Good morning, ladies and gentlemen, and thank you for joining us on our conference call today to review our Q3 2017 results. With me today are Ruben Ritter, one of our 3 Co CEOs and Birgit Hatter, SVP Finance. Each will be available for a Q and A following today's call. This call is being recorded and webcast live on our Investor Relations website and a replay of the call will be available later today. Now I will turn over the call to Ruben, who will review our Q2 Q3 figures.
Ruben, go ahead.
Yes. Thank you, Patrick, and good morning also from my side. Thank you for joining. As always, the call will have 4 parts. We'll start with the results and business highlights of the Q3.
We will then review our financial performance in more detail. And then we talk about the guidance. And then, of course, we talk about your questions. So to get started on the results highlights. 1st 9 months of this year, I think we can see that our investments into growth really pay off as we're able to show accelerated growth.
We have been growing close to 24% in the 1st 9 months of this year, which means that already now it's pretty clear that 2017 will be the 4th year after the IPO that we will be able to deliver on our 20% to 25% growth corridor. Underlying, we see that the Partner Program continues to gain share. As a result of that, GMV is growing significantly more than 25% in the 1st 9 months of this year, which encourages us to stay focused on growth also in the coming quarters and coming years. However, to deliver this growth, we all know it's also important to continue to invest, and we have been ramping up our investments quite significantly in the 1st 9 months. Despite this, we still deliver very healthy level of profitability, €103,000,000 of adjusted EBIT.
We continue to be committed to profitable growth, yet we have increased our investments in the 1st 9 months of this year, which has led to a reduced margin compared to last year. However, as you know, the strongest quarter in terms of seasonal profitability is still ahead of us. When we talk about cash flow, we see a very positive operating cash flow of €155,000,000 which is then sort of eaten up by the investments we are making primarily in CapEx but also some M and A activity, which leads then to a negative cash flow of €54,000,000 in the 1st 9 months. Now I think one of the most important parts is to talk about really where these investments are going and what the areas are that we are focused on. And of course, we want to continue to execute on our growth opportunity and create a unique shopping experience for our customers.
So to go through 4 dimensions of these investments, the first one would be to create the world's best digital experience in fashion e commerce. As you know, our customers have 3 use cases that we continue to invest in to serve all three of them. The first one is search, where customers come to our site and have a very specific product in mind that they want to buy. We have been able to implement a new search engine that is now being rolled out to all markets by the end of the year, which yields faster and more relevant results, leading to an increased revenue per user that the team has been able to show in a number of AB tests. The second use case is what we call the browse use case, so customers that come to the site that have a maybe less specific idea of what they want to buy and then want to browse through a number of products.
Here we have been able to launch a newly designed product detail page, which shows even more relevant product information, pictures and videos and which specifically offers more entry points into features like shop the look, where traffic has increased by more than 200 percent and our recommendation engine, where clicks per session have increased by 50%. And then the 3rd use case for customers is what we call inspiration. So here the customer comes with a pretty open mind and wants to discover a number of different products and content pieces. And for us, clearly, a highly personalized and inspirational digital experience is a key lever for our future growth. We want our customers we want to offer our customers more and more reasons to come back to our site more frequently, for example, by combining products and content more intelligently and using more social elements and more interactive elements on the site.
Here, we have conducted the 1st large scale AB test in the sports category of our new next gen interface, which has yielded quite promising results. And we will be very focused to roll out this new experience piece by piece in 2018. In terms of mobile traffic, it has continued to increase and now makes up for more than 70% of our traffic, both app and M sites continue to grow, but the app at much faster pace. And in terms of tech hiring, we are happy to announce that we will open a new tech hub in Lisbon at the beginning of next year, where we hope to recruit something between 15, 100 engineers over the coming years because we think it's a great environment to recruit additional tech talent, which we, of course, urgently need to continue to advance on our projects. The second area of investments is convenience.
This is an area that we have discussed in a lot of detail on our last earnings call and where we continue to execute on our road map. So we have been able to sign and kick off the second fulfillment hub in Poland, which will be located at the center of Poland. The CapEx and the size of the facility will be similar to the larger facilities that we have launched before. Construction is starting now in November, and we expect ship the 1st parcel in the fall of next year. So here we continue to add very significant pieces of capacity into our network to allow for future growth.
Secondly, we have been able to take the Swedish satellite warehouse life, which is located close to Stockholm, where we have been shipping the first parcel on October 17. We expect to cut delivery time by 1 to 2 days for our customers across the Nordics markets, which we think will yield additional growth momentum in these markets that also in the past have been important drivers of our growth. And then we continue to pilot new delivery methods. So one example is what we call Dalando Binksdia, which is a service where customers can choose a delivery time slot of about 60 minutes to make delivery even more personalized and more customized to the individual consumer. The 3rd area of investment continues to be our brand.
We have talked about our focus on male customers in the beginning of the year, where we have been seeing a lot of great progress, especially in the Q3, where Mail customers have been growing over proportionately both in terms of revenue and also in terms of new customer acquisitions, which is due to a number of drivers but also very importantly due to the continued focus we have put on communicating to male customers through our campaigns, for example, through the James Franco campaign that we started beginning of the year and where we see continued positive results. Secondly, the bread and butter, which we have done for the 2nd time now this year has been very successful. The event was sold out with 30,000 customers here in Berlin with a great feedback from the live audience but also from the brands that were presenting themselves on this occasion. But even more importantly, we were able to drive a very strong digital amplification with strong global reach. So we have been able to generate €1,500,000,000 media impressions globally, which is almost twice the level of last year.
And we were able to have 35,000,000 livestream impressions, which is up 500% year over year. Now the 4th area is the assortment, which I want to focus on even a bit more in detail because an exciting assortment is really at the core of our proposition to our customers. There are a number of topics we have been able to drive successfully in the Q3. The first one is exclusivity, which continues to be something we want to drive and which we have made one of the focus areas of the bread and butter 2017. So we try to bring the value proposition beyond just the physical event into making it a place and a time where we are able to present even more exclusive products and also exclusive content.
So this year, we're able to show 4 50 exclusive products, which then drove quite significant traffic also to our web shops. So for example, brands that participated in this were able to drive traffic uplift of around 35% to their brand shops on Zalando. Secondly, we continue to be very focused on adding new exciting brands. So in October, we are able to bring live Pull and Bear, which is the 2nd Inditex brand that we offer after oil show. So here we continue to make great progress to really make our assortment even more interesting for our consumers and to work closely with those brands that we are not yet serving to make sure that also they see a future in making business and reaching consumers through the Zalando platform.
Then we have a really cool project that we launched together with Adidas, which is called Mi Adidas, which is a customization tool where consumers can customize some of the most interesting Adidas styles going from the famous Adi Letter to Stan Smith or Superstar. All of these models can be individualized through colors, fabric, sole design and more, which we offer exclusively on the adidas workshops and on Zalando. And this is probably the only product where we are not able to keep our very fast delivery promise because these products are then produced to order and therefore the delivery time is 4 weeks. But it's still, I think, a great feature to show how individual commerce can work going forward. And then of course, one big news that we communicated with the update earlier this month was the launch of beauty, which is the 1st category expansion we have done in quite a while.
We are planning to launch it in the first half of twenty eighteen. And I really think it's a sizable opportunity with very significant expansion potential. The overall beauty market has a size of €80,000,000,000 annually, which we think is underserved in terms of online offering and which will significantly increase our target market from €220,000,000,000 to around €500,000,000,000 total addressable market. I think from a customer perspective, this is something that customers expect from us in order to be able to shop complete looks on Zalando. I think from a business perspective, it's also very logical next step as yet another way to monetize the very high traffic numbers that we have and also to create new reasons to for customers to come back even more frequently.
The basis for this will be, of course, a very broad offering of a product range that covers cosmetics, skincare, fragrances, tools and accessories across all price points. And we will start with a relatively simple setup serving our customers only in Germany and only through wholesale. But then we will very quickly try to expand into offering partner program also for beauty products and then, of course, also to expand beauty into additional markets going forward. Now if we turn into the financial update. As always, I would like to start with a closer look at our growth.
The Q3 has been a quarter with strong growth actually above our target corridor. We have been able to grow 29%, which has been the fastest growth for the last 2 years. GMV actually grew more than 30% in the Q3 of this year. And when we look at the 2 regions, we see that especially in DACH, we were able to drive a really exceptional reacceleration of growth to more than 22% growth. Actually, when we look at GMV for DACH, it is growing faster than 25 percent, which I think is especially an acceleration that is very pronounced if we compare it to the last year.
So last year in Q3, we were growing single digit in the DACH region. So we were able to increase that growth by a factor of 2.5, which is mainly driven by the investments we have been making in convenience and the assortment in our brand essentially across all the dimensions that I was talking about earlier. And of course, when we talk about investments, we'll come back to that in a minute when we talk about the margin profile. But it has yielded really a very significant uptake in growth in our core region. When we look at Rest of Europe, we see, I think, a very consistent and continued growth picture of revenue growth actually more than 30% in this quarter and GMV growth also above 30% for Rest of Europe, where we continue to drive penetration, especially in the markets that we entered more lately.
Also in the others segment, the very strong off price business in the 3rd quarter. Now if we talk about the drivers of growth, I think we see a really significant acceleration in active customer growth. So we show 22,200,000 active customers, which is a growth of close to 16% year over year. But I think even more importantly, we have been able to add 1,000,000 active customers compared to the 3rd quarter, which is actually the strongest quarter over quarter growth since the Q2 in 2015. There are a number of very strong drivers behind this.
So we were able to consistently improve retention over the last quarters by driving better and better service. Secondly, we had strong new customer acquisition, especially in DACH but also especially in France, which has been developing quite positively in terms of growth since the beginning of the year. And then as a third driver, we have been growing over proportionately in male customers, which I already mentioned earlier. So I think it's a very positive picture on active customer growth, which should also be a good basis for growth in the coming quarters. When we look at the activity of these customers, we see a continued pattern, which is that the order frequency continues to increase to a level of 3.8 orders per year, which is a new all time high, which is great because that's been really part of our strategy to drive frequency.
At the same time, we see that the average basket is constant or slightly decreasing. That is also a continued trend that we have seen over the last quarters where we have comment already commented already a number of times on the reasons that are behind this. And but net, this leads to an increased spending per active customer, which is equally important as active customer growth to us, where we have been growing about 11%. So overall, I think this shows that we have very strong customer KPIs. And it also shows that the investments into the customer proposition that we have been making over the last quarters really continue to pay off.
Another perspective to look at our growth and to deaverage our growth, by the way, that we don't have on the page, is to deaverage into visits, conversion and basket size. In visits, we were able to grow very substantially by 30% to more than 600,000,000 visits in the 3rd quarter. Also conversion has been increasing by about 5%, not percent points, but percent. And the basket, as I mentioned, is flat or slightly down. Now after talking about the growth drivers, let's talk about the EBIT development.
We reached breakeven, which in my mind is okay for an off season quarter like the Q3. I think you are familiar with our seasonality. So Q3 is probably the quarter with the weakest seasonality of all 4 quarters. What you also see on the page is a relatively clear decline compared to the last year margin for the Q3. And here, I would like to make a number of comments.
The first one is if we remind ourselves of situation in the Q3 last year, you will remember that we showed relatively low growth overall, and we saw limited growth opportunity, especially due to a late season start, which also meant that we delayed a couple of investments, which actually led to a profile where we had relatively low growth and a relatively high margin for an
off season
quarter. If we compare this with this year, we were able to reaccelerate growth and we were able to really push customer acquisition, but this came at the expense of margin, which is the main reason why our margin is weaker compared to the Q3 last year. This is also the case if we look one level deeper into the different regions where the different the most important driver of the DACH of the margin development has been the DACH segment. Here, we showed an extraordinarily high margin of 10%, which I think for an off season quarter is not a sustainable level. And we also commented on this last year, which was contrasted with the relatively slow growth in the DACH region and, as I mentioned, the late season start and also a shift of discounting activity in the last year with relatively low discounts in the Dutch region and relatively high discounts in the rest of Europe markets.
And if we contrast this with how we operated the business this Q3, we saw the opportunity to reaccelerate and more than double our growth rate compared to last year, this also meant continued investment. This also meant that we shifted some discounting activity from rest of Europe markets into the DAS market to bring the discount rate in DACH back to what we think is a healthy level for Q3 because in that time, of course, the consumer also expects to see attractive discounts. Of course, that doesn't mean that we changed our full price strategy in any way. I think we just corrected something that we did not steer properly in the last year. And in that context, I think the DACH margin that we showed this year is probably a more typical margin for a Q3.
When we look at the rest of Europe EBIT, there we see a positive trend, which to some extent also improved due to the factor that I just mentioned, which is that we shifted discounting activity back into the DACH region. But it continues to be a region where we are investing not only in the Q3 but also through cycles to continue to drive strong growth. Now if we go to the next page, you get a better overview and some more details on how we are investing and where we are investing. When we look at the gross profit, it is slightly down compared to last year by 0.5% point due to an increased level of discounting overall. We had a share of old season sale, especially in July August, to make sure that we start into the new season with a very clean stock position in terms of sell through of the springsummer season.
But by far, the biggest investment we continue to make in terms of fulfillment costs. Here, I think you have to keep in mind that we continue to drive a record level of ramp ups in parallel. So when we look at our German distribution centers, we are ramping up automation in Machinlattva in terms of the back sorter, and we are ramping up also automation in LA. When we look at our satellites, we are continuing to ramp up Paris, which we launched at the beginning of the year. And I mentioned that we just launched the Swedish satellite.
And then when we look at the new hubs in Poland, we also launched Stettin and made the first order shipped the first order from Stettin. And we are kicking off the second greenfield in Poland. So 6 really quite significant ramp up projects that we are managing in parallel, which, of course, also comes at increased operational costs. Secondly, the fact that we do see is that the decrease in basket, even though it's only a small decrease, leads to a picture where we have higher frequency but lower baskets, which means that the number of orders grows faster than revenues, which, of course, also puts pressure on the fulfillment cost line and also can be seen as an investment into frequency and continued growth. I think on marketing, you see a picture that is very familiar.
We continue to see operating leverage in terms of marketing as we drive more and more of our active customer acquisition through an improved proposition and not only through increased spending in marketing. Now to briefly comment on working capital and CapEx. On working capital, we see a similar seasonal trend compared to last year. Q3 is a quarter where we take in a lot of merchandise, but we don't pay for it yet because we have longer payment terms. So we see negative working capital of €115,000,000 The trend is not as pronounced as last year because we decided to take in stock earlier this year, which is something that we already commented on in the last earnings call to be ready for the season start, which I think also helped us to grow strongly in September.
At the right hand side, we show our CapEx. We have spent year to date primarily in PP and E, which is related to logistics investments. In the Q3, we spent €46,000,000 and we are on track to reach our full year guidance in terms of capital expenditure. Yes, very quickly on liquidity. The position remains largely stable with about €1,100,000,000 in liquidity, so no major change on that size.
And now I would like to come to the outlook for the full year 2017. So when we start with revenues, I think as described in this presentation, we have seen a very fast growth year to date, 20 17, which was our main focus for this year. And in the Q4, we have seen so far a weaker than expected October, which is primarily driven by a warmer than expected weather. Nevertheless, given our very strong focus on growth and the commercial events that we have planned and lined up for the rest of the year, we are still comfortable that we will achieve our top line guidance to reach the upper half of our growth corridor of 20% to 25%, also because growth will continue to be a focus in the 4th quarter. When we look at the margin, in order to achieve this growth and to continue to invest, we will see a similar compared to the 1st 3 quarters of this year.
So we expect to also be slightly below last year's strong margin level also in the 4th quarter, leading to a full year adjusted margin slightly below 5%. This is very much in line with our statements on the top line, bottom line trade off that we have made previously. It is the value maximizing strategy for our business to focus on growth, capture market share and to strengthen our competitive position. So instead of focusing on just optimizing our margin for the Q4, we choose to maintain our focus on growth. With respect to 2018, you know that we will give our guidance at the beginning of 2018.
However, I also would like to take the opportunity to reiterate what we said during the Capital Markets Day. So the focus will remain on continued strong growth, which means we'll continue to target our growth corridor of 20% to 25 percent, which I think is not a big surprise. And ideally, we'll be able to repeat this year's very strong performance. And this is also in line with our long term goal to double our scale by 2020.
At the
same time, this also means that we will continue to reinvest into the continued growth of our business, not only in 2018 but also beyond. And as a result of that, we do not expect margins to increase in 2018, but we expect to further build our leading position in the European online fashion market and to expand our market share in the years to come. So those are our comments on the outlook. And now let's dive into your questions.
The first question is from Andrea Feras, Morgan Stanley. Your line is now open.
Hi, good morning. I have Firstly, can you give us an update of what percentage of your gross sales is the partner program right now and maybe what your expectations are for the next couple of years? Secondly, when it comes to Q4, should we be expecting growth maybe towards the upper end or the lower end of 20%, 25% at this stage? And finally, can you give us a little bit more color as to what the take up has been of your new loyalty program? Thank you.
Yes, sure. So on your first question, Yes, sure. So on your first question, the Partner Program continues to gain share in terms of GMV share of our business. It still continues to be a high single digit share of our business. And I think going forward, we have commented in the past that we think this can be a share of 20% to 30 percent of our full business over the next couple of years.
And that is what we continue to give as a target also to the Partner Program team to make sure that we really build the infrastructure, build the trading tools, build the onboarding, build how we provide data to the brands in a way that they can really drive growth successfully in our platform and therefore also gain a higher and higher share over the next seasons and years. On your second question, whether growth will be at the upper end or lower end of our target corridor. As you know, we don't give quarterly guidance. Nevertheless, of course, when you give yearly guidance, then the Q4, you come to almost a quarterly guidance. And here, we said that we continue to be comfortable with our guidance for the full year to be in the upper half of our guided range for the full year.
And the last numbers I saw in terms of consensus, I think also point into a direction that we think is very realistic, and I think that allows you also to back into a growth expectation for the Q4. On your third question, the loyalty program, we have successfully launched the test setup. As you know, the program is only live in a couple of cities in Germany, and we are only targeting a very limited segment of our customer base in order to test the program and to optimize it then for full rollout where we are making great progress. But it is at the same time still way too early to provide first numbers. But we continue to be excited about the project because we think it can be a great tool to really segment and deaverage the customer proposition that we're offering.
The next question is from Tushar Jain, Goldman Sachs. Your line is now open.
Yes, hi, good morning. Just two questions from me. On the gross margin, is it possible for you to give us a little more color, how did the wholesale gross margin actually moved in the 3 months in Q3 or in the 1st 9 months of this year? Just trying to understand what is the underlying gross margin movement in the wholesale and if that comes back next year? And the second is, it does look like the trade receivables have increased considerably in the Q3.
Can you explain the reason for it? Is there any concerns there? Thanks.
Sure. So on the first question in terms of gross margin, so as mentioned, we had a slightly weaker gross margin in the 3rd quarter, which is, of course, primarily driven the wholesale gross margin as we had higher discounting activity, which I think in the Q3 where you try to sell through the old merchandise is actually a valid means to get rid of old stuff but also to make sure that we have an attractive offer to our customers. So of course, it also helps and can be one additional tool to acquire new customers and drive retention of active customers. But there hasn't been any change in our underlying discounting strategy. It just has been a quarter with a bit more pronounced discounting activity on wholesale.
With respect to your second question, wasn't able to understand it. And also I looked at the team and they also didn't fully catch it. So maybe if there's a chance to repeat it, I'll be happy to take it.
Yes. I'll just think I mean, after the trade receivables have increased year on year considerably, mean, the account receivables. Is there something to be worried about? Or it's just a normal invoicing? There's no invoicing issues with that, so I'm just trying to figure that out.
Okay. Yes. On accounts receivable, so we have been driving successfully the invoice offering in the last quarters, which is also reflected in the higher number of receivables. But there's no underlying issue in terms of fraudulent activity. All the systems indicate just regular cost of business and actually quite successful that we were able to increase invoice offering and therefore also drive growth without incurring additional fraud activity.
The next question is from Falko Basu Baader Bank. Your line is now open.
Yes. Hello. Falko Basu Baader Bank.
A question from my side. 1st, starting with your cosmetics beauty initiative from next year on. You said you want to offer a broad assortment. What does it mean? Is it going from really from NIVEA body milk to high class fragrance?
Is this channel number 5 or so? So will you go more into competition to drug stores or perfumeries or to both? Or how you can think in terms of products here? And second question would be on your regional momentum, Rest of Europe, impressive growth. Any specific countries to highlight which show the best momentum?
And regarding next year, do you have any specific countries in mind which you explicitly want to intensify your marketing efforts in order to drive growth? Any focus countries, so to say, for next year? And the final question would be on your fulfillment center near Paris, which you started beginning of the year. Do you can give us any idea how much of deliveries into France are coming out of Paris already or how much the ramp up is done to have some feeling on that front? Thank you very much.
Sure. So on your first question regarding beauty, I think in general, our strategy is to, over time, offer a very broad assortment, right? That has been the case for shoes, for apparel, for all the categories that we drive, and that will be similar in beauty to be able to cater to a very wide customer segment. But of course, the focus of the assortment in order to make it attractive and also in order to make it fit our customer base will be on the more sort of fashion related pieces and on really exciting brands that maybe some of them also are not available in Germany or Europe overall. But we really have due to our scale the opportunity to bring exciting brands to European customers.
And that is what we will focus on for the start. But then, of course, over time, we will also be able to show a more basic assortment that maybe, to some extent also will compete with offline drugstores. But the focus really will be on the more fashionable pieces to make that we have a strong link to our fashion proposition overall. On your second question in terms of regions, we saw very strong growth that I already mentioned in DACH. We saw strong trends in France.
We also continued to see strong performance in the Nordics markets, which, as I mentioned, was the reason also to go for a local satellite to even further foster this growth potential. In terms of new regions, we will comment on it when there is something to comment on. But right now, we don't have any specific plans to open up new regions. On your third question, the fulfillment center in And we think over time, the share will actually go higher. But we already see that it is a good tool to drive customer satisfaction and to continue to improve our proposition to French customers.
Actually, we are not even communicating the improved delivery time so openly to our customers. So I think that actually is another yet another growth opportunity for the coming quarters to also communicate more proactively the faster service that we're offering.
The next question is from Magnus Raman, Handelsbanken. Your line is now open.
Magnus Roemann, Handelsbanken. Firstly, on the lowered EBIT margin guidance here, you speak about the weaker October. Does that imply that you have discounted more than planned for in October? Or is it an anticipation, your estimate of higher discounting need for the rest of the quarter that lies behind the lowered EBIT margin guidance? That's the first one.
Then secondly, if you can comment on expected gross margin profile in the new beauty category, how it differs on shipping costs and potentially on return rates? And then finally, my third question relates to the difference in return rates between male and female customers, if you can share any details on that. And maybe if you could comment on the current split in top line between male and female customers. Thank you.
Sure. So on the EBIT guidance, I think it is driven by a number of pieces. I mentioned slightly weaker trading in October, which if we want to compensate for that growth, obviously has an EBIT implication. If that will be driven through additional discounting or additional marketing activity, I think, remains up to the trading that we see in November December. The team is very focused to drive a strong Black Friday, to drive a strong gifting season and of course, overall, to just drive a strong finish of the year because obviously November December are our 2 most important months.
But of course, it is also related just to the general increase in investments that we are making. As you saw in the 1st 3 quarters of this year, we have been below last year's very strong levels of EBIT because we, in general, have increased our investment speed in a number of areas, and this will also be the case in the Q4. So it is also, to some extent, just a continuation of the increased investment activity that we have seen in the 1st 9 months of this year. On your second question with respect to gross margin and other KPIs for beauty, I think in general, it's still way too early to comment on these KPIs primarily because we have not observed any yet because the category has not yet started. Of course, we have our own assumptions.
We think very clearly Beauty will long term not only be a driver of growth but also a source of profitability. But I think it's too early to comment on these KPIs. I think also, as you know, in general, we don't typically break down operational KPIs by market or by category. And I think we will also keep it that way going forward. In terms of return rate and differences between male and female customers, yes, we have commented in the past that female customers tend to have a higher return rate than male customers because we see overall that female customers are more eager to try out new things, to shop cross category, to shop multiple items and then try on different pieces at home where I think male customers overall have a bit more pragmatic approach maybe to shopping on our side, and they are happy to just order a few items from brands that they know where they have a high likelihood that these items will fit.
So there's just a difference in general shopping behavior that we continue to see between male and female customers.
The next question is from Jurgen Klopp, Kepler Cheuvreux. Your line is now open.
Thank you very much. On gross margin again, sorry, first of all, the you mentioned that you had a higher discounting part in Q3. Was wondering if you could also maybe give us an indication how much maybe Lounge had an impact, access branded goods that you gained from your partners that negatively affected the gross margin. And then coming back again on the beauty part, maybe I understand certainly that you don't want to break down any additional information, but it is obviously the first new category that you're launching. So maybe some additional comments here with respect to CapEx that you might see coming on and how you plan to have fulfillment costs really managed tightly given that obviously return rate of a lipstick, for example, will obviously be or could be a burden.
So maybe any additional comment here would be really helpful. And lastly, on October, you mentioned that weather was too warm. Is that predominantly a German phenomenon? Or was that across the DACH region and maybe also some of the other regions? Thank you.
Yes, sure. So on your first question with respect to gross margin, yes, of course, also the strong performance of the lounge business had an impact on the overall gross margin. As you know, some of this business is 3rd party business where the launch team will acquire leftover merchandise from our partners and to help them to sell it off at very high discounts, which typically are between 60%, 70%. And the lounge also sells a lot of merchandise, leftover merchandise from our other businesses where we also saw increased activity to sell off more old merchandise and high discounts. So clearly, also the lounge business impacted the gross margin overall.
On your second question with respect to beauty, yes, on logistics costs, there will be CapEx in the beginning. For example, we have to refit the warehouse and airport to be able to carry beauty items which have specific requirements in terms of sprinkling and in terms of fire protection. So there will be an additional cost in the beginning. On the other hand, long term, if we are able to drive beauty products as an addition to fashion baskets, actually, they will be very nicely supporting our logistics costs relative to sales because they will the beauty item will just travel on a regular basket and therefore leads to very low incremental logistics cost compared to revenues. So but I think this is exactly one of the effects where we have to see how it plays out over time.
You asked specifically for return rate. I think it's a fair assumption that return rate will be lower for the beauty category. We will be very surprised if it is as high as for fashion merchandise. The third question with respect to weather. So the October has been weaker in the DACH region overall but also in some of the rest of Europe markets.
So I think it's a phenomenon that we saw actually in the majority of the markets that we operate in.
The next question is from Charlie Meursen, Deutsche Bank. Your line is now open.
Yes, good morning. I've got two questions please remaining. The first one was, can you tell me what the contribution was from acquisitions to your revenue line in the Q3? And the second one is, I just wanted to clarify, because I wasn't in the statement, but were you saying that in 2018 you're not expecting your adjusted EBIT margin to rise, so therefore you are anticipating adjusted EBIT margin around or below 5% again. Thank you.
Sure. So on your first question of the contribution of acquisitions to growth, There was obviously some contribution because we acquired some businesses, but it was a relatively small contribution and in our mind also too small to break it out. So that has not been a major driver in the accelerated growth. On your second question with respect to 2018 guidance, I think the statement is, as we said, that we don't expect margins to increase in the next year because we will continue to focus on growth. Of course, we'll give a more specific guidance in the Q4 earnings call, where we typically talk about the guidance for the full year.
We just thought it makes sense to reiterate something that I already said during the Capital Markets Day, given that today we have the chance to speak and to also take questions and so we wanted to share a little bit of an outlook.
The next question is from Ann Crichlow. Your line is now open.
Thank you. It's Anne Critchlow from SG. I've got two questions, please. The first one on Beauty. Would you consider an own label range in Beauty?
And then the second question really goes back to the weather. Is there anything that you could point to in terms of maybe measuring sales trends on days that were helpful from a weather perspective versus days that weren't that could give us some confidence because the weather differences year on year have been quite marked. I know that September August were good in the German market and across Europe and October hasn't been. So just wondering what confidence you have that you can continue to drive sales in the Q4 based on the initiatives and investment you've made?
Sure. So on the first question, I don't think that own label will be a major driver of beauty for us in the short term. For us, it's more important to get the category launched and organize it in a way that it is exciting to our customers. And I think that we'll be really focused around having very exciting third party brands to make sure that the cross selling really works in a seamless way to make sure that the beauty category in itself is really an inspiring place in terms of offering content, offering tutorials, offering all these things that customers will expect from us. But it will be very focused on 3rd party brands, at least for the 1st seasons.
And I think we see also from the feedback that we from beauty brands that there's a high interest to work with us. So we are very confident that the assortment will be very exciting. On your second question in terms of weather and forecasting, so I think there are 2 perspectives to take. 1 is in terms of long term planning. There it is, of course, for us very difficult to make specific assumptions around the weather.
So when we plan a season maybe a year ahead, we'll just assume that there will be a regular weather pattern. I think that's the only fair assumption that we can make. But then, of course, we will see short term fluctuations, which our job is to make sure that we react the best way possible to changes in weather. And it's not new to us that the weather can move one way or the other. So if the winter is particularly cold, that is that supports our growth.
Like in September, when it is too warm, it is a bit more of an uphill battle. But our task is not to sort of complain about the weather but to make sure that we find the best possible reaction. And in terms of really short term forecasting, I think our models have become more and more sophisticated in terms of really taking weather forecasts into account for the coming weeks and to incorporate that in our commercial planning, for example, with respect to warehouse capacity, with respect to campaign activity, with respect to discounting activity, with respect to marketing activity. So there, I think our models get more and more sophisticated to find always the best response in terms of trading.
The next question is from Rocco Strauss, Retail Research. Your line is now open.
Hi. It's Benjie Scurlock calling in for Rocco Strauss. I have 2 broadly based questions. First of all, so we've seen ASOS basically running a global 20% off everything discount campaign early on in 4Q. Is there anything in particular you see driving this?
And then if we could get a comment on your full price sales compared to last year, that would be fully really appreciated. And then second question, with around €1,000,000,000 of net cash, are you feeling you further accelerate international expansion and increase your CapEx to drive the warehouse build out? Or is the EUR 1,000,000,000 mark some level where you would start to think about returning capital? Thanks.
Sure. On the first question, to be honest, I think you will have to ask ASOS to comment on their campaigns. That is really difficult for me because I simply don't know. On the second piece with respect to net cash, yes, we have a very high cash balance. And I think the great thing is that it will enable us for the coming 3 years where we said we want to double the scale of our business to drive any investment that we think is required to reach this target, which could be
around CapEx for operations,
which could be around investments into new categories like beauty or new markets. It also could be around M and A activity if we see targets that make us stronger. And this will really be the focus on the next 3 years to continue to invest and find a good use for our capital. We also see that if we take a view in terms of return on investment on our customer acquisition or if we look at ROIC that the interest that we earn on our assets is quite high. So I think there's a good reason to continue to invest.
So returning cash to our shareholders is not on our agenda for the near term.
The next question is from Andrew Ross, Barclays. Your line is now open.
Good morning all. Just one left for me. It's on Zalando Fulfillment Solutions. Can you give us an update there in terms of how many brands you've got signed up now? I think it was 5 at the end of Q2.
And just how conversations are going as you try and scale up a bit of your business. Yes. So ZFS, I think, is a really interesting opportunity for us in terms of broadening our cooperation with the brands and making the partner program more attractive for them because operating on our fulfillment will typically enable them to offer greater customer service and also operate their fulfillment at better cost. The team is working very intensively to roll out the program, which means to increase capacity. So we are able to take on more partners and then also to onboard partners.
Right now, we have about 10 partners that are using or are starting to use Zalando Fulfillment Solutions. One of the bigger ones would be bestseller, and we are also in talks with a number of other large accounts. And then there are also some smaller accounts that we have taken into the service. But the ramp up is going according to plan. And actually for next year, we think we'll be able to scale it quite substantially.
The next question is from Andreas Ines Macquarie. Your line is now open.
Yes. It's Andreas Ines Macquarie. I have a question on 2018. Could you please summarize the positives and the negatives for your margins? What are the key drivers?
What are the underlying assumption for the Maybe you can elaborate. I would have expected slight margin improvement next year consensus as well based on strong top line growth and some benefits from the partner program. So maybe you can elaborate what are actually the negatives which are driving down the margins to a stable development? Thank you.
Yes. So I think I said earlier in an earlier question on 2018 that we will give a more specific guidance in the earnings call for the Q4. And of course, specifically to talk about the sort of detailed drivers of any development, I think only can be part of the call where we also talk about a detailed guidance. I think on a very high level, coming back also to what we said on the Capital Markets Day, we want to publish the business by 2020, which means we have to continue to invest. So in principle, I think the additional operating leverage that we expect to see over the coming years, which comes from a number of sources in terms of driving scale, driving efficiencies, better negotiation leverage and all these things, we will likely reemploy into additional investments that will help us to drive growth over the coming years.
But I think in order to comment in more detail, you will have to dial in on our earnings call for the Q4, where we will talk about 2018 in more detail.
As there are no further questions, I would like to hand back to you, Patrick Koffler.
So thank you, and thanks for joining us today. If you have any further questions, do not hesitate to get in touch with us. Our next official touch point will be our trading statement in January. The exact date, we will announce a few weeks before. And here with, I wish you we wish you a great day and see you soon.
Thanks. Bye bye.