Zalando Se Ord

Dear ladies and gentlemen, welcome to the conference call of Zalando SE regarding the publication of the Q2 Results 2020. At our customer's request, this conference will be recorded. As a reminder, all participants will be in the listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Patrick Kofler, who will lead you through this conference. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to our Q2 2020 earnings call. After pre-releasing some of the figures already, we are now able to show you the full results of Q2 2020. My name is Patrick Kofler. With me today is our CFO, David Schröder. As always, this call is being recorded and webcast live on our Investor Relations website, and a replay of the call will be available later today. David, the floor is yours.

Thanks, Patrick, and good morning, everyone. Today we would like to provide you with a business update. We would like to look at our financial performance for the first half of 2020, and we would like to discuss our upgraded outlook for the rest of the year. Before we dive into the details, let me start by saying that we are overall very happy with our strategic progress and business performance in the first half of 2020. especially given the extraordinary circumstances that we've seen in the past months. We've proven the strength and agility of Zalando in many ways. We've come out of the first wave of this pandemic much stronger than we went into it as a result of our strategic clarity, our strong partnerships and an extraordinary team effort. I would therefore like to take this opportunity to once again thank all our teams for their great contribution especially those who have been on the front lines to serve our customers during this critical time. The dedication, the focus and the support that our teams have shown has truly made a huge difference for our customers, our partners and our business. Most importantly, it has put Zalando in a strong position to tackle the rest of the year and to further accelerate on our journey towards becoming the starting point for fashion. This is also reflected in the four main messages that I would like to share with you today. First, we see continued and in some key areas even faster progress on our strategic agenda to become the starting point for fashion, supported by an accelerated offline to online shift, driving record numbers of new customers and partners to our platform. Second, we delivered a strong financial performance in the first half of 2020, driven by a faster than expected recovery in demand and underlying changes in customer behavior. Third, we have further strengthened our balance sheet by successfully placing 1 billion euros in convertible bonds, allowing us to further accelerate our growth strategy and to invest through cycle with even more conviction. And last but not least, on the back of our strong performance in the first half of this year and our revised plans for the second half, we've upgraded our full year 2020 guidance as we are back on track to deliver strong and profitable growth for the full year. We will dive deeper into all these points during the presentation. Let's now first start with a strategic update. In our last earnings call in May, we talked a lot about the steps we have taken to successfully navigate through the crisis and to become part of the solution for the fashion ecosystem. We have realized at a very early stage of the pandemic that our starting point for fashion strategy has become even more relevant, as the needs of our fashion consumers and brands are very much aligned with the key building blocks of our strategy. Let me now remind you of the three strategic priorities we talked about ever since we communicated our strategy at our Capital Markets Day in Spring 2019 and which we also reiterated again at the start of this year before COVID-19 hit Europe. Our first priority remains to deepen customer relationships. We want to play an indispensable role in the lives of our customers and we will achieve this by building an even more attractive, inspiring and engaging destination. We measure our success by the help of our customer cohorts, by the share of wallet and the resulting customer lifetime value. Our second priority is to grow our active customer base. We want to be relevant to a broad audience in Europe as evidenced by the ability to attract new customers to the platform and retain existing ones to continuously increase our active customer base. Our third priority is to drive the platform transition. We want our customers to enjoy endless choices and we want them to say If I cannot find an item on Zalando, it probably does not exist. In order to get there, we aim to build a highly scalable infrastructure of technology, data and logistics that all brands can leverage to reach European consumers with their content and products. Let me now provide you with some more details on the progress with regards to these priorities. Starting with our strategic priorities to grow our active customer base and to further deepen our customer relationships, we observed strong progress in the past quarter. During this time, more than 3 million customers shopped at Zalando for the very first time, contributing to the strongest year-over-year active customer growth since 2013, with an increasing share of first-time online shoppers and mail customers. As a result, we now proudly serve more than 34 million customers across Europe. When looking at the quality of this new customer cohort, we see that it shows very similar or even slightly better characteristics compared to previously acquired cohorts. as indicated by their engagement, their reorder behavior, and their spend with us. Furthermore, recent customer surveys have confirmed our customers' intention to shop at Zalando again, even as offline retail slowly returns back to normal. To give our customers even more reasons and ways to engage with us in the future, we are currently working on a series of new exciting experience releases. As previously announced, one of these new experiences will be the introduction of our new pre-owned fashion category to our main Zalando destination. This will enable customers to give their fashion items a second life by selling them directly to Zalando quickly and effortlessly and will also provide them with a highly curated, quality checked and convenient selection of items available for purchase. We will launch this and other exciting experiences over the coming months. These new experience releases present major strategic milestones in our multi-year journey to establish deep, long-lasting customer relationships in order to realize our vision to become the starting point for fashion. Stay tuned for more to come in the following months. With respect to our strategic priority to drive the platform transition, we shared four focus areas for 2020 with you at the beginning of the year. The first one is to continue to internationalize the partner program. Between April and June, we saw more than 900 country launches of existing partners in markets outside of Germany, with 80 of them leveraging Zalando Fulfillment Solutions. As a second focus area, we aim to win even more partners to join our platform. During Q2, a record-high 180 new partners signed up for the partner program and will start to trade soon. Thirdly, we wanted to further drive our partner-facing logistics service, Zalando Fulfillment Solutions, to allow partners to leverage our European logistics network to increase their customer reach and satisfaction, while at the same time reducing complexity and cost. Over the course of the past quarter, Zalando fulfillment solutions grew by more than 180% year over year, and we recorded a 50% share of partner items shipped for the first time ever towards the end of the quarter. As a result of the strong underlying momentum, as well as these key initiatives, Our partner program, GMV, grew more than 100% over the past quarter. Furthermore, we observed a strong traction of our connected retail program, connecting offline stores to our platform, which achieved a GMV share of 5% in Germany with its 1,800 active stores, contributing successfully to the strong overall performance of our partner business. Going forward, we expect to benefit from a fourth initiative that we announced back in February. a new generation of data-driven tooling as one of the future growth drivers of our platform business. I am happy to announce that we just launched our new partner portal, Zalando Direct, which will serve as a main entry point for all our partner-facing tools and services going forward. This represents a major milestone for us on our way to become a fully integrated platform for our partners and will help them maximize the sales opportunity on Zalando. The new portal and its tools aim at providing a sales service environment for partners to manage every step of their journey on the Zalando platform. The key steps are, first, an improved onboarding flow that reduces operational barriers to entry to the Zalando platform by building an onboarding process that is capable of scaling with any partner size and type. It supports a high level of process automation to remove manual work and creates transparency throughout the process. The new functionalities will help to drive down time to integrate and time to online. Next, the portal will come with a powerful suite of data-driven products that enable partners to completely manage their entire season, right from budget and assortment planning to in-season merchandising all the way to end-of-season overstock management. We will provide benchmark data and KPIs to elicit partners to continuously outperform in the quest for customer attention. Last but not least, the new tools will enable brands to enhance discoverability and visibility, empowering partners to improve their overall brand presentation and engagement. Our Zalando marketing services integration enables partners to drive targeted content and directly engage with customers, contributing to fully immersive experiences on Zalando. The first set of functionalities was already made available to our more than 500 partners In the upcoming months, we will roll out additional tools and functionalities to our partners. This concludes our strategic update. Let's now have a look at our financials in the first half of 2020. Starting with top line, group top line growth in the first half of 2020 was very strong with GMV growing by 25.1% year over year to 4.7 billion euros. tracking at the high end of our midterm target corridor of 20 to 25% growth. I would like to particularly highlight that we were even able to accelerate our growth to 33% in Q2, driven by a faster than expected demand recovery and an accelerated channel shift. Over the past six months, we doubled our partner program GMV compared to the prior year. This also explains to a large extent the degree to a large degree, sorry, the gap of around 5.5 percentage points between GMV and revenue growth, which is particularly well pronounced in the DACH region. Now let's take a look at the development of each of those three segments. Our core sales channel, Fashion Store, saw strong 18.8% revenue growth in the first half, driven by an accelerated shift to online and an outstanding performance in rest of Europe. The strong demand was mainly supported by a re-acceleration of traffic growth as well as an exceptional new customer growth over the past few months as a result of an accelerated channel shift from offline to online. Q2 particularly benefited from the pent-up demand from the first quarter shifting into the second quarter as consumers held off making purchases when the pandemic started. In terms of regional development, the DAHC revenue growth showed a solid 12.8% year-over-year increase and particularly benefited from the platform transition, recording more than 20% GMV growth in the same period. With almost 25% revenue growth in the first six months of the year, the rest of Europe continues to outperform DACH by 11.7 percentage points. Growth was particularly strong in Southern Europe, which had been hit hardest in the early weeks of the pandemic. but then showed a fast recovery and even stronger shift towards online, allowing us to significantly grow our customer base in France, Italy, and Spain. In addition, we saw a truly outstanding performance of our off-price segment in the first half of 2020, recording revenue growth of 49.4% year-over-year, up 24.9 percentage points year-over-year, driven by our flash sales destination Zalando Lounge. The success was primarily driven by the strong organic demand of customers who have an affinity for bargain hunting and was additionally fueled by good stock availability. Conversely, our other business segment is still impacted by a negative baseline effect and muted demand for ZMS as a result of the pandemic. As discussed in previous earnings calls over the past quarters, our private label activities, which had historically been reported as part of our other business segment, were significantly downsized in Q1 2019 and are no longer reported in the other segment, but are now part of the fashion store. As a result, the other segment has been declining in H1 compared to last year, with no impact on group-level sales since it only affected internal inter-business unit revenue. Adjusting last year's results for our private label activities would have resulted in a pro forma revenue growth of 4.5% in the first half of 2020. Looking more closely at the last few months, Zalando Marketing Services, which is among the businesses we report in our other business segment, had to cope with a COVID-19-related negative demand impact as brands cut back on their marketing investments in the short term to protect their cash position and bottom line. However, we now see demand returning in preparation of the upcoming fall-winter season and therefore remain confident around the long-term opportunity of this key platform service. Looking at our key customer metrics, we generally see a positive trend on all of them. Site visits increased 31% year-over-year, showing an accelerated growth of 8.3 percentage points quarter-over-quarter. Site visits even exceeded those of our fourth quarter 2019 peak trading period, which so far had been the quarter with the most site visits, given that Cyber Week and Christmas usually attract the highest traffic within a year. Active customers grew also faster than in the past few quarters, surpassing 34 million in Q2, fueled by a strong new customer intake. We had 5.8 million additional active customers year over year, the highest year over year growth since 2013, which is truly outstanding from our perspective. Customer order frequency remained at its all-time high of 4.7 orders per active customer over the past 12 months, which is a great result considering the significant inflow of new customers over the same period. Average basket size showed a positive development as well, showing a small 0.3% uplift year-over-year. The major drivers behind this development were change in product mix as well as the temporary decrease in return rate, partially offset by a lower average item value as a result of a change in product mix. Overall, these order frequency and basket size developments have let GMV per active customer grow by more than 3% over the last 12 months. Turning now to profitability, our absolute profit as measured by adjusted EBIT increased by 5.1 million euros year over year to 113.3 million, primarily driven by an outstanding Q2 performance with an all-time high adjusted EBIT of 211.9 million and a record high margin of 10.4%. fully compensating the significant hit we took in Q1. Relative H1 profitability came in slightly below last year, mainly driven by a lower gross profit, as we will see on the next slide. Overall, when putting the latest results into perspective and the challenges we were confronted with, we are very satisfied with what we've achieved in the last six months, thanks to our decisive corona response and the focused execution of our platform strategy. Additionally, profitability was supported by a temporary reduction in return rates as a result of a shift in category mix with a higher share of need-based categories as well as a strong increase in new customers. When looking at the regional profit distribution, we can see that our mature markets in the DACH region were able to increase the absolute as well as their relative profitability levels. Furthermore, we managed to steer the rest of Europe close to break-even for the first half of the year, which is quite an achievement given the record high loss in Q1. However, when looking solely at the second quarter performance for rest of Europe, both absolute profit of 74 million euros and relative profitability of 7.3% increased strongly year over year. Last but not least, off-price and other businesses also strongly increased their profitability both in absolute and in relative terms. Let me now give you more detail on the main effects that led to the positive development of profitability so far this year. First, our gross margin declined 2.5 percentage points year over year in the first half of 2020, driven by country and product mix effects. For example, we had a higher share of basics, sports, kids and beauty, as well as a larger share of sales via our off-price business and the exceptional inventory write-down of 40 million euros in Q1, which has only been partly reversed in Q2. Second, our fulfillment cost ratio improved year-over-year as a result of higher level of utilization and therefore also improved efficiency across our logistics network and improved order economics benefiting from a lower average return rate. Third, our marketing cost ratio decreased year-over-year mainly due to our saving efforts as we adjusted our marketing approach at the beginning of the quarter by shortening the investment horizon for our ROI-based personalized marketing. With the demand recovery observed in recent months, the marketing spend, especially for personalized marketing, has been ramped up again in the latter half of Q2. Back to pre-COVID levels with a longer investment horizon of up to 720 days to capture the full opportunity arising from the accelerated channel shift. And fourth, admin costs improved year over year as a result of increasing economies of scale, continuous process improvements, and ongoing savings and cost efficiency measures, both on a half-yearly as well as on a quarterly basis. Turning to cash-related items now, we recorded the negative but increased working capital year over year. The main driver behind this development was the relatively higher increase in inventories and receivables than in payables, reflecting lower marketing investments during Q2 than last year, as well as earlier payments of supplier invoices. CapEx spending is in line with our plan, but below last year's level, as a result of our revised CapEx plan for 2020, as communicated during the Q1 earnings call in May. Mainly due to the strong operational performance, as well as lower CapEx, we recorded a positive free cash flow of €39.9 million for the first half of 2020, up from 8.1 million euros in the prior year period. As we conclude the section on quarterly financials, let us take a look at the development of our liquidity position. Thanks to our positive free cash flow development in the first half of 2020, as well as our proactive drawdown of 375 million euros from our general-purpose revolving credit facility, we could increase our strong liquidity position. As a result, our cash balance at the end of the first half amounted to 1.38 billion euros. Additionally, we made use of the current favorable capital market conditions in recent weeks and successfully placed two trenches of unsubordinated, unsecured convertible bonds with an aggregate principal amount of 500 million each. The transaction resulted in gross proceeds of 1.4 billion euros, giving us access to liquidity of now almost 2.4 billion euros. We are truly thankful to all our investors who have backed this transaction and have thereby helped to make it a success. We are convinced that we are only at the beginning of a dramatic and sustained shift towards online channels. With this capital, we are even more equipped to further accelerate the execution of our strategy, specifically the transition into a platform business model, and to put more capital behind our investment opportunities and our growth conviction, independently from external market conditions. Let us now turn to our revised outlook for the full year. Back in May, when faced with significant uncertainty with regards to the further evolution of the pandemic, we expected GMV and revenue to grow in the range of 10 to 20% and adjusted EBIT to be in the range of 100 to 200 million euros. However, given the much faster than expected demand recovery and elevated profitability levels during Q2, we feel even more confident for the full year outlook, as we continue to see consumer demand shifting towards online shopping in general and Zalando in particular. We therefore upgraded our full year 2020 guidance as outlined in our trading statement on July 15. For GMV, we now anticipate GMV to grow between 20 and 25% for 2020, in line with both our performance so far in 2020 and our midterm ambition going forward. For revenue, we expect revenue growth to trail GMB growth as a consequence of an accelerated transition towards a platform business model and an increasing partner program share, resulting in revenue growth of 15 to 20%. For profitability, driven by a strong H1 business performance as well as our commercial and overhead cost savings efforts, we raise our profit outlook and now expect adjusted EBIT in the range of 250 to 300 million euros. We leave our guidance unchanged for cash-related items and continue to expect negative networking capital as well as capex of 230 to 280 million euros to fund our continued investments into our European logistics network and into our technology platform. While our upgraded full-year guidance reflects our general confidence and optimism for the rest of the year, 2020 for sure continues to be a year of unprecedented uncertainty. Not only can we not foresee the future evolution of the global pandemic, but we also see an increasing amount of uncertainty and potential constraints on the supply side of our business, as many brands have cut back on collections and production volumes to protect themselves against potential overstock risk. However, based on the resilience and agility we have shown over the past months, and as our upgraded guidance certainly reflects, We are confident to reach at least 20% GMB growth and a higher adjusted EBIT than last year, even in the event of a severe second wave of infections and a pronounced economic recession in Europe. In the absence of a second wave and driven by improved consumer confidence and the availability of sufficient supply in the market to meet demand, we would have the ambition to get closer to the higher end of this range. Before we conclude, I would like to briefly comment on current trading in the third quarter. Looking at July, we saw a strong end of season sale and continue to observe a healthy customer demand for fashion and lifestyle products. As a result, we expect Q3 to deliver GMB growth within the range of our full year 2020 guidance corridor of 20 to 25%. In terms of profitability, we continue to see tailwind from a favorable return rate development although at a much smaller and further diminishing magnitude, and thus expect Q3 2020 adjusted EBIT at an elevated level compared to the prior year period. Let me close the presentation by reiterating that Zalando has a clear strategy and a clear direction. At our Capital Markets Day last year, we shared with you our vision to become the starting point for fashion in Europe. Our key strategic priorities remain to grow our active customer base, to deepen customer relationships, and to drive the platform transition. More than ever before, we are prepared to invest through cycle and drive long-term value creation for customers, partners, and ourselves. That concludes our presentation. Let's now go into Q&A.