Thank you. Good morning, everyone, and thank you for joining us again for our conference call for Q1 2016. As usual 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. Also as usual, the quick disclaimer upfront.
I'd like to remind you that we'll be making forward looking statements during this call regarding future events and financial performance. These statements are based on assumptions that are believed to be reasonable at the time they are made and are subject to significant risks and uncertainties. You should not rely on these forward looking statements as predictions of future events, and we undertake no obligation to update or revise these statements. Our actual results may differ materially and adversely from any forward looking statements discussed on this call due to a number of factors, including, without limitation, changes in general economic conditions, in particular, economic conditions in Europe changes affecting interest rate levels, changes in competition levels, changes in laws and regulations or the potential impact of legal proceedings and actions, and Solana's ability to achieve operational synergies from past or future acquisitions. As you know, this call is being recorded and web cast live on our Investor Relations website, and a replay of the call will be available later today.
With that, I'll hand it over to Ruben.
Yes. Thank you, Birgit, and good morning, everybody. Welcome to our earnings call. As always, the call will have 4 parts: first, about the results and business highlights then secondly, we'll look closer at our financials and thirdly, we'll talk about guidance and then we'll go to your questions. So let me get started with the result highlights and business update.
When we look at the numbers, we see a very good start into the year, which is very much in line with our expectations. We show you again the 3 dimensions: revenue growth, profitability and free cash flow. On the revenue growth, we have been growing at the upper end of our long term growth corridor of 20% to 25%. We achieved a growth of 24% in the Q1, which actually in terms of absolute growth represents €153,000,000 in additional revenues, which is actually higher absolute growth than we achieved last year. We achieved this result despite Easter being in the Q1 this year as opposed to the Q2 where it was last year.
And this means we continue to outperform the market. We continue to outpace competition in terms of growth, and we also continue to gain market share. On the second dimension, profitability. Here, we continue to invest, but we are spot on where we plan to be. And I think we're also the market and the analysts expected us to be with an adjusted EBIT margin of 2.5%.
This is in line with our full year guidance and also our internal plan. Despite a lot of continue to make, which I will talk about in a second, we continue to be profitable even in an off season quarter like Q1. We have commented before when you compare to last year that Q1 2015 was unusually high, driven by back end loaded investments in the last year and also driven by a particularly strong seasonality in 2015. Then on the 3rd dimension, free cash flow was driven by continued investments. So for the operating cash flow, we have, of course, the earnings.
We have an improved net working capital year over year, but driven by seasonality leading to an expected outflow in terms of net working capital in the Q1. And then we had some tax payment that affected our cash flow for prior years but which were also planned for. And then we have the investing cash flow, which is mainly driven by CapEx, which we will comment in more detail later on the call. So let's talk about the operational highlights. As always, it was our goal to continue to drive NPS, which we did very successfully.
We reached a new all time high in terms of NPS. And then secondly, to continue to drive our platform strategy, where we also continue to make progress. So the first topic I would like to point out is our co branded campaign with Ivy Park. We made great progress in becoming the digital strategy of our brand partners with this co branded campaign after Topshop and Kevin Kline last year. We started this season being the launch partner of Ivy Park, the new label by Beyonce.
We are an exclusive partner for Continental Europe, and we launched this brand with a joint campaign. The impact of this campaign for us been quite positive. I think Beyonce clearly is right now one of the most powerful, if not the most powerful influencer of our time. And we have driven again a very localized approach in the campaign, especially on social media, which was very successful. We had about 100,000,000 impressions just in the 1st 7 days of the campaign.
So it has been by far our most successful social media campaign. We sold 25,000 items of Ivy Park just on the 1st day. So we are all very happy with this. And I think this type of campaign is really one piece, one big piece of what differentiates us from competitors, specifically competitors like Amazon, that we are able to do these type of projects together with our brand partners. A second topic I would like to touch on is our fulfillment footprint, which we continue to invest in.
So the first topic is our first satellite warehouse for the Italian market in Stradella, which fulfills already around 50% of our Italian orders and has reduced lead time for impact on long term shopping behavior and CLV. And based on those results, we'll make decisions on future local satellite projects. Then with respect to our next big hub warehouse in Laar in Southern Germany, you can see on the picture, construction is progressing very quickly, and we are on track to take manual operations live in the fall of this year. And by doing so, continuing to improve our customer proposition, especially for Southern Germany, Austria and Switzerland.
Then the
team is working to finalize the planning for the next hub, which potentially can go live in 2017. And we continue to test and pilot new innovative delivery and return proposition to our customers. So we started our instant return product in Berlin as a pilot, which means as a customer, when you want to make a return, you can go to the website and order a return pickup. And then within 1 hour, a driver arrives and picks up the parcel. I tried this beginning of the week myself, and I think it's quite a good addition to our service proposition to the customer.
And then as a third topic, I would like to point out how we progressed on our platform strategy. We have discussed in a lot of detail in our Capital Markets Day how we want to grow beyond being just an online retailer, but really to continue to build the platform and the that our brand partners can use to be successful to grow online and to digitalize their business. And with that respect in that respect, we have made, again, a lot of progress in the Q1. We have continued to scale our tech team to now around 11.50 tech employees, which represents an almost 70% growth year over year, and the team continues to grow quickly. We have connected 150 brand partners to our partner program and are showing more than 20,000 SKUs on our sites.
We have connected the 1st offline store, BodyCheck, in Berlin to our platform. As you know, this is one of the big and long term projects that we have started to not only connect the inventory that we have in our own warehouses or in brand warehouses but also all the inventory that is sitting in offline stores into our system and make it digitally available to our customers and shoppable on our platform. And then last but not least, we're very happy to announce today the acquisition of a marketplace software company called TradeBytes. It is a company that offers brands very easy solutions to connect to online marketplaces. Tradewise also in the past has been one of the integrators for our own partner program.
We know the team very well for quite a time, And we are convinced that together, we can find even better solutions and better ways for our brand partners to digitalize their business and to connect their stock and their business to the online world. So we are very happy about this partnership and yes, are eager to start together with them to continue to build the business and to continue to become the online strategy of our brand partners. Now with that, let us move ahead to the financial update in some more detail. So you see here the revenue development in a bit more detail as you're used to in aggregate and then driven broken down by the different segments. So I already commented that we are very happy with 24% growth, continuing to capture market share.
In the DACH region, we are growing 17%, which, given the scale that we have in the DACH region, still is very fast growth. It isn't as fast as we have seen in the last quarter. I think the main reason for that is that effects like Easter tend to affect more mature markets even in a more pronounced way. And also, you remember the fraud impact that we had from last year, which, of course, was also more pronounced in the DACH region because here, we have the highest share of invoice paying customers. And then for rest of Europe, we grew 26 percent, which I think is very strong and yes, continues to be the fastest growing part of our business in terms of the fashion store.
There's one segment that we typically don't show on this page because in terms of scale, it is by far the smallest segment. But I want to mention it on this call because it has been making quite a good progress in terms of growth in the Q1 of this year. That's our other segment, which mainly comprises the Zalando Lounge, which is our own shopping club. They have been growing by more than 75% in the Q1, which is extremely strong, which has been driven by the new Zalando Lounge app, which we have launched, but also by externally sourced inventory. As you know, the fallwinter season was difficult for many brands because of the mild weather.
And so we're able to take on quite a bit of this last season inventory and sell it off as it counts, which is great for brand relations because it shows brands that we are also able to help them with respect to getting rid of old merchandise in a very good way. In terms of what has been driving the growth, let's take a look at our customer KPIs. So we continue to grow, driven by both active customer growth and GMV per active customer growth. So active customers have been growing by 20% year over year to an active customer base of 18.4 1,000,000. Quarter over quarter, it has increased by 500,000 actives.
This is driven continuously by the app taking more and more share and also having a significant share in the number of new customers that we acquire, especially young customers. It's driven by reduced churn and the successful campaigns that we have been driving in the Q1, both in terms of branding but also in terms performance marketing. And then at the same time, we see that we make progress in GMV per active customer. I think very positively, we have a new all time high in terms of average order per active customer, which has gone up to 3.2%, increased by about 15%, which I think is very strong. We see that the average basket size after return has been fairly stable, has been slightly going down.
This is driven by the reduced by the fast growth that we have in the lower price points that we have been discussing continuously over the last calls, which help us to grow but which, of course, over time, also have some effects on our average basket size. But for us, I think most importantly, the GMV per active customer is going up quite significantly year over year by 10%. So it's great to see that customers active customers shop even more with us, which is clearly driven by the extensions we have been making to our assortment but also by the improved customer satisfaction ratings that we have been able to achieve. Now let's take a look at the profitability picture. So as expected, we are at 2.5% adjusted EBIT for the Q1.
In the DACH region, I think the result is very strong. We have seen that payment costs have been coming back to normal, which is very good. We have been improving the margin compared to last year. This is also driven by the fact that we have actually kept some powder dry in terms of DACH region in the Q1. We have actually, in the DACH region in the Q1.
We have actually reduced slightly the level of marketing spending, which has also driven some of the margin improvement we have seen in that region. In Rest of Europe, we have increased our investment levels. I have mentioned before when we talked about the last year that we think, in general, the profitability level in Rest of Europe is probably too advanced given the growth opportunities we have in many of those markets. So we are ready to increase our spending whenever opportunities come up, and we have been actually spending slightly more in terms of marketing, also in terms of pricing invest in order to drive growth in this region for the long term. And then we take a look at our cost lines.
So the first thing that comes to mind on this chart is the gross profit, which has been reduced by about 3 percentage points year over year. I think it's at first, when you look at it, it's quite a large decrease. I think overall, Q1 has been weak in the industry. And of course, after the mild season, discounting overall has been the topic in the industry. When you ask me about this number, I think we are not so worried about it.
And I think you shouldn't be either. I think the effect can be explained, in general, 1st of all, by having, I think, a normal season start in this year versus a very strong season start in the Q1 of last year where we had, I think, almost a perfect quarter with a very early season start. That, of course, has driven a higher share of on price sales in the Q1. Secondly, FX has had an impact. I think this is not surprising.
We have been commenting on it a number of times, mostly the U. S. Dollar, which is related to our to how we buy at least part of our assortment. And this had an impact in the Q1. And then I mentioned that the Zalando Lounge has been growing very over proportionally by driving some additional campaigns.
And of course, the lounge is operating at much higher discount levels. So this also had an impact on gross profit. In addition to that, also tech investments, which we increasingly are also doing on the brand integration side, which is also allocated to gross profit. Then we come to the fulfillment cost here. I think we have a very positive development.
Even though we continue to invest quite heavily into our fulfillment proposition and convenience proposition, we had a positive development by 0.6 percentage points. Here, the biggest driver is really the payment cost improvement, which has gone back to a normal level that we would expect and which has driven this improvement year over year. And then in terms of marketing costs, we see almost 1.5 percentage points improvement here. I think it's the picture that we have been seeing over the last year extremely consistently. Plus, I think, in the Q1, given the seasonality, we did not see a lot of reason to accelerate at the efficiency levels we would like to see.
So we have not been pushing marketing so much in the Q1. In admin expenses, I think you see the general continued scaling of the business, especially in technology, but I think we are still at a very reasonable level in terms of administrative expenses. And then let's briefly talk about capital efficiency. So in terms of net working capital, I already said we saw, relative to sales, a very positive development compared to last year. We are around neutral on net working capital, which for Q1, I think, is a a quite good results.
In terms of CapEx, we see that CapEx has increased to about €25,000,000 in the 1st quarter, half going in intangibles, specifically tech developments that are being capitalized and then half going into property, plant and equipment. This is the €25,000,000 is not quite at the level that we guided to. So if you take the €200,000,000 that we guided to for the full year and divide by €4,000,000, of course, you get to roughly €50,000,000 per quarter. But this is really driven by how we exactly time the investments in the year. And we believe that the payouts will actually increase, especially for the warehouse related ops projects.
Very quick comment on liquidity. It has remained at about €1,000,000,000 So if you take the cash and cash equivalents that you see on the balance sheet, you have to add the short term deposits, which shows you then our total liquidity position of about €1,000,000,000 dollars And with that, let's come to the outlook. So as we have talked about, Q1 has been going very much according to plan and according to expectation. Q2 is also in line with our planning and in line with our expectation. And I think for that reason, the guidance really remains unchanged for the full year.
So we continue to believe that we will grow at the upper end of our target corridor of 20% to 25%. We continue to aim for an EBIT margin corridor of 3% to 4.5%. And we continue to aim for neutral working capital at year end and around €200,000,000 in CapEx. So I think for the year, we continue on track. There's just a small comment I would like to make on cost of sales.
I have mentioned the FX rate effect in the Q1. We expect that to continue in the Q2 but to a lesser extent in the second half of the year. And with respect to the tech investments, I briefly mentioned that we are sort of over proportionately increasing our tech investments that is allocated to the cost of sales lines. This has started in Q1 and I think will also continue throughout the year. All right.
Those were the comments I wanted to make. So let's turn over to, yes, I think the most interesting part of the call, which is, of course, your questions.
Thank you. Now we will begin our question and answer session. The first question is from Jamie Merriman, Bernstein. Your line
is open. Please go ahead. Thanks. Good morning. My questions are about the partnership and what you've announced this morning about 150 brands or 150 brands plus that you've signed so far.
First, I was wondering if all of them are existing brands with Zalando, if you
can give us any sense
of what percentage of revenue they represent today and whether all of them will handle all of their own fulfillment or if any of them will do a fulfilled by Zalando type partnership? Thanks.
Sure. So out of the 150 brands, I cannot give you an exact breakdown how many of them are new or existing, but the majority of them are existing. But there are also some brands that we have been able to acquire specifically for the Partner Program that don't work with us in terms of wholesale, but there are also many brands that have been working with us on wholesale for a long time and now start to do both ways of doing business on Zalando. In terms of the revenue share, it continues to be a fast growing but single digit. And in terms of fulfillment by Zalando, we are actually starting this year to test the fulfillment by Zalando solution, which we then will start to roll out.
We expect it to be quite well received by many brands. But so far, all the brands that are working on Partner Program are shipping through their own fulfillment center or through their own fulfillment partners.
The next question is from Claire Hov, RBC.
Yes, morning. Thanks for taking my questions. I have 3, please, if that's okay. The first one, just wondering if you could possibly quantify the negative impact from the earlier Easter this year and perhaps provide a bit more color on how trading has started in the Q2, particularly since I believe the cold weather in Germany continued into April and other parts of Europe as well? And second question, just wondering if you could give some color on KPIs by region.
I appreciate you don't officially report them, but just wondering whether you're seeing an increase in the number of orders per customer outside of the DAC region as well. And then third question on U. K. Growth. I think you had said previously you've been prioritizing U.
K. Orders in the warehouse for faster delivery times. So just wondering what the response has been to this, whether there'll be more of a push into the U. K. Going forward and how your thinking towards marketing has changed in the U.
K, please?
Sure. So on the first question in terms of the Easter impact, I think it's difficult to quantify it very exactly. And I think since the overall, the first quarter has been very much in line with our expectation, we have not broken that effect out very specifically. But when you look at Easter, it's a long weekend. It's 4 days where business, of course, is a bit slower because people are on vacation or go for a brief holiday.
And those days were sort of in Q1 and not in Q2. So it had some impact but also not an enormous impact. On your second question in terms of KPIs by region, yes, you're right. We don't disclose specific KPIs by country or by region in terms of the general trend that number of orders per customer is increasing, that we do see fairly consistently across the two regions, DACH and Rest of Europe. And then with respect to your third question, U.
K. So as you said, we have been making some convenience improvements in the last year, and that has increased the NPS quite significantly in the U. K. So we are now able to offer, I think, a convenience proposition that has improved very significantly. We have, on this basis, also increased our performance marketing spending, and U.
K. Is growing quite fast for us. And I think on this basis, we continue to evaluate what our next steps should be. I think in general, in the U. K, we right now still have the challenge that our brand is not as well known as it is in Continental Europe because we have always held back on brand marketing.
And I think that is a sort of commercial debate that we have to what extent we should increase our spending in the U. K. Over the next quarters.
The next question is from Charlie Muir Sands, Deutsche Bank.
I had several brief questions. The first is on the gross margin and currency. Could you just help quantify how much of the decline in the margin was due to currency? What proportion of your purchases are in dollars? And what your hedging policy is, please?
Yes. With regards
to the gross margin, maybe starting with the hedging effect or like the hedging policy we have in place. It's like we hedge a certain portion of our of the sourcing volumes we actually do in the currency, which is not where we do not have a natural hedge in place. And that actually helped us also with regards to the currency fluctuations we've seen in the past. As some of those hedges are rolling off now, we see the impact also in the Q1. But as Ruben mentioned, we see that impact mainly in Q1.
And also coming in Q2, there shouldn't be a major impact coming on in Q3 and Q4. And on the gross margin side, the major impact sorry?
Yes. Hello, the major impact?
The major impact, I mean, we do not break it out. Specifically, the major impact was actually coming from discounts from the shop but also from the lounge. The second point was coming
from that.
Great. And then the second question is you've called out the annualization of the change in payment method weighting and fraud for Q1. Can you just remind us whether that was a bigger factor in Q2 that we need to take into consideration? And indeed, how that faded out in Q3 as well?
Yes. So the majority of the fraud wave actually occurred in the Q1 and only some of it in the Q2. So in terms of revenue impact, the impact last year was larger on the Q1 than the Q2. In terms of EBIT impact, it was actually larger on the Q2 because that is when we accounted for the majority of the fraud losses.
And then by Q3, no impact really at all?
Smaller portion.
Yes. I think for Q3, it was fairly negligible in terms of impact.
Great. Thank you very much.
Thank you. The next question is from Dan Holman, Citi. Your line is open. Please go ahead.
Good morning all. A couple
of questions from me. First of
all, on trade bites. Could you just give us some guidance on how much this has cost, particularly the impact on cash flow for 2016? And then secondly, just so I understand, with the Zalando Lounge and the other businesses, is that stock a completely separate file to your main stock file? Or do you transfer in stock as trading conditions have been difficult in the quarter?
Yes. So on your first question on TradeBite, so we have agreed with TradeBite that we're not going to disclose specific facts about the transaction. In general, I think from that, you can already see that I think from a Zalando overall perspective, the amount was not super large. So it's somewhere in the area of low double digit million amount, which
I think makes
a lot of sense for us. And we think it's going to be a great addition in terms of one additional capability that we add to our portfolio. With respect to the second question, maybe you could repeat it because I didn't quite catch it.
So just to understand,
during a
season where you've mentioned that January March were difficult months, do you transfer stock from your main Zalando websites onto your Zalando Lounge websites? And therefore, has some of the growth of Zalando Lounge been through the same stockpile that you'd order now, will you be trying to sell at full price?
Yes. Yes. So in terms of how we clear stock on Zalando, there's a multilayered approach in terms of stock that we can send back to our suppliers, stock that we can discount. And also one lever is to actually sell fashion store inventory through the launch. But so that has been one part of Q1.
But actually, the bigger part of the growth in the lounge has been additional inventory that the lounge has purchased from brands that had a lot of leftover from the last season or from previous seasons and to sell this portion on the Zalando launch. So we do actually both.
The next question is from Adam Cochler, UBS.
Good morning.
Firstly, on Italy, when you sort of talk about the sort of improvement in net promoter score, etcetera, Can
you sort of just give some a
little bit more around how the Italian customer is reacting to it, the reduction in lead time, just some sort of feedback around that, please. And in terms of the margin being or the investment you talked about in Rest of Europe, is sort of the Italian distribution center a material contributor to that? Does it, in the short term, impair the margin of the products sold in Italy? And then on TradeBite, can you just sort of give us 1 or 2 minutes on what TradeBite is actually adding to your sort of your platform strategy, please? Thanks.
Sure. So on your first question, so the reaction by the Italian customer, I think, has been extremely positive. I mentioned an increase in NPS. Also, the qualitative feedback that we get from customers is very positive. I think you have to keep in mind that Italy is a market that is not yet very used to online shopping and where people have not yet, I think, fully appreciated the amount of convenience you can gain by e commerce that is functioning on a very efficient infrastructure.
And of course, the infrastructure includes also last mile delivery in all of these pieces. And the improvement that we have been able to deliver to the customer is quite notable and significant on the orders that are affected. So we hope that it really can change the way that people think about e commerce and think about sort of proximity of delivery because in Italy, offline shopping overall is still very prominent compared to other European markets. On your second question in terms of EBIT impact of the Italian satellites, so it had some impact because obviously, it is costly to launch such a project even though we are doing it with a partner. So as you know, the workforce on the ground is not our own team but the team of a partner.
But the cost impact has been very much according to plan. And when you look at it for the whole Rest of Europe segment, the impact has not been so large. So I think it's very much in line with what we thought we would see. And also from a cost perspective, it looks like it's going quite well. On your 3rd topic, what does trade by acquisition mean for our platform strategy?
I think on the Capital Markets Day, we talked quite a bit about how the platform strategy also includes us wanting to become really an essential part of our brand partners' online strategy. And I think this is what we're achieving more and more. And Tradebite is one important piece to this because in order to be successful online, brands need to connect their stock and digitalize their stock and make it available online to be able to do business on our platform and also on other platforms. And I think that is why TradePal is a very important point in this whole system where, of course, we are also working on these types of projects on how to better integrate brands into our systems. And this is where it adds a lot of capabilities, a lot of experience, and this is why we are very happy to have them on board.
The next question is from Georgina Johanan, JPMorgan.
Two questions from me, please. First of all, just on the release of the bad debt allowances that you flagged going through fulfillment costs in the Q1. Apologies if I've misunderstood, but is this can you just talk to that a little bit and A, perhaps quantify the release and B, just explain whether we should be expecting that going forward? I appreciate that there will be a helpful annualization effect in Q2. But should we also expect to see some further provision releases in Q2?
And then secondly, just a question on the Ivy Park brand that you're selling. Noticed that you're also selling that in the UK where obviously you don't have Topshop distribution rights. Does this mean that this could potentially open the door for you to actually selling the Topshop brand in the U. K. As well, please?
Yes. Let me briefly comment on the second part of the question, and then Jan will comment on your first question regarding the allowances. So yes, Ivy Park has been successful in the U. K. As well, and we were very happy that we were able to sell it almost across the board.
In terms of what it means for Topshop for the U. K, of course, we are discussing this continuously with Top Shop. And I think a lot of the like the success that we have had together in Continental Europe, of course, opens up many possibilities to do additional business in the future together with Topshop. So let's see where it takes us. But of course, it's something that we continue to discuss with our partners because from a customer perspective, we just really want to be able to offer as many brands and as many markets as possible.
Yes. And with regards to the bad debt allowance release in the Q1, we're talking about SEK 7,000,000 as you can also find in the Q1 accounts. And that is due to the fact that with the payment issue we had last year, we obviously also went a bit more conservative in our allowance building process. And given the fact that towards the end of the year and also in Q1, we have a better vision and better grip on the respective KPIs and see how they trend. It gave us the confidence then to release a bit of that provision build over the last weeks months.
With regards to the next quarters, we feel quite comfortable that at the moment, our valuation of the provisions in a way or the building of the provision is wide. And so we do not anticipate at the current stage any further release.
The next question is from Volker Bossel, Baader Bank.
First, I would like to know what's the market growth in ecom in the Fashion segment was in Q1 from your point of view? And second, I would like to give it another try on the gross margin minus 3 20 basis points. So how much was related to currencies? Is it fair to assume 100 basis points? Or is it even too high just to get an indication here?
And also, the third question related on growth drivers in the Q1. Which product segment or brands provided the best growth momentum? Or additionally, on regional specifics, what is worth to highlight here? Where do you see the best momentum outside the DACH region? And finally, a trading update.
How was your run-in April beginning of May? As you mentioned in the report that you had slow start into springsummer season so far. Perhaps a word on that.
Sure. On your first question, I think it is always very difficult to get very precise short term data on how the online market is growing. The numbers that we believe in most, like a bit more for the mid to long term, is that the growth is somewhere between 5% percent for Online Fashion in Europe. But of course, that can fluctuate quarter by quarter, but it's difficult to say how exactly it has been fluctuating. In any case, I think it's very clear that we are outpacing the market by something between a factor of 23.
On your second question with respect to gross margin, how big has the FX impact been? It has been a bit less than the 100 basis points that you mentioned. So it has been it has had some impact, but it's also not a huge impact. I think everything that we do with respect to hedging and being careful in terms of managing currency risk has been paying off to keep this really the impact very limited. But of course, we cannot hedge away every impact over the long term.
Then on your third question in terms of growth drivers, so where do we see the best momentum outside of DACH? As you know, we don't comment on specific markets, but I think the momentum is quite good. In the Nordics, they have been performing quite consistently. Actually, we see across our portfolio very high growth rate, especially now in the U. K, but also commented that the basis is relatively small.
In Italy, we have seen a lot of positive momentum related to our satellite warehouse. So I think every market is really developing very much in line with what we would like to see, and we are happy pretty much with the development across the board. And then with respect to your 4th question, I would actually need to ask you to repeat it. I just see in my notes, Q2 trading update. So the question is, if we do a Q2 trading update?
No, no. I would be curious. How was your run, sales wise, in April and May, so the start in the Q2? As you mentioned in the report, a slow start in springsummer season. So what do you mean by saying that and perhaps a hint here?
Yes, makes sense. So I thought you were referring to our trading updates with the preliminary numbers that we already published. So as I said, I think the Q2 from the early visibility that we have has been going in line with plan. I think some questions earlier, somebody made a comment about weather in April and then May. I mean, yes, the weather, it is how it is.
It's going back and forth. I think, in general, we have the great we are lucky that we are digital and online and can react, I think, very much quicker than competition to such changes. So overall, we think Q2 is going in line with how we would like it to go.
Thank you. The next question is from Graeme Reneck, Exane. Your line is open. Please go ahead.
Just two questions from me, please. Firstly, you previously highlighted a campaign in reactivating it has progressed into Q1. How do you, in general, approach acquiring these customers? What is their purchase behavior after being reacquired? And what are the acquisition costs associated to these cohorts versus brand new customers to Zalando?
And then secondly, I just saw that orders were up 30%. Average basket was down 2%, but revenues was up 24%. So I just wondered whether this implies a higher returns rate now across the business.
Sure. So on your first question, the reactivation campaigns that we have been doing in the past, we continue to do them. Of course, I think they have become now really a regular part of our business. So we do them continuously. Although typically, we do it more in season, we don't do it, for example, early in the Q1 and in an off season time.
The approach is there can be several approaches. I mean, one is really by e mailing, and then we even go so far that we do also physical mailings. We do some without vouchers. We do some with vouchers. So there's a pretty sophisticated system in terms of optimizing these reactivation campaigns.
The cost of these reactivation, of course, lies in the mailing costs themselves, but then also potentially cost for reactivation vouchers. But overall, it is a very efficient way to drive active customers because people that have bought with us before are, of course, easier to convince to shop with us again than people that have never tried Zalando. With respect to the growth in terms of orders and in terms of revenues, Well, I think there are a number of effects that can drive this difference. The return rate actually has not been impacting it. The return rate is fairly stable.
There are a number of effects like revenue shifts between quarters. There are effects like marketplace going over proportionally that are impacting this gap.
The next question is from Magnus Raman, Handelsbank.
Two questions for me. Can you comment on the development of competition in Rest of Europe region? And if that has affected you in terms of pricing or if you're more aggressive pricing is only an effect of your own priorities? And then secondly, in the major uptick in volumes in Zalando Lounge, should you view that as only a onetime effect of your opportunity here to source externally purchase merchandise? Or is there also something that we could put into our models?
Sure. So on your first question with respect Q1, we don't we have not seen any unusual effect of competition on pricing. Of course, in the quarter that is following a season that's, in general, by the industry was perceived as too warm or adverse in terms of weather. You have in the market, of course, more and more people that are driving higher discounts. I think to a large extent, we can actually decouple from such developments driven by the flexibility that we have in our own supply chain and the very advanced pricing algorithms that we are using.
So it is very much a result of our own priorities. We are driving different campaigns in different markets, and some markets are very reactive to discounts. Markets also have different return rates. So there is, of course, a different rationale in each market on how you set prices. And we have commented before that the DACH region tends to be less discount fee.
And this difference is, of course, even more pronounced in off season quarters where discounting plays a bigger role. With respect to your second question on the lounge, well, it has been a nicely growing business in the past, and it has now really accelerated in the Q1. I think to some extent, this was a specific opportunity that presented itself in this particular market environment, which the team did a very good job to make use of and to execute on. So I think we shouldn't sort of expect this very high level of growth now continuously. On the other hand, the lounge is clearly a fast growing business, and it's just started to really use the advantages of the new app.
Shopping clubs, as you know, are very heavily driven by app usage because it has this every morning, you get a new campaign, every morning, you get a new push notification. It is very engaging for customers. So we expect the launch to continue on a very good growth trend, although it may not be as pronounced as it was in the first
quarter. We are coming to the last four questions in the queue. The next question is from Jurgen Kolb, Kepler Cheuvreux.
Two questions. First, you mentioned, I think, that you didn't find real compelling marketing initiatives in the Q1. Has that changed? Or do you see anything on the short term horizon where you may want to increase marketing in order to push maybe sales in the Q2 currently? And secondly, I see that, Mr.
Adler, you made a comment here saying that you hope to make further acquisitions this year. Maybe a word on where you see these acquisitions, adding to your expertise, maybe a little additional comment on that front?
Sure. So yes, it's right that in the Q1, we did not see many opportunities to really increase marketing spending, especially on performance marketing to drive growth over proportionally. This doesn't mean that we have to spend this money in Q2. I think we will continue to do it like in the past. When we see opportunities, we are ready to spend and we can do it quite fast.
If we don't see them or if we think they're not the return on investment is not good enough, we will not do it. So to be honest, I can only tell you after Q2 if we have seen these opportunities or not because we are continuously evaluating them. On your second question in terms of acquisitions, I think like last year, we are ready and more than willing to do acquisitions and also numerous acquisitions if we are able to find capabilities that we can use to build our platform and to become stronger in the core. And I think also in terms of what we have done last year, these capabilities can be around how to integrate brands into our platform. Like in the example of Trade Bites, they can be around buying technologies around advertising technologies where we are building a very exciting product.
There, we did some acquisitions last year. It could also be in the form of consumer facing apps that we find interesting to acquire. It could be companies related to mobile in general. It could be companies related to advanced data analytics, related to artificial intelligence. I think there are numerous fields where we are looking.
And luckily, we are equipped with capital in a way that we can at any time execute on these opportunities.
The next question is from Christian Schreckenbacher, Hauke Neufelder.
Also three quick questions from my side. The first one on trade buy and potentially further M and A. I'd just be curious how you see yourself well equipped in terms of managing the connectivity of the brands and digitalization, I. E, I guess that most of the brands that show quite a strong demand of logging on to that services might not always have the right supply chains to connect. So obviously, TradeBite helps you now.
Just be curious if you see further M and As needed to get up to speed where you want to be. And secondly, just on Ivy Park and sportswear. If I'm right, the initiative started in Q2 in terms of Ivy Park. So should we expect sales to somewhat accelerate or benefit from that in the second quarter? And thirdly, related to that, your Fashion Meat sportswear campaigns, I guess, that's split into 3 parts.
And if I'm right, the 3rd part has started in May. And here, just be curious again how you see the phasing of that. Would it be the strongest emphasis on the 3rd part here? And what are you planning in particular as this trend seems to be quite strong in this year?
Sure. So on the first question with respect to Trade Bites, of course, for brands to digitalize their business and to really connect their stock into the offline world, there are different parts that they have to get right. One is, of course, the technology systems they need to build in any case on their end, for example, to have visibility on their own stock. Then there's the second part, how to connect this data then into platforms or into marketplaces, which is the area where TradeBite is active. And then, of course, there are many things around supply chain like being able to, of course, supply the goods and then also to fulfill them to the customer, which is also an area where we are doing a lot of work in terms of fulfillment by Zalando.
And we are already today, obviously, able to integrate brands into our system. This is why a partner program, for example, is working. So we already can do it. We just think we can get a lot better at it and make it even easier for our brand partners, and that is what we are working on. And they're trade by this one piece, but there might be additional pieces that we will either build ourselves or acquire or both.
To your second question, IV Park, well, yes, hopefully, there's going to be a benefit in Q2. Obviously, I mean, I think the campaign has been very successful. On the other hand, of course, this is also reflected in our planning. And to your third question, Fashion Meat Sportswear, I think there has been a very interesting trend over the last seasons and even more pronounced in this year. In terms of emphasis, yes, you're right.
We have actually three phases of brand marketing. We have the season start, then we had Ivy Park, and then we have the sort of remix, so to speak, of Fashion Meets Sportswear. Actually, they are they have fairly similar emphasis, maybe with a slight pronunciation on Ivy Park also in terms of the attention that this campaign has been getting. But in general, the emphasis is also similar to how we have been managing it over the last seasons.
The next question is from Rocco Strauss, Arwood Research.
Yes, good morning. Two questions for me. One on marketing spend. You said you have well, you said you have to or you plan to raise marketing spend later on through the year. Some more color here on how that will go along with higher adjusted EBIT guidance will be appreciated.
And second one, taking another look at the other segment and the strong growth, which you explained partly by more third party inventory on the flash sale side. I guess just curious here if there are some early revenue gains from fleet movements, Zip Card, etcetera, and some of those initiatives. I guess the real question behind that is, how will we see platform driven revenues like also shop in shop on the main Zalando page or app coming through over time to differentiate between the main bread and butter wholesale part as well as what you drive through the new platform initiatives?
Sure. So in terms of marketing costs, I think that the comment I tried to make is that in the Q1, so we did not spend all the marketing that we could have spent, given that we did not think it makes a lot of sense at this point. That, of course, doesn't mean that marketing has to increase over the course of the year. So there, we have flexibility in how we see our marketing, which, of course, then will impact how growth and how margins develop throughout the year, and we will manage it in a way that we think is most value creating. But all in all, I think that leads to the guidance that we have given, and our marketing spending will be in line with that guidance.
But as you know, we also have ways to trade investments in different cost lines. You can decide to invest more into fulfillment or to invest more into marketing depending on where you see the best payoff. On your second question with respect to the other segment, so the increase in revenues that we have seen is mainly related to Zalando launch. Of course, also the new apps start to contribute revenues. But given they have just been launched, I think it is way too early for them to have such a notable impact given that the fashion store and also the Zalando Lounge actually are very meaningful businesses.
So in terms of having an impact on the overall top line, you have to generate, of course, quite meaningful numbers. Of course, many of our platform initiatives or the initiatives of having brands doing their business directly on Zalando also involve the fashion store or the main our main Zalando proposition, including the app. And that is, of course, already happening. So I think a big part of the impact of integrating additional partner stock will come through the fashion store because it is the proposition that we have with the broadest reach and the most customers. So a lot of the impact obviously will also come from this part of the business.
The last question comes from Andreas Niemann, Commerzbank.
Yes, good morning. Three questions. €4,000,000,000 again, but a different question. Is fair to assume that the negative U. S.
Dollar impact at gross margin level is related just to the private label business? Or are you forcing a material part of the 3rd party brands in U. S. Dollars? Question 1.
Question 2, the pilot test with BodyCheck in Berlin. And in what way was it successful? And can we expect that you take on more brands on board?
Or yes, would it
take more time? Do you want to test more things? And if it takes more time, why and what do you need to improve? And the third one, maybe I missed this one, the operating margin in the DACH region was up. Was it just better full price sell through in the DACH region?
Or anything else that can explain the EBIT margin increase?
Sure. So I would ask Jan to comment on the first question. I will first tackle number 23. So on BodyCheck, it has been successful in the sense that we have successfully integrated the first store, which I think is quite an achievement in such a short time because you have to think about all the complexities that come with such a project. So many stores don't even have a proper system of measuring what type of inventory and what specific items they have in the store and if they are available at the time and then to connect them into our system to make sure that they can fulfill actually from store to consumer that they're able to handle outbound shipments.
So there's a lot of complexities, which is also why we always have said this is one of the projects that probably has the longest lead time because there are many topics to be solved. And this is why we are super happy that we managed within a couple of months to launch the first pilot store, and it is working. And they can fulfill orders, and we see the inventory in our system. And this is why we think this is a big success. On your third question, operating margin in the DACH region.
The improvement that we've seen here comes from 2 effects, the payment cost and increased marketing efficiency.
Yes. So to make it quick on your first question, I mean, it's fair to assume that the major impact comes from private labels also. Yes.
Thank you. There are no further questions for today.
Well, with this, thank you for joining us today. As you know, our next touch point will be our Q2 trading update and the date we will let you know a little bit in advance. And then the following touch point will be for our regular Q2 reporting, which will happen on August 12, 2016. Talk to you then. Thank you.
Good morning, everyone, and thank you for joining us again for our conference call for Q1 2016. As usual, with me today are Ruben Witter, 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. Also, as usual, the quick disclaimer upfront. I'd like to remind you that we'll be making forward looking statements during this call regarding future events and financial performance.
These statements are based on assumptions that are believed to be reasonable at the time they're made and are subject to significant risks and uncertainties. You should not rely on these forward looking statements as predictions of future events, and we undertake no obligation to update or revise these statements. Our actual results may differ materially and adversely from any forward looking statements discussed on this call due to a number of factors, including, without limitation, changes in general economic conditions, in particular, economic conditions in Europe, changes affecting interest rate levels, changes in competition levels, changes in laws and regulations or the potential impact of legal proceedings and actions and Solana's ability to achieve operational synergies from past or future acquisitions. As you know, this call is being recorded and webcast live on our Investor Relations website, and a replay of the call will be available later today. With that, I'll hand it over to Ruben.
Yes. Thank you, Birgit, and good morning, everybody. Welcome to our earnings call. As always, the call will have 4 parts: 1st, about the results and business highlights then secondly, we'll look closer at our financials and thirdly, we'll talk about guidance and then we'll go to your questions. So let me get started with the results highlights and business update.
When we look at the numbers, we see a very good start into the year, which is very much in line with our expectations. We show you again the 3 dimensions: revenue growth, profitability and free cash flow. On the revenue growth, we have been growing at the upper end of our long term growth corridor of 20% to 25%. We achieved a growth of 24% in the Q1, which actually in terms of absolute growth represents €153,000,000 in additional revenues, which is actually higher absolute growth than we achieved last year. We achieved this result despite Easter being in the Q1 this year as opposed to the Q2 where it was last year.
And this means we continue to outperform the market. We continue to outpace competition in terms of growth, and we also continue to gain market share. On the second dimension, profitability. Here, we continue to invest, but we are spot on where we plan to be. And I think we're also the market and the analysts expected us to be with an adjusted EBIT margin of 2.5%.
This is in line with our full year guidance and also our internal plan. Despite a lot of investments that we continue to make, which I will talk about in a second, we continue to be profitable even in an off season quarter like Q1. We have commented before when you compare to last year that Q1 2015 was unusually high, driven by back end loaded investments in the last year and also driven by a particularly strong seasonality in 2015. Then on the 3rd dimension, free cash flow was driven by continued investments. So for the operating cash flow, we have, of course, the earnings.
We have improved net working capital year over year, but driven by seasonality leading to an expected outflow in terms of net working capital in the Q1. And then we had some tax payment that affected our cash flow for prior years but which were also planned for. And then we have the investing cash flow, which is mainly driven by CapEx, which we will comment in more detail later on the call. So let's talk about the operational highlights. As always, it was our goal to continue to drive NPS, which we did very successfully.
We reached a new all time high in terms of NPS. And then secondly, to continue to drive our platform strategy, where we also continue
to make progress. So the first topic
I would like to point out is our co branded campaign with the topic I would like to point out is our co branded campaign with Ivy Park. We made great progress in becoming the digital strategy of our brand partners with this co branded campaign after Topshop and Kevin Kline last year. We started this season being the launch partner of Ivy Park the new label by Beyonce. We are an exclusive partner for Continental Europe, and we launched this brand with a joint campaign. The impact of this campaign for us has been quite positive.
I think Beyonce clearly is right now one of the most powerful, if not the most powerful influencer of our time. We have driven again a very localized approach in the campaign, especially on social media, which was very successful. We had about 100,000,000 impressions just in the 1st 7 days of the campaign. So it has been by far our most successful social media campaign. We sold 25,000 items of Ivy Park just on the 1st day.
So we are all very happy with this. And I think this type of campaign is really one piece, one big piece of what differentiates us from competitors, specifically competitors like Amazon, that we are able to do these type of projects together with our brand partners. A second topic I would like to touch on is our fulfillment footprint, which we continue to invest in. So the first topic is our first satellite warehouse for the Italian market in Stradella, which fulfills already around 50% of our Italian orders and has reduced lead time for our Italian customers by 1.5 days, which has led to an all time high in NPS in Italy. And we continue to assess and measure the impact on long term shopping behavior and CRV.
And based on those results, we'll make decisions on future local satellite projects. Then with respect to our next big hub warehouse in Laar in Southern Germany, you can see on the picture, construction is progressing very quickly, and we are on track to take manual operations live in the fall of this year. And by doing so, continuing to improve our customer proposition, especially for Southern Germany, Austria and Switzerland. Then the team is working to finalize the planning for the next hub, which potentially can go live in 2017. And we continue to test and pilot new innovative delivery and return proposition to our customers.
So we started our instant return product in Berlin as a pilot, which means as a customer, when you want to make a return, you can go to