Zalando SE

XETRA:ZAL

Earnings Call Transcript 2021-Q3

[Operator]

Dear, ladies and gentlemen, welcome to the conference call of Zalando SE regarding the publication of the Q3 results 2021. At our customers' request, this conference will be recorded. [Operator Instructions]May I now hand you over to Patrick Kofler, who will lead you through this conference. Please go ahead.

[Patrick Kofler, Head of Investor Relations]

Thanks, and good morning, everyone, and welcome to our Q3 2021 earnings call. I am joined today by our Co-CEO and founder, Robert Gentz; and our CFO, David Schroder. Robert will kick us off with a strategic update and a sneak peek into 2022. David will then walk you through the financial development of the quarter and our outlook. Both Robert and David are available for questions afterwards.As usual, this call is being recorded and webcast live on our Investor Relations website, and a replay of the call will be available later today.Robert, I will now hand it over to you. Please go ahead.

[Robert Gentz, Co]

Yes. Thank you, Patrick, and a very warm welcome to all of you. Thank you for joining our call today.We are very happy with the development of Zalando in 2021 so far. So we are making progress on our strategic agenda while staying focused on strong day-to-day execution.So we have successfully navigated the first full quarter with reopened economies and delivered strong financial performance in the third quarter. David will dive deeper into our financial performance later in the presentation today.In a nutshell, these are the key highlights from the past quarter. We successfully launched Zalando in 6 new markets and are paving the way to be the Starting Point for Fashion across Europe. We upped our game in terms of brand collaborations, taking our brand relationships to the next level with exciting product growth. Third, we made progress on our long-term commitment to move the fashion industry from a linear to circular system.Financially, we showed strong growth in Q3 at a normalized profitability level. So we have now reiterated our upgraded outlook for 2021 with GMV growth of 31% to 36%, revenue growth of 26% to 31% year-on-year, and adjusted EBIT in the upper half of our initial EUR 400 million to EUR 475 million range.So now before we head into detail, let me zoom out and look again at what we laid out at our Capital Markets Day earlier this year. So to achieve our vision to be the Starting Point for Fashion, we focus on 3 strategic dimensions and have set ourselves ambitious targets for 2025.First, we aim to grow our active customer base and achieve deep customer relationships to play an indispensable role in their lives. Second, in order to provide the greatest customer proposition, we've transitioned towards a true platform business. And as a platform, we work in deep partnerships, which allows us to scale and create strong benefits for customers, partners and Zalando. And third, we use our ever-increasing platform scale to become truly sustainable and drive positive impact on people and the planet. And we do it because it is the right thing to do and we are aligned long term with the interest of our customers, partners and talent.So what does this mean for our business? It means that the major opportunity remains ahead of us. So by 2025, we aim to triple Zalando's GMV to more than EUR 30 billion compared to 2020. And in the long term, we will serve more than 10% of the European fashion market. So in the course of Q3, we made strong progress and executed further against our long-term strategy.So first, let's talk about our customers. We made strong progress increasing our active customer base to over 46 million with a growth of over 30% year-on-year, adding about 11 million customer accounts over the last 12 months. So 11 million newly added customers is an abstract number, it's a huge number. It's roughly compared to the population of Belgium of newly added customers that we acquired at Zalando over the last 12 months, which is an impressive way to think about it.And we have executed on our promise at the CMD to bring Zalando to about 100 million more people in Central and Eastern Europe. We have now successfully launched 6 new European markets over the last 6 months, so Croatia, Estonia, Latvia, Lithuania, Slovakia and Slovenia. And in each of these countries, we've provided from day 1 the largest assortment of global and local brands 2.5x the assortment of the next best choice.A fully localized digital experience with local language and currency options but also locally relevant content influencers and marketing, and the best-in-class convenience proposition with local payment and delivery options.So our leading proposition, combined with a proven go-to-market playbook, pays off. In the newly launched market, we're serving up to 1.5% of the population as customers of Zalando just 12 weeks after launch. We are, as of today, the most downloaded fashion app over the past 3 months across all 6 markets. And all this was achieved even faster than in all previous country launches that we have [indiscernible] in the past.So these are some early success indicators, and we are very happy about the results. Yet to us, it is a multiyear investment journey to establish deep customer relationships and to ultimately be the Starting Point for Fashion.So now let's talk about our partners and the progress we made on our platform proposition. An important success factor of our platform is from brands use Zalando for the most strategic agenda, and particularly when entrusted with the launch of highly exclusive drops of their most sought-after products. And I'm very happy to share that in last month, we initiated several exciting product launches together with our partners.So for example, the adidas Super High Yeezy sneaker. So it was sold out within only 24 hours. And the same holds true for the Levi's Atelier Reserve collection, which was sold out within 48 hours. And we experienced similar strong customer resonance with other hot product drops, which were part of the brand collaborations with Dr. Martens or The North Face. And this is actually exciting. It shows that we are on the right path to be the digital strategy for our fashion brands to tell their stories and create excitement for their brands. And this is the result of our many years' continuous work on our platform proposition building strategic relationships with brands based on trust and providing them with value-adding capabilities that they uniquely and only get at Zalando.So thirdly, we made progress on our third strategy dimension: to use our platform to drive positive change in fashion. And as you know, we have set ourselves 6 specific focus areas of change in our sustainability strategy. These are climate action, packaging, sustainable fashion, circularity, human rights in the supply chain and upskilling. And to give you a feeling, in 2021, our investments into our sustainability efforts will be almost EUR 50 million, with the largest share during 2021 into climate action and packaging.So now I would like to share our progress specifically in the area of circularity. So it is our aspiration to move the fashion industry from linear to circular by applying the principles of circularity and extending the life of at least 50 million fashion products by 2023. And this will require new ways of thinking and collaboration, and we recently progressed with investments in new pilots that will help us to identify more scalable solutions for the future.And this happens in all stages of the circle, although we're at different levels of maturity at the moment. For example, in the design and manufacture state, we recently launched the collections with our private label, redeZIGN. So all products here are designed for circularity, and that means the products are made of recycled or renewable materials and made for last longer.In the use stage, our pilot project, Care and Repair, [ explores ] and we can make it easier for customers to use their items for longer. And already much more advanced our efforts in the reuse stage.So here, we continue to develop and invest into our preowned proposition so that our preowned proposition customers can buy and sell used clothes in a very convenient way as they use from Zalando. And our preowned proposition just celebrated its first anniversary. And since the launch in September last year, the scale have [ offer ] tenfold from 20,000 items to now over 200,000 articles that customers can enjoy on Zalando.And in the final stage, closing the loop, we have recently participated in the funding launch for the Infinited Fiber Company. So with such investments, we aim to grow our share of textiles and that are recycled into new textiles, which currently only happens with about 1% of all textiles in the industry.So these examples underline how we make continuous progress in the third strategic dimension of our Starting Point strategy to be net positive for people and planet.Now let's talk about next year. So in 2022, we will double down on our strategic initiatives to make strong headway towards our long-term Starting Point for Fashion business. We will invest into growing our active customer base and deepening our customer relationships, and deepening our customer relationships with a particular focus in 2022. So the key here is to engage our customers across multiple propositions and join our Zalando Plus membership program.We know that once our customers enjoy the richness of different Zalando propositions that span from Fashion, to Beauty, Preowned, Lounge or Plus, their buying frequency, the share of wallet and, ultimately, the loyalty increases beyond the sum of the parts. So in 2022, it will therefore be the key theme of our strategic agenda: to drive deep relationships with other customers, play in this sensible role with a great set of projects, features and experiences.So next, we are continuing to work on our transition towards a true platform businesses. And here, our key strategic theme for next year is to advance our platform proposition internationally. So maybe let's look first at Germany. So already 40% of our Fashion Store GMV come through our partner program and Connected Retail. In other markets, there is still more potential in these markets at earlier stage when it comes to the platform share. So we want to expand the success across Europe, support partners in their internationalization efforts and source as well locally relevant partners to our platform. And this requires us to invest, for example, into new and innovative shipping and return solutions or into software automation.So by the end of this year, we will have made significant progress to position our platform as an even easier and cost-effective way for our partners to drive their digital direct-to-consumer strategies all across all of Europe on our platform.Then finally, we continue to drive our sustainability agenda forward in 2022. And this requires us to even more ingrain our sustainability and diversity and inclusion efforts into all teams and parts of Zalando. And already today, sustainability is not a single function, but it's a thought of in many different areas of our business. So for example, sustainable assortment in our buying teams or sustainable packaging or logistics teams.And by the end of next year, our approach to our D&I and sustainability efforts will have anchored with in-depth initiatives and it goes across all the launch themes. For example, raising the bar with regard to our sustainability assortment, not only in Fashion Store but as well in Lounge. So it's going to be exciting.So let me conclude this strategic outlook. So 2022 will be a great year for us. We will use next year very wisely to progress on our strategic agenda while relentlessly delivering great experiences on a day-to-day basis for our customers and partners.So David will now take you through the highlights of the quarter, of Q3, and the financial development.

[David Schroder, CFO & Member of the Management Board]

Thanks, Robert. And yes, welcome also from my side. Let's turn to our Q3 financial [ stand ] and start with a more detailed look at our top line performance.As most of the lockdown measures have been lifted across Europe, off-line stores have reopened and consumer mobility has almost bounced back to pre-COVID levels. Our GMV growth rates have started to normalize, starting in the second half of Q2 and continuing during Q3, as already expected when we communicated our upgraded outlook back in May.Additionally, a delayed start into the fall/winter season amid warmer-than-usual weather conditions across most of Europe in September also contributed to the slowdown in growth rates versus previous quarters.Despite these general market dynamics, group top line growth came in at 25.3% year-over-year, slightly exceeding our midterm target growth corridor of 20% to 25% and also ahead of pre-pandemic growth rates.Throughout the quarter, our platform business again showed a very healthy performance. Partner GMV growth substantially outpaced our overall GMV growth. But due to an even stronger performance in our partner-facing services, ZFS and ZMS, the gap between GMV and revenue growth of 1.9 percentage points is less pronounced this quarter than in previous ones.Let's now take a brief look at the development of each of our 3 segments. Fashion Store performance was strong with GMV growth of 23.4% year-over-year. In the DACH region, we recorded a GMV growth of 21.3%. Rest of Europe, which now also reflects our 6 new markets, grew even faster with 25.3%. Our Offprice business continued on its strong growth trajectory, recording a GMV growth of 40.9% year-over-year. The main driver behind the performance in the Offprice business is still under Lounge, which offers our customers fashion products at a discount and daily sales campaigns. In addition, our outlet stores also contributed to the strong Offprice performance, particularly benefiting from positive reopening dynamics.The Other business segment followed the positive trend driven by a particularly strong performance of Zalando Marketing Services, which benefited from strong demand of our brand partners for our advertising products, resulting in revenue growth of well above 130% year-over-year in the past quarter. Besides using ZMS to drive sales on the platform by increasing visibility for certain products, our partners also increased their investments in branding campaigns to build their brand equity on [indiscernible].The key underlying driver of our continued strong growth momentum over the past few quarters has been our exceptionally strong customer acquisition and the continued positive development of existing customers over the past 12 months, as evidenced by 3 key developments.We achieved an active customer growth of more than 30% year-over-year, now counting 46.3 million customers across Europe, fueled by continued strong new customer acquisition as well as increasing retention rates for new and existing customers. Secondly, customer order frequency reached a new all-time high of 5.1 orders per active customer over the past 12 months. And last but not least, average basket size increased slightly by 0.4% year-over-year mainly due to a continued lower-than-usual return rate.As a result of these changes, GMV per active customer grew at an exceptional rate of 6.8% over the last 12 months and is getting closer to EUR 300. Similar to our financial metrics, we expect our customer metrics to normalize over the coming quarters.Let's now turn to profitability. In addition to the normalizing growth momentum, we also saw profitability normalize compared to the extraordinary levels reported in Q3 last year, reflecting the usual seasonal pattern observed before the pandemic as well as our continued significant growth investments, including our recent market launches.Group profitability, as measured by adjusted EBIT, came in at EUR 9.8 million, representing a margin of 0.4%. When looking at the regional profit distribution, we delivered solid profitability in DACH, while profitability in Rest of Europe turned negative, again, due to our disproportionate investments into local customer experience improvements and customer acquisition efforts, particularly in our 6 new markets in Central and Eastern Europe, as Robert just highlighted in his strategic update. However, it should also be noted that our profit margin actually improved compared to pre-pandemic levels despite these additional investments.Offprice recorded a slightly negative adjusted EBIT of minus EUR 3 million on the back of higher price and marketing investments in the past quarter. In other businesses, we observed an increased profitability both in absolute and relative terms.Let me now give you more color on cost line developments that drove group-level profitability in Q3. Gross margin decreased significantly by 5.6 percentage points year-over-year as we lapped last year's EUR 35 million reversal of the write-down on spring/summer merchandise. Furthermore, we increased our price investments in response to a highly promotional market environment, particularly during the end-of-season sale, and saw a lower-than-usual fall/winter season share due to the late season start.Our fulfillment cost ratio continued to improve year-over-year as a result of a higher level of network utilization driven by the strong business volumes and improved order economics due to ongoing yet likely temporary return rate benefits.Our marketing costs in terms of revenue increased by 0.8 percentage points year-over-year as we remain focused on customer acquisition and engagement investments, supported by our ROI-based marketing approach, and also ran dedicated launch campaigns in our new markets.Last but not least, admin costs improved year-over-year as a result of our continued focus on driving efficiencies across the business.Turning to cash-related items. We recorded an increase in our net working capital year-over-year. The main driver behind this development is a relatively stronger increase in inventories and in receivables than in payables, reflecting our deliberate decision earlier this year to prepone pawn fall/winter season inbound as much as possible as one way to mitigate potential supply chain disruptions. This now puts us in a good position to cater to customer demand during the festive season.Mainly due to the strong increase in net working capital, we recorded a negative free cash flow of minus EUR 245 million for the third quarter, down from plus EUR 213 million in the prior year period. Our cash balance amounted to around EUR 1.95 billion at the end of Q3.Let me now conclude this presentation by revisiting our full year outlook. With most of the lockdown measures being eased across Europe, physical stores reopened and consumer mobility is steadily increasing. Growth rates have started to normalize during Q3, and GMV growth is returning to our midterm growth target corridor of 20% to 25%.Although uncertainty remains with regards to the further evolution of the pandemic, we expect that the return to the new normal will continue over the coming months.Consequently, we are happy to confirm our previously upgraded full year 2021 guidance, anticipating GMV growth between 31% and 36% and revenue growth in the range of 26% to 31%. Our profit outlook remains unchanged as well. Adjusted EBIT is expected to come in at the upper half of the EUR 400 million to EUR 475 million range. Furthermore, we anticipate net working capital to be negative at year-end and capital expenditure to amount to around EUR 350 million in 2021.Looking further ahead into 2022 and beyond, I would like to echo what Robert already mentioned earlier. We will continue to execute our Starting Point strategy by growing our active customer base, building deeper customer relationships, transitioning towards a platform business and building a truly sustainable fashion and lifestyle platform. In doing so, we will build on the strong fundamentals we already have in place today, particularly our strong relationships with more than 46 million active customers and more than 4,500 brands, our unique logistics infrastructure and technology platforms as well as our exceptional team and entrepreneurial culture. These fundamentals will enable us to make further progress towards our mid- and long-term ambition as outlined during our Capital Markets Day: to generate more than EUR 30 billion in GMV by 2025 and to serve more than 10% of the European fashion market long term.When looking at 2022 in particular, we expect the European fashion market to recover to pre-COVID levels as the pandemic recedes and economic activity rebounds. At the same time, significant uncertainty remains in the face of ongoing supply chain disruptions and resulting price increases as well as general consumer price inflation, which might have negative short-term impact on both supply and demand, particularly in the first half of next year.While we will not be able to fully isolate ourselves from these macroeconomic developments, we are confident that just like during the pandemic, our platform business model will once again prove to be more resilient, allowing us to mitigate some of these risks by leveraging multiple alternative sources of supply by a wholesale partner program and connected retail as well as by quickly adapting our offer to potential changes in consumer preferences and behaviors.Based on this market outlook, we nevertheless aim to continue to grow 2 to 3x faster than the European online fashion market overall and to hence gain further market share next year. Similar to this year, this growth won't be evenly distributed across quarters, though. Especially in the first half of 2022, we are going to face exceptional year-on-year growth comparables. We thus expect our growth to be more back-end loaded in 2022.To achieve and to sustain this level of market outperformance in terms of growth, we will continue to invest through cycle along all dimensions of our Starting Point strategy as well as into our technology and logistics infrastructure to enable our 2025 ambition.Let me close this presentation by reiterating that we are truly excited about the immense growth opportunity ahead of us. We remain laser-focused on our long-term vision to be the Starting Point for Fashion and our 2025 ambition to build a truly sustainable platform business with more than EUR 30 billion in GMV, maximizing the long-term value for our customers, our partners and our shareholders.That concludes our presentation. Let's jump into Q&A now.

[Operator]

[Operator Instructions] The first question we've received is from Andrew Ross, Barclays.

[Andrew Geoffrey Ross, Research Analyst]

I've got 2. The first one is on new markets. It sounds like the new launches have gone well in 2021. But wondering what you can share with us in terms of plans for 2022. Anything directional there would be helpful.And then the second one is a longer-term one on the GMV. Clearly, you've set an ambitious EUR 30 billion target by 2025 at the CMD back in March. Just interested, another 6 months have gone by, the trading environment is normalizing, just what the puts and takes are that have changed in your eyes since you set that target. And just any more color you can give us as to what gives you confidence that you can do that.And if I can just add on to that question and on the back of David's remarks. So are you saying that you think you can do that 20% to 25% in 2022 despite the act as you remarked in those prepared remarks?

[Robert Gentz, Co]

Yes. Thank you for your question. So maybe I'll answer the first question. David, take the second one. So for the new markets, so as we have promised at the CMD, we are going to launch like in all these major markets in Eastern Europe. So the 2 ones that are missing are Hungary and Romania, and these markets will be launched in the course of the first half year of next year.

[David Schroder, CFO & Member of the Management Board]

Yes. And then on your second question relating to our 2025 ambition to reach EUR 30 billion in GMV, I think it's clear that as we follow the development this year, we are actually ahead of plan with regards to that target. So if you remember back at the CMD, we were still expecting slightly lower growth for this year. And that means that we'll be roughly EUR 0.5 billion ahead of our original plan when the year closes, making us even more confident that we can reach that long-term ambition.I guess you also remember that already as part of our CMD midterm outlook, we said that it would require us to achieve growth in the range of 20% to 25% in the years 2022 until 2025 to reach that long-term ambition. And also there, we obviously now are in even more comfortable position to reach that target.

[Operator]

The next question is from Miriam Adisa, Morgan Stanley.

[Miriam Anuoluwapo Adisa, Equity Analyst]

First question, just on the comment about the deepening customer relationships next year. And I think you mentioned a couple of initiatives like Plus and Beauty. Can you just talk about which initiatives in particular you are prioritizing or which you would expect to have the biggest impact on customer behavior or your conversion rates?And then secondly, the second one just on gross margin. So I guess even if you exclude the reversal of the inventory write-down next year, your margins are still sort of below the 2019 levels. So could you just give a bit more color on the breakdown of the impact from pricing investments versus the late start to the season? And then also, what are your expectations in terms of pricing investment and promotional activity in Q4? And just generally, how we should think about gross margins in Q4?

[Robert Gentz, Co]

Great. And maybe again, I take the first and you take the second one. So with regards to deep customer relationships, I think as we have shared at the CMD, like once the customer actually -- like only as an example, actually shops at Fashion Store and Lounge, we actually see that like in the order of frequency of customer goes up like by 3x versus the average.So I think the key here is really to provide customers with the richness of our propositions, yes? And that goes, in many cases, beyond like the first experience when they just bought at Fashion, for example, when they just bought at Lounge.And the key theme for the next year will be, first of all, to make these propositions on our main traffic hub, like the Fashion Store, much more discoverable on a personalized basis. So when customers only have experienced one proposition to actually more expose them to the other propositions to like Beauty, Fashion Store and just to discover them. So the ease of this capability will be a big theme.And then the second big theme will be to actually enrich these propositions. So for example, on the beauty proposition, there will be like a major experience upgrade that makes the beauty proposition much more interesting and much more innovative to be experienced by customers.And the third layer is our Zalando Plus program, which is the ultimate commitments from customers to Zalando to form deep relationships. And particularly, in last year, we have -- or in this year, we have experienced a lot with access to exclusive assortments and product drops that are first available to our Plus customers. So this is an example. And we're continuously innovating with new benefits into the Plus program in the course of next year in order to expand the Plus program much more with [ Zalando ].

[David Schroder, CFO & Member of the Management Board]

All right. And then I'm going to take the question on gross margin. So if we first take a look at Q3 and the year-over-year decrease, I think it's clear that roughly 1/3 of the decrease is due to the reversal of the inventory write-down that positively impacted our gross margin last year. The other 2/3 are due to essentially the factors I mentioned during the presentation, so one being the increased promotional environment during the end-of-season sale. You might also remember that's something we commented on already in the Q2 earnings call, and it's just a reflection of off-line stores reopening after a period of lockdown, sitting on significant levels of inventory and making sure that they can sell those through.And in this type of environment, we obviously wanted to make sure that our customers sign similarly attractive deals on Zalando and don't have to have the fear of missing out on great deals just because they choose Zalando as their Starting Point for Fashion.And then the second major impact was obviously the late season start due to the warmer-than-usual weather, which particularly impacted our trading in September. And during that period, we saw a much lower share of fall/winter sales and a continued high share of discounted spring/summer sales, which obviously then also had a negative impact on our gross margin. The good news, though, is that the fall winter season finally picked up towards the end of September and, yes, took full steam in October. So we are particularly confident that the full season picture will be a positive one, as usual, and it mainly now relates to a late start.

[Operator]

The next question is from Volker Bosse, Baader Bank.

[Volker Bosse, Co]

Volker Bosse at Baader Bank. I would have 3. I would like to start with the Sephora Corporation. You plan to start the business in the fourth quarter. Is it in Germany? Does it already happen? Or how is it -- has it started? And then how the European rollout plan looks for next year in regards to Beauty and the cooperation with Sephora.And second would be on social marketing or social commerce. Could you please remind us and give us a bit more granularity on the strategic importance of social marketing and social commerce within your marketing mix and for your business model?And the last question would be on the trading update in the fourth quarter. You just said for winter, picked up nicely, so it means growth rates in October even exceeded what we've seen in the third quarter. And can you confirm that the product mix also changed towards more going out where? So do you see a product mix effect towards higher ticket items? Is that confirmed?

[Robert Gentz, Co]

Yes. So maybe on the first question on the Sephora partner. So we launched the first major milestone with 94 brands now in the last quarter already, and the remainder of the portfolio is going to be launched like in this quarter. So that's our plan. So -- and these brands, they're, at the first stage, available in Germany, but our plan is in the course of 2022 to have the full Sephora assortment life across international markets. And so far, we're very happy with the development, and the beauty proposition was scaling very nicely with more 90% year-on-year growth in Q3.With regards to the second question of the importance of social marketing, our marketing mix. So the major part of our marketing is driven by performance market, by our [ ice-based ] marketing. And within that, it's basically the biggest piece is search and social, yes. And with social commerce -- with the social market space, what we've seen obviously in the last couple of quarters with the updates on the privacy side through ATT and IDFA from Apple. That, first of all, has taken a slight hit, especially with regards to retargeting and more kind of database marketing methods. What we though have seen is that in the reach campaign area, we were able to actually more than make up for these developments. And these campaigns have scaled very nicely throughout the quarter.

[David Schroder, CFO & Member of the Management Board]

Yes. And then on your last question regarding current trading. As mentioned earlier, October definitely meant a strong start to Q4. I guess we saw some of the demand come in that otherwise would have come in, in September. And that obviously makes us confident that we will land well within the range for -- communicated for the full year.That being said, I think we also obviously need to realize that November and December sales actually make up by far the majority of our Q4 sales. And therefore, we are now very much focused on making sure that we serve our customers and partners well during these key weeks of the year.

[Operator]

The next question is from Anne Critchlow, Societe Generale.

[Anne Critchlow, Equity Analyst]

I've got 2. First of all, could you tell us, please, how many percentage points the returns rate is now below the normal 50% and whether you expect it to stay slightly lower perhaps in the longer term?And then secondly, could you talk a bit about Cyber Week and your expectations and whether you think lower volumes and lower inventory levels in the industry might affect promotions available for customers or perhaps supply chain pressures being fed through to pricing that might affect discounts? So do you expect it to be as strong as last year?

[David Schroder, CFO & Member of the Management Board]

Yes. To start with return rates, I think contrary to what we had predicted at the start of the year, I think we are seeing a continuation of those temporary return rate benefits that carried us also through most of the pandemic. They are in the low single-digit range compared to the pre-pandemic return rates that we observed. We do, however, continue to expect that, eventually, category mix and also customer mix, which have been the key drivers of this effect, will return back to normal as well. And as a result, return rate will also move back to the long-term trend.That being said, I think we were clear also that before the pandemic, return rates were on a decreasing trend mainly related to our move into markets outside of DACH and to our investments into size and fit. And these long-term trends will obviously stay intact also as the return rate at some point normalizes.Now with Cyber Week, I think, quite honestly, it's hard to predict what will happen in the market overall. What I'm happy to confirm is that we once again will have a strong offer for our customers, and we'll also have many opportunities for our partners to present their brand and to offer great deals to customers. And as a result, we definitely aim to make this an even bigger event than last year. What will happen in the industry overall and particularly with competition, I'm not going to comment on because I think we'll only know when it actually happens.

[Operator]

The next question is from [ John Berrison ], Exane BNP Paribas.

[Charlie Muir-Sands]

This was Charlie Muir-Sands. I think that was me being announced. I've got 2, both related to next year. The first is whether you could share what you're seeing with respect to price changes as you're looking at the spring/summer collections that the brand is presenting to you. Are you seeing any significant changes in price on like-for-like garments in order to offset some of the supply chain cost pressures?And then second one, also related to next year, is I think back at the Capital Markets Day, you talked about your path to 2025 involving a EBIT margin corridor ranging from 3% to 6% with the start of the period being at the lower end of the range and finishing towards the upper end of the range. Clearly, this year, the margin has come through a bit stronger. Should we be thinking about that extending into next year now? Or do you think it's more likely that the investments you're talking about today bring you back closer to that 3% point?

[David Schroder, CFO & Member of the Management Board]

Sure. So on inflation, yes, as we all know, I think there's currently a lot of talk about it. And also most recent data suggests that we are actually seeing some of the strongest inflation levels since the financial crisis. For our business and also based on our wholesale activities, we also see those increasing trends with regards to prices. So we see an average increase in recommended retail prices in the high single to low double digits in our -- across our brand portfolio. And yes, that would obviously mean that there could potentially be an adverse demand effect next year related to either price sensitivity or also share of wallet considerations, particularly if energy prices and prices for other nondiscretionary spendings go up. And therefore, we mentioned both the inflation but also the supply chain disruption as 2 key uncertainties that we still see remaining for next year, particularly in the first half, and we are currently working on different scenarios to make sure we are prepared to act when needed.And then on the second question relating to our path to 2025 and how the margin would develop. I think, obviously, we are very much committed to the path we outlined at the CMD, starting at the lower end of the 3% to 6% range and then ending closer to the higher end by 2025. As you already commented yourself, I think the margin in 2020 and also in '21 have received a major benefit from return rates primarily. We, therefore, obviously would expect to return to a more level -- more normal level next year. But at the same time, the business is growing, and we obviously continue to increase our operating leverage so that we will see those 2 effects playing a role in our margin development next year.

[Operator]

The next question is from Clement Genelot, Bryan Garnier.

[Clement Genelot, Analyst]

I will have 2 questions from my side, if I may. The first one is on the supply chain. So with earning in Vietnam has a lag effect on product availability, do you expect some availability issues with, let's say, of course, Nike, adidas and so on in late December and especially also in Q1 and Q2 of next year?My second question is rather on prices and gross margins. Do you intend to stick to a higher amended prices on your wholesale business? And do you think it will offset lower demand in volume terms? In other words, I understand that sales growth in '22 will be more back-end loaded, but is it just some because the comps are much tougher in H1? Or is it also because price inflation and also supply issues will affect the sales?

[David Schroder, CFO & Member of the Management Board]

Yes, thanks for your questions. I think on the supply chain, I think we need to distinguish between the fall/winter season that is in full steam now and the spring summer season that will start in February, March next year. So for the fall/winter season, as commented during the presentation, we have taken the deliberate decision to prepone inventory intake and, therefore, are in a comfortable position to serve the demand that is coming our way and to provide all customers with great offers in the coming months.Does that mean that we have all the stock that we would want to have? Probably not, right? So if you would offer me even more volume from some of the brands you mentioned, we would probably not say no. But at the same time, with more than 4,500 brands and several hundred thousand articles, I'm pretty sure that each and every single customer will find a good offer that fits their personal taste and preference.For spring/summer 2022, the story is slightly different. So obviously, we have seen a large-scale impact both in Vietnam and in China to production and also to shipping. And therefore, we have also received more than usual cancellations, and we have also been informed of delays for spring/summer season stock. And that creates the risk that the spring/summer season start next year might be delayed by a few weeks or at least we wouldn't be in a similar stock position than usual, creating potential impact also for the growth that we can generate and also the margin given that we would then expect some of that stock to rise at a point in the season where we are already running into mid-teen sales and, therefore, discount periods.But I think I would still like to come back to what I said during the presentation that based on our platform business model, we are better positioned than many other players in the industry because I think we'll be able to leverage not just our strong partnerships with brands in wholesale, but we'll also be able to leverage all the other stock pools that exist, namely the ones at the brand side with partner program and the ones that sit with off-line retailers via Connected Retail, and that makes us confident that no matter what happens, we will be able to outperform the general market in terms of growth.Then moving on to your second question on price. I think we just commented on what we see with regards to wholesale prices. I think coming back to the supply chain disruption that we just commented on, obviously, that could lead to a lower promotional activity in the first half of the year if everyone is sort of more short on stock. But yes, I think it's hard to say for each single effect but also for the interplay of inflation and supply chain how it will exactly play out. And therefore, I think we'll remain just as agile as we were in the early parts of the pandemic and find the right answers as those scenarios become more clear over the coming weeks and months.

[Operator]

The next question is from Simon Irwin, Credit Suisse.

[Simon William George Irwin, Director]

A couple of questions for you. Firstly, just on marketing, both you and many peers are reporting higher marketing as a percentage of sales at the moment. Is there an element that potentially this could be structural as everyone is kind of moving online and into the same channels and you're simply kind of competing with each other and potentially marketing spend might be higher in the future than expected? And also, just what are you seeing in terms of the unit cost of marketing at the moment through the varying channels?And secondly, can you just talk a little bit more about whether you're seeing any cost pressures or labor availability levels through your logistics operations?

[Robert Gentz, Co]

Yes. Thank you for your question. So as I laid out, second, I think there's -- one thing is happening, as I laid out, is on the -- with regards to the major privacy updates. So that's actually like our social media. Marketing actually took, first of all, hit like in terms of our spending, which are based on retargeting and personalization. And the second piece of the marketing spending is with regards to reach campaigns.So with regards to reach campaigns, what we are seeing is, first of all, like the unit costs also increased, but we were actually managing to get as well positive [ our eyes ] long-term. So in the long term, in the midterm, we're actually expecting our social media marketing spending to go back to the levels that they used to be.With regards to the search area, we didn't really see any of these effects. So actually, we are benefiting for increasing search volumes and search queries. So this is as well kind of increasing the marketing budget.With regards to our general view on marketing, it is -- nothing really has changed. It's a ROI-based marketing approach. We know what we get back in with the future with regards of deep customer relationship. We see the leverage at the moment. We just see like a lot of potential because we get like better and better in marketing. We see a lot of potential to drive our business, and this explains the marketing cost line.

[David Schroder, CFO & Member of the Management Board]

Yes. And then on cost pressures, labor availability in logistics, I think, on logistics, the picture is pretty much unchanged to previous years. So we see a single-digit percentage increase in costs, both relating to our own fulfillment network but also to carriers across Europe. And when we look at our preparation for the upcoming peak season, we are well staffed and, therefore, also have the required capacity to serve our customers and to also work for our partners when we offer them ZFS services in the coming weeks.

[Operator]

The next question is from Jurgen Kolb, Kepler Cheuvreux.

[Jurgen Kolb, Analyst]

First one, again, on logistics. You mentioned that, obviously, automation and the work and the improvements to work with partners and customers next year will be top of the agenda. I was wondering if you may need to make deeper investments into automation given that the cost inflation will certainly also be felt more probably in logistics. So maybe some learnings that you have currently from these logistics issues that might affect your overall warehouse business and logistics business overall.And then just one thing to double check. The mentioned price increases, the suggested retail price increases that you mentioned of high single to low double, that already affects the spring/summer collection? Or is that rather fall/winter next year?

[David Schroder, CFO & Member of the Management Board]

Yes. So to start with the price increases, that affects already spring/summer 2021. For winter, the buying just started, so I think it's a bit too early to tell how that will play out. But my comment's related to the spring/summer season starting in February, March next year.On logistics automation, I mean, if we zoom out for a second and compare the first warehouse investments that we did at Zalando and [ airport ] back in 2011, '12 with the investments that we are now doing, for example, in our most recent addition in Rotterdam in the Netherlands, obviously, there's a huge difference when it comes to automation, right? So the first automation concept was still what I would consider semi-manual and, therefore, also only cost us around EUR 50 million to EUR 75 million in CapEx back then. Back then it was a huge investment. But obviously, technology advanced and also our concepts advanced.And so if you look at Rotterdam, we are talking about comparable sort of automation investments in the range of more around EUR 200 million for a single facility, which obviously come with the benefit that we can operate a facility like Rotterdam with a bit more than 1,000 colleagues rather than 3,000 that we still need to operate upward.And I think that shows the speed at which we are innovating our logistics network and why we are also comfortable that in the long term, we'll not only be able to serve customers well and offer strong proposition in terms of fast delivery and convenient returns, but why we will also be able to benefit from a higher level of efficiency that we can then share with our partners via Zalando Fulfillment Solutions.

[Operator]

The next question is from Anubhav Malhotra, Liberum.

[Anubhav Malhotra, Analyst]

I just had a couple of questions. Most of them have been answered, but I have a couple more. Just on the guidance. So you have still maintained the revenue guidance of 26% to 31%. And now that the 10 months in the year are already done and you have an idea of fourth quarter, how that has been trending. I was just wondering if you could confirm to us if you would land in the top end of the guidance or not.And secondly, on the new markets and the contribution from them, if it is possible for you to break out how much they contributed to sales growth and what is kind of a negative effect they had on EBIT margin in this quarter.

[David Schroder, CFO & Member of the Management Board]

So on the guidance, I'm happy to repeat what I said earlier. We'll be well within the full year guidance also based on all the insights that we now have about the strong start into Q4. But yes, no further specification will be provided, also given that there's still 2 months to go and those are very important months for the overall growth.On the new markets, as always, we are not going to provide a detailed breakdown of our sales and profitability. And so I think you will see those reflected now and also in the future in our figures on Rest of Europe.

[Operator]

The next question is from Georgina Johanan of JPMorgan.

[Georgina Sarah Johanan, Analyst]

Two from me, please. The first one, with regards to medium-term guidance, I understand that you're tracking ahead of that, ahead of the EUR 30 billion GMV at the moment. But for 2022 specifically, do you expect to be able to be within the corridor of 20% to 25% growth year-on-year, please? Or should we be thinking about it more along the lines of a compound annual growth rate? That's my first one.And then my second one is thank you for the color around recommended retail price increases. It's just really how we should be thinking about this in terms of your wholesale gross margin. Do you actually expect to achieve the same gross margin in light of those retail price increases? Or actually, would you expect to achieve the same gross profit cash but actually with a lower gross margin percentage?

[David Schroder, CFO & Member of the Management Board]

All right. It feels to me that we are already getting very detailed about 2022, and I hope you understand that, as usual, we'll only be more specific and provide even clearer numbers when we report our full year figures on March 1 next year. And so please understand that there's no detailed answer, especially on your second question.At the moment, I think we've laid out what we are seeing in terms of our numbers. We've also laid out that so far, it's hard to predict what will happen to consumer demand, and that will obviously have an impact on how the gross margin will shape up. So bear with us, and we'll provide you with an update when we come back in March.On the medium-term guidance, yes, so obviously, we are slightly ahead of plan when we look at our 2025 targets. And we'll obviously aim to make another strong step towards that target next year. What that means exactly in terms of our ambition for next year is something that we'll also communicate with our next earnings release.

[Operator]

And the last question is from [ Elsa Ekart ], Deutsche Bank.

[Unknown Analyst]

I have 2 questions from my end. Firstly, on your unchanged EBIT guidance for the full year, does that imply based on consensus numbers that Q4 would be margins of around 5.5% to 6%, if I calculate that correctly? This is ahead of Q4 '19 but lower than Q4 last year. Can you remind us what helped margins in Q4 versus Q3? That's my first question.The second one is on the current environment of supply constraints, as you've been mentioning. In a scenario like this, how important is a large marketplace like Zalando to some of the large brands in a global context? Because if they have to prioritize between selling on their own websites, their own stores but also selling through a marketplace like Zalando, what sort of conversation do you have with them in this current scenario? Just some color there would be great.

[David Schroder, CFO & Member of the Management Board]

Yes. So let me take the first one and then Robert can follow up with the second. So on the first one, Q4 margin outlook, I guess, yes, so I assume that if you take our full year guidance and what we report so far, you can back out what that means in terms of low, mid and high end of the guidance.I think it's also pretty clear that the Q4 will obviously see a quarter-over-quarter improvement in margin. I think that follows the usual seasonal pattern that we have also seen in previous years, particularly relating to much stronger margins in the fall/winter season related to higher average item values. And therefore, I think it's no surprise that these margins look very much in line with pre-pandemic levels.

[Robert Gentz, Co]

And with regards to the question on how brands will deal with stocks -- with their stock distribution, so we have like very long partnerships with our brands. And when a brand looks at selling the stock through our platforms, as I have laid down, Zalando's proposition is very much in line with the D2C provision, but even adds more because on Zalando, when you -- when a brand has pushes their assortment through Zalando as a channel, you get access to our customer reach, you get as well access to insights that you in a D2C environment would not get because like you benefit from a multi-brand environment and you get more information and insights about what customers want. So it's a very strategic way of looking at Zalando from the brand side. So we are very confident that brands will continue to push their business on Zalando as well as stock scarcity, which we -- as we've seen many times in the past, that is the winning recipe.

[Operator]

There are no further questions at this time. So I would like to hand back to Patrick Kofler.

[Patrick Kofler, Head of Investor Relations]

Yes. Thanks, everyone, for joining today's session with Robert and David. We hope we were able to give you a comprehensive update on our Q3 figures as well as our outlook into 2022. If you have any further questions, do not hesitate to get in touch with us, and we are looking forward to seeing and talking to you in the coming weeks. Thanks. Bye-bye. Have a great day.

[Operator]

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