Zalando Se Ord

Thanks for the intro and good morning ladies and gentlemen and welcome to our Q3 2023 earnings call. Today I'm joined by our CFO Sandra Denbeck and Sandra will briefly walk you through the presentation and is available for questions afterwards. As usual this call is being recorded. The live webcast as well as a replay of the call will be available on our Investor Relations website later today. Sandra, I will now hand it over to you. Please go ahead.

Thank you Patrick. Good morning, everyone, and thank you for joining today's call. I got a bit of a cold, so please excuse my voice. Let me kick off. In 2023, we set ourselves two key priorities. The first one was profitable growth, and the second one, selectively investing in future growth. Both priorities continue to guide our strategic decision-making and are reflected in our first nine months' results. Let's look at how we performed in the first nine months before we dive into the third quarter. In the first nine months, we improved our profitability year over year by more than 120 million euros. That's a significant step up. We delivered an adjusted EBIT of 167 million. And that despite quite some headwinds. We saw ongoing normalization between offline and online, pressures on consumers' disposable income continued, and we experienced adverse weather conditions particularly in September. And despite these top-line headwinds, we managed to maintain our pandemic peak GMB. Our business model mix continues to inject resilience with our brand partners continuing to grow their direct-to-consumer business on Zalando. In the first nine months, partner business share increased to 39%, a six percentage point increase year over year. This was fueled by an increased adoption of ZFS, with the ZFS share now at 64%, an increase of almost four percentage points year over year. And at the same time, we continue to selectively invest into strategic areas of our business. So in September, we launched Stories by Zalando. But before I talk more about this, let me update you on our latest full-year guidance. We continue on our path of profitable growth, and therefore our adjusted EBIT guidance for 2023 remains unchanged. We are committed to deliver 300 to 350 million euros. However, we expect pressure on demand to continue throughout the upcoming peak trading season, which is why we revised our top-line guidance for the full year. So let's move on to Q3. Throughout Q3, we continued our focus to selectively invest in future growth. And on page 3, let me highlight one of our strategic investments, Stories on Zalando. We believe that adding more inspiration and entertainment is a crucial next step in the evolution of our customer experience. That's why last year, in collaboration with High Snow Biety, we started our discovery journey, and now in September we launched the next iteration, Stories on Zalando. Here we completely redefine the way our customers can discover exciting fashion trends. So what are we aiming for? Firstly, we want to capture the attention of our customers so that ultimately they spend more time with us and they come back more frequently. Secondly, we also want to attract customers. those that have a higher discretionary spending and are more fashion-affine. And thirdly, the experience creates a strong halo effect also for our brand. It's still early days on our discovery journey, but the first results have been very encouraging. So keeping in mind our strategic efforts of investing in future growth, let's now move on to the Q3 financial results. Let's start off with our group financials on page four. The market environment in Q3 remained challenging and limited our ability to grow. In this environment, we maintained the necessary balance between short-term sales and strategic business objectives. And as a result, we improved our profitability by staying on track with our inventory sell-through targets. Before Q3, we reported a muted top-line performance. July and August showed small but positive top-line growth. However, the unusually warm temperatures in September dampened consumer demand for winter merchandise. And with that, our GMV came in at 3.2 billion euros, down 2.4% year-over-year. Revenue at 2.3 billion is down 3.2%. On profitability, here we again show an improvement. Adjusted EBIT increased from 14 million to 23 million, and this corresponds to an adjusted EBIT margin of 1%. a year-over-year improvement of 0.4 percentage points. Here, our continued efforts to drive efficiencies and fulfillment costs offset the decline in gross margin. Now, looking at the first nine months, our financial performance translates into slightly negative GMV and revenue growth. While adjusted EBIT came in at 167 million, or 2.4% margin, so a significant increase compared to last year. Let me now walk you through our customer metrics on page five. And as always, this is on a last 12 months basis. So let's start on the left. Our active customer base stands at 50.1 million, showing a flat development year over year. And the main reason for this is the lower new customer acquisition, which is due to the subdued demand environment and our continued focus on profitable growth. Moving over to the right, Order frequency decreased by 3% from 5.2 to 5. The average basket size, however, increased by 5% to 59 euros. And this is due to a higher average item value as a result of black price inflation, but also our work on the assortment mix in wholesale and partner business. GMV per active customer increased by 1.5% to almost 295 euros. So let's turn to our segment performance. Starting with the top line performance on page six. Let me walk you through the chart from left to right here. Fashion store GMV is down 3.7%, revenues declined by 4.4% as the partner business share continued to increase to 39%. Top line in DACH region was particularly impacted by the delayed fall winter season start. It was more pronounced there. While in rest of Europe, we actually saw positive development in Eastern Europe and also in some of our mature markets. The off-price segment grew by 4%, and we already indicated that last time, we see a normalization for off-price. It's a dynamic we also expect to see in Q4. Tavings from more attractive in-season stock being available in the sourcing markets were reducing. And coming to the all other segments, This is including high-smobility trade bite and ZMS. Here revenue declined by 12.1%. For ZMS, we saw that in the current market environment, brand partners spend more cautiously. And given the delayed season start, they also canceled or postponed start of season campaigns. So turning to the segment profitability on page seven, Let's start with the fashion store. We see a strong improvement in adjusted EBIT as a result of the improved profitability of the DACH segment. In DACH, adjusted EBIT more than tripled to $48 million. Adjusted EBIT margins significantly stepped up from 1.7% to 6%. The main drivers here are improved order economics and lower fulfillment costs, also benefiting from scaling of partner business. Rest of Europe showed an adverse development with adjusted EBIT at minus 29 million and margin declining from minus 1.6 to minus 2.8%. Efficiencies in fulfillment only partly offset the declining gross profit and the higher marketing costs. Off-price saw decline in adjusted EBIT to 3 million, and this was driven by lower gross margin due to the assortment mix and the promotional environment in the full-price channels. And the all other segments delivered an adjusted EBIT of 6 million. Let's move on to the P&L on page eight, and let's focus on the Q3 development, which is on the right hand side of the table. Our growth margin declined by 2.4 percentage points to 36.7%. And there are two main reasons for the decline. First, in this promotional market environment with subdued demand, the effectiveness of additional price investments remains reduced, and as such comes at the cost of margin. And secondly, due to the delayed fall winter season start, pressure on sell-through rates increased. So we chose to prioritize reducing overstock early on, meaning in September we actively managed the sell-through of our fall winter stock by additional price investments, and this way mitigate any potential overstock risk at the season end. On the positive, our partner business remains margin-accretive and helped to offset a small part of the margin decline. Fulfillment costs improved by 3 percentage points to 24.9%. This continues to be the result of favorable order economics and the scaling of our partner business with a growing ZFS share. Improved order economics from higher basket sizes as well as several efficiency measures more than offset the inflationary cost increases. Marketing costs at 7% developed broadly flat year-over-year. We deliberately decided to not push for more marketing spending throughout the quarter in light of the continued subsidy demand. And admin expenses increased by 1.2 percentage points to 5.6%. We saw an increase in non-personal costs and made an impairment for lease assets as we consolidate our office footprint here in Berlin. So summarizing the P&L, Our continued drive for sustainable efficiencies, particularly in fulfillment costs, resulted again in improved profitability and more than offset the decline in gross margin. Let's turn to page 9 for networking capital. Networking capital was neutral in Q3. Looking at the year-over-year development, we see a cash inflow of around $130 million. And this development is primarily driven by lower inventories. And let's talk about inventory. At the end of Q3, our overall inventory position is at around 1.9 billion euros, so it's down 10% compared to last year. The fashion store inventory is significantly below last year as we reduced our wholesale buy and we effectively managed any potential overstock risk throughout Q3, albeit at the cost of gross margin. And for the full year, we expect a further improvement in our inventory position. Returning to cash on page 10, our cash and cash equivalents remain strong at 1.9 billion. Compared to the second quarter, this is around 170 million less due to the seasonal changes in our networking capital as we received inventory for the fall winter season. In regards to investing cash flow, we invested roughly 70 million, of which 50 million was for capex investments in our logistics infrastructure for the new distribution centers in France and Germany, as well as for existing logistics sites. The cap expense of 147 million in the nine months reflects our financial discipline in the current environment, while we continue to selectively invest in setting us up for future growth. And our cash position, as such, remains strong. It continues to provide us with financial flexibility and allows us to invest in future organic or inorganic growth opportunities. So this concludes the QC Financials, moving on to page 13. As in previous quarters, let's do a quick check-in on our three main objectives for 2023. So here on this slide, you will see that apart from one amber tick, it's all green. But let me walk you through the slide, and this time let's start from the bottom. Selectively investing in future growth. So earlier, we already talked about stories on Zalando, but there are also other examples worth mentioning. So in mid-October, we started rolling out a new luxury boutique-style space for designer brands fashion store and the brand feedback is already very positive in the second quarter we talked to you about our fashion personal fashion assistant power by chat GPT this one will shortly be live in four countries on time for cyber week and we launched our b2b brand sales it will enable brands and retailers to manage the multi-channel business across Europe within one unified platform By now we have around 30 brands and retailers such as Pepe Jeans, Marks & Spencer, and Casar already on board. And lastly, Zalando Plus. In Q3 we expanded our offering to Belgium and Luxembourg, so Plus is now available in eight countries. We're also well on track with our second objective for 2023, which is to simplify for speed of execution. So here we finalized our program to simplify our organization. And we're continuously working on improving our operating model towards a more localized shopping experience, whether that is through locally relevant assortment or convenience. And we are live with the first pilot in Sweden. So coming to the third objective, strengthen gross margin. So this clearly has proven to be more difficult this year than what we had initially expected. The current tough market environment prevents us from showing positive year-over-year gross margin development. Nevertheless, it's important to mention that the actions we are taking around more prudent wholesale buy, driving full-price sales through focusing on assortment relevance or through creating inspiration on our platform, the new commission table, the growth of the partner business, all these efforts that we are making are ultimately supporting this objective of strengthening gross margin. So in summary, despite the temporary headwinds we experience, we are delivering against our objectives And with that, we are all well positioned to not only deliver on profitability, but once the momentum in the market returns to accelerate our growth. So with that, let's have a look at the outlook on page 12. We expect continued pressure on demand throughout the rest of the year. Hence, as you saw, we adjust our top line outlook for 2023 and expect GMV growth in the range of minus 2% to plus 1%. So this is from previously the lower half of plus one to plus seven. Revenue growth is adjusted accordingly and is expected to be in the range of minus 3% to minus 0.5%. So from previously the lower half of minus 1% to 4%. It's really important to note that our adjusted EBIT guidance remains unchanged. We are committed to deliver 300 to 350 million euros as we continue to focus on profitable growth while we continue to selectively invest. With regards to capex, we have already adjusted the speed of our spending throughout the year to reflect the macro dynamics. We have now recalibrated the timelines of our investments in distribution centers in France and Germany and therefore expect capex to be between 260 to 300 million euros from previously the low end of 300 to 380 million. So this concludes the outlook. And before we move to the Q&A, let me conclude with the key takeaways of today. Both of our key priorities, profitable growth and selectively investing in future growth, continue to guide our strategic decision-making, and they are reflected in our first nine months' results. Here we delivered a significant improvement in profitability of more than $120 million to $167 million. And we are committed to deliver 300 to 350 million in adjusted EBIT for the full year, and that despite the temporary top-line headwinds. And at the same time, we are progressing well along our strategy. With our 50 million active customers, we are well positioned in the European fashion and lifestyle space. We make strides to unlock the future potential of new innovations, and we invest in inspiration to elevate the customer experience on our platform. And at the same time, we continue to empower brands to grow their direct-to-consumer business by leveraging our enabling capabilities, whether that's on or off Zalando. And while we cannot change the current adverse market conditions, we can prepare so that once consumer sentiment and online growth return, we can best capture the opportunities and we can accelerate. So let's now open up for Q&A.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one under touchstone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. In the interest of time, please limit yourself to two questions only. If you are using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. The first question is from William Woods with Bernstein. Please go ahead.