Zalando Se Ord

Good morning, ladies and gentlemen, and welcome to our Q1 2022 earnings call. I'm joined by our co-CEO and founder, Robert Gens, our new CFO, Sandra Dienbeck, and David Schroeder, who served as CFO until March and has just transitioned into his new role as COO. Robert will kick us off with a holistic update on the current performance and an update on the progress we have made against our strategic objectives. Sandra will then walk you through the financial developments of the quarter and Robert will discuss our outlook. Robert, Sandra and David are available for questions afterwards. As usual, the 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. Good morning, everyone. Since we last met at the beginning of March, the world has changed dramatically. So there's a prolonged war in Ukraine. There's even more cautious consumer sentiment. There are inflationary pressures as well as ongoing supply chain challenges. And although these circumstances have affected the business, they have not derailed our three goals or ambitions. So jumping into the numbers, let's talk about the key drivers and challenges for our performance in the first quarter and how we are addressing them. So when we shared our full year results in March, we communicated we expected a rather flat Q1. And we expected that because the challenging macro environment combined with the more technical lepping effect of a comparison of an extraordinary Q1 last year with 56% GMB growth. So Q1 came in as we expected in early March, unfortunately not better. And I'm not proud to present the results of a quarter where, for the first time ever, we have not grown. Yet the drivers of this result are much more complicated, technical, and external than we'd like them to be. So here's what has happened. So first, we're comparing this quarter with an extraordinary Q1 2021, with extraordinary new customer growth last year and extraordinary GMB per customer. And we already knew that we would likely see normalization in 2022, both for new customers and on customer spending when the economy is reopened. So this is the technical part of the transition. Second, we face a very volatile market environment in Q1. So on the consumer side, the EU consumer confidence index dropped significantly, driven by inflation and war, and even lower than at the beginning of the pandemic. So it was, and partly it still is, not so much on everyone's mind, to buy fashion and lifestyle articles. And for those wealth on their mind in 22, they have more choices than just the digital starting points from the height of the pandemic last year. And on the industry side, we saw continued disruption in supply chains, making it harder to access the merchandise. There was more demand, particularly in the footwear area. So this is what has driven the result of a rather flat year-on-year comparison. What the flat top line yet does not tell you, and looking into the machine room of our business, we actually made good progress on our fundamentals in Q1. So let's look at the strategic key customer and partner metrics. Since we communicated our strategy in 2019, they have developed all positively. And these same positive trends now continue in Q1 2022. So our customer base continues to grow. the visit and engagement metrics continued to grow. And we saw more proposition adoption. In fact, our unpaid traffic actually grew with a CAGR of 20% since the pandemic, and so it grew in Q1-22. We are making great progress on deepening our customer relationships. So the customers that spend more than 500 euros per year with us were at a CAGR of 29% since 2019. Our PLUS membership program grew in fact more than 150% year-on-year in Q1. So we're continuing to build deep relationships. And we as well make great progress on the platform proposition to enable DTC for the brand. The 32% of our fashion store GMB in Q1 was driven by partners. The London Fulfillment Solution and the London Marketing Service have as well grown very well in Q1. So there has been great progress in Q1 on our strategic metrics. And this is what is the most important thing for us and that drives long-term success of the Lambda and ultimately moves us forward on our path to 30 billion Euro in GMB by 2025. Yes, there were as well some important learnings for us in Q1. We will leverage them to improve our performance going forward. So first, the spending per customer in Q1 was lower than last year, yet it was higher than pre-pandemic. And we also saw shifts in demand in Q1. And one shift was low and high price points continued to grow fast and were in much higher demand, while the mid-segment, in fact, actually saw contractions on our platform. So there's an observable trading up and trading down. As another shift, so occasion and trend-based categories are growing ahead of need-based categories as the pandemic impact kind of fades. And these shifts were negative and they were positive for us. And why were they negative? Because last summer, the biggest concern, as you might recall in the fashion industry, was access to stock. And we deliberately increased our wholesale commitments to mitigate the supply chain risk. And as some of these shifts We see now we're not anticipated in our buying decisions. This caused an additional headwind on our growth path in Q1 and as well on our growth margin in Q1. And why were they positive? Because we saw once again that our platform business model works and offers a high degree of flexibility and resilience. The partners could and did jump into the demand shifts and grew their business on our platform. And the second insight was the challenge we saw in our order economics. So our fulfillment costs per order increased by 10% year-on-year driven by three drivers. So first, the return rate normalization trend continues as the temporary return rate benefits observed during the pandemic are unwinding. And second, the lower-than-planned volumes, which are causing lower utilization, operational deleveraging of our logistics network, And third, the rising energy prices and fuel surcharges from all carriers and increasing our logistics costs in the short term. So these are the insights. So what are we doing now to mitigate these challenges? First, we will be smarter in fall-winter with regards to our offer and risk position in our inventory. We're doubling down on the platform model and additionally adjusting our fall-winter wholesale offer to match the demand patterns that we now better understand. And second, we are improving our order economics. And this enables us to further de-average our convenience proposition and invest in deep customer relationships. We will introduce the minimum order value in more of our markets where we see it helps us to de-average. We had positive experience with minimum order value when we introduced it in nine of our 23 markets in 2019. And based on this experience, we will further drive the rollout now. On top, we will pass through the few price searchers that we see in logistics to our ZSS partners. And third, we are laser focused on driving cost efficiencies across our business. So not only marketing and logistics, but also pacing our overhead investments. And finally, we invest through cycle. So we believe in our strategy and we see very solid metrics that confirm it. And we know from experience, a crisis is always a good catalyst to become a better company. So getting more efficient and lean at the core, but also laying the foundation for future growth and going as well after the opportunities where they present themselves. And our strong balance sheet allows exactly for that. So our goal remains to reach more than €30 billion of GMB by 2025, and we continue to make progress towards this. We're acting decisively on the short-term challenges focused on our long-term vision. Now I'd like to hand over to Sandra, who will provide you with some more details around the Q1 performance.

Thanks, Robert, and good morning to everyone on the call. Let's start with a more detailed look at our top-line performance. As Robert already alluded, after many quarters of strong growth, we experienced a challenging first quarter of flat growth. Our group GMB grew by 1% to 3.2 billion euros, And our revenues declined by 1.5% to 2.2 billion euros. The extraordinary strong growth in the first quarter of 2021 does somewhat distort this picture. So when looking at the two-year CAGR for GMV, we delivered 25.3% growth. Taking a look at the performance of each segment in the first quarter, the fashion store, our corsage channel, the GMV grew by 1.7%. The South region lost 3.4% of GMB. It was lapping very strong year-on-year comparables due to the strict lockdowns in the first quarter of last year. The rest of Europe delivered 6.7% GMB growth. All new Eastern European countries, the ones we launched in 2021, performed very well. And this gives us confidence for upcoming launches in Hungary and Romania in the second quarter of 2022. Moving on to our off-price segment, it recorded a broadly flat GMV development and a decrease in revenue of 1.6%. We faced a challenging supply situation, impacting the quantity and quality of the offer, as well as weaker demand. Palando Marketing Services had another strong quarter, and delivered year-on-year growth of around 40%. Our partners continued to use ZMS to increase the visibility on the platform and drive sales. Let's turn to our customer metrics. Robert already mentioned it, we make great progress in line with our strategic agenda. Looking at our last 12 months key customer metrics, we continue to build deeper customer relationships and our active customer base grew to 48.8 million. That's 17% or seven million more customers compared to the first quarter last year. Let me explain the two black bubbles you see on the chart. They show the trailing three-month customer metrics to help explain why our GMV grew by 1%. We grew our active customer base by 5.2%. Both new customer acquisition and retention were well above pre-pandemic levels. GMV per active customer saw a 4% decline year-on-year. And this reflects the changes in customer spending patterns compared to the pandemic peaks. But it's important to note, despite the decline, GMV per active customer in the first quarter remains well above the pre-pandemic levels. So there are two key takeaways from our customer metrics. First, in the first quarter, our key metrics continue to perform above pre-pandemic levels, and our deep relationships with new as well as existing customers remain really strong. Second, the cohorts we acquired in 2020 and 2021, so the pandemic cohorts, are outperforming. They're outperforming with regards to their engagement activities, but also in regards to their spend. Let's turn to profitability. For the first quarter, we recorded an adjusted EBIT loss of €51.8 million, representing a negative margin of minus 2.4%. This was the result of the slow growth we experienced and temporarily changing customer spending patterns. When looking at the regional profit distribution in our core segment fashion store, DACH and rest of Europe saw a similar drop in margin. In DACH, the slowdown in demand led to overstock, challenging order economics, and costly leveraging. Additional price and marketing investments helped to clear the inventory, albeit at the cost of margin. In rest of Europe, investments in convenience, and a change in customer behavior towards smaller baskets impacted profitability. Off-price delivered a profit of 6.5 million euros, while other businesses delivered a small loss. Let's move on to the P&L, and let's go a bit more into detail on some of the line items. Our gross profit margin declined year-on-year by 2.1 percentage points. In order to activate demand and increase inventory sell-through, we increased promotional activities at the beginning of the quarter. Our platform business model made a positive contribution to gross margin, given the strong performance of the partner program. This was slightly offset by the strong growth we experienced in ZFS which is a lower gross margin business. The fulfillment cost ratio increased by 4 percentage points year-on-year, and this was mostly due to an unfavorable development of order economics. We saw increasing return rates, lower items per order, and lower fixed cost progression. We benefited from a temporary COVID-related reduction in return rates, which we are seeing normalized now, but in line with our expectations. In addition, investments into customer convenience, particularly to enable PLUS, increased logistics costs. Marketing costs improved by 0.1 percentage points. During the first quarter, we increased our focus on marketing return on investment and reduced both brand and performance marketing accordingly. And finally, our administrative costs increased by 0.6 percentage points as we continue to invest in people and systems as enablers of future growth. Let's turn to cash-related items. We recorded an increased net working capital year on year. The main driver behind this development is a relatively higher increase in inventories and in receivables compared to the payables. Robert already mentioned it. Back in fall 2021, when supply chain issues first emerged, we committed to buy additional stock for our wholesale business. We wanted to mitigate supply chain disruption for the spring-summer season 2022. Back then, we had not anticipated the change in spending patterns that we experienced. We have now put in place measures to address any risk of overstock. CapExpand is at 66 million euros, is in line with our plan, and reflects investment into our logistics infrastructure and in-house software development. Because of the strong increase in net working capital and negative net earnings, we recorded in the first quarter a negative free cash flow of minus 532 million euros. This compares to minus 143 million euros in the prior year period. Our cash balance remains strong, and at the end of the first quarter, it was 1.6 billion euros. Let me now hand back over to Robert to conclude the presentation by looking at the full year 2022 outlook.