Zalando Se Unsp/Adr

Good morning ladies and gentlemen and welcome to the Zalando earnings call. The conference will be recorded. At this time all participants have been placed on listen only mode. The floor will be open for questions following the presentation. So please dial in to state your question. Thank you very much and let me now turn the floor over to your host Patrick Kofler.

Good morning everyone and welcome to our Q3 2026 earnings call. Today I'm joined by our CFO, Anna Dimitrova. Anna will kick off with a short business update before walking you through the financial developments of the quarter. Anna will then discuss our outlook and will be available for questions at the end. As each quarter 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. Now handing over to Anna, the floor is yours.

Thank you, Patrick. Good morning everyone and thank you for joining us today. In the third quarter we regained business momentum and increased adjusted EBIT year on year. Our performance keeps us firmly on track towards our full year 2026 guidance which we are confirming today. Let me start with the five key highlights reflecting our progress in the third quarter of 2026. First, in Q3 we delivered an improvement in growth and increased profitability. Reported GMV grew 7.5% and group revenue is up 5.1% year-on-year. On a performance basis, growth improved to 6.1% and 3.3% respectively. Adjusted EBIT reached 107 million euros, up 11% year-on-year, lifting our margin to 3.4%. Second, agentic commerce is opening entirely new growth opportunities and we are on the forefront. Zalando Extended is a great example. More on that shortly. Third, all three B2C apps carried solid momentum with Zalando and Lounge both improving. And the shift towards our more scalable capital efficient platform model is picking up speed. Partner business and retail media each grew double digits. Forth, B2B grew almost 28% driven by partner volumes in key merchant collaborations. Zeus Fulfillment added key wins in scale broke through with major new customers in the US and in the UK. And fifth, we are confirming our full year 2026 guidance. We expect reported GMV and revenue growth in the lower half of the 12 to 17% range, adjusted EBIT in the range of 680 to 720 million euros, CAPEX between 240 to 300 million euros, and Next, I will elaborate on the progress of our business, starting on slide 3. Let me quickly remind you of why Zalando has a unique competitive advantage in the AI race. Remember that we see millions of customers a day and take hundreds of orders a minute. Over more than 15 years, we have built the richest data in fashion and lifestyle, whether it's a software data or customer behavior data. No competitor has that, and none of them can buy it. Our B2C and B2B segments are powered by AI that's trained on and running on that data, driving growth and efficiency. Like we have done in the last two quarters, I will provide some examples of how our AI efforts have progressed this quarter, in this time focusing particularly on agentic shopping. Everyone is talking about agentic shopping. Let me show you why Zalando is best positioned to thrive. Consumer behavior is changing. Consumers are interacting with AI agents everywhere. And this is why we see Argentic Commerce as a great opportunity to create new seamless consumer journeys. We are approaching this shift from three angles. First, offering an Argentic shopping experience in the Zelando app via the Zelando Assistant. and already more than 22 million unique users visited the Lando Assistant this year. Monthly active users are up five times and high value actions such as add to basket are up seven times compared to last year. Customers that used the Lando Assistant during the shopping journey are twice as likely to complete the purchase. The system helps customers discover, evaluate and purchase fashion products more effectively. We make it our mission to ensure that Zalando is always the best place to start a fashion and lifestyle discovery journey. Second, we have what we call inbound agent e-commerce. When the customer is using a third-party agent, You will recall from previous calls that we lean into agentic commerce to meet customers where they are. We piloted Chachi BT ads in the UK. Initial results were encouraging and we are now evaluating its long-term use. We are also a launch partner for Google Universal Commerce Protocol in the UK. When our partners are with us, they automatically benefit from our agentic commerce integrations. Agenting is still a very small share of overall traffic, but it is increasing. Through early investments in generative engine optimization capabilities, we ensure Zalando is the top preferred platform for fashion and lifestyle questions by AI agents. By using direct integrations and targeted ads on external AI platforms, we can capture a new wave of shoppers who already know what they want and are ready to purchase. And third, we don't stop there. We are excited to pilot Zalando Extended, our outbound agentic commerce experience. Zalando Extended lets customers find and buy products that are not sold on Zalando from other online shops without ever leaving the trusted Zalando app. Zalando's own AI agent will securely buy them on their behalf. Partner shops benefit as well because their AI agent does the work. Partners reach Zalando customers and gain new sales without complex technical integration or changes to their logistics. It also takes Zalando's platform a step further. Starting with complex categories such as bulky home goods, it will, over time, open up an ever-growing range of products from shops across the internet, all in the secure environment of the Zalando app. Our launch partner is the furniture retailer West Wing, Europe's number one premium destination for home and living. In selected markets, you can already find their furniture in our search results and product catalog. At the moment, when you click to buy an item, you will be redirected to their site like an affiliate deal. From 2027, however, customers will be able to buy West Wing products directly between our Zalando app using our agents. We already are the leading fashion and lifestyle discovery platform in Europe and now customers will be able to use Zalando to discover and buy a much broader range of lifestyle assortment from across the internet. We are excited by this new opportunity. And with that, let me move to our second growth engine, our B2B operating system. Before the quarter's highlights, a milestone worth celebrating. Ten years ago, we launched Zalando Fulfillment Solutions. What began as a small pilot is now the go-to fulfillment solution for our partners. With zero fulfillment, ZFS has evolved, set to cross 1 billion euros in revenue, and is increasingly recognized as a turnkey solution for our own e-commerce and marketplace Fulfillment across Europe. I'm very pleased with the development across our B2B solutions. This quarter, Laskana, LC Waikiki and Champion choose ZEOS Fulfillment, cutting logistics complexity and maximizing inventory productivity via one-stop pool. SCALE is building momentum internationally, especially in the US and in the UK. We recently secured major enterprise deals with Neighborhood Intelligence, whose portfolio includes Bed, Bath & Beyond, Care Clans, and Bye Bye Baby, and Root Guild Group in the UK, and Brown Group decided to use Scale. Scale Studios, the new software as a service platform that replaces traditional photoshoots with AI-generated content, won Hugo Boss as a major customer. This win These wins validate our B2B strategy. Our infrastructure and software are competitive globally and a powerful growth engine for the group. Our B2B operating system offers a unique end-to-end spec from the logistic layer with user fulfillment to a scale and trade-by to overarching services such as content. This concludes the business update. Now I will move over to our Q3 financial performance. As a reminder, our reported financial results incorporate About You from July 11, 2025 onwards. This is why reported numbers are still slightly higher, even if we now lapped the inclusion of About You in the third quarter. To provide a like-for-like year-on-year comparison, I will refer to performer growth metrics that assume full ownership throughout the prior year period. Having now lapped the inclusion of About You, and as with any individual business unit, we don't provide standalone figures for this quarter onwards. Moving forward, our reported figures provide the complete, like-for-like picture of how our underlying combined business is performing. In Q3, we sustained our profitable growth trajectory. Group GMV reached 4.5 billion euros, a 6.1% year-on-year improvement performer, an improvement compared to Q2 and from the first half of 2026. GMV increased across all three consumer apps. The improvement was driven by our Zalando app and the growth of the partner business alongside strong momentum in launch. Performer group revenue growth also improved to 3.3% year-on-year reaching 3.2 billion euros driven by strong performance in retail media and B2B in particular. The gap between GMV and revenue growth reflects the strong momentum in our partner business. GMV, our primary top-line KPI, captures the full value of goods sold to customers bought by Zalando and by our partners. For partner sales, however, we recognize only our commission as revenue. We continue to deliver growth in adjusted EBIT. Adjusted EBIT rose 11% year-on-year to €107 million. Adjusted EBIT margin expanded by 0.2 percentage points to 3.4%, supported by lower fulfillment costs, synergies and B2B growth, partially offset by targeted investments in attractive offers for our customers and higher marketing costs. and About You improved its profitability in line with previous quarters. In Q3, we also sustained our synergy momentum, delivering mid-teens millions in group synergies. Over the nine-month period, we recorded 16.2% year-on-year reported GMV growth and a 16% year-on-year increase in reported revenue. Adjusted EBIT reached 376 million euros, up 14.5% year-on-year. Building on our performance through the first nine months, we remain fully confident in landing within our guided top-line ranges and in hitting the midpoint of our 2026 adjusted EBIT Guidance. Turning to B2C, Q3 delivered solid financial results while accelerating our shift towards a platform-led model. On a performer basis, GMV increased 6.1% year-on-year and revenue reached 2.8 billion euros, or 0.9% year-on-year gold. GMV increased across all three consumer apps, Zalando About You and Launch by Zalando. Performance on call of Zalando app was driven by continued acceleration in our partner business along with an improvement in our retail business. In terms of category performance, we saw a strong growth in our fashion categories directly benefit from a higher partner share and driven by all types of partners on our platform. Additionally, our lifestyle categories such as beauty and sport grew strongly. Partner share increased by 2.9 percentage points to 33.6%. Now, as we laughed about you, inclusion, we are making meaningful progress towards our 2028 Midterm target range of 40-50% partner business. Retail media revenues increased by nearly 18%, a stable development compared to Q2 pro forma 4. In Q3, retail media reached 2% of B2C GMB. Zalando Plus, our loyalty program, now has more than 22 million members and we added new partner benefits with Spotify and Duolingo across all 17 plus markets. In summary, our B2C business gained momentum while we continued our shift to platform-led model. The shift weighs on revenue growth in the short term, but it builds a more scalable business for the long term. Turning to customer metrics, Top-line growth in our B2C segment was primarily driven by two factors, more active customers and higher spending per customer. First, on the last 12-month basis, active customers grew 2.9% to 62.2 million and we added more than 600,000 active customers quarter on quarter. Growth was driven by loyal, the returning customers, whose share of our business continues to increase. Our PLUS program is a key driver. PLUS members order more frequently. Second, we are increasing our share of wallets as existing customers spend more with us. Average spend per customer increased 2.9% to €308, mainly driven by larger average basket sizes as more customers shop across several categories. In summary, we continue to successfully expand our customer base across our consumer apps while deepening engagement and share of wallet with existing customers. Turning to B2C profitability. Our B2C gross profit margin reached 41%, representing a 0.7 percentage points decrease year-on-year. This decline was primarily driven by targeted investments in attractive offers for our customers in our retail business, especially in sneakers. At the same time, our gross margin continues to benefit from positive contributions from our partner in retail media businesses. We delivered in Q3 B2C adjusted EBIT of 64.4 million euros, down from 76.6 million euros in the prior year period. This corresponds to an adjusted EBIT margin of 2.3% compared to 2.8% last year. The margin decline by 0.5 percentage points was linked to two factors. First, the decrease in gross margin and second, marketing spend was higher in the quarter due to an earlier start of our autumn-winter marketing campaign in Q3 rather than Q4, as well as our marketing activities around the World Cup. Both effects were particularly upset by synergies from the integration of About You and lower fulfillment costs. The logistic network reshaping continues to progress as planned. Looking ahead, we expect further improvements in our fulfillment costs throughout 2027 and 2028. So now moving to B2B, where double-digit revenue growth translated again into a profitability increase. B2B revenue reached 354 million euros, up 27.2% on a pro forma basis and accelerating again from last quarter. Zalando Fulfillment Solutions sustained in strong double-digit growth trajectory on the back of the growing partner business. Multi-channel fulfillment continued to grow strongly. This was primarily driven by major partner collaborations such as our strategic partnership with UK Retail OnX, which launched last year, alongside the recent launch with Max & Spencer in 22 markets in August. Solid momentum across scale and trade-wide further drove higher margin software revenue streams. This strong top-line revenue growth in B2B generated higher bottom line earnings and strong margin expansion. B2B gross margin increased by 2.2 percentage points to reach 20.6%. Furthermore, B2B adjusted EBIT more than doubled to €42 million, driven by overhead leverage and a higher gross margin from scaling zeros. The gross margin also benefited from higher ZFS volume reducing shipping and packaging costs, as more items could be combined into shared parcels. The corresponding adjusted EBIT margin expanded from 7.1 to 11.9%. Let me now walk you through the group P&L. Group cross margin decreased 0.9 percentage points to 38.7%. This reflects a 0.6 percentage points decline in BTC. We view the gross margin development in Q3 as transitory and continue to expect a broadly flat gross margin for the full year. Let's have a closer look at the cost lines, excluding adjustments. Fulfilment cost improved by 0.9 percentage points, driven by the lapping of ramp-up costs at our Paris and Dyson logistics sites, alongside operational efficiencies in content production and customer service. Marketing costs remained flat on the group level. Admin costs remained broadly flat, reaching 3.6%. On an unadjusted basis, the cost line improved by 0.7 percentage points due to a reversal of office impairments as we bring our employees back to the office next year. Other operating income and expenses also remained flat. As I told you in the Q2 call, On an unadjusted basis, we increased by 0.7 percentage points reflecting restructuring expenses, mainly relating to costs associated with the closure of our fulfillment center in Erfurt. Furthermore, we recorded additional restructuring costs for unorganizational efficiency measures, specifically at our headquarters in Berlin. And as usual, those one-off costs are reported outside of adjusted EBIT. Overall, our adjusted EBIT margin reached 3.4% up from 3.2% a year ago, driven by low procurement costs. In Q3, total adjustments to EBIT amounted 93.4 million euros. As mentioned last quarter, we expect around 380 million euros of total adjustments for 2026. Let me now turn to our balance sheet and cash flow development. We continue to operate with a negative working capital position. Negative working capital reached 424 million euros by the end of Q3. Driven by an increase in payables due to strong momentum in our partner business development, this reflects a 283 million euro improvement compared to the 141 million euros reported in Q3 2025. Inventories were slightly down year on year, while retail GMV grew. Looking forward, supported by the solid performance of our autumn-winter merchandise, with improving sell-through rates, we expect full-year inventory to stay at these healthy levels. We continue to see strong GMV growth in our partner business, which leads to higher trade variables. Now to our cash position, which remains solid. We close the quarter with €1.2 billion in cash and cash equivalents, down from €1.4 billion at the end of Q2. This position remains fully consistent with our capital allocation target of maintaining a cash reserve equal to roughly 10% of our trailing 12-month revenue over time. Let me walk you through the movements during the quarter. As most of you know, Q3 typically sees a cash outflow from seasonal network and capital changes. Furthermore, cash outflows from the effort restructuring and the about-you integration partially materialized in Q3, reflecting costs already provisioned for in the earlier quarters of 2026. As a result, operating cash flow decreased by 57 million euros, quarter on quarter, TAPEX of 61 million euros was driven by investments in fulfillment centers and further automation, particularly in Sweden and Germany, as well as continued investment in internally developed software. This concludes our financial performance review. Let me now move to the outlook. In Q3 Our business improved and we saw a good start into the fall winter season. Our full focus is now on executing a successful Q4 to maintain this solid momentum, driven by our plans for the upcoming Cyber Week and Christmas holiday season. Current trading remains on track, reinforcing our confidence that full-year topline results will land within our traded are updated target ranges. Regarding profitability, we remain committed to deliver the midpoint of our adjusted EBIT guidance range. We expect margin expansion predominantly to improvements in our OPEX lines as well as continued synergy delivery. With that, we fully reiterate our financial year 2026 guidance as updated in August. Let me now turn to the key takeaways before we open for the Q&A. We are advancing our agentic capabilities and are excited about the new opportunities they bring. In business to consumer, we delivered growth improvement compared to H1. In business to business, we are delivering strong double digit growth and a significant margin expansion. The integration of About You is progressing well. So now let's open up for your questions.