Zalando SE

XETRA:ZAL

Earnings Call Transcript 2019-Q3

[Patrick Kofler, Teamlead Investor Relations]

Good morning, everybody, and welcome to our Q3 2019 earnings Call. With me today is our CFO, David Schröder. 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. David, the floor is yours.

[David Schröder, CFO & Member of Management Board]

Thank you, Patrick. Good morning, and welcome to all of you from my side as well. Our presentation today consists of 3 parts. Our highlights of the quarter, our quarterly financials and our financial outlook. As always, we will be concluding with Q&A. So let's get started with the highlights. We are very satisfied with the developments we've seen over the first 9 months of this year. We are making progress on our strategic agenda. And at the same time, stay focused on strong day-to-day execution. Consequently, our Q3 results are showing a solid reversal from the highly disappointing Q3 figures of last year. We thereby continue the positive trajectory that really started with the fourth quarter in 2018. This is also reflected in the 5 main messages that I would like to share with you today. First, our starting point strategy continues to bear fruit. For the first time ever, we surpassed 1 billion site visits in a single quarter. On the back of this traffic growth, we achieved an outstanding active customer growth of 17.5% year-over-year. Second, Q3 showed strong financial performance with revenue growth of almost 27% and an adjusted EBIT of EUR 6 million, which is up EUR 45 million year-over-year. Third, we confirm our outlook for the full year. We continue to expect GMV growth of 20% to 25%, revenue growth around 20% and adjusted EBIT between EUR 200 million and EUR 225 million. Fourth, our platform transition is progressing well. Next to the overall growth of our Partner Program, our key partner facing services, Zalando Fulfillment Solutions and Zalando Marketing Services are scaling fast. Our ZFS share of Partner Program items shipped for the first time surpassed the 40% threshold at the end of Q3. At the same time, ZMS already reports more than 2% paid product views. And fifth, we complemented our Zalando group strategy with our new sustainability strategy, which we communicated to the public yesterday, recognizing both the business opportunity this presents as well as our corporate social responsibility. We aim to become a leading player in terms of sustainability, targeting a net positive impact for people and planet. During the presentation, we'll dive deeper into all of these topics. Let's now start with our starting point strategy first. As laid out already during our Capital Markets Day earlier this year, our ultimate vision really is to become the starting point for fashion for European consumers. We aim to achieve this by transitioning to a platform model, by expanding our customer base as well as by deepening the relationships with our customers. Over the past 3 quarters, we've already seen very good progress on that journey. We have managed to reaccelerate our active customer growth over the course of 2019. Already today, we are proudly serving more than 29 million customers across Europe. For the first time ever, we have surpassed 1 billion site visits in a single quarter. This is an enormous number, which shows that our customers love to get inspired by us more and more frequently. More importantly, we have not only been able to broaden our customer base, but are also building deeper and deeper customer relationships, which is evidenced by a new all-time high in order frequency and GMV per active customer. We attribute these developments to 2 main drivers. First, continuous improvements of our customer experience. We continue to double down on our long-term-oriented investments in key areas such as assortment, digital experience and convenience to drive customer satisfaction and retention. Second, improved and increased marketing activities. As we already elaborated during our last earnings call, we increased the level of our marketing investments by optimizing for longer time horizons in our new ROI-based marketing approach, in line with our strategy to create deep and long-lasting customer relationships. Going forward, we are committed to further improve our customer experience, and we'll also keep investing into marketing, whenever we see an opportunity to accelerate our growth and grab additional market share. While the basic approach to managing the growth of our platform is derived from our overall growth strategy, you also clearly see it reflected in our highly localized market-specific growth strategies. And just like on a global level, we are happy to report strong growth across all our markets. In order to provide some more color, let me share 4 brief examples with you on how we broaden and deepen customer relationships on a local level. Let's start with our home market, Germany. In Germany, we recently passed an important milestone with our loyalty program, Zalando Plus. Although the program only became publicly available to all German customers at the beginning of Q2, already 10% of our German GMV is generated by Zalando Plus members today. This is a great first proof point on how our premium membership program, Zalando Plus, can help drive growth through deepening customer relationships by offering customers a range of premium fashion and convenience services. Let's next talk about Spain. In Spain, which is among the 5 largest European markets for fashion and lifestyle, we've seen a very strong growth momentum over the last 12 months. This has been driven by 2 main factors. First, continuous improvements in our customer proposition as we partnered even more closely with local delivery providers to offer our Spanish customers faster and more reliable delivery. And second, a targeted investment into brand and performance marketing. Going forward, we aim to further invest in the Spanish market and into the local customer proposition with the goal to develop this market into one of our future core markets, next to Germany, France and Italy. In Sweden, we have seen very positive traction as well. Our customer satisfaction reached a new all-time high this year, as our local value proposition has been significantly improved through the following initiatives: On the one hand, a more localized assortment with many more local Scandinavian brands; secondly, the introduction of Beauty in Sweden in spring this year; and last, but not least, the ramp-up of our local satellite warehouse in the Stockholm area, which by now is also delivering to other Nordic markets and enables even faster delivery for our Nordic customers. In our youngest market, the Czech Republic, which we only launched about a year ago, we were able to significantly step up our game in terms of customer acquisition through a series of marketing and sales campaigns, aimed at creating a clear leadership position in the market. The success of these efforts is already visible today. To give you a very tangible example: We were already able to acquire about 1% of the Czech population and turn them into Zalando first-time shoppers through a viral sales campaign just in the month of July. To further build on this momentum, we want to increase our touch points with Czech customers by introducing our flash sales model, Zalando Lounge, to the Czech Republic in December. Going forward, we are aiming to develop all our existing markets further to truly become the starting point for fashion in Europe. After talking so much about growth, let's talk about sustainability. We are aware that to really become the starting point for fashion, we cannot just focus on driving more and more growth, but we also need to offer sustainable fashion and have to make our whole value chain more sustainable, starting with our own operations. Our revised sustainability strategy, do.MORE, will therefore play a key role going forward as it will help us reach our overall business strategy and vision. Through our commitment to sustainability, we can realize our business goals. The fashion industry is facing huge, complex challenges. We will use the power of our platform to be part of the solution. And it starts with improving our own business. We are taking a stand on climate change, use of resources and workers' rights, while taking our partners with us on this journey. We are styling with care to make it easier for customers to shop sustainably, and we are experimenting and collaborating across the industry to shape a circular future for fashion. This is how we will do more to move the fashion industry forward for people and the planet. This, for sure, is a long-term vision and a task for the next decades, but we've set ourselves the first set of ambitious targets for the short and midterm. From today onwards, our own operations and all deliveries and returns will be carbon neutral. In addition, by 2023, we aim to achieve the following targets: We design our packaging to minimize waste and keep materials in use, specifically eliminating single-use plastics; we apply the principles of circularity and extend the life of at least 50 million fashion products; we generate 20% of our GMV with more sustainable fashion products. We have continuously increased our ethical standards and only work with partners who align with them. We have supported 10,000 employees by providing skilling opportunities that match future work requirements. This is how we will do more to move the fashion industry forward for people and the planet. Let's now turn to our Q3 financial results. Starting with top line. Group top line growth was again strong, with GMV growing by 24.6% year-over-year. We continue to grab market share by growing several times faster than the overall European fashion market as well as the European online fashion market. Revenue growth came in at 26.7% and was thereby even higher than GMV growth, due to the following 3 effects in order of importance: First effect was a revenue recognition shift as small orders have been fulfilled and placed in the third quarter; second effect was an overproportional scaling of our partner-facing services, Zalando Fulfillment Solutions and Zalando Marketing Services. This overproportional growth of ZFS and ZMS is not reflected in the definition of GMV, while it is contributing to our revenues; and the third effect has been that the Partner Program continue to grow significantly year-over-year, but partners limited their participation in our end of season sales as a result of difficult order economics during spring/summer sales. In order to create an even stronger incentive for our partners to offer the full range of assortment on our platform and to also reflect the significant differences in terms of order economics across different categories and price points, we recently introduced a new commission structure. We are convinced that this new structure will provide our partners with even better opportunities to drive their business on our platform and will thereby allow us to further scale our assortment for our customers and the Partner Program GMV as well. Let us now dive even deeper and take a look at the different segments. Our main business unit Fashion Stores saw a 26.9% revenue growth in Q3. We are very happy with the performance of this core sales channel, as we saw a strong recovery of revenue growth after only 10.8% in Q3 2018. This was equally true for the 2 regions, DACH and Rest of Europe. DACH revenues grew 22.9% year-over-year, and Rest of Europe even grew by more than 30%. As mentioned earlier, we still see tremendous growth potential in all our markets, and we'll continue to invest into strengthening our customer proposition and scaling our customer acquisition to capture additional market share. Our business unit Offprice recorded 42.2% revenue growth. This was mainly driven by a strong performance in Germany and our younger Offprice markets, Spain and Poland. In our Other segment, we saw revenues decrease by 62.1% year-over-year. As communicated already with our Q1 reporting, we have changed our approach to our private label business, zLabels, in light of our platform strategy in spring this year. As part of this new approach, our private label activities have been significantly downsized and are no longer reported in the Other segment anymore, but are now part of the Fashion Store. This does not have any impact on the external sales reporting since it only affected internal inter-business unit revenue. As a result, the Other segment is declining compared to last year. Excluding our private label business, would have resulted in a pro forma revenue of EUR 24 million in Q3 2018 and a growth of above 70% in Q3 2019. Our Other business continues to contain, amongst others, Zalando Marketing Services, Zalando Integration Services as well as emerging businesses like our circular fashion model Zalando Wardrobe. Since we already commented on the exceptional development of our active customer base and our site visits earlier during this presentation, let me focus on the remaining key customer metrics now. We see the positive trend on order frequency continue, and we have now reached a level of 4.6 orders per active customer in the last 12 months. We also see our basket size develop in line with past trends. It is still declining, but at a much slower pace. Comparing last 12-month basket size year-over-year, we see a decline of 1.9%. If we only look at the quarter-over-quarter development, however, our basket size decreased by merely 0.7%, driven by a higher share of fall/winter merchandise due to colder weather and by the introduction of a minimum order value for free delivery in 9 countries, with the latest addition in France beginning of August. As a result of these order frequency and basket size developments, GMV per active customer grew by more than 5% over the last 12 months. In terms of profitability, the picture reversed completely versus last year, especially in the DACH region. This year, we were operating in a much more normalized trading environment across all regions, and hence, absolute and relative profitability as measured by adjusted EBIT came in clearly above last year. In absolute terms, adjusted EBIT increased by EUR 45 million year-over-year to EUR 6 million, driven mostly by the DACH region. In relative terms, we recorded an adjusted EBIT margin improvement of 3.6 percentage points. The Rest of Europe margin improved only slightly year-over-year. As mentioned previously, we still see quite a few Rest of Europe countries on a fairly early point on their growth curve, and hence, are willing to invest significantly into local customer experience improvements and customer acquisition efforts. Offprice profitability came slightly down in absolute and relative terms, mainly caused by higher fulfillment costs due to the continued growth of new, more distant markets and the ongoing ramp-up of our new Offprice fulfillment center in Olsztynek, Poland. The Other segment stayed roughly stable despite the transformation of our private label business, as we continue to invest into our emerging business portfolio. Now let me give you more detail on the effects that led to the positive development of our most -- of most of our cost lines this quarter. Before we jump into individual line items, I would like to highlight 2 overall effect: Firstly, we simply benefited from much higher sales versus last year, and therefore, a much higher contribution margin; secondly, thanks to our ongoing focus on overhead cost efficiency, we recorded substantial savings, which are not fully visible in our admin cost line, but are really spread across all major cost lines. Besides these 2 general effects we see some specific line item effects that I would like to comment on now. Gross margin showed a healthy recovery due to less allowances for goods due to the effective returns. As you might recall from last year, a higher-than-usual share of inventory was classified as damaged returns due to internal operational mistakes. Additionally, improvements were driven by better buying conditions as well as an earlier start into the fall/winter season. Our fulfillment cost ratio improved year-over-year as a result of higher level of utilization and, therefore, also improved efficiency across our logistics network and almost stable basket size. Similar to Q2, we still view this as a rather temporary effect as we continue to invest into scaling our European fulfillment network and into improving our convenience proposition. The marketing cost ratio was flat year-over-year. While we continue to invest into customer acquisition, supported by our ROI-based marketing approach, the marketing cost ratio remained flat due to already elevated marketing spend levels in Q3 last year. As a result of our 10-year campaign and our last Bread & Butter fashion event. Last but not least, admin costs improved significantly as a result of ongoing cost efficiency measures. As we conclude this section on quarterly financials, let us now look at the development of our cash flow. Net working capital continued to be negative, and even further improved year-over-year. The main driver behind this development was the relatively higher increase in payables, then in inventories and receivables, reflecting a different timing of fall/winter inbound deliveries than last year and a higher level of marketing investments. For CapEx, we saw an acceleration in spending as expected. All our key projects are progressing well, and we therefore spent EUR 90 million over the course of the quarter, taking our CapEx year-to-date to a level of EUR 190 million. As already mentioned during our last earnings call, our CapEx spend is usually backloaded since larger sums are typically billed towards the end of a calendar year. Overall, our free cash flow decreased by EUR 49 million from minus EUR 30 million in the prior year period to minus EUR 89 million in this Q3. This development is mainly driven by a higher CapEx of EUR 27 million versus last year, and a significant one-off payment of EUR 57 million received from the sale of our warehouse building in Gryfino last year, while we recorded an increase in operating cash flow of EUR 25 million, which partly offsets the aforementioned negative effects. As a result, our cash balance at the end of Q3 amounted to EUR 867 million. As always, let me conclude this presentation with our updated outlook for the full year. Based on another strong quarter, we are happy to confirm our full year outlook. For GMV, we still anticipate GMV growth between 20% and 25% for 2019. For revenue, we continue to expect revenue around the low end of the 20% to 25% growth corridor. Our profit outlook remains unchanged. Adjusted EBIT is expected to come in at the upper half of our initial EUR 175 million to EUR 225 million range. On cash-related items, we anticipate net working capital to stay slightly negative at year-end, and we still expect capital expenditure of around EUR 300 million in 2019. 2019 has been a very successful year for us so far. We are making progress on our strategic agenda to become the starting point for fashion and to transition our business to a platform model. At the same time, we stay focused on day-to-day execution and managed to deliver continued strong growth as we broaden our customer base and create deeper customer relationships. Based on our strong track record over the past quarters, we are very confident to finish the year in style and to also deliver on our full year guidance. We now look forward to celebrating Cyber Week and Christmas together with our customers. Looking even further ahead, we believe that on the back of our strong performance in 2019, we are in a really good position to reach the goals and to deliver on the midterm guidance we have laid out for the coming years at our Capital Markets Day earlier this year. Pursuing our vision to become the starting point for fashion, we will continue to capture market share to show strong growth and solid profitability, while we execute our platform strategy and invest into attractive opportunities for long-term value creation. That concludes our presentation for today. Let's now go into Q&A.

[Operator]

The first question is from Rocco Strauss of Arete Research.

[Rocco Strauss, Analyst]

Two questions for me, please. First, could you help to further untangle the difference between GMV and revenue a bit more with Partner Program gaining share. GMV growth is generally ahead of revenue growth. Is there some kind of like country mix shift here with lower Partner Program share shift to off-season? Or that a mass uptick and how we should think about this going forward? And also, you mentioned that, I mean, can you share any more detail on the issues with Partner Program sellers, with respect to off-season sale at year-end? That would be much appreciated. And secondly, on the sustainability efforts you had rolled out yesterday, how are you planning to kind of like balance the efforts, which clearly come at a cost with your long-term GMV growth targets? And as a follow-up to that, probably given Zalando's size, do you believe that you can put pressure actually here on other less scaled online fashion retailers to adopt similar standards, which at the end, could lead to even further market share gains by Zalando?

[David Schröder, CFO & Member of Management Board]

All right. Let's take them one after another. So on your first question regarding the difference between GMV and revenues. I think it's definitely unusual that you see it in that order, that revenue growth actually is stronger than GMV, and that's also something we do not expect for the full year at all. So for the full year, you should still expect GMV growth to be ahead of revenue growth as also has been true for many of the past quarters. If we look at Q3 more specifically, and try to untangle what happened, I think it's really down to the 3 effects I already mentioned during the presentation, and I'll try to elaborate a bit more now. So as I already said, I think the first and main reason really was a revenue recognition shift from Q2 to Q3. Q2 ended on a weekend, and it was one of our strongest sales weekends, actually. And therefore, all the revenue that was done on that weekend shifted into Q3. And that definitely pushed up the number for this quarter, whereas it was included in the GMV for the second quarter. And that's something that is very different from the year before, because in the year before, actually, we saw a negative financial shift between the quarters, whereas this time, Q3 really benefited from this effect. On the second effect, so the overproportional scaling of our B2B businesses. As I said, I think we are very happy with the strong traction we see on Zalando Fulfillment Solutions and Zalando Marketing Services. Both are actually scaling faster than the Partner Program itself. And therefore, you definitely see a stronger effect on revenue, since those services are not accounted for at all in our GMV figure, since that's just the sales we do towards our consumers and not accounting for our B2B service. So I would read that as a strong sign that our B2B services are actually scaling very well. And the last point around the Partner Program, which also, I think, ties with your second question on what partners did during the sales period. The program overall continues to grow and also grow significantly faster than the group growth overall. So I think there's no negative things to say about Partner Program growth in general. What we are seeing though is that, if we look at it more on a seasonal pattern, partners definitely are much more active during full price periods than they are during sales periods, and that's specifically pronounced in the spring/summer sales period, where already low average item values are coming together with very high discounts. And therefore, for many of our partners, it's just not economically feasible anymore to ship single item orders. That's something we will try to alleviate in the future, mainly with two things. So one is obviously moving more and more partners to the ZFS, because then you at least benefit from the superior basket economics of ZFS. And second of all, we are also currently testing and implementing specific incentives for sales periods for partners, which can take the form of co-funded vouchers or also discounts on the commission rates, where we obviously aim to serve, take a good cut at Zalando, but we also understand that during that period, probably the take rate can't be as high as in the full price season. So I think that should have answered the first 2 questions that you had, let's maybe now switch to the last one, on sustainability. I think on sustainability, it's important to understand that really, sustainability is part of our overall strategy and does not really replace the overall strategy, right? And that also, obviously, then plays a big role when we think about potential trade-offs. I personally don't feel there's such a strong trade-off because we are really pushing so hard on sustainability because we see it as a really big business opportunity. We see that more and more customers take this topic very seriously and also expect from destinations like Zalando, that we do more on this, and that's why we also call our strategy do.MORE, actually. And in rolling that strategy out, we'll obviously always look not only at our sustainability targets, which are very ambitious, but we'll also look at our growth targets and also profitability targets and customer satisfaction targets because we want to advance on all of them in parallel, and we are obviously not going to sacrifice customer satisfaction growth or profitability just to reach our sustainability targets even faster. So for us, it really goes hand-in-hand, and we think, overall, it presents a great opportunity. Regarding your point on whether it puts pressure on other players, I wouldn't call it pressure, but one intention of our strategy is definitely that we want to challenge the whole industry. Not only our competitors, actually, but also our partners, because we feel that being the leading fashion destination in Europe, it is also our duty to take a stand here and to make sure that the whole industry moves faster on that important topic.

[Operator]

The next question is from Anne Critchlow, Societe Generale.

[Anne Critchlow, Equity Analyst]

I've got 2. First of all, are you lowering the commission rates for partners generally, or just in the sale periods? And should we assume that when you're lowering those rates, it might be closer to 10% or maybe even below that, rather than the 10% to 20% range that we had? And then secondly, on Zalando Fulfillment Services, what percentage of Partner Program is that now, please?

[David Schröder, CFO & Member of Management Board]

All right. On the commission rate, maybe to clear things, fix things up a little, right? I talked a bit about our new commission structure. And I try to explain why we introduced it, with the main reason being that we really see big differences between different categories and also different price points when it comes to profitability on the partner side. So just an easy example. It's obviously hard to earn a high-margin on a very low-priced item in the dress section, whereas you'll probably earn a really healthy and nice margin on a premium accessory, like a handbag. And therefore, we think it's just unfair to charge the same commission rates to those 2 products and potentially brands. And therefore, we've introduced a new commission structure now, which differentiates between price points and categories mainly, and which ranges from 5% at the low end to 25% at the high end. If you look at the kind of aggregate level or the average level of commission, that really hasn't changed so much compared to the commission we charged before. We just think it's now much fairer distributed across partners and categories and price points. And therefore, every single partner should have a better incentive to list their full assortment. With regards to the lower commission rates or potentially discounts during sales periods, that really applies to sales periods only, and it's also not a formal part of our partner contracts. So we keep it as a discretionary part that we can always either use or not use, depending on where we think it makes sense. We definitely decided that we'll use it for the upcoming Cyber Week, because we think it will make our offer even more attractive, and it will also give our partners an even bigger business opportunity. And that has been very well received by our partners overall. Now on your second question regarding ZFS share. ZFS continues, I think, on its very strong success story. If you remember, it started below 10% share of Partner Program last year. We then said earlier this year that we surpassed the 30% mark. And now, a few months later, we already surpassed 40% share of Partner Program items shipped, which makes me very confident personally that we will get to the 50% mark over the course of, yes, the next 6 to 12 months, just like we promised to you already during Q2. So the growth is, yes, still very strong. Many more partners are joining the program. Actually, more than 150 have signed up, but we are still busy integrating many of them, and I think we also have a few strong additions that joined us in Q3. The most well-known one probably being Mango, which is scaling their volume very quickly. And it's also significantly contributing to that strong traction of our ZFS business.

[Operator]

The next question is from Tobias Sittig of MainFirst.

[Tobias Sittig]

Could you elaborate a little more on your sustainability strategy? Firstly, the financial implications? Does it mean that you will have to buy certificates for the sort of 250,000 tonnes of CO2 you're emitting at the moment? And what do you think will be the financial implications on that on 2020? And secondly, does it mean that you will shift your deliveries to some extent, shifting to providers which offer carbon neutral products? Or how should we think about that?

[David Schröder, CFO & Member of Management Board]

Yes. So I mean, as I tried to explain, we mainly look at our sustainability strategy in terms of creating a new business opportunity for us and fueling our growth, not as just adding additional costs to our P&L. And so the main point is really about doing those investments to fuel future growth. Regarding your specific questions on certificates, I think it's correct that in order to be true to the goal that by today, actually, we are carbon neutral with our deliveries and returns. We will need to offset most of it until we found better ways to reduce our actual footprint. But it's -- I think it needs to be understood that offsetting is only the short-term lever, whereas long term, we think we'll be able to work more and more with our delivery partners to reduce the actual emission footprint, and therefore, we'll do less and less offsetting over time. With regards to the certificates we have to buy, I think it's important to understand that also, our customers have the option in the checkout to offset the footprint of their specific order and return. And based on tests we've run so far, that is also leading to a high adoption on the customer side. So we'll only have to cover parts of those certificates. And the overall number is going to be in a range where it won't materially impact our profits for next year. And will obviously also be included into the guidance that we'll issue in February next year, together with our Q4 results. Since you also asked with regards to a potential shift of deliveries, I think that's really to be seen over time. But I definitely think in order to make sure that over time, we have to do less and less offset. One potential lever and probably one good lever is to shift more and more deliveries to delivery partners that have a strong sustainability agenda and also managed to reduce their carbon footprint every year by a substantial amount. And therefore, we are definitely looking into the topic, together with our delivery partners. We are also encouraging them to do even more. And we are also exploring potentially new partnerships with delivery partners we are so far not working with, that might also already have a good position in that area. What you also might have seen is that actually, we started in our local delivery network to also do last mile deliveries with electric vehicles recently, in the city of Hamburg. And that's also, I think, an angle that we'll continue to pursue. That's obviously not going to be large scale, since it won't work for all of Europe, but at least in certain metropolitan areas, that can also be a good solution.

[Operator]

The next question is from Michelle Wilson of Berenberg.

[Michelle Wilson, Analyst]

Three from me, please. Firstly, on the basket size decline, that's coming in despite the introduction of minimum order values. Is that more of a mix effect because the outperformance of markets like Spain and CEE? And does the lower basket size in those markets mean that those markets will be structurally less profitable than the DACH region? Or can that lower basket size be offset by lower costs in those markets? And secondly, on the fulfillment costs, could you just give a bit of an update on where we are with fulfillment costs. I know the ratio was down 140 bps off prior year, but it's still up 160 bps off 2 years ago. And so just to understand how we should expect that ratio to develop into Q4 and going forward once we're against more normalized comps? And then thirdly, just a follow-up on the potential to lower the commission rates during periods of discounting. Can you just give us an indication of what proportion of Zalando sales are actually made during discount periods? Is that the whole of Q1 and Q3? Or was it just selected weeks?

[David Schröder, CFO & Member of Management Board]

All right. On the basket size topic, I think you're right. There are some structural levers still at play here. Overall, as I said, we are actually very happy that the decline has slowed down significantly compared to the past. But the 2 main structural drivers that we still see in places a further increasing mobile share. So I think you saw that our mobile share actually increased 5 percentage points year-over-year. And the second structural driver is, obviously the stronger growth in Rest of Europe, where we structurally see lower basket sizes, at least for now. We think that part of this will go away as markets continue to mature and actually also customers in those markets start to enjoy the full benefit of online shopping, especially combined with our strong returns proposition. But for me, that doesn't really mean that even if the basket size in those countries does not reach the DACH level, those regions necessarily need to be structurally less profitable because as you already alluded to, we also have some benefits in those markets, most notably, probably a lower -- much lower return rates than in the DACH region, and that obviously also translates into lower costs for fulfilling those baskets. So I think it would be a bit too simplified to deduct lower long-term profitability potential just from a lower basket size in those regions as we see it currently. On the fulfillment costs, yes, it's true, obviously, in the more long-term view, those have increased. But that is really due to the continued investments into our European logistics network, which does not fuel only our customer proposition, but as you know, also fuels Zalando Fulfillment Solutions. So that business would not be possible if we wouldn't scale that network anymore. And as you know, we are also continuously investing into further improvements of the customer proposition. So also things like Zalando Plus, with same-day and next-day delivery, obviously lead to a higher fulfillment cost per order, but this higher fulfillment cost per order is more than outweighed by the additional spend that we receive from customers, and therefore, we still think it's a very good investment for us. Now in regards to your question on the future outlook. I think for the full year, we still expect a slight uptick on fulfillment cost compared to last year. And in terms of our mid- to long-term guidance, I think you remember from the [indiscernible] we said, we expect a rather flat development over the coming years as we will reinvest any efficiency gains into further improving our customer proposition and further strengthening our network. And then your last question regarding the lower commission rates, that really only applies to specific weeks so end of season sale weeks or the Cyber Week and not to a whole quarter. And therefore, the impact is also, maybe not as huge as it sounded to you in the first place. What we do not disclose, actually, is how much sales we actually do in those periods. But Cyber Week, as you know, not only for us, but also for many other retailers, is the strongest week of the year. I think that's obviously something you can expect.

[Operator]

The next question is from Richard [ Jen ] of Goldman Sachs.

[Tushar Jain, Research Analyst]

This is Tushar from Goldman. Just two questions on my side. Just trying to understand how you'd be rolling out zPlus? How should we be thinking about this sort of beyond Germany or DACH region? And second point, there was quite a strong growth in Offprice segment. Is there anything specific going on there? Just if you can explain that.

[David Schröder, CFO & Member of Management Board]

Yes. So on Zalando Plus, obviously, we're very happy with the strong traction we are seeing ever since we opened it up to our customers in Germany at the beginning of Q2 and that also means that we'll not only be aiming to scale the program even more in Germany. But obviously, we'll also double down on our efforts to introduce it in more markets. I think we already said earlier this year that we aim to launch it in 2 additional markets, that's within the next 12 months. That's still our plan, and we'll communicate the exact date and time when we are ready for it. But stay tuned. It's definitely not going to take a long time until you hear from us regarding the next country for zPlus. Then on the growth in the Offprice segment. I think that is really based on multiple drivers. One is that we really see a strong traction of this program in Germany. But we also see strong traction in the new markets that we opened about a year ago. So specifically, Spain and Poland. And what is also working well for us is that with opening more and more outlets, we also see more revenue in that Offprice channel. So those are probably the 3 main drivers that contribute to the strong growth of Offprice and then also make us confident that this model can actually, sooner or later, surpass the EUR 1 billion mark as it continues its strong growth trajectory.

[Operator]

The next question is from Olivia Townsend of UBS.

[Olivia Townsend, Analyst]

So my first question is just a follow-up on Michelle's questions about basket economics. Can you give us any information on the impact of minimum order values on basket value and then ultimately, profitability? Are you still seeing -- or are you seeing similar uplift to profitability in other markets, as you said, you have seen in Italy? My second question is on some of the KPIs. Can you give us an update on conversion and on NPS? Conversion seems to have declined slightly in Q3. Could you elaborate on any drivers of this and what you expect to see going forward? And then on NPS. Are you still seeing NPS broadly similar between Partner Program and wholesale orders?

[David Schröder, CFO & Member of Management Board]

Yes. So I think you sneaked 3 questions into 2. But I'll still try to answer them. So on the basket economics, yes, we still see a positive impact of the MOV. So in all the countries where we introduce an MOV, we actually see an improvement year-over-year, and we see similar patterns that we also reported for Italy in all the other markets, including the latest market where we introduced it, so France. On conversion, conversion rates have come down a bit as a result of our strong increase in traffic. We still are predominantly seeing organic traffic, but as we increased our marketing spend so much, obviously the share of paid traffic has increased. And typically, as you would expect, that leads to a lower conversion. Overall, although the conversion rate on the organic traffic really hasn't changed. So it's mainly a mix effect and should not be over interpreted, from my point of view. On NPS, actually, we are very happy with what we see this year because we reached a new all-time high on group level, but also for many different countries. I think I especially commented on the Nordics earlier on, but the same is true for other countries as well. And also, if we look deeper and compare Partner Program versus wholesale, we really see that we have reached parity between the two, as a result of our strong investments and strong adoption of Zalando Fulfillment Solutions. So the main pain point of Partner Program used to be a subpar delivery and return experience, and that's something that ZFS has helped us to effectively solve for most of the cases, and we think that can only improve as the share of ZMS further grows over time.

[Operator]

The next question is from Jurgen Kolb of Kepler Cheuvreux.

[Jurgen Kolb, Analyst]

Two questions. First one, you mentioned that your buying conditions have improved. Maybe if you could share with us a little bit additional information. Is that predominantly because of your size? Or have you -- what have you changed here specifically? And secondly, you mentioned already Cyber Week, but also Black Friday, any word on what you're planning this year? Is that going to be bigger this year compared to last year? And is that going to be a several weeks period rather than a shorter-term topic?

[David Schröder, CFO & Member of Management Board]

So I think the answer to the buying conditions is pretty simple. It's mainly based on scale discounts. As we grow bigger, we also get more scale discounts from our partners. So that's really economies of scale, and that's something that we hope to see even more in the future. As you know, we are intending to triple the size of the business over the course of the next few years. And therefore, that should be a continuous source of improvement. And therefore, as you know, from our long-term guidance, we also expect an improvement in gross margin over time as one of the key levers to get to a higher overall margin. Now on Cyber Week and Black Friday, we definitely aim to make it bigger. I mean everything else would be a bit strange, right? If you want to grow 20% to 25%, you also need a much stronger Cyber Week, and that's what we are preparing for and planning towards. And just like last year, we also want to make it a bigger, multi-day event, not just a single-day event. But obviously, I'm not going to reveal the whole game plan now, since we also know there are quite some competitor's dynamics. And therefore, I'm happy with the state of preparation on our side. And I'm also confident that we'll have another very strong Cyber Week ahead of us.

[Operator]

The next question is from Mark Josefson of Pareto Securities.

[Mark Josefson, Analyst]

You've given already some color with respect to ZFS. But is there any -- anything you can share with us with respect to ZMS in terms of Q3 or the 9 months in terms of number of campaigns or clients, et cetera? And secondly, with respect to EBIT in the Offprice segment. I think that given the way the sales level is growing there, I was a bit surprised that the profit is going down. Is this just because of the growth of Spain and Poland? Or is there something to do with -- I think there's a new logistic center for the lounge, and I believe there's some new outlets, but is there something else within the cost structure of that subsegment that we should be aware of, please?

[David Schröder, CFO & Member of Management Board]

Yes. So on ZMS, I think the key news that I already mentioned during the presentation is that we increased the share of paid product views to 2%. If you remember, earlier this year we reported something like 1.1%, 1.2%. So that is growing strongly as well. We see more partners using it. So if I look at -- actually, at the customer list of ZMS, it includes almost all Partner Program partners. So you -- probably there's only a handful that is not using it. Obviously, they're using it to a different degree, but what we are seeing, and that's especially encouraging for us, is that partners that use it once, actually use it more because they are happy with the results they see, specifically when it comes to driving their sales, but also building their brand image. And that's obviously something we want to continue going forward. Now on the Offprice segment, and its EBIT development, I think the main driver really is the transformation in the fulfillment backbone of Offprice. I don't know if you're aware of it, but Offprice used to be fulfilled from 1 legacy fulfillment center with very manual operations in the south of Berlin. This center is still operating. And at the same time, we are ramping up a new facility, which is more automated and also obviously benefits from lower labor costs in the eastern part of Poland. For now, that is rather a burden, since we have to pay for 2 facilities and also have orders that split across the two. As of next summer, where we'll close down operations in our legacy site and only operate from the Eastern Polish sites, that will turn into a huge benefit. And therefore, I see it as a temporary effect, and Offprice will be able to deliver stronger EBIT again in the future.

[Operator]

The next question is from Simon Irwin of Crédit Suisse.

[Simon William George Irwin, Director]

A couple of questions. Firstly, just, is the timing of Black Friday are going to make any difference this year, I think it's a week later? And secondly, can you just talk about the phasing of logistics, particularly with the big DC in Verona coming up. At what stage do you start kind of adding costs -- preopening costs and things to that? And is that big enough in itself to kind of weigh on fulfillment metrics?

[David Schröder, CFO & Member of Management Board]

So on Black Friday timing, it definitely does make a difference, because this year, it's effectively 1 week later than last year. And since, particularly the time between Cyber Week and Christmas is prime time for us in Q4, that will probably be one reason why we won't see the same level of relative growth that we saw in Q4 last year, right? So I think last year, we had an exceptional Q4, which was due to two things, really. So first of all, a really weak Q3. So customers actually did some of their spending that they would have otherwise have done during Q3 in Q4. And I think the second big driver really was an exceptional Cyber Week and Christmas business. And if we look at this year, those 2 drivers are going to reverse, right? So Q3 is much stronger this year. And therefore, we will not benefit from this effect in Q4 and the time between Cyber Week and Christmas is shorter by 1 week. And therefore, we just do not have the same opportunity to grow that we had last year. That being said, we still target a growth for Q4 that is within our target growth corridor, right? So it's not like it's going to be a disappointment. It's going to be a solid quarter, but you shouldn't expect the same outperformance that we saw last year. And then on the phasing in logistics, we are going to ramp up Verona over the course of next year. The same, by the way, applies for our warehouse in Lounge in Poland, which is also still rather operating at lower volumes right now. But given that we are by now approaching already a double-digit number of fulfillment centers in our network, ramping up 1 single facility does not have the same impact for the Fashion Store that it has for Offprice, right? So when I commented on Offprice earlier, it's really -- they used to have 1 fulfillment center, and now they are ramping up a second one, and that obviously makes a huge difference on cost, whereas for the Fashion Store, when we're talking about 8, 9 in the future, even 10 fulfillment centers, 1 new fulfillment center doesn't weigh so much on the cost anymore, particularly because the remaining ones obviously, deliver efficiency gains through automation and also through having more and more capacity in Eastern Europe, where we can benefit from lower labor costs.

[Operator]

The next question is from Georgina Johanan of JPMorgan.

[Georgina Sarah Johanan, Analyst]

Most of my questions have been answered, but just 2 quick ones, please. First of all, just following on from your comments on Q4, and of course, understand what you're calling out with regards to the dynamics. But can I just ask what you're seeing in the first month of the quarter, please? I know some of the data for Germany has been slightly weaker than September. So is that something that you're witnessing as well? And then secondly, just to ask on the new commission rate structure. Is that something that should mean the fulfillment cost ratio actually goes up from here? Or are you sort of adjusting ZFS rates and so on to take account of that? I suppose I'm just wondering if you're giving lower commission rates for lower-priced items, whether that encourages partners to push more lower-priced product through you and skews the mix negatively from a fulfillment cost perspective, please?

[David Schröder, CFO & Member of Management Board]

Yes. So starting with your first question on Q4 and potential early indicators for how the quarter is going. I think the first month has been going well, not exceptionally well, but also, we didn't see any signs for concern. That being said, I mean, the main driver behind our Q4 numbers will really be Cyber Week and everything afterwards, right? So I would say it's almost irrelevant how October went, because we'll deliver the quarter in the second half of the quarter and not in the first half. But so far, we are happy on, with how it's going. On your question regarding commission rates. Yes, so I mean, actually, what you are describing is a potential challenge. It's something we are doing by intention, right? So we are lowering commission rates on lower-priced items because in some categories, because we think it will actually encourage partners to open up even more assortment for our customers. And as you know, from our starting point strategy, that's really one of the main promises towards our customers, that we say, if it isn't on Zalando, it doesn't exist, right? And that's only true if customers really find everything, and that requires that partners offer their whole assortment on Zalando. And that can only be true if they find the right economics for every single product. And what's really the main intention behind this commission structure change? Now I don't see a real issue for fulfillment costs though, based on the fact that in ZFS, we charge in a cost-plus model, right? So it doesn't matter for us how expensive or nonexpensive the item is that we ship. We always charge the same amount. So the ZFS charge is not differentiated by price point, whereas the commission rate is, and that hopefully clears up your question.

[Operator]

We are now taking the last question. That's from Adam Cochrane of Citi.

[Adam Gareth Cochrane, Director]

I think you answered Q1 left would be, you talked about the pull forward of sales that maybe were made in Q4 last year. And they're made in Q3 this year. But you've also talked about October being relatively strong. What makes you think that there was a pull forward of sales, if you haven't seen a weak period in October, into Q3, please?

[David Schröder, CFO & Member of Management Board]

Well, first of all, I didn't say that October was strong, right? I just said that we are happy with the development we see. So I think what you should take from it, it was according to expectations. And second of all, I think it's also fair to assume that customers have a certain fashion wallet they spend each year. And we know that fashion wallet is rather stable and the way we grow with existing customers is we try to increase our share of wallet obviously, but it's also fair to assume that if they already spend a considerable amount of money with us in Q3, they are probably not going to spend -- they are the same, maybe they spent last year in Q4, where the same customer maybe didn't spend anything in Q3 with us, right? So I think it's just also important to realize that the spending power of consumers is not endless. And therefore, the more they spend in Q3 with us, at least directionally, the less they will spend in Q4. Still, we believe Q4 in absolute terms will be a very strong quarter. I was just more commenting on the relative growth that we expect to see compared to last year, where we are comparing ourselves with a very strong base and where we had those benefits that I tried to explain earlier.

[Patrick Kofler, Teamlead Investor Relations]

Thank you, everybody, for joining today's call. If you have any further question, do not hesitate to reach us. Otherwise, we'll meet and see you and be in contact over the next couple of the days and weeks. Thanks, bye-bye.