Westwing Group SE

XETRA:WEW

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and welcome to the Westwing Group SE Second Quarter 2022 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Andreas Hoerning. Please go ahead, sir.

[Andreas Hoerning, executive]

Thank you so much. Good morning, everyone, and thank you for joining us. I'm glad to be speaking to all of you. Today, we will review our half year and Q2 2022 results, and provide some information on what we plan for the full year and going forward. Joining me on this call is our Chief Financial Officer, Sebastian Säuberlich.

As a quick reminder, Westwing's mission is to inspire and make every home a beautiful home. Before I share the agenda for our call today, I want to introduce myself to those of you who don't know me. My name is Andreas Hoerning, I've been the CEO of Westwing since the 1st of July of this year. I joined Westwing over 7 years ago. And during this time, I held a few roles across the business, including Founder of the Westwing Collection and, more recently, Chief Commercial Officer. I'm very pleased to now be leading Westwing as CEO.

Westwing has achieved a lot in a very short period of time by building something very unique, and I'm truly excited about the opportunity ahead as we are still at the very beginning of what is possible for Westwing.

With that, let's get to the agenda for today. I will begin by providing key updates on our business, after which Sebastian will be sharing the details of Westwing's financial performance in Q2 2022 and the half year. I will then provide a quick update on our strategy, after which Sebastian and I will be happy to take your questions.

So I'll briefly walk you through the 5 key points. of the business update and then dive a bit deeper to provide some more details. First, our top line for Q2 2022 is significantly below previous year. We are confronted with an especially challenging macro environment, with very low consumer sentiment and demand for Home & Living plus a lower online share versus a year ago, with still significantly up versus 2019 though.

Second, we are fighting for top line, but our main focus lies on preserving unit economics and restoring profitability. This is because a lower top line, in combination with investment decisions taken last year, resulted in an adjusted EBITDA loss for Q2 2022. This is far off our ambition, and we are working decisively to adjust our cost base.

Third, regarding our supply chain, disruptions have eased, but we have a lot of work ahead of us in terms of managing the high inventory levels we have built up in the aftermath of the situation and the overall lower top line. We're confident that this will be resolved over the course of 2023.

Fourth, the fundamentals of our business model are intact: loyalty, inspiration and focus on sustainability. Our much loved and highly profitable Westwing Collection, along with the best design brand, will be at the forefront of the next stage in our evolution. I will be going into more detail on this in the strategy update session.

Fifth, it goes without saying our liquidity profile and capital structure is top of mind. While we are very focused on getting back to the state of the neutral free cash flow, we have ample liquidity to navigate through the current challenging market environment, which is fundamental to outlasting this dynamic. Sebastian will cover this point in the financial section in detail.

Let's now dive into some details on points 1 to 4. Regarding top line, I'm not telling you anything new here, I guess. On the chart, which depicts consumer sentiment in Germany, you can clearly see that it began to drop sharply in the first half of 2022, worsening quite dramatically in Q2 just because in terms of perspective, the level recorded in Q2 was even lower than at the onset of COVID-19 pandemic. This highlights the extent to which the current macro volatility is driven by rising costs, the war in Ukraine and fears of a looming recession has contributed towards a lower consumer sentiment and weak demand. Obviously, together with spending with other categories such as travel.

It's expected to last short term at least. What is in the next slide is Q2 grew GMV since 2019 and the same for active customers on the right-hand side. While the year-over-year result was severely impacted by the aforementioned macro factors, comparing our current performance against the pre-pandemic quarter of Q2 2019 revealed a strong compound annual GMV growth of 19% and year-end active customer growth of 18% on a 3-year basis.

I believe it's quite important to take a step back in this period of uncertainty and have a look at the mid- to long-term structural growth of Westwing. In spite of the acute headwinds, we find ourselves today to be a company of a whole different scale and size compared to back then.

Moving on to the second topic, profitability. As mentioned, we are focused on steering Westwing in our financially responsible manner through this period and have identified robust measures to mitigate against the lower top line. Our focus here is twofold: one, retaining our unit economics; and two, adjusting our cost base to the current top line level. To retain our unit economics we have used a combination of tactics, including, general price increases to account for inflation, managing our high inventory levels only via selective and reasonable discounting events, but not just at any cost.

In addition to an increasingly high margin Westwing Collection shares through category and portfolio expansion, but also through closing the expensive short-term warehousing capacity we required last year prior to the opening of our new warehouse in Q1 of this year.

Last on unit economics, in order to adjust the cost base in the current top line level, we are implementing an annual benefit in P&L savings of about EUR 15 million achieved through a combination of significantly lower paid marketing and reduced organic marketing investments to increase our ROI. In addition to operational savings gained through a review of our overall investments and organizational cost structure.

Moreover, we have shelved imminent CapEx investment into further warehousing, which we will remain on hold as long as the demand environment does not show signs of improvement. On top, we are continuing to review the cost base beyond the EUR 15 million savings as we speak.

Third topic is supply chain. As you can see from the chart here, inventories significantly increased over the last quarters which is a result of orders placed 6 to 9 months earlier, respectively, for an entirely different demand environment that we simply got wrong in our forecasting.

Supply chain disruptions further added to this scenario with delays of orders. We've implemented correctional actions, and we are confident about solving this issue over the course of 2023 as we have enough warehousing space and inventory that can be sold over time at good margins with limited write-off impact. That's because most of it does not have an out-of-fashion risk.

Beyond stock levels, the global supply chain situation for us has normalized with no immediate risk of -- to business operations. Freight rates have started to come down, but they are still significantly higher compared to pre-pandemic levels, which we partially offset through retail price increases.

Fourth point, on the fundamentals of our business that all remains intact. I am very excited to share the success of our 2 beautiful exclusively co-created Westwing Collection collaboration with fashion icon and influencer, Alex Rivière and the artist Donald Robertson. What's special about these launches is that this was the first time we collaborated with designer artist to exclusively create a Westwing Collection collaboration.

Both campaigns were highly successful and well received by our customers, also gaining media attention and coverage from the likes of both Italy and [indiscernible]. These collaborations are testament to the power and versatility of Westwing Collection and our brands, which we have only just begun to untap. In light of the overwhelming response, we will continue to expose similar collaborations and partnerships with designers, influencers, celebrities and other brands in the future.

Underscored by the success we have had with the Westwing Collection over the last years, all of which at over 10 percentage points margin upside versus third-party products, and the incredible brand we have built, we now recognize the need to offer customers multiple touch points to our brand and our products.

Therefore, it's my pleasure to announce that we will be launching our first permanent store in Hamburg later this year, providing our customers with an opportunity to experience our brand firsthand. We've rented the retail base for this first store in Hamburg's prime Jungfernstieg district, which will cover 530 square meters in retail space. Also opening is planned for Q4.

We believe that our permanent store will enable us to offer our customers new aspects of the customer experience. The physical stores offer our customers in many aspects that they don't get know, such as live interaction with our branded products, which leads to further strength -- strengthening the Westwing Collection product brands, therefore, reaching and ascertaining even more existing and new customers, making Westwing experience a full rounded experience. For now, this is the only store we plan to gather learnings and decide on subsequent investments.

To close off the business update section of our presentation, I am proud to announce that our sustainability strategy continues to pick up pace with 3 special initiatives underpinning our commitment to pursue a more sustainable future. Westwing is now a member of the United Nations Global Compact, which is one of the world's largest corporate sustainability initiatives. Our 2030 sustainability strategy is based on many of the same principles that UNGC is an advocate for, and our membership reconfirms our deep commitment.

Additionally, we have committed to the science-based target initiative to help limit global warming in line with the Paris climate agreement. Another team in our climate efforts is that we continue to be climate neutral in our own operations since last year, which means that we have estimated our greenhouse gas emissions and compensate for them by investing in carbon offsetting projects. Furthermore, we believe providing our customers with sustainable options is fundamentally driving a sustainable future.

In our sustainability strategy, we have committed to using long-lasting materials from sustainable sources and being as resource efficient as possible along our supply chain. In this respect, we have joined the Better Cotton Initiative to support responsible cotton production, and are committed to sourcing 90% of our cotton as more sustainable cotton by 2026.

Additionally, we are certified to the Global Organic Textile Standard, GOTS, by sourcing GOTS-certified products. We ensure a high level of environmental and social criteria have been respected along the entire supply chain. At the same time, we continue our efforts to source other materials sustainably. For example, we are constantly increasing our product portfolio made from FSC-certified wood.

With that, I will now pass on over to Sebastian, who will take you through the details of Westwing's financial performance in Q2 2022 and cover the fifth point I mentioned at the beginning, our cash position and outlook.

[Sebastian Säuberlich, executive]

Yes. Thank you, Andreas, and good morning, everyone. Before we go into the details of our Q2 results, let me quickly summarize where we stand financially in these very volatile times. As Andreas shared earlier, in the first half of 2022, we faced tremendous macro headwinds, which overall led to a very low consumer sentiment and subsequently put pressure on our top line. The lower top line, in combination with the investments we took in 2021, back then in anticipation of a much stronger top line development, resulted in an adjusted EBITDA loss for the first half of 2022.

To be very clear, the negative profitability is far off our ambition, and we are working decisively on adjusting our cost base accordingly. We are committed to returning to positive profitability and have a clear game plan on how to get there through efficiency gains and cost management measures.

Next to the negative profitability, our high inventory levels were heavily on our cash flows. While this might seem rather alarming from the outside, I can assure you that we are proactively addressing this and are now confident about solving it over the course of 2023. We will be able to sell most of this inventory over time at good margins and expect only limited write-off impact, as our inventory is not subject to out-of-fashion risk. While we will continue to focus on navigating the current turmoil, we remain very confident in the long-term success of our business.

The Home & Living e-commerce market potential remains massive. Our loyalty and inspiration-driven business model is fully intact. We have a clear strategy to work towards. And last but not least, we are equipped with a very strong net cash position of EUR 64 million by the end of Q2, which provides the basis to emerge even stronger from this downturn.

With that, I will now walk you through the details of Westwing's financial performance for Q2, followed by our expectations for the current year and the priorities for 2023.

Starting with our top line. In terms of top line, it's important to take a step back to grasp the bigger picture in these volatile times. The underlying structural growth can be explained best by comparing versus the pre-pandemic size of Westwing.

In comparison to this baseline, Westwing's top line performed strongly, growing 21% on a year -- on a 3-year CAGR since Q2 2019. On a year-over-year basis, though, revenue for Q2 decreased by 22%, which is clearly impacted by the very low consumer sentiment we have already discussed in detail. The DACH segment generated revenues of EUR 59 million, while the International segment generated EUR 45 million, both growing comparably since 2019.

Coming to the P&L for Q2. Up first, our gross margin for Q2 is at 48.6%, which is only 0.9 percentage points lower than Q2 2021. We have been able to adequately maintain our healthy gross margin levels despite inflationary headwinds and cost pressure faced by the business, mostly by passing through price increases and a shift towards Westwing Collection products.

Fulfillment ratio for the period increased by 3 percentage points, mostly due to less scale in our operations, some cost increases in the workforce due to inflation and additional warehouse capacity that went online, which, however, now gives us the benefit of releasing the expensive temporary warehousing space that we were renting in H1.

Overall, the effect on our gross margin with rising fulfillment costs resulted in a contribution margin of 25.2%, which is down by 3.8% compared to last year. In terms of marketing, we maintained our marketing expenses in line with our target range of 9% to 11%. We decisively reacted already in Q1 and cut down our performance marketing investments, as these investments didn't provide attractive ROIs. Based on these cost measures, we were able to keep our target margin in Q2 despite less scale on organic marketing investments, which are mostly rather fixed personnel costs. Yet, we also reviewed our organic marketing organization and implemented selected headcount reductions as well as putting further investments on hold.

Coming to SG&A. Our investment decisions from 2021, in combination with the lower top line, increased the SG&A ratio for this period by 7.9 percentage points versus last year. It is important to note that our second quarter and our third quarter are our seasonally weak quarters. So the G&A ratio of 21.5% for Q2 is not representative of the full year G&A ratio.

Having said that, similar to our marketing investments, we are also constantly reviewing our SG&A cost base and have already implemented headcount reductions as well as OpEx savings. We will continue to review our past investments into SG&A and remain extremely cost cautious for the foreseeable feature. Overall, the described developments resulted in a negative adjusted EBITDA profitability of minus 2.3% for the second quarter.

Please note that we decided to adjust our EBITDA for nonoperating restructuring costs caused by the workforce reduction in the amount of EUR 1.1 million this quarter. Taking a closer look at profitability on segment level, this a similar picture. DACH continues to be profitable at 2.2% adjusted EBITDA for the quarter, while international reported a minus 7.4% adjusted EBITDA margin for the same period.

Moving on to cash flows. Our net working capital position at the end of Q2 stood at positive EUR 24 million, much higher than our ambition of being neutral in working capital. Our net working capital has increased a lot over the last few quarters, and I will share some more on this on the next slide. While we expect net working capital to remain significantly positive for the remainder of the year, we are confident that we will begin to see an improving net working capital coming back down to this single-digit millions by the end of 2023.

Our CapEx ratio is 3.4% of revenue for Q2, representing an increase in CapEx spending versus previous year. This increase is mainly driven by onetime investments into equipment for our recently opened warehouse and ongoing investments in our growing technology function, with its focus on enhancing the customer journey.

Looking into the net working capital development in more detail. The Q2 increase is mainly driven by higher inventory levels related to lower top line. Fortunately, the obsolescence risk is rather low in our industry, and we have ample storage space in our warehouse at present.

So this is primarily a cash flow timing issue, not a structural issue, although certainly vital to maintaining healthy liquidity in the current environment. On top, we can see that trade and other payables, as well as contract liabilities, are reduced in Q2 driven by the lower size of the business.

Net working capital is expected to increase further in Q3 and then decreased towards Q4 2022, before returning to single-digit millions by the end of 2023. Our net cash position stands at a strong EUR 64 million per end of Q2, which provides us with reassuring strategic optionality in the current challenging landscape.

Our financial debt-free balance sheet remains a great asset as we have ample liquidity to navigate the currently challenging market conditions. Based on our expectations of an increased net working capital levels still in the third quarter and seasonally lower profitability, we do expect a lower net cash position by the end of Q3 2022 though, before it then increases significantly in the fourth quarter again.

With that, I move on to the details of our outlook for the remainder of 2022 that we published yesterday night. Based on the current challenging demand environment, we lowered our revenue guidance for this year to EUR 410 million to EUR 450 million, at a minus 22% to minus 14% year-over-year growth rate. For adjusted EBITDA, we now expect minus EUR 15 million to breakeven at minus 4% to 0% adjusted EBITDA margin. The updated guidance reflects the extremely low consumer sentiment observed across all segments, especially over the last 2 months, with no improvement besides normal seasonality expected in H2. The updated adjusted EBITDA guidance factors in our updated growth expectations, some margin investments in H2 to reduce inventory levels and already implemented cost reductions.

We strongly believe that we are well positioned to navigate back to growth and profitability. Yet, as stated in the beginning, our current profitability levels as well as cash flows are not meeting our own ambition, and we are committed to steering Westwing back into financially stable territory. Therefore, we have set a clear short-term priority for 2023. In 2023, we expect a neutral to positive free cash flow again. This will be mainly driven by an improving profitability and a lower single-digit net working capital position.

While we remain very confident in the long term, Home & Living e-commerce market potential and our strategy, we can, at the moment, given the potential longer-lasting macroeconomic challenges, not provide a reliable time frame by when to achieve the communicated midterm targets of EUR 1 billion in revenues and more than EUR 100 million adjusted EBITDA, that we so far wanted to achieve by 2026. But what we are certain of is that with returning growth and hand size, we can achieve a very attractive long-term target P&L with an adjusted EBITDA margin of 10% to 15%, combined with a strong cash conversion.

We have proven that our model works immensely well at scale and the long-term target reflects this through a combination of greater operating leverage as well as continued expansion of the highly profitable Westwing Collection driving our contribution margins.

With that, I will pass back to Andreas to walk you through an update on our strategy, before we jointly address your questions at the end of this call.

[Andreas Hoerning, executive]

Thank you, Sebastian. In this last section, I would like to share a brief update on strategy. Nothing that fundamentally changes the way we work, it's about putting our permanent assortment and our Westwing Collection more to the forefront of what we do. Let me start by listing the core assets we've built over the past years.

Firstly, we created a consumer love brand with creativity, daily inspiration and loyalty at the very core that attracts both new and existing customers to engage with us again and again.

Secondly, our unique Westwing Collection is loved by our customers and also helps us to generate superior margins because it's a 10 percentage points higher versus third-party products.

Thirdly, we have gained a huge organically built audience with more than 10 million followers across our social media channels.

Fourthly, we deliver an outstanding customer experience with best-in-class customer service, unique propositions such as Westwing Studio and Westwing Delivery Service, setting the next level of post-order experience.

As a result of these assets, we achieved best-in-class repeat order shares of 80%. From the time of first purchase, we see the lifetime value of our customers rise, resulting in EUR 1,500 GMV after 8 years, which continues to increase. 85% of our sales come from customers who visit us on average more than 100x per year. This is the strength of our business model, and we will -- we continue delivering upon the trust placed in us by new and existing customers -- to new and existing customers alike.

To mark the next phase of profitable growth for Westwing, we will further evolve our commercial model and unleash Westwing's full potential by bringing the Westwing Collection to the forefront. What we will be doing is the following. One, enhancing our product assortment through the rapid buildup of Westwing Collection to get to more than 50% group GMV share as fast as possible. We will also increase the offering of the best design brands across both daily themes and permanent assortment.

Two, offering a seamless personalized digital customer experience with world-class shoppable content, with heightened visibility for permanent assortment and Westwing Collection to drive growth and margins.

Three, optimizing our marketing and sales model to be more product focused, delivering high margins and superior traffic. As also shared earlier, we will be showcasing Westwing Collection in our first offline store, and we are working on offering the collection through selected external channels also, which will serve as brand and volume driver.

And so the highly profitable Westwing Collection will be at the core of our next growth phase, building a clear differentiator. It has unique and sustainable in-house design. It has very high margins, over 10 percentage points margin upside versus third-party product. It's loved by our customers with lower than average returns. It has great design quality price proposition, and therefore, superior value for money.

As I now end the strategy update, let me summarize the key takeaways. Westwing lies at the interface between digitalization of Home & Living and lifestyle consumer brands. What makes us unique versus the competition is our loved brand, daily inspiration and content, a unique Westwing Collection and the best third-party brands in one place. And altogether, that's a one-stop shop for home enthusiasts.

Before we move to Q&A, a quick summary on our investment highlights. The opportunity ahead of us is massive. The European Home & Living market has a size of EUR 120 billion and is still very clearly in an early e-commerce space, which provides exciting growth momentum based on dynamic online adoption for years to come. We target about 70% of the overall market by converting more and more customers into home enthusiasts.

Customer loyalty is at the core of our business, and we combined this changing dynamic with our unique loyalty-driven business model. We create superior loyalty based on our differentiating inspirational core. As a result, we achieved best-in-class repeat order shares of 80%. Our Westwing Collection then perfectly leverages the loyalty to our love brand at over 10 percentage points margin upside, and our strategic target is to bring Westwing Collection to more than 50% share of our GMV.

We have a strong cash profile. Our financial debt-free balance sheet allows us ample liquidity and strategic optionality to navigate through the current challenging market environment. And lastly, based on this highly profitable consumer love brand strategy, we have an attractive long-term profitability target of 10% to 15% adjusted EBITDA.

With that, Sebastian and I are now happy to take your questions. Operator, please open the line. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Volker Bosse from Baader Bank.

[Volker Bosse, analyst]

It's good to see that Westwing Collection share continues to increase. However, obviously, it is more than overcompensated cost increases in all P&L lines. So my question would be the increase in OpEx is driven by which P&L, or is it energy, is it personnel costs, is it material costs? Can you give us a bit of granuality here and the front would be helpful.

The second question would be on the sourcing. We see the U.S. dollar rising. How does that impact your sourcing costs going forward? How much are you hedged? And what does it mean for your gross margins in '23, basically?

And the final question would be a question on the trading update, you said that you would expect too much improvement in the half as implied in the guidance. Could you give us an idea about the 1 of July and the 1st of August, did they still remain at the minus 20% level year-over-year? Or how is the trend evolving?

[Andreas Hoerning, executive]

Thank you, Volker. Sebastian will be taking the first 2 questions, and I'll be answering the last one.

[Sebastian Säuberlich, executive]

Yes. Okay. Volker, thank you for your questions. I think increasing cost is -- there are several effects to this. So I think the biggest effect is if we think about relative cost or the lower scale. So we see that in all our cost lines, be it warehouse, be it marketing, be it an admin, be it our sales. So kind of we have negative operating leverage, so to say.

The other thing, like in terms of absolute cost increases, is mostly driven by us investing into certain areas like we did at the end of last year and the year before. Yes, in hindsight, probably under wrong assumptions based on the growth expectations going forward, but we invested basically in a lot of areas, mainly being in technology and our Westwing Collection, where we want to increase the share as you have described.

So there's not a single driver being it energy or anything. It's more like we increased across -- not across the board, but across certain areas, we increased cost to get faster to the point of arrival we wanted to get to. And obviously, this is a bit harder now and we have to revert some of this and be more cost conscious.

In terms of sourcing U.S. dollars, it's just it is. We are sourcing from China in U.S. dollars, but that's kind of a smaller share of our total Westwing Collection share, as we also saw from other areas where we saw in euro. So the effect is there, but it has not a huge effect on our top line -- sorry, on our gross margin. And also, we are able to pass on some of these cost increases like we did with the container cost that are kind of going down now a bit. So we don't see a huge risk here.

To be transparent. We are not hedged. It's something I'm not a big fan of currency hedging, but we can have a longer discussion the next time we see each other on this. So but I think -- so no, we're not, but we are -- like in a market where we can pass on price increases like inflation, like container cost to the customer, and it's something we have to face.

And the third question, Andreas will give you an update on the trading update.

[Andreas Hoerning, executive]

Exactly. So you asked about what does July look like or Q3 actually today. So what we see is at the moment, about minus 10% year-over-year trading. And for the remainder of the year, we do not see anything significantly changing about that. We expect, as always, a seasonal uplift in sales, yes. But then we have also potential up and downside that where we have very limited visibility.

One is obviously a potential recession with energy crisis, et cetera, looming. On the other hand, there's also potential upside from Home & Living and in consumers' total spend going back to normal levels or back towards normal levels when consumers spend less on travel. So it's really governed by limited visibility.

[Volker Bosse, analyst]

Okay. For clarification, the minus 10% was sales in August year-over-year?

[Sebastian Säuberlich, executive]

The GMV quarter-to-date. So July and the -- GMV is -- so July plus the first 10 days of August or something or 9, I guess.

[Volker Bosse, analyst]

Yes, yes. GMV. And one follow-up, if I may, on price increases, you just managed to pass on higher cost to customers. What do you plan in regards to price increases for the second half? What have you done in the first half? Will you do more in taking out than you have done in the first half, so a bit of this opportunity to increase prices?

[Andreas Hoerning, executive]

Yes. So we actually saw increasing costs already last year to a certain extent, and we actually already increased prices last year on our products. So -- and we continue to do so wherever we can. The ability to increase prices is limited to a certain extent by the high inventory that we have because, obviously, that's also a focus. So what we're doing is they will basically be passed on part -- a part of the cost increases that we had to our customers and part of it you see in a slightly lower contribution margin at this point in time.

[Volker Bosse, analyst]

So if I got you right, you did not speak about price increases for H2, right?

[Andreas Hoerning, executive]

What we do is we analyze the individual buckets, so categories, et cetera, et cetera. And we actually -- we implement price increases wherever it is possible. We do not see a huge upside from price increases in the second half, though, because of the inventory levels that we have still at this point in time.

[Operator]

Our next question comes from Christian Salis from Hauck Aufhäuser.

[Christian Salis, analyst]

Christian from Hauck. I've got 3 questions, please. First of all, could you please talk a little bit about the cohort behavior you have seen among your customer base? And is there any difference between the customers you won since 2020 during COVID and the cohorts you won before?

Second question would be on the top line guidance. So at midpoint, the guidance implies some 15% sales decline year-over-year in the second half. So if we look at the 3-year CAGR, this implies a quite significant drop to around 13% versus 21% in Q2. So my question is, are you already seeing this kind of significant slowdown in Q3? You just mentioned minus 10% GMV growth year-over-year, which is actually a gradual improvement versus the first half. Are you just being very cautious considering that consumer spending might take a hit, particularly probably towards the end of the year when European households will face the extra payments for energy?

And then the third question is on profitability. I think you have taken steps to protect profitability and cash generation. So could you please talk about this a little bit more, provide some details where you see -- in which cost lines you see the biggest levers here to stabilize the profitability in the second half versus the first half? And whether we've already seen any impact from these measures in Q2.

[Andreas Hoerning, executive]

Thank you, Christian. Sebastian will take the first 2 questions, and I will comment on profitability.

[Sebastian Säuberlich, executive]

Yes. Okay. Christian, I think core behavior, yes, it's a very tough question to answer because, I think, there's so much noise around the cohorts, right, in this time. So what we've seen is, obviously, that all cohorts at a very weak Q1 and Q2. So obviously, also the cohorts, we recently won, right?

If I look at from the very big picture, kind of they still follow the same trend, but obviously, they started much higher and now they are coming into like a phase of the market where they are very low market interest. So you can either interpret this as the cohorts are getting weaker or it's just like, because we see that in all cohorts kind of the behavior that is currently baked into the market.

So I think it's very hard to answer. I think we have to go through kind of also some form of normalization to give you a proper answer on that one. So high level, they're following the same patterns. But obviously, Q1, Q2 is weak across all cohorts. So it's super hard to judge on that. On the top line, I think, yes, you're right on what you're saying. But I think also the minus 10% that we see so far in Q3 is against a much smaller baseline from last year.

So if you look at the 3-year CAGR, as you did, I also -- we've seen from June onwards and also then confirmed in July that the 3-year CAGR is actually lower than what we have seen in Q1 and Q2 total, and that is also kind of the basis for the prediction going forward. So we have seen a strong change on top of what we've seen in the first quarter that starting from June on, and July confirmed that. And that's why also we kind of reviewed the guidance again based on what we've seen and learned from July and the first day of August and put that.

And yes, there is some cautiousness in there. But also, as Andreas said, we have very little visibility on the Q4. And kind of the Black Friday, for us, is still a very, very important sales event it's just very hard to predict at these days. So I think, yes, it's our fair estimate, but I wouldn't say it's super conservative, but it's also not super risky, yes.

[Andreas Hoerning, executive]

And Christian, to answer your question on profitability. So it's very clear that we have a too high cost base at the moment. We already decided upon and implemented most of the EUR 15 million. So 2/3 of this is being effective in 2022, and most of this already now.

Beyond the EUR 15 million that we already decided and partially implemented, we are also fully committed to returning back to positive adjusted EBITDA and at least neutral free cash flow. So on top of what we already did and decided upon, we are reviewing the cost base further as we speak. Don't have any numbers on that yet to share at this point in time. Hope that answers your question.

[Operator]

[Operator Instructions] As there are no further questions -- pardon, we have a follow-up question from Volker Bosse from Baader Bank.

[Volker Bosse, analyst]

Yes. I mean you just spoke about '23 and return to positive EBITDA and positive free cash flow. Is that something based on your prediction that also sales will return to positive growth? And yes, one of the underlying currently which you have put into your model, is currently slight growth, plus 10% growth, plus 20% growth to be bullish. But yes, just share your view on your base assumptions in order to come up to the positive free cash flow finally.

[Andreas Hoerning, executive]

Thank you, Volker, for the follow-up question. So the question is what is our confidence on achieving what we said on 2023 returning to positive adjusted EBITDA and to at least neutral cash flow. So the basis of this is actually, in terms of top line, we're taking a cautious approach here because no one knows if the recession really will hit us, how hard and how long it will last, so we're actually taking a conservative view here. So what we are doing is, on the cost basis, we're actually adjusting everything to get back to this positive adjusted EBITDA.

On the cash side, obviously, we count on, we are sure that we will be able to release our cash flow from our working capital that we have today. We believe that we will have solved most of the working capital topic that we have until the end of next year. So that will certainly help on cash. And beyond that is the cost base that I talked about beforehand. So a conservative approach on top line expectation, and then very clearly based on cost reduction and also working on our net working capital.

[Volker Bosse, analyst]

Whatever the conservative cost is, sorry to come back. Is it -- does it mean a continued decline, is this conservative? Or is it a slight increase, is that competitor just cognitive? I don't know how you look at this.

[Andreas Hoerning, executive]

So basically, we do not plan a significant growth for next year in our planning for cost base and for inventory. We do obviously not know what it will look like. So that's why we're taking enough measures so that in any case, we will be at adjusted EBITDA positive next year.

Obviously, I mean, if a huge recession comes, and the top line tanks significantly, then there will be drastic measures that we have to do. At the moment, we're doing enough measures, and we are implementing enough measures that actually, even with a very conservative approach for next year, we will be fine.

And we will adjust this by the way, over the next quarters. So obviously, we update our assumptions on next year on an ongoing basis, and we will adjust that also over the next couple of months and quarters as we go ahead. That's very limited visibility at the moment. We will make sure that we actually are positive adjusted EBITDA next year and at least neutral free cash flow.

[Volker Bosse, analyst]

Yes, it's clear. Nobody has a -- but let's see, top line, your assumption is to be flat or slight positive thing. This is what I got from your indications. Is it right, what's coming?

[Sebastian Säuberlich, executive]

Yes, Volker. I mean, I think -- yes. I think on top line, I think you're absolutely, right? No one has a crystal ball, right? We would have not predicted the top line where it is now half a year ago. So I think to be fair, the top line we assume for the cost planning is a scenario, right? We don't -- that's not -- it's not an educated assumption where we end up last year. It's a scenario that we use for kind of what we can afford to achieve the targets we have set out. And I think that nobody knows what will happen, right?

But we have to plan for some -- for different scenarios. And that's what I think Andreas mean, we are rather tending towards, from our perspective today, cautious scenarios and planning. But obviously, we don't know, right, and let's see. But I think the key message is we have communicated targets, and we are agile and flexible in achieving them, and we will do what is needed depending on the top line, but that just means the steps will be different in the size we have to execute them.

[Volker Bosse, analyst]

Okay. I leave it with better. Okay.

[Sebastian Säuberlich, executive]

I'm sorry. I can't -- we don't know what the sales of 2023.

[Andreas Hoerning, executive]

But we know what we will do on bottom line and on cash, because we will adapt it to whatever comes. That's committed.

[Operator]

Thank you. As there are no further questions in the queue. I'd like to hand the call back over to Andreas for any additional or closing remarks. Over to you, sir.

[Andreas Hoerning, executive]

Then thanks for your questions. Thank you for dialing in today. I wish you a great remainder of the day. Bye-bye, and take care.

[Operator]

Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.