Zalando SE

Rubin Ritter - Co-CEO, Finance & Operations Jan Kemper - SVP, Finance

Andrea Ferraz - Morgan Stanley Simon Irwin - Credit Suisse Angus Tweedie - BoA Merrill Lynch Magnus Raman - Handelsbanken Capital Markets Adam Cochrane - UBS Dan Homan - Citi Andreas Riemann - Commerzbank Carl Hazeley - Goldman Sachs Graham Renwick - Exane BNP Paribas Mark Josefson - equinet Bank AG Richard Chamberlain - RBC Capital Markets Philipp Frey - M.M.Warburg Research Georgina Johanan - JPMorgan

Good morning, ladies and gentlemen, and welcome to Zalando's conference call this morning to review our fourth quarter and full year 2016 financial results. My name is Susanne Seibel and I am sitting in Birgit Opp's chair this morning while she's on maternity leave.

With me today are Rubin Ritter, co-CEO responsible for finance and operations; and Jan Kemper, SVP Finance. After a brief presentation which will follow the usual format, they both will be available for your questions.

A few brief remarks before we get started. Please be aware that during the conference call we will make, as you might hope, forward-looking statements, so please read carefully through the disclaimer and the additional legal information that governs this call.

The call is recorded as we speak, and a live webcast is our Investor Relations website. A replay of the call will be available later today.

Let me now turn over the call to Rubin, who will review our Q4 and full year 2016 results.

Thank you, and good morning also from my side. Thank you for joining our call.

As always, our presentation will have four parts. We will start with the result highlights and business update, we will then take a more detailed look at our financials, and then come to the outlook for 2017.

And then, as a fourth section, we have, of course, time for your questions. So, let me get started, and maybe we start with the financial highlights of the year.

I think, when we look at the numbers, it's quite obvious and you won't be surprised that we are very happy and very proud of the results we have been able to deliver in 2016. If we look at the growth dimension, we have been able to meet, once again, our very ambitious growth corridor of 20% to 25%.

And we have continued to gain market share at a very fast pace. And as, this has been the key priority over the last years and we are very happy that we have been able to deliver also in 2016, despite the fact that, of course the absolute numbers of growth also have become very high.

So it has been a very challenging target, but we have been able to deliver on it. At the same time, we have been able to significantly increase our profitability.

We have now reached, I think a very significant level. We have exceeded the upper end of our guidance by 1.5 points and we have actually doubled the absolute EBIT to a level of €216 million in 2016.

When we come to the third dimension, the use of our capital, in terms of net working capital we have been able to reach a negative working capital of around €130 million, which leads to very strong free cash flow dynamics. Our free cash flow was positive, despite the high level of investment, with €63 million in 2016.

And here we are benefiting from the growing volumes that we have, but also some temporary effects like delivery peaks and shifts in our delivery perps. With respect to CapEx, we said at the beginning of the year that we want to spend around €200 million in investments.

We have spent a bit more than €180 million, so I think there we are pretty much on schedule. Some smaller cash outs has been delayed into the first quarter of this year, but, I think, we are really on schedule also in terms of investing into our infrastructure.

Now, as at the heart of our efforts and also as a key driver of our growth, we continue to follow the goal to build the leading fashion destination for European consumers, and here we have made great progress, both in the fourth quarter but also in 2016 overall. We continue to offer our customers a fresh and seasonal and fast-changing assortment.

Around 90% of the items that we offer are seasonal assortment. We continue to add many new brands.

We have added 300 new brands in 2016 alone. And we have continued a very strong growth, not only in the core categories like women, but also in niches that we try to tackle with even more effort.

For example, we have been able to grow around 150% in special sizes. As a second pillar, we continue to grow demand through mobile, which has been the major growth driver over the last years, and the same is true for 2016.

Our mobile share is approaching 70%. We have been able to scale our app download base to 28 million installs.

That's an increase of 75%, so that underlines that mobile and especially the app is one of the fastest growing areas of our business. And in context with that or in line with that, we have been doing a lot of work to improve the app proposition further and further, releasing 25 new app releases in 2016 alone.

As a third pillar, we continue to invest into our top-of-mind brands. By now we have around 80% organic traffic, which makes us more and more independent from third-party traffic sources, but really pulling traffic through our brands.

We had close to 2 billion social media impressions through contents and campaigns that we have driving on social media. And, we had the two big joint campaigns with Gigi Hadid and Beyonce, which, again, helped to really shape the image of our Company and of our brand.

And then, as a fourth pillar, we continue to, really, invest in best-in-class convenience. I think two projects that stick out are the same-day delivery proposition, as well as the instant returns that we are driving in more and more cities.

And this is something that is, really, supported also by the build-out of our fulfillment infrastructure to bring this service to more and more cities and more and more countries. All these efforts combined have led to even higher and even better customer reviews.

So, we have been able to improve our NPS by 5 points again, in 2016, driving it to a new all-time high. Now, at the same time, we, as we build a consumer destination, we also invest into building the leading online platform for fashion brands, which has the purpose of giving our brand partners access to the huge reach, consumer reach that we have created over the last years.

Here, we continue to invest into our wholesale proposition, in terms of better data exchange, better replenishment, which has helped us also on our net working capital, better forecasting mechanisms to drive this core of our business to become more and more successful. At the same time, we focus on scaling the partner program, which allows us to offer additional areas of assortment.

We have also significantly internationalized the partner program to now more than, to now 10 markets. We continue to offer our partners digital services.

Most importantly, Zalando media services, where we have announced a new partnership with P7S1, where we offer tailored, targeting products to advertisers, both in display and, also, in video. And we also continue to offer brands space on our own premises, on the fashion store and on our apps, where they can advertise their products.

And last, but not least, we are investing in fulfillment services. We have launched Fulfilment by Zalando, which has been successfully tested and rolled out to more markets, while we still continue to work an offline integration to also allow our brands to leverage, not only the inventory that they have with us, or in their own B2C warehouses, but also the inventory that they have in their offline retail locations.

And now, as a third dimension, in order to connect brands and consumers more successfully also in the future and in order to continue to scale, we invest heavily into building Europe's digital infrastructure for the fashion industry. The one big pillar of this that you know is technology.

So, we continue to scale our tech team. We have also completed several large scale rebuild projects in our shop systems that allow us to operate the shop at higher speed and -- which increases conversion and customer economics.

And, as you know, we are investing heavily into building a European operations footprint. So we have extended our fulfillment network, not only by large capacity expansions in Poland, in Lahr, but also by really moving into a truly European network, implementing satellites in Italy and Paris, which is now already fulfilling more than 25% of orders from French customers.

And we have also announced that we will build the next satellite warehouse in Sweden to improve our proposition in the Nordic market. So I would now like to come to the financials and to dig into the numbers in a bit more detail.

So, as always, starting with the growth; we had, in Q3, as you will remember, a slightly weaker quarter in terms of growth. So we are very happy that we were able to reaccelerate to a level that is actually beyond our target corridor of 20% to 25%.

So we have been growing, in the fourth quarter, close to 26%, despite a very strong comparison period from 2015. This takes our full-year growth to a level of 23%.

When we look at the different regions, DACH, in the fourth quarter, grew 17.5%; so, again, very healthy growth levels at scale. And rest of Europe continues to operate very nicely at a growth level of about 30%.

I think there are, along those two regions, two initiatives that helped us to drive the growth beyond 25% in the fourth quarter. The first one was Black Friday, which we focused on a bit more than in 2015 and where we really were able to show a perfect execution along all elements of this campaign.

So, in terms of creating attractive offer; having the right communication; having the right level of capacity available. And I think the second driver was really Christmas and gifting, where, as you know, we also put more emphasis on this year.

And we will continue to build on this also in the Q4 of this year. When we look at the drivers behind the growth, as always we separate it into active customer growth and spending per active customer growth.

And here, you see again that we have been able to grow both very important KPIs, pretty much in line; so, around 10%. Active customers is reaching around 20 million; so, really, a significant customer base that we have built over time, and that continues to grow.

At the same time, we were able to significantly increase the number of average orders per active customers through to a level of 3.5. And this increase in frequency is really important to us because it also means we get the customers more frequently to our site.

We also get more data points and more interactions with these customers. At the same time, the basket has been relatively stable which has grown then our GMV per active customer by about 10%.

So we see this continued pattern and this is something that we are very -- that we feel very comfortable with. Now, if we turn over to profitability.

I think, really, what sticks out around 2016 financials is the steep increase in EBIT margin, compared to 2015. So we have been able to increase our margin by 2.3 percentage points, which is, I think, extraordinarily strong.

Also, in the fourth quarter, which already was very strong last year, we were able to slightly increase our margin to a level of now around 9% in the fourth quarter of 2016. When we're looking one level deeper at the two regions, I think DACH and I've said this in the past, but I would like to re-emphasize this, has created a very important proof point, in terms of also our target margin model, by delivering a margin of 12.5% now for the full year.

And a very steep increase by 6 percentage points, which is partly driven by the reversal of the fraud effect, but also driven by many other factors that where the margin benefits from the scale that we have created in the DACH region. However, I also wanted to point out that I think we should also remember and also be willing to reinvest maybe some of this margin to make sure that we can generate continued growth in the DACH region, like we have been able to do over the last years.

Now, when we look at rest of Europe, rest of Europe continues to be operating around breakeven. So, I think this combination of 30% growth and breakeven is also a very attractive financial profile for rest of Europe, where we still have a lot of growth opportunities ahead.

So on the next page, we would look at our P&L in a bit more detail, so let me make a couple of comments on the margin development from this perspective. So first of all, cost of sales increased year over year by around 0.9 percentage points and in the fourth quarter by 0.6 percentage points.

In this context, I would like to point out the strong comparison period in 2015. So, as you will recall, the gross margin in 2015 was very strong and we also made the comment that there might be some areas where we can actually invest into growth also on the gross margin and this is exactly what we have done in 2016.

One example is the cyber days but there are also many other examples along the year where we have been able to use an attractively priced offer to generate growth. The second cost line would then be fulfillment costs which has improved very significantly, 2.6 percentage points for the full year and 1.5 percentage points for the fourth quarter.

This has been the major driver of our margin expansion. Here we have, first of all, the reversal of the payment effects but also overall increased levels of efficiency in how we operate our logistics while we have, at the same time, continued to invest into a better and better proposition.

We have already mentioned the satellite warehouse and the new services that we offer. And then the third big cost line, marketing costs, which continues to improve, I think, very consistently over time, contributing 1.6 percentage points to our margin improvement for the full year.

Here we just repeat again and again, we continue to see operating leverage, we continue to see increases in the absolute level of our marketing spending. But it is growing slower than revenues as we are benefiting from the large brand investments that we have made in the past and we also benefit from increasing our NPS further and further which allows us to more and more decouple also growth from our marketing spending.

Then in terms of admin expenses. This has been an area of investment in the last year in terms of increasing our headcount to be geared for future growth in terms of the tech investments that we did and also in terms of expanding our infrastructure and office space.

So on the operational capital efficiency. On the left hand side, you see the development of our working capital which we have been able to drive down very significantly which, of course, financially is a very positive effect.

The main drivers are continued improvements. I already mentioned some of them with respect to stock turn and how we drive our wholesale business, but also please keep in mind that there are some temporary seasonal swings that we have seen, particularly towards the end of last year with respect to CapEx, €182 million, which is perfectly in line with our guidance and also in terms of the distribution and property, plant and equipment and intangibles, is very much in line with what we communicated at the end of last year.

Then a quick comment on liquidity. You see starting at the end of this [funnel] cash and cash equivalents of €973 million.

If you add the short-term investment, that brings you to a total liquidity of about €1.2 billion. So now let's come to the most interesting section of our presentation which is the outlook for the coming year.

And before we come to the specific financial objectives, I would like to start the presentation on this section by highlighting that we want to continue to focus on gaining market share also in the coming years like we have been in the last years. What we continue to see is really the tremendous potential across our European footprint to benefit from the continued shift of customers from offline into online to leverage our leading position, in terms of our fulfillment proposition, in terms of our brand, in terms of the customer base that we already have filled, and to leverage also our capability to make large scale investments into growing this market.

When we take a step back and take a look at these numbers, we compare here 2013 and 2016 and what you can see is that we have been able to more than double our market share. And so for total Zalando which is the last column, we have been able to take our market share from 0.5% to now more than 1% in 2016.

When we take a look one level deeper at the regions, you see that in rest of Europe we actually were able to expand our market share by a factor of 3 and therefore the DACH region, even though we already had a market share of beyond 1% in 2013, also here we were able to grow very significantly to a level of around 2.5% market share. Yet we continue to see tremendous room for growth and I think that already becomes evident from just looking at these market share numbers.

So, for example, in DACH we already have a share of 2.5%. We don't see any structural reason why we would not be able to grow our share for rest of Europe or for also total Zalando to such a level.

If you look even one level deeper, when you look at the market share that we have for shoes in DACH which is our most mature category because that is how we started, we're actually operating at a market share of more than 5% so that underlines the potential that we have, in terms of realizing high market shares when we really have continued to,when we really have built a strong brand and a strong proposition in the market. So I think from this perspective, it's quite obvious to us that there's leeway to double and potentially triple our Company over the coming years.

In addition to this, this is only looking at the categories that we're operating in, in our current markets, we also see potential going forward to grow our business from extending into new but fashion-related categories and also potentially taking our model into new markets. So this is why we are still very excited about the growth opportunities that we have ahead and this is also why we want to focus our investment into continued growth of our Company.

And, as I mentioned in the first part of the presentation, also going forward our investments will focus on three very important areas. So to the left, you have the consumer side.

So we are Europe's top-of-mind fashion destination for the European consumers. I would like to add here that we have been able to grow our traffic in the fourth quarter of 2016 to a level of 560 million visits in just one quarter.

So this is really an unprecedented level of consumer reach. And then, in turn, we are able to offer our brands in order to give them access to this huge amount of traffic and to build the leading online platform for brands in Europe which, in turn, makes our offer to the consumers again more attractive.

So this growth dynamics of adding consumers which allows us to add brands which again allows us to add consumers, this dynamic is what we want to continue to drive and what we want to continue to invest in based on the strong infrastructure that we build so that allows us to more efficiently and add scale, connect suppliers to consumers. So just to give you some examples of these three areas that we want to invest in, starting with the consumer side.

We'll continue to invest into extending our assortments. We have announced this morning, for example, the acquisition of Kickz which is also in the context of giving us access to their competency that they have in terms of streetwear and in terms of basketball to extend our assortment and our competency in this area.

Also we have commented that we have started to work, for example, with Oysho so the first Inditex brand that we have been able to bring online so I think there's also really huge growth potential from tapping into the large verticals and also having them join our platform and gaining access to the huge consumer base that we have been able to build in Europe. We will invest into personalization, especially on mobile.

We think this can be a very significant driver of conversion and also of loyalty. We'll continue to build our brand, actually our spring/summer 2017 campaign will mainly focus around male customers, which is a segment where we are still underrepresented compared to the penetration that we have in the female customer segment.

And we'll continue to work on step changes and convenience. As I mentioned in the earlier part of the presentation, we still see a lot of leeway to make online shopping for fashion for consumers even more convenient and even easier.

On the supplier side, we'll continue to invest heavily into scaling our partner program to improve stock connectivity through our acquisitions of Tradebyte and Anatwine. We want to scale the digital services that we offer such as ZMS and Fulfillment by Zalando.

And all of this, and this is the third area, of course, takes place on the infrastructure that we continue to invest in to really build the leading infrastructure at scale, both in terms of operations but also in terms of the technology solutions that we offer to our partners. Now, in the light of this direction, and also in the light of the investments that we continue to make, let us now take a closer look at our financial objectives, which continue to follow the mid-term outlook that we have given in the IPO and the years after.

So if we take a step back also on this dimension, in the IPO in 2014 with respect to growth we said that we want to target a multiyear corridor of 20% to 25% growth and, if we look back, I think we can really say that we have been able to deliver on this. We have achieved this corridor in 2014.

We've actually outperformed it in 2015 and now we have bridged the gap in 2016 which brings our CAGR of those three years to more than 27%. So actually significantly beyond this target corridor which makes us very confident to continue to aim for a level of elevated growth of 20% to 25%.

I would like to add that at the scale that we are at now, this means that we will add around €800 million in revenues to our business. So this is a very-very significant chunk and this represents a very significant growth.

As the second dimension, profitability. We have said in the IPO and also in the years after, that extending profitability is not our priority.

We want to focus on growth and want to focus on making the right investments. So we said that we want to deliver a breakeven or solid profitability but not extend the profitability significantly.

Actually, we have seen over the last three years that we were able to do both, to grow in the target corridor and to extend our margin, so we had a very successful year 2014, bringing our margin level to around 3.5%. Repeated that level in 2015 and now again we had a very significant step to a level of 5.9% which was significantly beyond expectations.

For the coming years, we have decided to guide for an adjusted EBIT margin of 5% to 6%. So based on the development of the last year, we are now aiming to deliver our growth corridor on an elevated level of profitability compared to the discussion or compared to the long term guidance we gave in the IPO.

And this level is 5% to 6%. And on the third dimension, free cash flow and working capital and CapEx.

Also here we have been very much in line with what we have given as a long term outlook. So also in 2017 we think we will be able to deliver slightly negative working capital and we aim, again, for a level of CapEx of around €200 million to be able to make the investments that we see in operations and the investment opportunities that we continue to see in software development.

If we take then a closer look at each one of these three dimensions. So revenue growth, 20% to 25%, I think it follows the long-term ambition.

It underlines that our number one priority is to grab market share. It actually means that we outgrow the overall online fashion market by a factor of 2 to 3.

It also means that we would double the Company again over three years, if we continue at this pace. So, I think this is a very ambitious, but very good long term target because it really is the main driver of value creation that we see for the coming years.

And as I mentioned we see growth opportunities across all markets, of course specifically in rest of Europe, as here we are still early in our development and see still a lot of potential to build our brands, to build our customer base and build our infrastructure. On the second dimension with respect to EBIT margin, the 5% to 6%, as we said our number one priority is growth, not to extend margins.

We will continue to invest into our customer proposition and platform initiatives, I'll come to that in more detail in one second, and we want to maintain a healthy balance between investments and sustainable profitability. So, I think with the progress on profitability, has been enormous in 2016, has been a tremendous result and we expect to largely maintain this already elevated level of profitability.

But we also really want to make the conscious decision to reserve leeway to be able to invest into those initiatives that we think will really drive long term growth for our business. Because I know it is a big discussion point I also would like to make some additional comments with respect to the trade off of growth and profitability.

So on the left hand side of this chart you see our guidance, I think a very attractive combination of fast and self funding growth at a very healthy level of margin. Now, as I said in the presentation, in order to maintain this growth, also for the coming years, we want to continue to invest, especially with two horizons.

So the first horizon would be our customer proposition which drives growth in the short to midterm which includes investments into pricing, into attractive price points into our fulfillment infrastructure and additional levels of convenience that drives NPS; but also an elevated level of marketing spending as we continue to be aggressive in building our brand, acquiring new customers, pushing our app and all of these initiatives. And then the second horizon, our platform projects which drive growth and profitability really more for the long-term.

So in this bucket of about 2 percentage points additional invest you find mainly initiatives with respect to long-term technology projects with respect to scaling our partner program, with respect to offline integration, ZMS, so it's Zalando Media Services and Fulfilment by Zalando. So those two brackets together get us to an investment level of about 5 percentage points, so on the right hand side you see if we chose not to make these investments we would be operating at a margin level of around 10%, however you also have to keep in mind that our growth would likely slow down if we chose to realize such a margin.

And I think as a proof point, as I mentioned before, you can also refer back to the DACH, level of DACH profitability and growth that we already have been seeing in 2016. So to sum it up, in order to execute on the growth opportunities that we have had and that we want to execute on and that we think we have to execute on in order to maximize the long-term value of our Company, we want to continue to remain on this growth path and want to continue to make these investments.

Now on the third dimension, I think very briefly, it's a picture that allows us to continue to be around self-funding and that allows us to continue to invest into the big CapEx projects that we have ahead, in order to fuel our growth and build our infrastructure. So, yes, those are the comments I wanted to make for the outlook 2017.

So while we speak ,the spring/summer season has already started. The whole team is really excited about what we can achieve this year and is really determined to, once again, deliver great results and great service to our customers but also great numbers ,of course, to our shareholders.

And, yes, this is what we are already working on and fully involved into. And, yes, with this last comment I would like now to hand over to your questions.

Two questions from me, please. Firstly, can you give us an indication of what percentage of gross sales you've been delivering through the marketplace so far?

And also, in terms of the interest that you've been receiving from brands on the partnership program, how many of them are looking at doing fulfillment through Zalando versus just the pure market model? And then my second question is, you mentioned that you might be willing to expand into new markets.

Is this still within Europe, would you be willing to go outside of Europe and are you thinking about it in terms of organic growth versus acquisitions? Thanks.

Sure. So on your first question, we don't disclose specific levels of partner programs but we have said in the past that it's still in the earlier days, so it's still a single-digit share of our business but it's vastly growing.

The interest of brands is very high, we also see that some brands that are particularly eager and particularly good at managing their business and their partner program can get to pretty significant shares on their business quite quickly, which we feel is very encouraging. With respect to Fulfillment by Zalando, also here we have a lot of interest because I think it really allows many brands to leverage the network that we have been building.

So I think also from an industry perspective it doesn't really make sense for every brand to operate 10, 15 warehouses across Europe. But I think it makes much more sense for a player like us to build this infrastructure and then allow the brands to leverage it.

So I think the interest is very high but also here we are still very early in rolling it out. With respect to new markets and the discussion, if and when we would like to go outside of Europe, I made those comments to remind everyone that we focus a lot on talking about that target market already is quite big but I think we also have additional growth optionality beyond the current scope of our business.

There's nothing in particular that we want to announce now but it was a reminder that we continue to think about these options and I think they could materialize at some point and still form, I think, quite relevant and also quite sizeable growth options that we still have.

Two questions. The first of which is, this time last year you talked about 2016 and 2017 as being the build years and then next year onwards, I think you talked about impact.

Then coming from that, can you just talk about which of your speedboat developments in particular you think move into the impact phase in 2018? And does that also necessarily imply that next year we're going to see a reduction of the percentage investment in customer proposition and platform?

I think the initiatives that are showing most progress also in terms of what I talked about in this presentation, I would like to point out the progress that we have been making in Zalando Media Services, which we think is a very scalable business that can leverage the capabilities and the reach that we have in the core but can also build a business proposition that really goes beyond just using the Zalando reach and building really a data product that we think has very high demand in the market. Our curated shopping offer has developed quite positively, on Zalon.

I think the team has made great progress to really build an attractive offer for our customers, and to also take it beyond Germany. And I think there are also many options that we can use going forward to leverage the stylist base that Zalon has built and integrate that experience even more into the fashion store to make also our core offer more attractive by using these assets that we have created on Zalon.

And then I think Fulfilment by Zalando is one of the big opportunities that we have, in terms of being a valid self-standing business, but also particularly in terms of leveraging it to make the participation and the partner program even more attractive and also economically more attractive for both sides as we think there's great efficiency opportunity in leveraging our fulfilment footprint for brands. In terms of reducing the level of investment in 2018, I think we focus today on the guidance of 2017, but I'm not saying anything new that we, in principal, would like to continue this very growth focus steering of our business also beyond 2017.

You have seen the chart with the market shares and what we have been able to achieve over the last three years. So, of course, in principal we hope to do something similar over the next three years and really build a European tech champion, an online champion, and this is what the team is excited about and this doesn't stop after 2017.

I just wanted to ask on the acquisition today, if you can give us any idea of revenues and how that fits into your guidance and any impact that might have had on the margins for 2017? I also wanted to ask on the conversion rates, so looking at active customers versus site visits, the proportion that a converting continues to deteriorate.

What do you think the issue there is, presumably it's harder to build sales in these new markets, but does that just imply a lot of investment in logistics? Any thoughts around that would be appreciated.

Yes, so on your first question, the Kickz acquisition that we announced this morning, I think it's very exciting and we're very eager to see how it works because it's the first time that we acquired a company that has particular knowledge in one very attractive niche. So the street wear basketball market where they have also great access to very interesting products, and so we are very excited about the acquisition.

I think in terms of having a substantial impact on our growth numbers and EBIT numbers, there the scope of the business is not so significant that it would have an impact on the Group numbers that we have to break out, or that we are particularly concerned about. In terms of your second question, with respect to conversion rate.

So actually the conversion rate, year over year, when you look at 2015, 2016 has improved. So also here we see continued progress that we are making in terms of improving onsite, but also building a more loyal customer base that converts more frequently.

So there actually, I think our conversion rate, already in 2015, was on the pretty high level when you compare to benchmarks. So, I think we are very happy with the progress we have been making.

Q4 has been particularly strong in terms of visits, which I think is a great sign actually because it shows that we have been really able to boost visits through Black Friday, but also across the entire quarter, and also with respect to our Christmas campaign. So getting more traffic, I think it's a great time because long term, if you want to acquire new customers, the first thing you have to do is to get them to the site and then over time convince them to convert.

So we are very happy about these dynamics actually.

I have two questions. The first one relates to what you spoke about in terms of margin in the DACH region, and maybe a need to reinvest some of the margin to drive growth, and how we should view this in relation to total Group margin, assuming you would stay on a flat margin 2017 compared to 2016.

Would that imply that rest of your region would produce a margin above the flat level that we've seen? That's the first question.

And then on the marketing budget, in 2016 you commented throughout the year that you targeted a budget in absolute terms of around €400 million, it actually ended up a bit below that, around €375 million. And maybe if you could provide a similar comment here on your planned marketing spend for 2017?

Thank you.

Sure. So on your first question with respect to that margin and DACH.

So as you know we don't give particular guidance on a segment level, but I just wanted to point out that we have seen such tremendous progress in the margin in DACH that I just wanted to alert everybody, also including ourselves, that we should remain entrepreneurial also in how we steer DACH. So it is our most mature region, that's for sure, and it will also be our most profitable region for a long time because rest of Europe is still operating around breakeven.

But to me that doesn't mean that the margin always has to go up in DACH, I think there are also scenarios where we can reinvest in a good way into continued growth because also in DACH when we talked about the market share, it's a 2.5% market share that's already very significant. But we still see it going higher, and this is why I wanted to make sure that you know that we also in DACH are prepared to make investments, and I think there are several areas where we think investments could pay off.

This is an investment that we could balance with the margin in rest of Europe, but I am not sure if we always have to balance it with the margin in rest of Europe. So to some extent I would also like to think about the two, as two fairly independent businesses that we can steer, and each one we should steer in the way that maximizes value.

And actually it goes even one level deeper because, obviously, we also steer on the market level, and try to make sure that for each market, and for each category we steer it in a way that it maximizes long-term value, and that could also include reinvestments, for example, in DACH. On your second question, the marketing budget.

So you're right, we used to numbers of around €400 million. To me €375 million is close enough to €400 million given that we are still growing so fast, and it's difficult, and, to really make a precise forecast especially when you want to remain very agile in the way that you steer your commercial investment.

So I think for 2017, what you can expect is that the absolute level of spending will continue to go up, like it has in the last years, but that as a percent of sales it will continue to come down. And over the course of the year we will see to what extent, but I think in general that remains the direction.

When you have talked throughout the presentation today, you've mentioned the phrase, elevated levels of profitability, a few times, and it may just be a translation thing going on here. But by elevated, do you mean high rather than unsustainably high, when talking about the elevated levels of profitability for this year, and looking into next year?

And then secondly, the gross margin movement in the year, could you give us a bit more explanation about the moving parts within that? So as your marketplace, obviously increasing, there should be some benefits there, if you could just give us some idea of the moving parts within that, please?

Thanks.

Sure, so with respect to the first question on what elevated means. So what I wanted to say is that clearly the level of margin in 2016 went beyond what we expected when we guided for the year, and it went significantly beyond what we promised during the IPO.

So this is what I mean with elevated, and maybe another word for it would be to say high. And I think it is a pretty high margin, especially in combination with the growth corridor that we have been delivering, and that we want to deliver going forward.

And so, in principle, I think definitely this is a level of margin that we can deliver. We have done it last year and there's nothing -- there was nothing strange with the margin last year.

And I've also said that our long-term target model actually yields the potential of an even higher margin. But I think you always have to acknowledge that we want to do this margin in combination with a continued and very high growth and this is what I wanted to describe.

In terms of gross margin; of course, there are many aspects that go into the gross margin. So one big point is how we negotiate terms with our suppliers and how we see continued leverage in this over the next years.

A second big component is how we do seasonal discounting. And how we make sure that we sell through our inventory and how we drive commercial events, like Black Friday and how we make an attractive offer to our customers.

And then, of course, a third element is partner program, which has essentially a 100% gross margin. So on partner program the dynamics is that we only realize the commission.

So we don't realize the full value of the product, but only a smaller portion of it. But that is our revenue and that is also to 100% our gross margin.

So as we scale the partner program, you can expect that to have a positive effect on the gross margin. But when you look at the development, as I pointed out, you should also keep in mind that 2015 already was a very strong level of gross margin.

And it was actually already in the corridor for our long-term target model. So I think it was a good decision to also make some reinvestments in terms of gross margin in 2016.

First of all, it was just to follow up on Kickz. Just to clarify, is Kickz an acquisition where you're not buying market share, it's more about you're buying some capabilities that you feel you don't have?

And if that's the case, why can't you build those capabilities organically? And then second, just on the margin in DACH.

Obviously well ahead of the 10% target that you've talked about as the long term, and the increasing partner programs, etc. Should we start to think about the long-term margin being above 10% as a target?

So, on your first question with respect to Kickz; so, yes, we are, of course, also buying market share, but I think in a not significant degree, compared to our overall size. So the main point around the acquisition is really to buy capabilities and experience in one specific segment, being streetwear and basketball.

Of course, we can also build that organically. I just think it takes longer.

So if we find a great company, with a team that we like, and that has a great capability, we have the cash to make such acquisitions in order to speed up our progress and to speed up our growth. Then on your second question with respect to DACH.

So, yes, you're right, I think the DACH margin is a very important proof point around also our target margin that we discussed during the IPO. And I remember that some people were very curious if this really would be possible with all the return rates and all these things.

And so I think it's a great sign that in DACH we have shown that we are able to actually exceed that level of margin, while we are still growing very healthily in this region. So, I think that's a very positive data point.

And it also indicates that, in a market like DACH that I think for us also structurally is a strong market because people buy on price, they tend to buy higher price points. Obviously we have been able to achieve a level that goes beyond our target margin model, which I think also is very positive for our long term outlook.

Two questions from my side. First about Kickz again.

You speak about the capabilities. Do they have special connections to sports brands, or does it have connection to certain customer base that you want to address?

Maybe a bit more clarity here. And then do you want to integrate the Kickz online shop into the Zalando platform or will they remain independent?

And then, of course, the bigger picture is can we expect more M&A in this direction, i.e., adding a retailer with offline stores even? And the second topic, a quick one on working capital.

It's negative as a percent of sales and the growing relevance of the non wholesale activities in my view should support that. So is there any particular reason why you say working capital should be flat going forward?

Yes, so let me comment on your first question on Kickz and then I would like to hand over the second question on working capital to Jan. So on Kickz, the main asset that I think they have is really that they have figured out to build a fan base around the segment that they operate in.

And also to build very strong supplier relationships and access to very attractive inventory. And this is, I think, what makes this business attractive to us and we think also attractive to the customer in the long term.

We expect them to operate very independently. Even though, of course, there are some opportunities that we might have as a Group to drive the business even stronger.

But in principle we look at it as an independent company that we would give, in terms also of our platform strategy, that we would give opportunities to also drive their business on the Zalando platform. So to bring their offer on our platform.

In terms of doing more M&A. So we have been doing selected M&A transactions in the last years.

And we think it has helped us to build the Company even stronger. So, I definitely think we'll continue with these activities.

Although I think to acquire retailers just because they have offline stores, I don't think that this is very attractive to us. We have said in that past the we think of line will also play an important role in the digital world.

But there we are more interested to partner with existing offline players and allow them to integrate into our platform. It's not our strategy to really operate large store networks ourselves.

So in terms of the Kickz acquisition, the primary focus was not to acquire somebody who has physical stores, the primary focus was to acquire someone who has specific capabilities in a segment that we find very attractive.

Very clear.

Yes, with regards to working capital development it's correct that some of the non wholesale activities might be beneficial for the working capital development. But also please keep in mind that we always said in the past that we focus on a neutral working capital, slightly negative for the 2017 as we look on it as a portfolio approach in a way, so always looking for opportunities to optimize our working capital in general.

But also opportunities to reinvest into the wholesale but also other initiatives. So it's, I guess we give out the guidance for a neutral working capital and for 2017 a slightly negative one that, and also the portfolio approach still remains intact.

Two very short questions from me. Firstly, could you just remind us about the mix you're expecting over the mid-term from partner program as a percentage of GMV?

And secondly, is there any color you can give on how January and February have trended so far, and perhaps some of your thoughts going into spring/summer.

Yes, so on your first question, mix partner program. Ultimately, of course, the brands decide themselves how much business they want to drive through which mechanism and the customers decide which product they want to buy.

So ultimately we feel like we want to lay the groundwork for both wholesale and partner program and then customers and brands decide which model gets which share. But in principle when I look also at those brands that have been very successful in driving their business through partner program on our platform, I think the share can be somewhere between 20% and 30% of GMV.

So I think it can be a very significant part of our business in the future. With respect to your second question, I think it's too early to comment on how the business is trending in 2017.

With respect to the spring/summer season, well I think we're all looking forward to summer, to some extent. But also because I think it can be a very interesting season for us.

So in terms of the campaigns we have lined up, in terms of the assortment that we have created, in terms of the also delivery innovation that we want to offer, in terms of scaling, for example, the local satellite in France. So I think there are many initiatives where we are, of course, very eager to see how they play out and I think we go with very positive spirits into the year and also into the spring/summer season.

Just when looking at the drivers of revenue growth across 2016, customer acquisition slowed from 22% in 2015 to 11% and this was offset by strong 13% growth in orders per customer. So the balance of growth looks to have shifted more towards greater share of customer wallet as opposed to adding new customers.

I just wondered if you can give a bit more detail as to why customer acquisition has slowed to 11%, given I would have expected capturing new customers is still your biggest long-term growth driver and route to take more market share? And then when we think about your revenue guidance for 2017, should we expect the same shape of revenue growth with new customers growing at low teens and stronger growth in order frequency?

Or should we expect a reacceleration in customer growth?

Well I think what we have seen over the last, actually I think all the quarters since we do this earnings call, is a very balanced picture between growth of active customers and spending per active customer growth. Of course, it varies a bit by quarter but in general I think you have seen always that both growth drivers have a similar magnitude in terms of contributing to our growth.

Actually in the fourth quarter, particularly of 2016, the active customers that we were able to add were significantly higher than in the quarters before. So we added 700,000 active customers in Q4 alone, driven by the Christmas business, by Black Friday, but also overall by a strong fourth quarter.

So from that point of view I think I would characterize this slightly differently. Of course, when you compare these numbers to 2015, you know 2015 was a remarkable year of growth.

I think in Q4 in 2015 we grew more than 30%. So, of course, when you compare the growth drivers, all of them are stronger in 2015.

But in principle we have the dynamic that we are able to do both, growing the active customer base and growing their average spending.

Just two questions from me. Firstly, could you tell us what your revenue growth would have been in 2016 if you had fully recognized partner program sales?

And secondly, do you see 2017 as a near-term peak for CapEx, given that you're building both the Lahr and opponent satellites, or should we have seen that CapEx would be 4% to 5% of sales going forwards?

Yes I will take the first question and then I would hand over to Jan for the question on CapEx. So with respect to the balance of revenue growth and GMV growth, yes, we don't break out GMV growth but we limit our disclosure to revenue growth.

But as we have said before, the partner program is growing in GMV share.

Yes. And with regard to CapEx, I guess as we already also pointed out last year, we're going through a phase of elevated CapEx levels of around 5-plus-%.

Still in the longer term we expect somewhat to level that number down to around 2% to 3% that remains intact. Now for 2017 we remain roughly the number we've seen in 2016, based on some of the logistic projects we actually speeded up and some of the new initiatives Rubin pointed out during the presentation.

But it does not change our view on the longer-term levels.

Two questions from my side. First of all, you mentioned the first business with Inditex; maybe an additional word on how you see that business developing and at what level and what stage you are here?

And secondly, again on the M&A side, the Kickz acquisition, I think in previous calls and comments you said that you were looking at adjacent categories like lingerie or jewelry or what have you, or cosmetics. So shall we expect or shall we believe that in order to get more expertise in these categories you also consider acquisitions to gain additional expertise on those fronts?

So on your first question with respect to Inditex, we have said in the past that we think one of the big opportunities that we have for long-term growth is to also start to work with the big verticals. And obviously Inditex is a huge vertical and we are very happy that we are able to start our cooperation with them by focusing on Oysho, which is one of their brands.

And we are very eager to see how that works but we are very excited about it because there are some very strong verticals that resonate really well with our customer base and where we think we can really create value for both customers and the verticals to bring them together on our platform. So that is something we are very excited about.

With respect to Kickz and what that means for adjacent categories and moving into them with M&A, I think that is an option that we clearly have. So that could be a potential way to launch new categories.

On the other hand, of course, we always want to balance that with the opportunities that we have to build these new categories in house. We have shown in the past that we have been very successful in extending our range of categories organically.

And so, I think, there we have really two options and we will, for each opportunity figure out which one is the better option to provide a great offer to the customer and also to make it for us a very profitable and value creating step.

I have a question regarding the costs of the IT hubs that were expanded last year and found in Europe. Are the costs solely charged against the European base or, given the nature of the business that they're doing, are they charged at the center and then apportioned across the sales base of Zalando?

And my second question regards the share based compensation; in Q4 there was a reversal effect. Can you give us some of the background to what's happening there, please?

Yes, so I take the first one with regards to the costs of the respective tech hubs. We take the typical approach of allocating the respective costs to the products the respective engineers are working on and then those costs are actually allocated A, to the cost centers and then B, to the respective businesses.

So it's not an overall approach simply allocating to everybody on a specific revenue or cost basis, but literally pinpointing the specific areas, the respective tech guys are working on, in order to have the most accurate allocation of the cost bases.

With respect to your second question with respect to share based compensation, I'm not quite sure which effect you're referring to. According to my knowledge, there has not been any significant change in how we account for share based compensation.

Okay, then I will look at that again. I had the impression that there was a larger sum allocated at the nine months than was for full year, there was some sort of reversal in the fourth quarter.

But I will check that again if that's not the case.

Yes please; if you could check it and then get back to us, we can answer it separately.

Just going back to the profitability by region. I just wondered if you can say whether in the medium to long term you think there are any structural reasons why profitability should be lower in the rest of Europe compared to the DACH region.

Should we be expecting those margins to converge in the medium to long term? And second would be, it would be really helpful if you could give a comment on the UK market.

I know you've been much more aggressive in the past year, in terms of advertising and marketing. How successful do you think you've been in attracting new customers in the UK and increasing spend per customer?

Thanks very much.

Sure. So in terms of profitability by region, we don't see any structural reason why the margin profiles should be dramatically different.

I think the main driver of margin difference that we have right now is that we are still growing faster in the rest of Europe, that we are still earlier in investing into our brand and building our infrastructure and building our customer base. So that is the main reason for the difference in margin that we see right now.

However, I also cannot promise that they will be exactly the same, so of course, in DACH we have the advantage of great scale, we have the advantage of higher purchasing power per consumer. We have the disadvantage of high return rates.

So it may be that also long term, DACH margins are slightly higher than in rest of Europe but I [don't] see them as being dramatically different. With respect to UK, so it has been, as you know, a market that we used to focus very little on, where we have increased our focus, however, where we also encounter some headwinds from exchange rates changes after the Brexit decision and also, I think, some long-term uncertainty with respect to what it means to operate in the UK and to import goods into the UK.

So, I think that makes us a big more cautious on this market. However, we see that, in principle, customer reaction has been positive to our offer and in principle we feel comfortable to find levers in terms of how to extend our reach in the UK.

Well, first of all, could you remind us of the actual growth investments by the definition which you used for your outlook for 2017, that you actually incurred in 2016? Then, can you update us a bit on the progress of your private label initiatives.

Did private label continue to gain share? What are your plans regarding further private labels or extending the range here?

And lastly, probably, what kind of benefits do you expect in terms of efficiency improvements in the, after the ramp up now of the Lahr warehouse in 2017?

Sure. So, in terms of growth investments, I think you will recall also from the last year's presentation that we had a similar structure in terms of talking about the level of investment that we have and how that trades off with additional growth.

And that we, also in this year, want to continue to invest a level of around 5 percentage points in terms of margin. Of course, this is an approximation, so there's no exact way to figure out this level of investment.

But we feel very comfortable with the order of magnitude of the numbers that we have provided. That relates to many investment areas that we already have been working on in 2016 and where we potentially want to increase our investment levels to the extent that we see these investments really are paying off.

In terms of private label share, the share is relatively stable. As we have commented in the past, our strategy is not to necessarily drive private label share up, but really to continue to introduce more and more brands to our platform.

We just discussed our approach to verticals and, of course, when you include such high performing brands, you will create more and more competition also for your private brands. So this means that our strategy, in terms of extending our assortment, means that, I think, we are limited in the way that we can grow our private label share.

However, the private label business continues to grow in line with the overall business and continues to be a very viable part of our Company and our proposition. With respect to Lahr, so of course we will see efficiency improvements in Lahr as the location ramps up.

It will also be our most automated location, in terms of having a very large back sorter built into the facility, so long term it should show very good operational KPIs. On the other hand, of course, we will then also have ramp-up costs for our new facilities right now in Paris, then later this year in Poland, and then following that, in Sweden.

So, as we continue to extend our footprint, one warehouse gets more efficient but of course, we also add, again, the next one right away.

Two quick questions, if I may, please? The first one is, apologies if I missed it, but can you give some color on the KPIs by region?

I know that you don't disclose specifically, but just any color you could provide would be useful. In particular, what sort of active customer growth you're seeing in DACH?

Has this flattened off now? And then my second question, I think Italy has also been one of your focus markets in rest of Europe.

One of your competitors is, obviously online competitors rather than mass market, has obviously seen growth slow there quite considerably recently. If you could just comment on progress in Italy, that would be really helpful, please?

So as you know, we are a bit reluctant to disclose a lot of KPIs by region. But, of course, what we have commented on is, that as you know, return rates differ significantly between markets.

So we have very high return rates in DACH. We have lower return rates, for example, in Southern Europe.

We have significant differences, in terms of discount rates, so customers in different markets tend to react differently to discounting where we have also the DACH region probably being less heavy to discounting, whereas some other customers really jump on red-price opportunities. We have differences in item values because also the mix of categories are different by markets.

For example, Poland has a very high premium category share. The same is true for the Nordics.

So there are -- I think there are numerous differences and really, each market has its own economics. But as I also said before, I think we see that typically every market has some disadvantages, some advantages and ultimately, I think they can get to similar levels of profitability because ultimately, the business model is the same in all of these markets.

With respect to Italy, it is a market where we have been doing a lot of --- bringing a lot of focus on because it is a very large market and we see that we have a lot of traction. We see that we also have a very high online market share, just that the online market in itself is not yet so developed.

So we are doing a lot of initiatives to really convince Italian consumers to spend more time and more of their shopping online. One of the big initiatives has been the satellite warehouse, which has yielded great results in terms of operating efficiency, but also in terms of customer feedback.

We have been doing a lot of targeted campaigns in Italy to really explain the customers, the benefits of shopping online. So Italy will continue to be a market that we put a lot of emphasis on because we really believe in the long-term growth prospects that we have in this market.

Thank you very much, ladies and gentlemen. With that, we are closing the call for today.

Please note that the call a recording of the call, is available on our website. Thank you very much and goodbye.