Zalando Se Ord

Good morning everyone and welcome to our Q3 2021 earnings call. I am joined today by our co-CEO and founder Robert Gens and our CFO David Schroeder. Robert will kick us off with a strategic update and a sneak peek into 2022. David will then walk you through the financial development of the quarter and our outlook. Both Robert and David are available for questions afterwards. As usual, this call is being recorded and webcast live on our Investor Relations website and a replay of the call will be available later today. Robert, I will now hand it over to you. Please go ahead.

Thank you, Patrick, and a very warm welcome to all of you. Thank you for joining our call today. We are very happy with the development of the Lambda in 2021 so far. So we are making progress on our strategic agenda while staying focused on strong day-to-day execution. So we have successfully navigated the first full quarter with three open economies and delivered strong financial performance in the third quarter. David will dive deeper into our financial performance later in the presentation today. In a nutshell, these are the key highlights from the past quarter. We successfully launched the land in six new markets and are paving the way to be the starting point for fashion across Europe. We upped our game in terms of brand collaborations, taking our brand relationships to the next level with exciting product drops. Third, we made progress on our long-term commitment to move the fashion industry from a linear to circular system. Financially, we showed strong growth in Q3 at the normalized probability level. So we have now reiterated our upgraded outlook for 2021 with GMV growth of 31 to 36%, revenue growth of 26 to 31% year-on-year and adjusted EBIT in the upper half of our initial 400 million to 475 million Euro range. So now, before we head into detail, let me zoom out and look again at what we laid out at our Capital Market Day earlier this year. So to achieve our vision to be the starting point for fashion, we focus on three strategic dimensions and have set ourselves ambitious targets for 2025. First, we aim to grow our active customer base and achieve deep customer relationships to play an indispensable role in their lives. Second, in order to provide the greatest customer for vision, we've transitioned towards a true platform business. And as a platform, we work in deep partnerships which allows us to scale and create strong benefits for customers, partners, and so on. And third, we use our ever-increasing platform scale to become truly sustainable and drive positive impact on people and the planet. And we do it because it is the right thing to do, and we are aligned long-term with the interests of our customers, partners, and talent. So, what does this mean for our business? It means that a major opportunity remains ahead of us. So by 2025, we aim to triple the London's GMB to more than 30 billion euros compared to 2020. And in the long term, we will serve more than 10% of the European fashion market. So in the course of Q3, we made strong progress and executed further against our long-term strategies. So first, let's talk about our customers. We made strong progress in increasing our active customer base to over 46 million, with a growth of over 30% year-on-year, adding about 11 million customer accounts over the last 12 months. So 11 million newly added customers is an abstract number. It's a huge number. It's roughly compared to the population of Belgium of newly added customers that we acquired at Zalando over the last 12 months, which is an impressive way to think about it. And we have executed on our promise at the CND to bring Zalanda to about 100 million more people in Central and Eastern Europe. We have now successfully launched six new European markets over the last six months. So Croatia, Estonia, Latvia, Lithuania, Slovakia, and Slovenia. And in each of these countries, we've provided from day one the largest assortment of global and local brands, two and a half times two and a half times over the assortment of the next best choice. A fully localized digital experience with local language and currency options, but also locally relevant content influences the marketing. And the best-in-class convenience proposition with local payment and delivery options. So, our leading proposition, combined with the proven GoToMarket playbook pays off. In the newly launched market, we're serving up to 1.5% of the population as customers of Zalando just 12 weeks after launch. We are, as of today, the most downloaded fashion app over the past three months across all six markets. And all this was achieved even faster than in all previous country launches that we at Zalando did in the past. So these are some early success indicators and we are very happy about the results. Yet for us it is a multi-year investment journey. to establish deep customer relationships and to ultimately be the starting point for a fashion. So now let's talk about our partners and the progress we made on our platform proposition. An important success factor of our platform is when brands use their number for their most strategic agenda. And particularly when they entrust us with the launch of highly exclusive drops of their most sought-after products. And I'm very happy to share that in the last month, we initiated several exciting product launches together with our partners. So, for example, the Adidas Super Hype Yeezy sneaker, so it was sold out within only 24 hours. And the same was true for the Levi's Atelier Reserve Collection, which was sold out within 48 hours. And we experienced similar strong customer resonance with other hot product drops, which were part of the brand collaborations with Doc Martens or the Nose Faces. This is all truly exciting and shows that we are on the right path to be the digital strategy for our fashion brands, to tell their stories and create excitement for their brands. This is the result of our many years continuous work on our platform proposition building strategic relationships with brands based on trust and providing them with value adding capabilities that they uniquely and only get at Zalando. So, thirdly, we made progress on our third three-dimensional to use our platform to drive positive change in fashion. And as you know, we have set ourselves six specific focus areas for change in our sustainability strategy. These are climate action, packaging, sustainable fashion, circularity, human rights in the supply chain, and upskilling. And to give you a feeling, in 2021, our investments into our sustainability efforts will be almost 50 million euros with the largest share going in 2021 into climate action and packaging. So now I would like to share our progress specifically in the area of circularity. So it is our inspiration to move the fashion industry from linear to circular by applying the principles of circularity and extending the life of at least 50 million fashion products by 2023. This will require new ways of thinking and collaboration, and we recently progressed with investments and new pilots that will help us to identify more scalable solutions for the future. And this happens in all stages of the circle, although we are at different levels of maturity at the moment. For example, in the design and manufacture stage, we recently launched a collection with our private label Zine. So all products here are designed for security and that means the products are made of recycled or renewable materials and made for last longer. In the use stage, our pilot project care and repair explores how we can make it easier for customers to use their items for longer. And already much more advanced our efforts in the reuse stage. So here we continue to develop and invest into our pre-owned proposition. So in our pre-owned proposition, customers can buy and sell used clothes in a very convenient way as they used from Zalando. And our pre-owned proposition just celebrated its first anniversary and since the launch in September last year, it's gained its offer tenfold from 20,000 items to now over 200,000 articles that customers can enjoy on Zalando. And in the final stage, closing the loop, we have recently participated in a funding round for the infinite fiber company. So with such investments, we aim to grow our share of textiles that are recycled into new textiles, which currently only happens with about 1% of all textiles in the industry. So these examples underline how we make continuous progress in the third strategic dimension of our starting point strategy to be net positive for people and climate. Now let's talk about next year. So in 2022, we will double down on our strategic initiatives to make strong headway towards our long-term starting point for fashion business. We will invest into growing our active customer base and deepening our customer relationships. And deepening our customer relationships will be a particular focus in 2022. So the key here is to engage our customers across multiple propositions and join our Zalando Plus membership program. We know that once our customers enjoy the richness of different Zalando propositions that span from fashion to beauty, pre-owned lounge or plus, their buying frequency, the share of wallets and ultimately the loyalty increases beyond the sum of the parts. So in 2022, it will therefore be the key theme of our strategic agenda to drive deep relationships with other customers, play indispensable roles with a great set of projects, features and experiences. So next, we are continuing to work on our transition towards a true platform business. And here, our key strategic theme for next year is to advance our platform proposition internationally. So maybe let's look first at Germany. So already 40% of our fashion store GMB comes through our partner program and connected retail. In other markets, there is still more potential in these markets at an earlier stage when it comes to the platform share. So we want to extend the success across Europe, support partners in their internationalization efforts, and source locally relevant partners to our platform. And this requires us to invest, for example, into new and innovative shipping and return solutions or into software automation. So by the end of next year, we will have made significant progress to position our platform as an even easier and cost-effective way for our partners to drive their digital direct-to-consumer strategies all across Europe on our platform. Then finally, we continue to drive our sustainability agenda forwards in 2022. This requires us to even more ingrain our sustainability and diversity and inclusion efforts into all teams and parts of Salamu. And already today, sustainability is not a single function, but it's thought of in many different areas of our business. So for example, sustainable assortment or buying teams or sustainable packaging or logistics teams. And by the end of next year, our approach to our D&I and sustainability efforts will have anchored with in-depth initiatives and goals across all the launch teams. For example, raising the bar with regard to all sustainability assortment, not only in fashion store, but as well in launch. So it's going to be exciting. So let me conclude this strategic outlook. So 2022 will be a great year for us. We will use next year very wisely to progress on our strategic agenda while relentlessly delivering great experiences on a day-to-day basis for our customers and partners. So David will now take you through the highlights of the quarter of Q3 and the financial development.

Thanks, Robert, and welcome also from my side. Let's turn to our Q3 financials then and start with a more detailed look at our top-line performance. As most of the lockdown measures have been lifted across Europe, offline stores have reopened and consumer mobility has almost bounced back to pre-COVID levels. Our GDP growth rates have started to normalize, starting in the second half of Q2 and continuing during Q3, as already expected when we communicated our upgraded outlook back in May. Additionally, a delayed start into the fall-winter season amid warmer than usual weather conditions across most of Europe in September also contributed to the slowdown in growth rates versus previous quarters. Despite these general market dynamics, group top-line growth came in at 25.3% year-over-year, slightly exceeding our mid-term target growth corridor of 20-25%, and also ahead of pre-pandemic growth rates. Throughout the quarter, our platform business again showed a very healthy performance. Partner GMV growth substantially outpaced our overall GMV growth, But due to an even stronger performance than our partner-facing services ZFS and ZMS, the gap between GMV and revenue growth of 1.9 percentage points is less pronounced this quarter than in previous ones. Let's now take a brief look at the development of each of our three segments. Fashion store performance was strong, with GMV growth of 23.4% year-over-year. In the DAF region, we recorded a GMV growth of 21.3%, rest of Europe, which now also reflects our six new markets, grew even faster with 25.3%. Our off-price business continued on its strong growth trajectory, recording a GMV growth of 40.9% year-over-year. The main driver behind the performance in the off-price business is Stellando Lounge, which offers our customers fashion products at a discount in daily sales campaigns. In addition, our outlet stores also contributed to the strong off-price performance, particularly benefiting from positive reopening dynamics. The other business segment followed the positive trend, driven by a particularly strong performance of Zalando Marketing Services, which benefited from strong demand of our brand partners for our advertising products, resulting in revenue growth of well above 130% year-over-year in the past quarter. Besides using ZMS to drive sales on the platform by increasing visibility for certain products, Our partners also increased their investments in branding campaigns to build their brand equity on software. The key underlying driver of our continued strong growth momentum over the past few quarters has been our exceptionally strong customer acquisition and the continued positive development of existing customers over the past 12 months, as evidenced by three key developments. We achieved an active customer growth of more than 30% year-over-year. now counting 46.3 million customers across Europe, fueled by continued strong new customer acquisition as well as increasing retention rates for new and existing customers. Secondly, customer order frequency reached a new all-time high of 5.1 orders per active customer over the past 12 months. And last but not least, average basket size increased slightly by 0.4% year-over-year, mainly due to a continued lower than usual return rate. As a result of these changes, GMV per active customer grew at an exceptional rate of 6.8% over the last 12 months and is getting closer to €300. Similar to our financial metrics, we expect our customer metrics to normalize over the coming quarters. Let's now turn to profitability. In addition to the normalizing growth momentum, we also saw profitability normalize compared to the extraordinary levels reported in Q3 last year. reflecting the usual seasonal pattern observed before the pandemic, as well as our continued significant growth investments, including our recent market launches. Group profitability, as measured by adjusted EBIT, came in at 9.8 million euros, representing a margin of 0.4%. When looking at the regional profit distribution, we delivered solid profitability in DAF, while profitability in rest of Europe turned negative, again due to our disproportionate investments into local customer experience improvements and customer acquisition efforts, particularly in our six new markets in Central and Eastern Europe, as Robert just highlighted in his strategic update. However, it should also be noted that our profit margin actually improved compared to pre-pandemic levels despite these additional investments. Off-price recorded a slightly negative adjusted EBIT of minus 3 million euros on the back of higher price and marketing investments in the past quarter. In other businesses, we observed an increased profitability both in absolute and relative terms. Let me now give you more color on cost-line developments that drove group-level profitability in Q3. Gross margin decreased significantly by 5.6 percentage points year-over-year. as we left last year's €35 million reversal of the write-down on spring-summer merchandise. Furthermore, we increased our price investments in response to a highly promotional market environment, particularly during the end-of-season sales, and saw a lower-than-usual fall-winter season share due to the late season start. Our fulfillment cost ratio continued to improve year-over-year as a result of a higher level of network utilization, driven by the strong business volumes and improved order economics due to ongoing yet likely temporary return rate benefits. Our marketing costs in terms of revenue increased by 0.8 percentage points year over year, as we remained focused on customer acquisition and engagement investments supported by our ROI-based marketing approach and also ran dedicated launch campaigns in our new markets. Last but not least, admin costs improved year over year as a result of our continued focus on driving efficiencies across the business. Turning to cap-related items, we recorded an increase in our net working capital year over year. The main driver behind this development is a relatively stronger increase in inventories and in receivables than in payables. Reflecting our deliberate decision earlier this year to pre-pone fall-winter season inbound as much as possible, as one way to mitigate potential supply chain disruptions. This now puts us in a good position to cater to customer demand during the FedBiz season. Mainly due to the strong increase in networking capital, we recorded a negative free cash flow of minus 245 million euros for the third quarter, down from plus 213 million euros in the prior year period. Our cash balance amounted to around 1.95 billion euros at the end of Q3. Let me now conclude this presentation by revisiting our full year outlook. With most of the lockdown measures being eased across Europe, physical stores reopened and consumer mobility steadily increasing, growth rates have started to normalize during Q3 and GMV growth is returning to our mid-term growth target corridor of 20-25%. Although uncertainty remains with regards to the further evolution of the pandemic, We expect that the return to the new normal will continue over the coming months. Consequently, we are happy to confirm our previously upgraded full year 2021 guidance, anticipating GMV growth between 31% and 36% and revenue growth in the range of 26% to 31%. Our profit outlook remains unchanged as well. Adjusted EBIT is expected to come in at the upper half of the 400 to 475 million euro range. Furthermore, we anticipate networking capital to be negative at year-end and capital expenditure to amount to around €350 million in 2021. Looking further ahead into 2022 and beyond, I would like to echo what Robert already mentioned earlier. We will continue to execute our starting point strategy by growing our active customer base, building deeper customer relationships, transitioning towards a platform business, and building a truly sustainable fashion and lifestyle platform. In doing so, we will build on the strong fundamentals we already have in place today, particularly our strong relationships with more than 46 million active customers and more than 4,500 brands, our unique logistics infrastructure and technology platforms, as well as our exceptional team and entrepreneurial culture. These fundamentals will enable us to make further progress towards our mid- and long-term ambition as outlined during our Capital Markets Day. to generate more than 30 billion euros in GMV by 2025, and to serve more than 10% of the European fashion market long-term. When looking at 2022 in particular, we expect the European fashion market to recover to pre-COVID levels as the pandemic recedes and economic activity rebounds. At the same time, significant uncertainty remains in the face of ongoing supply chain disruptions and resulting price increases, as well as general consumer price inflations, which might have negative short-term impact on both supply and demand, particularly in the first half of next year. While we will not be able to fully isolate ourselves from these macroeconomic developments, we are confident that just like during the pandemic, our platform business model will once again prove to be more resilient, allowing us to mitigate some of these risks by leveraging multiple alternative sources of supply via wholesale, partner program and connected retail, as well as by quickly adapting our offer to potential changes in consumer preferences and behaviors. Based on this market outlook, we nevertheless aim to continue to grow two to three times faster than the European online fashion market overall and to hence gain further market share next year. Similar to this year, this growth won't be evenly distributed across quarters though. Especially in the first half of 2022, we are going to face exceptional year-on-year growth comparables. We just expect our growth to be more back-end loaded in 2022. To achieve and to sustain this level of market outperformance in terms of growth, we will continue to invest through cycle along all dimensions of our starting point strategy, as well as into our technology and logistics infrastructure to enable our 2025 ambition. Let me close this presentation by reiterating that we are truly excited about the immense growth opportunity ahead of us. We remain laser focused on our long-term vision to be the starting point for fashion and our 2025 ambition to build a truly sustainable platform business with more than 30 billion euros in GMV, maximizing the long-term value for our customers, our partners, and our shareholders. That concludes our presentation. Let's jump into Q&A now.