 to 55.6 billion KRW last year, causing current liabilities to jump from the 59 billion KRW range to the 65 billion KRW range.

The deficit accumulated from operating losses reached 115.8 billion KRW, but thanks to 128.2 billion KRW in additional paid-in capital from issuing convertible preferred shares and paid-in capital increases for stock option grants, total capital stands at 15.3 billion KRW. However, this is about half of the 34.2 billion KRW total capital recorded last year.

Lagging Behind Competitor Abley

Since Kakao Style's acquisition, Zigzag seems to be losing ground to Abley, a latecomer and competing service. Abley, a women's fashion platform, overlaps with Zigzag in offering mid-priced fashion products and personalized recommendation services. However, Abley Corporation, which operates Abley, escaped losses last year by posting an operating profit of about 3.3 billion KRW. Its sales also reached 259.5 billion KRW, about 80% higher than Kakao Style's.

App user numbers are also trailing behind competing services. According to IGAWorks' Mobile Index, Zigzag's monthly active users (MAU) last month were about 3.18 million, ranking third among major fashion platforms. In contrast, competitors Musinsa (about 5.73 million) and Abley (about 5.05 million) each surpassed 5 million users during the same period.

C-commerce (Chinese e-commerce) companies such as AliExpress, Temu, and Shein are also considered potential threats to Kakao Style's fashion industry. Zigzag, the main platform, mainly handles mid-priced clothing products, which partially overlap with the ultra-low-priced products offered by C-commerce. Recently, AliExpress began selling domestic brands' clothing through its domestic sales channel K-Venue. Although C-commerce's fashion business has yet to show clear results, it could pose a significant threat once it gets on track.

Kakao Style states that it is continuously striving to improve profitability. A Kakao Style official said, "The capital surplus balance is about 130 billion KRW, which is larger than the accumulated deficit, so resolving the accumulated deficit through capital transfer is always possible," adding, "More importantly, we fully recognize the need for actual financial capacity and are focusing on strengthening financial capacity through continuous profitability improvement."