Zalando SE

Patrick Kofler - IR Rubin Ritter - Co-CEO Birgit Haderer - SVP, Finance

Andrea Ferraz - Morgan Stanley Volker Bosse - Baader Bank Andreas Riemann - Commerzbank Charlie Muir-Sands - Deutsche Bank Simon Irwin - Credit Suisse Anne Critchlow - Societe Generale Jurgen Kolb - Kepler Cheuvreux Andrew Ross - Barclays Georgios Pilakoutas - Exane Dan Homan - Citi Andreas Inderst - Macquarie Georgina Johanan - JP Morgan Rocco Strauss - Arete Research Michelle Wilson - Berenberg

Good morning ladies and gentlemen and thank you for joining us today to review the year 2017 and to look ahead into 2018. As usual, with me today are Rubin Ritter, one of our three Co-CEOs responsible for the Zalando core business; and Birgit Haderer, SVP Finance.

Both will be available for a Q&A following today's call. Also, 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.

With that, I now turn the call over to Rubin.

Yes. Thanks Patrick and good morning everyone.

I'm very happy and looking forward to present another year of successful development at Zalando. As always, our call has four parts, we'll start with the business highlights, we'll then talk about the financial performance in more detail, we then will look at our outlook and then, of course, last we'll have your -- we'll focus on your questions.

So, let's start with the results highlights and business update. Clearly, 2017 was another year of major strategic and operational progress as we continued to deliver on the trajectory that we have described in the IPO back in 2014.

We were able to keep our promises and delivered on our goals. Specifically, we have been able to deliver on our sales growth targets in the upper half of our corridor of 20% to 25% with a growth of 23.4% in revenues, where we have once again outperformed the overall market and gained market share.

Actually, our CAGR since the IPO is at about 26%. So, I think this has been really great progress over the last years.

At the same time, we remained at a solid level of profitability with €215 million adjusted EBIT, which corresponds to a margin of about 4.8% despite continued investments into future growth. Working capital was slightly negative at year end and CapEx increased to €244 million, also these were in line with our guidance.

But even more important to us than either is strong financial performance is what we have been able to deliver for our customers in 2017 and the areas where we have been able to invest. So, on the following pages, I want to talk about the improvements in the areas of assortment, digital experience, and convenience.

So, our assortment clearly is at the core of our value proposition and I think we have been able to drive a number of important improvements in 2017. We always strive to expand our offering to give our customers access to an almost unlimited choice.

We offer our customers about 2,000 brands and 300,000 SKUs across different styles and price points and one of the most relevant drivers of having and expanding this selection has been the Partner Program in 2017, which allows brands to bring additional styles online or to backfill on styles that we -- where we are out of stock. Actually the Partner Program has been able to double in size in 2017 and therefore has been a great driver of our assortment quality.

At the same time, we want to offer our customers a highly fashionable and entertaining selection and therefore, we always focus to bring on new exciting brands. In 2017, we have been able to add 350 brands to our selection, which means that we almost add a new brand every day including weekends.

I think some highlights are the Inditex brands Pull & Bear and Stradivarius that we have been able to add to our selection. The same is true for Weekday from H&M Group, Tricon, Sandro and the sports brand Jordan has been other exciting additions to our assortment, which make it even more unique.

The third area, we are always focused on the freshness of our assortment, so we want to show the most up-to-date styles and most up-to-date trends. We continue to be fully focused on in-season merchandise.

We continue to increase our Fast Fashion offer. Actually, we activate every day on average 1,300 SKUs, which I think really creates a lot of reasons for customers to come back frequently because every day, there are more than a 1,000 styles -- new styles that you can discover.

Second important area of our proposition is clearly the digital experience. Actually in the fourth quarter, we have been able to reach a new all-time high in terms of visits.

We had more than 700 million visits on our sites, that brings us to a run rate of about 3 billion visits per year and clearly it is our aspiration to show to all of these people really the most exciting digital experience when they come to our web shops or our apps. There are many areas where we drive continued optimization.

Those are very specific and tangible improvements for our customers that help us to drive growth. So, some examples are an improved search, which yields faster and better and more personalized results.

A new PDP that we have launched, which has led to improved conversion in many markets, improved sizing advice which starts to have a positive impact on our return rates, also to invest into scalable systems. So, we had another stress test with Black Friday where in the peak minutes, we had 2,400 transactions per minute which really show that our systems are highly scalable and all of these efforts combined just yield a very positive development across all onsite KPIs.

At the same time, we have kicked off the next gen projects which will be a big focus especially in 2018. Our goal is to redefine the onsite experience and create new ways for customers to interact with the assortment and the entire team in this area is really fully focused on making this project happen.

It has two major elements, the first element is to create more interesting and inspirational assortment entry points. A first important proof point in the fourth quarter has been the launch of the outfit section called Get the Look where customers can see a stream of outfits which are combined by our stylists or by external influencers and where we already see a great impact on conversion rates, but also time spent on site.

And the second big element is that we aim to create a significantly more personalized experience for our customers. We are convinced that customers want to be recognized as individuals and we need to do a better job at helping them to find the right content and to find the right products in our increasingly broad assortment.

And over the last years, we really laid the technological basis for this and we believe that in 2018, we will be able to bring a lot of this potential to life and show really specific personalized elements for our customers, which we know from experiments have a really significant impact on their browsing behavior and also their conversion. Of course, mobile continues to be a big focus area as it has been over the last year, specifically the app.

We continue to see great traction with more than 70% of visits coming from mobile devices and also mobile transactions approaching 60%. So, we see that we can also more and more close the conversion gap that existed between desktop and mobile.

We continue to drive a lot of app installs, on average 1.3 million installs per month with an overall installed base of now more than 40 million installs and this continues to be an area of great focus and also a big driver of growing the business, especially with respect to frequency, which we'll come back to later in the presentation. Now, as you know from all our previous earnings calls, clearly, convenience and specifically logistics has been a big area of investment and big area of focus.

2017 was a year where we significantly increased our investments with three main priorities. The first priority was to increase our capacity and efficiency in the network.

We are building a pan-European fulfillment network that is ready to support more than €10 billion in revenues to allow for our planned growth over the coming years. In terms of capacity, we are ramping up more projects in parallel than ever before.

So, just to run you through the list, to give you a flavor. In Stettin, our first Polish location, the ramp-up is progressing as planned and the location will be fully ramped up by summer 2019.

We are launching a second project in Poland in Łódź. Construction has started in November 2017 and manual operations are planned to start at the end of this year.

In Verona, we have started the construction or we are about to start the construction of our Italian hub, which is planned to go live in fall 2019. In Milan, our current satellite warehouse in Italy, we are in the process of doubling capacity by adding additional building segments until fall of this year.

Paris is ramping up as planned, already has 50% fulfillment share for local customers. In Stockholm, we are operating our Nordics satellite warehouse in an interim setup and will move into the permanent setup by the end of this year.

Also for the Zalando Lounge, which continues to grow very nicely, we are adding a new facility, which also will be located in Poland close to Duns. So, I think this is a very impressive list and it gives you an idea on how busy we are in this area to really ramp up capacity for future growth.

In parallel, we are investing a lot in automation and so we clearly want to get faster and more efficient in our processes. Mönchengladbach, the bagsorter ramp up was successfully completed this year.

In Lahr, we are ramping up the bagsorter this year. In Stockholm, we are piloting new automation technologies and approaches for satellite warehouses.

So, also this is a big area of investment. Clearly, a second priority in this area has been to scale further fulfillment options.

So, same-day delivery we are now enabling in 12 cities. We have rolled out return on demand to all customers in Germany and Netherlands.

We are introducing a dynamic and more precise delivery prediction, which results in narrowed delivery windows for the customers and therefore, will yield not only higher satisfaction, but also higher conversion. And as you know, we have launched our loyalty program Zalando Plus which is still at a small scale, but shows positive customer KPIs from the first months.

The third priority in this area is really a strategic piece of our puzzle, which is to launch and extend Zalando Fulfillment Solutions, which is a product that allows partners to leverage our fulfillment network once they are using our Partner Program. From this, we see very positive impact both on customer satisfaction and also on unit economics.

We already have 14 brands live including some large accounts like the[Indiscernible] Group. Already in December, we were actually delivering 10% of all Partner Program orders through Zalando Fulfillment Solutions and our goal is until the end of this year to actually deliver 20% of the Partner Program outbound volume.

So, I would like now to continue with some comments on our financial performance. As always, starting with growth.

So, clearly 2017 has been a big success in terms of growth. We have been growing 23.4% in revenues.

Actually, when we look at the GMV growth, we have been able to grow 26.5% for the full year, which indicates once again that the Partner Program is really gaining traction and is supporting our growth quite significantly. Especially when we look at DACH, we have seen a strong reacceleration of growth from 14.8% growth in 2016 to 18.3% growth in 2017.

Also the fourth quarter has been particularly successful to drive growth in the DACH region and I think here we really have been able to make the right investments to drive growth. When we look at rest of Europe, the region continues to grow even faster at about 26% for the full year and about 23% for the fourth quarter.

In the fourth quarter, we saw slightly less momentum in Southern Europe in a -- I think also very warm winter. However, structurally, we still see a lot of growth opportunity for the seasons to come and we expect rest of Europe to continue to grow significantly faster than the more mature DACH region.

Now, I think very interesting as always is to look at the drivers behind the growth and here we see once again really strong results on active customer acquisition. So, when we look at quarter-over-quarter growth, we have been able to grow active customers with 900,000 additional active customers, which is particularly strong.

When we look at the year-over-year, actually active customers have been growing 16%, on absolute numbers 3.2 million additional active customers, which is significantly up compared to the growth we had in 2016 where we grew 2 million absolute additional active customers. And this acceleration in active customer growth is really driven by both accelerated new customer acquisition, but also improved retention where we see that our investments into the customer proposition really continue to pay off.

Now, this shows that we have been able to have more and more customers. I think the great news is that they also come more frequently.

We have a new all-time high in terms of purchase frequency with 3.9 purchases per year in the last 12 months, also related to mobile, also related to Fast Fashion, also related to younger customers, which in turn has an adverse effect on the average basket size. So, I think here we an effect that is comparable to what we have been discussing in previous quarters.

To us what is most important is that the GMV per active customers, so the combination of frequency and basket size continues to grow with 9% to a level of €253 per active customer. Actually, we looked at the IPO presentation and there it said €180 per active customer.

So, over the last years really very step-by-step, we have been able to grow revenue per active customer quite substantially. Now, if we look at profitability, as mentioned, we kept absolute EBIT around constant compared to last year at €215 million adjusted EBIT, which corresponds to a margin of 4.8%.

In the fourth quarter, we were able to increase absolute EBIT to €113 million. When we look at the different regions, we already commented in previous calls that after the very strong margins in 2016 in the DACH region, we ramped up our investments to re-accelerate growth, which clearly has paid off as we discussed on the previous pages, but it also had an impact on the margin level in the DACH region, which we still consider to be very healthy, but slightly lower than in the year before.

At the same time, the margin in rest of Europe actually has improved. We have clearly reached breakeven for the full year and I think at the strongest or one of the strongest margin levels in this region ever in the fourth quarter.

And I think going forward to drive additional growth, also here we see opportunities to reinvest and to continue to really drive growth in those markets, but we still have a relatively low penetration. Now, if we go through the major cost lines, starting with gross margin, here we see we are 0.6 percentage points below the prior year.

There are predominantly two drivers, on the one hand, we have made pricing investments to create a more attractive offering as an investment to drive retention and purchase frequency, which we think has fully paid off. On the other hand, we have some negative mix effects with rest of Europe segment growing faster than the DACH region.

When we look at fulfillment cost, here we see a quite significant impact by the higher investments we have been doing into our convenience proposition. I have described that we have been ramping up and are ramping up several new warehouses.

So, this takes quite a lot of investment, also everything we do around automation with more locations ramping up than ever before. Out of eight warehouses that are operational right now, six are in ramp-up mode, so this typically leads to temporarily lower efficiencies and we went through this list earlier on the call.

The second driver are the investments that we make into the improved convenience proposition, so the local satellites, return-on-demand, same-day delivery, Zalando Plus, Zalando Fulfillment services, so all of this obviously takes additional investments and we also see that the order economics that we mentioned earlier, so the reduced -- slightly reduced basket size, of course, also has an impact on the efficiency of our logistics network. On the other hand, in marketing cost, we continue to see a very favorable development.

We see continued operating leverage, which as we have discussed earlier, we chose to reinvest into investments in gross margin and fulfillment. So, overall, I think that the strategy that we have described really is paying off.

We see continued growth, especially in DACH, we see great active customer growth, we see improved frequency, we see improved spending per customer. So, I think these shifts and these investments we have been making along the P&L really are showing a positive effect.

So, to quickly finish off on the financials, when we look at net working capital, we see a negative level of €62 million at the end of the year, which is slightly negative and therefore in line with our guidance and on CapEx, we see to €244 million predominantly from logistics investments were €68 million in the fourth quarter, also this is clearly in line with our guidance. And a quick comment on our liquidity, which stays at very high levels of more than €1 billion.

So, with this, I would like to move to our outlook and we spend some time now discussing particular KPIs. So, I think would like to start with taking one step back and taking a more long-term view and here very clearly, our focus will continue to be on market share.

We are targeting a particularly attractive market, which is very sizable with €420 billion in size and actually we can add another €80 billion in our target market after the launch of the beauty category. We think it's particularly attractive in terms of gross margin and customer frequency.

It is a market that is very fragmented on the supplier side and is the market that continues to move online very quickly and we think that actually this trend from offline to online will continue and we see even scenarios where it may further accelerate. So, we think in targeting such a market clearly, the winning strategy for us is to go for market share and we have done so very successfully since the IPO in the DACH region, we have been able to double our market share to now about 2.8%, in rest of Europe, we have actually increased our share by four times in those years to 0.8%.

When we look at Zalando overall, we have grown our market share by a factor of 2.5 to now 1.3% and we will very clearly continue to focus on growth because we think there is significantly more potential. We want to reiterate our long-term ambition of a 5% market share across the European fashion market and we have, as you know, shown that this market share is possible because we already have reached it in the shoe category in the DACH region, which is where we started the business initially and we continue to believe in the benefits of driving scale and driving market leadership long-term.

Now, what does this ambition mean for the mid-term outlook. We have doubled the company in the last three years and as we said on the Capital Markets Day, we have the ambition and we have the aspiration to double again until 2020.

So, our number one priority will continue to be growth. We will continue to target a corridor of 20% to 25%, potentially with revenue being more towards the lower end of this range and GMV being more towards the higher end of the range as we continue to grow the Partner Program over proportionately.

This growth target is clearly very ambitious, it will mean that we have to continue to outperform the overall online fashion market by a factor of two to three and we also want to reiterate like on the Capital Markets Day that we do not expect a significant or a margin expansion in this very high growth phase. I think this is a point that is again and again important to highlight.

I think we need to be realistic and we have to acknowledge that the continued need for investment if we want to reach these very ambitious growth targets. So, what do we plan to invest in, I think we have an impressive number of initiatives for 2018 that we are driving in parallel across the entire proposition.

On assortments, we will continue to focus on brand launches. Actually in the first quarter, we already have launched exciting brands like Swarovski, Tory Burch, and Massimo Dutti.

We are ready to launch the beauty category. We intend to do this in March, which means we will significantly expand our target market in a very complementary category, but really to crack it will also require additional investments going forward.

We actually intend to launch two European markets this year which I'm particularly excited about because the last time we launched a new market was in 2013 and I think the entire team is looking forward to launch new markets again and bring our service also to these potential customers. On the digital experience, I already commented that Next Gen will be a big focus with the goal to make Zalando significantly more personalized for the individual customer.

We'll continue to invest into the app in terms of design, but also in terms of convenience and customer flow. For example, we are planning to launch a one-tap express checkout and we have a project that we call Allophones, so we want to offer more languages to our current countries.

So, for example, we will bring an English version of the site to Germany, which we expect to drive additional customers. In terms of convenience, this will clearly continue to be an area of investment.

We have talked about the long list of logistics expansion projects both to scale our network and also to make it more efficient and bring it closer to the customer. In terms of payment, we'll continue to roll out deferred payment methods to customers in more and more countries and Zalando Fulfillment Solutions we already discussed that we want to actually double the share of Partner Program volume where brands opt to use our fulfillment network to bring their goods to the customer.

And then, underlying all of this, we'll continue to invest into platform and emerging businesses. I've mentioned that the Lounge has been growing quite substantially and we intend to continue to invest into this very attractive off-price business which both helps us to sell off leftover merchandise, but it also is used by our partners to clear leftover merchandise into the market.

We'll continue to invest into integration services because we think this is a interesting topic in the platform world with the acquisitions of Tradebyte and Anatwine which we continue to scale. With Zalando Media Solutions, we are targeting the very attractive online marketing market, which has very strong margin potential and is already scaling profitably.

We'll continue to grow Zalon, our curated fashion service and there are actually a number of new initiatives that we have lined up for 2018. So, let me finish the presentation as always with our specific 2018 financial guidance.

For the fifth year in a row, we aim for a strong 20% to 25% revenue increase, which is roughly two to three times the growth rate of the online fashion market overall. This translates into about €1 billion of additional revenues at the midpoint of the range.

This is clearly our biggest absolute growth ever. To reach these very ambitious growth targets, we have made it clear today that we will continue to invest along many dimensions.

Nevertheless, we expect to remain at least constant or even grow in absolute profitability with an adjusted EBIT of €220 million to €270 million. This range actually implies a margin level between 4% and 5% and a 15% growth of absolute EBIT at the midpoint of the range.

As in prior years, we also want to say for 2018 that if in doubt, we will prioritize growth over profitability because this is what is in line with our long-term strategy. Please also keep in mind that the increased CapEx investments of the last year's will result in higher depreciation and amortization which we estimate to be around €90 million in 2018, which if you do the math implies a 0.3 percentage point change in the margin at the midpoint of the topline range compared to the previous year.

As already last year, we anticipate net working capital to be slightly negative at year end and as a consequence of our outlined growth strategy, CapEx will increase to a level of around €350 million, the investments will be mostly going into logistics and technology, similar to what you have seen in the previous years. In addition, I would like to make a brief comment on our Q1 trading.

While we see that the sell-through of the fall-winter season is going well, we observe a delayed start into the spring-summer season compared to last year. This trend is likely also impacted by the cold temperatures that we experience currently across Europe.

While the short-term trend does not impact our full year outlook, it likely has a negative impact on Q1 growth and profitability. And with those comments, I would like to conclude the presentation and I would now like to take your questions.

Please go ahead.

Hi, good morning team. I have two questions please.

The first one is on the beauty roll out, I know you said you would launch in March, but is it going to be a staggered roll out where you maybe start in Germany and you will only sort of roll out to Europe next year. Can you give us a little bit more guidance as to sort of what the ramp-up process will be for that product.

And then the second question is, your CapEx guidance for this year is €350 million, which is quite a bit higher than the below 5% you talked about at the Capital Markets Day, can you help us understand whether this is about sort of bringing investments that you'd already thought saw you would do forward or whether it's about sort of new areas which require incremental investment relative to what you thought a year ago? Thanks.

Sure. Thanks for your questions.

So, on beauty, yes, we will have a staggered approach, so we will start in Germany and first launch and roll out and then we will also I think have a period of really optimizing the offering and then over time, we have the option to also bring it into other markets, but focus for now will be on launching in Germany. With respect to CapEx, you're right that our -- so investment level increases once again in 2018, I think this is really related to the sheer number of projects that we also went through in terms of logistics, of course, also in terms of technology where we really I think now see the opportunity to accelerate the build out of our capacity to make sure that we already now can secure the space that we need for the continued growth over the next years and in terms of doubling the business over the next three years, we also have to make sure already now that we have sufficient capacity.

I also commented on Zalando Fulfillment Solutions, which I think is really perceived very well in the market by our brand partners. So, also here we want to make sure that we really have sufficient capacity to drive this part of our platform and this is also reason for us to actually accelerate our investments.

When you look at it at CapEx in percent of sales, I think you're right with your comment with respect to the 5%. On the other hand, I think when you also look at some of our competitors, I think our CapEx as percent of sales is still at a pretty good level if you consider the magnitude of investments that we are able to drive with it.

Thanks. Does that mean that you might be comfortable, so sort of keeping up slightly higher level of CapEx for the next couple of years?

I think that really depends on the project, right. So, if we in two years, say, okay, for the next three years, again, we want to double, then for sure we will also need to keep investments at a high level and as long as we see that they have a great ROI, I think this is a good thing.

But clearly again and again we will also challenge our teams to make sure that the investments that we make and the money that we spend really have a very specific plan behind them and have also very good ROI in terms of a long-term growth. So, I think that is really -- those are really the parameters that will drive our decisions for the right CapEx level also in the coming years.

Yes, Volker Bosse, Baader Bank. Yes, first of all congratulations, I think certainty a strong sign that you are also move now Massimo Dutti to the Zalando web page.

So, do you see also a chance that even the Inditex core brand Zara could be offered by Zalando sooner or later? Are you in talks there, any indication from that front?

And the second question would be, could you please share your experience with us about the implementation of the stationary retail partners as you did with some shoe stores into your business platform. Recently you announced to expand this offer, so how is the progress and how high the learnings are of that initiative here?

And also one last question on the beauty segment, could you give us bit of range, quantity in sales contribution in absolute terms and progression of the plan going forward? And am I right that this ramp-up costs are all implemented in or included in the guidance.

So, no extraordinary one-offs out of that to expect in the first or second quarter. Thanks.

Sure. So, on your first question with respect to adding additional vertical brands, I think also over the last years, we have always said our aspiration is to serve our customers with all brands that are available and of course, including also the very effective vertical brands that are out there and that is really our aspiration, that is what we are working towards and that is also where I think we are making great progress.

On the other hand, I think we also shouldn't get ahead of ourselves, so we are open to discussions with all of these brands and we are really building great partnerships, but we also want to give these partnerships the time that they need to evolve. But as you can see from our progress, we actually I think every quarter able to show again great progress in terms of attracting more and more leading brands.

With respect to stationary retail, so right now we have 30 stores integrated that are able to deliver from their local merchandise to our customers and to bring additional traffic to their stores through our site and that is something we continue to do, but as we also said previously, it is also something that takes time because integrating offline stores especially those that don't have the digital infrastructure also takes lot of effort. With respect to beauty, so clearly, beauty has the potential to add several hundred millions to our topline in the long-term.

However, I think when launching a category, we have launched many categories in the past, we have also launched many markets in the past and to be very honest, it is difficult to predict really the sales level in the first year. So, what is important to me is that we do a launch that; is convincing to customers; that we do a launch that is convincing to our brand partners and that we really figure out how to serve beauty well.

And I think if we achieve that then really for the coming years, beauty can be a substantial driver of our growth and the cost that we need to launch the categories are included in our plans and therefore also in our guidance.

Yes, good morning. Two questions from my side.

First one on private label, I think you're managing 18 own labels at present, so can you name the two, three most relevant private labels at present and what is the strategy here, are you also using external partners to promote these labels? And the second topic, the effectiveness of logistics investments, can you provide some specific examples how these investments did improve -- fared or net promoter score, any insight on the effectiveness on these investments would be highly appreciated.

Sure, so on private label, you're right that we serve our customers a pretty broad range of private label brands. We do not disclose specific sales numbers for individual brands and therefore also not which brands are more successful than others, but each brand, of course, is serving a different target customer.

And of course, we have this broad portfolio, we also challenge from time-to-time are all the brands performing according to plan, but overall, really is that labels has been able to add, yes, great selection to our assortment and also to add exclusive styles to our assortment, which is important to us. In some cases, said labels also has chosen to market these brands externally, which is in line with our strategy and which allows us to even further increase the depth that we order on individual items.

With respect to the effectiveness of our logistics investments, I think that some of the numbers we have given on this call with respect to improved retention, with respect to improved frequency all hints that these investments that we are making in terms of convenience really pay off. I think that's the big picture and when do our customer satisfaction surveys, we always see that the convenience that we offer clearly yields one of the higher satisfaction levels across the different satisfaction drivers.

What we do is that we challenge the teams in terms of any investment, if it is return pick up or if it is same-day delivery or if it is a local satellite to really test these improvements and to show us tangible impact in terms of customer KPIs, but also ultimately in terms of payback and in terms of financial return and in many cases, that is actually possible, right. So, on same-day delivery, we have tested this in Berlin in an [Indiscernible] test setup and from that we were able to infer what is the uptake that we can expect from customers where we are able to deliver same-day and these are metrics that we then use to evaluate all of these different projects.

Hi, good morning. Yes, I've got four questions please, but all quite short I hope.

You mentioned some new adjacent markets you're opening in the year ahead, when I look at the map, they all generally seem to be quite small other than Russia. I wonder if you could say whether Russia is one of those two markets.

Secondly, on Zalando Fulfillment Solutions, can you clarify whether you expect that to be gross margin and or EBIT margin accretive. Third, you mentioned over 40 million app installs, but obviously only around half that number in terms of active customers.

I wondered if you -- what your interpretation of that gap is? Is it that people have multiple devices or is it a lot of yet to be activated consumers?

And then finally, you've referenced your shoe market share in the DACH region of 5% for some time. I just wanted to clarify, has that been stabilized or you're saying that it's well over 5% now?

Thank you.

Sure, so on your first question, I personally don't consider Russia to be adjacent to our current markets. So, I think that hopefully answers the question.

On Zalando Fulfillment services, if I understood the question correctly, so on those fulfillment services, we are charging the partner a fee, which I think yields a lot of benefit to the partner because they are able to use many of the efficiencies that we have in our system, but at the same time, also allows us to earn a margin on the service. With respect to the gap between active customers and app downloads, I think that's a very fair question.

To be honest, also, I thought before the call that at this level, maybe the absolute number of app install base becomes less meaningless over time, because obviously, you do have the effect that people change phones and not in all cases, we can account for that in the numbers. However, I think the speed at which we increased this download base still gives you a very good hint that we are -- continue to drive growth through app installs by having close to 1.5 million installs every month.

So, some of these apps have become inactive, but also others still remain to be activated, so customers are using it and it can be an acquisition channel to then turn these customers with an app download into active customers. With respect to your last question, so, yes, we continue to reference to the 5% which we've achieved in Germany, but the truth is that in this particular market, we are still growing obviously and therefore, our share is by now actually above 5% in shoes in DACH.

Good morning gentlemen. Couple of questions for you, first of which is just talking about marketing leverage.

Obviously, that has been significantly higher than what was guided to at the time of the IPO. Is there a natural limit to the amount of marketing leverage you can put through the business or is it simply that the kind of cost of customer recruitment or that you're recruiting in different ways that don't necessarily kind of flow through that line, if you can just discuss that a little bit.

And secondly, given that you've just invested in an automation company, where do you see the potential? I mean in five years' time, would you expect to see a significant amount of your picking being fully automated?

Sure. So, with respect to marketing leverage, you're right that at the time of IPO, the target model I think indicated a range of 8% to 10% if I remember correctly and then at one of the following Capital Markets Days, we communicated that we will likely actually increase our investments in convenience, but seen even lower level for the target margin for marketing spending.

So, there we communicated 6% to 8% in the target model. And you're right that we have been making even faster progress towards those targets than we originally anticipated, whereas at the same time, we have even further increased our investment in convenience and also to some extent as investments into pricing.

So, I think the progress has been fast. Of course, the operating leverage is not unlimited.

So, marketing, it will not go to zero. On the other hand, when I look at some other e-commerce competitors, we also see several examples where the marketing spending is significantly below the 6% to 8%.

So, I think there still is leeway going forward and over time we will reevaluate again and again what is the right strategy, what is the right level of investment for each cost line and there could also be a scenario, we say it's time again to increase marketing cost as percent of sales. I don't think that's likely, but we will do whatever is -- whatever yields the better outcomes and I think over the last years, we really have shown that we, since the IPO have been able to drive growth, which I think went beyond any expectation at that time and we have been able to do so with margin levels that also went beyond expectations at the time.

So, I think that indicates that we have been able to take the right decisions in terms of where to make the investments. Your second question touched on automation.

So, clearly, we see potential to further automate processes in our warehouse. We also see potential to use digital tools to automate other processes in the company, which clearly is beneficial both from a financial perspective, but also from a customer perspective and also in terms of avoiding highly repetitive tasks.

So, we will continue to potentially invest into companies that develop automation technologies and we are also already testing a number of approaches to make sure that we find the right mechanisms and the right technologies to be rolled out across our logistics footprint.

Thanks. Good morning.

I've just one question on the EBIT margin outlook, medium-term but also maybe a bit longer term as well. Because you said again that we shouldn't expect the EBIT margin to rise above that 4% to 5% guidance corridor to 2020, but I'm just wondering if 4% to 5% might actually be a bit too high if we consider say Zalando Plus, Zalando Zet roll out and then the gross margin mix pressure from young fashion.

So, just wondering what's your thoughts are on that?

Well, I think that our thought in terms of mid-term trajectory are pretty much around the points that I was making around our mid-term outlook that our focus will continue to be on growth and for the phase that we are growing at such high levels, which are actually two to three times the market levels, we do not expect margin to increase and we actually wanted to make whatever investments are necessary to drive this growth as long as we feel that these investments have a positive return on investment long-term. So, that is, of course, always the benchmark, and I think if we come to the situation where these investments are not yielding, these are highest, then we should stop, but we don't see that coming anytime soon and this is why we'll continue to be really focused on investing.

I think that when we look at the market and when we look at the industry, I think you are right that with this 4% to 5% we are operating at a pretty healthy level of margin and I think that is true and we have been able to show a great combination of growth and profitability in the past and our aspiration is to do so also going forward, but as we always have said, if in doubt, we would prioritize continued growth as long as the ROI is right for the long-term.

Thank you very much. On your expansion into two new countries, maybe I have missed it, but could you just give us an indication of which country you're talking about and also in terms of potential that you see in these two countries, what and when you can really reap these benefits and in this context also, will you deliver then this country from your new distribution or new warehouse in Poland or how is the delivery going to ramp-up here?

And lastly, or secondly on personnel, you're adding or you're targeting 2,000 additional employees this year, obviously the personnel cost ratio will further increase here, maybe any indication as to where we should look at this ratio going forward? Yes, thank you.

Sure, so on the new countries, we have one purpose, we have said, we will launch two adjacent markets and I think that's about the information that we are ready to give on this topic and we will update you further along or during the year. In terms of how we deliver to those markets, well, that will depend on which markets we go into and as always we will deliver to those markets not only from one warehouse but from the entire footprint and naturally from those -- ideally from those warehouses that are closest to the customer.

In terms of personnel growth, I think growing the business also means to hire more talent and with the goal of more than 2,000 new jobs, we just wanted to indicate that we continue to create new jobs, both in logistics and also in Berlin and when you actually look at the base that we have of 15,000 and then if you put 20% to 25% growth on top of that, I think you even get to a higher number. So, I don't see that we're -- I wouldn't expect that we necessarily have to grow over proportionately relative to sales and so our personnel to sales ratio I think should not increase in 2018.

Good morning everybody. I've just got two [Indiscernible] please, the first one from the Partner Program.

Can you give us a sense in Q4 how big they was as a percentage of GMV, I think you've said high single-digits in the past, so we got up to 10 now? And can you give us a sense to how big it is DACH versus the rest of Europe.

Then the second question is back to Zalando Media Solutions, which I think you said is now scaling profitably. Can you actually give us a sense as to how big that is in revenues?

Yes, so I think those are two valid questions, but I'm afraid that I don't have a lot of additional information that I can disclose at this point. In terms of Partner Program, the share is growing quite substantially as I indicated and the share continues to be higher in the DACH region compared to the rest of Europe region even though we are -- also this year making effort to really grow the Partner Program, particularly in the markets where it is still lacking share.

With respect to Zalando Media Services, we don't disclose specific numbers for this business. In general, we don't see it as a major revenue driver, we see it as a driver of additional services that we can offer to the brands and we see it as a potentially particularly profitable area of the business, but in terms of revenue growth contribution, it is only a small part and will also only be a very small part given the nature of the business.

Good everyone. The first question is just -- could you expand on what the profitable sourcing deals were that supported the profitability in the other segment.

And then the second question is, in the presentation you referenced the positive unit economics from the Zalando Fulfillment Solutions, could you potentially just expand on this what you mean by kind of positive unit economics, is this kind of in a relative sense or is a unit being sold through a more traditional channel or is this more just kind of on an incremental sale, there's a positive contribution there. Thank you.

So, I did not fully capture the first question, it was around profitable sourcing deals, but I didn't--

Year-to-year profitability, the shift in the margin was explained in the annual report as benefiting from profitable sourcing deals. So, I just wondered whether you could expand on what this was?

So, I will elaborate maybe, I will start with the second question and then Birgit can -- will answer the first question, which I still haven't fully captured, but Birgit got it, so she will take it. On the unit economics for Zalando Fulfillment Services, there are several sources of that economic benefit and so I think the first big advantage is that we typically have customers that order several items in one order and if we consolidate the merchandise for the Partner Program, we're able to send all of those items in the same parcel, which clearly generates cost savings.

The second is of course that we have built a very big network. So, gaining additional volume for this network will make it also more efficient.

So, we are able to leverage assets that we already have built. And I think thirdly, typically we will operate a fulfillment network that is tailored to fashion and that is operating at a very high level of efficiency also driven by the scale and automation that we have in the system and that is also something that we benefit from, if we take over the Fulfillment Services for the brands.

So, all of this combined creates a very good economic benefit and we're able to share this benefit with the brands, which makes it attractive for the brands to work with [Indiscernible] and for us to turn [Indiscernible] into a good addition to our to business.

And on your question on the Lounge business and the profitable sourcing deals you're referencing in the annual report. In the end, the Lounge business is working in the opposite direction of the sort of the wholesale business.

So, if there -- if the market is having difficulty selling products to the consumers, so there's surplus merchandise available in the market, obviously the price for that merchandise comes down and as such the Lounge has a better chance of sourcing merchandise at very profitable terms, which then obviously drives the growth as well as the margin profile of the Lounge business.

Yes, good morning guys. Two questions from me.

First of all, on the gross margin, can you give some sense of what you expect gross margin development to be over the next couple of years. Do you expect continued pressures through mix and pricing or should we start to see some positive impact from scale or the Partner Program.

And then second one just on the CapEx, can you just give the split of what you expect, PP&E versus intangibles for 2018, please? Thank you.

Sure, so on your first question on gross margin, so as you know we don't give guidance on specific cost lines and I think for good reason because we should have some flexibility in terms of how we allocate the investments over the years. I think on gross margin, we will see both positive and negative impacts, so positive impact as you mentioned improved negotiation successes, improved scale, and the like, but also maybe the opportunity to make additional price investments to drive growth and drive retention and I think we cannot say today with certainty how that specifically is going to play out over the next years.

On your second question, the CapEx has roughly a split that is comparable to last year, so I would expect roughly 80% to go into PP&E and roughly 20% to go into software development.

Yes, thank you. Good morning everyone.

Two questions. The first one on your full year 2018 EBIT guidance range, which is quite wide, what are the swing factors to get to maybe to the lower end and to the higher end, what is in your hands, what is due to external factors such as the recent cold weather, which should impact the entire industry.

My second question on Inditex and its decision to extend the offering on Zalando to three brands, now including Massimo Dutti. In your view, why did Inditex actually choose Zalando and not other online retailers in Europe to do that job, a quick reminder would be helpful here?

And in this respect is the new collaboration with Massimo Dutti for Germany-only or is it across Europe? Thank you.

Yes, so on your first question, with the 2018 guidance range, yes, some people say it's a wide range. Some people feel it's a narrow range, but I think like in the previous years, we do a range because, clearly we want to reserve leeway to figure out along the year what specific level of investments we want to make and that will be a function of many things, you mentioned external factors, which is true.

I mean there is things like weather and other industry specific things in our business and then of course, there's also internal factors which relate to how quickly are we going to be able to launch all of these initiatives. What our eyes do we see throughout the year and how do we see the business trending and do we think it makes sense to double-down on some investments or do we think it makes sense to hold back a little bit and those are decisions that we want to make throughout the year and we think the business long-term would not benefit if we would put ourselves into a range that is too narrow.

On your question on Inditex, I think they have chosen Zalando because it's a great channel for them to drive their business digitally and where it's also a great channel to reach customers, additional customers. So, I mentioned already that we had more than 730 million visits in the fourth quarter.

I think that's just a enormous amount of traffic and enormous amount of reach. And it is unparalleled in the European fashion industry to have one channel where you can reach so many customers and I think Massimo Dutti has a great offering.

I think it's super relevant for our target customer group. So, I think it's a win-win situation that we can allow them to tap into this broad reach and they bring very attractive product to our platform.

So, I think that has been driving their decision-making process.

Morning guys. A couple of questions and then just clarification please.

First of all, just on the gross margin, I understand that you are sort of reluctant to give an outlook, but just to perhaps help in our forecasting in terms of understanding the bridge for this year. I mean, on my numbers, the Partner Program would have been adding something like 90 basis points to the gross margin this year.

If you could just comment on the sort of magnitudes that would be helpful. The second question on pricing investments in DACH, obviously, being sort of heavily weighted into branded product, there's a bit leeway for you to kind of change pricing.

So, I'm just really wondering what you mean there. Do you mean on own label product, has it been going in or do you mean on more promotional activity rather than headline pricing?

And then my clarification question, I'm not sure if it was only me, but as you were talking about your Q1 comments, my line actually cut out, so would it be possible just to give us a reminder of those in case that was for anyone else as well. Thank you.

Sure. So, I think on your first question, you're right that the Partner Program drives additional gross margin.

On the other hand, scaling the Partner Program also requires investments in terms of building the salesforce, in terms of building the systems, in terms of scaling things like setup and bringing those into the market. So, I think this is also something that we should consider when we think about the margin impact of the Partner Program.

With respect to the price investments, that is really across the Board. So, it's really about creating an offer that is attractive to the customer that can drive retention that can drive additional conversion.

And of course, we are also very mindful to make these decisions in a way that they, also they need to have a positive ROI, but these investments can involve offering products at more attractive black prices, it can involve bringing brands in that have very attractive price offering to begin with, it can also mean to make strategic price adjustments. There are different levers that we can play on that side.

With respect to the Q1 trading comments, so sorry to hear that the line was down, like, it wasn't me hitting the mute button. So, I'll just repeat them for you.

So, we said that while we see that the sell-through of the fall-winter season is going quite well, we observe a delayed start into the spring-summer season compared to the last year. This trend is likely also impacted by the cold temperatures that we experience across Europe.

While the short-term trend does not impact our full-year outlook, it likely has a negative impact on Q1 growth and profitability.

Yes, two questions from me. I mean, one is on the two new markets that you mentioned that you're jumping in, would love to understand a bit better on how that will impact your marketing spend given that historically you had entered markets running larger TV campaigns.

And a second one, a bit more in general. I mean, you have added several high end brands in 2017.

I mention Massimo Dutti and Swarovski in particular. I mean was you or the whole line up thing company most probably be taken over by [Indiscernible] now and several brands signaling that they aren't really happy, that lineup is independent player in the market anymore.

Do you think you would gain more on the high end potential here and also using high end brands with better unit economics for parcel I guess, as well as the Partner Program are ramping, could that also help you to expand into markets outside of Europe. Thank you.

Sure. So, with respect to new markets, you're right that whenever we launch a market, they tend to have elevated marketing costs at the launch, especially marketing costs relative to revenues because in the beginning you start without any active customer base and clearly we expect that also to be the case for the markets that we intend to launch in 2018.

On your second question, clearly, the premium segment has been very attractive for us in the past and also has been growing quite nicely. And we also see more and more demand from higher end brands to list with us, which I think is also related to the more and more improved brand image that we have been able to build and the reputation that we have been building in the market.

So, this is clearly a very positive trend for our business because obviously the premium segment is quite an attractive segment. With respect to the Partner Program, yes, I think it gives us flexibility in all directions.

It gives us flexibility to onboard more brands, to show more assortment without taking additional risk, and it may also help us to go into new markets more efficiently. Although we have also shown in the past that also with a wholesale model, we can expand quite quickly into new adjacent markets.

Hi, good morning. Thanks for taking my questions.

Just one question really and a point of clarification. There's a lot of talk in terms of e-commerce businesses and offering a try before you buy proposition and I know that's something you've already been offering through payment by invoice.

Could you give us an indication of what proportion of sales are paid for using that method, using that invoice method? And whether you'd ever consider outsourcing that rather than using your own balance sheet to improve cash flow.

And then the point of clarification just on in terms of the capacity from the distribution centers, you mentioned €10 billion in revenue, but I noticed in other areas of guidance, you've talked about GMV. So, just wanted to clarify that, that's definitely a revenue capacity?

And if that's the case, could you give us the GMV capacity? And then also when you talk about a 5% market share target based on GMV, is that still assuming a 20% share from the Partner Program?

Sure. So, on the first question with respect to try before you buy, you're right that this is a mechanism that we have been using for a long time.

In the DACH region, it is very popular, also in some other markets and in DACH, it makes up more than half of our revenues that are paid through that mechanism and we also have started to bring this mechanism to other markets and we see a very positive customer response. Of course, it is an investment on the net working capital side, which given our cash balance and given our financial strength, we are happy to make as long as we see also here positive ROI from this payment method.

With respect to capacity, well, when we talk about capacity of a warehouse, it obviously includes everything that is shipped from this warehouse. So, we have expressed it as a revenue number and it also then coincides of course with the GMV potential if you just put the VAT on top of it and we will need some of this capacity also for additional GMV as we will fulfill more and more orders from the Partner Program also through Zalando Fulfillment Services.

But, of course, any GMV that we do that is not fulfilled from our logistics footprint could come on top because there the capacity is in theory almost unlimited. In terms of GMV share in the future -- sorry, in terms of Partner Program share in the future, I think we've continued to see the Partner Program growing to a level of about 20%, maybe a bit more.

There we are really open, it could be 30%, also could be 15%, depends on also what the brands want and what the customers want, but our best guess is that the Partner Program will exceed that level over the coming years.

So, thank you all for joining us today. If you have any follow-up question, do not hesitate to contact us.

We wish you all a good day and see you soon then. Thanks.

Bye, bye.