Good morning, ladies and gentlemen, and thank you for joining us on our conference call today to review our Q2 2017 financial results. As usual, with me today are Ruben Ritter, one of our 3 Co CEOs responsible for Finance and Operations and Birgit Hatterhill, SVP, Finance. Each will be available for 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 results.
Go ahead. Yes. Thank you, Patrick, and good morning also from my side. Thank you for joining our call. As always, the call will have 4 parts.
We'll start with the results, highlights and business update. We'll then take a closer look at our financials. We'll then comment on our guidance, and then we have time for your questions. So let's go ahead and start with the results highlights. So in the first half of 2017, we continued to see very strong growth at a solid level of profitability.
We have been able to grow 21 point 5% in the first half, bringing us to sales of about €2,100,000,000 in the 1st 6 months of this year, which is well within our target range of 20% to 25% growth. Actually, GMV grew substantially faster at about 25 percent in the first half, which indicates that Partner Program continues to grow over proportionally and which I feel is very much in line with what we commented on the Capital Markets Day that we expect a picture where GMV growth is going to be more towards the higher end of our target corridor. So I think this is very much in line with our strategy. We continue to significantly outperform the growth of the overall online fashion market and very aggressively gain market share and really make use of this continued window of opportunity that we see to grow our business. On the profitability side, we achieved solid adjusted EBIT of €102,000,000 which is at the same absolute level as 2016, which translates into a profitability of 4.9 percent adjusted EBIT margin.
As you know, we continue to invest to allow us to reach our long term growth objectives, which was also implied in our full year guidance that we gave at the beginning of this year. In terms of cash flow dynamics, we see that the operating cash flow remains clearly positive. The free cash flow is impacted by the high level of investments we are making, most importantly in our logistics
infrastructure, but also we
see an effect from the acquisitions that we made. Enertwine where we now acquired a majority stake in the Q2 of this year. Now of course, what are the main priorities in the second quarter and what were the areas that we invested in? I would like to run through some of the highlights. And I think you will see that really a lot of stuff is going on in parallel, a lot of things that we are driving in parallel around investing in our customer proposition, investing in our proposition towards brand partners and investing into our infrastructure.
So if I start on the customer side, we have launched a 4 pay membership program, which we branded Zalando Z. I'll actually dive a bit deeper into this topic on one of the following pages. We have been able to extend our assortment quite substantially. We added 50,000 SKUs and now serve 250,000 SKUs, which is, I think, an unprecedented level of selection for our customers. A lot of this increase is driven by the partner program where brands upload more and more styles, but also a big part is driven by exclusive collections that we are able to bring online and offer to our customers to drive traffic.
At the same time, we continue to add new brands. We already serve the vast majority of fashion brands, but there are some that we are still hunting for. So we were able to get H and M weekday online, which is the 2nd H and M brand after Cheap Monday. And we also included a number of other interesting brands like Swatch, TOMS, FILA and Dryporn. Then on the right hand side of the page, we talk about the progress and the projects we're working on with respect to brand partners where we continue to push to make Zalando the online strategy for brands.
So we were able to launch Nike on the partner Program in the next 12 months. We launched Fashion Trade, which is a joint venture with Bestseller, where we together aim to build Europe's leading B2B marketplace where brands and retailers connect to digitize their wholesale relationship. So I think this is yet another building block of really digitizing the fashion industry. And then we continue to integrate offline stores. We have integrated 4 Tommy Hilfiger stores in Berlin, which brings us to a total of 14 connected stores.
And we continue to see positive feedback both from customers but also from brands on the additional volume that we bring to their offline locations. Then at the center, the 3rd area of investment continues to be the effort into scaling our European operations network. This is actually a big focus of our investments. So I'll also comment here in more detail on one of the following pages. We continue to expand our same day delivery and return on demand network.
So on same day, we are now serving 8 cities across Europe. Return on demand, we now serve 18 cities, 12 of them in Germany, 6 outside of Germany, which is an initiative that makes returning even easier than before, which we know will drive return rates, but more importantly, will also drive customer satisfaction and therefore also retention and lifetime value, which is why we think this is a very promising initiative. At the same time, we commented that we want to open up our fulfillment network to our brand partners, most importantly, those brand partners that are using the Partner Program. And there, we have been making a lot of progress. We have 5 external brand partners live in the Landau fulfillment services, and we have quite a long pipeline of additional brands that are eager to join.
So all in all, we are convinced that these initiatives are the right initiatives to drive growth for the quarters years to come. At the same time, we continuously evaluate growth opportunities that we can invest in. We try to test many ideas and then we try to scale those that work best. And this may also include the extension into fashion related other fashion related categories or taking our model into new geographies. Now I would like to dive deeper into 2 of the initiatives I already touched on, one of them being Z and one being our fulfillment network.
So Z is our membership program, which is tailored to fashion. We have started the rollout in Germany, and the vision of this program is really to build a program that defines the best in class online fashion experience for our best customers and that we can long term also use as a platform to launch and showcase our newest developments and innovations along the entire customer journey, so convenience but also assortment access and discovery and advice. So I think in the beginning, this will be a program that sticks out and is very focused around convenience. But I think over time, it will become broader and broader and involve more and more parts of the customer journey. At the start, we'll offer this program for EUR 19 to selected customers in Germany where they get the benefit of even faster delivery.
So for Berlin, we even offer same day and also of more convenient returns driven by this return on demand program that we have been scaling for a while now. We'll offer early access to sales. We'll offer personal stylist advice and we'll offer premium customer service. This will be the starting proposition that we hope to build on in the years to come. In terms of target customer, this program is open for all customers that want to sign up.
But of course, it is designed and tailored at our most active customers that have a very high overall online fashion spend and a very high shopping frequency. The economic objective that we are following is to, of course, increase the service to our customers, make them even happier and therefore also increase their frequency and share of wallet that they spend with us. And it also gives us a tool to really differentiate our service and offer the very best experience to our very best customers. And this is, I think, a theme that we have discussed in several earnings calls and also several individual investor discussions. The rollout of the program is currently it's a test case in Germany and will then gradually open it up to all German customers and then based on that, also consider to roll it out to more markets over time.
Now the second deep dive I would like to make is on our fulfillment network, which is actually one of the biggest areas of investment. So here, we are really driving a huge number of projects in parallel. And to give you an idea of the magnitude of these projects, I would like to briefly run through them. So in Munchen Lappach, we have been launching the back saucer in the second quarter, which is our biggest automation initiative. It's already running at 75 percent of the full capacity.
And some of you were able to take a look at it during the Capital Markets Day. I think it's a very promising project. Then we have launched at the beginning of the year the satellite warehouse in France close to Paris, which is already shipping and delivering 50% of the orders made by French customers. We continue to ramp up La. The inbound automation is already live and outbound is also on track and the volumes are scaling.
We are preparing the launch of our Nordic spoke for the Q4 to significantly speed up delivery times for our Nordics customers. And we are launching, actually in this quarter, our new hub in Stettin, where first parcels are being shipped over the coming weeks. So this network, once fully built out, already brings us to capacity of €7,000,000,000 to €8,000,000,000 in revenue potential. Now at the Capital Markets Day, we already communicated on our continued growth ambition, and we said that we want to double GMV by 2020. We also talked about Zalando Fulfillment Services where we want to open up our network to our brand partners where we see great interest.
And based on those two goals, we have now taken the decision to actually further scale our network. And we are planning to kick off 2 new hubs in the coming 6 months. We expect one of them to be located in Poland, which will also going forward give us not only additional capacity but also give us additional cost advantages. And the second location is most likely going to be the North of Italy, which brings us even closer to our customers. We see continued growth in Italy, and we see that the satellite warehouse in Italy is working well.
So we want to upgrade to a full hub, which then also could serve customers in Switzerland, Austria and the South of France. Both locations will be similar in terms of layout and automation technology to the hubs that we are already operating. And once fully completed, these additional facilities will bring us to a total capacity of about €10,000,000,000 in revenue. So I think that underlines that we actually really mean it if we say that we want to significantly grow the company also in the coming years. Now I would like to dive deeper into our financials, starting as always with growth.
So the IPO is now was now 3 years ago. And I think it's important to underline that since that time, we have been able to meet or exceed our growth corridor in every quarter except for 1 quarter. So we are very happy that we were able to meet this corridor again in the Q2 of 2017. When we look one level deeper into the two regions, you see that DACH continues to show very strong growth at scale. We see even a slight acceleration compared to last year, even though absolute volumes, of course, have increased significantly.
And when we look at GMV, where DAS is also the strongest region for the partner program, GMV growth is actually higher than 20%. When we look at Rest of Europe, we continue to grow over proportionately with growth of about 25%. And also here, GMV growth is higher than 25%. One other area I would like to point out, which is not on the page, is our other segment where especially our off price offerings. So the Zalando Lounge and our offline outlets have been able to grow substantially at a level of more than 40%, which is also very strong result and allows and supports the overall growth of the group.
If we look again one level deeper at the customer economics, we see also very interesting trends, especially on the active customer side. So here, we're able to grow our customer base by 12.6%. And specifically, we're able to grow quarter over quarter by 800,000 additional active customers, which corresponds to a pretty large city. And I think this is a great result because we have been able to actually deliver the fastest active customer growth since the Q4 of 2015. And this is, I think, especially impressive because we have actually reduced our our proposition start to really also drive active customer growth.
But of course, also spending per active customer where we also have been growing more than 8%. This is primarily driven by additional orders for active customers where we have been driving to a new all time high of 3.7 orders per active customers, where we also see that customer satisfaction is really driving loyalty and is driving frequency. Now if we come to profitability. Here on the next page, we have the opportunity to also look one level deeper at the different drivers. So overall, we continue to profitable growth at very solid margins.
I think we can say that also compared to competition, our margins are at a very healthy level. And nevertheless, we are emphasizing also the continued investments that we need to make in order to reach our long term growth ambition. And this has been primarily these investments have been focused on the DAF region, as you can see from the page. I had commented on this already last year where margin had increased even above our long term target of 10%. And to ensure that we keep growth in our biggest and most mature region very high and like in the first half even maybe able to slightly reaccelerate, we have decided to reinvest some of this margin that went beyond the 10%.
And we are now trading at about 10% EBIT margin, which is in line with our corridor. And I think in combination with this continued very fast growth is a very good combination also from a financial perspective. When we look at Rest of Europe, the EBIT remained relatively constant around breakeven, which continues to be our strategy for those regions. Now when we look at the margin trajectory from a P and L perspective, there are also some interesting trends to comment on. So I think the first comment is that especially the second quarter was a quarter of increased investments in order to drive long term growth.
And secondly, we continue to shift marketing spending into convenience investments and also to some extent into cost of sales investments. And especially in terms of fulfillment, this is a quite significant shift. We have been talking about this also in the past. The main reason is that we think that investments in these areas are the more efficient driver and the more sustainable driver of growth for the long term. So if we go through the cost lines on gross margin, we see that gross margin slightly decreased by 0.4 points, which is within our budget and is the result of a number of smaller effects.
So as you know, we're addressing even more younger customers. And here, we are also focused on offering attractive price points. This is also something we discussed on our Capital Markets Day. We have been taking in a lot of merchandise in the Q2 more than usual in order to have a lot of merchandise ready already for the fall winter season, which increased inbound cost, which also flows into the cost of sales. We have some seasonal effects due to a later midseason sale.
And all of that can only partially be compensated through economies of scale, successful renegotiation with our brand partners and also the effects from the Partner Program. If we look at the fulfillment cost, we really think that this is the primary area of investment that we are currently focused on. I already commented on the number of warehouse projects that we are ramping up in parallel, which of course also means that we are incurring lower temporarily lower efficiencies. So this is true for LA, for Paris, for the new facility in Poland and also for the new satellite in Sweden. We are launching automation projects, which we think have a lot of efficiency potential long term but in the short term also mean additional investment and lower efficiencies, so especially the back sort of mentioned that but also the ramp up of Laar, which will be our most automated facility.
We are investing into our proposition. I already commented on return on demand and same day delivery. I commented on Zalando Z. I commented on scaling Zalando Fulfillment Services. And we continue to invest in technology because in order to scale off of Filament footprint in such an aggressive way, we have to make sure that really the technology infrastructure is also advancing at the same speed, which also takes additional investments.
I would like though to make the comment that this does not impact our target model. So we think that the cost, if you look at the first half of this year of 25.9%, that is a bit above our long term target corridor of 24% to 25%. We think that this is, to a large extent, also driven by the ramp ups that we are currently putting forward. Now this, as I mentioned, is partly financed by the significant savings we have been able to make in terms of marketing costs, where we have been winning 3.2 percentage points in the Q2 compared to last year. This is a function of continued operating leverage that we talked about also in the past, but it's also the result in many cases of a conscious shift of spending and investment towards convenience.
And I think it is important in this context to note that still our active customer acquisition has been very strong. Actually, also our level of visits has been very strong, around 6 100,000,000 visits, which is also new all time high. So I think this indicates that we are able to manage this shift of investment in a very good way. And now some brief comments on CapEx and working capital. So on working capital, we continue to be negative, minus €37,000,000 which corresponds to 0.8% as percent of revenues.
This is negative. It's slightly less negative than last year. I already commented that we are taking on a bit more merchandise even earlier. So this has been the main root cause for this development. And then in terms of capital expenditure, we are spending in line with budget, €100 and EUR 30,000,000 in the first half of this year, EUR 52,000,000 of that in the second quarter, the majority of that going into fulfillment infrastructure and around 1 fourth of that going into own developed software.
In terms of liquidity, the picture remains unchanged. €1,100,000,000 full liquidity, €130,000,000 of that is invested in short term investments, which brings us to a cash balance of €975,000,000 So with that, let's come to the outlook for the full year 2017. I think it's important to start with our strategy, which I think remains unchanged. We continue to favor growth over profitability in order to reach our very ambitious long term targets of doubling GMV by 20 20. In order to achieve this, we'll have to continue to invest.
We'll be able to leverage our scale and our capabilities, but we also need to strengthen them even further. And for this, we are willing to trade short term profitability to have long term gains and long term value creation for our shareholders. In this context and based on the performance in the first half, we are specifying our 2017 guidance as follows. On the revenue side, we expect revenue growth in the upper half of the guided range of 20% to 25%. Please note that we are talking here about revenue, so this actually implies a GMV growth above 25%.
In terms of profitability, we expect adjusted EBIT margin to be well in the lower half of our guided range of 5% to 6%. This is driven by incremental investments to achieve higher growth this year and also in the coming years. And in addition, we are actually accounting for some inorganic growth initiatives. So I already mentioned that in the second quarter, we acquired the majority stake in intertwined, which is an early stage software as a service company to more directly drive our long term inventory integration strategy. This means that we are now fully consolidating this business, and this was so far not reflected in the guidance at the beginning of the year.
And this investment will have an EBIT impact of about EUR 10,000,000 in the second half of this year. In terms of CapEx and net working capital, our guidance remains unchanged. We expect slightly negative working capital at the year end, and we expect CapEx excluding M and A of €250,000,000 as discussed also during the Capital Markets Day. To conclude, I would like to make a quick note and a quick reminder on the dynamics of the Q3. As you know, the Q3 is a seasonally challenging quarter.
So first of all, it is an off season quarter, which means that there's pressure on margins through discounts on springsummer merchandise. And secondly, we are very bullish on the fallwinter season overall as reflected by our ambitious growth targets, but we are not able to exact time the season starts. So assuming normal market conditions, the seasons should switch in September. So with that, I would like to conclude the presentation and now give you a chance to ask your questions.
Thank you. We have a question from Francois Halconry, Morgan Stanley. Please go ahead.
Yes, good morning, everyone. I guess I have two questions. The first one is, if I look at your first half, so you delivered around 21%, 22% of top line growth with a bit of a margin decline. And my question, I guess, is what gives you the confidence to guide today towards the upper end of the 20%, 25% for the full year in terms of top line? Is it the initiative that you've spoken about in your prepared remarks that you have rolled out in H1?
Or is it also a bit of easier comps? So that's the question number 1. And the question number 2 is specifically on the DACH region. So Ruben, I think you've highlighted pretty clearly that maybe you were over earning a little bit last year and now you're reinvesting the excess running at around 10% margin. We saw this adjustment in H1 already, but then the growth remained at around 15%, 16%.
Do you think that this 10% margin run rate you're operating at now is, let's say, a good level to sustain this type of top line growth, so mid teens, around 15% or so?
Yes. So on your first question, what makes us us confident for the second half of the year? So I think there are a number of pieces. I think the first one is just in terms of mindset. We have asked our team to be very forward leaning in terms of growth for the second half of the year.
I think the second piece is, of course, due to the initiatives we have been launching in the past years and also in the first half. I have been commenting on many of the initiatives we are driving and actually expect them to deliver continued growth also in the second half of the year. Also, I think maybe the growth benchmark from last year is a bit easier for the second half than it was for the first half. So when you study the numbers of last year more closely, I think that also plays a role. But I think most importantly, it's really a result of investing and asking the team to really be aggressive in terms of our growth strategy.
On your second question with respect to DACH. So yes, as you say, I think we it's great that we saw last year that the margin potential in DACH actually goes beyond our original target model. So I think that has been a very important proof point. And I think that can also give everyone a lot of confidence that there's quite a lot of margin upside in the DACH region once we optimize even more for margin. But I think that is yet too early.
And if we want to reach our growth targets, of course, we also have to have solid growth and strong growth in our most mature region because in terms of absolute growth, that is, of course, a very meaningful contribution. And this is why we have decided to reinvest some of the margin upside we had last year because I think if we had continued to run at margins of last year, it's clear that growth would have to come down at some point. Now we are, I think, at a really strong combination in terms of having growth having profitability around 10% and having top line growth around 15% and in terms of GMV, even around 20%. So I think that is a very remarkable combination also financially. Of course, what you have to keep in mind is the increasing level of absolute growth, right?
So when we grew last year around 15% and now again grow around 15%, the absolute level of growth actually has increased significantly. And I think it is difficult to say that a combination of 10% margin and 15% or 20% growth in terms of GMV can be sustained for perpetuity. But I think we want to try to sustain that growth really over the coming years to make sure we build a stronger and stronger position in our core market.
Our next question is from Georgina Johanan, JPMorgan. Please go ahead.
Good morning, guys. Thanks for taking my questions. Just two questions, please. The first one just on working capital. I know you touched on the stock increase year on year, but if my numbers are right, sort of year on year, your closing stock position is actually up close to 50%.
So should we read this as a message again of your confidence into the second half? Or can you just run through the timing again? Is there any reason why you've brought stock in earlier, perhaps early discounts? Or anything you can share there would be helpful. It just seems like an awfully high number.
And then second question on the gross margin. Again, I know you kind of touched on this during the presentation, but could you just run through the moving parts again, please? And perhaps actually put a magnitude on some of the moving parts for us, please? Thank you.
Hi, George, it's Birgit. I'll take the working capital question. So yes, we're up year on year, and there's predominantly 2 the second as well. And the second driver is what Ruben already mentioned before that we are, as a sort of convenience investment into our customer, are increasing the availability of the fall winter stock already earlier. So we're ready for the season switch and can already kick off fairly early into the season.
And then maybe I can make an additional comment on the development of cost of sales. So the different factors that I mentioned were, 1st of all, addressing younger and younger audience. We also mentioned on Capital Markets Day that we think this is a very interesting strategy for us because acquiring a young customer means that we can actually keep them for a very long time because we do not only cater to young customers, we also cater to people in their 30s 40s. So we are actually able, if we acquire a customer at a young age, to keep them for hopefully 20 years and more. And we have seen that the spending level of young customers actually increases over time as they start to work and start to have income.
They start to also spend more on fashion. So this is why we are quite focused on the young audience, which is supported by fast fashion, which we sell more and more, which is supported by our focus on mobile and which is also supported by offering attractive price points for this audience, which again, it does not mean that we are becoming a discount or anything. It's just about offering an attractive price point, especially for the younger audience. I think to some extent, that's also comparable to the strategy of ASOS to also win customers with attractively priced products. And then we commented on the intake of more merchandise, which also Birgit just commented on, on the working capital side, on why we do it.
We talked about the shift in the mid season sale, which is more a timing shift. I think in terms of magnitude, those factors have similar contribution. As you can see, all of them add up to, I think, relatively modest investment in the cost of sales. And I think that should give a pretty clear picture hopefully.
Thank you. Our next question is from Volker Bosz from Baader Bank. Please go ahead.
Hello, Volker Bos from Butterbank. Three questions from my side. First on all, you stated to consider to expand into new markets and categories. So could you share your view on that? What are your priorities?
And to when we can decide what kind of markets, categories you have in mind, speaking about that? And second question would be about your impression about the overall competitive situation? How is that developing price pressure? Do you feel that the multichannel retailer out there are becoming better e commerce retailer and more pressure from that side? Or how do you see the dynamic from that front?
And finally, the third one among others, your Adidas flagship store in Berlin is now also part of your partner program. And perhaps I would be interested to get your first takeaways. How is the option to pick up merchandise in store accepted by consumers? Any first outcomes out of that integration of stationary stores into your model? Thanks.
Yes, sure. So on your first with respect to sort of considering new categories and new markets, I think the general message is that since 2013, we have decided not to add any new geographies or any new categories. And that has been a deliberate choice because we said there's a lot to focus on in our existing markets and our existing categories. And the message we want to send is that we think it could become again more interesting over the coming years to also focus on this as an additional growth driver. There are a number of things that we are looking at and that we are evaluating.
There's nothing yet to be announced, but we just wanted to comment that we think this could be an additional layer of growth for the coming years. Also in the context that many of the products we are offering, by the way also offering to our brand partners are more and more digital and therefore also have different dynamics in terms of internationalizing them. So I think this is a general direction that we are thinking into, and we'll let you know if there's anything more specific to follow-up on. On your second question, the competitive situation, especially with respect to multichannel. So we have discussed on several calls that, of course, we are competing with ASOS.
Of course, we're competing with Amazon. And I think the continued strong growth numbers that we show indicate that we have our way of competing in this market and that we have our advantages that we can build on. I think when you specifically ask for multichannel and for sort of offline and yes, offline retailers going online, they actually have to say that we don't really see an increase in the competition level. Actually, I would say that there we, if at all, see a sort of decrease in the competition level, which is interesting because we have more and more online players like ourselves and Amazon and ASOS that are really gaining strength and that are all growing very healthily, which at the same time goes, I think, clearly at the expense of offline retail and multichannel. So I think this is really creating additional space for us to grow.
So if I see it in that context, I think actually the competitive situation is developing quite positively for us. On your third question with respect to the Adidas store, so right now when we integrate a store, we focus on delivering customer orders from the store, which has a number of advantages. It allows for faster delivery. It allows for the brand or the retailer to leverage their physical infrastructure and generate more frequency in terms of more business and more sales. I think to direct customers to the store is a very interesting opportunity long term, but that also requires some changes in our front end in order to be more location based.
So right now, the focus is really on delivering from the store and sort of making giving the stores the opportunity to turn into a sort of mini inner city delivery hub in order to drive more business.
Our next question is from Graham Renwick, Exane. Please go ahead.
Good morning all. Just two questions for me, please. Firstly, the profitability in the other segment was stronger in Q2 with 900 basis points of margin expansion. Can you give us a little bit more detail on the drivers here? You talked around more profitable sourcing deals.
So can you give a bit more color on that and whether the performance in the other segment was in line with your budget ahead of Q2? And secondly, you are currently accelerating the ramp up your hub and spoke network, and it certainly looks like you're working on a lot more product projects in one go than you have done over history. I just wanted to know what you're doing to manage the execution risk around delivering those network upgrades without disruption to the network or the customer experience. Thank you.
Hi, Graham. I'll take your question on the other segment or the especially the lounge business, which is the vast majority behind the other segment and the profitability. So yes, you're right, profitability has increased quite a bit year on year. When you look at it, the Lounge sources its merchandise from internally, so our other premises as well as from externally. So the internal source part is less than onethree and twothree or more is from outside sourced merchandise.
When you think about the market dynamics, you'll see that whenever the markets are not doing super well, then the lounge business is profiting from that because there's more merchandise available. And so there's better sourcing deals available for the business. And this is what we've seen in Q2 that, yes, the business was able to manage to source merchandise more favorably, which you then see in an improved margin profile.
And then to comment on your second question. So you're definitely right. I think what we are doing on logistics and fulfillment infrastructure, and that was also important to me to really highlight this on this call to allow you to really understand why we are making these also significant investments in terms of EBIT and then also in terms of CapEx that we are really driving a huge amount of projects in parallel. And the reason why we are doing this is that we are just convinced that speed is important and that we really want to conquer these markets and win new customers and become better in our proposition. And this is why we choose to invest so aggressively.
And of course, to grow at such speed, especially at such scale, also means operational risks that we are incurring. And these risks and these growth risks always have been there in the history of Zalando, right? So if I think back when we launched Airports, it was our first own facility. It was the first time that we actually constructed a warehouse. It was the first time that we made a concept for a warehouse.
It was the first time that we did the IT ourselves. It was the first time that we did automation ourselves. And I think that was also a situation where the team was quite under some pressure to really deliver. And I think we have shown in the past that we are able to manage this type of expansion operationally. So right now, what we are doing to manage it in the best way possible is that we continue to strengthen the team.
There's already a very strong leadership in place, but we have been extending the team in terms of site search capabilities, in terms of automation capabilities, in terms of network planning capabilities. So there we have been doing a lot of hiring. Definitely, we can build on our experience. So we always try to innovate in terms of the design of our warehouses. But to some extent, we are also able to do copy paste.
So for example, very likely, a facility in Italy would be a copy paste facility of LA. And that allows us to leverage really the work that we have done in the past and not have to do everything from scratch. And then I really also can say that the team is super motivated and super fired up because they see this really this is the by far the biggest B2C fulfillment infrastructure in Europe besides Amazon. And I think that is something everybody that is doing something around logistics dreams of. And therefore, we are really able to hire and motivate a great team, and we are confident that they will also deliver.
Thank you. Our next question is from Anne Quickslow, Societe Generale. Please go ahead.
Thanks. Good morning, everyone. I've got two questions. The first one is on the fulfillment costs and the outlook for that. So with regard to timing fulfillment cost to sales, when do you think that the pressure will build?
And when do you think fulfillment cost to sales will peak, given that you've got a lot going on with additional warehouses and Zalando Z. So just wondering if that's going to peak in FY 2018, for example. And then linked to that, my second question, what do you mean by solid profitability in terms of solid? So what at what level would the EBIT adjusted EBIT margin not be solid? So if you went below that, at what level would it not be solid?
Thanks.
Yes. So on your first question, when will fulfillment cost peak? So typically, of course, they are when you look at the quarterly perspective, they are relatively high in the off season quarters, in the Q1 and then the Q3. That's at least the typical seasonal pattern that we have. In terms of 2018, I think that we'll have to wait for the time when we give our specific full year guidance.
Of course, what you see from all of these projects is that we will continue to invest into fulfillment, and we'll continue to see an elevated cost level. I think that is evident from these projects. But if it will peak in 2017 or 2018, I think that is something we'll comment on later when we address 2018. In terms of when is the margin solid and when is it not solid, think there are different ways to look at it. So I think in terms of when you look at it in terms of our own history, I think we have been able to, in parallel to our growth, really ramp up margins very consistently.
And then we think we should also continue to invest at this level while we have held them sort of in absolute terms stable compared to last year, where we think the investments we are making absolutely have the potential to pay off in a great way going forward. So I think in terms of being solid, being not solid, I think there's a way to look at it from an absolute level. I think there's a way to look at it from a relative level. So when you're going to very close to breakeven, then of course, the margin is only slight margin, not a solid margin. I think there are ways to compare to competition where I think also in relative terms, we are tracking quite well to our pure play fashion online competitors.
So I think it is a matter of interpretation. This is how I would interpret it. And I most of the people I talk to actually agree.
Our next question is from Jurgen Kold, Kepler Cheuvreux. Please go ahead.
Yes, thank you very much. Three questions from my side, please. On the expansion with your warehouses, could you please share with us the project time that you're putting in here in terms of total CapEx volume, which years will be affected? That'd be helpful. Secondly, on the increased share in Anna Twine, which you said was not in the budget in the beginning of the year, what caused you to share increase that share in Anna Twine?
And what are the metrics behind it that you like so much? And lastly, on the merchandise intake again, please, I may not have fully understood why you decided to increase the merchandise intake for that season specifically. Is that also referring to the your decision to be a little bit more active on the price entry level, the fast fashion area? Or maybe an additional word on why you've decided to be a little bit more aggressive this season? Thank you.
I'll take the first two questions. So on the warehouses and CapEx, so also when you look at our history and what we said before, it typically takes 3, 3.5 years or so to ramp up a warehouse. And this is typically also where you see the vast majority of the CapEx
being expensed or incurred. So then it
depends a little bit depends when you start, do you start earlier in the year or later in the year on how much it goes into a specific year. But in the end, it's fairly evenly distributed typically over that 3, 3.5 years time horizon. On your second question on AnaTwine, as you know, we've increased that stake in Anna Twine piecemeal over the past roughly 2 years now. By working with the company, we realized more and more the importance of working on sort of our digitalizing inventory out there. Remember, we also acquired TradeBite and did some other things around this whole digitalization effort.
And for us, Enno Twine is a key ingredient as part of this strategy. And so we decided earlier this year that it makes sense to increase the majority control to even have more, yes, push on the strategy and be able to influence the strategic path of the company. And when you think forward, you can think about scenarios where we really combine all our efforts into or behind this digitalization effort. And just to repeat, so the impact in the second half is about minus 10,000,000 euros As Rubin commented earlier today, it's an earlier stage SaaS company. So you virtually see very limited revenues at this point in time as the company builds its software and scales up.
At the same time, though, you do see essentially the fixed costs behind the team.
And then on the third question in terms of merchandise intake. So this does not change really our assortment strategy. It also doesn't change the assortment mix. It's just a decision also compared to last year where I think the merchandise intake from our perspective was a bit too late in hindsight, and we thought we left some growth on the table. So there, we are trying to just have the delivery curve slightly earlier.
This is not a massive shift, but it's just a shift that has some effect. So we wanted to comment on it.
Thank you. We have a next question from Dan Hohman from Citigroup. Please go ahead.
Thank you. Good morning all. First question from me is first of all, on the fulfillment costs, the 2 30 basis points increase in fulfillment costs in the first half, are you able to quantify how much of that investment went into the warehouse ramp up versus the investment in customer proposition and convenience? And then second question, just going back to the M and A. Could you quantify the impact of Kix on the financials in the second half, both on top line and EBIT?
Thank you.
Sure. I'll briefly comment on the first question, David will take the second question. So in terms of fulfillment cost, we don't specifically break out the fractions of this investment. Of course, to some extent, those two areas are also linked. So for example, when you open a satellite warehouse in Paris that brings you capacity, at the same time, it enables you to do same day delivery in Paris.
So those two investments are, of course, also very tightly linked to each other.
And then on Kix, just to quickly recap for everyone on the phone. There was an acquisition we did in Q2. It's a small specialty retailer online and offline focused top line contribution given it is a small niche provider. We did not acquire Kicks because of its top line contribution to inorganically grow our top line. It was really more around the specialty knowledge that resides within that company around basketball and streetwear.
From a bottom line EBIT perspective, the impact is also very marginal. The business is breakeven but at a very low level and as such, is a yes, very small impact only on our overall group level.
Thank you. We have a next question from Michel. I'm sorry, please go ahead. Our next question is from Michelle Wolfson from Berenberg. Please go ahead.
Hi. Two questions for me, please. First of all, just want to follow-up on the question around the acceleration in revenue growth in H2. I know you mentioned you've asked teams to be more aggressive and forward leaning, but could you give any more detail around the levers that the teams have to pull and to achieve that? Will it affect pricing at all or perhaps promotion activity?
And then second of all, just on reverse factoring, I noticed that the balance there has been increasing to quite a material level now. And given you're paying interest on that loan, I guess, looking for an explanation of why you choose to use a loan to fund that inventory rather than the €900,000,000 of cash that's on the balance sheet. Is there something that, that cash is kind of being set aside for? And also, are there any conditions attached to those loans along the lines of revenue growth or profitability?
Yes, sure. I'll take the first question on the second half. So yes, I said we asked the team to be more forward leaning. But I also said that, of course, the growth relies on the initiatives that we have been driving over the last quarters and frankly also years that we have been talking about. So we expect these initiatives to have a positive impact.
Of course, it's also in terms of having lined up a great assortment, making sure it goes online really early and on time for the next season. I think promotion activity, we will not change our promotional strategy for the fallwinter season. Of course, you will see increased promotion activity in the Q3 and around Black Friday. But in the full season, we will, I think, play the season quite similar in terms of our promotion strategy.
And on reverse factoring, just a quick recap of what it is. So reverse factoring allows us in a tri party agreement to extend our payment terms to the merchandise that we source from our brand partners. So what happens is we do receive an invoice from a brand pay a certain amount. With the help of a financial institution, we pay that invoice early and receive an early payment discount. That's a positive for us.
And then the bank extends that payment period for us, and then we pay the bank at a specified point in time later. And for that extension, we do pay an interest expense. When you look at the sort of sconto or discount environment relative to the interest expense environment today, you will see that the cost that we incur is essentially negligible or not existent. And so as such for us, it's a very good tool to effectively manage our working capital. You also asked if there's any conditions attached.
And the answer is no. Also, when you look at our financial profile today, you will see that we are investment grade. And as such, the terms that we receive on our financing are very preferential. I think we also commented on that in an earlier earnings call when we end of last year refinanced our revolving credit facility that we received very favorable terms, also no conditions attached.
Thank you. We have no other questions. I will hand back to you for the conclusion. Thank you very much.
Thank you for joining us today. And if you have any further questions during the day or afterwards, just do not hesitate to reach out. Thank you for joining again, and have a great day. Bye bye.