Zalando Se Ord

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Zalando SE publication of the Q1 results 2023. Throughout today's recorded presentation, all participants will be in a listen-only mode. There will be a question and answer session. If you would like to ask a question, you may press star followed by 1 on your touch-tone telephone. Please press the star key followed by 0 for operator assistance. And I would now like to turn the conference over to Patrick. Please go ahead.

Good morning and welcome to our Q1 2023 earnings call. Today, I'm joined by our CFO, Sandra Dembeck. Sandra will briefly walk you through the financial developments of the quarter and is available for questions afterwards. As usual, this call is being recorded and the live webcast, as well as the replay of the call, will be available on our Investor Relations webpage later today. Sandra, I will now hand it over to you. Please go ahead.

Thanks, Patrick. Good morning and hello, everyone. Thanks for joining today's call. As always, let's start with a short summary. As anticipated, the macro situation of Q4 continued into Q1. We saw inflationary headwinds and continued pressure on discretionary spend. Clearance across the industry remained at elevated levels, and normalization of e-commerce adoption continued. Against this backdrop, with our focus on profitable growth, we are reporting a solid first quarter. We delivered modest GMV growth and significant year-over-year improvement in our adjusted EBIT. And at the same time, our business model continues to prove strong resilience supported by our broader platform strategy. Our partner business continued its strong performance, increasing its share by 8 percentage points year-over-year to 39%. And this was supported by an increased adoption of the London Fulfillment Solutions. Another example is our balanced and diversified business mix, It allowed us to leverage our launch by Zalando proposition to fuel growth and to clear access inventory. But 2023 remains a year of transition and our ambition for this year is to deliver profitable growth and to continue selective investments through the cycle. And with that, we remain committed to deliver on this ambition and we confirm our full year guidance for 2023. So let's talk about the Q1 performance in a bit more detail. Starting off with the group figures on page four. I already said, like, we delivered a solid first quarter. Top line growth was modest. GMV grew by 2.8 percent to over 3.2 billion euros, and we delivered revenue growth of 2.3 percent. With our focus on profitable growth, we significantly improved our profitability, and our adjusted EBIT came in at break even. This is reflecting a year-over-year improvement of 51 million euros, or 230 bps in margin. And this was largely the result of fulfillment cost deficiencies driven by improved order economics. With this set of results, we continue on our journey to deliver GMV growth and improve profitability in 2023. Let's turn to our customer metrics on page five, starting on the left. Our active customer base stands at 51.2 million. This is close to 5% more customers compared to the first quarter last year, and it is flat versus the fourth quarter of 2022. We see resilience in our retained customer base, and we continue to focus our customer acquisition efforts on profitable growth. Looking at the right-hand side, Consumer discretionary income remains under pressure. And despite this, we see fairly stable customer metrics on a trailing 12-month basis. While order frequency continues to show a slight decline from 5.2 to 5.1, GMV per active customer remains resilient at 291 euros. And this is driven by an increase in average basket size as a result of a higher average item value. Let's turn to page six. Our segment performance and starting with the top line performance. And here I'll walk you through the chart from left to right. Starting off with Fashion Store. Fashion Store GMV developed flat while revenues were down 3.5% as the partner business share continued to increase. In DAF, we recorded negative 5.7% revenue growth. Performance was particularly impacted by continued weak consumer confidence inflationary pressure weighing on consumer wallets, and the ongoing normalization of e-commerce adoption. Rest of Europe, here the revenue slightly decreased by 1.8%, and we saw continuous solid performance in Eastern Europe, including our eight new markets launched in 2021 and 2022. Moving on to the off-price segment, the off-price segment showed an extraordinary strong performance with revenue growth of 32.9%. With our launch by Zalando proposition, we successfully captured the demand in the market and also supported the clearance of overstock from our fashion store. This dynamic clearly underlines the strength of Zalando's business mix, where our off-price segment is partly offsetting the temporarily subdued environment for full price sales. And last, in the all other segments, revenue grew by 40.8%, as a result of the inclusion of high-smobility and the performance of Zalando marketing services. Moving on to page seven, segment profitability. In the first quarter, profitability increased significantly in both segments, fashion store and off-price. So our continued efforts and focus on profitable growth are really paying off. Zooming into the fashion store, DACH and rest of Europe saw a similar margin recovery. Off-price. delivered a profit margin of 5.9%, so that's a strong increase over last year. The increased scale drives leverage across various cost lines, and in addition, gross margin improved modestly year over year. And lastly, all other segments, they delivered adjusted EBIT near breakeven in line with last year. Let's now move on to the P&L on page eight. You can see that our gross margin declined year-over-year by 0.8 percentage points. This was expected. This is the result of the remaining four winter clearance activities. And in addition, also a delayed spring-summer season start. So, we had a delayed start to the full price sales. Our partner business remains to be gross margin accretive, and that's despite the strong growth that we experienced in ZFS, which comes with a significantly lower gross margin. Fulfillment costs decreased by 3.1 percentage points, and this is thanks to our continued efforts to improve order economics and to drive sustainable efficiencies to offset the inflationary cost increases. And in addition, we are, of course, also benefiting from scaling our partner sales. Marketing costs improved by 0.4 percentage points. This is due to the increased scale of our off-price business, which operates at a lower marketing cost ratio. And admin costs. They increased by 0.8 percentage points. That's driven by inflationary cost increases, higher share-based compensation, and the inclusion of high-smobility. To summarize the P&L, we significantly improved our profitability year over year as a result of our continued drive for sustainable efficiencies, particularly in fulfillment costs. And with that, we more than offset the necessary investments in gross margin to clear the remaining overstock. So let's move on to networking capital and inventory on page nine. In Q1, networking capital was neutral. Looking at the year-over-year development, we see a cash inflow of around 150 million. And this development is primarily driven by the continued strong growth in our partner business, which is reflected in the relatively larger increase in the trade payables on the right-hand side. Let's turn to inventory. Our overall inventory position is around 2 billion. So it's up 5% versus last year. When looking at the inventory in the fashion store, here the inventory actually is down year over year. And this is a result of our prudent approach to wholesale buying and our continued focus on effective inventory clearance. So a bit more information here. So our fall-winter 2022 overstock ratio which shows the effective inventory clearance, is now at pre-COVID levels. And our 2023 wholesale buys are all in line with our top-line guidance. So in fashion stores, we're in a good inventory position. The year-over-year increase in inventory is coming from off-price. And we already mentioned that when we presented you the full year. Here in the fourth quarter, we leveraged the opportunity to purchase quality stock to support the increased demand in our off-price channel. So while our inventory overall is up by 5%, we are in a really good inventory position. Turning to cash on page 10, our cash and cash equivalents remain strong at about $1.8 billion. And this is almost $200 million better than last year, coming from a higher operating cash flow primarily the result of improved networking capital. And compared to Q4 2022, we recorded a decrease of $240 million, which is primarily due to the seasonal networking capital changes as we inbounded inventory for the spring-summer season. On CapEx, cash CapEx amounted to $38 million as we continued to invest through the cycling in key capabilities like logistics. So with that, I conclude the financial update for Q1. We all delivered, so all in all, we delivered a solid first quarter. So let's move on to the outlook. So first on page 12, a quick recap of what we presented to you in March. We were talking about our two main ambitions for 2023, which are profitable growth and continued selective investments through the cycle for future growth. We also presented three objectives, and so let's check in on the progress along our three objectives. The first objective is to strengthen gross margin. Here, we remain committed to show year-over-year gross margin improvement for the full year. Already last time, we mentioned that we increased flexibility in our wholesale buy and that we are very effective in our overstock clearance. We also talked about the changes to our partner commission table. Besides this, we are working very hard on adding new brands and relevant assortments to increase customer engagement towards full price sales. For example, we recently launched an exclusive Paco Rabanne collection, and we see positive impact from our creative product drops. The second objective is to simplify our organization for speed of execution. And in this context, in February, we announced a program to reshape our organization. The consultations with the Works Council are ongoing, and we will provide more details about the program once these have concluded. And last but not least, we continue to selectively invest in future growth by staying disciplined on our capex spend. So in Q1, with the rebranding of Lounge by Zalando, we delivered an enhanced on-site experience for our shopping club members. And we continue with our new multi-channel fulfillment solution, which has gone live with more partners in the first quarter. So we are progressing well along our three key objectives, and we stay committed to deliver on our 2023 ambition. So let's talk about our full year guidance on page 13. As already mentioned earlier, we confirm our guidance for the financial year 2023. Q2. Q2 has started slower, and we do not foresee any significant improvements in the macro situation. Because of that, our focus in Q2 remains on delivering improved profitability versus last year. So this concludes the outlook, and before we jump into Q&A, let me just wrap up with the key takeaways of today. So we delivered a solid first quarter, and this reflects our continued focus on profitable growth. Financial discipline remains a key priority for us. Our platform strategy and business mix prove successful, and we benefit from it with continued strong performance of our partner business and our Launch by Zalando proposition. And besides the financial performance, the strategic progress around our two main ambitions for 2023 makes us confident for the remainder of the year. And with that, we reiterate our full year guidance for 2023. So let's now open up for Q&A.