Zalando SE

XETRA:ZAL

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, welcome and thank you for joining the Zalando SE publication of the Q2 results 2023.

[Operator Instructions] I would now like to turn the conference over to Robert Gentz, co-CEO. Please go ahead.

[Patrick Kofler, executive]

Hello. Good morning. This is Patrick. Good morning, ladies and gentlemen, and welcome to our Q2 2023 Earnings Call.

I'm joined by our co-CEO and Founder, Robert Gentz; and our CFO, Sandra Dembeck. Robert will kick us off with a business update then Sandra will walk us through the financial development of the quarter. And Robert will discuss our outlook. Robert and Sandra are available for your questions afterwards.

As usual, this call is being recorded and webcast live on our Investor Relations website. And a replay of the call will be available later today.

Robert, I will now hand it over to you. Please go ahead.

[Robert Gentz, executive]

Thank you, Patrick. Hello as well from my side and thank you for joining today's call.

2023 is clearly a year of transition for us. In the economic environment, we are focusing on profitable growth. At the same time, we continue investing with confidence into several exciting areas to set us up for future growth. We also started a program to reduce complexity, simplify the organization and increase our ability to execute fast. And overall, we're making great and steady progress on our overall strategy to have an even bigger impact for our customers and partners and deepen our relationships with them. They continue, as always, to be at the heart of everything that we do.

And we deliberately [ said ] to not push for more short-term growth at high incremental costs, for example, through even more promotions and marketing spending. Instead, we continued our focus on long-term value creation and boosting future growth even as today's financial results rather reflect our focus on profitability in the current environment.

And now let me move on to the executive summary. In the first half, we continued to face headwinds on our top line. This is the result of reduced discretionary spend and the ongoing normalization between off-line and online spending following the exceptional dominance of online during the pandemic. At the same time, we delivered a significant year-over-year improvement in our adjusted EBIT, rising by over EUR 100 million to EUR 144 million. This resulted in a margin progression of 2.5 percentage points to 3%.

We are also continuing to invest selectively in our 3 -- vision to be the starting point for fashion and boost future growth. Let me highlight 3 areas. First, we launched new brands -- new brand high-profile partnerships, for example, with the global athleisure brand lululemon and many more, to excite our [ customers' integration ] across our propositions. Second, our partners continued to further embrace our logistics infrastructures and scale their businesses. The Partner Business share of Fashion Store GMV rose 7 percentage points in the first half of the year, driven by increased adoption of Zalando Fulfillment Solutions. At the same time, our so-called multichannel fulfillment, which is now out of the pilot phase and is being prepared for wider market launch, is proving successful, with more partners signing up. And third, we are also unlocking the potential of new tech innovations. In July, for example, we launched a new tool that enabled customers to receive size recommendations based on their unique body measurements.

We remain committed to our ambition for this year to deliver profitable results and to continue selective investment through the cycle. We also are narrowing our full year guidance. As a result of improved profitability for the [ first year ], we now expect the full year adjusted EBIT to be in the range of EUR 300 million to EUR 350 million. To reflect the temporarily subdued demand for online fashion, we expect GMV and revenue for 2023 in the lower half of our initial guidance ranges.

So let me now touch on the mentioned highlights in more detail to show you how we are progressing on our strategy. First of all, we're excited that we are attracting and launching more high-profile brands on Zalando, across our propositions. In sports, we have a new partnership with lululemon in 11 of our European markets. lululemon has seen amazing success in North America, and we look forward to being their only multi-brand partner of choice allowing them to reach millions of European customers. And to enable to -- their story to be told, we are going to launch a premium campaign of a really innovative [ digital mindful ] experience and have brilliant curated collections.

Next to sports is beauty. We have made further progress in offering a bigger and smart selection to our customers. In Q2, we've added key brands like Lancôme, MUGLER, Shiseido in several of the markets. We also continue to make progress to better serve our customers with more locally specific and relevant choices. For example, in France, we added sought-after brands like Claudie Pierlot and Le Slip Français. Progressing further on our brand portfolio across all propositions is our flywheel. The more exciting and relevant our portfolio of brands is, the deeper the relationship with our more than 50 million customers gets and the more Zalando becomes the place to be for fashion and lifestyle brands in Europe, so we're really excited about the progress.

Next, let me talk about helping our partners building their business and reaching their full potential. We're not just connecting partners with their target audience. We're also adding great value by boosting their digital business and supporting them with our capabilities like logistics, and we are very proud that we can support our partners in so many ways. The growth of our Partner Business and ZFS is a great example of how partners use our reach and infrastructure to successfully sell to their customers via Zalando. In the first half of 2023, the share of the Partner Business contributing to Fashion Store GMV was up 7 percentage points compared with a year ago. During the same time period, the share of partner items shipped via Zalando Fulfillment Solutions increased by 3 percentage points year-over-year.

And since last year, we have taken ZFS now one major step further. Our partners can now also use our logistics [indiscernible] beyond our Partner Program to drive their ecom business outside of Zalando. This is what we call multichannel fulfillment and this is great growth potential. With 100,000 items shipped since launch, it's growing quickly in size. Our pipeline for this new service [ is workflows ], and we convert more and more partners into new multichannel fulfillment partners. Partners can use multichannel fulfillment already in 6 markets. And we will add Finland and Denmark now very soon. By the end of 2023, we plan to serve many more partners. In the medium term, we expect this recurring business to be positively contributing to our [ group ] margin.

Now let me also mention a few things that really excite us about how we are using and experiencing these new technologies to serve our customers better and offer them a top-notch experience: first, our advances in size and fit technology, something that can really make a dramatic difference for our customer experience. Thanks to the work of our in-house team, we already had reduced the size-related returns through our own existing size advice by 10% compared to items without any size advice. And it's clear that this helps our customers to make even better choices, but now we are applying even more technology to the problem. We've started to help customers find the right size and fit using their own body measurements, and we're able to do that with only 2 pictures that customers have to take from themselves. And these pictures never leave their phone, but the measurement data then allows us to predict the right sizes for them. And [ we've rolled it out in that -- ] for customers shopping for women's dresses, jumpsuits and tops. And dresses and jumpsuits represent some of the biggest pain points for customers when it comes to selecting the right sizes. And for us, this is truly exciting, as it shows the way of how one of the core challenges in fashion e-commerce can be served -- can be solved in the future at scale. And this new experience also demonstrates how we're using the technology from our 2023 -- 2020 company acquisition in Switzerland, Fision.

Second, we are very excited about the potential about -- that AI has on our ability to build great experiences for our customers. We see exciting use cases for us in the area such as recommendation engine or personalized fashion discoveries. For example, we recently launched a beta version of a fashion assistant powered by ChatGPT. While still in beta, it gives us a very important insight into how fashion discovery based on large language models will develop going forward. It will be simpler and smarter than traditional search [indiscernible]. It is much more scalable and accessible than human advice as well. So we believe there are exciting things to come in next few years.

And with that, I will hand over to Sandra, who will give you more details around the financial performance.

[Sandra Dembeck, executive]

Thank you, Robert. And good morning, everyone.

So Robert talked about some of the exciting core dimensions of our strategy that we are investing in. And with that, we will unleash our next growth phase on our way to being the starting point for fashion. Let me now focus on our Q2 financial results, which in this temporarily subdued demand environment reflects our continued efforts to deliver profitable growth. And it allowed us to narrow our adjusted EBIT guidance range to EUR 300 million to EUR 350 million from previously EUR 280 million to EUR 350 million.

Let's start with the group figures on Page 8. For Q2, we report a muted top line performance, as inflation continues to weigh on consumer wallet and normalization between offline and online continues. Our GMV came in at EUR 3.7 billion and is down 1.8% year-over-year. Revenue at EUR 2.6 billion is down 2.5%. In Q2, we again significantly improved our profitability. Adjusted EBIT almost doubled from EUR 77 million to EUR 145 million, and this corresponds to an adjusted EBIT margin of 5.7%, which is a year-over-year improvement of 2.7 percentage points. The improvement was largely the result of continued efforts to drive efficiencies in fulfillment costs as well as a lower marketing spend.

Looking at H1. Our financial performance translates into a flat GMV and revenue growth, while adjusted EBIT came in at EUR 144 million or 3% margin, an increase of 2.5 percentage points compared to last year.

Let's turn to our customer metrics on Page 9. So starting on the left. Our active customer base stands at 50.5 million. On a trailing 12 months base, we grew it by 2.4%. Moving over to the right: Order frequency decreased by 3% from 5.2 to 5. And average basket size increased by 3.9% to EUR 58.10, which -- more than offsetting the declining average order. And GMV per active customer slightly increased by 0.8% to just over EUR 293. Similar to Q1, this development is driven by an increase in average basket size as a result of higher average item value.

So let's turn to our segment performance. So this is on Page 10. Let's start with top line; and I'll walk you through the chart from left to right, starting with Fashion Store. Fashion Store GMV is down 4.2%, while revenues declined 6.2%, as the Partner Business share continues to increase. In DACH, we recorded negative 7% revenue growth. And performance was particularly impacted by continued weak consumer confidence, as inflationary pressure continues to weigh on consumer wallet, but also the ongoing normalization of e-commerce adoption, especially in Germany. Rest of Europe revenues decreased by 5.5%. And here we see quite stable performance across the 22 markets, with some of them demonstrating significant positive development, for example, our 8 new markets. And just as a reminder: Apart from macro factors, growth rates of individual markets are also a function of market-specific factors, maturity profile of the market and also different comparison bases.

Moving on to Offprice. Similar to Q1, the Offprice segment continues to show a strong development, with double-digit revenue growth of 16%. With our Lounge by Zalando proposition, we successfully capture the current demand for great deals and continue to support the clearance of older stock from our Fashion Store, so this dynamic underlines the strengths of Zalando's business mix where our Offprice segment is partly offsetting the temporarily subdued environment for full-price sales.

The all other segments revenue grew by 18.5% as a result of the inclusion of Highsnobiety.

Let's turn to the segment profitability on Page 11. Here you can see that all of our business segments and regions are profitable. Looking at Fashion Store: Adjusted EBIT increased more than 80% to EUR 111 million and thereby strongly improving adjusted EBIT margin from 2.7% to 5.3%. Both regions DACH and Rest of Europe show a similar positive development. Adjusted EBIT in Offprice reached EUR 25 million, with margin more than doubling from 2.3% to 5.8%. The significantly improved profitability in Fashion Store as well as in Offprice are the results of our continued focus on driving efficiencies in fulfillment as well as lower marketing spend.

The all other segments delivered adjusted EBIT of EUR 8 million, which is in line with last year.

So let's now move on to Page 12, the P&L. And let me explain the major cost drivers in a bit more detail. Let's focus on the Q2 development, which is the one on the right-hand side of the table, starting off with gross profit. Gross profit margin ended the second quarter at 40.6%, a slight decrease of 0.4 percentage points compared to last year. The market environment continued to be very promotional as inventory levels in the industry remained high. And it wasn't helped by the late spring/summer season start either. Besides, we see a small mix effect from the growing Lounge by Zalando business, which operates on a lower gross margin. Our Partner Business continues to be gross margin accretive.

Let's look at the 2 major profit improvement drivers, fulfillment and marketing costs. We see continued improvement in fulfillment costs. They declined by 1.6 percentage points to 2.4 -- 24.4%; and the reasons here are twofold: favorable order economics and the scaling of our Partner Program [ with a growing set of ads business ]. On order economics, we benefited from higher basket sizes but also improved due to efficiency measures like order bundling and [ the average ] delivery options. Additional cost improvements more than offset inflation-related cost increases in energy, packaging and wages.

Marketing costs decreased by 1.1 percentage points to 6.8%. And while we continue to invest into future growth, we do so with a focus on improving return on investments. In addition, the higher scale of our Offprice business, which operates at a low marketing cost ratio, further contributed to the improvement. Segment expenses came in flat at 4.8%.

Let me explain the other operating expenses, which increased to EUR 36 million. Within here, EUR 33 million relate to the program to reshape our organization, so these one-off costs are reported outside of adjusted EBIT. To conclude: Looking ahead, we expect to deliver sustainable year-over-year profitability improvement, also in the second half, while we continue to invest in future growth.

So let's move on to net working capital and inventory on Page 13. Net working capital ended the quarter with a cash inflow of EUR 114 million compared to a cash outflow of EUR 207 million in the previous year. This development is the result of a relatively large increase in trade payables primarily driven by the continued strong growth of our Partner Business as well as an increase in DPO.

Coming to inventory. Our inventory position has further improved to EUR 1.7 billion and it is now 1.6% lower than last year. The Fashion Store inventory is significantly below last year. And so it clearly paid off, that we stayed focused on effectively reducing our overstock through in-season clearance and through our Offprice channels as well as taking a conservative approach to our spring/summer '23 wholesale buy. On the Offprice inventory, the additional quality stock we bought in the second half of 2022 is [ turning ] in line with expectations and supporting our [ lounge ] growth.

Turning to Page 14, the development of cash and cash equivalents. Our cash and cash equivalents remained strong at about EUR 2.1 billion. Compared to the first quarter, our cash position improved by around EUR 300 million mainly resulting from a higher net income and the typical seasonal trading patterns. The strong cash position provides us with financial flexibility and allows us to invest in organic or inorganic future growth opportunities. On investing cash flow, we invested roughly EUR 45 million, of which EUR 39 million relate to CapEx spend for logistics infrastructure. The CapEx spend of EUR 77 million in H1 reflects our financial discipline in the current environment while we continue to selectively invest and setting us up for future growth.

So moving on to Page 15. [ Let's just say ] let's conclude the finance section with a quick check-in on the progress we have made along the -- our 3 main objectives for 2023. The first objective is to strengthen gross margins. We adjusted our approach to wholesale buying and the increased flexibility to scale up via our growing Partner Business. The benefit of this is already visible in our reduced Fashion Store inventory position and in the strong growth of the Partner Program. We also continued to improve the relevance of our assortment, which increases engagement towards full-price sales. And we introduced an updated commission table. The second step became effective now in July, so we will start to see -- sorry. So will start to see related margin benefits in the second half of 2023. So all of these measures have already and will continue to strengthen our gross margin.

The second objective is to simplify our organization for speed of execution, and here we have followed through on making changes to our organizational setup. And last but not least, as Robert highlighted already earlier, we continue to selectively invest in key platform capabilities for future growth.

So with that, let me hand back to Robert to talk about the outlook.

[Robert Gentz, executive]

Yes. Thank you, Sandra.

At the beginning of 2023, we predicted that this year will be challenging, especially with regards to uncertainties around consumer demand. We made sure that our GMV and revenue forecast ranges are broad enough to reflect these uncertainties. And given the subdued demand environment and our trading in the first 6 months 2023, we now expect GMV and revenue for 2023 in the lower half of our initial guidance ranges of 1% to 7% for GMV and of minus 1% to 4% of revenue, respectively.

The picture is different in regards to our bottom line. Already last year, we started to take decisive steps, and this year, we'll continue to implement a range of efficiency measures. The numbers confirm our successful focus on profitability. For the full year, we were able to narrow our adjusted EBIT guidance to EUR 300 million to EUR 350 million from previously EUR 280 million to EUR 350 million, so for the second half of the year, we expect an improvement in our top line. And as I said earlier, we are laser-focused on putting an attractive assortment in place for our customers. At the same time, we're investing into large-scale fall/winter and holiday marketing campaigns and preparing ourselves for cyber and Christmas trading.

In regards to CapEx, we already mentioned that we've adjusted the speed of investments to the current macroeconomic situation. As a results, we will end up at the lower end of the CapEx range of EUR 300 million to EUR 380 million. Our net working capital guidance remains unchanged in negative territory.

So this concludes the outlook. Before we jump into Q&A, let me just wrap up with the key takeaways of today. Our H1 performance reflects our continued focus for profitable growth in a temporarily subdued demand environment. At the same time, we continue investing with confidence into several exciting areas to prepare for the future growth. In H1 '23, we launched new brand partnerships, for example, with the global athleisure brand lululemon, to excite our customers. In '23, our partners continue to further leverage our logistics infrastructure to scale their businesses. And in first half year, we continued to embrace new technologies to enhance our customer experience, this time in the area of size and fit and artificial intelligence.

And so we are narrowing our guidance for the year 2023.

So let me finish by saying we are excellently positioned in the European fashion and lifestyle space. The European consumer may need more time to fully embrace, again, the e-commerce fashion space, but the current conditions are the same for everyone in our industry. And while we cannot change them, we can be the best to capture the opportunities that come with them. The key advantages of technology-powered e-commerce over off-line retail are structural, and these advantages will get stronger over time with the new advancements and technology breakthroughs that we're seeing. The share of e-commerce in fashion and lifestyle will continue to grow at a rapid pace even if 2023 is still a year where consumers are holding their breath after the rallies in the years before, but the rally will come back soon. And that's why we'll continue to invest on our core dimensions of our starting point strategy, and that's why we are confident to return to double-digit growth in the midterm.

And with that, we're very happy to take on your questions.

[Operator]

[Operator Instructions] Our first question comes from Nicolas Katsapas from BNP.

[Nicolas Katsapas, analyst]

Well done on the good developments on margins. And speaking about margins, I have a question on the adjustments that you put through to EBIT. So you mentioned the EUR 33 million restructuring charges, but then there were also EUR 5 million acquisition costs. Could you explain in a bit more detail what those related to? Because I think that it certainly took a quantum at least [ to leave us surprised ]. And then the second question is really on your guidance for the second half. i.e., on the top line, you're implicitly still expecting to inflect back to growth, but could you give us a sense of the balance of growth between the regions and Offprice? Is Offprice going to run at the same run rate as the first half? Or would it be more balanced between Fashion Store and the Offprice channel? That's all.

[Sandra Dembeck, executive]

Thanks a lot for the question. On the margin -- so you were asking about the adjustments that we were taking to EBIT. On the one hand, it is the restructuring, as we've said, like for the program that we launched to reshape the organization. Here we adjusted for EUR 33 million which is in relation to severances. We are about to now finalize the program, so this is the largest part now that we have booked there. The EUR 5 million acquisition goes to -- full related to Highsnobiety. So the acquisition that we took last year. So this is the amortization and some other smaller elements. In regards to our top line guidance, yes, let me just, first of all, take a step back. The one thing to say there is we do expect an improvement in growth in our top line in the second half. It is more balanced across the regions. When we're talking about the segments, Fashion Store versus Offprice, we currently still see an improvement, I will say, in the consumer sentiment. And with that, we do expect that the Fashion Store performance will improve. With that, we do believe that Offprice will continue to see a good performance, but don't forget that they have stronger comparatives in -- especially in the fourth quarter.

[Operator]

Our next question comes from Adam Cochrane from Deutsche Bank.

[Adam Cochrane, analyst]

2 questions from me. Firstly, on ZMS, can you just talk about how ZMS evolved during the second quarter in terms of looking at your -- the marketing budgets from your partners and things? Do you think you're taking more of their marketing budgets? I'm assuming that they haven't been spending lots of money during the period, so just an update on ZMS, please. And then secondly, when you're talking about the change in online penetration, offline versus online, that you saw in the first half, would you be able to point to any sort of large differences by market? So to give us some comfort that we're going to see online sales recovering at some stage, can you point to any of your markets where you've already seen some evidence that this is happening? I know you called out Germany as being one where maybe it's a bit worse [ than average ], but are there others that are better than average on that?

And with regards to that point, are you waiting to see evidence of that shift back to online before you pull the trigger on increasing your marketing budgets in Q3 or Q4? Or is that something you're going to do irrespective of whether the online penetration is recovering?

[Robert Gentz, executive]

Thank you for your questions. Maybe I'll start with the second one, first. So I think -- when we actually look at the moment, I think, at the -- over the last couple of years, I think there has been like an artificial tailwind, I think, in the pandemic. And there's now -- there are some artificial headwinds that we see now on the online on -- [ and the growth ]. So I think what we can say with very -- confidence, that rally towards e-commerce will come back because it's grounded on so many structural advantages that actually e-commerce has when it comes to being grounded in technology innovation, being grounded in data, being grounded in a lot of things that are happening on the global scale that will further improve the e-commerce experience that we're able to build. And don't forget that in Europe we're already -- we're still like very much behind in our penetration rate of e-commerce on fashion than, in comparison, to China and [ the U.S. ] So there is a lot of growth that's going to come. So that's what we can say with 100% confidence in the long term. We can't say with 100% confidence when this is going to be -- when they're starting is coming exactly, so what we'll do until then is -- as we point out in our presentation is we're not chasing artificial growth in the very short term at very, very high cost. What we, however, do is we invest into the long term when it comes to our customer experience. So bringing on new brand portfolios; investing into the storytelling elements on our digital experience, investing into localization of our experiences even more, investing into the partner perspective, so how they can engage with our platform, the multichannel fulfillment in the long term; and maybe a third element as well, investing to take capabilities that in the long term will even more provide the future of growth. We talked about artificial intelligence. We talked about size and fit, yes. So this is how we see it.

When it comes to the market, like, how markets are penetrated, we don't see like a very different pattern across the 25 markets that we're operating in. When it comes then to H2, we -- in the second half of the year, we will already increase our marketing spend. So we will increase our -- the -- we will decrease the expectations on the our -- on our performance and marketing spend because we already have, I think, some more -- some evidence with regards to how we see the -- like the autumn/winter merchandise being -- performing. And we as well just had as well a little bit more data to understand like how our customers are performing. So that's why we are -- yes, why we're looking like to a better top line in the second half of the year.

To your other question, on ZMS. So I think what we have seen with ZMS generally is like it has -- does not have like the biggest tailwinds in these times because that's like what's -- in line with the overall sentiment that we've seen, the fashion sector to rather focus on the profitability aspect. That being said, it's like in the same 2 percentage range of our GMV; and we continue to forecast it to grow in the course of this year.

[Operator]

Our next question comes from Andreas Riemann from ODDO.

[Andreas Riemann, analyst]

2 topics. One, the reshaping program, how shall we think about the savings? Is it mainly head count related? And is it coming like a hockey stick effect, or is it gradually arriving over a few quarters? And when should the full savings be visible? So that's topic number one. And then on returns: So what could be the new target for the return rate going forward? Or how much can you improve the returns with the new technology to provide better advice on size?

[Sandra Dembeck, executive]

Thanks a lot. And I think I caught both questions, but if not, please ask a follow-up. On the reshaping program: So we said that we would take several hundred roles, but the main ambition of this program was not around actually the cost saving of it. It was around being able to reinvest in the areas where we see the future growth, so it really is about reshaping our organization, making it more efficient in some areas while investing in others. So net-net on an FTE base, you can already currently see in the numbers that we have started to reduce our FTEs, yes. So we are very efficient on how we deploy our people, but in terms of savings, I will say the stabilization of the admin cost line is more the -- the cost ratio is more the ambition that we seek here. This was not meant to be a restructuring to save costs. This was meant to be a reshaping to really help us to invest in the right areas that help us to deliver that future growth.

In terms of return rates. So in the first half of this year, we now have seen a stabilization on return rates. We do believe that we have now reached a normalized level. It is in a similar region than it was pre COVID. We see a slight improvement, which is similar to what we said already. The areas where we offer the size advice, we have that 10% improvement in return rate. And so I think what we expect now on return rates going forward is 2 things. One, there will always be an impact from us scaling in regions and categories with different return rates, so there will always be mix effect. And on the other hand, of course, with what we're just launching now, the efforts in size and fit, that we will be able in the long term to see some improvement on size-related returns.

[Operator]

Our next question comes from Georgina Johanan from JPMorgan.

[Georgina Johanan, analyst]

I've got 3 questions, please. The first was just around your comments on seeing some improvements in consumer sentiment. And if I heard correctly, I think you said that you're already seeing some signals that give you encouragement for autumn/winter. I guess, can we just get a bit more color on like what metrics you're actually seeing around that? And indeed, should we presume therefore that current trading is back in -- that GMV is back in positive territory in July? And that was my first one, please. My second one was just looking ahead to next year, if you could just give an update on your thinking for full year '24 and the sorts of levels of growth kind of reasonable to expect at the moment. Like would you still expect a double-digit exit rate in Q4, for example, on top line?

And then finally. Appreciate you made some comments around working capital in the presentation, but could you give a bit more color on the trade receivables number, please? And indeed, like, are you seeing any change from customers in how quickly they're paying off their invoice balances? Is there any change in either direction in bad debt, for example? That would be really helpful.

[Sandra Dembeck, executive]

Thank you. I'll take the first and the third one and then hand over to Robert. So in regards to current trading, which I think summarizes the first question, well -- so we are guiding to an improvement in our top line in the second half, yes. And as always, the degree of it will depend a lot on the strength of the fall/winter season start as well as the strength of the key trading events like cyber. So when we then therefore now [ move into ] Q3, we do see signs of an improving consumer sentiment, yes. And we do see in -- and it's very, very early days, but we do see in the sales data for our fall/winter merchandise promising results, yes. As such, July for us was a better month. It was better than in Q2. And it was also in line with what we now would expect, that gradual quarter-on-quarter improvement throughout the second half. And just to be clear: As always, of course, Q4 is a more important and stronger quarter for us in the second half, yes.

Coming to the third one, trade receivables. So the movement here is actually not driven by the B2C. Our receivables is driven by actually the B2B trade receivables, which has to do with the growth of the Partner Program and some small changes we made that we elaborated on at the full year. So on the B2C side, the bad debt and all of that, because of the algorithms that we applied, hasn't really increased, yes. So we still operate, of course, with a large share of buy now pay later, but we still see not material movement on bad debt.

[Robert Gentz, executive]

Yes. And with regards to your questions on next year, I think -- we are just in the middle of '23. And our focus is now very much, I think, on the second half of the year; and trading through, I think, in a good way for the second half of the year. So I think in this sense what is important is that we stay very closely to the details of what we see on the consumer side. And that's, and Sandra was commenting on this, I think, some more positive things that we are seeing when we -- with regards to the next season. So that makes us, I think, more -- slightly more positive. And then I think as well, in the view of being very close to the details, is we'll be as flexible as we can towards the future, but clearly our mid-term ambition is getting back to double-digit growth. And as I was commenting in my remarks, like, we are very clear that the e-commerce rally will come back in the future because it's so much ground on so many structural advantages and it will come back. And if it come backs -- comes back next year, we will see, but we don't yet know. But it will come back and that's [ what we're working ].

[Operator]

The next question comes from Monique Pollard from Citi.

[Monique Pollard, analyst]

Just 2 questions from me, please. The first is on the gross margin progression. Obviously that was 40 basis points down year-on-year. I just wondered if you could give any sense of how much of that was mix versus clearance activity; what we should expect for the margin progression as we go through 2H given your inventory, you're feeling, is in a better position now. And then the second question is just on CapEx. Obviously I appreciate 4Q is a bigger CapEx quarter, but it also seems a bit of a stretch to get to even the bottom end of that CapEx guidance given what you've done in the 1H, so maybe you could just outline sort of what the big ramp-up is going to be in the CapEx and whether we might end up coming in below the lower end of that CapEx range for the full year.

[Sandra Dembeck, executive]

Thank you. So starting off with the CapEx question maybe, first. So as per the current plan, especially the plan around our logistics network expansion, we do believe that we will spend that CapEx and come in towards the lower end of the range, yes. So we have 3 major projects. That is Paris. That is Germany. That is Poland. There has been a shift of timing between the first half and the second half, as [ some markets had ] moved, but as of per the current plan, we do expect for this to happen.

On the gross margin. So I mentioned on the call that the objective really is to strengthen our gross margin. And to be honest: We have been very busy with that already. And I've talked about it with like improving the buy, which then as we mentioned also has helped the inventory. We launched the new commission table. We are working hard on the -- on improving the relevance on -- of the assortment to drive the full-price sale, but what we cannot forget is that we're currently operating in what is an extremely promotional environment given the high levels of inventory in the industry. And so we need to cater to that environment, and therefore, the -- talking about the mix that you would see there, it is heavily driven by clearance or by discount, yes. That's what really hindered us from showing a positive gross margin in the second quarter. And looking into the future, we will continue these efforts on like strengthening our gross margin also in the second half, but when you look into our guidance, then I think it is important to understand that this will allow us to really move with the market, yes. If we see this intense promotional environment continue in the second half, we will have flexibility on the gross margin. And if it returns to more normalized trading, we will, of course, see all the efforts come through and see the positive upside, yes. So I think what -- the way we have to conclude is that we are improving structurally our gross margin. It's just, at the moment, not yet visible in the numbers given the environment that we're operating in.

[Operator]

The next question comes from William Woods from Bernstein.

[William Woods, analyst]

I just want to follow up on a previous question. You said that you -- obviously you chose to reduce marketing spend to not chase growth in the quarter, but in order to grow in H2, do you need to increase marketing spend? And how will you think about that trade-off? And then the second one is around the health of your customer base. Obviously, quarter-on-quarter, customers declined. Can you comment on cohort behavior, retention? And which customers are you losing? What type of customers are they?

[Sandra Dembeck, executive]

I'm happy to take them. So in regards to the marketing, maybe let me come back to our EBIT guidance in the second half, yes. We said that we are aiming for an improvement in our year-over-year profitability, and that will be primarily driven by continued improvements on the fulfillment costs line. And with that, we will be able to increase our marketing spend and fund that increase, so I think that is important to understand in terms of the dynamics. In regards to the customer metrics, yes, we have seen a small decline in the active customer numbers, but don't forget we also added 20 million over the last 3 years. But when you look into the details here, then it is really driven by the new customer acquisition, yes. And that was a conscious decision from us given the current slowdown in the online segments. And when we look into the existing customers, we can see that the retention rates here are still ahead of pre COVID. So we are still having better retention rates than what we had prior to the pandemic. Of course, the COVID cohort, they are part of what we currently see, that rebalancing between online and offline.

[Operator]

The next question comes from Jurgen Kolb from Kepler Cheuvreux.

[Jurgen Kolb, analyst]

2 questions also. I think in your prepared remarks you mentioned that you want to be more cautious in buying into spring/summer 2024. This more cautioned buying, is that related rather to your initial thinking? Or would that be on a comparable basis with spring/summer 2023, which I think -- where you have already reduced your buying? And secondly, we noticed obviously that there is a lot of talk about potentially letting customers pay for returns. I know that in the past you've mentioned and you said that this is not really, well, how you think this business should develop. Is that still the case, or are you maybe currently rethinking if you may want to charge customers for returning merchandise?

[Sandra Dembeck, executive]

Let me answer the first question, so about the more cautious approach to our buying. What we think here is what we really want to leverage more and what we have done already in this year for spring/summer and also for fall/winter is we want to use the flexibility that the Partner Program injects to scale up. So that is very important for us. And then secondly, on wholesale, we want to better leverage in-season management of stock because there is a lot of in-season ordering feasible. And so we want to be able to leverage that more rather than making that too-early commitment. Also what goes into that is the category mix, yes. So it's a question around which categories are you really buying deep versus which ones are the ones where you also kind of like split it with the Partner Program, yes. So this is for us the level of caution that we are applying, yes. And then maybe over to you, Robert...

[Robert Gentz, executive]

Yes. I think, on the return proposition, your question there, like, for us at the moment, we don't have any plans to change this customer proposition because, like, our fundamental logic is nobody really likes returns. So that's the customers as well don't like returns. They don't really enjoy to go back to postal office and send back a return. So we don't like it. Customers don't like it. The environment doesn't like it, so -- but it's more for us to enable customers with the right choices. And therefore, we talk so much about the -- all technologies that we're investing in to helping customers to make better choice, to prevent unnecessary returns. This is for us, I think, the much more -- much better way to drive CLVs and, at the same time, to reduce returns. And we have had quite some success over last couple of years in that. And I talked about that, I think, as well in my remarks.

[Operator]

The next question comes from Anne Critchlow from Societe Generale.

[Anne Critchlow, analyst]

I've just got one question, please. And it's about the performance of product by segment, by price segment. So just wondering if you still see opportunities for premium and affordable luxury sales growth. And currently or in the second quarter, how did the various segments perform, if you look at, say, premium, mid-market and value fashion?

[Sandra Dembeck, executive]

Yes. So we -- it's we saw the similar patterns on what we saw last year. So the trends are continuing to be very similar. So there is momentum in [ street wear ], in the whole premium segment. And there is a more intense environment in, I would say, the young fashion environment, but that's also what you would expect. And this is the area where our partners, I would say, really come into play. Compared to last year also, sports, yes. So I think that is also on a positive path again. And yes, in terms of price points, of course, recommended retail prices have gone up high single digits, low double digit; and so of course, you do see an increase in the price points as such.

[Operator]

The next question comes from Volker Bosse from Baader Bank.

[Volker Bosse, analyst]

Volker Bosse, Baader Bank. And first question is on the order economics, which improved. How much can be explained by the introduction of the minimum order values? And are minimum order values are -- now introduced in all of your countries? First question. And second question is on Connected Retail. You did not mention that. Can you give us an update and how the role of which -- how important the role of Connected Retail will be in the future? And how do you look at Connected Retail at the moment?

[Sandra Dembeck, executive]

Yes. On order economics. So MOV and order bundling are 2 main levers for improving order economics, but they're not the only ones, yes. So it is a basketful of initiatives, and therefore, we don't really isolate out the seeming impact of it. The reason why we always mention it is because it's the most visible one when you go on to our web page or when a -- what our customer experiences, but you have to keep in mind that we also worked on increasing the average item values, that we also look on the -- on countering the inflationary cost increases through improvements in packaging, et cetera, et cetera. So there is a lot happening beyond that, including return rates, yes. On Connected Retail, I would say, as you know, we updated the commission table. And with that, I would say we see the expected development within Connected Retail. For us, Connected Retail remains important as part of our platform business. We see very positive development on the average item values on Connected Retail, which is great because that means that our strategy of connected retail partners adding locally relevant assortment is really working. So I think that would be our update on Connected Retail.

[Operator]

Our last question comes from Anubhav Malhotra from Liberum.

[Anubhav Malhotra, analyst]

Can I just ask on your multichannel fulfillment? Can you give us an update on how many partners you are working with at the moment? And how many more are in the pipeline coming soon? And then secondly, on the same, multichannel fulfillment, you mentioned that you expect it to positively contribute to your group EBIT margin. Can I just clarify if that's on the basis of what you charge your partners? Or is that also including the efficiency this brings to your fulfillment costs?

[Robert Gentz, executive]

Yes. Thank you for your questions, yes. I think multichannel fulfillment is something that we -- yes, that we've started to talk a little bit more about, as we are excited, quite excited, about like the rollout and as well the feedback that we get from partners. So we have 11 partners at the -- with -- that's live. We have many more in the pipeline that are onboarding and going to it. When it comes to the margin question: So as I was commenting on, in the midterm, yes, it's going to be margin accretive to our business. And this includes all costs that we charge or that are relevant for managing this business. And it's recurring, as these business contracts are very long-term-oriented contracts.

[Patrick Kofler, executive]

Thanks, everyone, for joining today's section. I think that's concludes the Q&A section. If there are any follow-up questions, do not hesitate to contact us. Otherwise, we wish you a happy Thursday. Thanks, everyone.

[Robert Gentz, executive]

Thank you very much...

[Sandra Dembeck, executive]

Thank you.

[Operator]

Ladies and gentlemen, the conference is now concluded. You may now disconnect. Thank you for joining, and have a pleasant day. Goodbye.