Zalando SE

XETRA:ZAL

Earnings Call Transcript 2018-Q3

[Operator]

Dear ladies and gentlemen, welcome to the publication of the Q3 Results 2018 of Zalando SE. At our customer's request, this conference will be recorded. [Operator Instructions]May I now hand you over to Patrick Kofler, Team Leader, Investor Relations, who will lead you through this conference. Please go ahead, sir.

[Patrick Kofler]

Good morning, ladies and gentlemen, and welcome to our Q3 2018 earnings call. My name is Patrick Kofler, Team Lead, Investor Relations. And with me are Rubin Ritter, one of our 3 Co-CEOs; and Birgit Haderer, our SVP Finance. As always, this call is being recorded and webcasted live on our Investor Relations website, and a replay of the call will be available later today. With that, Rubin, the floor is yours.

[Rubin Ritter, Co]

Yes. Thank you, Patrick, and thanks, everyone, for joining our earnings call today. As usual, we have 4 parts on our presentation. We will start with the high and low lights. We'll talk about our financials, about our guidance, and then we'll have time for your questions. So let's start right ahead. I think given the financial results, it is fair to start this call by addressing the lowlights of the third quarter head on. Very clearly, we are not happy with the financials that I'm presenting to you today. We had growth of 12% in revenues and 17% in GMV, clearly below our long-term ambition. We had a negative EBIT of EUR 39 million, also clearly below our targets. We will have time on this call to talk about the specific drivers of this financial performance. There were clearly some effects which were within our control, there were some other effects which were out of our control and there were also some transition costs related to the platform shift, which we continue to drive. But bottom line is that we did not deliver on what we promised. And clearly, as a team, we do feel accountable for that.Now going forward, clearly, our #1 short-term priority is to return to the growth trajectory of 20% to 25% in the fourth quarter, and therefore, deliver on our upgraded guidance. Our #1 long-term priority continues to be to drive the transition towards a true platform business. Now in the context of our long-term targets, I think it's important to also highlight that below the surface of the financial performance, we continue to see a very positive trajectory. For example, in the third quarter, the number of active customers surpassed 25 million for the first time. That means that 6% of the European population has shopped with us over the last 12 months. We have pointed out our ambition to reach a more than 5% market share of the European fashion business overall, and the fact that we have already reached this scale in terms of our active customer reach makes us confident that also our long-term targets are achievable. In terms of customer satisfaction, we have seen a new all-time high in September, and we see that growing our product selection, improving the digital experience and also investing into a premium convenience proposition leads to outstanding customer feedback. And of course, we continue to drive the transition towards a platform with a fast-growing Partner Program. And here, I would like to make some more detailed comments on the next page.As we said before, we can only reach a market share of more than 5% if we do not limit ourselves to things like a retailer, but if we are ready to think much broader and build the ecosystem for fashion in Europe. Our strategic priority is to create the starting point of fashion for consumers, to create the destination with the highest consumer reach overall. And here, we have made a lot of progress in the third quarter. We have grown site visits by 18% to about 750 million visits just in the third quarter. We have grown frequency. We have grown active customers. And we have grown number of orders, actually, by 23%.Now doing so, we create a place where all the brands want to be and where all the brands need to be in order to reach the digital consumer, either through our wholesale business or through increasing these through our Partner Program business, where we allow brands to sell directly to our consumers. So the Partner Program grew more than 60%. We were able to onboard many new brands to many new markets. Zalando Fulfillment Solutions continues to scale, now serving more than 15% of the Partner Program volume, and also ZMS continues to grow quite massively year-over-year.And these have been the growth dynamics of the last years, to have more and more happy customers, which again makes us more attractive to the brands which drives the assortment, which again drives customer growth. However, this transition into more Partner Program sales also comes with some requirements. It requires us to have a high willingness to invest into our infrastructure, into new services, into the traffic that we need to drive. It requires us to absorb a negative impact on our unit economics, as we used to ship essentially all items from our wholesale business, and now some are shipped by partners. That means that the sort of wholesale basket, in many cases, gets smaller. But we think these challenges are solvable in the midterm through Zalando fulfillment services or other mechanisms. And the transition also requires us to manage customer expectations in a much better way going forward.Now with that, I would like to come to our financials in more detail. On growth, I already mentioned the 12% revenue growth in the third quarter. The Fashion Store is growing around 11%, so that is where the main impact comes from. Offprice continues to grow strongly with 40%. And also, when we look at the regions, we see sort of both regions were affected, with DACH growing around 9% and Rest of Europe growing around 13%. I would like to make some additional comments on growth on the coming page. So I have 3 observations I would like to make on the growth. Number one is that GMV growth was significantly stronger than revenue growth with 17%. That number is influenced by some accounting shift effects, but the main effect is really that the Partner Program continues to grow much faster. And here, we see that the platform transitioning is progressing, and it's also leaving a mark in our P&L.The second observation is that we are comparing against a very strong period in 2017, which actually was growing with 29%. That means if we look at the 2-year CAGR, in revenues, we would be at 20%; and for GMV, we are at 24%. So again, with this background, we think that our growth plans, our internal growth ambitions for the third quarter were probably too ambitious. And the third observation is clearly is the delayed season start which was caused by a very warm September, which has hurt our growth. We see this very clearly in our internal data and we see it very clearly also in our trading patterns, and we also see it in the market data that the fashion market in DACH actually shrank quite considerably in September.As I said before, we see continued strong underlying trends in our customer base. So let's go to a bit more detail here. We see that our active customers grew by more than 13% to more than 25 million. These 25 million placed 28 million orders only in the third quarter, which is up 23%. I already commented on visits growing very strongly. So these are very strong dynamics, especially when we look at the order frequency of customers, which is up 13% to 4.3 orders per active customer, which again is the main driver on why the GMV per active customer continues to grow by about 5%. Now you also see on the slide that the average basket size is down quite a bit compared to last year. And here, we see some temporary effects, such as the higher share of summer items, which typically have a much lower item value, which is related to the late season start. We specifically see that in some categories like shoes. But on the other hand, we also have some structural shifts in the behavior of our customers, which we also have discussed in previous calls, such as the mobile shift. By now, more than 60% of our orders come from mobile devices, which is up 10 percentage points year-over-year. We have more and more lower price points because we continue to drive fast fashion, and these are, of course, more structural changes in our basket dynamics. Now what are we doing to address this? I think on the one hand, there are measures to counter this effect, such as cross-selling, such as improved size recommendations to drive return rates down. But I think, on the other hand, we also have to accept that customers want to order with a higher frequency but then lower basket. So we have to find ways to get better to serve lower baskets in a more profitable way. As one of the measures in this context, we have decided to introduce a minimum order value in Italy. So we will charge for delivery for all orders that are below EUR 25. The background is that over the last years, we invested a lot into the Italian market, both in terms of the satellite warehouse to improve convenience, but also in terms of offering more lower price points. And we see that, in Italy, we have a high share of low baskets orders. In this context, we will also introduce Zalando Plus in Italy in 2019 to give our best customers the opportunity to continue to shop without any delivery fees irrespective of basket size.So in summary, I think the structural drivers of increased frequency and lower baskets very clearly support our long-term growth ambition. However, we do see short-term negative impact on profitability. We believe that these factors can be addressed and fixed in the mid to long term.Now let's come to profitability. As mentioned, we see a negative adjusted EBIT, which is below prior year and also below our expectations. I already mentioned that we have a negative adjusted EBIT of EUR 39 million. And on the side, you see that this is clearly driven by our Fashion Store business, and you also see that both regions are affected by this trend.I think it's more interesting to go to the next page and actually look at the impact line by line. So if you look at the third quarter, you see a number of effects. I think the first one is very clearly related to the impact of missing sales, and therefore, also missing contribution margin that we had planned for. Then if we go to the cost lines, starting with gross margin, it's down 1.4% compared to last year. Actually, compared to our own expectation, the miss is even larger because we had expected a small improvement in this cost line. What are the major drivers? The first one is the impact of the slow season start, which resulted in higher allowances, lower volume discounts and a higher discount rate. The second driver is an unplanned impact from higher cost of defective returns. So due to internal operational mistakes, a higher-than-usual share of inventory was classified as damaged returns. This matter has been investigated and resolved. And it looks like for the fourth quarter, we will be back to the expected values. And the third driver is an impact from the cost shift from admin cost into cost of sales, which we have also explained in previous calls. Overall, we think that the drivers that affect gross margin are mainly temporary and addressable in the short term.Now if we come to fulfillment costs. There, we have a negative trend of minus 3%. And this is a very similar development as in the previous quarters, with 4 major drivers, which we have also mainly talked about in the past. The first one is investments into our logistics infrastructure, which relates to more capacity, but also to improved convenience. The second one is a decrease in the basket size, which we just talked about. The third one is increasing transport cost. So we see increased carrier prices in several countries, and we saw this starting throughout the summer. We expected -- we expect also some impact over the Christmas period, where supply of capacity will be scarce. But also beyond this year, we see increasing pressure coming from transport costs, which I think is very clear that it's a challenge for the entire industry. And then as a fourth impact, we see the cost shift from admin cost into fulfillment cost. Also, this effect, we have explained in previous calls.Now if we come to marketing costs. Over the past years, the marketing cost has been the source of very significant margin improvement over time. This improvement now in the third quarter is relatively small, and the reason is that as discussed also in our last call, we want to change gears a little bit after the marketing change that we executed earlier this year. We see significant positive ROI potential in both performance and brand marketing activities and aim to increase our spending in the coming seasons. Specifically, for the second half of this year, we have increased our spending by about -- and plan to increase our spending by about EUR 25 million. Now in the short term, this creates margin pressure, in general because the ROI only materializes over a longer period of time, and specifically at a time where we have much weaker season starts than expected, as was the case in the third quarter. But unlike in previous quarters, we decided not to pull back but to stay the course and to continue our spending through cycle because our data indicates that this will be value driving for the long term. Now coming to CapEx on the next page. CapEx, we have spent year-to-date EUR 169 million, and we believe that CapEx in 2018 overall will be lower than expected. This has 2 reasons. The first one is that we have further optimized our network design to make it more capital efficient. Specifically, we have decided to build an inbound distribution center in Central Europe, which will start operations in the second half of 2019, and it will be operated by a third party. This will allow us to allocate our inventory in an optimized way and thus use our capacity more efficiently than originally planned, and therefore, also reduce CapEx needs and CapEx requirements. The second reason specifically for 2018 is that we have all running projects going according to plan, but the big chunk of the CapEx was planned in the fourth quarter and some of that will shift into 2019. Consequently, we lowered our guidance for the full year slightly and now anticipate to spend around EUR 300 million in 2018. While we see continued elevated levels of investments in logistics and technology, we think that outflow for additional projects will be spread over longer periods of time.Now on the coming page, I would like to only make a very brief comment on liquidity. As you see, we have a very comfortable liquidity position of about EUR 900 million. Additionally, we have a revolving credit facility of about EUR 500 million, and this gives us the opportunity to manage the business with a very long-term view.Now let's come to the outlook and our guidance. Our outlook for 2018 stands as given with the update mid of September. As always, Q4 is the final and also the most important quarter of the year, and success depends on important commercial events like Cyber Week and Christmas. We expect revenue growth to come in around the low end of the 20% to 25% range. As I said at the beginning of the call, it's the priority to us to show that in the fourth quarter, we can return to our 20% to 25% growth corridor, and we are confident to achieve this. We also confirm our expectation for adjusted EBIT of EUR 150 million to EUR 190 million. We expect net working capital to be slightly negative at year-end, and we expect CapEx to be slightly lower than previously guided at EUR 300 million.Finally, I would also like to make some comments for 2019. As in the previous years, we will very clearly continue to focus on growth. We think that a market opportunity that we have ahead of us is huge, and we see customers continuing to shift from offline to online. We even think that the shift, which already has been predominant over the last years, could further accelerate as offline retail continues to face structural challenges and online continues to offer better and better solutions for consumers through new technologies. We also believe that additional growth opportunities and growth dynamics can be unleashed by the transition into the platform business model. We see currently that demand for our platform services continues to grow, as I commented, especially on an increased usage of Zalando Media Services (sic) [ Zalando Media Solutions ] and Zalando Fulfillment Services (sic) [ Zalando Fulfillment Solutions ], which will allow us to further improve customer satisfaction and economics of our platform business.Clearly, we keep our eyes on the target that we have set ourselves for 2020 to double Zalando in terms of GMV relative to 2017. At the same time, we think it's important to now start looking beyond 2020 and to invest into the continued growth of our platform. In this context, we will continue to prioritize growth over profitability as long as we see evidence that we manage this trade-off in a way that it maximizes long-term value for our shareholders and also for us as shareholders. While some temporary struggles from this year will abate in the near term, some things will persist also into the coming year. We want to continue to leverage the growth dynamics which come from higher frequency, which may, for now, have a negative impact on our baskets. We want to continue to drive the platform transition and to build a true ecosystem for fashion even though this transition might also come at some short-term cost. And we want to make use of the opportunity to increase marketing pressure even though these investments will take some time to fully pay back. As always, we'll give our detailed guidance in the earnings call in February of 2019. And with that, let's go into your questions.

[Operator]

[Operator Instructions] The first question comes from Magnus Råman, Handelsbanken.

[Magnus Råman, Research Analyst]

Starting with average basket size, as you spoke about, it is the lowest this quarter since Q2 2012, I believe. And you mentioned a few measures here like an average or a lowest ticket in Italy. Do you think you would potentially move forward with several more of these initiatives going forward to mitigate declining average basket size? That's my first.

[Rubin Ritter, Co]

Yes. Thanks for your question. So on the MOV, the minimum order value. As you know, when we started the company, we very much drove this -- all deliveries, everything is for free, no matter what, and that has been our philosophy for quite some time. I think now if we look at the KPIs, we clearly have this benefit of improved frequency, and we see it as one of the sort of most important growth drivers of the business, and we want to keep that trend. But then on the other hand, we have to think about ways to cope with smaller baskets and to, also long term, be able to serve them in a profitable way. And so we think that the MOV, especially in Italy, is sort of very accepted among customers. All of our competitors have it. And so this is why we decided to introduce it. I think, overall, our business has become so much broader since we have been growing so much in lower price points. Also, we have been growing so much in the Partner Program. So I think there are some opportunities to have these shipping fees either for the very low item orders or for orders that come from the Partner Program and maybe some other opportunities. And I think that, also, sort of consumers know why that is and understand why that is, and it would enable us to continue to invest into our proposition, to invest into lower price points, to invest into the platform and to continue to drive our growth. So we think, directionally, it is very interesting, and it's a step that we now take in Italy. And like with anything, we will also take this step by step, look at the KPIs, look at the reaction and then see what is the right path for us going forward. But I think as a means to really bring the unit economics of our business to the next level and to adapt it to some of the changes that we have implemented over the last years, I think it is a very viable option.

[Operator]

Next question is from Volker Bosse, Baader Bank.

[Volker Bosse, Co]

Volker Bosse, Baader Bank. Two questions, starting with the Partner Program. You mentioned in the press release your new partners joined, as well as the Zalando Fulfillment Services (sic) [ Zalando Fulfillment Solutions ] grew very good. So could you provide names, which kind of new partners were joined here as well as in the Zalando Fulfillment Services (sic) [ Zalando Fulfillment Solutions ] division? And in this context also, Hugo Boss announced today a close cooperation with you guys, so a bit more details on this would be welcome. And the second question would be regarding your margin outlook. You shared your views on 2019. Having the 2018 guidance on hand, this would indicate 3% adjusted EBIT margin. Would you call this as to be the new normal, so to say? I mean, you previously will speak more about 4% to 5%. A word on that would be helpful as well.

[Rubin Ritter, Co]

Sure. So on your first question, some of the new partners are Boss, as you already said, where we are very happy to really deepen the partnership and make sure that, together, we can use the Partner Program sales as an additional lever to drive our joint business. Another example is Bershka from Inditex, which has been a new addition. But also, there have been many cases where we have been able to bring brands that we already work with into more markets, which of course also helps to drive the growth dynamics. In terms of 2019, I think like in the previous years, we try to give you sort of a directional outlook on what we want to drive at. And clearly, the message should be that we want to continue to focus on growth not only because we have set ourselves a 2020 target to double the business, but also because, beyond that, there's still a lot of growth to be realized. We are still quite far ahead -- quite far away, sorry, from the 5% that we have said before should be our long-term ambition. So very clearly, we want to make sure that we stay on the growth path and that we stay investing. Even though clearly, as we, for example, discussed with minimum order value and maybe some other opportunities, there are also adjustments that we want to make to our business model to make sure that the economics continue to be very good and very healthy. I think we'll be back in the next year with a more specific guidance, but I hope that with the general comments I have made, we have indicated that besides the more short-term trends and trading that we have seen in the third quarter, there are some developments and some cost trends that will also go into 2019. I mentioned the fact that costs increased in logistics. You also know that we will continue to invest into our convenience proposition. I talked about marketing cost, so I think that sort of sets the tone, but we will be back with more specific numbers then on the next call.

[Operator]

The next question is from Rocco Strauss, Equity Research (sic) [ Arete Research ].

[Rocco Strauss, Analyst]

Two questions from me. First one, with Partner Program scaling in your international markets or, say, outside of DACH, could you speak about how this is driving efficiencies around basket economics, basket sizes, fulfillment costs in general? Does Partner Program scale in those markets before this is meaningful -- yes, before this becomes meaningful? Yes, any insight here would be helpful. And secondly, could you speak about zLabels? I think we haven't heard anything around that in quite a while. How is that tacking along? With growth driven more by Partner Program, are you kind of underemphasizing on those now? Or are they kind of keep stable as a percentage of sales?

[Rubin Ritter, Co]

Sure. So on scaling the Partner Program, really bringing our partners live in ultimately all of the markets is a big priority to us, and we are driving that effort in parallel to ZFS, right? ZFS, we have introduced only quite recently. It already serves more than 15% of the volume. We think it can be significantly higher, because using ZFS just offers a very big advantage close to our partners and ourselves to drive the logistics setup in a much more efficient way. As I mentioned, sort of one of the short-term sort of obstacles in scaling the Partner Program is that, previously, we have ourselves shipped all of our items that are in the basket. So typically, that's roughly 3 items, depending on the market. Now -- so for some of the orders, we are shipping 2 items, with partners shipping one. And I think it's quite obvious how that is creating additional cost in the system. It's creating the benefit of more availability and more access to assortment, but it's creating the obstacle of increased logistics cost, And the ZFS really can be one very effective way to solve this, and we think that the share of Partner Program that will be served through ZFS can be significantly higher than what we currently see. On your second question, zLabels. You're right, we haven't given sort of a big update. The main reason is that the direction has not changed. As we really drive the platform, the idea is that we don't want private label to be sort of the predominant sort of representation of our platform. I think we really want to be the platform that features all the brands, and our private label can be one of them. So that strategy I think we have been driving for some time. Private label continues to have a high share of our business, but it's not growing over proportionate to the business overall because, obviously, we are onboarding more and more brands, and therefore, also more and more competition to our private label.

[Operator]

The next question is from Magnus Råman, Handelsbanken.

[Magnus Råman, Research Analyst]

I had a second one that actually is related to what you just replied. But I could take the opportunity to ask about ZMS. You talked about it growing massively. Can you describe what is the typical customer to ZMS? And also, is Zalando itself a customer here or is it only external customers that represent this growth?

[Rubin Ritter, Co]

Sure. So ZMS essentially is offering a tool where someone who wants to do marketing can either use the tool to place marketing somewhere on the web or, even more importantly, to place marketing on our site. That can take different forms. It can be in the form of sales teasers. It can be in the form of featured products. It can be on the PDP. It can be in the checkout. There are different areas where we offer access to our traffic. And this access predominantly is being used by external brands, so brands that work with us, even wholesale on the Partner Program who use it as a lever to drive more traffic to their brands and also to position new launches that they have and to position their brand overall. But the service is also used by some internal customers, right? So in principle, also, zLabels can use that as a tool to drive more traffic to their products. Zalando Lounge can use it to attract customers from our main destination into Zalando Lounge. Zalon can use that to drive traffic into their proposition. So it is a sort of -- essentially a capability that we are building, and the main user of that are the brand partners that we work with.

[Operator]

The next question is from David Gardner, Morgan Stanley.

[David J. Gardner, Equity Analyst]

Two questions from me. On the operational issues, could you please elaborate as to sort of why these are very specifically Q3 issues, and what gives you confidence that these won't be recurring issues through Q4 or even next year? And then secondly, could you also comment on the current trading, given it sort of implies that Q4 now needs north of 24% to meet the 20% full year growth. Could you give us some comments as to why you're confident in meeting expectations there?

[Birgit Opp]

So David, on your first question on the operational issues. So first of all, it's not Q3 specific, it just happened to occur in Q3. And so what's happened is the following. So as you know, we have a return rate that's roughly around 50%. So items that have come back are being checked for the quality of the items, so are they A items and good for resale right away; or, for example, are they classified as B items, where we would need some refurbishment to make sure they can go back into the A and the resale. For example, ironing or if there's some assoilment that we can remove to reclassify them A and to have them go back. And the focus in the various return centers that we have spread across Europe mostly operate also by third parties. The focus was more on sort of improving logistics processes when it comes around the customer proposition, but less around sort of the inward-focused processes around refurbishment. And so what we've seen is that a high share of the returning items were classified as B items. Also, they could have been easily converted back into A items. So we reviewed the processes in the various return centers that we have, and ensured that process consistency is there for classification of the items as it used to be before as well. And we already see that the processes have been improved. And we've seen our most current numbers, that it seems this issue has been resolved. This is why Rubin alluded to it before as a topic that we have in our hands that we didn't focus on enough in the past couple of months, but it's back in order. And we're confident that going forward, this will not reoccur.

[Rubin Ritter, Co]

I think with your question on current trading, as I said in the presentation, our priority is to return really to the sort of 20% to 25% corridor. And that is something that we are very focused on for the fourth quarter. As you know, success in the fourth quarter always also depends on the big events that we have ahead like Cyber Week, like the Christmas trading. So we think we're really well prepared for those, and we have a good game plan to show really good growth. But ultimately, we only comment on them once they have occurred.

[Operator]

The next question is from Rebecca McClellan, Santander.

[Rebecca Anne McClellan, Equity Analyst]

Just a couple of questions from me. Firstly, in terms of the decline in the average basket over the third quarter, what percentage of that was associated with the mix effect of the sort of higher summer garments in 3Q? And secondly, talk about the MOV in Italy. Does it have any ramifications in terms of revenue growth? Or are you seeing that it seems [ to be introducing back most of the headroom for ] growth?

[Birgit Opp]

So Rebecca, on your first question around the mix, the different effects that Rubin laid out are temporary and structural. I think there's a well mix between those 2 factors, but we're not breaking out in detail sort of the splits between the 2. But it's fair to assume that it's a solid mix between the 2.

[Rubin Ritter, Co]

On your question regarding MOV. I mean, of course, in principle, that is a step that can also have a negative effect on growth even though we believe that customers are very used to this from essentially all the other e-commerce sites. And I think also customers understand it, right? I mean, I think it's understandable why we are charging for the lower orders. Also, when you look at it more holistically, if we are able to impact unit economics in this way, our assumption is that if we take the money that we save there and would reinvest it into another lever, probably we could even generate more growth, right? So if you charge something here but then you reinvest it in something else, which is a more effective driver of growth, I think that can also be net-net a positive outcome on growth. But ultimately, we will sort of introduce it now. We will see how customers react, and we will then steer it accordingly.

[Operator]

The next question is from Anne Critchlow, Societe Generale.

[Anne Critchlow, Equity Analyst]

Just a few questions from me on Zalando Plus. Would you be charging minimal order value on Zalando Plus at any point? And also, please, could you update us on the rollout of Zalando Plus? And talk a little bit about how this fits with accepting greater frequency of ordering. And do those 2 things together, Zalando Plus and accepting this greater frequency, mean that we might be looking at a permanently lower margin?

[Rubin Ritter, Co]

Sure. So on your -- the first part of your question, the idea is, of course, to make sure that for Zalando Plus customers, we really offer the best fashion e-commerce has to offer, which relates to faster delivery, which relates to return pickup, which relates to stylist services, which relates to exclusive access to assortment, and of course, also relates to not charging for delivery even for low item orders. I [ can ] also rule out that ever we will charge for something, but the general idea is that with Zalando Plus, you really get sort of the prime service and you get the best that we have to offer. In terms of the frequency, I'm not sure I fully understood your question. Of course, having greater frequency ultimately drives growth and drives scale, so I think there are also great effects from this. And I think we've tried to lay out how we wanted to long-term mitigate the impact it has on the basket economics. And I think Plus can be one very effective tool to achieve this because there is a mechanism to essentially get our best customers that are interested in the best service to sign up to a program with a sort of -- with a fixed annual fee, which then means they can use all the services that we offer for free throughout the entire year. We already see in the first customers that signed up to Plus that their spending actually increases quite nicely. And this is also why we are eager to roll out the program even more. The first rollout will be in Switzerland, which is starting quite soon. And then the second one will be next year moving into Italy, as just explained. And I think also beyond that, there are more opportunities in other markets to drive that program. And I think it's also a good idea to drive the [ source of ] MOV topic and Plus in parallel. Because ultimately, of course, there's a big link between those 2 steps.

[Operator]

The next question is from Michelle Wilson, Berenberg.

[Michelle Wilson, Analyst]

Could you just talk us through where we are with the distribution center rollout? How many of the distribution centers are now automated? How many are in the process of automation? And then what impact that has on the fulfillment cost ratio? And just get an understanding -- you identified the fulfillment cost ratio will be higher this year than last year, just wanted to understand when that ratio will peak. And then second question, you mentioned you're prioritizing revenue growth over profitability, which you've said consistently since IPO. But is there any floor to the EBIT margin that you'd be willing to kind of invest up to?

[Rubin Ritter, Co]

So on your first question on the distribution centers, overall, I think it's fair to say that a large portion of our footprint is currently in ramp-up. So if we take everything together, we are -- we right now have 11 facilities that are operating or being sort of constructed, and 8 of those are either in construction or ramp-up. And I think that gives you an idea on sort of how much we are investing into building this capacity and building this footprint. Overall, the warehousing side is representing 1/4 of our fulfillment cost. So of course, the ramp-up that we are seeing here is -- has quite a big impact. And also, I think, we quite consciously have decided to really put ourselves a bit sort of before the wave so that we are not restricted by capacity in the coming years in terms of driving growth. I think sort of how fulfillment cost will develop over the next years, I think, in general, as I said in my commentary also on 2019, we still see additional investments we will make into this cost line. And we also see some drivers that come from external, like increased factor costs. So I think also, over the next seasons, we'll continue to see investments that we make into that cost line. And of course, we'll make them as long as we see that it's really an effective driver of our growth. I think in terms of floor to profitability, as you rightly pointed out, since the IPO, we have said we wanted to drive growth and we wanted to drive growth as a priority over bottom line, but of course, as long as it economically makes sense, so as long as we see a positive ROI on our investments and as long as we can show that the investments that we are making are really driving long-term value. And I think that is exactly the mindset that we should have in driving the business. And that is how we look at the trade-offs, and that is how we look at the decisions that we are making.

[Operator]

The next question is from Paul Bonnet, Bank of America Merrill Lynch.

[Paul Jacques Philippe Bonnet, Analyst]

Yes, so 2 quick questions from me. One, a little bit specific, which is -- so basically, can you give us -- enlighten us on the average parcel value that you're sending, because obviously it's different from the average basket size because of Zalando Partner Program? And then the second question is a little bit more holistic about the business, which is -- so Offprice is actually growing very nicely. Could this potentially be a problem for the brands that you are showcasing on your traditional platform?

[Rubin Ritter, Co]

Sure. So on the first question, on the baskets, the only sort of basket value and KPI that we are disclosing is the one that we are disclosing. I think if you do some math around our Partner Program share, you might be able to draw some conclusions from that, but we don't disclose the shipped parcel value. On your second question, Offprice. You're right, that is growing quite considerably and it's a very healthy growth. And we see that in our Offprice business, we are able to really leverage a number of assets in a great way. So combining the trust and the appeal of the Zalando brand with a very clear sort of value-for-money proposition, I think that is a great concept. Also, to really leverage the overstock that we have from our core business, to leverage the brand relationships that we have built, to get more access to brands that's -- to the overstock from brands. So I think that's really a winning formula. I don't see any negative impact from the brand side. Actually, I think quite the opposite. Brands, primarily of course they're interested to drive their full price business, and that's what they do with the Fashion Store. But also, all the brands know that overstock is just a reality of the business. There's always something left over, and they are also looking for channels on how they can sell this leftover merchandise. And there, to be able to work with one partner that can do both, I think, is a big win also from the brands.

[Operator]

The next question is from Georgina Johanan, JPMorgan.

[Georgina Sarah Johanan, Analyst]

Two questions, please. First of all, just you're calling out obviously revenue growth. One of the reasons that it's been behind the ambition is due to the strong growth in the Partner Program. I just wondered, are you seeing more cannibalization of the wholesale business than you initially anticipated when you launched the Partner Program? And then my second question, just on Q4. If my math is right, to hit 20% growth for the full year, you would need to do 25% for Q4. So can you just clarify, when you say guidance for the full year is the lower end of the 20% to 25%, are we talking sort of 18% to 20% rather than 20%, please?

[Rubin Ritter, Co]

Sure. So on the revenue growth and the Partner Program, it is very difficult sort of to statistically prove what is incremental and what is not. And for sure, there's some cannibalization, right. If you just allow brands to onboard much more merchandise, of course, some customers that might have bought something from our wholesale assortment now decided to buy something from the Partner Program assortment. Net-net, I still think it's a sort of very important and very positive growth driver for us, also because we know that we are onboarding a lot of merchandise that clearly is incremental, right? So for example, onboarding Mango in the Partner Program, I think, clearly is driving the attractiveness of our assortment. Onboarding the Inditex brand is clearly driving the attractiveness of our assortment. Having sort of brands like Boss or adidas, not only in wholesale but additional availability from Partner Program items, I think also clearly drives incrementality -- drives incremental NMV. We know that many customers come to our site and look at a product and then don't find the size they're looking for. The Partner Program allows us to have significantly higher availability. So even though I cannot put a specific number to it, I think, in general, it's true that more assortment and more attractive brands also drive growth. And ultimately, what we want to prove to our customers is that Zalando is the destination where you find it all. And if you don't find it on Zalando, it's not there. And I think that's ultimately the customer promise that we are driving towards, and where of course the Partner Program is a very important lever to get there. In terms of our guidance, we said that we aim to be around the low end of our full year guided range. And we also said, we think for the fourth quarter we are aiming and our ambition is to be back to that 20% to 25% growth corridor, which I think after the very weak third quarter is a very important proof point, and we are confident that we can make that proof point in the fourth quarter.

[Operator]

Last question is from Jurgen Kolb, Kepler Cheuvreux.

[Jurgen Kolb, Analyst]

Just one question here really on the marketing side. I think, Rubin, you indicated that -- and it sounds as if you've changed a little bit your marketing posture. In the past, if I remember correctly, whenever you realized that the demand was not kicking in from customers, you also lowered your marketing spend. This time, it looks as if you're going the opposite way. Is that the strategy we should be looking at going forward, that you're putting more money behind marketing going forward in order to achieve your 20% to 25% top line level?

[Rubin Ritter, Co]

I think the short answer is yes. I think if we take the approach to be able to invest a bit more through cycle in terms of marketing, maybe compared to how we have been driving it previously, we think that, long term, there will be a positive impact on growth. Of course, the important side condition is that we are able to prove very clearly what the ROI of each specific investment is, especially for performance marketing. And there, I think after the changes we have made earlier this year, we are making a lot of progress, and that makes us confident to actually start to invest more into marketing. As you know, we have been keeping marketing constant in absolute terms for a long time, or only growing it slightly in absolute terms. And we think accelerating our investment pace there really would bring us more additional customer growth. And I think it's also one important ingredient to make sure that, also beyond 2020, we can really show growth that is significantly above the average growth of e-commerce and fashion e-commerce.

[Operator]

We conclude the question-and-answer session, and I would like to hand back to Mr. Kofler.

[Patrick Kofler]

Thank you very much for joining us today. We are looking forward to speaking to you soon. And if you have any follow-up question in the meantime, do not hesitate to contact us. Have a great day. Bye-bye.

[Operator]

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