Westwing Group SE

XETRA:WEW

Earnings Call Transcript 2020-Q3

[Operator]

Dear, ladies and gentlemen, welcome to the Q3 2020 Earnings Call of Westwing Group AG.At our customer's request, this conference will be recorded. [Operator Instructions]May I now hand you over to Stefan Smalla, who will lead you through this conference. Please go ahead.

[Stefan Smalla, Founder, CEO & Member of Management Board]

Thank you. Good morning, everyone. Thank you for joining the Westwing Q3 Earnings Call. I'm glad to be speaking with all of you and hope that you are safe and well.Today, we will review our third quarter 2020 results. And with me in this call, I have Sebastian, our CFO.In summary, as we had already indicated in our ad hoc release a few weeks ago, Q3 2020 was again a very strong quarter. Let me start with an overall description of what we currently see in the market and what it meant for Westwing in Q3. The overall, so the online as well as stationary retail, Home and Living market has seen very strong demand over the last couple of months, resulting in market growth rates significantly above usual rates. The cocooning trend we currently experience and the preference as well as necessity of people to spend more time at home continues to drive the desire to create a homely and comfy environment at home, especially as consumers spend less on traveling, dining and other categories. In addition to the overall strong market demand in Home and Living, we see an accelerated Home and Living e-commerce adoption, which results in significantly higher growth rates for e-commerce and Home and Living. While it is difficult to pinpoint the exact market growth rates, based on what we see from our competition, our data and the market data we receive, we assume that Westwing is currently participating strongly in that accelerated online move and is gaining share in our markets. The strong market growth is also visible with our suppliers and their factories, which run at high capacity utilizations. Some even struggle to fulfill the current demand level. There's no growth restriction for us now, yet it does require us to ever more increase our efforts to provide a strong product availability for our customers.In the end, we are in a good position, as our overall market is growing. Our specific e-commerce market is growing. And we are fully capable of leveraging that growth into market share gains and strong profitability based on our attractive business model. Let me now give you a few more details what this overall strong market demand, in combination with an accelerated e-commerce adoption, meant for Westwing and how it resulted in overall very strong Q3 results.We delivered 66% of revenue growth year-over-year in Q3; and see this trend continuing with a very strong start into Q4, in which we see slightly accelerating growth within the first week of the quarter -- first weeks of the quarter. In Q3, we were very profitable with the 11% adjusted EBITDA margin based on strong contribution margin in combination with scale effects. We generated free cash flow of EUR 7 million, and that happened in our seasonally weaker summer quarter. These strong results continued to be driven both by strong new customer acquisition, and those new customers continued to indicate a strong repeat purchase behavior; as well as our existing customers, who have shown higher engagement and repurchase rates.These results have been very encouraging for all of us, yet given the escalating COVID situation in Europe, our focus remains on the health and safety of our customers, teams and partners. Additionally, we continue to proactively manage COVID-related risks with our highest attention. In a minute, I will give you some more details on that.Our guidance remains as updated with our October ad hoc release. We now expect for full year 2020 a revenue of EUR 415 million to EUR 440 million and an adjusted EBITDA profitability of EUR 37 million to EUR 48 million. So very profitable and very strong growth.Let's dig into a few details. Amid the escalating COVID situation in Europe, our #1 priority in these unprecedented times remains the health and safety of our customers, teams and partners. Customer safety is of utmost importance to us. To live up to this priority, we operate with wide-ranging hygiene measures in warehousing and together with our freight carriers in delivery. Our various warehouses and photo studios continue to operate with the highest hygiene standards and effective distancing measures so our frontline workers can deliver at the highest level in a safe work environment. At this point, I would also like to acknowledge once again the enormous performance that our frontline workers have been delivering to manage our growth at heightened safety measures for more than half a year right now. The tireless work and dedication are impressive and very much appreciated. Thank you so much to all of you.Most of our office teams continue to work from home at excellent productivity levels. We have our offices partially open to foster team cohesion for certain highly interactive meetings and for certain team members, yet at the same time we remain mostly working from home, which is working very well. While focusing on health and safety, we'll continue to manage the COVID-related risks carefully and take all possible prevention measures. And let me give you some details on the top 3 risks that we believe we have to manage: number one, a potential forced warehouse closure. That could happen. And we take comprehensive safety measures to minimize the risk of a temporary warehouse closure due to a COVID outbreak, and we don't see any indications. And we have no heightened numbers of infections in the warehouses, yet we want to be clear there is risk that remains. Number two, potential freight carrier capacity restrictions. This is general online shifts that we're all experiencing. Freight carriers might face capacity constraints, especially in the coming weeks in the run-up to Christmas. We are working with existing as well as newly onboarded carrier partners to mitigate these effects. And number three, a potential border closure, rigid border closures that could happen. We don't see any indication of that yet. If that happens, that would severely affect our supply and delivery processes as most of our processes are cross-border. Again we don't see any of the -- these risks manifesting themselves right now, but they could.Overall, we continue to manage this special COVID situation well with a focus on health and safety. And we are mitigating the COVID-related risks as good as possible, but we also need to acknowledge that some relevant risks remain and work closely on this topic.Coming now to the details of our Q3 results. Due to the acceleration of online adoption, we delivered very strong GMV growth of 59% year-over-year to EUR 113 million GMV in Q3. This went in line with incredible active customer growth of adding 358,000 active customers to overall 1.3 million active customers. Keep in mind we ended last year with less than 1 million active customers, and now we're already at 1.3 million. And these are all customers that we can work with in our loyalty-driven, predictable business model. This growth happened in all our countries. Especially, development in our International segment was very encouraging, further strengthening the progress made across the whole country portfolio.On the following pages, let me provide you with some more insights and drivers of our growth and the implications this accelerated online adoption has on our business. The very positive aspect of this strong growth continues to be that it's driven by both our existing loyal customers and strong new customer acquisitions. On this slide, you have some data on our existing customers. Our loyal existing customers showed continued higher engagement and repurchase rates in Q3, which we believe is a strong indication that customer behavior has changed fundamentally towards more e-commerce. As a result, we were able to increase our overall GMV with older cohorts significantly. Here shown are the 2012 to 2018 cohorts, which then express themselves by a 20% increase in yearly average order frequency, which now stands at 3.6 orders in the last 12 months versus 3.0 orders in the same quarter of last year. All in all, the third quarter was again a great proof of our loyalty-driven business model, which is at the core of Westwing and provides the basis to our profitability and growth strategy. Therefore, we will continue to focus on the loyalty of our customers by investing even more into great customer experience and inspiration.New customer metrics also remained very strong in Q3, as we were able to acquire 68% more new customers in Q3 compared to the same quarter of the previous year. We believe that also the ongoing strong new customer acquisition is another indicator for a structural online shift. Moreover, the new customers we have won during the last 6 months continue to indicate strong repeat purchasing behavior already in their first weeks and months, as shown by our Q2, Q3 cohorts; and the accumulative GMV generation in weeks after the first purchase, which are in line with 2018 and 2019 cohorts. Thus, we believe these new customers are likely to become also long-term loyal Westwing customers and will contribute not only to this year but also to future years' growth, but not only the new customer acquisition developed very strongly. Also the underlying new customer drivers have been going very well, for instance, our strongly growing organic audience, here shown on Instagram. By now we have more than 5 million Instagram followers across Europe. And we're reaching more than 25 million different people each week on Instagram only, so organic marketing continues to be really one of our core competencies. And we benefit from that and we are further intensifying and investing into that.Let me now give you some more insights on the growth dynamics we have seen in Q3 and now in Q4. In Q3, growth rates stabilized on a very strong level after our extraordinary Q2 despite in Q3 lockdown measures have been eased and stationary shops opened again. For us, this is a clear indication that we are actually seeing a structural shift towards e-commerce and Home and Living market. Also our Q4-to-date growth rates seem to confirm that hypothesis. Q4 growth accelerated compared to Q3, and we are confident so far that we will deliver a very strong Q4. Worth noting also that we, of course, have prepared our operational supply accordingly, as we laid out in the last call.Having said that, we are on track to deliver our increased guidance for 2020 of EUR 415 million to EUR 440 million revenues, and we are on track to build a strong company based on the new scale we will achieve in 2020.With that, I would like to hand over to Sebastian for the financial details.

[Sebastian Säuberlich, CFO & Member of Management Board]

Yes. Thank you, Stefan. Good morning, everyone.Let me start with giving you my overall assessment of Q3 financials before we jump into the details of our results. Overall, Q3 has been very strong on every single financial metric. The basis of the success was once again very healthy contribution margin in combination with significant scale effects. We achieved again very strong profitability of 10.9 percentage adjusted EBITDA in Q3 2020 even though we ramped up our marketing investments back to the lower end of our target ratio.In Q3, we achieved group revenues of EUR 99 million driven by the strong customer momentum, as Stefan described in the first part of our presentation. This was a 60% -- 66% year-over-year growth in Q3. For the first months -- for the first 9 months of 2020, we generated EUR 277 million revenues or 55% year-over-year growth. By the end of Q3, we had already more revenues than we generated in full 2019.Also it is very encouraging to see that our International segment was growing at attractive levels, outperforming our DACH segment on growth with a 75% year-over-year increase in Q3 versus 59% in the DACH region. This again confirms that we are on the right track with our International segment and our measures continue to pay off.Next to growth, also profitability has been very strong in Q3, with Q3 adjusted EBITDA margin at 10.9%. This strongly improved profitability was driven, on the one hand, by the increased size. The level shift in size enabled us again to realize significant operating leverage as our business continued to scale nicely. On the other hand, profitability was based on very strong unit economics reflected in our contribution margin. While we have achieved substantial and structural improvements in terms of our contribution margin, I also want to highlight that we benefited from some special effects here. Let me give you some more details on these developments as I move down the P&L lines.Starting with gross margin. Our gross margin improved by 4.9 percentage points year-over-year to an all-time high of 49.2% in Q3. This increase was mainly based on a great retail margin discipline in combination with a strong Own and Private Label share, yet we also benefited from a special effect in Q3 as we have seen lower inventory-related costs. Our inventory level was relatively low; and hence we sold off inventory at a fast pace and high inventory turns, hence hardly had any aging write-offs on our inventory.Going further down in our P&L. We were also able to improve our fulfillment costs in Q3 by 4.2 percentage points year-over-year. As a reminder, our fulfillment costs include our logistics, customer care and payment costs. Basis to this improvement is our very efficient warehouse setup that we run across Europe, where we also experienced operating leverage through high utilization, yet also on our fulfillment costs we benefited from considerably lower return rates, which we expect at least partially in 2021. To give you an idea: In Q3, our return rate was around 3 percentage points better compared to the same period previous year, which saves us significant costs. We estimate this effect to be around 1 to 2 percentage points on our fulfillment costs.As a result of the higher gross margins and low fulfillment costs, contribution margin improved significantly to 29.3%, an increase versus Q3 2019 of 9.1 percentage points, yet as we discussed, this was partially driven by the special effects in gross margin and fulfillment costs. We assume the structural contribution margin excluding those special effects at 26 to 27 percentage, i.e., 2 to 3 percentage points lower than reported. This would still imply structural improvement of 6 to 7 percentage points compared to Q3 last year. So overall, we are very happy with our contribution margin and the improvements we have implemented.In terms of marketing, we have now ramped up marketing almost to the lower end of our target ratio of 8% to 10% of revenues, with Q3 2020 at 7.8%. We believe and continue to believe this is needed to generate sustainable long-term growth. G&A costs, which primarily consist of salaries and wages, were another important driver of our improved profitability. The G&A ratio decreased by 7 percentage points compared to Q3 2019, demonstrating strong operating leverage. I personally think it's super important to highlight how well our G&A basis did scale the last 2 quarters, as this realization of operating leverage was and is one of the key prerequisites to achieving our target P&L. At the same time, we believe we still have very attractive business cases to invest in and are prepared to slightly increase G&A ratio again in 2021, yet we will remain substantially below the levels of 2019.The combination of the top line growth, strongly improved contribution margins and operating leverage resulted in fantastic bottom line results in Q3. Adjusted EBITDA improved by 18 percentage points to 10.9%. In absolute terms, we had an adjusted EBITDA of EUR 11 million in Q3 versus a negative EUR 4 million in Q3 2019. Year-to-date adjusted EBITDA margin was already at 8.8%, or in absolute terms EUR 24 million. Just like the growth, the improvement in profitability was driven by both segments. The International segment, which had been challenging in terms of profitability for some time, now showed positive 4.4% adjusted EBITDA margin in Q3 2020, while the DACH segment, still ahead and realized a margin of 16.4%.Now moving to our cash flows. As we operate a highly capital-efficient business with a negative net working capital, we actually didn't need to fund any net working capital to enable the strong growth. To the contrary, the strong growth released net working capital and provided further cash versus previous year. By the end of Q3, our net working capital was EUR 11 million negative.The lower net working capital compared to last year was mainly driven by higher customer prepayments and higher trade payables. Both typically increase while we grow. Furthermore, we had a very low CapEx ratio. Our CapEx is mostly capitalized internal software development. In Q3 2020, our CapEx ratio decreased by 2.5 percentage points to 1.9% of revenue versus previous year. The decrease does not reflect a significant change in our absolute technology spending nor a repurposing but is a result of the higher revenues and the lower capitalization ratio versus previous year. As we have already discussed during the last quarterly presentation, we will further ramp up our technology investments, as these are the backbone of our growth and profitability. Including these investments, you can expect us to spend maximum 3% of revenue on CapEx going forward.As a result of the strong profitability, supported by the changes in net working capital, free cash flow for the first 9 months of 2020 improved by EUR 53 million year-over-year to now EUR 23 million. Q3 was also very strong in terms of cash generation, as we generated EUR 7 million of free cash flow despite Q3 usually being our weakest quarter in cash flow. Subsequently, also the last 12-month free cash flow margin improved significantly to now 9%.Based on the strong free cash flow generation of EUR 23 million in the last 9 months, our net cash balance increased to EUR 92 million, which is already EUR 19 million higher than the ending balance of 2019. This cash position and the assurance it provides to us in these uncertain times could not be highlighted enough.Before turning to our guidance, I want to highlight how proud we are that Westwing has been able to scale so simply adding tens of millions of euros in revenues over the last 2 quarters. And this is not by accident, but by the way, we have focused on building a scalable business over the last years. On top and thanks to the efforts to improve our contribution margin significantly, around 30% of these additional revenues made it to our bottom line.For 2020, we are well on track to deliver our guidance that we have communicated on October 19. While top line remains volatile and Black Friday is still to come, the start in Q4, as Stefan mentioned, has been strong so far. Having said that, the full focus of our organization is now on delivering a great Q4 for our customers. 2020 so far has been also a very special year. On the one hand, it proved our business model, our ability to scale and hence our target P&L. On the other hand, there have been also some special effects. Therefore, we believe 2020 cannot serve as the baseline for the short-term with regards to growth and profitability. In 2021, we will continue to pursue our long-term growth strategy, which requires investments into areas that provide further growth.First, we want to increase marketing back to the 8% to 10% of revenues on a full year basis to enable attractive growth going forward. We plan to do this through further investments into high-ROI organic channels. Second, we need to invest into technology as the backbone of our business and growth enabler. And last but not least, we want to aggressively expand our own and private label business. This is a great investment for us long term due to the additional growth and profitability upside it provides.I know that most of you would like me to give you an accurate outlook for 2020 today, but honestly, at this point we simply cannot do that. While we remain very confident and optimistic with regards to the long-term potential of our market, the short-term growth outlook remains volatile. And there is some uncertainty around 2021 development. This uncertainty comes with both risks and opportunities. What I can assure you, though, is that we will take a prudent approach in our 2021 planning and the way we manage the business going forward. At the same time, we also have to make sure to capture the opportunities that will be coming up. Hence, we will, a, stay flexible as we have been in 2020; b, continue to react fast to the changing market environment; and c, update you, our investors and analysts, transparently on how things are evolving.With that, I would like to turn the call back to Stefan before we take your questions.

[Stefan Smalla, Founder, CEO & Member of Management Board]

Thank you, Sebastian.Before we go into Q&A, a quick summary on Westwing. 2020 so far has been a very successful year. We further increased our scale and reach. By now we process an annualized 3.4 million orders. We sell a product every 2 seconds. We're serving 1.3 million loyal active customers in Europe.We will grow to EUR 415 million to EUR 440 million in revenue in 2020. And while doing so, we'll be generating EUR 37 million to EUR 48 million in adjusted EBITDA profitability, which is great and which validates the target P&L that we have set for ourselves and, at the same time, demonstrates our unique opportunity to build a highly cash-generating business. And despite the growth we have generated, this size-wise is still tiny compared to the huge opportunity in front of us, as we intend to lead the shift to online in our EUR 100 billion-plus market. It's truly day 1, as one famous e-commerce founder always says. Our business model focused on loyalty remains unparalleled, with 80% of orders from repeat customers. We are strongly growing our Own and Private Label products or Westwing Collection, where we sell gorgeous best sellers at good prices and, for us, fantastic margins. We have a very strong cash profile not only with a growing net cash position of EUR 20 million (sic) [ EUR 92 million ] and a negative net working capital but also low CapEx ratio. And most importantly for shareholders, we have an attractive target P&L, which we will validate in 2020, 10-plus-percent adjusted EBITDA margins and strong cash conversion. We even achieved 9% free cash flow margin in the last 12 months, something we are very focused on and proud of.We are looking very forward to the coming months and the next year. We are very positive on the overall outlook. At the same time, we remain cautious and prepared as we've always been. We are building Westwing as a long-term winner, and our results give us confidence we are on the right path to inspire and make every home a beautiful home.With that, we are happy to take your questions.

[Operator]

[Operator Instructions] And the first question is from Volker Bosse, Baader Bank.

[Volker Bosse, Co]

Volker Bosse, Baader Bank. Congratulations on the great results. I have 4 questions. As of my first, I would touch the International business plus 58% in 9 months, very strong performance. Which countries performed above average, so to say, and perhaps also below average? To get a bit of granularity in regards to the International business. And the second question would be regarding your products. Which have been the best-performing product segments or even items in third quarter or in the 9 months? Do you have any guidance here in that respect?And the third question would be on the performance of WestwingNow. How is WestwingNow performing, the shoppable Westwing magazine, so to say? And last but not least is Private Label in the third quarter was 1 percentage point down year-on-year. So do you have a reason for that? And could you give us some background here for that?

[Stefan Smalla, Founder, CEO & Member of Management Board]

Sure. I'm going to take all those 4 questions. First, on International, overall it was very encouraging to see that our International segment was growing at strong levels, even outperforming the DACH segment. So as Sebastian said, we're on the right track here. And we believe the measures that we did pay off. The countries are all kind of growing. On a country level within the International segment, the majority of countries were growing circa at the same pace as the DACH segment, while a couple of countries showed even higher growth rates. In the end, we don't feel that this comparison is super relevant at these growth levels. Both segments have an extraordinary growth; and now looking for details below the surface, we don't actually think, will give interesting insights. We don't do that internally because the growth rates are just so fluctuating and volatile and might have been improvements we implemented in the last years in International overall, might have been some timing issues with the lockdowns, might have been performance of the team, might have been just volatility. So I mean I think we're not going to give individual country details. Overall, we're super happy with Q3 growth in both segments.In terms of the best-performing product segment. It's really astounding. It's the same situation as we explained in the last call. We don't really see any outliers in terms of kind of products or specific ranges or specific price points or specific categories or anything that really specifically stands out. We believe that, because customers are generally at home, some will decide, "I want to cook more." Some will decide they want to get more furniture. Some will decide they want to redo a whole room. Some want to have more decoration. Some want to go outdoors a bit more to their balcony and do that. Some -- really we don't see anything in the internal metrics where we track like category shares and brand shares and all kinds of shares. There's nothing that stands out. I mean I could wish to give you a sexy press story or something like this product stood up but actually it didn't happen. Like it's really across the board, which we think structurally is quite good.Then WestwingNow performance. WestwingNow has been performing as well as the daily themes and the Private Label. WestwingNow is a permanent assortment. And so we've seen strong growth in Westwing now across the board in all categories. It's more furniture heavy than the daily themes. So that stayed the same. And what we also saw is that kind of the interrelations where we cross- and up-sell the customers that we get through our daily themes model than in the permanent assortment were converted well.And that leads us to Private Label, which is a big part of WestwingNow. And there actually we did have one effect that I could highlight. One is that, in the end, it remains one of our strategic priorities, right? And we stick to our long-term target of increasing the share to 50%, but during the Q2, Q3 level shift in demand, we also saw a huge demand for our Westwing Collection. And it came very sudden, and at the same time, we had disruptions in supply chains, so what we didn't have is all of those products in the Westwing Collections to have sufficient stock levels that we wanted. And so it slightly impacted the overall Private Label share also of the group because we basically substituted this with third-party products for the very short term. The good thing in our business model is when we have like those 5,000 suppliers and we can work with them very kind of flexibly. That helped us a lot to not have any customer impact, but it did have kind of a metrics impact in terms of Private Label share. We have recently improved the availability of our Own and Private Label products as we ramped up the team and just to deal better with the increased demand levels and the complex supply chain right now. And our Own and Private Label share is already up by 4 percentage points quarter-over-quarter, and we expect that the share will continue to increase in the coming months as kind of the supply chain disruptions are getting less. Overall, we're really proud of how flexible our business model works.

[Volker Bosse, Co]

Okay. Yes, I think it's an encouraging time that the growth was so broad-based throughout all product segments as well as countries. So congratulations again, perfect.

[Stefan Smalla, Founder, CEO & Member of Management Board]

Thank you. We agree. Thank you.

[Operator]

And the next question is from Adam Cochrane, Citi.

[Adam Gareth Cochrane, Director]

A couple of questions from me. In terms of the supply constraints that you just mentioned, is this something which has been worked through the system now not just for the your -- Own Label products but from your -- I mean, your suppliers' perspective? Is this something that you see as being in the rearview mirror now? And then secondly, I saw that the average basket size was down at, let's say, slightly 2% or so. And you're talking about freight, potential freight constraints. Is this something that you have to work hard on to manage? Obviously you've got more and more baskets. It's not the actual basket size getting bigger. And potentially the freight rates either, I presume, go up rather than are not available. How do you manage the freight rates with pricing versus consumer paying for delivery? If you can just talk about those bits.And then finally, bigger picture. Do you see the change in consumer behavior towards online, particularly in your category, as something that is very permanent in nature? So as we look at 2021, I find it hard to believe that customers who've either found your brand and/or other online players will suddenly say, "Oh, I'm going to go back to the way I shopped before." Just your views on that.

[Stefan Smalla, Founder, CEO & Member of Management Board]

Sure. I will take the questions on the supply constraints, on the freight and the consumer behavior. And then Sebastian will talk about the average basket size. And so in terms of supply constraints: So we actually took a decision in February, March, when it was still unsecured, to add to our stock. And that helped us a lot. We've started pretty early on building up that stock, especially on best sellers, so we're quite well prepared, yet at the same time what we see in the market is that suppliers and factories, some of them, are struggling to fill -- fulfill the demand within the usual time frames. And that's actually, we think, not due to supplies chain constraints mostly. It's mostly because the overall demand for Home and Living products is elevated. And what we see from other companies in the market, both online as well as off-line, everybody is seeing higher demand, the online players even more. And I think we're really taking share right now, yet the overall market is just growing. And in our business model, right now there's no operational risk that we see, so -- because we can just work with -- if one supplier falls out, we have 5,000 others to kind of take care of providing products for us, but we do see a bigger challenge overall to make sure that we get the right products and that we make sure that these elevated levels are working through the supply chain. So it's something that we continue to have to work through in the coming months, as well as in the coming year where we believe the market overall will probably hold pretty strong. So we're prepared for that at least, right? We don't know. We don't have the kind of looking glass into the future, but right now it looks like elevated demand across the board in Home and Living and something that's going to be something to work on, not an operational challenge that we cannot solve but something to work on.Then in terms of freight. So in the end, all our freight providers are experiencing online growth. Online penetration of almost all consumer industries is increasing, and so is the demand for carrier services. And accordingly, we also expect price pressure from carriers as the carriers don't have unlimited capacity. And we actually strongly encourage our carrier partners to increase capacity to deal with increased demand, talking to lots of carriers to make sure we get the best deal in this market. We have seen some price increase in the past. And I've seen some surcharges during the seasonally strong Q4. There might be a similar behavior from carriers this year, although our teams will work very hard against that. Overall, we try to work hard against any increase by rebalancing volume between carriers and optimal carrier selection too, but in the end, will we pass this on to consumers if it happens? No. This is not something that kind of -- it's not going to be substantial in the sense of that it changes the overall profitability of the company. It will slightly. And as Sebastian said, we have buffer in our contribution margins versus what we want to do as target P&L, so we don't expect that this will have a material impact. It's something that operationally we have to deal with and we're more worried about capacity constraints there, right? Then -- and Sebastian will talk about what this means for AOB or how we think about that.And then in terms of is customer behavior permanent, that's we believe to some degree, yes. All we can see is that the customers behave exactly like customers of the past. We believe that the Home and Living online market is now going through an acceleration of kind of the S curve, and we're now in a steeper phase of the S curve. And every kind of vertical in e-commerce has been at that phase, books in the late '90s, early 2000s; electronics in the mid-2000s; fashion in the early 2010s. And there is a phase where just consumers are saying, "Okay, this feels like it's ready for prime time. I'm ready to shop a lot there." And then once they do, there is typically no market in retail, no vertical where once you reach a certain e-commerce penetration then it goes downwards again. It's the convenience of e-commerce is too strong. The customers have learned that stuff actually arrives at their door. It -- they don't have to go to stores. And on top now we have this effect that, when ever a vaccination or whatever comes at some point, there's insecurity and people just don't want to go outside. And even before the pandemic, we always said like, "Why do you want to go 1 hour outside of the city, to walk hours through a big store, when you can do that from the comfort of your home, on beautiful pages; and then it's going to be delivered to your door in a convenient way?" So we believe a lot of that will be long term. The growth rates that we see, that's not long term. We don't think that the growth rates that we've seen this year is something that we will see next year, but we think -- on the terms of level and growing from there, we think there's potential there. Sebastian, do you want to talk about the AOBs, average order baskets?

[Sebastian Säuberlich, CFO & Member of Management Board]

Yes, absolutely. So I think there are 2 ways to answer this. I think, first of all, what does drive this change? And is this something we worry about? I think, first of all, the change versus previous years is timing, as you said. And it's mainly driven by mix effects. So our International segment that grew now stronger in Q3, on average, has a slightly smaller average basket size than the DACH segment. And it's also driven as those countries partially have lower purchasing power, and also logistics costs in those countries are cheaper. So I think the average on profitability -- impact on profitability, if it stayed within a segment, is negligible, so overall we are not worried about that. Then from a strategic point of view, I think, how we look at that, it's not a number we try to manage up because we actually believe that order frequency is kind of a key measurement and a key topic for our loyal customers. So basically we want actually to have customers order a lot because the loyalty is so important. It increases the customer lifetime value in the long run much more than like doing one big order at a time. So that's why we actually -- we look at the KPI, but we don't try to manage it up even though it will be good for profitability and unit economics. But we believe the bigger impact on loyalty is if customers do frequent orders. And we don't want to kind of hardly manage them into bigger basket sizes like we could do by increasing shipping fees or like other limits from where we ship one for free, but that's nothing we want to do. So it's something we observe but has 2 sides. And we currently believe the loyalty is the more important one.

[Operator]

And the next question is from Christian Salis, Hauck & Aufhäuser.

[Hans Christian Salis, Equity Analyst]

I have 2 questions left, please. So first of all, could you please quantify on -- or a little bit on Q4 revenue? So how much is really depending on the Christmas business, on the holiday season? And maybe, yes, how much revenue is generated in the last 4 weeks before Christmas? And then secondly, could you also talk a little bit about your expectations regarding free cash flow in Q4? That would also be helpful.

[Stefan Smalla, Founder, CEO & Member of Management Board]

I think both are for you, Sebastian.

[Sebastian Säuberlich, CFO & Member of Management Board]

Yes. Christian, let me try to answer that. I think, first of all, Q4 is of course very dependent on, I think, this -- the weeks from Black Friday, usually 1 of the last weekends in November, to then kind of the weeks -- till like, let's say, 1 week before Christmas. Because from then on, we can't deliver -- or we can't make the delivery promise before Christmas anymore. So kind of that is kind of the interesting time. In terms of revenues, I think usually what we do on a weekend of Black Friday or something is kind of, I will say, like, I don't know, factor of 4 to 5 of an average day in the quarter. So basically you can imagine how much this drives to the Q4 revenues. So I think we're running well now, but I think, kind of the answer how Q4 will look like, I can give you when Black Friday and the Christmas heavy season is over, so very late into the quarter.Regarding free cash flow, I think the most important driver, of course, is profitability, yes. I think, from the guidance we gave, you can derive an adjusted EBITDA for Q4. And then the next big step is actually working capital developments. There we would also expect a significant improvement versus Q4 last year. And I think that will then result in a very positive cash flow for Q4 without now giving you a number.

[Operator]

And there are currently no further questions. [Operator Instructions] And we haven't received any further questions at this point, so I hand back to the speakers for closing remarks.

[Stefan Smalla, Founder, CEO & Member of Management Board]

Thank you.Hey, everyone, thank you for attending. We're super excited about where we are. And we're focused on health and safety at the same time and take a very measured approach to business. We're very focused intensely right now on delivering a great Q4 and then going into a super exciting 2021, and we look forward to speaking -- you again at our next earnings call.Thank you very much. Have a good day, and stay safe and healthy. Bye-bye.

[Sebastian Säuberlich, CFO & Member of Management Board]

Thank you. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.