Zalando SE

XETRA:ZAL

Earnings Call Analysis

Strong Q2 performance with growth and margin improvement

In Q2, GMV reached EUR 3.8 billion, growing 2.8% year-over-year, while revenue increased by 3.4% to EUR 2.6 billion. Adjusted EBIT rose by EUR 27 million to EUR 172 million, improving the adjusted EBIT margin to 6.5%. This growth was driven by quality improvements in the retail business and strong performance in beauty, designer, and sports segments. Inventory management and expansion into high-profile sports campaigns contributed significantly. Looking forward, Zalando maintains its 2024 guidance with expected GMV and revenue growth between 0% and 5%, and adjusted EBIT between EUR 380 and EUR 450 million .

Introduction

Zalando's Q2 2024 earnings call saw key executives, including co-CEO Robert Gentz and CFO Sandra Dembeck, discussing the company's recent performance and strategic initiatives. The call was marked by a notable announcement from Sandra Dembeck, who will be stepping down as CFO after her contract ends.

Leadership Transition

Sandra Dembeck's departure was officially shared, with Sandra reflecting positively on her tenure and expressing pride in the financial discipline that positioned Zalando strongly. Robert Gentz expressed gratitude for her efforts in navigating challenging times, expanding margins, increasing liquidity, and steering the company back to growth.

Business Performance

Entering a new growth phase, Zalando reported a GMV growth of 2.4% for the first half of 2024, bouncing back from negative growth in 2023. The adjusted EBIT saw a significant year-over-year improvement at EUR 200 million, translating to an EBIT margin of 4.1%, indicating continued margin expansion.

Strategic Initiatives

Zalando's ecosystem strategy is performing strongly, especially in the B2C segment. The company saw a notable increase of 300,000 customers in the first quarter, with Sports, Design, and Beauty segments driving substantial growth. They introduced AI-powered e-commerce content to enhance customer engagement and inspiration.

Wholesale and Partner Program

The partner program remains robust, while the wholesale business also returned to growth after nine consecutive quarters of decline. This rejuvenation in wholesale business complements the strength of the partner program, contributing positively to overall B2C growth.

Supply Chain Stability

In terms of supply chain, Sandra Dembeck confirmed that Zalando is actively managing potential disruptions, especially concerning third-party brands and supplies from Bangladesh. The company ensures priority access to stock, with no current disruptions reported.

Conclusion

The earnings call concluded with Zalando's management expressing optimism about the company's future growth and strategic direction. Sandra Dembeck will continue her role for the next seven months to ensure a smooth transition while maintaining focus on the company's financial ambitions.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to the Zalando SE publication of the Q2 Results 2024 Conference Call. I am Myra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be followed by a question-and-answer session.

[Operator Instructions] At this time, it's my pleasure to hand over to Patrick Kofler. Please go ahead.

[Patrick Kofler, executive]

Good morning, and welcome to our Q2 2024 earnings call. Today, I'm joined by our co-CEO and Founder, Robert Gentz, and our CFO, Dr. Sandra Dembeck. Robert will kick us off with a business update, then Sandra will briefly walk you through the financial developments of the quarter and finally, Robert will discuss our outlook. Robert and Sandra are available for questions afterwards. As usual, this call is being recorded. The live webcast as well as the replay of the call will be available on our Investor Relations webpage later today.

There has been a few news today. Therefore, I will now hand it over to Sandra. Please go ahead.

[Sandra Dembeck, executive]

Thanks, Patrick. Good morning, everyone. And yes, let me say a few personal words before we start diving into the Q2 results. You may have read it in our press release this morning, I have decided not to extend my contract as CFO, and I'm looking forward to embracing a new challenge outside of Zalando.

I have to say the last 2 years have been an amazing and incredible experience for me, and I'm just grateful to you, Robert, and to David, our two co-founders, for having given me this opportunity and especially their trust in me to play my part in Zalando's unique success story.

I'm proud of what we all have achieved together. Our financial discipline has put us in a position of strength. And with Robert, David and Astrid, we have an amazing management team, a great team that will now accelerate, deliver and invest in the long-term growth of Zalando.

And for all of you in the call, this is not the moment to say goodbye, just to be clear. I'm still fully committed to Zalando, I still have 7 months ahead of me. And we will focus on delivering the financial ambitions that we have set out to deliver while we plan for my succession.

[Robert Gentz, executive]

Thank you, Sandra, and a good morning from my side. And Sandra, I also wanted to add that I'm tremendously grateful for your dedication for -- and [ your efforts ] over the last few years. I mean immediately after you joined, we had to navigate challenging macro times as a company and with your great experience and profound financial expertise, you played a crucial role in leading Zalando as we successfully adapted to this environment, expanded our margins, increased liquidity and then finally, steered back to growth.

And I personally very much appreciate you as a co-pilot during -- throughout all these rocky times that we navigated through. So you also played a very big part in building the steady foundation for the company's success now going forward. So let me say a big thank you, Sandra, for all that you have done for us. We'll miss you, and I look forward to continuing to work with you in the next few months.

[Sandra Dembeck, executive]

Thanks, Robert. Thank you.

[Robert Gentz, executive]

And now let's go to the business update. So last time we spoke was in March during our strategy update. I mentioned that we are entering a new growth phase. We can build on the robust foundation that we have established and expanding it into an ecosystem for fashion and lifestyle.

With our mid-term guidance 2028, we have set a clear path to return to strong growth, and we continue our margin expansion, giving attractive financial profile at scale. We continue to make material progress on the execution of our ecosystem strategy and the financial performance of the company. And with that said, let me now move on to the executive summary.

Turning commercially, number one. In the first half of 2024, we accelerated our GMV growth to 2.4%. This is a great achievement after a challenging year with negative growth in 2023 and an ongoing volatile market environment in 2024. At the same time, we also delivered a significant year-over-year improvement in our adjusted EBIT to EUR 200 million. With an adjusted EBIT margin of 4.1%, we continue to deliver margin expansion.

Moving to our strategic progress. We are successfully executing our ecosystem strategy at full force. So in B2C, we are seeing a growing customer base again as we serve 300,000 customers more than in the first quarter. We saw strong growth in our Sports, Design and Beauty propositions. In Sports, in particular, we have seen the strongest June in history of Zalando as we capitalized on the historic Summer of Sports now.

We continue to introduce as well new content formats into e-commerce to provide customer inspiration and entertainment. Just this quarter, we have now introduced an AI-powered content experience that allows customers to discover trends in major cities on a weekly basis. And I'll talk more about these exciting developments in B2C later.

The fourth point. In B2B, we delivered double-digit revenue growth. ZEOS enabled Switzerland as a new market, bringing our total to 12. In addition, we also added a new shopping club as a sales channel. Last but not least, in terms of financial performance, we remain committed to our ambition for this year to return to growth. At the same time, we delivered continued margin progression as reflected in our full year guidance.

So let me now touch on the progress of our B2C strategy. The growth of B2C platform is driven by three strategic pillars. And one of our pillars is about expanding Zalando into a lifestyle destination for more areas of our consumers' lives.

Over the last few quarters, we highlighted several high-profile sports brand launches such as lululemon, Hoka or On Running. And at the same time, we continue to deepen relationships with established brands. As a result, our customers have access to a highly relevant and most sought after assortment of leading sports brands on Zalando.

While doing so, we are engaging our customers by selling more compelling stories around sports type specific experiences such as football or running. Our elevated content experiences at stores in Zalando featured well-known football stars such as Eduardo Camavinga. We also hosted live streams with football icon Xavi Simons.

To further advance the Zalando brand momentum in the Summer of Sports, we launched now dedicated sports campaigns in major European cities featuring football icons like Robert Lewandowski and David Alaba. So the strong Q2 performance of our Sports category confirms that our strict focus on sports as a lifestyle proposition is relevant and valuable to our customers.

We had the strongest June in sports history at Zalando. National football jerseys drove 2.5x full price sales versus the Europe Cup '21. In our running category, more than 60% of running shoes were sold above EUR 100. So I guess it goes without saying that we're looking forward to the Olympics and the marathon season now.

So moving on to the next pillar. We expand our experience beyond the transaction and investors by entertain lifestyle consumption. So we aim to innovate with inspiration and entertaining experiences to drive more frequent app launches in our customer base.

An example that recently scaled beyond testing is the Trend Spotter. This is a content-based experience which allows us to explore emerging fashion trends in major fashion metropolis in Europe every week. And we can post these trends algorithmically by tapping into our data, we see strong movements in searches, in product likes and wish-list addings. So we look at the earlier signals and the actual sales.

This is a great way of how consumers on a weekly basis can explore emerging trends. And it's one example of our content experiences that we create to inspire consumers through relevant and entertaining content in the domain of lifestyle experiences. In this case, it is based on algorithms. Most of those content formats and experimentations will follow in the second half of 2024 and beyond.

Another area where we're excited about applying AI to generate content is on the product detail page. So recently, we started to elevate content with a much greater focus on product details, aesthetics and innovation than before. AI allows us to generate background images at scale at a much lower cost.

More than 10% of our content production is already supported by an embedded proprietary layer using OpenAI technology. We aim to significantly increase this share over the next few quarters. The impact is actually astonishing.

So products with elevated content pages have like-for-like a 10% high engagement rate than standard product shots. And for video content, the impact is even greater. Customers are 3x more likely to buy the product, while having significantly lower return rates.

So let me conclude. We are seeing a healthy acceleration in growth, and this is driven by an expansion of our customer base and increased purchases from existing customers. At the same time, we continue to increase our profitability. The result demonstrates the progress in executing our updated strategy to build the leading pan-European fashion and lifestyle ecosystem.

To do so, we have two growth factors we pursue: the business to consumer and the business to business. Our opportunity is huge, and we have now set a first step on our path to return to strong growth and continued margin expansion.

So with that now, I will hand over to Sandra, who can give more details around the financial performance.

[Sandra Dembeck, executive]

Thanks, Robert. So let me now focus on our Q2 financial results, where we saw acceleration in top line growth and further margin progression. So let's start with the group figures on Page 8.

In Q2, we accelerated our top line growth quarter-on-quarter. Our GMV came in at EUR 3.8 billion and is up 2.8% year-over-year. Revenue is up 3.4%, translating into EUR 2.6 billion. We also continued to increase our profitability. Adjusted EBIT reached EUR 172 million, which is an increase of EUR 27 million year-over-year. Our adjusted EBIT margin improved by 0.8 percentage points to 6.5% on the back of better gross margins and a further reduction in the fulfillment cost ratio.

So looking at the first half, our financial performance translates into 2.4% GMV growth and 1.5% revenue growth. Our adjusted EBIT came in at EUR 200 million and the adjusted EBIT margin improved by 1.1 percentage points to 4.1%. So with these results, we are continuing on our journey of top line growth and increased profitability in 2024.

So let's turn to Page 8, our B2C segment performance. Let's start with top line growth. In Q2, GMV and revenue grew by 2.8% year-over-year. Let's talk about some of the main highlights.

So first of all, our retail business returned to growth. It's the first time in 9 quarters. So our focus on quality is starting to pay off also in top line growth. Secondly, we saw strong GMV growth in the quarter in beauty, designer and sports. And this is in line with our strategy to further expand into lifestyle categories.

And as Robert already mentioned earlier, we capitalized in particular, on the moment of the Summer of Sports. We offered a credible assortment and engaged in high-profile dedicated sports campaigns.

Thirdly, our partner business continued to grow. And in the first half of 2024, it increased its share by 0.8 percentage points to 34.3% of B2C GMV. And lastly, in Q2, we saw ZMS return to growth.

In our B2C business, we also continue to focus on margin expansion. So in Q2, we delivered a stronger gross margin on the back of better inventory management, leading to a better sell-through in our retail business. And in addition, we continued our efforts to lower fulfillment costs, which were partially offset by higher marketing investments.

So all in all, our adjusted EBIT in the B2C business reached EUR 165 million in the second quarter. The adjusted EBIT margin increased year-over-year by 1.3 percentage points to 6.8%.

Let's look at the half year. Here, we delivered GMV growth of 2.4% and revenue growth of 0.6%. Adjusted EBIT came in at EUR 188 million, improving adjusted EBIT margin by 1.4 percentage points to 4.2%. And for the half year, we also disclosed the B2C gross margin. The gross margin improved from 41.9% to 43% year-over-year. And this is the result of a better retail gross margin as well as the scaling of the partner business.

So let's move on to Page 9, the B2C customer metrics. So starting on the left, you can see that our active customer base stands at 49.8 million. So we increased our active customers by 300,000 compared to the end of the last quarter. And on the right-hand side, all customer KPIs continue to show similar trends as in the previous quarters. Order frequency decreased by 3% from 5 to 4.9. Average basket size increased by 4.6% to EUR 60.80 as a result of a higher average item value. And GMV per active customer increased by 1.3% to EUR 297.20.

So let's now turn to Page 10, our B2B segment performance. And just as a reminder for all of us, our business-to-business segment includes ZEOS fulfillment, which is set up as a multi-channel fulfillment and it also includes our software business Tradebyte and Highsnobiety. So let's dive into the numbers.

In Q2, B2B delivered 10.3% revenue growth and that is continuing to significantly outperform group revenue growth. And this growth in B2B is predominantly driven by ZFS. Adjusted EBIT in Q2 amounted to EUR 7 million with a margin of 3.1%. This decline in profitability is driven by the front-loaded investments into our future growth. Those investments are primarily overhead investments but also include investments into our network build-out as we are ramping up our warehouses in Paris and in Frankfurt.

So let's now move on to the group P&L on Page 11. And here, we look at the Q2 performance on the right-hand side. Group gross margin improved year-over-year by 1 percentage point to 41.6%. And this increase was driven by our B2C segment where we focus on better inventory management, which resulted in the successful sell-through of new merchandise and inventory from previous seasons. And this positive and strong gross margin development in B2C was partly offset by the scaling of our B2B business, which comes with a structurally lower gross margin.

Moving on to fulfillment costs. Fulfillment costs improved by 2.4 percentage points as we continue to benefit from better order economics, which is reflected in a higher average basket size, cost reductions and also we benefit from the scaling of our ZEOS fulfillment business.

So looking ahead now, in order to support our midterm growth trajectory, we're expanding our logistics network and adding additional capacity by ramping up our warehouses in Paris and Frankfurt. As a result of that, going forward, we will see a continued increase in fixed costs, and as such, we expect smaller year-over-year improvements, so still improvements in fulfillment cost ratio going forward.

Our marketing costs increased by 2.1 percentage points. We consciously raised our investments in performance marketing for demand generation. And at the same time, we also increased brand marketing as we engage in various brand-building campaigns in light of the Summer of Sports.

Administrative and other income and expenses declined by 1.2 percentage points, benefiting from the one-off costs of the reshaping program that we executed in the previous year. The bottom line, the improved gross margin and the lower OpEx delivered an adjusted EBIT margin of 6.5%, a year-over-year improvement of 0.8 percentage points.

So turning to Slide 12 for net working capital. Our net working capital continues to be negative in Q2. Compared to last year, we see a decrease of more than EUR 300 million as a result of lower inventory levels. At the end of Q2, we had inventory valued at EUR 1.4 billion, a year-over-year reduction of almost 17%.

So I'll focus on inventory management, but buying more selectively and driving sell-through rates in our retail business is paying off visibly in gross margin and in net working capital. Trade receivables increased by almost 10%, driven by strong business performance towards the end of the quarter. And trade payables increased as a result of the higher inbound in Q2 and a further growing partner business.

So moving to Page 13, the development of cash and cash equivalents. Our cash and cash equivalents continued to be strong at EUR 2.6 billion. We were able to achieve an increase of EUR 260 million since the end of Q1 2024. And that is due to a strong operating cash flow as a result of the decrease in net working capital and the higher net income.

On investing cash flow, we continue to invest in our key capabilities like logistics and technology. And our warehouse in Paris is expected to go live in the second half of this year, and the warehouse in Frankfurt will follow the next year.

CapEx investments amounted to EUR 41 million in Q2, and this investing cash flow is partially offset by EUR 28 million cash received for investments in term deposits. So in Q2, we were able to conclude the share buyback of EUR 100 million, and we repurchased EUR 84.2 million of the convertible bond, which is maturing in August 2025. The total buyback of the convert of EUR 100 million was completed on July 18. And both of those buybacks, so the share buyback and the convert, are reflected in our financing cash flow.

So with that, let's conclude on Q2 and move on to the full year outlook on Page 14. So Robert, back over to you.

[Robert Gentz, executive]

Thank you, Sandra. We reiterate our financial year 2024 guidance. Let me explain this in more detail.

At the beginning of 2024, we set ourselves the ambition to return to growth. And our H1 results show progress with a GMV growth of 2.4% and revenue growth of 1.5%. We expect further acceleration in the second half of the year. And consequently, we remain confident in our guidance range of 0% to 5% for GMV and for revenue.

In terms of EBIT, we achieved an adjusted EBIT of EUR 200 million in H1. And for the full year '24, we confirm our adjusted EBIT range of EUR 380 million to EUR 450 million with our H2 profitability impacted by two main factors.

In H2, we're investing in strategic growth initiatives in B2C and B2B to support further top line acceleration in 2025. We will see some leverage on the fulfillment cost line, but to a lesser extent than in the past quarter.

We anticipate higher fixed cost in fulfillment as we prepare for the go-live of our warehouses in Paris at the end of 2024 and in Frankfurt early in 2025. On cash, we confirm our guidance for CapEx and for net working capital. So this concludes the outlook.

Before we jump into Q&A, let me just wrap up with the key takeaways of today. Our ecosystem strategy is fully on track. In B2C, we made material progress around our three growth pillars, faster expansion, inspiration and entertainment and differentiation through quality.

In B2B, we see a continued strong performance of ZFS and an increasing number of merchants using our multi-channel fulfillment services. In H1, we returned to growth, delivered an acceleration quarter-over-quarter and continued the margin expansion. And with that, we confirm our full year guidance for 2024.

And now let's open up for the Q&A.

[Operator]

[Operator Instructions] The first question is from Adam Cochrane from Deutsche Bank.

[Adam Cochrane, analyst]

My first question is, when you're talking about the sequential improvement expected in sales and GMV into the second half of the year, is this based on anything more than a view that online penetration is going to continue to increase against stores? Or is it a slightly more positive view on the consumer? Or is this all related to measures that you're taking yourself? And within that, has that already started in July, sort of carrying on from the strong June that you talked about?

On the second question, the business that you're talking about on AI sounds really quite exciting. Is this a question of if you were to put generated pictures on things, as that becomes more of the range, do you still get the same uplift? Or is it really just a transfer between different brands where one shoe has the background and another doesn't so that the shoe with the background goes up by 10%, but the other shoes go down by 10% or whatever the numbers are? If it's applied across everything, do you still get the same uplift from some of these sort of AI-generated type images?

[Sandra Dembeck, executive]

Good morning, Adam. Yes. So on the sequential improvement in the top line, so I think it's a mix of both, yes. So it is the improvement in the underlying consumer sentiment, but it is also especially the impact of the strategic initiatives that we are putting in place like if specifically, if we talk about lifestyle expansions. So we saw the great results in Q2 of -- especially of Sports but also of Beauty and Designer. And we see that continuing throughout July or we saw that continue throughout July.

[Robert Gentz, executive]

And Adam, on the second question on AI and the scalability, I mean, I think what we do is like we -- at the moment, we test a lot in terms of content production with all means of generative AI like in terms of content and elevated picture production. So what we typically do is then that we always create a holdout group where we just -- where we add as well pictures like in a normal way, and then we create as well an AI to elevate a picture.

And I think here, we actually see at the moment, I think this very strong uplift. How this would look at scale, I think probably not as much, like with a 10% uplift. But I think these early results that I also alluded to actually make us very excited about the general potential to increase through generative AI more content on the product detail pages at very low cost that actually help consumers very significantly to take better choices.

And yes, and I think just imagine, I think these products, I think, in a more inspirational and more gating way. And I think that's why we're actually very, very excited about these developments that we see here.

[Operator]

The next question is from William Woods from Bernstein.

[William Woods, analyst]

The first one is just on that recovery in the consumer. What specifically are you seeing in terms of the metrics that's driving that improvement in the consumer sentiment? And is there anything different between Germany or DACH and the international regions?

And then the second one is obviously, you're having to take marketing spend up quite a lot to drive that growth, manifesting in the active customers. And is that about -- is that spend about reactivation of customers or acquiring new customers? Or could you give any color on where the spend is going?

[Sandra Dembeck, executive]

Thank you, William. So on I think consumer sentiment, well, for me, it's less about reading in too much into all of it. For me, what is important is really to say, when we look, for example, into our DACH region, our DACH region has returned to growth now and especially Germany is back into growth, yes, and this is for us partly linked to consumer sentiment. You may have seen that in the last numbers, but it's also especially the effect of the measures that we have taken.

So when we talk now about the marketing spend, we have increased it significantly in Q2, that is correct, but we did it in -- to really do it in a twofold straight approach. One is on performance marketing, it was all about capturing the demand that is out there and driving that new customer growth. And that is what is reflected now also in our numbers and you saw the active customer number, for example, go up.

The second thing is we invested a lot more in brand marketing, and brand marketing is a longer-term approach. This is for the long -- for the mid- to long-term conversion of customers. It's about engagement and retention. And when we look here into our customer metrics, for example, in the last quarter, we have seen that the retention in our retained customer base has improved. So the measures that we're taking and the investment that we are making in marketing is paying off.

[Operator]

The next question is from Monique Pollard from Citi.

[Monique Pollard, analyst]

Just two if I can. The first one, I guess, if I look at the 1H numbers, you delivered GMV growth of 2.4%. You've talked quite confidently about the acceleration in the top line as we go through the year and sort of consumer sentiment and your own net measures. So just trying to understand why this full year guide is still 0% to 5%. I would have thought, I guess, given what you said at a minimum that could be narrowed to the top half of the range.

And then the second question I had, again, coming back to the marketing cost. I was wondering if you could give us an update on the customer payback period that you now have set on the marketing expense. I know it's gone from sort of 2 years out to 1 to 1.5. Are we back to the sort of 2-year customer payback period, particularly for the performance marketing now?

[Robert Gentz, executive]

Yes, thank you for your question. So I mean, on the guidance on GMV growth, I think -- I mean, I think two reasons. I think, first of all, as you know, like the big price in fashion is always in the second half. And I think within the second half, it always as well depends on the season side in September.

And so -- and then I think overall, the -- as well like these macro uncertainties that we saw. So I think we find at the moment just prudent to actually stick to the guidance range that we have set out, and we feel are coming within these guidance ranges.

On the marketing piece that you asked and payback period isn't a lot to it. So the marketing has two components, the performance marketing and the brand marketing. On the performance market, actually, our payback period of 1.5 years remains intact.

What we do, though, in performance marketing that we have increasingly is we're diversified into more and more channels, as we're more experimenting and do test so like we work with Snapchat and TikTok and the experiment is quite broader here in the performance marketing channel.

The bigger uptick of investment is actually though on the brand marketing piece where we are as well normalizing towards, I think, the subdued investments that we had in the last 2 years, and we just actually get it back to more normalized brand marketing investment level as we see the opportunity now for the future in the market.

[Operator]

The next question is from Sarah Roberts from Barclays.

[Sarah Roberts, analyst]

Just a couple from me. So it's largely on kind of current trading. You mentioned during Q1 results that April was a modest acceleration on Q1, so maybe low single digits. It sounded like May kind of especially given poor weather in Northern Europe might have been a little bit on the softer side, which kind of imply a bit of a step-up in acceleration in June.

And it would be just good to kind of share any color on kind of trading throughout the month. And then off the back of that, how should we think about July? Have you seen a continued acceleration in that kind of growth trajectory?

And then secondly, on ZMS, that came in at 1.2% of GMV for the half, so a little bit softer than maybe the full year for last year. Just curious as to what you're seeing in terms of advertising spend at brands and what your expectations for the second half of this year are?

[Sandra Dembeck, executive]

Thanks, Sarah. On current trading, so indeed, yes, we saw acceleration, especially in the last quarter towards in June, like at the end of the quarter. Let me now talk about Q3, looking into the July results, they make us confident that we will be able to deliver acceleration in Q3 over Q2. But as Robert said earlier, in Q3, the main month is really September. So it will depend once again on the season thought in September and how the month of September is coming in.

[Robert Gentz, executive]

And on your question about ZMS. So first of all, I think we are -- after a very challenging performance in Q1, we are now very pleased to see that ZMS is returning to its growth path in Q2, and we saw good momentum, especially with commercially oriented brands that build their business on the runoff.

I mean at the same time, the team is working very hard to unlock more long-term opportunities in the future to substantially increase the engagement and investments from brands -- equity-oriented brands. So for H2, we expect that ZMS continues to grow and then further accelerates in the years to come.

[Operator]

The next question is from Luke Holbrook from Morgan Stanley.

[Luke Holbrook, analyst]

I've got two questions. The first is just on the fact that actives were down 3% in the first half. I'm just wondering if you can just outline particularly around the Euro, the Olympics, some of the one-off impact that you had into the second quarter with that improving 300,000, how much of that is one-off versus sustainable? And then the second question is just on the AI feature rollout, it'd just be interesting to touch base on where we are on that geographic rollout of features like size fitter, maybe Trend Spotter, anything you can provide in that regard?

[Sandra Dembeck, executive]

So let me take the first one on active customers. So when you look at the last 12 months, yes, then the active customer number is still like a negative trend. But this has now reduced and is actually pivoting back into growth, and that's what we're highlighting here. Quarter-on-quarter, we have seen that 300,000 increase in active customer.

And around the sustainability of that, so I think I alluded to a little bit earlier, the growth is primarily coming from investments we are taking and increasing the retained -- the reactivated customer base, and we also see new customers improving. And at the same time, we also see that the elements of our strategy are helping to really now drive retention with our existing customer base.

[Robert Gentz, executive]

And on your question on the -- on some of the AI-related kind of features and products that we have. So the Zalando Assistant is now -- is available for markets in Austria, Germany, Ireland and U.K. and in the language English and German. So -- and I mean, for the moment, we stick to this footprint as we now are increasing as well the product experience for our consumers.

I think what we are actually quite happy about is that we see accelerated conversations that we have with consumers on the assistant actually get longer. So now we've about close to seven back and forth discussions and we as well see like an increase in engagement. But that being said, I think there's still like a lot of work that needs to be done, I think, in order to actually really improve these experiences in a way that fundamentally as well changes the experience.

And I think that's one of the topics that we shared in the release. Now with OpenAI, I think we actually realize that on both sides actually, the fashion domain is actually a domain where I think more work, I think, both from OpenAI as well as from our side actually needs to be done to actually really understand the contextual topics around fashion and lifestyle.

And the Trend Spotter, I mean, is a fairly recent feature. We now have about six European fashion capitals where we surface these trends like Berlin, Paris, Milan, Antwerp, Stockholm, Copenhagen and we see like, I think, good overall first engagement of people who really look at it on a frequent basis. But I mean, we're driving these features, I think, to drive more engagement going forward. And it's early, but I think it all fits into this narrative of, yes, inspiration and entertainment and how we actually use content to get people to OpenAI very frequently.

[Operator]

The next question is from Yashraj Rajani from UBS.

[Yashraj Rajani, analyst]

My first question is just a follow-up on the guidance, please. So I very much appreciate your comment on keeping the revenue and GMV guide unchanged. But if we just translate that to adjusted EBIT, what you're basically implying for the second half is that you probably see very little, if any, margin accretion, right?

So does that mean that, just putting in hindsight your marketing comment, does that mean that all of the improvements in gross margin and fulfillment will be kind of offset by marketing and that's why you've left the guidance for adjusted EBIT as well unchanged? I mean what else is holding you back on that?

[Sandra Dembeck, executive]

Thanks, Yash. So on the adjusted EBIT guidance, we need to go back to what Robert said in the outlook. He said the second half EBIT will be impacted by two main things. One is that we will be investing in strategic growth initiatives, both in B2C and in B2B. That relates to our expansion into lifestyle so there will be more investments in sports.

It relates to the inspiration and experience. And a little bit still in marketing, but that's not the primary driver, yes. So on marketing, we started to really invest again in the fourth quarter last year. So that one, we will still see the uptick in Q3, but in Q4, we're pretty much at the level that we will -- that we already had that level last year.

The second impact on EBIT is that we will see less leverage on the fulfillment cost line. And this is due to the fixed cost that we are now injecting by ramping up the two warehouses, one in Paris and one in Frankfurt. So we will still see leverage from scaling the B2B business, and moving fulfillment cost into cost of sales, but there will be less of an additional leverage from -- yes, from the benefits of the order economics as this will be partly offset by fixed costs.

So the dynamics in the P&L in the second half will continue to be similar to what we have seen in the first half, the gross margin expansion, leverage on the fulfillment cost line and an increase in marketing, but it will be less pronounced. And with that, it translates at the bottom line in a less pronounced margin improvement in the second half than what we have seen in the first one.

[Operator]

The next question is from Jurgen Kolb from Kepler Chevreux.

[Jurgen Kolb, analyst]

Two, first one on the inventory level, which is obviously very low if we base it on a trailing 12-month sales basis. And I was wondering if this is now the new level, the new level we should also consider going forward? And/or if you think that there might be a development into the opposite direction in the second half?

And then maybe also a quick look into 2025. Is that strategy in terms of maybe putting less emphasis on the wholesale business, but more emphasis on the B2B will then also translate in a continuously better inventory management?

And the second question around the tech center in Shenzhen. I was just wondering if you could maybe share some additional light on it. What do you expect from that investment? How many people do you expect to see there? What's the main purpose of innovation and targets that you expect to come from there? Just a little bit more details.

[Sandra Dembeck, executive]

Thanks, Jurgen. So on the inventory level, so we feel comfortable with kind of like the very strict inventory management that we have done over the recent year. And so the level as such is basically now expected to continue to grow again and to grow in line with the top line, yes. So we will not keep it at the 1.4 that you see in there. But as we also grow the top line, we expect that we also continue to invest again in our inventory position.

That doesn't mean that we will not also expand our partner business share, yes. So I think we need to always keep the right balance between investing in wholesale, but now wholesale has proven itself, it's back in growth, so we feel comfortable backing wholesale and basically injecting more inventory again, in line with the top line growth that we expect.

And that then basically, I think, answers also your question for 2025, yes, it will be the balance between backing wholesale to deliver top line growth while we, of course, expand the partner business.

[Robert Gentz, executive]

And on your question about the tech center in China. So I mean it's broadly like the strategy that we always have is to have tech centers, we run various tech centers across Europe that -- where we actually tap into as well local tenant markets and work together on the experience.

The Chinese tech center we're about to open is specifically for actually tapping into the capabilities that we see locally in China. And the Chinese domestic e-commerce market actually has a very interesting and I think in some aspect, actually a more advanced environment when it comes to how content and how commerce are actually created in a very fluid experience and hence it's much more social commerce as well driven market than I think, in the Western market.

And what we expect from this tech hub is actually like the tapping into the local capabilities of social commerce and actually marrying that with our European capability about knowing the European e-commerce market. And I think there's a lot of magic that can come from these -- marrying these two capabilities with each other. So generally, we look at it as a typical tech hub and we would expect it to ramp up to about 100 people, software engineers, data scientists, product managers throughout the course of next year.

[Operator]

We now take the last two questions. First question is from Georgina Johanan from JPMorgan.

[Georgina Johanan, analyst]

I had a couple, please. And the first one, just in terms of the gross margin outlook for the rest of the year. You're obviously starting to see a healthy recovery there, but given that we're expecting sort of inventory to go back up again, I mean, is it reasonable to expect an H2 recovery in gross margin sort of in the region of what we saw in the second quarter, please?

And then my second question, and apologies if you've commented on this and I missed it. I appreciate the color for the rest of full year '24 on fulfillment costs. But just thinking about how we should think about that for fiscal '25. Is it sort of -- is it a sensible modeling assumption that's sort of broadly flat year-on-year? Or actually as more of those costs are coming on from the Frankfurt ramp-up, could we actually see that ratio go up a little bit? Just any help there would be great, please.

[Sandra Dembeck, executive]

Georgina, so on the gross margin expansion in the second half, yes, so the first half, we really benefited from the inventory management. Part of that will continue into Q3. But of course, from Q4 onwards, we will annualize that effect, yes? So therefore, gross margin expansion in the second half will not be as strong as it was in Q2.

And then on the fulfillment cost line, I think -- so we will get back to you on these questions later in the year. But I think from now, the most reasonable modeling assumption is to assume that the scaling of ZEOS fulfillment will deliver the fulfillment cost leverage.

[Georgina Johanan, analyst]

So leverage -- still leverage year-on-year into full year '25.

[Sandra Dembeck, executive]

Correct. It's just a question of the extent of that leverage.

[Operator]

The next question is from Mia Strauss from BNP Paribas Exane.

[Mia Strauss, analyst]

Just two for me. I wanted to find out in your B2C growth, are you able to give us a little bit more color how much of it is coming from wholesale versus partner program? And then secondly, a slightly different question. But are you hearing anything from the third-party brands regarding supply disruption from Bangladesh?

[Sandra Dembeck, executive]

Yes. So on the B2C growth. So I think for us, yes, the partner program continues to be strong. I think what we just wanted to highlight in Q1 was that our wholesale business has also returned to growth, yes. It's the first in 9 quarters that the business has -- that the wholesale business has grown, yes, but the partner business has continued its strength.

In terms of the supply disruption, we are in frequent exchange with our partners on that. We kind of like taking our own actions to mediate any potential impact. At the moment, we don't see the impact, yes. at the Moment, everything is okay. And so I think for us, most important is that we are in direct contact and that we will get priority treatment to get access to that stock.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Patrick Kofler for any closing remarks.

[Patrick Kofler, executive]

Thanks, everyone, for joining today's Q2 session with Sandra and Robert. Wishing you all a great summer season, and hopefully, see you soon either over the next couple of weeks or/and back after summer. Thanks, everyone, for joining, and enjoy the rest of the day.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.