Ladies and gentlemen, welcome to the publication of the Q3 results 2016 of Solando SE. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Ms.
Birgit Arp, VP, Corporate Finance and Investor Relations. Please go ahead, madam.
Good morning, everyone, and thank you for joining us on our conference call today to review our Q3 2016 financial results. As always, with me today are Ruben Ritter, one of our 3 co CEOs responsible for Finance and Operations and Jan Kemper, SVP, Finance. Each will be available for Q and A following today's call. I believe many of you are familiar with the format, so I will make my remarks very brief. Please be aware that during the conference call, we will make forward looking statements, so we kindly stress that you carefully read through the cautionary statement and the additional legal information that governs our conference call.
This call is being recorded, always also as usual, and webcast live on our Investor Relations website and a replay of the call will be available later today. With that, I'll turn it over to Ruben.
Yes, thank you, and good morning also from my side. Thank you for joining our Q3 earnings call. As always, the presentation will have 4 parts. We will start with the results and business highlights, then we will go through the financials in more detail, and then we'll talk about our guidance. And then last but not least, we'll have time for your questions.
So let's start with the results and business highlights. So clearly, I'm very happy with the 9 months results that I can report today, thanks to the great work of our team, and we have been clearly delivering very strongly across the three financial dimensions. So if we start with growth, we are growing year to date at about 22%, which is in line with our long term growth ambition off the corridor of 20% to 25%. With that, we continue to outperform the market quite strongly. So we continue to grow faster than general and fashion e commerce growth.
And therefore, also we capture continuous market share, which obviously is one of our core strategic priorities. Then secondly, we continue to grow at a very clear and by now I think also quite high level of profitability. In the 1st 9 months of this year, we generated about EUR 120,000,000 in adjusted EBIT, which corresponds to an adjusted EBIT margin of 4.7 percent and a very steep increase of about 3 points year over year. This increase is much stronger than we expected at the beginning of the year, which is great and which points to the continued operating leverage that we see in the business as well as the strength of our business model overall. And then the 3rd dimension is, of course, the cash flow.
We continue to be not only self funding but also cash generating, Thanks to our high level of profitability and the progress we have made in terms of getting more efficient on net working capital, we have generated an operating cash flow of more than €200,000,000 which leads us to a free cash flow of €66,000,000 even though we continue to operate at very high levels of investments. We have been investing about €150,000,000 in CapEx year to date. So I think it's great that we continue this very strong growth path and our cash generating at the same time. Obviously, the customer comes first in everything we do. And I think the great performance towards the customer is also the basis for the strong financials that we have been able to deliver.
And obviously, we also keep investing into our customer proposition to build a greater and greater offer. If we look at our assortment, we continue to broaden the selection that we can offer to our customers. By now there are more than 200,000 items that the customer can choose from. We have been able to onboard some exciting new brands and have been doing some really extraordinary designer cooperations. For example, with Mani, the joint collection has been a big success, not only commercially but also in terms of continuing to build our brand.
Then on mobile, we have crossed the 50% in terms of mobile order share. So by now, the majority of customer orders come through mobile devices. We continue to push the app, which has grown by about 80% year over year to 25,000,000 app downloads. We continue to improve the customer convenience. In Germany, we have been able to launch 14,000 additional pickup points together with our new logistics partner, Hermes.
We have launched instant returns across Netherlands, which means that customers can have the return parcel picked up at their personal location. And we have continued to invest into the build out of our hub and spoke system, which I'll come to in more detail a bit later. And then on the brand side, we had a very successful first bread and butter event where we have also launched the cooperation with Gigi Hadid and Tommy Hilfiger, which has been driving a lot of attention. And this is actually a topic where I would like to give you some more detail on the next page. So the bread and butter event, which we launched now in the Q3, has a number of objectives.
The first objective clearly is to celebrate the start of the new season, and I think it's a great opportunity for us to present to the the public the innovation that we have been working on for the upcoming season. Secondly, it's clearly a brand facing event, so we want to give the brands that we work with the stage to present their collection for the upcoming season and to present the topics they are investing in not only to a physical audience but also to a very large digital audience. And we want to use that to deepen our partnership with those partner brands. And the feedback was really outstanding. And we believe that all of the brands that have participated in the first event will also join us next year and hopefully even some more brands.
And then the third objective of the event is clearly to create relevant content for our customers on social media and really also to use it as a showcase on how we can use social media for storytelling and how we can do very successful brand building and sense, we had 20,000 visitors that attended the events, the physical events. But on top of that, we had a huge social media reach of more than 800,000,000 media impressions in total across different platforms. We have broadcasted the event on to about 7,000,000 fans on Facebook through all Zalando Facebook channels across all markets. Actually, the attention was so high that Facebook blacklisted us for a very brief moment because the engagement triggered some alarms. So we were very happy to really see that this has been one of the opportunities to really drive reach through content and through organic reach.
And this is clearly something we will want to continue next year and even improve in the next year as part of building our brand both towards the customer and towards our partner brands. Then a second topic I want to give a more detailed perspective on is a very different one. So from fashion events to operations footprint. So clearly, we have been making great progress in building the operations backbone of the fashion industry. I think there are 3 big achievements in the Q3 I would like to talk about.
So the first one is the start of operations in La, which is going to be our largest fulfillment center and where the team has delivered really a start perfectly on time. Then the second big achievement is that we started the construction of our next large hub in Poland, which is planned to go live in the second half of twenty seventeen and which should add to our footprint some additional capacity but also some additional cost efficiency. It is also the first facility where we have decided to contract and to construct and to own the building ourselves. This has an overall CapEx sum of about €150,000,000 so it is a very significant investment. This will not necessarily be the new standard of how we build new fulfillment centers, but I think it's an additional tool that we can use to make sure that for each new project, we find the optimal setup to deliver it on time and to deliver it at the greatest level of cost efficiency.
And our strong balance sheet also gives us the leeway to do this. And then the 3rd project I would like to mention is the satellite warehouse in Paris. Based on the strong results and the strong success we had with our satellite in Italy, which by now drives about 70% of the Italian orders, we decided to launch a satellite close to Paris. We will save about 1 to 2 days for customers living in Paris and in France overall. And this location is scheduled to go live at the beginning of next year.
So with this footprint, we will once it is completed in the form that you have it here on the chart, we'll be able to support €7,000,000,000 in terms of revenue. So it gives us quite some leeway to grow. And I think you also can see really from earnings call to earnings call how we are step by step transforming a very centralized footprint into a true pan European footprint, which we have also started to open up to our brand partners. So we will now we have launched the 1st pilot for Fulfillment by Zalando, which offers brand partners that use the Partner Program also access to this delivery network. We will continue to invest into this network, which will also mean that the CapEx level will remain at an elevated level also in 2017.
Now we come to the financials in more detail. And as always, I would like to start with the growth. So as I mentioned, year to date, we grew 22%, which I think is very strong. In the Q3, we grew at about 17%. I think it's not a secret that 17% is below our ambition of 20% to 25% that we follow in general.
However, I would like to make some comments on this. So first of all, we have always said that the 20% to 25% is not a quarterly but an annual guidance and that we always can see volatility across the quarters. Secondly, I would like you to keep in mind that the comparison period in last year was really very, very strong. So it was a year where we grew 40% in the Q3. So I think it makes sense here to actually look at the 2 year CAGR, which has been at about 29%.
And then we also commented before that in the Q3, especially September has been quite a weak month in the industry and has been quite a late season start. So obviously, this also created an environment where growth is a bit more challenging. So of course, we're always ambitious on growth, and we would have liked to grow faster. But I think when you keep in mind these points, it's also evident that it was not realistic to reach a significantly higher growth at a reasonable level of efficiency. And as we have also commented, this Q3 result does not cause us to review our long term growth ambition.
If we look one level deeper at the two regions, DACH has been growing at about 10% and Rest of Europe has been growing at about 24%. And maybe some comments on DACH because I think DACH was specifically impacted by the slow season starts. And when you follow some of the research on the fashion industry, the German market was down about 16% in September. So of course, that is a very specific event that also has an impact on our growth. Also on DACH, when you look at the 2 year CAGR, it's actually at about 21%.
So I think the track is still very strong. And as we have also commented before, DACH is the region where we have the strongest growth of our Partner Program, which also has a negative effect on revenue growth, of course, not on GMV growth but on revenue growth. And that effect is at about 2 percentage points. Now if we go one level deeper and look at the drivers behind the growth on the next page, we always always, talk about the active customer growth and the spending per active customer. Active customer growth has been growing at about 11% to 19,200,000 active customers.
And at the same time, we have been able to continue to increase our spending per active customers by about 12% to now €213 per year. And that is driven especially by an increase in the average order per active customer, which has reached a new all time high of 3.4 orders per year, which is, I think, really great result, resulting from the growth in lower price points, which we have commented on before, on the focus on fast fashion, on younger audience and also on the engagement that we have been able to drive in the app. At the same time, the average basket size after return remains flat at €63 per basket. If we now come to profitability on the next page. Year to date, a very steep improvement of 3 percentage points to about €120,000,000 adjusted EBIT and even steeper improvement in the 3rd quarter to a margin level of 2.3% or €19,000,000 adjusted EBIT.
I think that is a super strong outcome that we were able to improve profitability, especially in the Q3, which is always a difficult quarter from a margin perspective. And then especially in the Q3, that was impacted by a slow season start. So I think this is really a very positive outcome, especially in the DAS region, which continues to operate around target margin level even in the Q3. So I think that is really outstanding. And also in Rest of Europe, we see that we're operating year to date close to breakeven.
And then also in the Q3, we have been able to show a positive trend in our margin. If we now look at the different cost line items, you can see that this improvement in margin, especially for the Q3, was really driven by all major cost lines. So if we start with gross profit year to date, gross profit is reduced by about 1 percentage points coming from a very strong level last year. But in the Q3, it actually increased by 0.8 percentage points. I think that points to the flexibility that we have built into our sourcing mechanisms.
So we are able to really react quite quickly to changes in demand such as in December, which sorry, such as in September, which has led to a lower discount rate. We continue to have negotiation successes in the discussions with our brand partners. So that has been very positive progress on gross profit. On fulfillment costs, we see a very big improvement both year to date and in the Q3 of about 3 percentage points. That is driven by continued operating leverage and really very smooth operations even though we are ramping up new facilities like La, which, as I mentioned, started in August.
And of course, we have the big effect from payment cost where we had the adverse development last year, which we have been able to reverse. And now our payment systems are really running at very low levels of fraud, which, of course, has then a very positive effect on our fulfillment cost. Now when we come to marketing cost, also here, we continue to see the improvements we have also been able to show over the last years. We have 1.8 percentage points year to date, and we have 2.8 percentage points in the 3rd quarter. Most importantly, this is really a continuation of the trend that we have seen over the last years that as we acquire more and more customers and as we build and build a brand in the different region, marketing as a percent of sales comes down.
In the Q3, we have also seen the reversal of some accruals where accrued cost has been higher than the actual cost, which is part of our ongoing business. And we have seen in the Q3 a specific reaction from the teams to the slow season start. So obviously, when the weather is not turning cold, that has an impact on marketing efficiency, which also means that we adapt our level of spending in order to not be spending at levels that we feel are inefficient. And then last but not least, on admin expenses and others, we continue to invest in technology, and we continue to invest into scaling our team for future growth. And this is why we have seen an increase in the admin cost of about 1 percentage point both year to date and in the Q3.
So if we compare this picture to the target margin picture we have communicated over the last calls and over the last years, I think when we look at gross profits, we said we want to operate long term at a target level of 45% to 47%. We are just 1 percentage points short of that level. And so I think that is already quite close to the long term level that we are talking about. In fulfillment costs, we said long term, we want to be at 24% to 25% of cost. When you look at the year to date number, you actually see that we are below this level.
And going forward, we actually expect to continue to invest into this area to really drive convenience because we feel it's still a very effective way to drive retention and customer satisfaction. On marketing costs, we have communicated a long term level of 6% to 8%. You can see that also on the group level, year to date, we are already approaching the 10% mark. So here, I think we continue to see very smooth progress. And as you know, the DACH region is already operating at this target level.
And admin expenses, I think we're also quite well on track to a level of 4% to 5%. So I think it really shows that along the different cost lines, we are we have been making a step towards our target model in 2016. So let's briefly talk about capital efficiency. And the first topic, of course, is net working capital, which has been very low in the 3rd quarter at negative 4.7% or €160,000,000 I think this is super strong. We have seen improvements across the different levers.
So inventory levels have become more efficient. Payables have been developing quite well, also in line with the positive development in payment cost. And also on receivables, we're making progress really across the different line items. We are becoming much more efficient in terms of our working capital. At the same time, on CapEx, we continue to spend according to plan.
Year to date, we have spent €116,000,000,000 the majority of that in property, plant and equipment, which is related to logistics investments. In the Q3, we have been spending €48,000,000 This is all perfectly in line with our guidance. On liquidity, our liquidity position continues to be very strong. When we look at the overall liquidity at the end of the third quarter, it's about €1,200,000,000 out of which €220,000,000 are invested in short term investments. So the cash and cash equivalents on the balance sheet is a little shy of €1,000,000,000 And now let's come to the financial outlook.
I think as it becomes evident from the numbers I have been talking about, we are well on track to deliver very strong growth and a very strong increase in profitability for full year. So when I look at revenues, we reiterate our full year growth guidance to grow towards the higher end of the 20% to 25% growth corridor. And also for the medium term, it continues to be our ambition to grow in this corridor for the coming years in order to continue to capture market share and to continue to build scale and the really strong and sustainable business. Secondly, on adjusted EBIT. Based on the strong performance in the Q3 and also year to date, we have increased our full year profitability guidance actually for the 2nd time this year to an adjusted EBIT margin of 5% to 6%.
And also on EBIT, our long term direction does not really change. So also for the coming years, our focus will be to continue on our growth path and to continue to invest into the long term development of our business rather than further expanding our margin levels. And on the third point, capital efficiency. Based on the very strong improvements year to date, we now actually expect net working capital to be slightly negative at the end of the year. And on CapEx, our view remains unchanged at about €200,000,000,000 for the full year.
So those were the comments I wanted to make on the Q3 and the 1st 9 months. And now let's dive into your
questions. Ladies and gentlemen, we will now begin the question and answer The first question comes from Magnus Roman, Handelsbanken. Your line is now open. Please go ahead.
Thank you. I have two questions. First, here in the presentation, you mentioned a 2 percentage points negative effect on revenue growth in the DACH region from the partner program. Can you also give us an estimate of the positive effect here on gross margin or EBIT margin from this? And then secondly, you mentioned it at fulfillment operations and the ramp up here has progressed very smoothly.
You also said that you expect to invest more in the customer experience. But I mean, you raised the target for fulfillment cost of sales to 24% to 25% some time ago, and now you produced 4 consecutive quarters here with fulfillment cost of sales at the low end or even below this target. So should we how should we view this ahead? Should we expect negative operating leverage on this line? Or is it more probable that this target could be lowered?
Thank you.
Yes. Thanks, Magnus, for your questions. So on the first one, yes, we made a brief comment on the revenue effect of the Partner Program because we are not communicating specifically GMV and revenue. So just to give you some idea, we made that comment on what the impact of Partner Program growth is. On the EBIT effect, we have decided to not yet make a specific comment also because we are still growing this business and developing our commission structure and all of these things.
But when the time comes, we will also give you more detailed idea on how the Partner Program affects our profitability. But I think in general, we still work with a very strong assumption that this is also, from an EBIT perspective, a very interesting opportunity. On the second question regarding operations ramp up, Yes, you're right. Beginning of this year, we actually changed our long term target model slightly and shifted actually some investment from marketing into operations. And this is still the direction that we see for the long term.
So you're right, since that time, we actually have been delivering very strong results on operations, which also was due to the fact that we were able to completely reverse the payment effect and that we were also able to drive payment at a very efficient level and also made great progress in terms of efficiency and operations. Going forward, I continue to see operating leverage. I just also see additional opportunities to invest into convenience. So we have made one investment in Italy, which also in the next year, we'll see the full effect of Italy after it has ramped up. We'll make an additional investment in France with the satellite.
We are discussing additional satellite opportunities. We are discussing a number of additional delivery methods. So I think there will be a lot of opportunity to invest, which we should take in order to further drive Net Promoter Score and also drive retention. So in general, this philosophy that marketing costs will continue to come down and we might reinvest some of that into operations, that view continues.
Thank you. The next question comes from Simon Aaron. Your line is now open. Please go ahead.
Good morning, everyone. Three questions for you. The first of which is that you implied that there wouldn't be a further increase in margin next year, the way you're currently thinking about it, and that there would be a ramp up in investment. Can you just talk a little bit about where you might see that investment coming through next year? Is it simply more physical facilities?
Or are we talking more investment in kind of speedboats? And at the same time, can you give us a
bit of can you give us a
little bit of flavor about what products went well, which went badly and kind of how that weather impacted the kind of products that you were selling in the quarter?
Sure. So in terms of the margin development, I think in general, what I wanted to say is our midterm outlook over the next couple of years does not change in that way that we will continue to aim for very high growth corridor and that we continue to that we continue to have the willingness to invest in order to reach this corridor. For the next year, of course, we'll give them more specific guidance when the year starts. So I don't want to go too far ahead. But in general, in terms of our philosophy, I just wanted to underline that this remains our focus.
Of course, like in this year, this also has been our focus, and we still have been able to extend the margin. So we are not opposed to that in any way. But in terms of philosophy, we will continue to prioritize growth. I think there are meaningful opportunities to invest. We just talked about potential fulfillment investments, which we'll continue to do.
I think there are good investments we can make to continue to scale our partner program and to continue to get even faster in onboarding brands. I think there are a lot of opportunities to drive further our mobile business and drive app downloads. And there are a lot of opportunities to continue to grow the strength of our tech team. So I think really along all of those lines that we have been talking about for the last quarters and years, that is really where we also see the investment opportunities. Also in terms of the speedboats we have launched, there will also be investment opportunities.
All of them are still quite young. So I think we'll give them some more time before we get more specific on those, but also they will hopefully present meaningful investment opportunities. Then on your question on the Q3, I think typically when a season starts late, what you see is that you sell an over proportioned share of springsummer items still in August September and a very high share of transitional items. And as a result of that, our sell through rate for the springsummer season has been very good. Of course, what you're not selling very well as the more winter ish part, but that is true for really all categories.
It's true for men, for female. It's true for apparel and for shoes. So I think this is broadly the picture that we have seen. Typically also what you see when the season starts late is that this is specifically difficult for the men category because male customers tend to be more need based in their fashion shopping behavior. So when the weather doesn't turn cold, they see less of a reason to buy winter stuff compared to female customers.
Thank you. The next question comes from Charlie Muir Sands. Your line is now open. Please go ahead.
Good morning and congratulations on the strong results. My first question relates to your positive revisions to the margin guidance that you've made through the year. I wondered if you could talk a little bit about what has surprised you, particularly versus your original budget? Or is it that you've just perhaps been guiding a bit on the conservative side? And then the second question was you kind of alluded to the release of accruals on the marketing line in the Q3.
Apologies if it's in your account, but I haven't found the number yet. I wondered if you could tell me what it is. Thank you.
Sure. So in terms of the update on the margin guidance, well, as we mentioned at the beginning of the year, we continue to expect operating leverage, and we continue to reinvest some of this. And what we have seen throughout the year is really that the progress we have made in terms of efficiency in the business has been faster than expected. This is specifically true for fulfillment, which we just discussed, where even though we are investing a lot, we see a lot of efficiencies. We also have a few projects that we expect to launch a bit earlier.
So there, we'll see the cost impact slightly later. But the major impact really is the efficiencies, especially also on the payment side. And the second cost line where we have seen very strong progress is really the marketing cost line, where we continue to review always the efficiency of our spending. We continue to reallocate it. Of course, we also continue to invest into new projects like the bread and butter, which has been also meaningful investment.
But still, we have been able to drive growth at even lower marketing levels than we had expected at the beginning of the year. With respect to the accruals, well, what happens is that marketing invoices, especially in brand marketing, tend to arrive late, so after the quarter closes. So in the quarterly closing, we have to rely on estimates, which we do accurately, but if in doubt, of course, conservatively. And here, it just has turned out that actual cost has been lower than expected. Of course, we also have ongoing negotiations with the different partners.
We also have volume discounts. And so this is the accrual that we have partially adjusted in the Q3. But as this is part of the ongoing business and it's also, especially on the year to date figures, a fair representation of the marketing cost lines, we have not disclosed a specific effect.
Thank you. The next question comes from Claire Hov, RBC. Your line is now open. Please go ahead.
Yes. Hi. Thanks for taking my questions. I have 3, please. The first one, just wondering if you could comment on any differences in your promotional between the DAC and the rest of Europe, as I think you said in the release that promotions were lower year on year in the DAC, but higher in rest of Europe.
And so just some comments around that please. The second one, just wondering if you could talk a bit about your trial with a number of the small local retailers that I was reading about can now sell via Zalando. So could we expect you to move more towards a marketplace model if that trial is successful? I'm not sure what the profit dynamics of something like that or fulfillment by Zalando is, but any commentary or color around that would be helpful. And then third one, just wondering if you could give an update on the UK.
We're clearly seeing a lot more visible marketing in London, in particular, and some interesting returns initiatives. So just wondering if you could let us know how that's going, please. Thank you.
Sure. So on the first point, the promotional strategy between DACH and Rest of Europe. So we do consider regional differences in our promotional strategy because we see that customers are reacting very differently. We also see that market price levels up or competition is behaving differently, which we are reacting to, to some extent. And specifically in the Q3, we have been driving more promotional activity in Rest of Europe because here we saw better elasticity and better effect on giving discounts or doing promotional activity as compared to DACH.
So this is actually this has driven also some of the difference that we have seen in Q3, particularly between the BACH region and Rest of Europe. But we think it has added overall to the efficiency of our promotional activities. On the second topic, local retailers. As you know, we are testing the integration of local retailers in Berlin and also in Stuttgart. And we continue to see that this is a very promising field, and we continue to see great interest both from brand partners and retailers.
But we also see that this is really a very long term project because it has a very high level of complexities and many topics that we have to solve that have not been solved yet. So it's something that we continue to be focused on, and we continue to believe it can have a very positive long term business impact. But it's not one of the initiatives one of the type of initiatives where you can expect a very quick impact on our numbers. And then on the third question, with respect to the U. K, we have commented also in the past that we have been making some improvements to our UK proposition in terms of delivery time, in terms of our promotional approach, in terms of the assortment.
We have lately also tested brand marketing and the reaction we would see from the UK customer. So all these initiatives are proceeding well. On the other hand, I know that U. K. Has been a focused topic, but I would also like to point out that it continues to be a relatively small market for us at least at this time.
So the impact that these activities have on our overall numbers are relatively limited.
Thank you. The next question comes from Volker Bossel, Baader Bank. Your line is now open. Please go
ahead. Yes. Hello, Volker Bosse, Baader Bank. Yes, I would also come back on the sales split by region outside the DACH region. So another try, can you give you some example of underperforming or outperforming countries in that region?
And second question would be on your partner program. Could you provide us an update how many brands are Tazeppi participating? Any prominent joiners in the 3rd quarter? And yes, what's the status quo in the percentage of sales? Was this coming from that commission based business model yet?
And finally, on your on the competitive situation, Amazon started its TV campaign in Germany. Do you see any impact? What are your thoughts? And as a reminder, what are your main differentiation points versus the model of Amazon? Thanks.
Sure. So on the first question, sales split between countries. As you know, we don't give specific numbers on individual countries. Of course, in every quarter, there are some countries that perform particularly well or some that are a bit below average in terms of growth. But we have not seen any change in the direction of the different markets.
So we still continue to see similar dynamics in Southern Europe, in Nordics and Benelux, in Poland. I think the trajectory of those markets has been fairly constant in the last quarter. On your second question with respect to Partner Program, we have about 150 brands that are part of the Partner Program. In terms of revenue for LNV share, they still only make up a single digit amount of our volume, but they're growing rapidly. And therefore, they're also growing their share within our business mix.
On the third question with respect to Amazon, so we have not seen any specific effect of their TV campaign. But as we have commented before, I think competing with Amazon is nothing new to us. It's a large competitor that, of course, we are watching very closely. They have the advantage of a very broad customer base, of a very strong prime program. They have impressive operations.
And in terms of fashion, they have built a very broad assortment that is very heavy on especially on the basics. So how do we compete with this and how have we competing over the last years? I think the first and most important point is really that we are focused on the more fashionable customer, yes? So we are focused on the customer that wants to see a very broad assortment but at the same time wants a really fresh and fashionable assortment. So we are really focused on on season items, whereas Amazon has a huge share of off season items, which actually means that for the current season, our overlap is in the area of 20% in terms of assortment.
So this is, I think, one of the very strong differentiators that we have compared to Amazon. Secondly, it's about curation and recommendation. Amazon is serving specifically search based use cases, whereas we think when people buy fashion and want to be inspired, the use cases look quite different. And then thirdly, I think very strongly is the brand appeal to our customers. And so the Zalando brand really stands for fashionability and even more so after the initiatives we have been doing over the last 2 years, which now I think cumulated really in the bread and butter event.
So I think when you take a closer look at the material that has been produced at this event, I think this is really something that customers would have a difficulty to associate this with a brand like Amazon that is extremely broad and not focused on fashion. And at the same time, of course, we have the scale and we also have the capabilities to compete in terms of convenience because we know that also for the fashionable customer, they also want a very high level of convenience. So there, we are able to match Amazon in terms of outbound logistics. And I think in terms of returns, we're even leading in terms of the convenience experience, which is particularly important in fashion. I think the second side to this is the brand relationships.
So we try to strengthen fashion as a category, and we try to support our brand partners successful in the online space and being successful in a digital age. So I think this is a strong partnership that is also very much appreciated by the brands, and they know that we are not out to commoditize or monopolize fashion but to really bring out the best of fashion by providing the infrastructure that is required to be successful in a digital age. And we also have built a great stage for the brands to present what they're most proud of, which are their products and which is their brand identity. And we do this both through events like bread and butter but also, of course, every day in our web shops where we give brands the opportunity to really use Zalando as a channel of presenting their brands to digital audience and not just to drive commercial volume. So I think this is the summary of how we compete, and this is how we have competed over the last 8 years, and we continue to invest to stay leading in what we do, which is to offer really the leading destination for the more fashionable customer.
And this is also how we continue to drive the migration from offline to online, which we think is the much more important underlying growth trend. So for us, it's not so much Amazon or Zalando. I think it's going to be both but with a different focus. And I think the much more interesting trend that we have observed and that we think will continue to observe and continue to benefit from is the migration from an offline customer into online.
Thank you. The next question comes from Jamie Merriman. Your line is now open. Please go ahead.
Good morning. Thanks. My questions are, first of all, if you could just talk a little bit about the DAC region over the course of the year. Are you still growing both your customer numbers and the frequency there? Or if you can just give us a little sense of where more of the growth is coming from?
And then secondly, in terms of the marketing cost and the leverage that you've seen this year, I'm just wondering, I understand the leverage point, but obviously, as you said, the market also hasn't been helpful. So if we see a more supportive underlying market in the short run, could you see marketing costs go up again as a percentage of sales? Thanks.
Sure. So on your first question on DACH, yes, we are still growing both. However, if you are in a more in a market that is more closer to maturity or where you have a much more much higher customer base, Of course, you will see that growing the spending of your existing base becomes a more and more important growth lever. So this is definitely also what we see in our different markets as they continue and as they mature and as they grow. On your second question in terms of marketing leverage, I think this is really the trend that we have been seeing over the last years.
We have been seeing that marketing does not necessarily go down in absolute terms. So it actually increases in absolute terms, but it goes down in relative terms. And this is what we have seen over the last 4 years happening. So are there opportunities where we might spend more? Clearly.
So if there's quarter where we think this is really a great opportunity to acquire customers, we might ramp up our absolute spending. And also, we have the flexibility to do this in a quite significant way. On the other hand, for the long term and especially on an annual level, I think we can continue to expect marketing costs to increase in absolute terms but to decrease as percent of sales.
Thank you. The next question comes from Christian Schwenkenbacher. Your line is now open. Please go ahead.
Yes, good morning, everyone. Also three questions from my side. The first one is just in relation to the last one that was just and on current trading basically. So in the DACH region, we're basically looking at the weather trends, seeing some very favorable trends here. So I was just curious how your view is on the running quarter.
I guess the delayed start into the auto winter season should be quite well on track in the Q4 here. Secondly, just on speedboat activities as well and just on 2. The first one on Media Solutions. I mean, there had been some industry rumors that there would be potential collaboration on that side with
some of
the bigger players in the DACH media space. I would just be curious how interesting that would be from a strategic point of view. I guess having one
of these players on board
would be of strong strategic importance for you. And just secondly on speedboats again, there was a news that you recently also took a stake in a company called Fashwell in Switzerland. And also looking at your previous acquisition on Tradebuy just on tech, I'd just be curious how Trade Buy is doing, how you're integrating that and what is bringing to
the business in terms of value add? Thank you very much.
Sure. So on your first question on the current trading, yes, you're right. The weather has the habit of changing every day. And that's, of course, something we are always reacting to in our daily business. And I mean we don't want to make it our habit to comment frequently really on the weather.
We made one comment for September because there, I think, the effect was very significant. But besides that, of course, as you know, it's our ambition to deliver great results irrespective on how the weather is turning because it's just something we cannot control. So on the current trading of this quarter, I don't want to make a comment at this stage, but of course, we have a lot of commercial activities lined up, and we want to drive a great Black Friday. We want to drive a great Christmas business. We have invested a lot in different initiatives around getting specific gifting items online, driving gift cards.
So I think there's a lot of opportunity to make Q4 a success, and that is what we are, of course, working on. The second question in terms of Media Solutions, I think clearly in that space, there are numerous opportunities to enter into interesting partnerships. But on the other hand, I don't want to comment on any rumors. It's something we typically don't do. But of course, it's a space where collaboration in general is an interesting theme.
And then on your 3rd comment regarding Freshwell, it is a company that's focused on image recognition, and we find that a very interesting field. But the investment that we made is really a very small and early stage investment, but we think it's an interesting company and an interesting area of focus. And then there was a 4th question on trade bias, on how that is doing, the value add is to our business. I think the value add is very clear. It is offering brand partners a tooling to integrate into marketplaces.
And of course, we do a lot of work to connect brands into the partner program on our platform. So that actually has quite a high value add, and that's a very important strategic capability that we want to build stronger and stronger.
Thank you. As we do have many more questions in the queue, please focus on the key questions. The next question comes from Georgina Johanan, JPMorgan. Your line is now open. Please go ahead.
Hi, guys. Thanks for taking my questions. 2 fairly brief ones from me then, please. Firstly, YNAP yesterday was actually
referencing some softer consumer sentiment in Germany.
Yesterday was actually referencing some softer consumer sentiment in Germany. And we've obviously seen Filman mis estimates as well. I was just wondering if you could give us your view on that, whether actually all the impact in the market is just weather or you think there's something else going on with the underlying consumer, please? And then secondly, just actually on Black Friday, we've heard a number of U. K.
Retailers talk about smoothing demand over November, so actually bringing some promotions forward to the start of November to kind of try and smooth that demand over the period. I was just wondering if that was something you were considering as well, please?
Sure. On the first question in terms of consumer sentiment, I think we have observed it in September as we communicated. Of course, it's always difficult to say exactly what is weather related, what is sentiment related. But in general, we don't have the impression that there's anything wrong with the consumer sentiment in Germany. On your second question in terms of smoothing demand, of course, it's always important to smooth demand because everything that we deliver to the customer also has to pass through on how we intend to drive volume on the Black Friday and before.
So that's maybe something we can comment on once we are through the quarter.
Great. Thank you.
Thank you. The next question comes from Andreas Indus, Macquarie. Your line is now open. Please go ahead.
Yes, good morning everyone. I have a question on your inventory position, plus 19% year on year. It's not necessarily fully aligned with your growth expectations of plus 30% implied in your full year guidance. Maybe you can elaborate on that. How confident do you feel on your current inventory position?
And in terms of inventory or working capital management, how confident are you that the great development in the last few quarters will be sustained? That's my questions. Thank you.
Yes. So in terms of the inventory position, we also had some later deliveries. Some were like conscious decisions. Some were just arrived a bit late. So that is something we are working on.
And on the other hand, of course, we also see from our working capital numbers that we actually have been able to increase turnover significantly. So there are also some really strong improvements we have been able to drive. But of course, it's part of the current trading work of the team to make sure that we have the stock available to grow.
Thank you. The next question comes from Adam Cohen, UBS. Your line is now open. Please go ahead.
Hi, good morning. Just one question for me. When you look at the cost of customer acquisition, have you seen it increase either in the DAC region or across the whole group? And ancillary to that, have you seen any change in the customer churn rate, please? Thank you.
Sure. So I just was reminded that I didn't answer one brief question from the previous question around net working capital improvement and if it is sustainable or not. So of course, we hope that some of the system improvements we have been making also will yield sustainable impacts, even though you should keep in mind that Q3 specifically is a quarter where you tend to have a positive swing in the working capital. So of course, not all of the improvement is only driven by sustainable improvement. Some is also driven by seasonality.
Thank you. The next question comes from Jose van Kult, Kepler Cheuvreux. Your line is now open. Please go ahead.
Yes, thanks very much. First one on the could you please talk about the open to buy levels that you are now experiencing over 9 months period this year versus 9 months last year? How has that changed? And lastly and the second one on new and additional satellites. It sounds as if you're quite happy with the progress that you've seen in Italy.
So you potentially want to roll out additionally. Any additional thoughts on where you want to put additional satellites into your markets maybe?
Thanks. Sure. So now we got sorry, we got now mixed up a bit with the how we answer the questions. So there's still some missing on the previous speaker, and then I'll come to the question on the satellites. So there was one question on customer acquisition cost, whether or not it is increasing.
What we see or what we always look at is the customer acquisition cost in relation to lifetime value because when time value increases or decreases, we also have to change our customer acquisition cost accordingly in order to sustain the return on investments that we are making. And we have not seen any significant changes in terms of churn. As you know, we don't communicate churn, but you also know that we have been very focused on driving Net Promoter Score. And of course, this also has a positive impact on churn even though changes in the churn rate typically come slowly and over a longer period of time. Then we had the question on the new and additional satellites.
So we have opened the 1st satellite beginning of this year in Italy, which has been very successful, and we have seen very positive customer feedback even though we are not yet fully leveraging it. So I think there's even opportunity to leverage it even more. Then we are planning the ramp up of our Paris satellite in the Q1 of the coming year, and we are currently in discussions where we will place a potential next satellite, which most likely will be in the market where a satellite would significantly improve our delivery proposition because the market is further away from our more centralized hub facilities. And then there was the question on the open to buy ratio, which continues to be at a level of 20% to 25%.
Thank you. The next question comes from Charles Allen, Bloomberg. Your line is now open. Please go ahead.
Yes. From Bloomberg Intelligence. Thank you for the question taking it. I just wanted to ask specifically about footwear and given your heritage there. Has your availability of the most fashionable items in this area been good and possibly better than some competitors, do you think?
And how has this affected your sales over the last 6 months or so?
Sure. So obviously, availability of the most interesting items is one really of the key pieces to compete in the fashion industry. And there are many ways in how we try to guarantee a high level of availability, of course, especially compared to competition, which is, 1st of all, the way of how we place our orders. So we have a large team that is not only using data but also their own experience to make sure that we place the right bets on the most attractive items. The second big lever is very fast reorder capabilities.
And actually, the 3rd big lever is the Partner Program. And there, we have seen some quite positive effects, for example, on Adidas, which we integrated a couple of quarters ago. So whenever we are sold out on a particularly attractive style of Adidas, and as you know, they're actually quite successful at the moment. We have the option to backfill that item to the Partner Program and therefore guarantee a much higher level of availability, which has significantly grown the turnover of Adidas on our platform. So these are the levers that we use to generate a high availability of the most fashionable items.
Thank you. The next question comes from Andreas Nyman, Commerzbank. Your line is now open. Please go ahead.
Yes, good morning. Two questions. Coming back on Adidas and the offline integration. So how many brands are you basically gave an interview and you spoke about increasing the number of products from 200,000 to 1,000,000. The question here is, is this only fashion related?
And where should 800,000 products come from? Is it more brands or more products from existing brands? Any insight on this would be highly appreciated.
Sure. So on Adidas, on the integration of offline stores, we have currently 2 stores integrated in Berlin and 10 stores in Stuttgart. And that is currently the focus of our pilot. And we will continue to potentially launch additional pilots, but of course, we're also looking at the results of this first integration to really think about what we can learn for the next integrations. And your second question, which was around additional SKU, so as you see, we continue to increase our assortment.
I think in the future, drivers of this increase can be additional product areas. It can be additional availability. It well. And of course, we also hope to continue to onboard very attractive brands, including brands that typically only work in the vertical setup. And I think all of these levers will help us to increase the assortment for the customer.
But we want to focus this really on items that we think are suited for our customers and that have a high degree of fashionability. And through personalization, that also can be played out really for the individual customer.
Thank you. The next question comes from Philipp Reis, Wabag Research. Your line is now open. Please go ahead.
Hello, gentlemen. Two questions. Firstly, on marketing flexibility. Can you comment on how much of your quarterly marketing volume is roundabout pre committed and how much flexibility you have in general? And secondly, on your spokes and satellite warehouses, how should we view them?
Would you see that they are permanently operating or diluting actually your fulfillment cost? Or should we just see them in the space of the ramp up period as being dilutive or actually an investment for in terms of your general margin?
Sure. So on the first question, actually, the majority of our marketing spending is flexible and can be changed in a very short time period. On your second question, on the hubs, once they are ramped up, we would typically expect them to be operating at a relatively similar level of cost, of cost, depending a bit on the specific location. But on the hubs, there's no structural reason why additional hubs should be less efficient. Of course, the ramp up period is always less efficient.
On the satellites, they probably will tend to be less efficient from a warehousing cost perspective just because they have a smaller scale and therefore likely also less automation. So the satellites, from a fulfillment cost perspective, actually will be a slight investment into driving retention and driving customer activity.
Thank you. Now we take the last three questions. The next question comes from Angus Tweedie. Your line is now open. Please go ahead.
Hi, and thanks for taking my questions. I was just wondering, could you provide any sort of color around the active customer growth by region? And whether you're seeing faster growth in Germany or anything that would be great? And then secondly, within the quarter, it looks like you're probably focusing more now on reactivating existing customers rather than driving new customers. Is that fair?
And do you think that's just a quarterly shift or something we're seeing structurally coming through?
On the
first question, the active customer growth by region. Of course, that is always faster in the younger regions. So you will tend to see a higher active customer growth in rest of Europe compared to DACH because those markets are still early in the growth phase. And the more mature market gets and the more, of course, it also relies on growing the spending of the existing base. On your second question, actually, we do both.
So of course, we try to reactivate existing customers that have become inactive. And given the size of our customer base, that is a meaningful channel for us. And we continue to focus on new customers as well because clearly, we think Europe is very large, and we have something to offer to many more customers than we currently have in our customer base.
Thank you. The next question comes from Simon Boler, Exane.
Just two questions for myself, if that's okay. First is, I think as you previously mentioned, your full year revenue guidance implies a good acceleration into the Q4. Can you give us any kind of sense of how you'd expect the balance of that growth to come between growth in customers and kind of continued growth in spend per customer? Second question was with regards to the benefit that's been coming through the leverage of fulfillment costs from payment costs. Can you just remind us whether there's any kind of further benefit you'd expect to see coming through into the 4th quarter as well?
Yes. On the first customer growth and spending per customer growth. Because to be honest, clearly, we're working on both levers, and you can see that it has been very consistent over the last quarters that we have always been able to do both. On the other hand, it is always it's not so easy to predict how this really plays out throughout the quarter because depending on how the season works, one lever might turn out to be more efficient than the other. And then we also take the liberty to really steer it fairly short term depending on where we see the greatest opportunity.
Your second question with respect to payment cost, of course, the improvement year over year has been specifically large in the Q2 and Q3 because this is where we had the higher cost levels in the last year. For the Q4, we expect payment costs to continue to operate at a very efficient level even though the improvement year over year will not be as significant.
Thank you. The last question comes from Carl Hazlett, Goldman Sachs. Your line is now open. Please go ahead.
Hi, good morning. Just a very quick one picking up on the CapEx comment during the prepared remarks. Could you perhaps just give some color please around the expectation for CapEx broadly similar next year versus this year and how we should think about various things within that, for example, the cost for France and associated cost for other fulfillment centers? And then how much of that is maintenance CapEx, please?
Yes. I mean, first of all, on the CapEx question, Ruben pointed out, we expect similar levels as we've seen in 2016. We'll come up with the exact guidance beginning of year. But as we also commented in the past earnings calls, so we broke down the CapEx for the specific facilities actually. When you sum them up and add the additional satellites, we also commented on, it will be a number above €200,000,000 also in the next year, the exact one we'll come up with.
Thank you. There are currently no further questions. I hand back to our speakers for the closing remarks.
Thank you again for joining us today on the earnings call. Our next touch point will be our Q4 fiscal year 2016 trading update, the date of which we will let you know in advance as always. Afterwards, our regular Q4 earnings call will be on March 1. Also please note that our 2017 financial calendar is in the appendix of the earnings release presentation. So please mark your calendars.
Thanks. Bye bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.