Boozt AB

STO:BOOZT

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, welcome to the Boozt Q4 2019 Report. Today, I'm pleased to present CEO, Hermann Haraldsson; CFO, Sandra Gadd. [Operator Instructions] Speakers, please begin.

[Hermann Haraldsson, Co]

Good morning. Everyone, and welcome to our Q4 results call presentation. So let's just dive into and go to the first slide, the key highlights. We had 20% growth in Q4, and 24% growth in '19 if you adjust for the exchanges, which is in the agreement with that large brand, where we can't take the full revenue as reported revenue. And the reported net revenue growth was 18% in this quarter and 23% for '19. Boozt.com was at the low end of 12%, of course, negatively impacted by soft markets in Sweden and Denmark and also because we chose not to chase unhealthy growth and also our 'fair use' implementation, we'll come back to that later. And then Booztlet continued as a rocket with almost 200% growth in Q4. We've an all-time high average order value and gross margin that has improved 2 percentage points. Fulfillment costs are lower and adjusted EBIT increasing 76% in the quarter and from -- by 3.2% points to 9.6% in Q4, and a full year improvement of 0.9 percentage points to 3.2%. Our outlook for 2020 is net revenue growth of 15% to 20% and an adjusted EBIT margin improved from '19. We've also updated our medium-term outlook, but we'll come back to that later. If we go to the next slide. Again, the most important KPIs, our customer satisfaction. You can see that the Trustpilot score is still very high at a good 4.6 and 5 stars. Our NPS in the quarter was slightly lower than one year ago, and this is only -- or solely to do with our 'fair use' implementation where we blocked some 9,000 customers, they were really disappointed pushing hard and doing everything we could to give us a bad score understandably. But very encouraged, you can see that the NPS is up again, and in January it was 71. So this was a temperative, and our customers are as happy as ever before. If we go to the next page, the order development. I think the most important KPI to look at that is the average order value. It grew 2% to a new all-time high of SEK 845 in the quarter. And this is solely to do with our new 'fair use' implementation that gave us fewer returns in the quarter than we saw in Q4 2018. If we again go to the next page, next slide, the cohort development. If we look at active customers, we had 1.6 million customers during 2019, up from 1.4 million. Average number of orders per active customers was slightly up. And the true frequency was down. Again, the true frequency was affected by the 'fair use'. So if we would have -- if we correct for that, then the true frequency would have been unchanged, and that's very good. Going to the next slide, looking more closely at the average order value. Again, as I said it before, it's driven by our 'fair use'. We have seen that the net average order has been stable in the last 2 years. We've seen higher gross average order value, meaning that they've been putting higher-priced items or more items in the bucket, but that has been offset by higher return levels as some of the existing customers return more than new customers. We implemented the new 'fair use' rule late in the quarter, and we saw already that the return levels they were unchanged compared to '18. And we can see now that the higher gross average order value now is materialized into higher net average order value. And this is something that we will see in Q1, Q2 and Q3 of 2020. So it's quite encouraged to see that the exercise we do to try to reduce the unfair returns is making good progress. If you go to the next slide and look at the gross margin. We can see that despite a very challenging market with a very aggressive and quite extraordinary promotor behavior, with the initiative we made to protect our gross margin has been successful. We -- a part of that has been due to -- big part has being due to contractual improvements, especially our shared risk-taking with the brands. We've had a higher share of campaign buys, meaning that we went quite cautious into the quarter and did less upfront buys and bought more into season and that paid off. And then finally, we don't want to chase unhealthy growth. And even though that they might kind of reduce the revenue growth slightly, it's not really that you want to have. So that's why we did not want to choose unhealthy growth also because our inventory positon is very good. And still, if we look at our customer-use economics, they are more or less the same as before, a new customer is loss making the first year. And -- but we have a payback within 18 months. So that's still quite encouraging. And with the average order value going up, we foresee that the customer-use economics will stay quite favorable going forward as well. Going to the next page and looking at fulfillment costs. We saw in the quarter that fulfillment costs, they were trending lower. And we expect that to continue into 2020. We have improved our operational processes. For instance, if you look at return, handling costs, that's decreased quite dramatically. Just to give an example, if you look at the chart at the bottom of the page, you can see how the cost per return item has decreased quite dramatically. And as we have somewhere between 4 million or 5 million items returned, it has a quite dramatical effect if you can save SEK 1, SEK 2 or SEK 3 per handled item. So that's been very encouraging, and also our new robot management system also has allowed us to be more efficient and starting to reap the benefits of the automation. Then finally, as most of you know, we have an external staff provider at the warehouse and a stronger management of that staffing and the way they work has also contributed to significant improvements. If we look forward to '20 or '21, we anticipate that the cost per hour will be low. It has to do with that we have terminated the contract with the current staff provider, and it will end in December this year, and we expect a significantly improved contract with either the current staff provider or someone else or alternatively to do it ourselves. You can ask yourself you know why are we doing it now? And let's do with that we've been working with the same staff provider since 2011, and they have been a quite important part of our journey as they provide stability during our hyper growth periods. Now that we are in control, it's our investment in the warehouse. It's all our automation, it's our warehouse management system. So the complete infrastructure in the warehouse is ours. This means that the current setup was painful and external staff provider is just too expensive. So -- and also with now with the new and very experienced fulfillment management team, we believe that we're placed to either improve the agreement or to do it ourselves. Going to the next slide and looking at Booztlet. Booztlet continues with a very, very strong momentum and Booztlet, again, we believe it increases our addressable market. It reaches its customer segments that we would not be interested in with Boozt.com. We also believe it's hedged against any economic downturn and especially at the moment with a very intense climate with the market sitting on high amounts of stock. This creates huge opportunities for Booztlet. And also, as you know, we created Booztlet as a kind of defensive measure to our life-cycle management but in late '18, we saw that there was maybe a bigger potential than we expected and started to build a Booztlet organization, and with that in place in the beginning of the year with dedicated buyers, et cetera, and their dedicated team, we've seen Booztlet do a rocket growth. And we expect that growth to continue. We are using all the experience we have from Boozt.com and to fund that into Booztlet, and especially our Boozt Innovation Lab, it's the former Touchlogic that we bought late last year, has a big role to play for that because we are improving the mobile app experience quite dramatically. We see that there are strong growth opportunities for Booztlet. It's a very fragmented competitive landscape. We don't see any direct competitors. Most of our peers, they are doing the defensive model that we don't think is optimal. We believe that customers like more the T J Maxx model where you can browse categories, brands, et cetera. So we don't have any direct competitor in the market. We have a lot of new markets coming up. We just launched in Norway, a soft launch. And with the new custom regulations in Norway, that's a big potential for us. We are partnering with many more brands to manage their excess inventory in the Nordics and doing own-buy and special productions to kind enhance this "everyday store" feeling now. So you can see that now that we are marketing more, we can see that will have a great impact. And speaking about marketing, the customers love some value -- or the customer-use economics are quite attractive. Contrary to Boozt, a new customer is profitable first year and costs less to attract. So we are pushing much more marketing, and we'll continue to do that. If you go to the next page and looking at the online business only. Meaning, excluding the physical stores, we can see that the online business is progressing more or less according to the plan as we set out at the IPO. The online business meaning Boozt.com and Booztlet.com did an adjusted EBIT margin of 3.7%, which we believe is quite close to what we expected when we did the IPO. So we are -- that's mentioning the physical stores. They are, as we see it, a temporary problem, and the most important thing for us is to look at how is the online business progressing, and we believe it's progressing in a very, very healthy way. If we go to the next slide, I would like to hand over to our CFO, Sandra Gadd.

[Sandra Gadd, Chief Financial Officer]

Thank you, Hermann. So if we move on to Page 12. It concludes what Hermann just talked about. The net revenue was up with [ 7 points ], 18%, corresponding to EUR 1.050 billion in the fourth quarter. Net revenue was negatively affected with around 2 percentage points from the change of agreement structure with a large partner. Our decision not to chase any unhealthy growth, that's very high discounts in December, also affected our growth. In addition, the various policy implementation also had a slight negative impact of approximately 1 percentage point on the growth in the quarter. The gross margin was up with 2 percentage points to very satisfying 43.2% in the quarter. The main reason was contractual improvements, including the change of agreement structure with a large partner. However, we also saw a slight improvement in the product margin in the quarter and that was driven by our disciplined pricing and supported by the healthy inventory position and a higher share of campaign buys. Finally, the adjusted EBIT margin for the quarter was up 3.2 percentage points to the all-time high, 9.6%, driven by the improved gross margin and improving operating cost ratios. So all in all, we believe that we ended '19 in the best way possible. If we look at the full year, our net revenue growth was 23%. The absolute growth was SEK 642 million. And in a declining market, we demonstrated that we continue to take significant market share in the mid-to-premium segments. The full year gross margin was 39.7%, which is only a slight decrease compared to last year's 40%. We believe that the performance towards the end of the year indicates that we can keep the gross margin stable around the level we earlier anticipated, also when market competition is extraordinary promotional. Looking at the adjusted EBIT of 3.2% for the full year, we demonstrated that the actions we've taken and especially in fulfillment, shows our ability to increase profitability, both in relation to '19, but also if we look into 2020 and beyond that. The realized adjusted EBIT for the full year in absolute terms, is substantially higher than the minimum level guided at the beginning of '19, where we had a revenue growth above 27%. This illustrates the importance of high average order value and the potential for high absolute profitable orders. So if we move on to the next page. Here, we see that Boozt.com grew 12.4% in the quarter and 18.5% in the full year. The EBIT margin improved to 10% in the quarter and 3.1% for the full year. The gross margin improved in the autumn/winter season, as we remained focused on the customer lifetime value versus customer acquisition costs, and therefore, did not chase any unhealthy growth in a very promotional markets, that we have especially seen in Denmark and Sweden. And this, of course, impacted our net revenue growth negatively. Our categories, Beauty, Sport and Kids, are growing the strongest and a record high average order value of SEK 845 in the quarter was driven by a lower returns from the introduction of the 'fair use' policy in November. Boozt.com has a healthy inventory position also when we look into 2020, which gives us possibilities and flexibility in the market that remains very challenging. So if we move on to the next slide. Here, we continue to see a very strong momentum for our rocket growing Booztlet, with a net revenue growth of almost 200% in the fourth quarter and 133% for the full year, combined with a steady adjusted EBIT margin around 10%. We continue to invest in this very attractive segment where the customer acquisition cost remains beneficial. To continue the positive momentum, we are intensifying the market investments in this segment as well as we're launching in the new markets. We started off with Norway, where we did a soft launch in Q4. To secure the hyper growth, we benefit from the high inventory levels in the industry that gives us opportunities to buy high-quality stock at attractive prices. So we're moving on to the next page, in the segment, Other. Here, we see a positive development, driven by a strong performance in the physical Booztlet store. The Beauty by Boozt flagship store in Copenhagen continues to be impacted by higher rent costs, low traffic and low conversion rates, which is the reason that we currently are evaluating the future strategy of the store. But all in all, the full year net revenue was SEK 27.7 million for the segment Other, with an adjustment EBIT loss of SEK 15.6 million, and this is what is in line with what we previously communicated. So moving on to the next slide. We are satisfied to see leverage in the fulfillment cost ratio of 1.2 percentage points in the fourth quarter. This corresponds to 0.7 percentage points if we exclude IFRS 16 effect. We expect this trend to continue, and we have seen it in the first half of Q1. The marketing cost ratio decreased with 0.4 percentage points in the quarter as the marketing spend was lower towards the end of the quarter. We held back on our spending due to the very high discounted market. Adjusted admin and other costs improved with 0.5% in the quarter and was unchanged if you exclude IFRS 16 effect. And this is since we continue to invest in personnel. If we look at the full year, we conclude that fulfillment cost was on par with last year as the strong fourth quarter under the new management team in the fulfillment center made up for the weaker development in the first 3 quarters of the year. We will continue to invest in automation, but expect to continue to gain leverage through improved operational efficiency as we demonstrated in the fourth quarter. Marketing cost decreased with 2.2 percentage points in '19, and we believe that this is 1 percentage point too much. The missing marketing investments had a negative impact on the net revenue growth of the year. The relative cost of personnel increased for the full year as we continued to invest in strengthening our different teams, including building the team and organization, allowing Booztlet to continue the strong development. So then we can move on to the next page. And here, we can see that our net working capital is up with 1.4 percentage points to 12.7%. However, if you exclude one-offs of approximately SEK 7 million, that is constituted of receivables on the Norwegian customs, and that is on returns not yet received, as well as inventory sold back to one of our partner as the consequence of the change in the agreement structure, the net working capital would have been 10.7%, which would have been an improvement compared to last year. In addition, approximately SEK 25 million of invoices related to the Boozt media partnership was later in December compared to November last year, and this affects comparables for the year. CapEx in the fourth quarter mainly consists of the finalization of AutoStore phase 3. Capitalized development cost relates to development of our platform and in relation to last year, the capitalized development costs include development performed by the new Boozt Innovation Lab as from the fourth quarter. The operational cash flow increased from SEK 24.7 million to SEK 55.8 million in the fourth quarter, and that was driven by the improved operating profit. For the full year, the operational cash flow improved from a negative SEK 13.8 million to a positive SEK 76.5 million. We expect an improved operating cash flow in 2020 from stronger earnings, and we also expect a positive impact from working capital changes. CapEx is expected to be around the same level as in '19 if we build out the major part of AutoStore phase 4. But there are some uncertainties on the timing of the build-out and whether it will be done in late 2020 or if one part will be pushed into 2021. So this concludes the walk-through of the financials. And now Hermann will take you through our updated medium-term expectations.

[Hermann Haraldsson, Co]

Good, and let's go to the next slide, which is the slide with our medium-term financial ambitions set at the IPO, Page #19. If we look back in May '17, we expected a growth midterm of between 25% to 30%, and an adjusted EBIT margin above 6% in medium term. And if you look at the net revenue growth process, we believe we're spot on the target. We are where we should be. Of course, the growth was higher in the beginning and trending lower at the end, but we believe that's achieved, whereas the EBIT margin progress has been slightly below expectations. It has partly something to do with a kind of postponed operational leverage, but mainly due to the Beauty segment or the physical Boozt stores being significantly more expensive than expected. Again, remember that the online-only had an adjusted EBITA of 3.7%. But we believe that we now are on a clear path to reach the above 6% target in 2022. So if you go to the next slide. And those of you who met us at the IPO, you will remember that we said that we expect the gross margin to go down and not go up and that we expected it to go -- trend towards the 40%. I think the only thing we didn't expect was that it would go that fast to this around 40% level. It just went faster than expected. And you might ask, what are the reasons for the gross margin to go this fast towards 40%? First of all, this online migration, where you still have 80% of the market being offline, it's creating a very unstable environment. And you will always have parties in the market that are sitting on excess inventory, they have made poor inventory planning, and that they will be desperate to get some cash. We see now, especially now that you have high inventory levels, both with off-line and on our retailers. In '18, we had unusual weather where the summer -- basically summer came, was very long, and there was kind of high inventory levels going into '19 as well. And finally, you have to remember that we are price takers. We are not driving any lower prices, but we cannot command a higher price than others are charging in the market. The market is very transparent. And as long as we can match the prices, we get the same but the customer does not accept to pay 5% or 10% more than they would be paying at some other, let's say. And also, finally, you have to remember that we are focusing on building our brand relationships and we're doing this for long term and strengthening the Boozt brand perception. This is also why we are not that aggressive and not participating in chasing this unhealthy growth. If we go to the next slide and look at operational leverage. You can say that the operational leverage that we have seen has not been achieved to the degree expected at the IPO. It's especially our fulfillment costs, we have seen that the automation that we made has not been levered to lower costs, mainly due to intentional redundancy. When you're having hyper growth, growing 50%, it's difficult to forecast, and you would rather have more staff than less stuff to be sure that you can deliver on the promise of what you own today, you would get free of charge tomorrow. Now that we're growing more strongly and in the hyper environment, so maybe 20%, 25%, then it's easiest plan. So it's getting easier, so we can reduce this lag and focus more on relationships, and also you tend to fall a bit in love with the robot so -- and forget the people around. So we also have been slightly focusing too little on improving the manual processes around the automation. The current contract with staff provider, taking into consideration that we have made all investments in the infrastructure, is just too expensive. And also, we have seen an inflationary pressure in distribution costs. Of course, the distributors, they want more money, and we don't want to give them more. So there's a constant battle going on there. If you look at the admin and other costs. The Boozt stores have just been too expensive. So that has been affecting highly. We've also invested in staff, strengthening the platform team as well as the teams around the new categories and Booztlet. So that's an investment for the future. And finally, marketing costs, we are seeing scale effects from the offline marketing slightly. And online marketing spend is growing, in line with revenue, but we have other spends. We cut marketing too much down in '19, and we intend to increase our marketing spend in 2020. 2019 was the first year ever, where we spent less in absolute terms in marketing than the year before that, that should not be the case. Going to the next page, looking at our financial ambitions through 2022. If you go to the left-hand side and look at the net revenue, our plan is to outgrow the Nordic online market significantly and keep on expanding our market share. What are the key drivers? We estimate -- it is difficult to get good estimates or good insight into how the market is growing. But we estimate that the market is still growing around 10%, and it probably will continue to grow around that rate for the foreseeable future. We want to continue to invest in the highest customer satisfaction in the market. And we still want to acquire new customers, and our growth is very much driven by our ability to acquire these new customers. But we don't want to sacrifice our use economics. So we're still focused on the customer lifetime value and not overpaying, so focusing on the customer relationship cost. And as long as the ratio is favorable as it is, we continue. If not, we will spend less and put more into the EBIT. We want to continue to invest in Booztlet to fuel the hyper growth, but also we have to -- we want to play the long game and invest in relationships, both with customers and with the brands. On the adjusted EBIT margin. We are quite confident that we will exceed the 6% margin in 2022. And the key drivers are the basket size. Gross margin will stay the same, around 39% to 40%. Fulfillment ratio will improve. Admin and other cost ratio will improve. And also the marketing cost ratio will slightly improve, but that's intentional. We don't want to cut the marketing cost because we still want to use marketing to grow fast and much faster than the market. But I will elaborate more on that later in the presentation. Going to the next slide. We want to continue to outgrow the Nordic online market significantly. We are steadily going towards this Nordic online leadership with the best-in-class customer satisfaction, but still, we are quite religious about not overpaying for new customers, be it in super discounting or paying for the marketing. So we are still staying very disciplined. We've seen that we've been growing our sales in absolute terms, around SEK 70 million over the last 3 years, and I think it's fair to assume that this is the rate in absolute terms going forward, plus and minus. Again, we want to do a significant market share expansion and still delivering our customer promise of the best service delivery and fastest deliveries in each of the territories in the Nordics. If we go to the next slide and look at the path to a higher EBIT margin. Then I can say that we have a very clear path to exceed this 6% EBIT margin in 2022. The unchanged gross margins at 39% to 40%, how is that is supported? It's supported by our mid-to-premium market position, which is extremely strong and proved to be extremely valuable in this market, providing this high basket size. We can also see that, that market also gives us opportunities to increase the seasonal campaign buying and also being the biggest customer of most of our Nordic brands, we can see that we are improving contracts and improving the terms. Fulfillment costs, we expect them to go down somewhere between 1 and 2 percentage points. We are now heavily eliminating the redundancy and slack in the processes. We've seen quite dramatically improved productivity from our new robot management system and also the improved contracts with suppliers and the improved rate we will have, either with our own staff or with a staff provider going forward will also support a lower fulfillment cost. So we're quite confident that fulfillment cost will go down. Admin and other costs also will go down by at least 1 percentage points. It has to do also with the scale effects where the cost base will grow slower than revenue growth. We also will see positive effects from reducing losses in the physical store, in the physical Beauty store in Copenhagen. And finally, a new custom regime in Norway with reduced customs will also benefit us on that path. And then finally, looking at the marketing costs, we are -- we intend to keep offline marketing stable at a high level. But again, as we grow, the ratio will go down and keeping the -- and then keeping on our marketing spend in line with revenue. We expect the marketing cost ratio to slightly increase in 2020 due to too little investment in 2019. And I think this leads nicely into the next page. So if we go to the next page, please. Looking at the basket size, which I hope you understand is our favorite page and favorite chart. If you look at the cost split per order with an SEK 808 market size. You've seen it before, and I think what is very important to us, is that most of our cost items are absolute costs. It could be Beauty cost, it could be distribution cost, it could be services across, even marketing cost, we must do pay for order. And going forward, you can see that we expect fulfillment and distribution go down from SEK 111 to SEK 99 or less, admin and other go down. But I think the most important thing is to look at marketing. So even though marketing might go down from currently maybe SEK 81 per basket to SEK 73 per basket. This is still more than our peers care for to be because the basket size of SEK 808 and being more than 60% higher than our closest peers, allows us as a cost ratio to spend a significant amount in marketing, which also, I think can show you kind of a path, how we can improve our growth and -- even beyond 2020 and continue to improve the EBIT margin. So I think that it's very important to focus on that still, even though we will reduce marketing, the average spend per basket; it's still it's relieving and we can afford to pay significantly more than our closest peers. If we go to the next and the final slide, looking at the outlook for 2020. We expect a net revenue growth between 15% and 20% and the adjusted EBIT margin, we expect to improve from '19, meaning it would be higher than 3.2%. And the medium-term targets, just to reiterate, we want to outgrow the Nordic online market significantly to expand market share and to exceed the 6% adjusted EBIT margin by 2022. So this concludes our longest presentations so far, and I would like to hand over to the operator for the Q&A session.

[Operator]

[Operator Instructions] The first question we have is from the line of Daniel Schmidt from Danske Bank.

[Daniel Schmidt, Research Analyst]

Just a couple of questions from me then. Starting with the fulfillment cost improvement that you've shown. And so I understand that the work to improve that started in sort of the mid of Q4, and we should see the full year effect from that, of course, in 2020, hopefully. And when you mentioned sort of the new robot management system and slight improvements in distribution costs, which are what you're seeing right now, how does that sort of stack up against a potentially new contract when it comes to third-party or in-house sort of fulfillment solution in '21, when you get to this 1.5% improvement over the coming 2 years? If you look at the targets, sort of how does it weigh each parameter? This is my question. Do you understand?

[Hermann Haraldsson, Co]

Yes. Good morning, Daniel, This is Hermann. Yes, we understand it, of course. You can see that we will make some big leaps in 2020, just because of efficiencies. And yes, being better management. But that's not all a part of it because we're still paying quite a high margin on the Other. So you can say that half of it would come in 2020 and the rest will come in 2021. So it's on a good path. But of course, we're still working with the staff provider and they are still making a margin. But that, of course, would change in 2020. So that's kind of -- we can improve to a certain degree, but you still need hands to do the work and these hands are currently just too expensive.

[Daniel Schmidt, Research Analyst]

Yes. Okay, good. So half of it basically, that's very clear. And then looking at some of the other points that are going to improve; the profitability in the coming 2 years,, then of course, you have this physical store in Copenhagen that has been heavily loss-making. And you said that you're evaluating the future for that store. It sounded like you're doing it during this year. Could you shed some more light on that? What sort of -- is there any possibility that, that would be closed down in any way or moved? Or how do you view it?

[Hermann Haraldsson, Co]

It's still an interesting playing footprint. If you lose all the time, it's just not fun. And when you opened, you didn't want to have a losing store. So obviously, we have to do something about it, and we will do something about it, and it will happen in 2020.

[Daniel Schmidt, Research Analyst]

And could it possibly be moved, is that a possibility, to sort of less expensive location or sort of -- because I know that when you took the -- took many of these sort of strong brands on board when it came to cosmetics, there was also an obligation to have a physical store, but is that what's being reviewed the contract? Or is it more to sort of get cost down in a...

[Hermann Haraldsson, Co]

Yes. We are investigating different possibilities. But obviously, we still need to have a beautiful and strong physical store, but -- so we're investigating, say, what are our options. But I think that we will shed light on that within the near future.

[Daniel Schmidt, Research Analyst]

Okay. But the trend is still quite troublesome if I read Q4. Is that the same for the start of Q1?

[Hermann Haraldsson, Co]

Beauty is a nice -- it's a beautiful category because it's so -- it's very profitable online, and it fits perfectly into our product mix. But of course, even though we see improvements in the Copenhagen store, I would be retired before it makes profit. So that's too late. So we need to do something about it, and we will do it now.

[Daniel Schmidt, Research Analyst]

Okay. And third question on one of the bullet points also on sort of improving profitability, coming back to custom paid in Norway, and the new regulations. As I understand it's going to be effective as of 1st of April. What sort of market dynamics could you expect that could sort of take away some of that potential gain, given that you yourself are actually entering the market with Booztlet already did so in Q4? Don't you think that it will be others taking the same decision now that sort of economics are looking more favorable?

[Hermann Haraldsson, Co]

But so far, we have been paying the customs. And so we've been losing money in Norway. I think now the change would ramp and we will be profit-making in Norway. But -- so we don't foresee that it will affect the pricing because it's also a very competitive market. And so for the consumer, I don't think that they will see any big changes in the market.

[Daniel Schmidt, Research Analyst]

But do you think the competition will increase, given that you yourself are taking this decision on the back of partly changed regulations?

[Hermann Haraldsson, Co]

Yes, but all our main competitors, they are all really in Norway, and we don't see any new competitors entering Norway, it's still a difficult market to enter. And even though we have new custom regulations, it's still quite a hazard to comply to the rules and regulations with sending goods up there and down there. So I'm not seeing any new big entrants in the Nordic. So I don't think that the customer dynamics would change dramatically in Norway.

[Daniel Schmidt, Research Analyst]

And then maybe short term, also coming back to sort of the outlook for 2020? And also, of course, you've had most likely, unfavorable weather conditions starting this Q1, what is sort of -- what is your take on promotional activity so far in January and February? And how has that been impacting your performance at the same time? Of course, you're entering the quarter with very much lower inventory, which, of course, increases your flexibility to participate or not in this activity, I guess.

[Hermann Haraldsson, Co]

Yes, we have chosen not to participate because there's no reason to give your stuff away. It's -- of course, it's good to be a consumer because you get good deals. But we have been quite on the sideline. Having said that, we believe it's so far, so good, and so we are focusing on healthy growth and not giving stuff away also because we have good inventory position. So we are waiting for the SS '20 season to start but I think that so far, we are okay, happy. Of course, growth is on the low end of our guidance. But that is as expected, also because we went into the season with the low inventory and paying cost for that. So I think that we're in very good shape. And this market gives, especially, Booztlet, good opportunities to do some good buy. So I think it's -- in our case, it's good to be light footed. So we are -- I think we're more kind of watching our peers beat each other.

[Daniel Schmidt, Research Analyst]

Good. And maybe a bit of a strange question may be, but do you think the inventory is even too low if you do want to get to the 15%, at least in terms of Q1 growth?

[Hermann Haraldsson, Co]

It's on the low end. I wouldn't say it's too low. But of course, if it had been high, we would have sold more. But again, that would have more exposed. We are going into the season at the moment with a lower upfront buy than we've done before. Cautious also because we are quite -- with the quite uncertainty with regards to the economy, customer dynamics and also because we see these dynamics, we see huge opportunities in buying in season and we get good deals. Also you have to remember that this new agreement we did with these big brand that also means that we have the inventory in stock, but it's just not counted in the inventory. So the real inventory is slightly higher than is reported.

[Daniel Schmidt, Research Analyst]

Right. And then finally, on marketing, you said that you're underspent on marketing in '19. And I think that especially goes for Q2 and maybe implicitly a little bit on Q4 and you still target 1 percentage point lower marketing cost ratio in 2022. But should we expect then that the marketing cost ratio is basically flat in '20, is that what you're saying? And then scalability will take it down in '21 and '22?

[Hermann Haraldsson, Co]

Hopefully, marketing cost ratio will increase slightly in 2020. That's our plan, of course, depending on our ability to attract new customers at the price they want to pay. And then you will see kind of a trend slightly down in '21 and '22. But hopefully, it increases slightly in 2020 because we can still see that the costumer-use economics are okay. We are to spend too much in Q2 but -- actually also in Q4. We had hoped to be able to spend more in Q4. But again, with our peers starting sales before Christmas, and also with our 'fair use' move, where we actually excluded 1% growth, that's kind of -- that was a conscious choice, so we ended up spending less, but it's okay.

[Operator]

Next question we have is on the line of Niklas Ekman from Carnegie.

[Niklas Ekman]

A couple of questions from my end as well. Firstly, the gross margin, I mean, this is -- we've seen a declining trend now consistently for the past 2 years, and now it's sharply reversed in Q4 and you're expecting the gross margin to more or less stay level. How credible do you think that this is, given that you still aim to continue to grow? Is there a risk that if you stay too disciplined on the gross margin, given the competitive environment, that your growth rate going forward could be lower than what you are targeting?

[Hermann Haraldsson, Co]

I think -- Niklas, I think that the Q4 is the best proof that is quite credible that we can maintain the high growth at this gross margin because we could have grown significantly more in the quarter had we chosen to start sales 1 week before Christmas, et cetera, et cetera. I think that actually Q4 is the best proof that our path with maintaining the gross margin and being disciplined in the pricing and not chasing this unhealthy growth, I think, execute -- I think the proof is in the pudding or the numbers. So I think it's quite credible, but yes, you have to judge.

[Niklas Ekman]

Yes. Excellent. And I agree, a very, very strong Q4. And then turning to your margin target for 2020, you are merely indicating an improved EBIT margin. And given what you are talking about now with disciplined gross margin approach, fulfillment costs coming down quite significantly, maybe marketing costs coming up slightly, but why are you only guiding for at least 3.2% margin, given that you have a target of 6% by 2022? Is there any reason why this margin improvement should be back-end loaded rather than front-end loaded?

[Hermann Haraldsson, Co]

I think the reason is that we are careful and we want to prove -- obviously, I will be disappointed if the margin is 3.3% or 3.4%. So -- but I think it's too early to kind of set a specific number because the market is extremely unstable. So we want to kind of move forward. We are -- we see the path going forward, and we see the improvements in our operating costs, we also see that we can get customers, but I think that we should take one step at a time. And I think it's prudent now to guide that we will improve, but not how much the improvement will be in 2020. But I'm quite firm that we will pass the 6% in 2022.

[Niklas Ekman]

Okay, excellent. And also, let's switch to 'fair use'. Can you help quantify the exact impact of that? How much did that impact sales, gross margin, EBIT margin, et cetera? Have you done that calculation and roughly, how that impacted the profitability in Q4?

[Hermann Haraldsson, Co]

Yes, we do that, of course, every month. But it has quite a high impact on the growth -- on the return rate. And you could say that that you lose out on 1% of the revenue. But there are something between 10% and 15% of returns. So this also has impact on return costs, both with regards to distribution and with regards to the return handling costs. So it doesn't affect the gross margin but it's more kind of the cost ratios that it affects. So -- and it would have given us probably 1 percentage points more in revenue growth. But again, it's revenue that we don't want because it has huge costs associated to itself. So we rather say no to that.

[Niklas Ekman]

Yes. Fair enough. And what is your current return rate roughly after the 'fair use' -- the switch to 'fair use'?

[Hermann Haraldsson, Co]

It was implemented in November and Q4 was at the same level as Q4 '18. And if you remember now, we've seen that over the last 5 years, that return rate has increased by 1%, of course, per year. At the moment, we can see that for January, return rate is actually trending lower than last year, which is very, very encouraging, but it's too early just because these people, they try to find a way to keep on buying. And so it's a -- the cat-against-the-mouse chase at the moment. But I think that if we manage to continue to spot it and continue to avoid people that have no intention to buy, they just want to do the shopping and get it closed, then we can manage to keep the return rates low and might even get it lower than [indiscernible].

[Niklas Ekman]

Excellent. And also, you mentioned here, shared risk-taking as a key contributor to the better gross margin. Is that referring to this new contract with a -- new agreement with a major brand? Or is this a general switch for other brands as well?

[Hermann Haraldsson, Co]

No, that's -- the shared risk-taking is, of course, partly due to the new contract. But as -- so they have to agree with that, that when we are growing in this environment, we ask competitors to take part in the risk. So that has a lot to do with the other brands and our risk agreements with those brands.

[Operator]

The next question we have is from Daniel Ovin from Nordea.

[Daniel Ovin, Senior Analyst]

I had 2 follow-up questions, please. So first, on the risk-sharing agreements. I think you talked about previously that if you have those in place last year, your gross margin would have been 90 basis points higher or something like that. So is that kind of a rough estimate of how much that benefited your gross margin in this quarter? And also going forward, do you -- where are you now on these risk-sharing agreements? Do you expect to close more of those? Or are you basically starting to see the full impact now? That's the first question.

[Sandra Gadd, Chief Financial Officer]

Thank you, Daniel. This is Sandra. And yes, it's true. It's the major part of the increase that we've seen. And looking ahead, it is -- we expect it to slightly increase. Of course, we're taking the big improvement, but it likely will expand on more contracts.

[Daniel Ovin, Senior Analyst]

Great. Okay. And then just finally, when you talked about marketing spend and the idea that you would be taking down it as a percentage of sales, but still outstanding competitors and thereby grow. So I'm just thinking about your largest competitor then Zalando, which has been actually also increasing its marketing spend, been growing faster and then also taking up the margin at the same time. So I'm just wondering, I mean, could that prevent you from -- basically, form it playing out the way you expect? Or is Zalando not as important as I fear here? That's the last question.

[Hermann Haraldsson, Co]

Well, our [ general spend ] there, of course, is important in the market being the biggest player. But of course, you have to look at the actual spend per customer and per basket and our basket size is I believe, 60% higher than Zalando. So now their marketing spend would have to be something like 14%, 15% just to match our spend. So I think that because we're in this mid-to-premium class segment, our use economics, basket -- on a unit -- basket level are just more favorable than theirs, so -- and they -- believe me, that they are spending outrageous amounts of money on Adwords. And we're still growing and still capture market share. So I'm worrying about them every day, but they don't keep me sleepless. So this is -- this has been -- since we launched Boozt.com in '11, they've been there and been very aggressive. So it's just a fact of our life. I guess, life would be boring if they would not be there.

[Operator]

The next question we have is from Michael Benedict. I believe it's from Ferenberg (sic) [ Berenerg ], if it's not can you please say your company and ask your question.

[Michael Benedict, Analyst]

Michael from Berenberg. Just a couple. Firstly, do you see any difference in the quality of products you get in terms of upfront buys versus campaign buys or is it broadly equal in terms of quality?

[Hermann Haraldsson, Co]

Michael, this is Hermann. No, it's the same quality. It's the same brands. So it's just a rip on the sidelines in our good brand partners. We are the first ones that they call because they know that we have cash. So it's the same quality. So there's no difference there.

[Michael Benedict, Analyst]

Right. And then actually just one more. So the brand you signed a consignment-like agreement with. And how quickly is that brand growing in terms of transactional revenue? Is it likely to change significantly in the mix in the coming years? Or would we expect a sort of similar impact for year '20?

[Hermann Haraldsson, Co]

It's similar. The brand is growing as much as it did before. It was a brand where we had a quite good assortment, and they have basically kept that or replaced that. So we don't expect to have an increased assortment from this brand. And so it will continue to grow in line with what we expect. So that's not -- there's kind of not a step-change in that respect.

[Michael Benedict, Analyst]

Yes. I guess, my question is more to the point, is it going to create a bigger headwind for net revenue in the coming years, if it's growing quicker than the group itself?

[Hermann Haraldsson, Co]

No, no, no. It will not. It will affect, I think we said before, like 1 or 2 percentage points. And that's it.

[Operator]

The final question in the queue is from Andre Thormann. [Operator Instructions]

[André Thormann, Analyst]

This is Andre Thormann from ABG. So just on the first question, in terms of these bans on the 9,000 clients. Do you expect this number to increase going forward?

[Hermann Haraldsson, Co]

Yes, we expect that as we grow our customer base. We believe that this ratio -- currently, it's 0.3% of our entire customer base. And I can't see that this rate will go down. So of course, it will increase. But again, it's a very tiny part of our customer base, and it has been in the press, it has been a lot linked with high returns. But we have 150,000 customers who have returned 90%. So it's not that -- it's just like these customers have no intention to buy. And I think that's the main reason. So as we grow, it will increase, but I think it was taking a big bulk already.

[André Thormann, Analyst]

Okay, okay. And then just in terms of the return rate. Because I understand that it's -- for Q4, it's in line with Q4 '18, but what was it in Q4 '18?

[Hermann Haraldsson, Co]

I don't think we have disclosed this, and I'm not sure that we're going to disclose it. So we only disclose full year rate. So it's around 4%, as we said before.

[André Thormann, Analyst]

Okay. And then just in terms of this terminated contract with Logent, I mean, you mentioned that you are still trying to figure out whether it will be yourself or another vendor who will take over this. But can you say something about your thoughts on it? And how much this is going to give you on margin going forward?

[Hermann Haraldsson, Co]

We are discussing now with Logent. And if -- I would tell you, I would give away all our negotiation tactics. So -- but of course, they -- we started the cooperation with them when we were [indiscernible] company, basically when we have 0 revenue. So a lot of things that happened during the years, and so now we know all this more. We also participate much more in the production process. So of course, we like Logent, we would love to continue to working with them. But everything has a price. And if we continue to work with them, we need to get the prices down. And also now, we have a very strong management team in the warehouse. So this gives us kind of optionality either to engage much better terms with Logent or do it ourselves or with another party.

[André Thormann, Analyst]

Okay, okay. And do you see any big risk in terms of changing?

[Hermann Haraldsson, Co]

Of course, there are risks, but all of the infrastructure, all the systems, the warehouse management system, that's our system. So basically, what happens today is that they take people that have no training and train them in our system. So if someone else does it or we do it, I don't see more risk on that path. So I think that as we now have the robots, it's our warehouse management system, it's our robot management system, I think that the risk profile has been reduced dramatically versus if it was a contract where we paid by their pick.

[Operator]

At this point, we have no further questions in the queue. I'd like to hand back to the speakers today.

[Hermann Haraldsson, Co]

Okay. Thank you very much for taking the time. Sorry for the length of the call but we thought it was quite important to elaborate on our thoughts. So thank you. And I guess I will see most of you in the coming weeks. So thank you, and have a good day and a good weekend. Thank you.

[Operator]

Thank you, ladies and gentlemen. That concludes your call for today. We thank you very much for joining and ask that you disconnect your lines. Have a great morning or afternoon ahead.