Zalando SE

XETRA:ZAL

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Zalando SE publication of the Q3 Results 2022 Conference Call. [Operator Instructions] I would now like to turn the conference over to Patrick. Please go ahead.

[Patrick Kofler, executive]

Good morning, ladies and gentlemen, and welcome to our Q3 earnings call. I'm joined by our Co-CEO and Founder, Robert Gentz; and also by Sandra Dembeck, our CFO. Robert will kick us off with an update on the current performance. He also tells you about the progress we've made against our strategic objectives. Sandra will then walk you through the financial developments of the quarter. And finally, Robert will discuss our outlook. Robert and Sandra are available for questions afterwards.

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

Robert, I will now hand it over to you. Floor is yours.

[Robert Gentz, executive]

Thank you, Patrick. Good morning, everyone. When I last spoke to you in August, it was on the back of a very difficult quarter. You remember that consumer sentiment was weak. GMV was flat, and our quarterly revenues were down 4%. And this year has continued to be challenging, but I'm delighted to say that Sandra and I have much better news to share with you today. As well as making solid progress on our strategic initiatives, we have also delivered on what we have promised.

So we delivered growth and projected profitability in Q3 despite a further decline in consumer confidence since our last call in August. GMV is up more than 7%. Revenues are up nearly 3%, and we've delivered an adjusted EBIT of EUR 13.5 million. But most importantly, we're very proud to have reached 50 million active customers, I mean 50 million. There is an amazing milestone we have achieved as a team and that we're very, very proud of. Only in Q3, we acquired more new customers than we did in the same quarter last year. So this is a very positive result for the quarter, but we know the headwinds for growth are getting stronger. Inflation is reaching record highs, and consumer confidence is reaching record lows.

On the positive side, we see that supply chain disruptions are slowly easing. We're also seeing further normalization of customer growth and spending from the high levels we saw during the pandemic. So as I told you last time, we've adopted a proactive approach and taking decisive action. Our efficiency measures are now bearing fruit. They're helping to stabilize our earnings compared to the first half of the year. If you look at the 2 charts above, you can see clear improvements in both GMV and adjusted EBIT forecast for the second half. We did a great job of managing excess inventory in the spring/summer season. At the beginning of June, we introduced the minimum order value in the remaining 50 markets that didn't already have one. We captured further marketing efficiencies in the third quarter, reducing costs by almost EUR 100 million so far this year. So you can see, we've worked hard to protect profitability as we remain laser focused as we now enter the final and most important quarter of the year with both Cyber Week and [ Christmas delivers ].

And on top of reaching more than 50 million active customers, I'm very proud of the following. The first, deeper customer relationships. We've grown the number of Zalando Plus numbers to 1.8 million, so this is nearly triple of what we had a year ago. We also increased the number of customers spending more than EUR 500 with us. So this shows that our strategy is working. We create deep and loyal relationships with our customers, and that's ultimately what counts.

Second, on partners. More brand partners and stores are building their businesses with us. Their share of Fashion Store was 7 percentage points. This proves how attractive Zalando platform is. We're advancing our strategic objectives to grow partnership to 50%.

Third, people and planet. This part of our commitment to include the fashion, we've just launched our first adaptive fashion collection. About one in 5 Europeans live with some form of disability. We are the first to offer customers a varying assortment in terms of price and style across both adaptive and other fashions. The collection is now available in 25 markets across our private labels and who also added the [indiscernible] adaptive collection in 9 markets.

So let me touch now on a couple of more highlights that show how we are progressing on important strategic dimensions of our strategy. At the end of September, we announced our connected partnership with Nike. We're one of a very few digital-only connected partners in Europe and are happy to announce that the partnership was successfully launched in Austria in October. And I expect the full rollout to all of our remaining markets by the end of this month. Now customers are able to link their Zalando and Nike accounts and access the selection of exclusive products only available to Nike members. And this means they can seamlessly shop an expanded and curated selection of Nike footwear and apparel on Zalando directly. So this represents a joint commitment to creating an exclusive experience with a better assortment and more choice.

Now let me show you the second highlight. Starting Point for Fashion doesn't just mean selling fashion, it means inspiring customers through stories and insights enabling discoveries. It ultimately means more fun and entertainment. And I'm very excited to share that in October, we released the new fashion discovery for customers on Zalando. This is the start of a multiyear shift in how we present our most exciting brand and assortment areas to our customers. As far as the new fashion discovery, customers in our DACH markets can now enjoy a selection of existing and new products curated by Highsnobiety and Zalando. And this is the first project where we have been closely collaborating since the acquisition a few months ago and just the beginning. Soon, we will bring new forms like [ live TV ] shopping to inspire our customers.

Now I would like to hand over to Sandra to go through the financial results of Q3.

[Sandra Dembeck, executive]

Thanks, Robert. Good morning, everyone. Robert has already given you the headline numbers, so let me dive a little deeper.

And before we do that, just the 3 key takeaways of today's financial update. First of all, we delivered on growth. Second, we worked incredibly hard to clear the spring/summer inventory and to drive efficiencies. And finally, with the top line headwinds continuing, we're working hard to execute and deliver on our financial outlook.

And with that, let's turn to Page 8, our top line performance. On the left-hand side, you see our year-to-date performance. GMV is up 2.3% and now totals EUR 10.2 billion. Revenue for the year stands at EUR 7.2 billion, showing a slight decrease of minus 1.1% over last year. Let's focus on Q3. In the middle chart, you can see that we delivered 7.1% GMV growth. Revenue was up 2.9% at EUR 2.3 billion, and this was on the back of a tiny start into the autumn/winter season in September.

If we dig a little deeper into the revenues, you see that the Fashion Store grew by 1.5%. Offprice saw revenue growth of 4.6%, in line with last quarter. And then if you look into the regions, on the right-hand side, we see that both regions, DACH and Rest of Europe, grew GMV above 7%. Revenues in the DACH regions are pretty much flat. It's a 7 percentage point variance to GMV growth, and that just reflects the strong performance of our partner program in this region. Looking at the rest of Europe, we can see revenue growth of 3.1%, and this was driven by growth in the Southern and Eastern Europe regions.

When we look at other segments, Zalando Marketing Services continued to grow at a solid rate as partners continue to use [indiscernible] app to increase the visibility on the platform. On 2nd June, we announced the acquisition of Highsnobiety. So Highsnobiety financials are now included in our results and are reflected in other segments. It contributed close to 1 percentage point in revenue growth to the group. And in the other segments, it accounts for low double-digit revenue amount.

So let's turn to Slide 9, our customer metrics. And Robert already mentioned it, we are really proud that we crossed the mark of 50 million active customers. That's up over 8% on this time last year. And in the last 3 months, we've grown active customers by 6.8%. Looking at the spending pattern of our customers, we see that GMV per active customer has remained broadly flat, and this is on a trailing 12 and 3-month basis. And one of the measures to support this was the successful introduction of the minimum order value.

So overall, it's a healthy picture, and it just confirms the strength of our foundation. But at the same time, of course, we remain very cautious for Q4 given the very low consumer sentiment we currently observe.

So turning to profitability on Slide 10. On the left-hand side, you see our year-to-date profitability is below last year as a result of the slower growth we saw the increased price investment and an inflationary environment. Robert already mentioned, back in Q2, we introduced measures to drive efficiency and to restore profitability. Those measures are now taking effect. The projected profitability in Q3 with an adjusted EBIT of EUR 13.5 million, in line with last year. This transit into an adjusted EBIT margin of 0.6% compared to 0.4% last year. Fashion Store delivered a loss of EUR 3 million as we effectively cleared the spring/summer inventory.

And as you can see on the right-hand side in dark, we saw a year-over-year decline in profitability from 5.7% to 1.6% primarily as a result of exactly that. Profitability in rest of Europe improved from minus 3.6% to minus 1.5% as a result of the efficiency measures we took. Offprice recorded a positive adjusted EBIT of EUR 8 million, and this was on the back of sales growth and improved gross margins. And in other segments, we observed an increase in profitability both in absolute and in relative terms. So all in all, we successfully operated in what was a tough business environment considering the low consumer sentiment and the inflationary pressures we had to face.

And with that, let's move to Slide 11. Let me show you how we drove profitability in Q3. So let's focus on the Q3 year-on-year column, which you find on the far right-hand side of this chart. Let's first of all talk about gross profit. Here we closed the gap and are now 0.3 percentage points better than last year. So in July and August, we leveraged the end of season sales and the continued hot weather to churn through the spring/summer inventory. In September then, to capitalize on the tiny season start and to really early on control the fall/winter inventory levels, we increased our price investment. Positively contributing to our gross margin is the strong performance of our partner business and the value-adding B2B services.

Moving on to fulfillment costs. Here, we're working hard to drive efficiencies. And our aim remains to offset any inflationary cost increases. And exactly, this has helped us now to reduce the year-on-year variance, although we have to be mindful that the cost deleverage from overcapacity as well as the investment into more convenient delivery will, of course, continue.

The introduction of the minimum order value was very successful. And you can see here that the majority of customers are either increasing the size of the basket or they choose to pay the delivery fee, also which improves our overall profitability.

Coming to the remaining cost line. Marketing costs were down by 1.5 percentage points as a result of further efficiencies. And our admin costs increased by 0.5 percentage points due to cost deleverage on the lower revenue growth.

So this now concludes the P&L. Let's now turn to Slide 12. Let me talk about cash. Starting off with net working capital, we currently have a positive net working capital of EUR 122 million, which is the result of the higher inventory levels. As a percentage of annualized revenue, net working capital remains at 1.3%. So that's the same than last year. Our inventory currently stands at EUR 2.2 billion compared to EUR 1.9 billion last year, so we are about EUR 240 million higher year-on-year. And back in August, I mentioned the overstock on spring/summer 2022 merchandise. So here now, we have effectively reduced the [ overstock ] percentage to pre-pandemic levels. So that's a real achievement.

The increased inventory that you now see here in Q3 relates to the fall/winter merchandise. So this is merchandise which we ordered early on in the year when we still expected much higher growth rate. So we worked hard to reduce this fall/winter buy as much as possible, but we couldn't to the full extent, yes. This is why our focus now remains on actively managing the stock and to ensure that we address any risky inventory positions early on as we did for the spring/summer 2022 merchandise.

And lastly, on CapEx, here, we spent EUR 77 million in Q3. This is in line with our full year guidance. It relates primarily to investments in our infrastructure as well as CapEx on internally developed software.

So moving on to the next page, our cash position. Here you see that our liquidity remains strong at EUR 1.5 billion. We had positive operating cash flow of EUR 142 million. However, this was largely offset by the cash payment for Highsnobiety acquisition. And because of that, in Q3, free cash flow was negative EUR 48 million.

So to wrap up the finance section now, let me remind you of the 3 key highlights. We delivered on growth. We effectively cleared the spring/summer overstock. And while it's not crystal clear how consumer spending will actually play out now in the final quarter, we are really working hard to execute and to deliver on our financial outlook.

And with this, I'll hand back to Robert.

[Robert Gentz, executive]

Thank you, Sandra. Let's now come to our outlook. We confirm our guidance for the financial year '22 which we provided to you in June. We now expect to reach the lower end of these ranges with regards to GMV, revenue growth, adjusted EBIT and CapEx. So you're all aware of the difficult market environment, and it's prudent to be cautious in such an environment with consumer sentiment at the record low and a challenging economic outlook. This volatile environment creates a high degree of uncertainty in the market. So in light of all this, we remain laser-focused on execution as we now enter the final and most important quarter of the year with both Cyber Week and Christmas still ahead of us.

So looking at next year, we continue to be cautious about consumer demand. While it's too early to give a forecast for '23, we expect headwinds to continue well into next year. We'll continue with our efficiency measures to deliver against margin progression year-on-year towards our mid-term ambition of 3% to 6%.

Now let me close this presentation by summarizing our key messages. So firstly, we delivered single-digit growth and profitability after successful steps to protect profitability in this year. Secondly, given the current environment, our focus is on execution, execution, execution. And thirdly, our vision remains consistent and relevant to be the Starting Point for Fashion. We have a clear strategy and direction and continue to invest through cycle to deliver value for our customers, partners and shareholders.

That concludes our presentation. Now let's jump to Q&A.

[Operator]

[Operator Instructions] And our first question is from the line of Charlie Muir-Sands from BNP Paribas Exane.

[Charlie Muir-Sands, analyst]

I will stick to two reluctantly. The first one relates to your outlook for 2023. I'd appreciate -- it's clearly too early to guide particularly on things like sales and profitability, but I just wondered, I guess, CapEx budget is a longer cycle given that a lot of that investments in big projects. Do you think that given that the growth has been a bit slower for longer that you got to significantly reduce CapEx as perhaps you've got significantly more capacity than you need for the next couple of years?

And then my second question relates to your 2025 targets. Clearly, they seem to be very stretchy now certainly to achieve all of them. Just in terms of your priority for the business, is the focus on trying to get as close to that EUR 30 billion of GMV or is it to get to as close as possible to the upper end of the margin corridor, the 3% to 6%? You said you you'll be aiming for the upper end towards the end of that period. Which is the main priority for the business over the next couple of years?

[Robert Gentz, executive]

Yes. Maybe I'll start, and I think Sandra will give comments here. So maybe on trade, so as I said in the call, the current macro environment remains volatile, so we are taking actions. We're focused on efficiency and margin improvement measures that will give us the flexibility and protects the downside and impact of inflation. So -- and as said, we believe it's too early to comment at this point. What we can say is that there is likely to be another year with low consumer demand and macroeconomic uncertainty. Maybe Sandra can comment later on it.

When it comes to our long-term growth, the growth is still our priority, but we'll take a more balanced approach now when it comes to profitability in light of the challenging macro environment that we see now. So when we have set ourselves the target of EUR 30 billion GMV, like no one could really anticipate a year as difficult as '22. So we do expect to reach our target of EUR 30 billion of GMV, but maybe the trajectory is different, maybe this is likely at the later stage now. So we will continue to invest in our efficiency measures, to deliver margin progression year-on-year towards our internal vision of 3% to 6%.

So what I can say is our business model is strong, our finance are strong, and we continue to see huge potential and set opportunities for Zalando. And our long-term view of the opportunity is to get to 10% and more market share in the European benchmark has not changed in the interest that the trajectory might have changed.

[Sandra Dembeck, executive]

Yes, and then maybe I'll add on CapEx. So our fulfillment capabilities are one of our important long-term growth drivers and the fact, of course, also the logistics infrastructure build-out. As such, we will continue to invest in there. However, we will adapt the pace of the investment to the environment that we currently see. So you already saw in this year's CapEx guidance that we have reduced it. Our long-term guidance is 3.5% to 4.5%, and we will basically review that for 2023 to stay within that guidance, but it will be more the bottom half than to be the top half.

[Operator]

The next question is from the line of Emily Johnson from Barclays.

[Emily Johnson, analyst]

So two questions for me as well. In terms of, I guess, more near-term questions, can you comment on what the October growth rate was and how much visibility you have on top line trends in November, December. Can you comment on what your kind of expectations are for Cyber Week, for example?

And then the second part of that is in terms of Q4 EBIT. Can you talk about the moving parts within that and what levers do you have if consumer demand gets worse?

[Sandra Dembeck, executive]

Thanks, Emily. I think I'll take those two questions. So on current trading, fall/winter season started on time, so we saw an improved performance in September and October now was slightly slower. I think what we have seen now is that consumers are there when there is a need in -- when there is a need. So we saw in September, the temperature drop, fall/winter season started, so the demand was there, we captured it. So this is a bit the spirit with which we now go into Cyber and we go into Christmas, yes. We focus on building up momentum within the business commercially and operationally to ensure that for those two key events, when the demand is there, we will capture it, yes.

On the Q4 EBIT, of course, in a market with high inventory level, in the event that consumer demand drops off, we will have to expect higher promotional intensity. And with that, we need to protect EBIT. We still have plenty of levers in place, so we filled our drawer with levers that we can then enact in order to protect our Q4 profitability. These are around fulfillment costs. These are our marketing primarily.

[Operator]

The next question is from the line of Simon Irwin from Credit Suisse. Unfortunately, we can't hear you, Mr. Irwin. In the meantime, we would go ahead with Rocco Strauss from Arete Research.

[Rocco Strauss, analyst]

Yes, I hope you can hear me all right. I have two questions as well. First is, how is the Zalando Media Service -- or Marketing Service behaving in the current market environment?

And then secondly, I mean given the recessionary environment, can you talk a bit more about the interconnection of lounge versus fashion store, wholesale versus a partner program, like what advantages do you have on the logistics side here, additional lounge inventory coming in, partner program versus wholesale regarding inventory risk and so on?

[Robert Gentz, executive]

Yes, maybe first on ZMS, so I think that overall we are happy with the development of ZMS in Q3. So it has grown stronger than the business in general. However, like in Q3, it has not grown as much like as in Q1, Q2, so a little bit less, but we're still growing through the business and that we are happy with the results. I think when it comes now to Q3, I think it is important to note like that Q3 is a bit of a different environment. The brand really trade their order for Q4, where because it's the most important trade and we're also now very laser focused to deliver great performance in Q4 with ZMS.

When it comes to the balances of this business, and maybe we can start and we can ship in [indiscernible] as well. But when it comes to the balances, so you're right, like there is a great interplay between the Fashion Store and the shopping club environment here. So the Fashion Store is based on selection, it's based much more on these, and we are employing that into discoveries. But that's basically on the upper part, and the lounge is actually based on promotions, on entertainment, on auction. So it is actually a great channel to, as well, clear overstocks that we actually have, and we're very happy about excellence that this combination really does approve when it comes to engagement with customers, when it comes to selling overstocks.

On the interaction between wholesale and partner program, it is as well a big plus, I think, in this environment because with wholesale, what we're really doing is to authenticate and anchoring our assortment with regards to the brands that we actually need to have. And with the partner, we only additionally invest into more long-term, where I think it might be a bit riskier over -- we actually want to have more depth and just fill in the holes, fill in the gaps in the platform so it can best serve our customers. So it's a great combination that actually enables us, I think, better to steer through such an environment than other places. They don't have these levers in one platform [indiscernible].

[Operator]

The next question is from the line of Anne Critchlow from Societe Generale.

[Anne Critchlow, analyst]

I've got two questions, please. So the first is on your product and price mix, do you feel that, that is better aligned now to customer demand? Because I know that you had sort of an adverse product price mix for spring/summer. And then the second question, just on the returns rate, I think it was 48% in the second quarter. If you could say how that's trending?

[Sandra Dembeck, executive]

So on -- maybe I'll start of with return rates. So on return rates, there is no material change to what we have seen in the first half of the year, yes. So return rates are slightly increasing compared to the pandemic period, but it remains at a similar level than what we have seen in the first half. The one thing we need to be mindful of with return rate, of course, it's one number, but there are many inputs. One is the product mix, one is the country mix, and then also if there is a dependency on how many new customers we have. We are working hard to improve return rate, yes. So this is where our size and fit guides are coming in of our continued efforts in this area.

On the product and price mix, so what we continue to see is that the partner program in this respect injects a lot of resilience and flexibility, so they have -- we have seen in Q3 that the partner program, again, very, very successfully has satisfied the demand on the lower price points. In regards to the fall/winter buy, we have -- and the category mix, we have adjusted our buy to have less within the risky areas, which primarily around what we call the country wear or western basics and that we have more of the products, as Robert already said, that authenticate our assortment. So yes, we have responded to what we have seen in the first half.

[Operator]

The next question is from the line of Georgina Johanan from JPMorgan.

[Georgina Johanan, analyst]

I've got a couple of questions as well, please. First of all, just in terms of the inventory position in the broader market, obviously, we've heard from a number of payers about excess inventories, and I appreciate that you're working very hard to control your own position. But how do you see sort of gross margin and promo pressure in the market more broadly?

And then just coming to think about sort of consumer behavior from here, I guess 2 strands to this question. First of all, are you sort of building in an expectation of greater consumer distraction and then normally would be in sort of late November around World Cup and so on and potentially some impact on advertising spend as well. But then also looking ahead to early '23, when the next utility price hike comes in for German consumers, how are you thinking about sort of behavior in the context of those two events, please?

[Sandra Dembeck, executive]

So in regards to the inventory in the market, I think in general, there are elevated inventory levels now in the market. And of course, in times of this uncertainty or volatile consumer demand, that triggers higher promotional intensity, yes. So this is something that we have factored into our Q4, yes. This is what we are countering through additional efficiency measures.

On consumer behavior, I think that's really difficult to judge. In that respect, I would say we try to do the best we can to ensure that when the demand is there, we are there and we capture that demand, yes. So I mentioned earlier, we demonstrated that with the season start in September. We really focus on execution, execution, execution. And this is also the strategy which we now go into Q4.

[Operator]

The next question is from Simon Irwin from Credit Suisse.

[Simon Irwin, analyst]

Hopefully, you can hear me this time. Can we just talk a little bit more about inventory levels? Particularly, I don't really understand given that your supply chain is pretty short, why you have inventory of 100 days in a normal environment and why you can't build more flexibility into that inventory with more in-season replenishment and lower upfront commitments and whether you think that there is a strategic opportunity for you here to get run rate inventory levels down. And secondly, can you just talk a little bit about how you bought spring/summer next year given obviously the kind of issues that you've seen this year?

[Sandra Dembeck, executive]

Yes, happy to talk about all that, Simon. On inventory levels, I think it's best to start like at the buying cycle. So we place our orders 6 months ahead of the season start. Yes, so the fall/winter merchandise that we have now on the balance sheet, we would have placed those orders in Q1 this year. And in terms of like flexibility, so usually, you have a share of 75% of orders being placed at that moment in time, so the flexibility is down to 25% of what we call the reorder share.

Of course, you try to manage that, but then the total negotiation, of course, with the brand because you want to ensure you do get the reorder share when you're in season. So therefore, our real flexibility comes from in-season management. And I think here we have the advantage of the multiple formats, yes. So we can, on the one hand, leverage the reorder share, but we can also leverage our Offprice business.

In regards to how we bought for Spring/Summer 2023, so we took a very cautious approach to that buy. We have learned throughout the pandemic and also in this year that the partner program for us injects a lot of flexibility. So when the demand is there, the partner program kicks in and satisfies that demand. So therefore, for our wholesale business, we took a cautious -- we looked at it very cautiously and bought prudently. What does that mean? So we were very selective in regards to how broad and deep we went with the brand.

[Operator]

The next question is from the line of Miriam Josiah from Morgan Stanley.

[Miriam Adisa, analyst]

First question, just on next year's margins, you said that you're still expecting margin progression. I think consensus has about 90 bps EBIT margin expansion. I know you're not going to give guidance but perhaps if you could give your thoughts around that, do you think that looks achievable and perhaps if you could just sort of talk through how you're thinking about the different cost buckets and where you would expect that margin expansion to come from.

And then if you could just talk a bit about ZFS. I think there was some reports that perhaps some retailers were finding sort of the pricing pressures coming through a bit there and perhaps holding back from putting some of their stock through ZFS. So if you could just sort of comment about the performance of that in Q3 and what you were expecting for the rest of the year.

[Sandra Dembeck, executive]

So let me take the first one on margin progression next year. I think we all agree that the current headwinds we see around low consumer demand as well as inflation are continuing into next year, and that's, of course, putting a lot of pressure on margin. Nevertheless, our focus now really is on continuing to drive efficiencies so that we can demonstrate margin progression next year.

Where are those improvements coming from? It is primarily the same lever. So it is once again around the inventory adjusting the buy. It is around fulfillment costs, working hard on the order economics, trying to offset as much of the inflationary increases through efficiencies in our logistics. And it is driving further marketing efficiencies, yes. We have gained a lot of experience this year in terms of marketing efficiencies, and we are continuing on that path.

In regards to ZFS...

[Robert Gentz, executive]

I think the question, if -- what we see on the offering side and how is it adopted by the brands at the moment. Yes, so I think we're continuously very happy with the adoption of ZFS. It's now a big, big -- it's more than the share patents coming from. As it actually has this -- the positive P&L effect for both the brands and as well for us, it has a lot of positive effect on our P&L metrics. So we continue to see an adoption even more so in this environment where everybody is really looking much more after costs and cash flow, so yes, we're happy with the development.

[Operator]

Next question is from the line of [ Jeff Ridimendas ] from Bank of America.

[Unknown Analyst]

So my first one is I just wanted to come back to the inventory question. I think you said that you had ordered a lot of inventory for fall/winter. I was just wondering, do you have any expectation as to how long it's going to take for you to get rid of that inventory, I don't know, in terms of months or quarters? I understand that next season, you are more cautious with the reordering, but just wondering how long it will take to get rid of what you have in store at the moment. So that's my first question.

And then the second one is for next year's growth. I think if we look at the consensus, it's above 10% for GMV growth. And I'm just trying to understand your comment, Robert, because you said you're expecting consumer demand to remain quite underwhelming for the foreseeable future. Does that mean that you're actually expecting sort of the same growth for next year than this year? Or am I misinterpreting?

[Sandra Dembeck, executive]

On inventory, the fall/winter season usually goes until the end of February, so therefore, we do expect that we will see us turning through the inventory now throughout Q4 but also into Q1 next year. So we have the 2 big sales events now, Cyber and Christmas. That will already help. But then the big end of season sale is actually only in January. And then, Robert, maybe you on growth?

[Robert Gentz, executive]

Yes I think that, yes, I think it's -- yes, as I said, I think it's a bit too early to comment like on 2023 at this point. I think a big range of outcomes is possible. So what we can say is that, at this point, we believe it's likely to be another year with low consumer demand and macroeconomic uncertainty. And that when the consumer demand is there, we are there. Like we execute on this, and we -- it's the biggest platform with 50 million -- more than 50 million customers, and we -- and we'll execute when the demand is there. When the demand is not there, we are very focused as well on protecting profitability.

[Operator]

The next question is from the line of Adam Cochrane from Deutsche Bank.

[Adam Cochrane, analyst]

First question I've got is the cost savings that you're -- that you've made. Can you outline what came through in the third quarter and how much you'd expect in the fourth quarter and whether we can expect an annualization of that into the first half of next year or it's still on an accelerating trend. I find it quite hard to get to the actual number of the cost savings.

And then secondly, A lot of the savings seems to be coming through from lower marketing. You call it marketing efficiencies. Can you give us some comfort that this is not just lower marketing spend that will lead to lower sales growth in the future? How do you -- when you spend on marketing, how do you see it as a lag between the marketing spend and the sales growth?

And then finally, from that, when you've given the comfort with the low end of the guidance range, is that really a midpoint and this flex either way from that EUR 180 million? Or is EUR 180 million cast-iron, and you can have some upside risk to that if things go in your favor?

[Robert Gentz, executive]

Maybe I'll start with margin question and then hand over to Sandra to comment on the cost of marketing, yes. So the reduction in marketing is primarily driven by efficiencies and us being more cautious. So big effect is the marketing that we actually early on I commented, I think, in Q1 already, that we reduced our expectations on the payback of the return remark, which is the biggest piece, which is the biggest part of our marketing spend from 2 years to 1 year, which is just, I think, just cautious in this environment, that we want to have these investments being breakeven after 1 year instead of 2 years in this environment.

And then there's a second bigger effect, which, especially now we saw more in Q3 now coming through, which actually is that we see the cost of marketing actually being more efficient. So it actually gets cheaper CPTs, the cost per thousands, they get actually cheaper on all platforms. So our marketing actually gets more efficient. And there is the sustainable level that we see. And I think the results speak for themselves. In Q3, we have generated more new customers than in Q3 last year, although they have decreased our marketing costs. Sandra, over to you on cost savings.

[Sandra Dembeck, executive]

So on the cost savings, so we're doing a lot across the total business. And I think what is worth highlighting here is that these are primarily sustainable efficiencies. So over the past years, we were really trying to capture the growth and, with that, make sure we create capacity. The focus now is ensuring that the capacity we've made and we're fulfilling in the most efficient way.

So what does that mean concretely? So if you start talking inventory, so we are taking a different approach to the buy. We have learned that we don't need to buy for the maximum growth, yes, because the maximum growth can be achieved through the partner program. On fulfillment costs, examples here are the facts of the fuel surcharges, yes, passing on the increased fuel costs as part of the cost-plus contracts to suppliers. The introduction of the MOV, we did optimization across our network and across all our logistics centers. You would have seen that we have a flat headcount development since the last quarter. So these are all measures that we are taking that are sustainable and, as such, helping us also in the coming year.

In regards to the full year guidance, I like how you put it. Yes, there is upside risk if things go into our favor. So this is not a midpoint.

[Operator]

The next question is from the line of Michael Benedict from Berenberg.

[Michael Benedict, analyst]

I have a couple, please. So one, just on Highsnobiety, you mentioned, I think it's a 1 percentage point contribution to growth. Could you quantify the impact on profit or margin, please? And then just on the inventory for spring/summer next year, I just wanted to clarify, that is back to 2019 levels in absolute terms or as a ratio?

[Sandra Dembeck, executive]

Okay. So on the inventory level, so this is a ratio. Because consider that we are growing, yes, so this is a ratio compared to 2019. And on Highsnobiety, it's a profitable business, put it that way, yes. But let's keep in mind, for us, Highsnobiety has -- is more than just the business, yes. We saw now in what Robert presented in his part, how we're driving customer engagement and inspiration through Highsnobiety.

[Operator]

The next question is from the line of [indiscernible].

[Unknown Analyst]

Firstly, a bit on -- can you talk a bit about your app. You've recently drawn some criticism that your app performance is probably not up state-of-the-art. And just wondering what's your view actually on your apps? Do you see any adequacy in your app? Do you see some improvement potential, some color there? And then secondly, in terms of your inventory composition for -- particularly for fall/winter, can you give us an idea how much the share of basic stuff that you could probably even carry over the season is? Just some color there.

[Robert Gentz, executive]

Yes. Maybe first, I was as well surprised to read some news about it because I think it's not at all what we know and what we see. Our app is actually the one which is leading in fashion. Then I guess the result we see for ourselves, we have 50 million active customers, so 50 million. And most of them you see -- we have more than 800,000 5 star reviews. So 5 star reviews in both our app stores, so really setting the standards in how fashion app should look like. And then like really, like the difficult stuff, like most difficult subjects, like giving personalized site advisers, is only really what -- a professional, is only really what our app actually offers and what we are actually working on with our teams.

When it comes to inspiration investments, I've talked a lot about that in the presentation. So we invest a lot into inspiration and browsing experience. We just launched a visual browsing experience. Yes, we invest into [indiscernible]. There are more than 50,000 sites were created in 2020 alone by more than 500 creators. And we launched a new content platform, we launched a new content platform in collaboration with Nike, so really leading the pack in the industry with our app.

[Sandra Dembeck, executive]

On the fall/winter inventory, so the way we bought the fall/winter inventory was really around the criteria of relevance, relevant brands and the relevant breadth and then the relevant depth. So of course, the categories are primarily like outerwear, knits, hoods, et cetera, et cetera. But primarily, this is not basics, yes.

[Operator]

The next question is from the line of Andreas Riemann from ODDO BHF.

[Andreas Riemann, analyst]

Yes, two questions. One, I guess, split deliveries is still a topic for consumers. So the question would be on ZFS. What is the Zalando Fulfillment Services share at present. And to that, does a challenging environment make it easier to increase the ZFS share? Or what else can you do mid-term to convince more partners to use your fulfillment offer? The second topic or question, categories. So what are the areas or categories where the consumers accept higher prices today?

[Sandra Dembeck, executive]

Thank you. Sorry, we had trouble understanding you, so I'll start answering the question, but if there is something that I don't answer, please let me know, yes. So the ZFS item share at the moment is around 60%. So ZFS for us is a really successful element of the platform business. And you asked about whether it's more attractive now in these current market conditions for our partners than otherwise. And yes, it is. So of course, because of our scale and, therefore, our negotiation power, there is a benefit for partners to switch to ZFS. And we have seen that recently with some of the retailers doing that. So that is -- that would be what I understood of your question. Was there anything else?

[Andreas Riemann, analyst]

No, no, that was the question. That was clearly answered.

[Sandra Dembeck, executive]

Thank you.

[Robert Gentz, executive]

I guess there was a second question you asked around where do we see that consumer accept higher prices. So where -- and I think like it is similar to how we commented in Q2. What we see here is that we see that brand with high brand equity. So that's -- so like exclusive assortment areas, so those are the ones that can push for higher prices. And those are as well ones where we will see like an uptick as well in demand for our 50 million customers that we have acquired now.

[Operator]

We are now taking our last two questions. And the next question is from Emily Cooledge from Redburn.

[Emily Want, analyst]

So just one for me. You've spoken a lot about the macro headwinds on top line which we're, of course, aware of. But this year, we've also seen quite a stark normalization in online penetration. So I'm just interested in what you're seeing that makes you so confident that it is just the macro challenging the sales rather than something more fundamental within and channel shift?

[Robert Gentz, executive]

Yes. So I guess, I think in terms of the [indiscernible], I think what we see now is, I guess, what the data suggests is that we were roughly there where the pre-COVID view of what online share should have been where it's now. So it is basically what we would have guessed like 5 years ago. So I think the overall trend towards online is intact. And as I said, I think there's not an inch of difference we have in our long-term view and long-term potential of the company.

So we still want to climb the Mount Everest, is just a way now in these 2 years, actually, as might have changed a bit. And I think even like in the last couple of months, we saw like Sandra was commenting, on September was weather change, there was a good demand of customers, and then we're there. So it is really, I think, the macro, the customer sentiment. Those are things that we cannot change. But once the change were there, and then we will execute on our strategy and performance. Our fundamentals are great.

[Operator]

The last question is from the line of Rebecca McClellan from Santander.

[Rebecca McClellan, analyst]

Just a quick one from me, please. In terms of what you're seeing in October, the slightly sort of slower trend, is that more pronounced in any particular market? Or is it pretty much across the board?

[Sandra Dembeck, executive]

No, that's pretty much across the board.

[Operator]

So this concludes our Q&A session, and I hand back to Robert again for closing comments.

[Robert Gentz, executive]

Yes. Thank you all for listening and for your questions. And maybe let me reiterate or summarize our key messages that we wanted to send you today. So firstly, so we delivered single-digit growth and probably across -- after successful steps to protect probability, and we reached more than 50 million customers now. So secondly, given the current environment, our focus is on execution, execution, execution. And third, our vision remains consistent and relevant, to be the Starting Point for Fashion. We have a clear strategy and direction and continue to invest through cycle to deliver value for our customers, partners and shareholders. So thank you very much for listening into and speak soon.

[Operator]

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