Zalando Se Ord

Thank you, and good morning, ladies and gentlemen, and welcome to our Q4 2023 earnings call. Today, I'm joined by our CFO, Sandra Dembeck. Sandra will briefly walk you through the presentation and is available for questions afterwards. Just as a reminder, later today, starting at 10.30 a.m. CET, we will provide a detailed strategy update. We cordially invite you to participate. Therefore, we will keep this call rather short, as well as the Q&A. As usual, this call is being recorded. 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. Hello also from my side. And thank you for joining me on this morning's call. So for 2023, we set ourselves two key priorities. One was profitable growth and two, selectively investing in future growth. and we followed through on both priorities. And with that, we are well set up now for 2024. So let me summarize our 2023 achievements. For the full year, we delivered at the top end of our adjusted EBIT guidance and came in in line with our revised top line guidance. We are strengthening our wholesale gross margins and combined with the strong performance of our partner business, we delivered year over year gross margin improvement in Q4. And we generated a strong free cash flow, ending the year with a cash position of 2.5 billion euros. So overall, in 2023, we laid a solid foundation for 2024. And in 2024, we return to growth, with GMV and revenue growth expected to be in the range of 0 to 5%. And we continue to improve profitability while investing in future growth targeting an adjusted EBIT of 380 to 450 million euros. So let's turn to the numbers for 2023. So on page three, you can see that we delivered on our revised full year guidance. On growth, on top line, we delivered in line with our revised guidance amidst the weak consumer demand continuing over peak trading. Year-over-year GMB decreased by 1.1% in 2023 and revenue by 1.9%. On profitability, on adjusted EBIT, here we came in at the top end of the range at 350 million euros. And that's underscoring our strong financial discipline and our drive for sustainable efficiencies. On CapEx, we spent 263 million as we recalibrated the phasing of our logistics network build-out. And networking capital came in negative. We saw a cash inflow of $442 million. So let's move on to the group financials on page four. In Q4, the pressure on demand continued and limited our ability to grow. And as a result, Q4 GMB came in at $4.5 billion, down 2.6% year over year. Revenues declined by 3.5% to $3.1 billion. We delivered GMV growth in October, yet experienced the subdued demand over the peak trading events, cyber and Christmas. And given this market environment and given our healthy inventory position, we continued with our focus on improving profitability and progressing on gross margin rather than chasing growth. So as a result, in Q4, we saw a significant step up in profitability. We delivered adjusted EBIT of 183 million. an increase of 25% year-over-year, and an adjusted EBIT margin of 6%, so up 1.4 percentage points year-over-year. So a quick talk about the full year. For full year 2023, GMB came in at 14.6 billion, so slightly down on 2022, but this is still ahead of the pandemic peak levels. Adjusted EBIT almost doubled year-over-year, from 185 million to 350 million. So we delivered an adjusted EBIT margin of 3.5%, which brings us back into our profitability corridor of 3 to 6%. Let me now walk you through the customer metrics on page five. As always, this is on a last 12 month basis. So starting on the left, our active customer base stands at 49.6 million, showing a decline of 3.3% year over year. And in this substitute demand environment, we acquired less new customers as we focus on profitable growth. Moving over to the right, order frequency decreased by 3.1% from 5.1% to 4.9%. The average basket size increased by 5.5% to €59.80 as a result of higher average item value. And this is due to black price inflation as well as assortment mix. And GMV per active customer increased by 2.3% to €295.20. Let's move on to page six, our customer cohort. The macro impact from the lower discretionary spend, the rebalancing between online and offline, as well as our focus on profitable growth and de-averaging the customer experience are reflected in our customer cohort dynamics. So for pre-COVID cohorts, DMV contribution is ahead of pre-COVID levels, yet it is lower than in recent years. And this is most likely the result of macro impact. COVID cohorts show a more pronounced drop in customer retention and shopping frequency. And this is given that offline we gained momentum post the pandemic. And then let's come to the new cohorts of 2022 and 2023. Here's a result of our focus on profitable growth. We see slowing growth in new customer acquisition. So all in all, our active customer base of about 50 million provides a healthy customer set as a baseline for sustainable future growth. Let's now turn to our segment performance, starting with top line on page seven. In Q4, fashion store GMV declined by 3.2%. Revenues came in at 2.5 billion euros, down 4.1%. The partner business continued its strong performance and increased its share to 39% of fashion store GMB. So that's up three percentage points year over year. Top line performance in DACH proved resilient, partly helped by a catch-up effect and following the unseasonable warm weather in September. And revenues at minus 0.6% developed broadly flat. In rest of Europe, revenues declined by 6.8%, and here the picture is pretty similar across the more mature markets, while our new markets continue to grow. Off-price, here revenues declined by 1.2%, despite a good cyber week, as availability of attractive in-season stock in the sourcing markets remained low. Nevertheless, on a two-year over year basis, We see growth accelerating from Q3 into Q4 and continuing into Q1 2024. All other segments, including ZMS, high-smobility, trade-buy, perform flat. For ZMS, we saw continuous cautious spend from brand partners. ZMS revenues as percent of fashion store GMVs, they broadly flat at around 2%. So let's turn to segment profitability on page eight. In fashion store, adjusted EBIT increased by more than 70% to 167 million euros. And adjusted EBIT margin came in at 6.7%. Fashion store and also both regions, DACH and rest of Europe delivered a significant step up in the fourth quarter profitability, as you can see here in the middle of the slide. In DACH, adjusted EBIT came in at 190 million euros, from 92 million last year and in rest of europe the profit improvement is even more pronounced and that's despite the weak top line development so here the adjusted ebit came in at 49 million up from 2 million last year and in off price adjusted ebit declined against the softer top line which is driven by more aggressive discounting as a result of the assortment mix as well as a higher marketing spend Adjusted EBIT came in at 3 million and adjusted EBIT margin at 0.5%. And all other segments delivered adjusted EBIT of 17 million. So moving on to slide 9, let's first focus on the Q4 P&L on the right-hand side, the one where there is the bar around. In Q4, our gross margin improved by 1.2 percentage points to 39.4%. So our normalized wholesale inventory position allowed us to focus on gross margin improvement over peak trading. Fulfillment costs further improved by 0.9 percentage points to 22% as a result of better order economics and further scaling of our partner business. More than offsetting the increasing costs we see, especially in transportation. Marketing costs are up 0.4 percentage points to 8.3%. and admin and other expenses slightly better at 4.2%. So summarizing the Q4 P&L, improved gross margin and continued efficiencies in fulfillment, costs dropped a strong improvement in profitability. Let me also highlight our major developments for the full year 2023 on the left-hand side. The gross margin ended at 38.7%, down 0.5 percentage points. So throughout 2023, the market remained very promotional as players tried to mitigate the impact of substitute online demand, the elevated inventory levels across the market and adverse weather patterns. And as a result, our wholesale gross margin declined while our partner business remained margin accretive. On fulfillment, we continue to see a very positive development. Cost to revenue ratio declined by two percentage points to 24.2%. Drivers have been the same throughout the year. Improved order economics based on higher average item values and continued efficiencies. And the scaling of our partner program further supported fulfillment costs. Marketing costs decreased by 0.3 percentage points to 7.4% as we reduced performance marketing in light of the continued substitute demand and our focus on profitable growth. And admin and other expenses increased by 0.7 percentage points to 5.2%. And the increase is largely the result of two factors. First, we concluded our reshaping program, which resulted in restructuring costs of overall 32.4 million euros. And secondly, we consolidated our office footprint here in Berlin. Returning to slide 10 for networking capital. Networking capital was negative in Q4. We recorded a cash inflow of 442 million. And the main driver was the inventory. At the end of 2023, we had inventory of around 1.4 billion, so 20% lower inventory than last year as a result of our very prudent wholesale buy this year and the effective in-season overstock management. So let's go to slide 11. Operating cash flow doubled from last year, reaching 950 million. the biggest driver being the reduced wholesale buy in the lower inventory position. Investing cash flows of 321 million include 263 million of capex. We invested roughly 180 million in new distribution centers in France and Germany, as well as for existing logistics sites, and software investments amounted to 73 million euros. And with that, we delivered a strong free cash flow of 684 million as a result of our focus on profitable growth while selectively investing in future growth. And at the end of 2023, we had cash and cash equivalents of 2.5 billion, a year-over-year increase of half a billion. Our strong cash position provides us with the financial flexibility and allows us to invest in future organic and inorganic growth opportunities. So this concludes the Q4 and full year 2023 financials. Moving on to page 12. So to conclude 2023, let me update you one last time on our three key objectives as mentioned on this slide. So you will see from the ticks on the right-hand side that we achieved all three objectives and will continue on our multi-year journey of strengthening gross margin. Here we see further room for improvement, which I will come back to in our strategy update later today. So to conclude on 2023, with our focus on profitable growth, we delivered a significant improvement in profitability and increase in cash. And in combination with our selective investments in future growth, we laid a solid foundation for growth and margin expansion going forward. And with that, let's have a look at our guidance for 2024 on page 13. So 2024 is the first year of our updated strategy. But in this context also, we have to say 2024 is for us the year to return to growth. So for GMV and revenue, we guide to 0 to 5% growth. And two things to note here. The wider range reflects the continued uncertainty we still see in the market. The fact that GMV and revenue are growing at the same pace is the result of our growing B2B business, with ZFS and multi-channel fulfillment under the sales brand adding additional revenue, which is not accounted for in GMV. Hence, GMV and revenue guidance are very similar this year. And it's worth noting year over year, B2B will be outgrowing the group significantly. Adjusted EBIT will further increase and is expected to be in the range of 380 to 450 million euros. This is reflecting our continued focus on profitability. And so our guidance range implies further adjusted EBIT margin progression to 3.7% to 4.2%. CAPEX is expected in the range of 250 million to 350 million euros. as we continue to invest in our logistics infrastructure as well as in technology in line with our strategy update. So in 2024, we will return to growth while we continue to improve profitability and we continue to invest in future growth. And with that, let me conclude the presentation and open the room for some Q&A.

And before we jump into the Q&A, let's be please reminded that in this Q&A session, we only cover as well as 2023 and 2024 topics. We will not answer any strategic update questions, which we have enough space and time afterwards. Thanks for consideration and over to the operator.

The first question comes from the line of Anne Critchlow with Societe Generale. Please go ahead.

Thank you. Good morning. Please, could you give a little bit of color on trading so far this year to date? So what's the consumer mood in the different markets, please?

Happy to. So current trading, we saw a similar start of the year as it had ended. However, we saw a positive start into the spring-summer season, and that continued into March. So consumer sentiment, I would say, is still subdued across many of our markets, but there is a positive thought into spring-summer.

The next question comes from the line of Volker Bosse with Baader Bank. Please go ahead.

Hello, good morning. Thanks for taking my question, Volker Bosse, Baader Bank. The average value per order increased, however, the overall consumer sentiment is still muted. So, my question would be on overall sector trends which evolved during 2023, which you see and which you build on.

Thank you. Thanks for your question. So, sector trends of 2023 primarily were around, I would say, two different topics. One was macroeconomics. So we still saw that continued consumer, muted consumer sentiment based on the fact that discretionary spend was impacted by the higher inflation. So there was less money available for consumers to spend. And secondly, we saw that, especially in the first half, that rebalancing between online and offline still continued. That gradually faded towards the end of the year. And we do expect online penetration to slightly improve in 2024. I think those were the two major things we have seen in 2023.

The next question comes from the line of Adam Cochrane with Deutsche Bank. Please go ahead.

Good morning, Jean. A couple of questions, if I may. You mentioned helpfully the current trading comment there. Have you got any other views on how the shape of the year is set to evolve? We've had a number of companies telling us that by the time we get to the second half of the year, we'll be expecting a significantly higher growth rate. That's a view that you share as well. And then secondly, can you sort of outline the major drivers of the EBIT growth as we look at 2024? largely gross margin you've got more on the opex sales uh to do fulfillment costs and things that you did last year so i have an idea of where that uh growth in ebit's coming from and then the third one is can you just give us a an idea on the category split how how premium's done maybe how beauty's done just just some ideas of how how things evolved in in in in 4q by by category if that's possible thanks

Thanks, Adam. So on the current trading and how things will progress throughout the year. So as I mentioned in the first question, the start into the year was similar to how we ended the year, but it was a positive start into the spring-summer season, and that has now continued into March. We do expect that we will see growth accelerate throughout the year. And so you mentioned about many companies coming out and talking about the second half. I think we take a bit of a similar view because at the moment we still see this low consumer sentiment actually continuing. But real wage increases will happen. Inflation has come down. Discretionary spend will go up. So consumption should return. On the next question around the major drivers of EBIT. So 2024 return to growth. The EBIT margin is progressing at the midpoint by 50 pips. The drivers behind that are twofold. So, gross margin at a group level, and remember that we have now the new segment reporting with B2B, B2C. Gross margin at a group level will be broadly flat, maybe slightly up, let's see, but broadly flat, whereby gross margin in B2C will be up, but that's compensated by the strong growth we see in B2B. And then we will see further improvements in fulfillment costs based on the fact that we continue to drive efficiencies as well as the scaling of our B2B business. And that then ultimately results in the EBIT margin progression. On your third question, the category split. So the substitute demand and given our health inventory position around fashion basically would result in The growth momentum being more around beauty. So here we saw for example for the full year double digit growth. We saw the pivot back into two year over year significant growth in off price. Premium just as a reminder is of course a category which is shop for Christmas. However, the whole design experience only went live towards the end of the year. So that's a category I think we should have an eye on this year. And other than that, there wasn't really much of a differentiation. I think the one to really point out is that pivot in off-price as well as the double-digit for the year-end beauty.

The last question comes from the line of Yasha with UBS. Please go ahead.

Thank you so much for taking my questions. So I got two, please. The first one is on active customers. Can you please give us some color on what percentage of your active customers after the attrition are still unprofitable and do you see for 2024 you'll still be losing some active customers? And then the second question is just a follow-up to the previous one on margin drivers. So On marketing, how are you thinking about that going into 2024 and is the Q4 run rate representative of what you are baking in for 2024? Thank you.

So on active customers, here, what is really important is that our, first of all, the GMV per active customer has increased, yeah? But so has also the profitability per active customer, yeah? We don't really differentiate or provide that information around like which categories of customers we see in there. But all in all, we have seen a significant increase in the profitability of all of our customer cohorts. And your second question, the margin drivers, so whether marketing is built into the EBIT progression that we're showing here, yes. So we intend to... slightly invest a bit more in marketing in 2024, but that has all been baked into the EBIT margin that we are guiding to.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back to Patrick Koffler for any closing remarks.

Thanks everyone for joining this short session today. And as said in my intro, we're happy to welcome everyone on our strategy update where we have many more Q&A sessions to come. And with that said, enjoy your day and hopefully see all of you soon. Thanks. Bye bye.