Zalando Se Ord

Good morning and welcome to our Q3 2024 earnings call. Today I'm joined by our CFO, Dr. Sandra Dembeck. Sandra will briefly walk you through the financial developments of the quarter and discuss our outlook. She is available for questions afterwards. 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.

Thank you Patrick. Hello and good morning also from my side and thank you for joining today's call. So today I'll do a bit of a recap of our pre-release in October before we dive into the full set of results. Let's get started. On October 10th we shared our preliminary headline numbers for Q3 as well as an updated guidance as our performance in the quarter had exceeded our initial expectation. Consumer demand had increased across the industry and we saw a strong start to the autumn-winter season compared to last year's slow beginning. The third quarter has shown that our updated ecosystem strategy positions us very well to see such demand upticks. And this is also reflected in the number of active customers, which continued its positive trend from Q2. We increased active customers by half a million quarter on quarter, so now again above $50 million. And with the strong Q3 results, we report a solid nine-month performance. In the first nine months, the Zalando Group delivered GMV growth of 4.4%. Our adjusted EBIT came in at $293 million, and the adjusted EBIT margin improved by 1.7 percentage points to 4%. In our announcement on October 10, we also upgraded our full year outlook to reflect the stronger performance in the third quarter, while keeping our expectations for the fourth quarter largely unchanged. Today, we are confirming that we are on track to deliver the upgraded full year targets. So let's now turn to number four and five of the executive summary to share some facts on the execution of our updated ecosystem strategy, which we presented to you in March. We remain really excited about our updated strategy and the material progress we continue to make with the execution of it across both segments. In our B2C business, we have now started to increase our investments into key growth initiatives to support top-line acceleration in 2025 and beyond. And this includes the introduction of a loyalty program. I talk about some of the growth initiatives later in the presentation. In our B2B business, here we are continuing our trajectory of double-digit revenue growth. And in Q3, we enabled ASOS as a sage channel for CEOs that were expanding the value proposition for partners. With CEOs, we are now serving nine marketplaces, as well as brands' own e-commerce channel. So let's now dive deeper into our Q3 performance, turning to page three. In Q3, we strongly accelerated our top-line growth quarter on quarter. Our GMV came in at 3.5 billion euros and is up 7.8% year-over-year. Revenue is up 5%, translating into 2.4 billion euros. The significant quarter-on-quarter acceleration in growth was entirely driven by the B2C segment and the aforementioned strong start into the autumn-winter season. On profitability, we continued to deliver margin expansion in the third quarter. Adjusted EBIT reached 93 million, which represents a significant increase of 70 million year-over-year. Our adjusted EBIT margin improved year-over-year by 2.9 percentage points to 3.9% on the back of higher gross margins and a lower fulfillment cost ratio. So looking at the first nine months, our financial performance translates into 4.4% GMV growth and 2.6% revenue growth. We delivered a significant year-over-year improvement in our adjusted EBIT of 125 million to 293 million euros. So with these results, we keep delivering on our ambition for 2024 of top-line growth, coupled with continued margin expansion. Let's turn to page 4, our B2C segment performance. Starting with top-line growth, In Q3, GMB and revenue growth accelerated to 7.8% and 4.3% respectively. The acceleration was mostly driven by a strong autumn winter season start in Q3 on soft comparators. Our sports, beauty, and kids propositions delivered strong growth, supported by our strategy to elevate these assortment areas into powerful lifestyle propositions. Likewise, we saw strong growth across all our business models. Our partner business continued to outperform our own retail business, showing double-digit growth. And our ZMS business continues to grow, following its return to growth in the second quarter. Moving to the bottom line, we're also pleased with our progress on margin expansion in the B2C segment. In Q3, we delivered a significantly better gross margin, and this was mostly driven by better-than-expected sell-through in our retail business, supported by the strong season start. Our partner business, as well as ZMS, also contributed to the strong gross margin development. And as in previous quarters, we continue to see lower fulfillment costs, albeit to a lesser extent, which were partly offset by higher marketing investments. Our adjusted EBIT reached 87 million euros. The adjusted EBIT margin increased year-over-year by 3.5 percentage points to 4%. So looking at the first nine months in our B2C business, we delivered GMB growth of 4.4% and revenue growth of 1.8%. Adjusted EBIT came in at 275 million, a doubling of our adjusted EBIT margin year-over-year to 4.2%. Let's move to page five, the B2C customer metrics. Starting on the left, our active customers grew by 0.5% to 50.3 million. With that, we returned to year-over-year growth. In terms of quarter-on-quarter growth, we served half a million additional customers compared to the end of last quarter. Moving over to the right, average basket size increased by 3.8% to €61.10 as a result of a higher average item value, more than offsetting the decrease in order frequency. And as a result, GMV per active customer increased by 1.8% to €300. Let's now turn to page 6, our B2B segment performance. So in Q3, the B2B business continued on its trajectory of double-digit revenue growth. With revenue growth of 11.1%, it is significantly ahead of group revenue growth. And as in previous quarters, the growth of B2B was predominantly driven by sales fulfillment and our more mature ZFS business. Adjusted EBIT in Q3 amounted to 7 million euros with a margin of 2.8%. The year-on-year lower profitability is driven by front-loaded investments into future growth across sales and trade bite. And these investments are primarily overhead, but in the case of sales also include higher fixed costs. Looking at the first nine months, We've delivered revenue growth of 11.5%. Adjusted EBIT came in at 19 million with an adjusted EBIT margin of 2.8%. So let's now move on to the group P&L on page 7. And here we look at the Q3 performance on the right-hand side. Our group gross margin improved strongly year-over-year by 4 percentage points to 40.7%. All three business models in our B2C segment, so retail partner business and ZMS, contributed to this significant increase, with the better inventory management in our retail business contributing the most. Supported also by the strong start to the autumn winter season, we saw improved sell-through rates and an increase in our share of full price sales. And as always, the positive and strong gross margin development in B2C was partly offset by the scaling of our B2B business, which comes with a structurally lower gross margin. Moving on to fulfillment costs, they improved by 1.2 percentage points. We continue to benefit from favorable order economics, which is reflected in the higher average basket size, as well as from the scaling of our sales fulfillment business. Coming to marketing, similar to Q2, our marketing costs increased by 2.1 percentage points. Here we deliberately raised our investments in performance marketing to capitalize on the better top-line momentum in the third quarter. And at the same time, we continued to scale our brand marketing campaigns to play a greater role in our customers' lives. So we engage consumers all across Europe in various brand building campaigns, including our latest brand positioning campaign called What Do I Wear? Administrative and other expenses declined by 0.6 percentage points. And so to conclude on the bottom line for Q3, the strong improvement in gross margin combined with the lower OPEX delivered an adjusted EBIT margin of 3.9%, a year over year improvement of 2.9 percentage points. So let's now move on to page eight, and here I would like to make some general remarks around some of the growth initiatives which we have launched to support top line growth in 2025 and beyond. So during our strategy update in March, we mentioned that we see ample growth opportunities in the market as reflected in our new midterm top line guidance. And then in our earnings call in August, we mentioned that we are starting to increase our investments in strategic growth initiatives to support top line acceleration in 2025 and beyond. So let me give you a brief overview of some of these initiatives. First up, In our B2C business, we aim for driving customer loyalty. So here we are evolving our Plus program from a paid membership program into a free points-based system where loyalty members can unlock various benefits. And while the current Plus program mostly focuses on convenience benefits, the updated version will revoke customers with a much broader set of benefits based on their engagement with us. This new experience was successfully tested in Spain in July, and in Q4 we expanded it to France and Austria. And it is planned to be further rolled out to the majority of our markets by the end of 2025. The incremental increase in top line will more than offset any running costs, apart from the launch of the program triggering a revenue deferral during the rollout phase. Second, in B2C, we are expanding our customer experience beyond the transaction, and we aim to make fashion discovery more inspiring and entertaining. Efforts to get more eyeballs and time of our customers and users on our platform will deliver growth. We offer example investing in self-produced content, such as live shows and teaser content, as well as external content creators. And we're also progressing fast with the ramp up of our new tech hub in China, which allows us to tap into local expertise in social e-commerce. And we have already hired key leadership roles and further recruitment is well underway. And then lastly, on our European logistics network, which supports the future growth in B2C and B2B, here we remain committed to improving our logistics network by focusing on localized and personalized convenience for our customers. So we went live with our new fulfillment center outside of Paris at the beginning of October and adding additional capacity. France is one of our fastest growing markets and the go-live of the fulfillment hub will drive faster lead times across France and neighboring countries. With the added capacity of Paris and in 2026 with the added capacity of Frankfurt, we have sufficient capacity to support growth in the midterm. We are excited about these growth initiatives, and they will support us to achieve our mid-term targets, which are growth of 5% to 10% CAGR through 2028, as well as adjusted EBIT margin of 6% to 8% by 2028. So you can see we are executing our ecosystem strategy at full force. So now turning to slide 9 for networking capital. In Q3, our networking capital continued to be negative benefiting from our improved inventory management. Our inventory levels are 2.3% lower than last year as a result of the improved inventory management and going forward, we will gradually increase our inventory position to support our growing retail business. For the full year, we continue to expect negative net working capital. Trade receivables increase driven by the strong B2C business performance and the favorable seasons start towards the end of the quarter. And this development was more than offset by higher trade payables due to the overperformance of the partner business and higher inbounds in September. So moving to page 10, the development of cash and cash equivalents. Our cash and cash equivalents remain strong at about 2.4 billion euros, almost 500 million higher than last year. The main driver was a higher operating cash flow as a result of higher net income and improved net working capital. Compared to the second quarter of 2024, we recorded a decrease of around 180 million euros in cash and cash equivalents. And this is primarily due to the seasonal net working capital increase of over 240 million euros as we inbounded inventory for peak trading around cyber and Christmas. Cash capex amounted to around 40 million euros as we continue to invest in key capabilities like logistics and technology, albeit at a lower speed. So this concludes the financial update for Q3. Let's move on to the outlook on page 11. We confirm our upgraded full-year guidance as published on October 10. For the first nine months, we have improved GMB and revenue growth to 4.4% and 2.6% respectively. And as a result, we expect GMB to grow for the full year between 3% to 5% and revenue to grow between 2% and 5%. This improvement is driven by a strong start to the autumn winter season in the third quarter. And the strong start brought forward some of the demand to the third quarter, especially when we compare it to last year where we experienced a delayed start to the season. Nevertheless, current trading is fully on track and makes us confident that we will land within our updated top line ranges for the full year. In terms of profitability, in the first nine months, we achieved an adjusted EBIT of 293 million euros, 126 million euros above last year. largely driven by an extraordinarily strong Q3 result of 93 million euros. And this development led us to upgrade our adjusted EBIT outlook to 440 to 480 million compared to 380 to 450 million euros previously. As already mentioned earlier, the positive business momentum reinforces our commitment to increase our investments into key growth initiatives leading to more modest EBIT development in the fourth quarter. With regards to cash, we managed to further adjust the speed of our investments in our logistics network to optimize network utilization. And consequently, our capex investments for 2024 were lowered from an initial range of 250 to 350 million to now around 200 million euros. Our networking capital guidance remains unchanged. So this concludes the outlook for 2024. Let's move to the summary. So let's wrap up with the key takeaways of today. First of all, we are making material progress on the execution of our ecosystem strategy across both segments B2C and B2B. In the first nine months of 2024, we accelerated topline performance and delivered strong margin expansion. We are fully on track to deliver the upgraded full-year targets. For 2025, we expect an acceleration of growth over 2024 in line with our midterm guidance as we increase our investments into key growth initiatives. So let's now open up for Q&A. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and 1 at this time. The first question came from the line of Luke Holbrook from Morgan Starley. Please go ahead.

Yeah, good morning, everyone. Thank you for letting me ask questions. My question is on the inventories, which increased about 450 million euros quarter on quarter compared to the half year period. That upswing is about twice what we saw last year. I just wondered why that was the case. I know it's down a couple of percent year on year, but on a quarter on quarter basis, it would be interesting to hear your opinion. And when you're discussing maybe less or more selling of high or full priced items, is this a conscious decision here to basically do less clearance, do less sell through, resulting in that higher inventory levels into Black Friday, into the Christmas holiday season? Just be really interested to hear your thoughts there. And then the second question is just on the plus program. You discussed some of the early success that you'd seen in Spain. It'd just be really interesting to hear some of the frequency uptakes that you saw from customers adopting that program and some of the learnings that you're then building into Austria and France. Thank you.