Zalando SE (ZAL) Earnings Call Transcript & Summary

Good morning to everyone. I would like to welcome you from our headquarters in Berlin. And on behalf of the entire Executive Board, thank you for joining us. This year, on March 13, we presented our strategy update to the capital market, and we are talking about this with you today, our history, our future and our opportunities. We are convinced that the strengths that have made us successful so far will also make us successful in the future. But first, there is a question, how did we get here? Now David and I founded Zalando about 16 years ago, and this is what the Zalando web shop looked like, back then, 16 years ago. In Germany, focused on shoes and free returns. We pack parcels ourselves in the beginning and sent them -- mailed them from the basement of Berlin apartment. And now on the right-hand side, you see a Europe-wide mobile e-commerce platform with around 50 million customers, more than 6,000 different fashion and lifestyle brands, and with the largest logistics network for fashion and lifestyle in Europe. Zalando's success has never been the result of one single product, one single innovation or one single algorithm. Success has always been anchored in our corporate culture, culture with an entrepreneurial spirit that remains humble and is always open to new ideas. And then, as now, we drive ourselves to create even better experiences for our customers and partners. And we want to say thank you to our more than 15,000 employees for this. Thank you. Yes, we have basically created the online meeting place for customers and desirable lifestyle brands in Europe. And we are proud of this. Our brands range from global heroes like Nike to local heroes like Lacoste in France and beauty brands like Lancôme. And this is the multi-brand environment that customers want to shop in. And we can see this when we look at the figures, 61% of consumers say that this is their preferred way of buying fashion. And when we look at the order history of our customers, we also see that, on average, 15 different brands end up in their shopping basket. So brands are what fashion and lifestyle are all about today and in the future. And we are clearly leading in Europe when it comes to this. We are the most visited multi-brand destination for fashion, more than 2.5x as often as our closest competitor. We are the most downloaded app more than 3x as often as the closest competitor. And we have the most active customers, around 50 million, more than twice as many as our closest competitors. And the customers spend an average of EUR 300 with us every year. And since our IPO in 2014, we've grown twice as fast as the online fashion trade. It's clear that our strategy has more than paid off. We have accelerated our growth through partnerships with brands and the figures speak for themselves. The number of our active customers has risen by 60% since 2019. The number of people who spend more than EUR 500 per year has almost doubled, and sales through our partner program have increased more than fivefold. But let's now look ahead to the year 2023. 2023 was a challenging time for online fashion retail characterized by inflation and pressure on consumer spending. The weak consumption climate could be seen when you looked at the gross volume of goods, it amounted to EUR 14.6 billion, a decrease of 1.1% over the previous year turnover amounted to EUR 10.1 billion, a minus of 1.9%. Our focus was on our profitability deliberately. So we made strong gains in this area. Adjusted EBIT rose from EUR 185 million to EUR 350 million. At the end of 2023, we achieved a particularly high level of liquidity at EUR 2.5 billion. And we have the opportunity of investing in strategically important areas because of this. And thanks to our financial discipline and our focus on growth, profitable growth, we were able to achieve this good result. The Management and Supervisory Board proposed that Zalando SE net retained profits for the 2023 financial year be carried forward in full to new account. We are a growth company and continue to invest in the future. So we, therefore, plan to not distribute a dividend. We want to increase profitability for you, our shareholders and for the company. Now let's look at the figures from the partner business. During the fourth quarter of 2023, it accounted for 39% of the fashion stores gross merchandise volume. And the share of items shipped by Zalando Fulfillment Solutions rose from 58% to 62%. Zalando Fulfillment Solutions generated sales of more than EUR 700 million with more than 1,000 partners. And we also enabled our partners to benefit from our comprehensive marketing offering. The turnover of Zalando marketing services amounted to around EUR 200 million last year.

As Robert has described, Zalando has developed from an idea into a high-performance e-commerce engine within 16 years. And now we can put the power of this engine on the road to take the next phase of growth. In 2019, our goal was to create a platform. We did so successfully indeed. And our new goal is to build an ecosystem for fashion and lifestyle. Now what will that look like in the future? Maybe you can just check it out for yourself. Before we talk about our new ecosystem strategy, let's just take a look at the most important social changes that are pertinent to our industry. We're observing several major trends that would shape our industry. And this is something that has always been important to Zalando to do so. So there are various trends, as I said. Firstly, purchasing power is shifting towards IT savvy generations. By 2028, 45% of the population will belong to the Generation Z or to Millennials. Secondly, generative artificial intelligence will vertically change the way customers interact with fashion and lifestyle, making it more interactive and making it more personalized. Third trend, regulatory authorities and consumers are striving for an ever smaller ecological footprint. And all these changes in combination with complexity and fragmentation of Europe, putting pressure on brands and retailers indeed. They make strong partnerships across Europe, increasingly important to be able to be competitive. Our ability to recognize trends early and act decisively positions us well to tackle the challenges that I mentioned. And we've got a clear vision. We are creating the pan-European ecosystem profession and Lifestyle e-commerce, which is based on our 2 growth areas, namely B2C and B2B. And how do we want to do that? In the end customer business that is in the B2C area, we will continue to serve all customers who are looking for fashion. In the past, when you did online shopping, it was mainly about a transaction. If you just look for pair of Levi's jeans in blue, you choose your size, and then you shop and basket and then pay. And these transactions, we have set standards for e-commerce when it comes to payment and delivery options. We will continue to work on this, and we'll continuously improve it. Today, many customers also want inspiration while they shop. And when we talk about inspiration, what we mean is that things become more entertaining, more personal. This is why we're going to one step further with our new ecosystem. We're going to expand our lifestyle offering. We are going to make the shopping experience more inspiring and more entertaining, and we are focusing on quality as a feature of differentiation. Now when it comes to our B2B business, we will also expand our offering. For coverage customers, we're opening up our logistics, our software and service infrastructure. This will enable brand partners and retailers to strengthen their online business in Europe, both on the Zalando platform, but also outside of it. And the move from the platform model to an e-commerce ecosystem. This shift enables us to serve an even larger part of the online fashion and lifestyle market. In addition, a strong ecosystem helps us to accelerate the sustainable transformation in the industry. We are convinced that the fashion industry needs to change, it will be a common goal to stop causing climate damaging emissions and we have defined this as our goal by 2040 for our own brands and by 2050 for the entire platform, but we not only want to improve our own carbon footprint, we want to help our customers to make better informed decisions. We want to help our brand partners to utilize their warehouse more efficiently reduce over production and promote the circular economy. Now let's talk about the B2C business, which is our business with end customers, with end users. Our 3 growth drivers in the B2C business are; firstly, we differentiate ourselves through qualities; secondly, we are expanding our fashion and lifestyle offering; and thirdly, we increase customer loyalty through inspiration and entertainment that go beyond the mere digital transaction. Now let's take a closer look at all those 3 points. First, we differentiate ourselves through quality. What does that mean? Let me give you 3 examples for that. First example is our product range. We, already, today offer a high-quality range with global brands like Adidas, lululemon, HOKA online, Lancôme, Sony and we're constantly working to further increase the quality of our range of products. We also, in tune to that, want to give even greater consideration to diversity and inclusion in our range. We are planning further collections in the area of adaptive fashion for customers with disabilities. Second example, we're continuing to work on the use of modern technology and artificial intelligence. Around 60% of all items offered on Zalando are already provided with a size recommendation. For example, we continue to invest in smooth logistics processes to improve the shopping experiences with localized delivery options, for instance. Now, let's take a look at the second point, the expansion of the fashion and lifestyle offering. What does that entail. Our customers have very different needs depending on which phase of life they are currently in. If I just think about myself, for instance, I, for once, I'm interested in fashion, and I need outfits for occasions like today. And secondly, I also do a lot of sport and I invest lot more in sports outfits, then my fitness level would suggest. But then again, at the same time, I have children and each family member needs entirely different things. And our aim, therefore, is to understand our customers' needs and their lifestyles better because that harbors a huge potential for us. The average European household spends EUR 13,000 per year on consumer goods. A large proportion of that is spent on lifestyle products, which we already cover like fashion, beauty, accessories, sports, children -- kids fashion, and we want to further expand these offerings. This includes our new sport fashion world and the kids and family fashion world, for instance. Let's take a look at the third growth driver, which I mentioned as being inspiration and entertainment. We have recently been hearing more and more from customers, from all of Europe and from all age groups that they say things like, oh, I'm overwhelmed with information and choice when shopping online or they say, I like advice in personalization. I need more of it or they say online shopping is just too boring. It's really not entertaining. There is no inspiration there. Our customers, well, basically put it in a nutshell for us. We need to bring inspiration, entertainment and e-commerce to [indiscernible] and then customize all that to the individual customers' wishes, needs. This is, if you will, the holy grail of online shopping, and we are in an excellent position to improve our customers' lives here. We see a first success in this field, Stories on Zalando is an example, where we integrate content such as storage and videos into a digital customer experience. Since the launch of Stories on Zalando, 5 million people have already interacted with this content. And second example is the Zalando Assistant, which is based on artificial intelligence. Customers can ask the Zalando Assistant, what I should wear, for instance, for a particular occasion, and we already have 0.5 million users with whom we engage in a dialogue through this channel. Now let's move on after B2C to our B2B business, which is our business with brand partners and retailers. Let's take a look at Europe from a brand perspective. Imagine you are a U.S. brand and you want to conquer the European consumer market. What do you see? You see a market with volume of EUR 450 billion on fashion and lifestyle with a growing share in online shopping. That sounds good, right? But suddenly, you realize how challenging all that is, you're confronted with more than 40 countries. There are 30 languages, 30 currencies, many different payment methods, different delivery and returns preferences on the barge of consumables and many different sales channels, in addition to all that. So that's what reality looks like. Europe is often being perceived as a single large market like U.S. or China. But in reality, Europe is rather a combination of many. In these unique markets, this makes it a major challenge for brands to be successful in the digital European world. But we've got an answer to all that, which is the Zalando e-commerce operating system abbreviated into ZEOS. ZEOS means that we are creating an operating system for brands and retailers who not only want to sell on Zalando, but also outside of Zalando. This system includes, firstly, our European logistics network, network with 12 logistics centers and 20 return centers and connections to more than 40 local delivery services. It was developed with view to service quality, cost efficiency and sustainable processes and offers a seamless convenience that's Zalando customers have already come to be accustomed to [indiscernible] software with the technology for database control on different platforms such as inventory and prices. Thirdly, network includes services from third-party providers such as content production. 27 partners use ZEOS in 11 markets, and we currently operate 6 different channels by [indiscernible]. The interest of brands in these solutions is indeed very strong. And ZEOS is already a profitable business. Last year, the B2B sales already totaled almost EUR 1 billion last year. That's a very strong and sustainable growth driver for the future. Let's now take a look at our long-term opportunities. We see huge market opportunities for Zalando Europe. It's got a huge potential for brands and retailers who want to sell it across the entire region with a population of more than 600 million people who, as already mentioned, spent around EUR 450 billion on fashion and lifestyle. Still only 28% of fashion and lifestyle sales are currently made online. But we expect that the online penetration in the European fashion world is going to increase compared to 31% in China, 39% in the U.S., it is at a relatively lower level. Online fashion retail in Europe is currently forecast to grow by 5% annually. If you look at the penetration rate of the fashion industry in Europe compared to China or the U.S., the market is still a long way from catching up, but we will get there. With our ecosystem strategy, our goal now is to cover 15% or more of the market in the long term via B2C and B2B. And then again, we have the economies of scale and the capabilities to achieve our goal. Our brand is well known throughout Europe. We have around 50 million active customers. We have built the best relationships with the best brands in the world. We understand the value of brands, and that's why brands can trust us and do trust us. Sustainability is part of our core business. Our own logistics network is the largest for fashion and lifestyle in Europe with 12 locations in [ 25 ] countries, and we have already invested more than EUR 1 billion in this network. In the area of technology and data, we have a team of more than 2,000 software developers and data analysts. And all these skills are unique. They are very difficult to be copied, which is why we are convinced that these skills will help us to achieve our goal. Let's move on to talk about the first quarter of 2024. 2024 is the first year of our ecosystem strategy. We have started into the new year with a lot of momentum. We grew in the first quarter and increased our profitability. The gross merchandise volume rose by 1.3% on a year-to-year basis to EUR 3.3 billion in the first quarter. Sales totaled EUR 2.2 billion compared to EUR 2.3 billion in the same period of the previous year. You see that the GMV rose, which has something to do with the increase of the partnership business. Sales only includes the commissions on the sales price. The adjusted earnings before interest in taxes rose to EUR 28.3 million in the first quarter. This corresponds to an adjusted EBIT margin of 1.3% since 1st of January 2024. We have been reporting in the B2C and B2B segments in line with our ecosystem strategy. Further information on this can be found in the quarterly reporting on our web site. Let's now turn to the outlook. In the medium term until 2028, our goal is to grow again. We expect to achieve gross merchandise volume growth of 5% to 10% per year. And profitability will be between 6% and 8%. This is the adjusted EBIT range. Let's take a look at the outlook for 2024. This year, we expect an increase in gross merchandise volume and sales growth of between 0% and 5% compared to 2023. We expect an operating profit. We can also refer to it as an adjusted EBIT of between EUR 380 million and EUR 450 million. We are convinced, we will return to a strong growth path, path we will continue growing and invest in the future.

Dear shareholders, we are optimistic about the future. Online fashion retail will continue to grow, and we are well positioned to benefit from this trend. To conclude, let me summarize our 3 most important messages of the day. Firstly, we are building the strongest ecosystem for fashion and lifestyle. Second, in our B2C business, we impressed with quality. This is the customer service that goes beyond the transaction. And secondly, in our B2C business, we impressed with quality, our fashion and lifestyle range. In our B2B business, we open up our logistics and help our partners to simply reach out to their customers, our customers all over Europe. And thirdly, our commercial opportunities are enormous. We have a clear path to return to strong growth. To our shareholders, we want to thank you for your interest. We are looking forward to continuing to shape the future of online... [Statements in English on this transcript were spoken by an interpreter present on the live call.]