Boozt AB

STO:BOOZT

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to the Boozt Q2 Report 2020. Today, I'm pleased to present CEO, Hermann Haraldsson; and CFO, Sandra Gadd. [Operator Instructions] Speakers, please begin.

[Hermann Haraldsson, Co]

Good morning, and welcome to our Q2 2020 presentation. If we go to the first slide with the key highlights, just want to run through quickly the highlights that we will touch on later. Net revenue growth was 37% in the quarter, with Boozt growing 29% and Booztlet 168%. And it's also important to highlight that we were negatively impacted by the currency by the NOK change of agreement with our large brand partner and the fair use policy. We have a higher average order value due to the lower returns, which is mainly driven by the migration towards the categories with Kids, Sports, Beauty and Men, plus our new fair use rule. Gross margin was positively supported by a higher share of campaign buys, some contractual improvements as well as the stock write-down in Q1. We are happy that the adjusted EBIT margin is 11.5% for the quarter and driven by improvements in operations, especially within our fulfillment center as well as general scale effects. Talk about the fulfillment center. We have now agreement with the current staff provider, where we have agreed that we will take over all staff in the warehouse when we in-source and start running it around in January 1 next year. And in our view, this reduces the risk of in-sourcing the operations significantly.We have opened a Boozt store in Malmö as well as a temporary outlet Booztlet store at the old location in Copenhagen. They're both open and have actually performed quite well and also are performing quite well at the moment. So that's good to see. Our cash flow has been strong during the quarter, and we have all-time high cash position of SEK 900 million at the end of the quarter.And finally, we maintained the revenue growth guidance but upgrade our expectations for the adjusted EBIT margin to be between 3.5% and 4.5%.If we go to the next slide, looking at the KPI highlights, customer satisfaction on Boozt.com, we can see that our Trustpilot ranking is unchanged. And there was a slight decrease in our Net Promoter Score in the quarter. This is mainly due to the fact that there was some congestion in the distribution during the start of the quarter due to the corona measures we saw towards the end of the quarter that NPS was back in the 70s, and it has remained also during the start of Q2 in the 70s. So customer satisfaction is still very high.If we go to the next slide, the average order value, as you can see, we have quite a good increase in the average order value. And this is due to lower returns, stemming from different category mix with higher share of Kids, Sports, Beauty and also Men, of course, also less sales of dresses, which typically have a higher return rate and also our fair use policy. So the development in the average order value was very, very encouraging in June the quarter and has been so basically for the first half of the year.Going to the next slide, the cohort development. We can see that for the last 12 months, we have increased the active customer base by 7%. So in the last 12 months, we have had almost 1.8 million customers. The buying frequency of these customers is more or less unchanged, slightly impacted by the fair-use policy and the higher amount of new customers towards the end of the period.True frequency, if you exclude the dark customers from our fair use policy, we can see that there's a slight increase in true frequency. So all in all, looking at all our KPIs, they are progressing very, very well during the quarter and the first half of the year. So with this, I would like to hand over to Sandra Gadd.

[Sandra Gadd, Group Chief Financial Officer]

So if we look at the group results, it concludes the storm net revenue growth of 36.7% for the group in the second quarter. Currency had a negative impact on net revenue growth of around 2 percentage points and relates primarily to the weakening of NOK against the SEK. Also impacting net revenue growth negatively was the change to the consignment like agreement with a large brand partner in second half 2019. This change of agreement structure impacted net revenue growth negatively with around 2 percentage points in the quarter. Finally, the implementation of the fair use policy impacted net revenue growth negatively with around 1 percentage point. Adjusted for these 3 factors, the group net revenue growth was around 42%. The net revenue growth was strong throughout the quarter with the highest growth in the beginning and a slightly lower growth towards the end of the quarter. The higher-than-expected sell-through resulted in limited availability for parts of the high-performing inventory towards the end of the quarter, which had a negative impact on growth.Throughout the second quarter as well as looking into the third quarter, we have invested heavily in available campaign stock to ensure enough stock availability for the summer and early fall. The top-performing categories in the quarter was Men, Kids, Sports and Beauty as well as Boozt. The change in product mix, Boozt has taken an increasingly higher share of the group total sales as well as a relatively high share of new customers impacted their return rate positively. On a like-for-like basis, the return rate decreased around 5 percentage points. Our growth was particularly strong in Denmark and Finland while Sweden grew slightly below average.Net revenue growth in Norway was negatively impacted by the depreciation of the Norwegian krone. For the first half of 2020, group net revenue growth was 23.8% with negative impact from currency of approximately 1 percentage point. Together with the impact from the consignment like agreement, as well as the implementation of the fair use policy, net revenue growth for the first half was negatively affected with around 4 percentage points. Excluding this impact, net revenue growth for the first half was close to 28%. The gross margin improved with 0.7 percentage points to 41.5% in the second quarter, driven by an improved product margin. The improved product margin was a result of us selling around half of the items included in the extraordinary write-downs during the second quarter. The difference between a normal product margin of around 40% and the realized higher-margin in the second quarter as a result of the extraordinary write-down that we did in the first quarter was approximately 1 percentage point of the total gross margin in the second quarter. This in means that if we wouldn't have done the extraordinary write-down and still sold those items that we sold in the second quarter at a margin of 40%, the gross margin would have been 40.4% in the second quarter. The underlying product margin for goods that were not written down was below last year as the markdown increased to fuel a high sell-through during the uncertain times in April and May, however, partly compensated by the higher share of campaign inventory, which in June led to a higher product margin compared to the same month last year. The change in agreement structure with a large brand partner also impacted gross margin positively.For the first half of 2020, the gross margin decreased with 1.6 percentage points as a result of the extraordinary write-down of SEK 57.8 million that was performed in the first quarter in order to allow Boozt.com securing a strong felter of in-season stock while Booztlet could sell the written down items. The gross margin was positively affected by contractual improvements, including the change of agreement structure with a large brand partner as well as the high share of campaign buys. We expect to retract parts of the gross margin decrease from the extraordinary write-down we made in the first throughout the remainder of the year as well as we sell the remaining written down items.Moving on to the adjusted EBIT. It was SEK 141 million, which corresponds to a significant improvement of 6.2 percentage points. Improved profitability is driven by the improved efficiency and fulfillment, including lower return handling costs and general scale effects from the strong net revenue growth as well as improved gross margin. The adjustment in the quarter consists of social charges and IFRS 2 costs related to the group's LTI programs of a negative SEK 21 million. The relatively high-impact is related to the increased share price during the second quarter.Looking at the first half of 2020, the adjusted EBIT of SEK 80.1 million corresponds to an improvement of 1.8 percentage points. The improvement is driven by the improved operating cost ratio, however, partly offset by the extraordinary rise on stock in the first quarter. The adjustment in the first 6 months consists of one-off costs, including write-down of SEK 35.1 million related to the closing of the Beauty by Boozt store in Copenhagen. The adjustment also consists of social charges and IFRS 2 costs related to the group's LTI programs of a negative SEK 12.5 million.So if we move to the next page. We can see that the net revenue growth for Boozt.com was 28.6% in the second quarter. Throughout the quarter, we had a tailwind with high new customer intake while many physical stores were closed and customers finding their way to online shopping to a higher extent than prior to the COVID-19 pandemic. Towards the end of the quarter, the net revenue growth called off slightly. Even if somewhat fueled by the extraordinary write-down of stock, it was in season campaign performed by the buying team that really did the difference and allowing us to keep a strong high revenue growth throughout the quarter without jeopardizing profitability. Our typical customer remains still women, and even though the growth in the Men's category was very strong in the quarter. However, we see that many of our female customers to a higher extent brought into other categories such as Kids, Beauty and Sports. This supports the average order value that increased to SEK 821 in the second quarter. The impacts with lower returns as the product mix changed as well as the relatively high new customer intake was also positive for the development of the Boozt.com segment. And even if it's still early days, our initial analysis shows that the behavior of our new customers from the second quarter are much alike our older customers, indicating that our assumptions in relation to expected profitability for new customers remain valid. The rebuy rates from these new customers are at the same level as last year.The net revenue growth in the quarter was negatively impacted by currency, the change to a consignment like agreement with a large brand partner as well as the introduction of the fair use policy. The adjusted EBIT of 11.2% corresponding to an increase of 5.9 percentage points are driven by operational improvements and general scale effects.Moving on to the next page. We see that Booztlet accelerated its already very strong momentum in the second quarter. The net revenue growth of 168% for the quarter and 144% for the first half of 2020 proclaims the accelerated growth momentum. One of the main strategies starting Booztlet was that we've seen a hole in the off-price segment that we assume to be a particularly strong tool in times of economic uncertainty as customer tends to shop at lower price points during such time. During the second quarter, we can conclude that those assumptions remain valid. The customer acquisition cost during the quarter was even more attractive than previous as the general marketing spend in the Nordics was reduced temporarily. Availability of stock was good throughout the quarter, and gross margin from Booztlet was improved as a result of the extraordinary write-down of stock that we performed in the first quarter where Booztlet has been the main channel to clear that stock. This enabled the average order value increase of 11% to SEK 682 in the quarter. The average order value for the first half of 2020 was SEK 684, corresponding to an increase of 8.7%. Out of the total items written down in the first quarter, approximately 60% of the items are sold as per today. At this point, we expect to sell main parts of the remaining goods at competitive prices during the second half of 2020. The adjusted EBIT margin was 14.5% in the second quarter, an improvement of 2.4 percentage points, driven by the gross margin improvement. The adjusted EBIT margin for the first half of 2020 was 7.2%, corresponding to a decrease of 3.6 percentage points. The decrease is related to the extraordinary write-down of stock in the first quarter. And please note that Booztlet took its fair share of its write-down and have not seen the full benefit of that yet.So if we move on to the next page. We can see that the other segment had a net revenue of SEK 2.9 million and an adjusted EBITDA of minus SEK 1.6 million. There are several factors impacting the financials for this -- for the other segments. As previously communicated, we have closed the Beauty by Boozt store in Copenhagen in order to reduce the deficit for the segment. In July, we opened a temporary Booztlet shop in the same premises as our contractual agreement of Logent to keep the store open until we can execute the exit cost agreement in April 2022. As a result of the COVID-19 pandemic, our physical Booztlet shop outside of Copenhagen was obliged to be closed for parts of the first and second quarter. Since this store, on a running basis, provides the segment with positive adjusted EBIT contribution, the fourth closure also affected the segment negatively. However, we have not accepted any support from the government related to the fourth store closure, which would have reduced the loss of the segment to around SEK 1 million. However, we don't believe that accepting such contributions would be fair as we are fully operational online. This is also why we have chosen to donate the Corona-related sickly compensation from the Swedish authorities to charity. Thirdly, we opened a new Beauty by Boozt flagship store in Sweden in June as our Beauty brand partner continues to emphasize the importance of a premium physical shop in order for us to be able to sell attractive brands online. As communicated at the last investor call, we expect significantly lower costs going forward compared to the previous Beauty by Boozt store. Because of the changes we made in our physical stores, the other segment for the first time, contributed with a positive adjusted EBIT to the group in July, not only as total but for all the 3 open stores individually. Looking into the remainder of the year, we expect a result around breakeven for the other segments.Moving on to the next page. Here we see the development of the cost ratios in the second quarter. The fulfillment cost ratio decreased to 11.1% in the second quarter, which corresponds to a decrease of 2.6 percentage points. The improvement is primarily driven by operational efficiencies in the Boozt fulfillment center however, also positively impacted by the lower return rates in the quarter as the number of items handled in the warehouse was lower in relation to net revenue. Distribution costs were also positively impacted by lower cost per shipment as we improved contracts as well as decreased the level of dependency on the specific distribution partners, which enables a more flexible and cost-efficient business model for distribution. The performed changes and efficiency gains in the fulfillment and distribution setup has not compromised the customer experience negatively. Looking at the fulfillment cost ratio for the first half of 2020, we are very satisfied with the decrease of 2.2 percentage points. And we can also conclude that we are ahead of our plans set out and also previously communicated where we said that we expect savings in the fulfillment cost ratio of around 1 to 2 percentage points over the period 2020 and 2021 compared to 2019. We expect to continue to gain efficiencies, especially after the in-sourcing of warehouse operations in 2021. We are on plan with the transition and believe that we're in a good position to in-source the warehouse operations with further improved cost efficiency looking into the following year. However, looking at individual quarters for the coming year, it should be expected that we will make investments that will have a slight effect on the cost ratio to ensure long-term efficiency. It could, as an example, mean that we sacrifice some of the full-scale efficiency during the fourth quarter in order to run in-house and outsourced processes side by side.Moving on to the marketing cost ratio. It decreased with 0.6 percentage points to 8% in the second quarter and 8.9% for the first half of 2020. During the second quarter, the general marketing spend decreased along favorable customer acquisition costs for the more than 300,000 new Nordic customers that we welcomed during the second quarter. Our absolute spend wasn't planned for the quarter, but the attractive customer acquisition prices meant that the return on investments was well above our normal level. We would have liked to spend more in marketing, but given the lower stock availability in June due to the strong sell-through, the conversion rates would suffer our new customers. As we see an acceleration in the online penetration within our segment, we will continue to be aggressive in new customer acquisitions as long as the unit economics makes sense. Hermann will actually come back to this a little later in the presentation.Looking at the adjusted admin and other cost ratio, it decreased with 1.8 percentage points to 8.4% in the second quarter while the decrease for the first 6 months was 0.9 percentage points. Relative decrease in cost of personnel, as well as other administrative costs, is related to scale effects from the strong growth as well as the improvement in the other segment that contributed with around 0.4 percentage points of the saving in the second quarter.Looking at other costs, one of the more significant cost items apart from personnel is accustomed to knowing, the cost that increases in accordance with our sales force in Norway. As mentioned on previous calls, new exception regulation came in place as of April 2020. It allows e-commerce businesses to be excluded from customs on items with the transaction price below NOK 3,000. We have been ready to comply with the new regulation and after some initial delays on how to implement it from the customs authority side, we expect it to be up and running during the summer. However, now we have run into complications due to interpretation from different Norwegian authorities. Hence as for now, we do not expect any benefit from this during the current year. The adjusted depreciation cost ratio decreased with 0.4 percentage points to 2.4% in the second quarter due to scale effects and an impairment of the Beauty by Boozt premises that we made in the first quarter. For the first half of 2020. The adjusted depreciation ratio increased with 0.1 percentage point to 3.2%. The increase was driven by the revaluation effect of SEK 5.5 million related to the Beauty by Boozt lease contracts made in the first quarter.So if we move on to the next page, which might be my favorite one, we are very happy to see that the net working capital of SEK 86.5 million corresponds to an all-time low, 2.3% of the last 12-month net revenue, a very strong improvement of 8.9 percentage points. The decrease is mainly driven by the lower inventory levels and higher accounts payable that are related to both ordinary as well as in-season campaign stock. The high discounts on the campaign stock had a positive impact on inventory, lower accrued income also improved the net working capital in the quarter.Moving on to CapEx and the investments in intangible assets in the quarter. The capitalized development cost of SEK 13.8 million corresponds to the same absolute amount as in the first quarter. Despite the higher relative change compared to last year, the absolute numbers remain relatively low. The increase is driven by the assets developed by the Boozt Innovation Lab. Boozt Innovation Lab is the former Touchlogic that we acquired in Q4 2019 that now develop proprietary systems and apps for the Boozt Group. Investments in fixed assets was SEK 10.1 million in the quarter. For the remainder of 2020, we expect investments in fixed assets in the range of SEK 50 million to SEK 60 million as we continue the build-out of other stock.Moving on to the operational cash flow. We are extremely satisfied to see that the operational cash flow of SEK 493.8 million, which is a step change compared to last year's cash flow and a result of the significantly improved operating profit and a strong improvement in the working capital. Cash flow from changes in working capital amounted to a positive SEK 326.8 million, that is to be compared to the positive SEK 31.5 million in 2019. This means that the free cash flow for the quarter was a remarkable SEK 470.6 million for the second quarter and SEK 447.9 million for the first half of 2020. Given our current forecast, we expect a positive free cash flow also for the second half of the year. We also expect a significant improvement in net working capital from last year as we expect the relative high share of campaign buys to remain high also throughout the rest of 2020. Finally, we ended the quarter with an all-time high cash position of 900 million, that puts us in a very good position to pursue further strategic opportunities to even higher extent than before. And that concludes the financial update. And back to Hermann.

[Hermann Haraldsson, Co]

Thank you, Sandra. And I would like to go to the next slides, the cohort economics. You will see that we have updated our customer lifetime value calculations. And we've talked before about that the customers, historically, have shown as kind of a subscription-like behavior and it seems as if they continue now that we're 9 years down the road, we launched in August 2011. The customers are actually becoming increasingly attractive. We have updated the calculations based on higher-order value, which stems from the change in the category mix, as we have been trying to do over the last 2 to 3 years, with more Men, Kids, Sport and Beauty, also with return behavior with a fair use clause, and finally, and very important, with a very much improved cost structure. And you can see that we now have a payback earlier than before, still more than 12 months which is very positive. So at the current customer acquisition costs and the combination of a high average order value and a very lean operational setup actually provides us with a customer unit economics that are second to none in the region. So basically, we are able to pay more for a new customer than anyone else and still being profitable. So this is very promising. And this also tells us that we should focus and continue to focus on growth.If we go to the next slide, on the strategic priorities, it's now almost exactly 3 years down the road since our IPO. We believe that we have delivered on our promises at the ARPU, even though margin progression has come slightly later than we expected. We also believe that we are doing good progress on our strategic priorities. As you know, we want to build the leading Nordic destinations for Fashion and lifestyle shopping for the mid- to premium-priced customer. We have many new brands. We have introduced many new brands during the first half of the year and will continue to do so during the year, and we have strong growth in Men, Kids, Sport and Beauty. At the same time, we also want to build the leading Nordic off-price destination. So basically almost doubling our accessible market in the region. And we saw for Booztlet that we accelerated even further during the second quarter. As we've also said before, we are always repeating ourselves, but this is how it is. We are trying to build a business that when we have the scale, will generate double-digit operating margin. It will not be tomorrow. But eventually, when growth slows down, we are quite confident that we will be able to provide a higher -- very high operating margins. And we saw kind of the potential of the model during Q2. Our cost base is very much under control. The focus we've had on improving, especially the supply chain also in the warehouse, has paid off meaning that we are in -- very much in control. And this allows us to continue to aggressively focus on relevant growth opportunities.Turning to the next page. As Sandra mentioned, we have more cash than ever before, SEK 900 million. And having a cash position now close to SEK 1 billion. I would like to touch upon our basic capital allocation principles. As before, our main priority is organic growth. We will continue to invest in capacity. We've been investing in our CapEx, in our warehouse automation, in our ware capacity, we'll continue to do that. We will continue to invest in inventory, both invest in growth in the old categories, if you can say so, Women and Men as well as the new categories, Kids, Sports and Beauty and also explore opportunities within new adjacent categories. We will continue to invest in innovation, very much internal innovation that can improve the customer experience and the customer journey. We have invested in our own robot management system as you know, we're constantly investing in our app and all internal systems, making sure that we can let technology to do the hard work. And then finally, we will continue to invest in people.At the same time, as we are investing in the organic growth, we will also have maybe a more open mind towards bolt-on acquisitions. That could be to get some category expertise within categories where we don't have that legacy. It could be within technology. We bought our -- so far OUR only acquisition has been Touchlogic. Last year, that has become Boozt Innovation Lab, and that has proven to be a very, very big success. And also, we also might consider acquisitions that could improve or strengthen our Nordic market presence. And then, of course, as you know, we have evaluated many Nordic assets since the beginning or especially since the IPO. And there are many assets for sale at the moment. But so far, as you know, none has fitted our strategic or financial requirements, and we have a quite strict receive in regards to kind of what makes sense for someone like us. And then finally, if there are no options and if we have excess cash, of course, we will return that to the shareholders.Go to the next slide. It's actually often hard to be precise on what you don't want. It's much easier to be precise on what you do not want. Basically, the Silver Rule as Nassim Taleb calls it. What we will not do is that we will not pursue acquisitions in unrelated areas. We will not expand the core business outside the Nordics. We still believe there's a huge growth potential within Nordics. Unit economics in market, unit economics is religion to us. So we will not do anything that might jeopardize those unit economics. And also, we're in this for a long run, so we will not prioritize short-term margin improvements over the longer-term opportunities. So if there's a trade-off between margin or profitable growth, we will definitely go for the profitable growth. And finally, we will stay extremely focused on cost control and the operational efficiencies. It's very, very strong for us to be in the Nordics, focused on a strong segment with only one warehouse operation and a very lean operations, and we will continue to do so. We like being one too few in this company. So we are quite firm on what we will not do.Going to the last slide, to the outlook. As said before, we will -- we remain or we reiterate the net revenue growth outlook of between 20% and 25% for the full year. I think it's quite important to highlight that we expect the growth to be in the second half to be skewed to us towards the late part of the second half, basically in Q4. We have seen from the current trading that revenue is at the lower end of the corner and that has a lot to do with basically being lower stock for the spring/summer items from the very strong sell-through. Profitability, however, is very strong, and it's considerably stronger than last year. And this is why we upgrade our EBIT margin guidance where we now expect it to be around 3.5% to 4.5% for the full year.So this concludes our part of the presentation, and I would like to hand over to the operator for any questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Daniel Schmidt from Danske Bank.

[Daniel Schmidt, Research Analyst]

Hermann and Sandra, I hope you can hear me. A couple of questions from me. And it's -- I think you mentioned a couple of times when it comes to stock availability, being a bit of an issue towards the end of the quarter and you also allude to that when it comes to sort of trading in Q3 stating that growth rate, is if I understood it correctly, was towards the lower end of the 20% to 25% corridor that you have for the full year. But on the other hand, could you give us -- shed some more light on what this means in terms of gross margin and also what you've seen in terms of return rates going into Q3? I think I'll stop there.

[Hermann Haraldsson, Co]

Yes, this is Hermann. Yes, of course, the strong sell-through means that in some sizes and styles, there's limited selection. So obviously, that affects the growth. The -- as there's a high amount of campaign goods, obviously, we have -- we have strong gross margin, considerably stronger than last year, which is also why we've said that the operating margin for the quarter is higher than last year. So as you know, we are this -- we are buying 6 months ahead. And even though we have had a very strong campaign buy, there is a limit how much you can replenish during the quarter. And now we're seeing and kind of moving towards the autumn/winter sales. And for that, it's mainly September, that's when it kicks off. And again, based on the customer cohorts and the behavior, we have kind of optimistic about the growth for the second half. I don't know if you asked because I actually forgot the last part of your question, Daniel.

[Daniel Schmidt, Research Analyst]

No. I was asking about return rates as well, which have been slowed down quite dramatically in Q2 and what's sort of happening in Q3?

[Hermann Haraldsson, Co]

Yes. Return rates have come slightly up partly because women are buying dresses again. And it's slightly changed. But also the category mix with this mix towards the lower return on categories as well as the fair use flows means that it's still around -- it's still down compared to last year-on-year. So I think that the combination of more kind of attractive mix and the fair use is giving us lower terms. And actually, we believe that this will continue -- that it will continue for the remainder of the year.

[Sandra Gadd, Group Chief Financial Officer]

And also Booztlet is taking an increasingly higher share, and there are -- their return rates are lower.

[Daniel Schmidt, Research Analyst]

Exactly. So mix is helping you as well when it comes to the platform -- platform mix?

[Hermann Haraldsson, Co]

Yes.

[Daniel Schmidt, Research Analyst]

And then if we summarize all this, and of course, it's still only halfway through the quarter and September is, of course, a very important month and that's still ahead of us, but you are usually loss-making in Q3. Would it be sort of a fair assumption that, that's not going to be the case this year?

[Hermann Haraldsson, Co]

That's a very fair assumption, yes.

[Daniel Schmidt, Research Analyst]

Okay, good. And then Sandra, I think you quantified a bit how much the recovery of the write-down was, I think you said 1 percentage point in the quarter and that would imply around SEK 12 million, if I'm correct? And you also said that you will -- or are you hoping to recoup a bit more of this in H2? Could you shed some more light on that?

[Sandra Gadd, Group Chief Financial Officer]

Yes. It's always hard to find a good way to describe how you recruit these margins, but your assumptions are fair. Of course, we don't know exactly what it will be. We think that we can trade the inventory but we want to give flexibility to our trading team, of course, to use those products to -- for our new customers to come in at that. But we have had the -- stock is left, then we think we probably can sell it around the same level with the same recoup that we did with the first half.

[Daniel Schmidt, Research Analyst]

Yes, okay. And then thirdly, on the cash position, you said that you had SEK 900 million in cash, not in net cash, but still, that's quite a substantial improvement compared to the start of the year. And you're also guiding for continued positive cash flow in H2, and you're highlighting that sort of M&A is maybe a bit more on the agenda now than it was before. But still, you want to be sort of quite prudent, and you want to stick to your sort of your rules of engagement, so to speak. Is there a situation where you believe that you can make all the investments that you need to make and maybe bolt-on and still return cash to shareholders? Or is that too optimistic?

[Hermann Haraldsson, Co]

Yes. It's -- I think the answer is like it remains to be seen. Of course, we are -- as you know, we're almost chickens with regards to M&A because we always calculate the unit order economics. And if it doesn't make sense, we turn it down. But of course, we expect that we could -- that even though we did some bolt-on acquisition that -- once the growth goes down, obviously, you have no interest in sitting on excess cash. But we believe that at the moment, in the current situation, where we have a large turmoil in the industry, in the fashion industry or fashion industry in retail in general, it's good to have a high amount of cash. So for us, being in a strong cash position and also seeing a strong customer lifetime value, that's the key because basically, this year we -- it means that we are able to pay much more for a new customer than anyone else can do and where it makes sense. So I think that it's very good for us to have a very, very strong cash position going forward.

[Daniel Schmidt, Research Analyst]

Yes. And then finally, when you talk about sort of building a business that at scale can generate a double-digit operating margin, and I think you said that's when sort of growth slows down. But your medium-term target is to get above 6% in 2022 and sort of when growth slows down, what are you thinking in terms of years into the future?

[Hermann Haraldsson, Co]

The -- as we said, we maintain the medium target. And -- but we are in no hurry of getting up to a double-digit operating margin because that would mean that we don't have the growth opportunities obviously. And again, I don't know if I came through with the chart, but the CLV slide is, for me, the key slide of this presentation because it demonstrates that there are still extremely good unit economics in acquiring new customers. So it would be foolish for us to go for a 10% EBIT margin if we can have this long-term customer lifetime value. So definitely, we are in no hurry of getting to this double-digit margin. Hopefully, we won't get there over the next 5 years because that would mean that growth will slow down.

[Operator]

And the next question comes from the line of Niklas Ekman from Carnegie.

[Niklas Ekman]

Yes, a few follow-ups here as well. Firstly, on the return rate, maybe you said this, maybe I missed this, but you said 5 percentage points lower return rates. Can you quantify what kind of impact that has to the gross margin? That's my first question.

[Sandra Gadd, Group Chief Financial Officer]

No.

[Hermann Haraldsson, Co]

It doesn't really have an impact on the gross margin, Niklas. It's more on the fulfillment costs where it has the biggest impact. Gross margin is unaffected on the return rate.

[Niklas Ekman]

Okay, okay. Fair enough. And I was curious whether you see this as a sustainable impact. I know you mentioned here that return rates increased a little bit again in Q3. But do you -- for a long time, you've been talking about a structural increase in return rates, and this has now reversed in 2020. Do you think this is a temporary change in consumer behavior? Or do you see a chance that the current rates are sustainably going to be more stable or maybe even decreasing going forward?

[Sandra Gadd, Group Chief Financial Officer]

Yes. I think in terms of -- for us, I think it's a matter of the product mix that we have. We have -- Boozt has taken a higher share of the total sales, and they have, typically have a lower return rate. We also see like the categories that we are really pushing like Men and Sports and Kids and Beauty, of course, they have low return rates. And those are the categories that we focused on also pre-corona or pre this quarter. But now, of course, it's got a little extra tailwind this quarter, but that's also where we aim to put our focus going forward. So it might not be as low as in Q2, but the more structural change where we can benefit from a lower return rate we believe is sustainable.

[Niklas Ekman]

But within certain categories like dresses, for instance, are return rates still increasing? Are Men's wear, are those categories see increased return rates? I mean now you're talking about mix effects, but I mean kind of like-for-like, are return rates still growing?

[Sandra Gadd, Group Chief Financial Officer]

It's -- no, not really. But if you look at -- depending on the mix of customers. So all the customers tend to return [ more ], so on the very old cohorts, they are a little higher. But not in general. But of course, dresses are still higher return rates.

[Hermann Haraldsson, Co]

I think also, Niklas, the fair use actually has had quite a high-impact. Quite a considerable part of the increase in return rates was actually driven by these extreme customers that were borrowing or close and then returning it. So I think that kind of reduced the increase in return rates for the old categories like the rest. So I think that kind of -- we've seen this mix effect and the fair use has lowered the return rate, and we believe that's sustainable. Although it would not be at 5% because we will buy more addresses, but it will be low.

[Niklas Ekman]

Yes, yes. Very good. And you mentioned these issues with the Norwegian customs. So no impact in 2020. What kind of impact do you expect from 2021 and going forward? Is there any way to quantify what that would mean?

[Sandra Gadd, Group Chief Financial Officer]

Yes. Well, basically, we pay 8%, around 8% in customs of the total Norwegian sales. So that is the impact.

[Niklas Ekman]

Okay, excellent. And I was curious when you talked about acquisitions and category expertise, what exactly are you looking at here? Are you looking at strengthening specific verticals like Soft Home, Sports, Men, Baby, are these kind of categories where you're looking at expanding? And are there many acquisitions available in these categories? And are you talking specifically about online players? Or are you at all considering acquiring store-based players?

[Hermann Haraldsson, Co]

Yes. We, of course, it's -- as we've said before, we're focused on categories. And we are of course, we are expanding into the Kids category, the Sports category, et cetera, and as well as Booztlet. So we are focused on the categories. And if we can do anything that can accelerate the growth within those categories, adding some subcategories within these categories, we will do this. As we said before, the industry is in turmoil. So there's kind of -- there's a lot of -- there's a lot for sale out there. Not that we're looking into anything specific, but we are -- always have an open mind. But so far, none has met our criteria and -- because we are quite picky because we believe, first, the key thing is the unit economics, customer lifetime value, average order value and then unit economics. And unfortunately many early e-commerce players, they were too focused on revenues and not enough on order unit economics. So which kind of makes them less attractive. So we are extremely disciplined, of course, with a higher organizational capacity, with world-class warehouse operations, world-class platform. Of course, that allows us to look are there any opportunities that could kind of be built on Boozt and that could benefit from being a part of the Boozt universe.

[Niklas Ekman]

Okay. They're very clear. And finally, an old favorite question. Amazon have finally confirmed plans to enter the Swedish market. I'm just curious on your take on this. What kind of product overlap do you see? Do you expect any dramatic changes in pricing when you compare products on your website compared to their prices for similar products? Do you expect any changes in actions by you, by Zalando by other players to kind of meet the increased competition from Amazon? Just curious on your thoughts here.

[Hermann Haraldsson, Co]

I think with Amazon entering the Nordics and much anticipated, we are happy that we are not a marketplace, and we are happy that we are in the mid- to premium-priced segment. We know that they cannot beat us on speed with regards to deliveries because they cannot offer -- they don't have a competitive edge of delivering free next-day delivery because this is what we're delivering. So with regards to kind of a competitive position, we believe that we are extremely strong towards marketplaces in the low to low-end of the mid categories. We know that brand overlap is very limited. And if there's an overlap, that could typically be with someone in a store in -- it could be in Germany or the Netherlands or in Italy or France, selling an item, which will take maybe a week or 2 weeks to come to the customers. So I don't foresee that we will change our behavior. We are still focusing on providing an outstanding customer experience and focus on being the best brand partner for the strong brands. So it actually doesn't change anything from our part.

[Operator]

And the next question comes from the line of Daniel Ovin from Nordea.

[Daniel Ovin, Senior Analyst]

Hermann and Sandra. Congratulations on a very well-executed Q2. So I had some more questions around the gross margin. So except for the unwinding of the write-down, I also wonder if there were any impact from mix, i.e., selling more Beauty, Kids and Sports? And I guess that would be then a negative impact. And also if you had any positive impact then from more consignment sales and perhaps there are other effects also worth mentioning such as risk-sharing with brands, et cetera. So if you could give any more information there?

[Sandra Gadd, Group Chief Financial Officer]

Yes, sure. So of course, there are slight effects on -- depending on which category we'd push, of course. But in this quarter, the main effects come from the campaign buy. And that was bought at really good prices. So that was very good in relation to that. As we said, we have 1 big brand partner that we changed the agreement structure with, in October 2019. And there's an impact on that. But otherwise, we don't have any significant impact from changes in agreement structures.

[Daniel Ovin, Senior Analyst]

And then following also on this lower return rate and impact on margin here. So I guess, even though it's not on the gross margin, but then it has help your fulfillment cost? And of this 260 basis point gain on the lower fulfillment to sales, can you quantify in any way for us to understand how much of that comes from the lower return rate?

[Sandra Gadd, Group Chief Financial Officer]

Yes. So if you look at the year-to-date savings in the fulfillment cost ratio, around 20% of that saving is related to lower return rates. The rest is our increased efficiency and better contracts and distribution and things like that. And of course, if you want to tweak it towards the quarter, and we have lower return rates in the second quarter, so the impact was a little higher there.

[Daniel Ovin, Senior Analyst]

Okay, perfect. Then just a final question here also when it comes to marketing spend, so down as a ratio of sales year-over-year, and I also understand that that cost per click et cetera, has been down and allowing you to get more so-called bang for the buck, but how's been [indiscernible] now into Q3? And how do you think about marketing expenditure for the last half of the year?

[Hermann Haraldsson, Co]

Daniel, we lost your last part of the question. Can you repeat the last question again?

[Daniel Ovin, Senior Analyst]

Yes. So it was on marketing spend. So it's down as a percentage of sales year-over-year. And I assume, I heard it's lower cost per click, et cetera. But how do you think about marketing for the last half of the year? Are you planning to keep spending more? And now as cost has gone up, is it likely to be even higher than last year? Can you say anything about how you think about marketing for the second half?

[Hermann Haraldsson, Co]

Yes. We will definitely invest more in marketing. It's probably slightly too low for my liking. But again, as I said, the costs were down, and you don't want to overpay for new customers. And also, again, having the stock availability at the low end, you can't -- there's a limit how much you want to invest in getting new customers because if you don't have the right stock, then don't convert the stock. So that's why they kind of -- we ended up having a cost base in marketing slightly below last year. Absolute spend was higher, and we will increase the cost ratio for the remainder of the year. And again, with improved unit economics and the customer lifetime value, we actually should increase the market spend. So we intend to spend more marketing for the second half of the year.

[Operator]

And the last question comes from the line of Michael Benedict from Berenberg.

[Michael Benedict, Analyst]

Yes, I have a couple. First one on full year CapEx. Do you have any number in mind for FY '20?

[Sandra Gadd, Group Chief Financial Officer]

3%.

[Michael Benedict, Analyst]

3% of sales?

[Sandra Gadd, Group Chief Financial Officer]

Yes. That's correct.

[Michael Benedict, Analyst]

Great. And then just secondly, on full year guidance. Can you give a bit more color on what return rate assumptions you've made over the second half of the year and does it include your full year guidance?

[Hermann Haraldsson, Co]

Yes. We are, obviously, not assuming a reduction of 5 percentage points for the full year. But it will be probably a couple of percentage points lower than last year for the remainder of the year.

[Operator]

As there are no further questions, I'll hand it back to the speakers for closing remarks.

[Hermann Haraldsson, Co]

Thank you. This is then the end of the call. Thank you very much for attending. And yes, I guess that we will talk during the next couple of weeks. Thank you much, and bye-bye.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.