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.

Thank you, Sandra. Let's now come to our outlook. When we presented our full year 2022 outlook to you in March, we shared our expectations that our key business metrics would continue to normalize as pandemic-related effects subside. And we shared that we would also experience a significant more volatile market environment. So back then, our outlook explicitly excluded a potential negative effect or impact from the war in Ukraine, which has started only days earlier. So since then, we've seen the market environment become even more volatile. So uncertainty remains high with regards to the magnitude and the duration of key macroeconomic developments. And as expected, the first quarter proved to be challenging. However, we have seen more positive traction after the Easter break across several areas of our business portfolio. We won't be able to fully isolate ourselves from current market development and uncertainty remains high. But we're confident that our platform business model, our agile business steering approach, and an increased focus on cost efficiencies will allow us to successfully navigate through the challenges ahead. We expect a significant acceleration in the second half of the year when we will no longer be comparing ourselves against pandemic peaks. So we are thus confirming our full year 22 guidance and now expect to reach the lower end of our outlook in terms of GMV growth, revenue growth, and adjusted EBIT. So let me close by reiterating that we have a clear strategy and a clear direction. Our foundations are strong. And thanks to our team, we are making continued progress in deepening customer relationships and driving our platform transition. While the current market environment has a negative short-term impact on our business, we are taking decisive actions to address these short-term challenges. And we do not expect them to change our longer-term trajectory or our 25 targets. Our vision remains consistent and relevant going forward to be the starting point for fashion in Europe. And wherever possible, we're prepared to invest through cycle and drive long-term value for our customers, partners, and shareholders. And maybe I would like to end on a personal note. So this macro environment of war in Europe, the inflation, the supply chain disruptions that we're seeing now, It really marks the third crisis that I've experienced as a founder of Zalando since we started this company in 2008. And although all these crises were different, our job here is to make the best out of each crisis and use it as an opportunity to come out stronger and better. And we have always done so in the past, and we will as well do so this time. Thank you very much. That concludes our presentation, so let's jump into Q&A.

Now, our first question comes from Adam Cochrane from Deutsche Bank. Please go ahead.

Hi, good morning. Two questions. On the first one, can you give a bit more description around these negative unit economics, please, in terms of what has moved from basket size to through the cost lines. If there's any flavor you can give on that and which bits you would expect to improve from your cost actions. And then secondly, a bigger question in terms of how are you, what discussions have you had internally about balancing the profitability versus the long-term investments? Is it a case of you're just prioritizing investments that make the highest return or some of them you're pushing into the following year. Can you just talk about how you've balanced or made the decisions to balance profit versus investment? Thank you.

Thank you, Adam. I'll take the first question. Robert will take the second question. In regards to the negative unit economics, I think it is three different dynamics in here. First of all, because of the slow demand, we of course had a much lower fixed cost digression. So the overhead base that we have in our logistics, we now needed to cover with lower sales. The second one is really, as you alluded to, the customer metrics. So what we saw is that they ordered less items per order. And that, of course, then also doesn't help our order economics. And the third area is really the inflationary pressures. So when you think about the warehouse operations, there you have inflation around the wages. We saw, of course, in transportation, which is another big block for us, the massive inflation on fuel, and in addition, the electricity. So all of those inflationary pressures we had to digest, we had to absorb. So I would call it there is a lot of operational deleverage from the lower fixed cost regression and at the same time there is the impact on the order economics largely by the way that the customer shops at the moment with less items per basket as well as the inflationary pressures that we had to weather.

Thank you. And on your question of how to balance growth and profitability. We are a growth company, so the big prize for us is in the future. We want to have more than 10% of the European fashion market that will be on our platform. And we believe that everything we do now is still very early in this journey. There's just so much potential down the road that we believe as a platform and as a business, we can drive value for our customers, for our partners, and just make the fashion industry more long. And we believe by doing so, it is very much aligned with the interests of our shareholders because in the long term, there's actually scale effects and the big prices in the future. So that's the mentality. However, we as a company, we're very mindful when it comes to investment, as you as well know. So we don't chase growth when there's no positive eye on the investments that we do and when it's too costly. As well, how we approach now this situation, as we allude to, is I think it's about being real in terms of driving efficiencies in our business, and this is what we as well allude to. But it's as well not only about that, it's as well about investing through cycle, and our balance sheet as well allows for that. So investing through cycle, where we actually see opportunities that present themselves that help us in the long and mid-term for our margin and as well for our path to 30 billion and even beyond that, under 10% of the European fashion market that might be passing through our platform. So that's the mentality. We're a growth company at heart, but very mindful as well.

Thank you. Our next question comes from Rocco Strauss from Aretz. Please go ahead. Oh, pardon. From Georgina Johanna. from JP Morgan, please go ahead.

Hi, morning, everyone. Thank you for taking my questions. I've got two, please. The first one was just on current trading and Q2 performance. I think you referenced that you've seen an improved performance post the Easter weekend. Is it still sensible to assume growth in sort of the region of 10% for Q2, which I think is where consensus is sitting at the moment? Or given everything else that's going on, is that still looking a bit ambitious, please? That's my first one. And then the second one was, I think you referenced that you've put measures in place to alleviate the overstock in the quarter. Can you just explain what you mean by measures, please? Do you mean sort of extra planned promo or giving stock back to partners? If you could just explain that, that would be great, please. Thank you.

Hi, Jenna. Thanks for your question. uh... talking about the current trading in in q two so at the accident q one so the market with me pretty much mute there wasn't really much of the city in that and that basically continued in in into april and the last two weeks now we have seen some some green shoes and i think that's also reflected in the me look at the fashion query volume they basically represent a little bit the picture that we can't be in our numbers at the moment for for book single digit in March and as we start April and now really gripping into the 18-20% week on week over the last two weeks, year over year over the last two weeks. So I think that this is what we currently see as the positive momentum. However, it shows you what swings are currently possible on a week-by-week basis. And so I think, personally, I think we feel that we will end better than Q1. But at the moment, it's too early for us to really comment on where we will end the quarter. In regards to your second question around the inventory, you will have seen from the release that we ended the quarter with $400 million more stock than last year. And we have already started to proactively address the overstock that we kind of incurred There were good reasons for the overstock, yeah, because we really wanted to ensure the customer experience, give them the full choice, and mitigate those supply chain disruptions. But now, given the change in the customer behavior, as well as the slower demand, the sell-through rates are just not where we would have wanted them to be. And we have created some overstocking categories that we would now call the pandemic staples that we just need to get off from. And the measures that we have taken here is we already started the exercise towards the end of Q1, and we have leveraged tremendously now the mid-season sale to really address those risky stock areas. And we still have another end-of-season sale ahead of us to get rid of the remainder of the stock. So at the moment, we feel quite comfortable with where we are. And so I would say, just as a heads-up, We feel that we have our stock position under control. We are not worried at this moment in time. You may not see that reflected when you look into the Q2 number because what we are doing at the same time is, given all the news that are out there about potential supply chain disruptions again, we are sticking to our strategy of pre-poning stock. So by the time we will report on Q2, we will have taken in already quite a large amount of our fall winter stock.

Our next question comes from Rocco Strauss from ART. Please go ahead.

Yeah, good morning and thanks for taking my questions. I would have two as well. First one on ZMS. Could you talk a bit more about the 40% growth year-on-year that you mentioned? Is that more driven by innovation around on-platform ad formats or is that more by brands warming up to the retail media opportunity? And then further, to what extent is ZMS driven by partner program or third-party sales versus wholesale? And then the second question I would have, I mean, we have seen commission increases on various players, like Etsy and so on, to reflect the challenging marketing environment, mainly driven by the deprecation of various IDs on Apple and soon also Android and Chrome. With S&M or marketing likely remaining at elevated levels moving forward, have you internally thought about commission increases around partner program to offset some of these cost pressures? Thank you.

Thank you, Robert. So, yeah, so first of all, ZMS continues to perform well and has seen a very good growth in Q1. So there is no magic in Q1 on Zermatt. So it's a continuous progress that we see with the formats and as well with the demand that was as well strong both across both the partners but as well across partner partners for driving more visibility in Q1. So there is no magic. So in terms of commission increases that you were asking for, so no, we have not thought about or we have no plans at the moment to increase any commissions to our partners. What we have said is just like in terms of ZLS, which is a cost plus model that we're just passing through the additional costs that we're seeing now, short-term costs through the fuel price surcharges to our partners, which is in line with the strategy of a cost plus model and just, yeah.

Thank you. Well, now, Motera, next question from Lise Townsend from UBS. Please go ahead.

Hi, everyone. Thanks for taking my questions. Also, I have two. Just the first one would be around fulfillment costs. into the rest of the year. Obviously as an online retailer, a large proportion of those are going to be variable, but I'm just wondering of the costs that can be contracted out, how much of the fulfillment costs can be contracted out and have they been contracted? So do you have visibility for the rest of the year? Secondly, just on expectations, marketing costs and how you're thinking about that for H2, Would you be looking to pull back on marketing costs if demand is suddenly lower than you expect? Following up from Adam's question on how you're thinking about investment would be helpful.

Thank you very much. I'll take the second question. I'll pass on the fulfillment cost question to David. On the marketing cost, our focus really is on the return on investment, and therefore it depends really a lot on our top line, and this is how we invest in marketing as well as the elasticity we see in the market. So we do expect that the marketing for the remainder of the year is kind of in line with what we reported previously. So neither big cuts nor big increases when it comes to the cost of safe ratio.

Yeah, and then on the fulfillment cost, I mean, we told you on March 1st that we actually expect fulfillment cost and percent of revenue to increase this year, mainly driven by two effects. First of all, unwinding of the temporary return rate benefit we saw last year, and second, continued investments in our proposition, particularly connected to the further rollout and expansion of Zalando Plus and also our investments into making our operations more sustainable. So this is still what you should expect for the full year. What we are obviously focused on as part of the action plan that Robert talked about is to make sure that any additional pressures from increasing logistics costs due to fuel price and the likes actually are managed well, for example, through measures like MOV, through measures like passing on the costs to our ZFS partners, and that's obviously where we have still a lot of flexibility to mitigate these effects for the rest of the year.

Our next question comes from Jurgen Kolb from Kepler Schiphol. Please go ahead.

Thank you very much. Two questions also from me. First of all, again, on the inventory side, I was wondering if you or part of your strategy also includes that you may have canceled orders for the fall winter collection. or maybe discuss with the brands that you may not take in all the orders that you've written for the second half. And secondly, if we could maybe talk about pricing, what have you seen in the first quarter in terms of price increases and what is on the agenda for the remainder of the year? And do you feel that there's a certain elasticity from clients or from customers to react on that? Thank you.

Thanks, Jürgen. On the inventory side, so I think what we did is we took the learnings from the first quarter, and what we saw there is a shift in the demand pattern towards certain categories. So within our portfolio of categories, we saw double-digit growth in some and then less growth in others. And so our buying budget for the winter reflects primarily that. The second thing we saw was a shift in price points. And so we have rebalanced our buying budget in that respect as well. And so I think it is not a question of now discussing it in the detail of cuts, etc. It's really a question of rebalancing the buying budget for the second half.

Yeah, and on your second question, on the price and the customer sentiment around it. So as I alluded to in my presentation, so first of all, we see there is a certain level of shifts that we see with customers. The mid-segment is the one that is seeing the most contraction, and there are some customers that just go more towards lower-priced items, and there are some customers that more go towards higher-priced. This is the effect that we So there's something around like inflation and customer sentiment that we're observing as well on the platform. Yet the customer, the sensitivity towards discounts is actually quite high. So, as we've seen in mid-season sales, that was where customers reacted to this. So, there is a continued sensitivity towards prices on the platform as we see that.

Our next question comes from Miriam Josiah from Morgan Stanley. Please go ahead.

Thank you. First question, just to follow up on the last one about the shift in price points. Is that concentrated in particular markets? Are you seeing that as a more broad-based trend? And would you expect the trend of the average basket sizes declining to continue for the rest of the year? Because I guess in your comments around current trading, you said you started to see more positive momentum. So is that more on the volume side rather than in terms of price points? And then secondly, if you could just give a bit more color on the performance across your market, specifically in the rest of Europe, and if you could talk a bit about what you're seeing in the CEE region, if there's been a recovery since the situation in March. Thanks.

Thanks, Miriam. In regards to the price point, it is a complicated picture because on the one hand, we see people trading up. And our designer segment is really growing in good double digits. And at the same time, we see a higher share of red prices towards the lower middle end and into the lower price segment. So I would say, coming back to the question around what will be the average basket size going forward, in Q1, it was heavily impacted by the share of red prices. we believe that that will fade away to a degree in the second half of the year. And we believe that as we are rebalancing the brands within our portfolio, that actually this will give us good momentum to further improve the average basket size. I just want to point out, our average basket size is still well above the pre-pandemic levels. In regards to the markets, CE was an interesting one because right when the war was unfolding of course there was a shock momentum but demand picked up quite quickly afterwards and so I would say that now actually our markets are performing according to expectations so we haven't seen a massive deviation from the ingoing trend in Q1 to where we exited now in Q1. So I hope that answers your question.

Our next question comes up. Maybe as a follow-up, I think, especially on Eastern Europe, I think, yeah, like, you know, the shock was there, I think, in the beginning of Q1, but it actually recovered well, and that is why the reason why we actually continue to open in Romania and Hungary, where we as well push ahead, as we've seen as well, this positive momentum there.

Thank you. Our next question comes from Guido Luccarelli from Citi. Please go ahead.

Yes, good morning. Thanks for taking my questions. Just one on the price segments. If you can please define your definition of low, mid, and high price segments in Euro terms. And the second one is, On your take on M&A, I mean, I guess the consolidation in the sector would make sense considering the improved economics that you get from that. And maybe it makes even more sense now from a valuation standpoint, at least compared to one year ago. So are you looking at all at any M&A opportunity? What's your approach there? And if not, what is, in any case, your take on consolidation in the sector? Thank you.

Maybe on this price segment. I think the way of how we look at it is more like the positioning of the brands. It's not about the price points. It's more the positioning on the brands. There are brands that are in the entry price segments and there are brands that are more in the mid segment and there are brands that are more in the higher segment. What we see there is the brands In the higher segment, in the brands in the lower segment, they are the ones in general that are in higher demand of our customers. And those that are in the mid-segment are the ones that are in the less demand. So this is not a very clear-cut definition, but it's more like in our understanding of the markets, our understanding that it's more management from Zalando kind of classification of these segments. And we want to provide it to you and just to... Provide some flavor of what we are what we are seeing and how we are acting on that and how we as well dealing with Yeah, and I think as a platform we have 7,000 of them and I think it's On our platform. So it's a you know, it's it's very much. I think a reflection of what happens in the market and In terms of M&A, as we said many times in the past, our main focus and priority is, first of all, organic. And when it comes to M&A, it's about capabilities that could add something to Zalando in terms of our ability to build better experience for our customers or for our partners. This is our main focus when thinking about M&A as an additional way next to organic efforts, which is mostly in our DNA.

Thank you. We'll now take our next question from Charlie from BNP Paribas Exam. Please go ahead.

Yeah, morning. Thank you very much for taking my questions. One on guidance to start with, please. I just wondered if the revision to your expectations, you know, now anticipating to be towards the lower end of the range is reflective of just the kind of experience that you've experienced, sorry, in Q1 and the clearance impact you were expecting for Q2 or whether you've actually revised your expectations for the consumer and for profitability in the second half And indeed, you know, if not, is that an incremental downside risk from here? And then the second question is, very much appreciated the colour you've given around performance of the different categories. You also, though, alluded to some availability shortages in footwear. So I just wondered if you can update us on the demand picture in athleisure, both apparel and sneakers. Thank you.

Good, yes. In terms of the first question on guidance, so when we shared our guidance in March, beginning of March, as I said, we explicitly, as was said, it does not yet reflect a full impact of any impact of the Ukraine war because it just had started just a few days before we actually spoke to you. And I think what we've seen since then, first of all, was a slower consumer sentiment that continued, but there were some strides of good positive signs in our business that we especially see over the last couple of weeks now, over the last two weeks. I think that's a part of the picture. The second part of the picture is actually that in the second half of the year, there's just this technique as we are not comparing ourselves anymore to pandemic height. That just is a technical effect that we will see double-digit growth again. Plus, the third thing is we don't stand still here, so it's not like we're not in observer seats. So we see the opportunities, we see the demand patterns, and it's our job to act on them. It's our job to make the best of the situation. And the second question was on performance of... And the second question was performance of categories. So, yeah, the supply chain topics, they are, like, they are They are relevant, but they are not the big piece of the picture at the moment. So that's not our Q1 performance. It is the minor effect, I think, of our performance. And we're in continuous discussions with our brands and as a platform. And as one of the key partners, obviously, we're in a good position to solve these supply chain issues and get the access, I think, better, comparatively better. And, yeah, we are... throughout the year, I think, in a good shape to be better equipped exactly on these categories where we see the demand shifts our customers moving towards.

Thank you. We'll now move to our next question from Michael Benedict from Berenberg. Please go ahead.

Morning, all. Thanks very much for taking my questions. I have a couple as well. Firstly, you mentioned you are introducing minimum order values in certain markets. Could you give us an idea of which major markets they'll be implemented in? And when you've previously implemented minimum order values, have you seen any material impact on the top line? And the second question is on the gross margin. Looks like it may well continue to fall in H1 despite the successful platform transition. I wondered if you could give us an idea of when you expect that to stabilize and begin to move in a positive direction. Thank you.

Maybe first on minimal order value. Mentality behind minimal order value is to de-average the proposition. It's a way to continue to be able to offer items that are in demand at a low item value. For example, beauty, secondhand, and as well. other articles. And it's a mechanism that we tested out in nine markets, and what we've seen in these markets is actually positive. So we didn't really see a material impact on the top line, but we saw actually a good shift of the customer behavior and direction upwards. And as I said, we're introducing it into more markets. It might be all markets, but we're introducing more markets. That's what we can say for now. In Germany, this is what included as one of our biggest markets where we see a share of orders that are below the thresholds that we also want to move upwards. But the experience is very positive, and that's why we are doing this. And it's very normal. It's in line with our strategy. On gross margin.

And then in regards to your second question about the gross margin, I think you pointed it out correctly. For the second quarter, of course, we still need to churn through our inventory in what is still a very low-demand environment. However, in the second half, as we see growth return and we have adjusted our buy, as I said earlier, we rebalanced it, we will be able to avoid exactly that situation and unnecessary markdowns. So therefore, we do expect our gross margin to perform well. better in the second half.

Thank you. And we will now take our final question today from Simon Ervin from Credit Suisse. Please go ahead.

Hi. I think most of my questions have been answered. Can you just quickly talk about the impact of product mix on on gross margins. I mean, presumably higher return rates and a lower participation of COVID categories should be quite positive for gross margin mix preclearance.

Thanks a lot. I think you pointed out in the right way, it's positive for gross margin, but not to forget that it has a negative impact on our fulfillment cost.

It has a negative impact, because especially those categories that were in high demand before COVID were the ones that actually saw lower return rates. And like occasion wear dresses and these categories are the ones that have higher return rates. So this is, I think, the shift of the way we're alluding to in quarters around what is extra return benefits, the temporary return benefit through the pandemic that is now part of the unwinding. So good for gross margins, not too good for the fulfillment costs.

Thank you. That was our last question today. With this, I'd like to hand the call back over to Mr. Patrick Koppler for any additional closing remarks.

Thanks everyone for joining this Q1 2022 call today. If there are any remaining questions, do not hesitate to contact us. And for the first time in two years, we'll also be on the road from next week onward physically and hope to see a lot of you there. Thanks a lot and thanks for joining. Have a great day.