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.

Thank you. And we will now begin the question and answer session. If you have a question for our speakers, please dial 0 and 1 on your telephone keypad now turned to the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial 0 and 2 to cancel your question. If you're using speaker equipment today, please lift the handset before making a selection. Please limit yourself to a maximum of two questions per person. Thank you. And one moment, please, for the first question. The first question we've received is from Andrew Ross, Barclays. Please go ahead. Your line is now open.

Great. Good morning, all, and thanks for the question. I've got two. The first one is on new markets. It sounds like the new launches have gone well in 2021, but wondering what you can share with us in terms of plans for 2022. Anything directional there would be helpful. And then the second one is a longer-term one on the GMV. Teddy, you've set an ambitious 30 billion target by 2025, a CMV back in March. Just interested now that six months have gone by, the trading environment is normalising. Just what the puts and takes are that have changed in your eyes since you set that target and just any more colour you can give us as to what gives you confidence that you can do that? And if I can just add on to that question and... on the back of David's remarks. Are you saying that you think you can do about 20 to 25 in 2022, despite the factors you remarked on in those pre prepared remarks? Thank you.

Yeah, thank you for your question. So maybe I have to answer the first question. So for the new market, so as we have promised we are going to launch like in all these major markets in Central and Eastern Europe. So the two ones that are missing are Hungary and Romania and these markets will be launched in the course of the first half year of next year.

Yeah, and then on your second question relating to our 2025 ambition to reach 30 billion euros in GMB, I think it's clear that as we follow the development this year, we are actually ahead of plan with regards to that target. So if you remember back at the CMD, we were still expecting slightly lower growth for this year. And that means that we'll be roughly half a billion ahead of our original plan when the year closes, making us even more confident that we can reach that long-term ambition. I guess you also remember that already as part of our CMD midterm outlook, We said that it would require us to achieve growth in the range of 20% to 25% in the year 2022 until 2025 to reach that long-term ambition. And also there, we obviously now are in an even more comfortable position to reach that target.

Thank you.

The next question is from . Please go ahead. Your line is now open.

Great. Thanks. Good morning, everyone. First question, just on the comment about the deepening customer relationships next year, and I think you mentioned a couple of initiatives like PLUS and Beauty. Can you just talk about which initiatives in particular you are prioritizing or which you would expect to have the biggest impact on customer behavior or your conversion rates? And then secondly, the second one just on gross margin, So I guess even if you exclude the reversal of the inventory right down next year, your margins are still sort of below the 2019 levels. So could you just give a bit more colour on the breakdown of the impact from pricing investments versus the delayed start to the season? And then also, what are your expectations in terms of pricing investment and promotion activity in Q4 and just generally how we should think about gross margins in Q4? Thanks. Thanks.

Maybe again, I take the first and maybe take the second one. So with regards to deep customer relationships, I think as we have shared at the CMD, like once the customer actually, like only as an example, actually shops at fashion store and lounge, we actually see that like in the order of frequency of customer goes up like by 2.3 times versus average. So I think the key here is really to to provide customers with the richness of our propositions, and that goes in many cases beyond their first experience when they just bought fashion, for example, or when they just bought a lounge. And the key theme for the next year will be, first of all, to make these propositions on our main traffic hub, like the fashion store, much more discoverable on a personal basis, so when customers only have experience one proposition to actually more expose them to the other propositions, to like beauty, fashion store, and just to discover them. So the ease of discoverability will be a big theme. And then the second big theme will be to actually enrich these propositions. So for example, on the beauty proposition, it will be like a major experience upgrade that makes the beauty propositions much more interesting and much more innovative to be experienced by customers. And the third layer is our Zalando Plus program, which is the ultimate commitment from customers to Zalando to form deep relationships. And particularly this year we have experienced a lot with access to exclusive assortments and product drops. that are first available to our Plus customers. So this is an example. We were continuously innovating with new benefits into the Plus program in the course of next year in order to expand the Plus program much more where it's today.

All right. And then I'm going to take the question on gross margin. So if we first take a look at Q3, and the year-over-year decrease, I think it's clear that roughly one-third of the decrease is due to the reversal of the inventory write-down that positively impacted our gross margin last year. The other two-thirds are due to essentially the factors I mentioned during the presentation. the increased promotional environment during the end of season sale. You might also remember that something we commented on already in the Q2 earnings call, and it's just a reflection of offline stores reopening after a period of lockdown, sitting on significant levels of inventory and making sure that they can sell those through. And in this type of environment, we obviously wanted to make sure that our customers find similarly attractive deals on Zalando and don't have to have the fear of missing out on great deals just because they choose Zalando as their starting point for fashion. And then the second major impact was obviously the late season start due to the warmer than usual weather which particularly impacted our trading in September and during that period we saw a much lower share of fall winter sales and a continued high share of discounted spring-summer sales, which obviously then also had a negative impact on our gross margin. The good news, though, is that the fall-winter season finally picked up towards the end of September and took full steam in October. So we are particularly confident that the full-season picture will be a positive one, as usual, and it mainly now relates to a late start.

Thank you. The next question is from Volker Bosse, Baader Bank. Please go ahead, your line is now open.

Yeah, thanks for taking my question, Volker Bosse, Baader Bank. I would have three. I would like to start with the Sephora Corporation. You plan to start the business in the fourth quarter. In Germany, did that already happen or how has it started? and how the European rollout plan looks for next year in regards to beauty and the cooperation with Sephora. And the second would be on social marketing or social commerce. Could you please remind us and give us a bit more granularity on the strategic importance of social marketing and social commerce within your marketing mix and for your business model? And the last question would be on the trading update in the fourth quarter. You just said fall-winter picked up nicely, so means growth rates in October even exceeded what we've seen in the third quarter. And can you confirm here the product mix also changed towards more going-out wear? So do you see a product mix effect towards higher ticket items? Is that confirmed? Thanks. Thanks.

Yeah, so maybe on the first question on the Sephora partnership. So we launched the first major milestone with 90 Sephora brands now in the last quarter already and the remainder of the portfolio is going to be launched in this quarter. So that's our plan. at the first stage available in Germany, but our plan is in the course of 2022 to have the full Sephora assortment live across international markets. So, and so far we're very happy with the development and the beauty proposition is, it was scaling very nicely with more than 90% year-on-year growth in Q3. With regards to the second question of the importance of social marketing in our marketing mix, so the major part of our marketing is driven by performance marketing, by our eyes-based marketing, and within that is basically the biggest piece is search and social, and with social commerce with the social market space, what we've seen obviously in the last couple of quarters with the updates on the privacy side through ATT and IEFA from Apple, that first of all they have taken a slight hit, especially with regards to retargeting and the more kind of database marketing methods. What we though have seen is that in the reach campaign area, we were able to actually more than make up for these developments and these campaigns actually have scaled very nicely throughout the quarter.

Yeah, and then on your last question regarding current trading, as mentioned earlier, October definitely meant a strong start to Q4. I guess we saw some of the demand come in that otherwise would have come in in September, and that obviously makes us confident that we land well within the range communicated for the full year. That being said, I think we also obviously need to realize that November and December sales actually make up by far the majority of our Q4 sales, and therefore we are now very much focused on making sure that we serve our customers and partners well during these key weeks of the year.

The next question is from Anne Kitchlow, Societe Generale. Please go ahead. The line is now open.

Good morning. Thanks for taking my questions. I've got two. First of all, could you tell us, please, how many percentage points the returns rate is now below the normal 50% and whether you expect it to stay slightly lower perhaps in the longer term. And then secondly, could you talk a bit about cyber weakened your expectations and whether you think lower volumes and lower inventory levels in the industry might affect promotions available for customers or perhaps supply chain pressures being fed through to pricing that might affect discounts. So do you expect it to be as strong as last year? Thank you.

Yes, to start with return rates, I think contrary to what we had predicted at the start of the year, I think we are seeing a continuation of those temporary return rate benefits that carried us also through most of the pandemic. They are in the low single-digit range compared to the pre-pandemic return rate that we observed. We do, however, continue to expect that eventually category mix and also customer mix, which have been the key drivers of this effect, will return back to normal as well. And as a result, return rate will also move back to the long-term trend. That being said, I think we were clear also that before the pandemic, return rates were on a decreasing trend. mainly related to our move into markets outside of DAF and to our investments into size and fit. And these long-term trends will obviously stay intact also as the return rate at some point normalizes. Now with Cyber Week, I think quite honestly it's hard to predict what will happen in the market overall. What I'm happy to confirm is that we, once again, will have a strong offer for our customers and we'll also have many opportunities for our partners to present their brands and to offer great deals to customers. And as a result, we definitely aim to make this an even bigger event than last year. What will happen in the industry overall and particularly with competition, I'm not going to comment on because I think we'll only know when it actually happens.

The next question is from John Bereson, Exxon BNP Paribas. Please go ahead. Your line is now open.

Oh, hi there. This is Charlie Munoz-Sands. I think that was me being announced. Thanks very much for taking my questions. I've got two, and they both relate to next year. The first is whether you could share what you're seeing with respect to price changes as you're looking at the spring-summer collections that the brands are presenting to you, are you seeing any significant changes in price on like-for-like garments in order to offset some of the supply chain cost pressures? And then the second one also related to next year is, I think back at the Capital Markets Day, you talked about the path to 2025 involving an EBIT margin corridor ranging from 3% to 6%, with the start of the period being at the lower end of the range and finishing towards the upper end of the range. Clearly this year the margins come through a bit stronger, Should we be thinking about that extending into next year now, or do you think it's more likely that the investments you're talking about today bring you back closer to that 3% point? Thank you.

Sure. So on inflation, as we all know, I think there's currently a lot of talk about it, and also most recent data suggests that we are actually seeing some of the strongest inflation levels since the financial crisis. For our business and also based on our wholesale activities, we also see those increasing trends with regards to prices. So we see an average increase in recommended retail prices in the high single to low double digits across our brand portfolio. That would obviously mean that there could potentially be an adverse demand effect next year related to either price sensitivity or also share of wallet considerations, particularly if energy prices and prices for other non-discretionary spending go up and therefore we mentioned both the inflation but also the supply chain disruption as two key uncertainties that we still see remaining for next year, particularly the first half and where we are currently working on different scenarios to make sure we are prepared to act when needed. And then on the second question relating to our path to 2025 and how the margin would develop, I think obviously we are very much committed to the path we outlined at the CMD, starting at the lower end of the three to six percent range and then ending closer to the higher end by 2025. As you already commented yourself, I think the margin in 2020 and also in 2021 have received a major benefit from return rates primarily. We therefore obviously would expect to return to a more normal level next year. But at the same time, the business is growing. And we obviously continue to increase our operating leverage so that we'll see those two effects playing a role in our margin development next year.

The next question is from Clément Genelot. Brian Gagné, please go ahead. Your line is now open.

Good morning. I will have two questions from my side, if I may. The first one is on this So, with in Vietnam and an effect on product availability, do you expect some availability issues with, let's say, of course, Nike, Adidas, and so on, in late December, and especially early also in Q1 and Q2 of next year? My second question is, do you have any on prices and gross margins. Do you intend to only stay true to the higher recommended prices on your wholesale business? And do you think it will offset the lower demand in volume terms? In other words, I understand that the sales growth in 2022 will be more back and loaded, but is it just because the comps are much more in H1, or is it also because price and inflation and also supply issues will affect the sales? Thanks a lot.

Yeah, thanks for your question. On the supply chain, I think we need to distinguish between the fall-winter season that is in full steam now and the spring-summer season that will start in February-March next year. So for the fall-winter season, as commented during the presentation, we have taken the deliberate decision to pre-prone inventory intake and therefore are in a comfortable position to serve the demand that is coming our way and to provide all customers with great offers in the coming months. Does that mean that we have all the stock that we would want to have? Probably not, right? So if you would offer me even more volume from some of the brands you mentioned, we would probably not say no. But at the same time, with more than 4,500 brands and several hundred thousand articles, I'm pretty sure that each and every single customer will find a good offer that fits their personal taste and preference. For spring-summer 2022, the story is slightly different. So obviously, we have seen large-scale impact both in Vietnam and in China to production and also to shipping. And therefore, we have also received more than usual cancellations. and we have also been informed of delays for spring-summer season stock and that creates the risk that the spring-summer season start next year might be delayed by a few weeks or at least we wouldn't be in a similar stock position than usual, creating potential impact also for the growth that we can generate and also the margin given that we would then expect some of that stock to arrive at a point in the season where we are already running into mid-season sales and therefore discount periods. But I think I would still like to come back to what I said during the presentation that based on our platform business model, we are better positioned than many other players in the industry because I think we'll be able to leverage not just our strong partnerships with brands in wholesale but we'll also be able to leverage all the other stock pools that exist, namely the ones at the brand side with partner program and the ones that sit with offline retailers via connected retail and that makes us confident that no matter what happens we'll be able to outperform the general market in terms of growth. Then moving on to your second question on price, I think we just commented on what we see with regards to wholesale prices. I think coming back to the supply chain disruption that we just commented on, obviously that could lead to a lower promotional activity in the first half of the year if everyone is sort of more short on stock. I think it's hard to say for each single effect, but also for the interplay of inflation and supply chain, how it will exactly play out. And therefore, I think we'll remain just as agile as we were in the early parts of the pandemic and find the right answers as those scenarios become more clear over the coming weeks and months.

The next question is from Simon Irvin, Credit Suisse. Your line is now open. Please go ahead.

Morning, all. A couple of questions for you. Firstly, just on marketing, both you and many peers are reporting higher marketing percentage of sales at the moment. Is there an element that potentially this could be structural as everyone is kind of moving online and into the same channels and you're simply kind of competing with each other and that potentially marketing spend might be higher in the future than expected? And also just what are you seeing in terms of the unit cost of marketing at the moment through the varying channels? And secondly, can you just talk a little bit more about whether you're seeing any cost pressures or labor availability levels through your logistics operations?

Thank you for your question. As I laid out, I think one thing that is happening as I laid out is with regards to the major privacy updates. Our social media marketing actually took first of all a hit in terms of our spending, which are based on retargeting and personalization. And the second piece of the marketing spending is with regard to reach campaigns. So with regard to reach campaigns, what we're seeing is, first of all, the unit cost has increased, but we were actually managing to get as well positive RIs in the long term. So in the long term, in the mid-term, we're actually expecting our social media marketing to go back to the levels that they used to be. With regards to the search area, we didn't really see any of these effects, so actually we are benefiting from increasing search volumes and search queries, so this is as well kind of increasing the marketing budget. With regards to our general view on marketing, It is, nothing really has changed. It's an ROI-based marketing approach. We know what we will get back and with the future with regards of a deeply customer relationship we see the leverage and at the moment we just see a lot of potential because we get better and better in marketing we see a lot of potential to drive our business and this explains the marketing cross-line.

Yeah, and then on cost pressures, labor availability in logistics, I think on logistics, the picture is pretty much unchanged to previous years. So we see a single-digit percentage increase in cost, both relating to our own fulfillment network, but also to carriers across Europe. And when we look at our preparation for the upcoming peak season, we are well-staffed and therefore also have the required capacity to serve our customers and to also work for our partners when we offer them ZFS services in the coming weeks.

The next question is from Jürgen Kolb, Kepler Chevreux. Please go ahead. Your line is now open.

Yes, thank you very much. First one, again on logistics. You mentioned that obviously automation and the work and the improvements to work with partners and customers next year will be top of the agenda. I was wondering if you may need to make deeper investments into automation given that the cost inflation will certainly also be felt more probably in logistics. So maybe some learnings that you have currently from this logistics issues that might affect your overall warehouse business and logistics business overall. And then just one thing to double-check, the mentioned price increases, the suggested retail price increases that you mentioned of high single to low double, that already affects the spring-summer collections, or is that rather fall-winter next year?

Thank you. Yeah, so start with the price increases that affect already spring-summer 2021 for fall-winter, the buying just started, so I think it's a bit too early to tell how that will play out, but my comments related to the spring-summer season starting in February-March next year. On logistics automation, I mean, if we zoom out for a second and compare the first warehouse investments that we did at Zalando and Erfurt back in 2011-12. with the investments that we are now doing, for example, in our most recent addition in Rotterdam in the Netherlands. Obviously, there's a huge difference when it comes to automation, right? So the first automation concept was still what I would consider semi-manual and therefore also only cost us around 50 to 75 million in capex back then. Back then there was a huge investment, but obviously technology advanced and also our concepts advanced. And so if you look at Rotterdam, we are talking about comparable sort of automation investments in the range of more around 200 million euros for a single facility, which obviously come with the benefit that we can operate a facility like Rotterdam with a bit more than 1,000 colleagues rather than 3,000 that we still need to operate upward. And I think that shows the speed at which we are innovating our logistics network and why we are also comfortable that in the long term we will not only be able to serve customers well and offer a strong proposition in terms of fast delivery and convenient returns, but why we will also be able to benefit from a higher level of efficiency. that we can then share with our partners via Zalando Fulfillment Solutions.

The next question is from Alam Kamalutra, Liberum. Your line is now open, please, go ahead.

Hi, Dean. I just had a couple of questions. Most of them have been answered, but I have a couple more. Just on the guidance, so you have still maintained the revenue guidance of 26% to 31%. And now that the 10 months in the year are already done and you have an idea of fourth quarter, how that has been trending. I was just wondering if you could confirm to us if you would land in the top end of the guidance or not. And secondly, on the new market and the contribution from them, if it is possible for you to break out how much they contributed to sales growth and what kind of a negative effect they had on EBIT margin in this quarter. Thank you.

So on the guidance, I'm happy to repeat what I said earlier. We'll be well within the full year guidance, also based on all the insights that we now have about the strong start in QQ4. But yeah, no further specification will be provided. Also given that there are still two months to go and those are very important months for the overall growth. On the new markets, As always, we are not going to provide a detailed breakdown of our sales and profitability. And so I think you will see those reflected now and also in the future in our figures on the rest of Europe. Thank you.

The next question is from Georgina Johan of JP Morgan. Please go ahead. Your line is now open.

Good morning. Thanks for taking my questions. Two from me, please. The first one, with regards to medium term guidance, I understand that you're tracking ahead of that, ahead of the 30 billion GMV at the moment. But for 2022 specifically, do you expect to be able to be within the corridor of 20 to 25% growth year on year, please? Or should we be thinking about it more along the lines of a compound annual growth rate? That's my first one. And then my second one is, thank you for the colour around recommended retail price increases. It's just really how we should be thinking about this in terms of your wholesale gross margin. Do you actually expect to achieve the same gross margin in light of those retail price increases? Or actually, would you expect to achieve the same gross profit cash, but actually with a lower gross margin percentage? Thank you very much.

All right, it feels to me that we are already getting very detailed about 2022, and I hope you understand that, as usual, we'll only be more specific and provide even clearer numbers when we report our full-year figures on March 1st next year. And so please understand that there's no detailed answer, especially on your second question. At the moment, I think we've laid out what we are seeing in terms of our numbers. We've also laid out that so far it's hard to predict what will happen to consumer demand and that will obviously have an impact on how the gross margin will shape up. So bear with us and we'll provide you with an update when we come back in March. On the medium term guidance, yeah, so obviously we are slightly ahead of plan when we look at our target and we'll obviously aim to make another strong step towards that target next year. What that means exactly in terms of our ambition for next year is something that we'll also communicate with our next earnings release.

Thank you. And the last question is from . Please go ahead. Your line is now open.

Great. Thank you. I have two questions from my end. Firstly, on your unchanged EBIT guidance for the full year, this does imply, based on consensus numbers, that Q4 would be margins of around 5.5 to 6%, if I calculate that correctly. This is ahead of Q4 19, but, you know, lower than Q4 last year. Can you remind us what helps margins in Q4 versus Q3? That's my first question. The second one is on, you know, the current environment of supply constraints, as you've been mentioning. In a scenario like this, how important is a large marketplace like Zalando to some of the large brands, you know, in a global context? Because if they have to prioritize between selling on their own websites, their own stores, but also selling through a marketplace like Zalando, What sort of conversation do you have with them in this current scenario? To some color, that would be great. Thank you.

Let me take the first one and then Robert can follow up with the second. On the first one, Q4 margin outlook, I assume that if you take off your guidance and what you thought so far, you can back out what that means in terms of low, mid and high end of the guidance. I think it's also pretty clear that the Q4 will obviously see a quarter over quarter improvement in margin. I think that follows the usual seasonal pattern that we have also seen in previous years, particularly relating to much stronger margins in the fall winter season related to higher average item values. And therefore, I think it's no surprise that these margins look very much in line with pre-pandemic levels.

And with regards to the question on how brands will deal with their stock distribution, so we have very long partnerships with our brands and when a brand looks at selling the stock through our platforms, as I have laid down, the landless proposition is very much in line with the seed proposition but it even adds more because On Zalando, when a brand pushes their software through Zalando as a channel, you get access to our customer reach. You get as well access to insights that you in a D2C environment would not get because you benefit from a multi-brand environment and you get more information and insights about what customers want. So it's a very strategic way of of looking at Zalando from the brand side, so we are very confident and clear that brands will continue to push their business on Zalando, as well as the stock scarcity, which we have seen many times in the past. That is the winning recipe.

Thank you. There are no further questions at this time, so I would like to hand back to Patrick Hawthorne.

Thanks, everyone, for joining today's session with Robert and David. We hope we were able to give you a comprehensive update on our Q3 figures as well as our outlook into 2022. If we have any further questions, do not hesitate to get in touch with us, and we are looking forward to seeing and talking to you in the coming weeks. Thanks. Bye-bye.