Good morning, ladies and gentlemen, and thank you for joining us on our conference call today to review the Q2 2018. As always, with me are Ruben Ritter, one of our
3 co CEOs responsible for the Zalando Fashion Store as well as Pervit Haderer, our SVP, Finance. 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, let me now turn the call over to Ruben.
Yes, thank you and good morning also from my side. Thank you for joining our earnings call. As always, the call has 4 parts. We will start with the business highlights. We'll then talk about our financials and then about our guidance before we turn over to your questions.
So let me start with the result highlights of the Q2. I think in the Q2, we once again achieved a really strong revenue growth in line with our target corridor. Revenues increased by about 21% to EUR 1.3 1,000,000,000. I think we were able to execute well in a fairly challenging market environment. We saw the fashion market actually declining in the Q2.
So I think in that context, we really continued to significantly outperform the market overall and continue to gain market share as it is in line with our long term growth strategy. This development was really supported by another quarter of strong customer KPIs. Order volumes grew massively by about 30% to 29,000,000 orders, which is very clearly a new all time high. Also visits, we saw growing really strongly by about 23% to more than 730,000,000 visits just in 1 quarter. We will have a chance later to dive deeper into active customer numbers and frequency numbers, but I think we can really say that the growth engine is still intact and running well.
When you look at these numbers, that also already suggests that we had a negative development in the basket. Also that is something we'll have in the presentation a little bit later. If we turn to profitability, we saw very solid growth year over year. Adjusted EBIT grew to €94,000,000 above last year's levels of €82,000,000 And we also saw that the program continues to be one of the key drivers of our growth, which reached now for the first time 10% of GMV. And this is actually something I would like to go into a bit more detail on because I think it's really important, has been one of the main themes also of our last calls that we want to really focus on bringing the platform and bringing the Partner Program to life.
So now it's at 10%. We see that really the top partners have been growing quite strongly because we gave them more and more opportunities to trade on our platform, so to onboard more merchandise even faster and therefore also take better trading decisions and therefore driving growth. We put a special emphasis on taking the Partner Program to a more international setting. In the Q2 alone, we created 65 new combinations of brands and countries, and we were able to launch Poland. So now the Partner Program is live in 14 markets.
Also the services that we drive around the Partner Program were able to add a lot of value, supporting our partners and driving their growth. So for example, Zalando Fulfillment Services is now live in 13 in all 13 countries of the European Unions that we operate in, and we were able to add about 10 brands to the program and also have a strong pipeline to continue to grow it in the second half of this year. In general, we also, of course, invested a lot in driving our customer proposition. We increased the reach of our platform by adding Ireland and Czech Republic. So the first two new markets for a number of years, adding 15,000,000 potential new customers to our reach.
We further enhanced the shopping experience. For example, we realized that we have many customers that come, for example, to the German web shop with English language browser settings, and we noticed that these customers tend to have a lower conversion rate. So we decided to offer multi language options to our customers in Germany and Switzerland. And depending on how the reception is, that is also something where we have the option to roll it out to even more markets. We started to offer more convenient payment methods.
So for example, we launched Pay Later in Denmark and Italy, which is essentially a sort of try before you buy mechanism where customers credit cards are charged only after these customers have really made their drives conversion and also net baskets. And then we have continued to work, of course, on our on time delivery through AI enabled delivery prediction. We were able to reduce the size of the delivery time window by 15%, which has a very positive impact on customer satisfaction and also on conversion. As another business highlight, I would like to talk about our Offprice segment for the first time in a bit more detail. The Offprice business started as an emerging business in 2010 and since then has shown outstanding growth performance and now it has actually reached size and the level of success that we will report it as an independent segment going forward.
You will also see this in the following financials. Now off price for us is an additional way to connect customers and brands. It consists of 2 parts, Zalando Lounge and Zalando Outlet Stores. And clearly, Lounge is the much bigger part of this. If you look at the proposition of the Lounge towards the customers, it is a shopping club that is offering attractive deals and specifically targeting very discount between customers.
So you will get daily sales campaigns with very high discounts of 50% to 70%, while we are selling leftover and old season merchandise. Lounge actually has 15,000,000 members and is operating in 14 markets. For the brands that allows us to offer additional services, it allows them to manage their excess inventory in a way that is respecting and maintaining their brand image, but with an international distribution, so also able to drive quite high volumes. And this model is highly synergistic to our platform overall because it allows us to target additional discount Athene customer segments and it helps us to solve the overstock problem both for our brands, but also for our own wholesale merchandise. Overall, this proposition has led to very strong financials.
So we saw about 45% growth since 2016, lounge off price is trending towards €500,000,000 in 2018, and during that time, it always has been operating profitably. Now let's move on to our financial update for the Q2. As always, starting with growth, So year to date, our growth is a bit above 21%. Also in the second quarter, it has been around 21%. Actually, if we look at the Q2 and if we were to account Partner Program at full revenues and if we also were to adjust for FX developments, actually the growth would have been around 25% for the group overall.
The page also outlines the growth of the different segments. So you see the growth in the fashion store, so our core business. You see the off price segment and you see the other business units. If we dive deeper into the Fashion Store, I think you see a very similar pattern compared to previous quarters. You see the DACH region growing faster than 15% and you see the rest of Europe region going close to 30%.
Now if we dive deeper into the customer KPIs behind this growth, we see that active customers have been growing by about 16% to close to 25,000,000 active customers, who actually placed in the 2nd quarter around 29,000,000 orders. And this already hints at the very strong trends that we see in frequency. So frequency is up about 14%. We are now at 4.2 orders per 12 months, which is clearly a new all time high. And this is also the strongest driver behind the growth of GMV per active customer.
At the same time, as mentioned before, we see that the average basket is declining by about 6% year over year. And behind that, I think we have 2 sort of 2 major regions. The first reason is the continuation of the longer term trends that we have also described on previous earnings calls. So they include the shift towards mobile, which now makes up about 80% of our traffic and more than 60% of our revenues. It refers to the higher mix of low price points, especially driven by fast fashion.
And it also refers to the shift that we see from DACH to Rest of Europe, where Rest of Europe tends to have lower net baskets. So those are more the longer term trends that drive down the basket, but also help us to really drive frequency. On top of that, in the Q2, we have seen a more seasonal effect. So given the temperatures that we observed in the Q2, this led to significantly lower share of sales in transitional items. So for example, summer jackets, which again led to a negative effect on the baskets and we expect that effect to be seasonal and therefore temporary.
In terms of order of magnitude, we would estimate that those two effects have a fairly similar magnitude in the second quarter. Now moving to profitability, you see here that profitability is slightly down for the first half and you see that profitability is up by about 15% for the Q2. Specifically in the core business, profitability has increased by about 23% compared to the Q2 of last year. When we look one level deeper, we see that profitability in the DACH region is at a similar level compared to last year, and we see that profitability in Rest of Europe has increased quite meaningfully. In absolute terms, it has actually almost doubled compared to last year.
If we look at the profitability trends by cost line, as an introduction, there's one brief reminder I would like to make because as we said already on the Q1 call in the context of our updated management and reporting structure, we also have reallocated some costs. With that, we wanted to increase cost accountability and speed of decision making in the business by shifting some costs from the admin cost line into the respective operating cost lines where we think that they ultimately belong. So in terms of the shift, you see that same dynamics as we pointed out in the Q1, which means admin expenses is about 1 percentage point lower because that has been shifted from admin cost to fulfillment cost and to a smaller extent also to cost of sales. So the increase in those two operational cost lines would have been less pronounced without the shift. And of course, the decrease in the admin cost line would also have been significantly less pronounced.
Now if we go to the different cost lines, we see that cost of sales is down by 1.2 percentage points in the 2nd quarter, which is due to increased price investments and to some extent also a consequence of the seasonal dynamic that we have seen in the season overall. The fulfillment costs are down by 1.4 percentage points, which continues to be driven by our investments in our convenience proposition. It continues to be driven by the fact that we are ramping up significant warehouse capacity. Right now, we have 5 warehouse locations that are in ramp up, which obviously also incurs extra cost. It is also impacted by the basket size development that I have described and it's also impacted by the shift in cost lines that I've alluded to in the beginning.
When we look at marketing costs, we continue to see operating leverage even though our absolute spending has increased compared to last year, it has increased less than our sales growth. So we see marketing cost 0.9 percentage points lower compared to last year. And netment expenses, we see a decrease, which is primarily driven by the reallocation of cost into other cost lines. As a result of that, adjusted EBIT margin is fairly similar, fairly close to the prior year period. Now let's take a quick look at working capital and CapEx.
You see that working capital for the 2nd quarter is at SEK 16,000,000 or 0.3 percent of sales, so fairly neutral. Actually, inventory development is at the level of prior year, if you account for the growth, which I think is a good result. And we expect we continue to expect slightly negative net working capital at the end of the year. If we look at CapEx, in the first half of this year, we spent €109,000,000 on CapEx. In the second quarter, we spent €67,000,000 dollars CapEx this year will be very meaningfully back end loaded, which is related to the timing of our projects, which are all progressing in line with plan, but will be very concentrated in the second half of the year.
And we continue to expect EUR 350,000,000 CapEx for the full year. Now with that, I would like to come to the outlook. Given that we are 7 months into the year, we want now to specify our guidance and make the ranges a bit more narrow. So on revenues, as you know, top line growth continues to be our main priority. In the first half of the year, we were able to realize strong revenue growth of 21.4% in an overall challenging season with a very late season start and then a very fast change into extremely hot weather, which significantly reduced our sales of transitional merchandise.
We see that the extreme summer conditions continue into July August. Today, I heard it's going to be 37 degrees in Berlin. And I think that is one of the drivers why we expect for the full year revenues to be in the lower half of the annual growth corridor of 20% to 25%. I would also like to point out that this is in line with the midterm communication that we gave at our last Capital Markets Days, where we said that for the next years, we expect revenue growth to be potentially in the lower half of our growth corridor, while GMV growth, we expect to be in the upper half of our 20% to 25% range. If we come to profitability, so as you know, while we are very focused on growth, we want to maintain a solid level of profitability despite our high levels of long term investments.
So far in 2018, we have achieved an adjusted EBIT of €94,000,000 which is a bit behind last year's level if we look at the full first half. On this basis, we expect to come in at the low end of the EUR 220,000,000 to EUR 270,000,000 range that we communicated at the beginning of the year. This will translate into a still very solid adjusted EBIT margin of around 4% at the midpoint of the revenue range.
For the
cash flow metrics, we expect net working capital guidance and CapEx guidance remains unchanged. If we look at the current trading of the Q3, I would like to point out that as you know, the Q3 is a seasonally very mixed quarter. July August are off season months, which means low margins due to discounts on springsummer merchandise, which is even more pronounced due to the ongoing heat wave that we observe in July August. And then September is typically the time of the season start. But of course, as always, the exact timing depends on when fallwinter actually starts.
And I think overall, I also would like to say that we are very excited to head into a new season. I think we have a number of exciting activities lined up. We will have bread and butter coming up at the end of the month. We will then have the season starts where we will really celebrate the 10th anniversary of Zalando in a way that I think will be also very impactful. From a customer perspective, We then are heading into the Cyber Days, we are then heading into the Christmas business.
So the coming months really will be very important for our business, and I think it's also months where the entire team is looking forward to deliver the best possible outcome for the fallwinter season. And with this, I would like to conclude the presentation and continue with your questions.
Thank you very much. Ladies and gentlemen, we will now begin our question and answer session. We've received the first question. It comes from Volker Bose of Baader Bank.
Bank. First question would be on the partner program, 10% of GMV. So what was the driver of the above average growth, increased assortment? Any specific brands worth to mention? Any new brands?
You mentioned 10 new brands. So perhaps some names here and some background would be helpful. And yes, final one on the tax rate. Just for clarification, what would be the tax rate for the full year you would expect? And perhaps finally, on the Beauty segment, an update on the expansion plan here out of Germany, any new brands would also be helpful.
Thank you very much.
Sure. So on the Partner Program, I think the predominant driver of growth is really that we continue to internationalize the program. We roll out more and more brands across more markets, which obviously gives them more customer reach. And the second big driver is, of course, the assortment. So and there, I think predominantly we have been able to grow with the large accounts that we already have by giving them more opportunity to onboard merchandise even faster to onboard more merchandise.
So we see that many of our large accounts like Mango, like Adidas, like Espy, like Next, they have really been able to drive very efficient growth on this basis. And I think that's also going to be the main driver going forward. Then a quick comment on Beauty. So there really the expansion is running, and we have a number of ideas for the coming quarters on how to further grow beauty. So very recently, we have started our first offline beauty location here in Berlin.
We were able to onboard M. A. C, which is a very important brand. And we also have a really good pipeline of brands to come online in the second half of this year. But as you know, we typically comment on brands once we've really signed and launched them.
But clearly,
And briefly on the tax rate, so we do expect similar to what you see in Q2 on an unadjusted earnings before tax basis, a 40% tax rate, on an adjusted basis, obviously, below. And the drivers that drive it above the 30% statutory rate is differences in tax accounting treatment, for example, for SBC.
Okay. Thank you very much. Then we come to the next question. It comes from Sivan Urban. Please go ahead.
Your line is now open.
Good morning, everyone. A couple of questions. With Beauty, I know obviously you mentioned that you've opened a store. Are you going to have to open a store in each country in order to get physical access to product? Is that the principal reason for opening a store?
Yes. Good morning, Simon. So no, we don't expect that we will have to open stores in every country. And we expect to open potentially some more stores in Germany or maybe some will also be outside of Germany, but we don't expect to do that in every market.
Thank you. The next question comes from Jurgen Kohl. Please go ahead. Your line is now open.
Two questions. The partner program, you said it's 10% of GMV in the second quarter. Maybe you could share with us where it was last year at the same time and what the growth rate was obviously here? And then secondly, you referred to the CapEx line saying that you continue to expect €350,000,000 That's about if we go to the low end of your sales guidance, about 6.5% of group sales. Is that the level we should also punch in for the coming years?
Will it stay on the 6.5% level for 'eight, 'nineteen and 'twenty? Thank you.
So I will take the first question on the partner program. As you know, we don't disclose of partner program share on an ongoing basis, and we also don't intend to do that going forward. But we thought that this 10% milestone is one that is important to share to give you some transparency on what part of our business it is currently driving. Partner Program growth has been significantly above average growth, as you would expect, because we continue to onboard new partners, we continue to internationalize, we continue to bring on much more assortment. So clearly, it is a very fast growing portion of our business mix.
And then briefly on CapEx. So as you might recall during Capital Markets Day this year, we gave CapEx guidance for 2019 2020, saying it should be around 6.2% of revenue. So how we've derived that at that point in time was to look at bottom up the projects that we see coming up, so €1,000,000 amount. And so for the time being, please assume that we stay with that €1,000,000 amount depending on what growth we will see in the next 2 years that then translates into the respective percentage of sales.
Thank you. The next question comes from David Gardner of Morgan Stanley. Please go ahead. Your line is now open.
Thank you. Two questions from me. Orders per active seem to keep increasing. How I mean, where does this max out? And how does this vary between DAC and rest of Europe?
And then secondly, with the expansion into Ireland, does this indicate that perhaps the UK could be more of a focus going forward? Thank you.
So on the first part of the question, where do sort of orders per active max out, To be honest, I think that is fairly difficult to foresee because already driving activity rates to above 4 orders per year is maybe something that a couple of years ago would not necessarily have expected. But I think it is a really great sign because typically a high frequency also means lower churn and higher loyalty. So that is a development that we definitely want to continue to drive. I think more high level, if you don't look at the orders per active, but if you look at the GMV per active customer, we are at 200 a bit more than €250 per year. And as we communicated before, if you look at the average spending per European consumer on fashion, you are talking about something like EUR 1,000 per year, even a bit more.
And I think for the more fashion savvy customers that we are addressing, it's probably going to be somewhere around €1500 So if you compare to those overall budgets per customer, I think that suggests that with €250, we are not yet close to the end. I think there's still opportunity to drive our share of wallet. I just think it's very difficult to forecast if that will be driven by orders per active or if it will be driven at some point also by higher baskets. But I think overall, there's more leeway to drive sales per active customer. And then on your question regarding the UK, I think the launch in Czech Republic and Ireland doesn't mean any shift of priorities in the other markets.
I think in the case of UK, it is still important for us to see how this whole Brexit topic plays out. And the fact that we launched 2 markets, I think it's a great sign and also the team enjoys it and it's great to be again entering new markets, but it hasn't really altered the way that we set priorities in the existing markets.
The next question is from Anne Critchlow of SocGen.
Two questions from me, please. The German market did seem a bit stronger in the Q2 compared to the first. So I'm just wondering whether it was pushed more offline into physical stores in the quarter and whether you felt that or whether there are any particular weak KPIs to mention in the DAC region? And then my second question is on marketing. It did rise a bit in the Q2.
I'm just wondering how it might pan out for the full year and whether you're seeing good opportunities now to invest in marketing.
So according to the numbers that we see, the Q2 in Germany was actually down year over year, which I think includes the fashion market overall. So it includes offline and online. Of course, there's always the question how precisely that can be measured in the short term, but those are the stats that we have available and it's also, I think in line with what we hear in general from our brand partners on how the Q2 has been going overall. Specifically on marketing, I think in general, it's our strategy to bring marketing down relative to sales, but to continue to increase it in absolute terms. And I think specifically in the second half of the year, we would like to actually drive a bit more of marketing spending.
So specifically for the season start, we have a, I think, really great campaign in the pipeline that sort of celebrates sort of the 10th anniversary of Zalando and really communicates quite well what we stand for and what we bring to the customer. So that we will play very prominently. And I think for us, also like in the competitive environment overall, it will be important in the next seasons to be again a bit more present in terms of marketing. So definitely, we hope to see some investment opportunities at good ROIs.
Thank you. The next question comes from Dan Holman of Citi.
A couple of questions from me. First of all, just on the decreasing average basket size that's been going on for a couple of years now. Can you comment on any trends in items per basket versus average selling price per item? Essentially, are items per basket still going up?
And then
is there any future solutions that you could help us with around whether there's a possibility of increasing that average basket size, anything you've looked at? And then the second question was just I noticed you've got a new long term incentive plan, which is going to push the share based payment costs up to £55,000,000 this year. Is that the level of cost that we should be expecting for the next few years? Thank you.
Sure. So on the baskets, I'm afraid we don't break down sort of basket trends in even more detail. However, on the question on what can be done about them, I think there are 2 parts to the answer. I think one part is that as we have seen this being a continuous trend that is driven by very important consumer shifts like a shift towards mobile, a shift towards lower price points. And since we want to leverage these shifts in order to drive more frequency and to drive more growth and more customer loyalty, I think to some extent, the pressure on the net basket is something that we will have to accept and that we have to learn to work with and really fine tune our proposition in terms of the cost structure, in terms of our customer acquisition strategy to reflect that shift over time.
But of course, the second part of the answer is that, yes, there are ways to also work on the basket and to work on it on a way that can be also positive from a customer perspective. So for example, in the way that we drive cross selling or in the way that we use also upselling opportunities, I think that is something where we definitely are not doing everything possible yet and where there's options to actually also improve our customer proposition. For example, we have started recently to offer full outfits to our customers also in our main Zalando destination, which I think is great from a customer perspective because that's exactly the advice and the inspiration they're looking for. And on the other hand, it also tends to lead to higher baskets because customers then decide to buy actually full outfits. On the LCI and the stock based compensation, I think that it's important to keep in mind that accounting for stock based compensation is always front loaded.
So in the 1st years of the program, you incur significantly higher cost than in the last years of the program.
Thank you. We have another question. It comes from Michelle Wilson of Berenberg. Please go ahead. Your line is now open.
Hi, good morning. Two questions for me, please. First of all, just on the fulfillment costs that are up 2 20 bps in H1. Could you give a breakdown of how much of that drag is caused by the rollout of new distribution centers or any sort of details you can give on the labor cost per unit of the new distribution centers versus the old and when that should kind of start to drop out? And then second question, you mentioned on the gross margins and price investments that you've been making over the last, I think, 12 months or so.
How long should we expect that to continue for? And how will you kind of gauge that you're happy with your price positioning versus competitors?
So I think on the fulfillment costs, we have commented also in the past about the effects driving up our fulfillment costs relative to sales, which continue to be related to increased convenience offering to our customers by even faster delivery, return pickup proposition and all these elements, which have been a significant driver in our Net Promoter Score and also a significant driver in getting retention up. And to make sure that, as we explained on our last Capital Markets Day, cohorts really are growing their spending over time and are increasing their loyalty over time. So we think that has been a very good investment for the company to make. In terms of warehouse ramp ups, we can comment on the magnitude of the ramp up, which affects 5 warehouses. So almost half of our warehouses are currently in ramp up.
And of course, that incurs additional costs. And given that we have really been pre ponning some of the warehouses to be ready for future growth, so we don't expect that pressure from warehouse ramp to increase going forward. Actually, it should help us slightly as we grow into that footprint. And then as I mentioned, basket size also has been the driver in that development. In terms of cost of sales, you're right that for a number of seasons, we have been putting a bit more emphasis on price investments because we saw it as a actually more effective driver in some cases to get additional growth and also to target younger customers and to make sure that we also win younger customers that we then expect to be serving for a very long period of time.
So I think also there, we have really tried to look at the ROI and see what the effects are and how we can drive it. I think also in the context of the discussion around the basket size, we are currently reviewing. So to what extent we want to continue with that shift or if there comes a point in time where we say actually now we are at the right spot and we don't need to continue into that direction. But I think that is really something that we will play season by season. And as you have seen also over the past, the investments we have been making into pricing, I think also have been quite measured.
And this is how we also intend to drive it going forward to continue to take little steps, but then also to revisit if these steps have been value creating for the company overall and value creating from a growth efficiency of growth perspective. Thank
you. The next question comes from Andreas Indus of Macquarie. Please go ahead. Your line is now open.
Thank you. I have two questions. The first one on your online delivery, you mentioned you improved it by 15%. How can I ask you, how much of your orders are actually arriving on time or earlier? And maybe you comment how you think you perform versus the overall market when it comes to order fulfillment?
And the second question is maybe a clarification on your inventory position. Ruben, how do you see your invent position right now? Is it clean, current? Maybe you can elaborate a bit more. Thank you.
Sure. So on the first topic in terms of on time delivery, maybe that's a slight misunderstanding. So in the presentation, I talked about the size of the delivery window, right? So if we tell a customer, look, your parcel will arrive if you order today, it will arrive Wednesday or Thursday. So we give a 2 day window.
And the size of that window, we have been able to reduce by 15 So we make our prediction more narrow, which customers like because then they know more clearly what to expect, right? So the size of the window has gone down by 15% or improved by 15%. If we look at our on time delivery, that's of course a different question. That's when the question in how many percent of the cases do we manage to fulfill within that window. And that number, of course, is very high.
So our internal benchmark is always 97% on time delivery. Actually, we frequently outperformed that internal benchmark and trend more towards 98%. So 98 out of 100 parcels will be delivered as promised. In terms of the inventory position, the inventory position grew in line with sales. So from that perspective, I think it is fairly clean.
Of course, there's still some springsummer stuff that we are now selling off. But it grew in line with sales, so it is developing according to plan, and we don't see any major underlying issues in our inventory position.
The next question is from Rochus Strauss of Arete Research.
Thank you, and good morning. Two questions for me. One of your British competitors have called out GDPR as a negative impact on growth, given that some customers could not be properly targeted as done before. I was wondering if you saw any disruptions from the GDPR coming into effect in May of this year. And secondly, more in general, I mean, given the 25,000,000 active customers on the platform by now, And I know you generally do not talk about churn, but could you share any insights on how many European customers you had seen overall in recent years?
And how much room is left to grow customers that have not tried Zalando before?
Sure. So on the GDPR question, I mean, of course, GDPR has been complex and cumbersome to implement. So it has taken also some internal resources to get to the place where we need to be. But really on the customer side, we have not seen any meaningful impact. And it hasn't changed the way that we do our business, that we are able to target customers, that we are able to address customers and that we really have not seen any impact.
In terms of churn, we have shared some stats with you on the last Capital Markets Day. And I think that is sort of the level of detail that we are comfortable to share. Of course, we have sort of seen more European customers than the currently 25 active 1,000,000 active customers. But Europe is very large. I think clearly there's more opportunity to grow.
And quite frankly, every customer that has shopped with us but then churned away or did not buy again, of course, we are eager to win these customers back and we have seen many cases in the past where that was possible. So actually, I would look at this population that has become inactive for whatever reason, actually as a growth opportunity that we quite actively try to retarget and win again and convinced that Zalando is the right place for them to shop fashion.
Thank you. The next question is from Chris Aviaraes. Please go ahead. Your line is now open.
Good morning, guys. Two questions from me, Ajmal, please. The first question, just a clarification, Ruben, from what you said towards the end of your presentation about the Q3. Did you say that because of the weather, there's going to be more discount more discounting on the transitional merchandising? And if that's the case, if I haven't understood it wrongly, if that's the case, has that already been baked into the guidance that you are given?
Or is there a risk for a bit more gross margin deterioration in the 3rd quarter? And the second question on the average basket size, I'm afraid. Given the reasoning that you've given on what causes the average basket size to go down, it seems like unlikely that this will reverse anytime soon. Is there a level if we assume that there isn't any upselling that can be materialized, although that's a possibility, as you say, but is there a level where you could be potentially alerted and you will have to bake a smaller average basket size into your longer term EBIT guidance? Thank you.
Sure. So on your first question, I think you correctly understood my comments on July August, where I just wanted to emphasize that in those quarters, we see a very high share of springsummer merchandise driven by sort of the current temperatures and the current environment. And as a result, that also leads to a higher share of springsummer discounted merchandise in the overall mix of the quarter. Of course, we try to reflect in our guidance what we currently see. Of course, for us, it's difficult to fully reflect, for example, when exactly the new season will start.
We don't know yet really how September and the to give a fair and reasonable forecast. In terms of the average basket, as I said in the presentation, I think there's one element which is sort of a structural more long term trend. And then the other element is a more seasonal effect that we have seen specifically in the Q2 and then also of course in July August. And I think the second one, like the temporary trend is something where we don't expect that to continue in every season naturally. So I think based on that, the trend will be less pronounced in the coming quarters compared to what we saw in the Q2.
Ideally, our idea would be to really try to influence this change in a way or shape this change in a way that this transition to lower baskets is sort of in line with our proposition and that it is in line and can be sort of reflected and absorbed by the way that we manage our overall financials and our overall strategy to acquire customers and to grow their spending. And I think that can be achieved by a number of the measures that we discussed and that we pointed out and maybe also additional ones to make sure that this development, even if we cannot fully revert it, because then we would stop our growth that this sort of continued trend is really well absorbed by our financial profile overall.
Thank you. The next question is from Andrew Hughes. Please go ahead. Your line is now open.
Yes. Good morning, everyone. It's Andrew Hughes from UBS. Could I just try and get a bit more color on the profit swings in fashion store just by region? So obviously, you mentioned that rest of Europe almost doubled in the second quarter, but it was pretty flattish in Q1.
So what sort of special factors happened in Q2? And the same for DACH region. I mean, that pretty much halved in Q1, and it was up in Q2. So have you got any just any broad comments on those areas? The second question is really going back to the average order value.
I think you said at the Capital Markets Day that cost per parcel delivery was rising by about 3%. Is that still the case? And is that the sort of key metric we should be looking at, your average order value down 6% or so and your average delivery cost up 3%. Is that really where the squeeze affects you most? Thanks.
So on the Rest of Europe segment, I think there are a number of factors contributing to it. One was the way that we drove, for example, marketing specifically in the Q2. But I think besides that, there are no really bigger structural shifts. On the average order value and the pressure on fulfillment costs, I think you're I mean, the observation is correct that we see baskets sort of coming down. And at the same time, we see that we invest more into our fulfillment proposition and that we invest more into this really big ramp up of our capacity.
So I think directionally, you're right that we see both factors coming together in this fairly large impact on fulfillment costs in the first half of this year.
The next question is from Andreas Schumann.
Yes. Good morning. Andreas Freeman, Commerzbank. Two questions. First topic, personalization.
How many Zalando customers do already have an individual landing page today? Or is there a target for 2018 or 2019? Or in other words, when can we assess the benefits from personalization? And the second topic, private label. Given the higher relevance of the partner program, which is bad for private label business, is it fair to assume that the revenue contribution from private label should decrease steadily over time?
Or are there any plans to give private label an additional push in the future? Thanks.
Sure. So on the personalization question, I think it is difficult to see
how many customers have a
personalized landing page because it really depends on what entry point choose into the assortment and depending on what that is, it might be personalized or it might not be. I think in general, what we try to do I mean, to assess the impact on personalization is very difficult to do. The way that we try to assess it is through AB testing and that we already do quite continuously. And there so we look at the different measures and we look at the different touch points and try to assess from this test setup what impact a more personalized experience for customers have. And we see that actually the impact can be quite meaningful.
Think in the global KPIs, it is not easy to fully assess it. I think one data point I can give you is that conversion rate year over year was actually up 5% to a level of 3.9% conversion rate, which is quite high and which is quite strong. And I think that gives an indication that we are trending into the right direction in terms of making the digital experience and the front end more and more successful and more and more interesting to our customers. On the partner program question, you're right that this affects our private label business because essentially by onboarding more and more partners and giving them more and more space, we are creating more and more competition for our own private label. And obviously, that is not in line with the strategy where you would expect private label share to increase.
So that has been a strategic decision to say actually we see the bigger value to create the platform for all the European fashion brands. And then our private labels can be one brand on this platform and hopefully it's very successful. But of course, in that environment, it's difficult to see the private label share to grow over time. So we would rather expect it to be constant or even decreasing, which means the private label business can still grow in absolute terms, but in share of the platform, it might well be that it decreases or continues to decrease over time.
Thank you. The last question is from Tasha Jain of Goldman Sachs. Please go ahead. Your line is now open.
Yes. Hi, good morning. Two questions. Can you just give us an update on the loyalty program? Can you share some KPIs, how many people are there?
And is that also impact? Is that also a big drag, a slight drag to your basket size? And the second question, I just was wondering if you can remind me what is your hope to buy in currencies at this stage? And are you planning to increase that given the volatility in the weather and the impact on the gross margin? Thanks.
Sure. So on the loyalty program, we continue to drive and grow that program and that effort. And what we see is that specifically with customers that already were very active and that especially live in urban areas, with our local delivery network, we can offer a far superior service that once we get them to sign up to the program, their revenues increases actually quite substantially and also their profit contribution goes up. So this is really the type of customer group that we are currently targeting the program towards. In terms of open to buy, we have about 20% to 25% of merchandise that we always buy within season.
And on top of that, as you know, we have now an increasing share of Partner Program sales. And I think both elements really help us more and more over time to manage our inventory risk more and more efficiently. And I think also when you look at this season and the trends that we saw and the market environment overall, I think we're able to really manage our inventory position quite well due to these levers that we have.
Thank you. As there are no further questions, I would hand back to you, Mr. Koffler.
Thank you very much for joining us today. We are looking forward to speaking to you soon. If you have any follow-up questions, do not hesitate to reach us. Enjoy the day and the hot day and have a great summer. Bye bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.