Good morning. Thank you. And thank you for joining us on our conference call to review our Q3 2015 financial results. 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.
Before we begin, 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. 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 turn over the call to Ruben, who will review our Q3 results.
Yes. Thank you, Birgit. Good morning, everybody, and thank you for joining our Q3 results call also from my side. As always, the call will have 4 parts. First, we'll look at results highlights and business update.
And then we will look at the financials. And then we'll take a closer look at our outlook. And last but not least, answer your questions. So let's get started with the results highlights and business update. So where do we stand after 9 months of performance in the current year?
We have three dimensions. As always, we would like to look at our growth, profitability and free cash flow. When we look at growth, I think it's quite clear that we see a substantial outperformance in the 1st 9 months. When we started the year, we said we are targeting our long term growth corridor of 20% to 25%, but that we would like to accelerate if we see specific growth opportunities. And very clearly, these opportunities have come up in the 1st 9 months.
We have been growing 35% and in the 3rd quarter, even more than 40%. This is a very significant acceleration of growth compared to last year. It is very substantial growth at scale. We're actually outgrowing the overall e commerce market by a factor of 3 to 4, and we are also growing substantially faster than long term strategy. On the profitability side, we see that we continue to show very clear profitable growth despite the acceleration in growth and the investments that were required to get there, we are able to show an improvement year to date in our profitability, and we will be clearly profitable for the full year.
On the free cash flow side, what we see is that free cash flow is negatively impacted by temporary cutoff effects from pretax reimbursements as well as investments in better stock availability and pressure assortment at the beginning of the fallwinter season and also increasing M and A activity in this year, which we have made in order to increase the speed on our platform initiatives and also increase the speed at which we build our tech team through acquihires. Overall, I can say we are really happy with those numbers as they are a result of great execution. So I can only thank really the team for the great efforts they have made throughout the first 9 months. I think as they are very much in line with our statement earlier this year to invest into growth opportunities as they come up and as they are not in conflict with our commitment to show profitable growth for the full year.
So I
think the most important question is really what is driving this very substantial increase in growth that we have seen. And in my mind, there are 2 factors driving this growth. The first one is a very fundamental and strong trend that we see, which is due to the very strong factors are very similar to what I mentioned in the Q2. I think they very much remain to be valid. So I think it is the growth is a result of the investments and improvements we have made in many dimensions.
For example, in our assortment where we have added throughout the year more and more attractive brands, where we have extended our value for money offer to acquire additional customers, where we have very consciously invested into some niche categories like underwear and maternity, where we have pushed some product segments like sneakers and shoes very successfully throughout the year. So this has been one important area of improvement. The second one has been mobile, where we are now approaching 60% mobile traffic. It continues to increase quarter by quarter In some markets, we're even significantly above 60% mobile traffic share. We have pushed app downloads by additional 3 1,000,000 app downloads in the 3rd quarter to now 14,000,000 downloads, which continue to show very strong KPIs.
Another area is the whole convenience aspect of what we do, which always has been at the heart of our proposition. We're offering faster delivery in markets like Spain in Q3, and we open direct injection to Paris. So there are many local initiatives to make the experience even more seamless. We are piloting same day delivery into German cities. So shopping at Zalando has become even more convenient throughout the year.
And last but not least, the investments we have made in our brand marketing. In Q3, we have launched global campaigns that were quite successful in Austria and also Italy. We have had a very season start campaign with the Motro Shellio style, which was around inspiration and fashionability, I think very much along the line with what we have seen in the first half of the year. Actually, the campaign half of this campaign had more than 3,000,000 page views and a lot of pictures must upload. So it was a quite interactive campaign, which is very much in line with how we want to position Zalando for the long term.
So I think this is really the fundamentals and the strong basics of our growth.
Then I
think in Q3, we had some very specific and more temporary effects that lifted our growth to above 40%, which we call Q3 growth boosters on top. So one is the very strong clearance there that we have made in July August. We set ourselves the target to go into the new season with a very clear warehouse where we have cleaned up all of the assortment from the springsummer, which has been quite successful. So we have been reaching a very high sell through rate. And for that, we also were willing to incur some extra temporary discounts.
Secondly, we had a very strong season switch in September, which was actually earlier than last year. So that made for a very good start of the fallwinter season. And I think to some extent, at least on the revenue side, we also had a somewhat weak comparison period with the Q3 of last year. So there were a number of temporary effects that led the Q4 Q3 growth to be quite extraordinary. So besides the specific initiatives to push growth in the 3rd quarter, we also have continued to invest into to more than 900 tech professionals.
We have added to more than 900 tech professionals. We have added more than 100 tech professionals in Q3 alone, and we are still hiring at fast speeds. So we will reach a level of more than 1,000 tech professionals at year end, which we think is great. Secondly, we are pushing forward on the different platform initiatives such as Zalon, our curated shopping model where we are investing a lot into the tooling for stylists, but also on Zalando Media Solutions, which as you know has the goal to offer targeted marketing services to our brand partners. We have this quite successfully in 2015, and we received a lot of interest and positive feedback from our brand partners.
So this is definitely something we want to start scaling in 2016. And here, we make a number of quite conscious investments into this product and into this tooling. And thirdly, as you know, we have accelerated our build out plan to keep up with the fast growth we have seen recently and that we also want to see over the next year. So we have decided to do the build out of Molchan Labbach even earlier and to launch our next large warehouse in Laar even earlier than initially planned. So the kickoff has started and the projects are on track just as well as our first satellite warehouse that we are piloting in Italy, which is planned to go live in the summer season of next year.
Also in terms of our relationships to our brand partners, we have done a lot of progress. I already mentioned some of these levers earlier when I talked about the growth drivers, but we think these are also really long term trends. So we will continue also this season to do joint campaigns with our strongest brand partners. So you will recall the quite successful Topshop campaign that we had in springsummer. We are now doing a similar format together with Calvin Klein featuring Joanne Smalls.
The campaign will launch over the next couple of days. And we think it's quite a good addition because it is pushing really this category, I already mentioned, underwear, where we think we have a lot more growth potential, but it also pushes our fashion credibility as I think Calvin Klein is an extremely strong partner to do a joint campaign with. And for Calvin Klein, it is, of course, a great tool to use Zalando as a platform to make their brand more well known and to also push it in the offline space. Secondly, we have continued throughout the year to offer more and more interesting brands. Most recently, Banana Republic has come live and we have made some further addition in premium brands.
And so also here we are showing great progress. And last but not least, we continue to invest into the tooling that we offer our brand partners to make sure they can manage the content on Zalando even better themselves and can manage their own brand shops on Zalando. Now, we have more than 70 brands signed up, and we continue to scale quite quickly also in this important strategic direction. So those were the major points on the business updates and the main operational highlights. Let's now take some time to dig deeper into the financials.
So first of all, let's take a look at the growth and the underlying growth numbers. So on Page 7, I think all of these numbers speak for themselves. So year to date growth of 35% in the group and 42% in the 3rd quarter. In DASK, we see year to date growth of around 30% in the 3rd quarter, even 35%. In Rest of Europe, we see year to date growth of more than 40% and Q3 growth of more than 50%.
I think there's not much to add to this. I think all of these numbers are extremely strong. When we look one level deeper into the customer KPIs that are, of course, driving this growth, Also here, we are super confident and super happy about the development. We continue to see a strong combination of active customer growth and spending per customer growth. This quarter, the emphasis clearly has been on the active customer growth, which has been which has been growing by 22% to 17,200,000 active customers.
In Q3 alone, we have added 800,000 customers, which is a combination of new customers we acquired and successful retention of existing customers.
At the
same time, we see that the frequency goes up. The average basket stays fairly constant, and GMV per active customer continues to increase to a level of €190 per active customers. I think these KPIs show that with the investments we are making, we are investing into the right things and that these investments don't lead to like in only short term growth but really a very healthy development of our customer base. Now let's move on to profitability and the profitability KPIs. As mentioned, we have invested in the 3rd quarter to capture specific growth opportunities that we saw in the 3rd quarter.
So for this reason, our EBIT margin decreased in the Q3 and was negative, whereas year to date, the margin is still on a positive trajectory. When you look at the underlying regions, you see a similar trend in DACH and Rest of Europe. In both regions, we have ramped up our investments. And that is still somewhat around breakeven. Rest of Europe is negative, which is fine because here we are obviously even more aggressively investing into growth.
But I
think it's more insightful in this case to look at the different cost lines of the P and L. So if we take a chance to run through the P and L on Page 10, Let's take it cost line by cost line. So cost of sales, what you see is that gross margin is flat compared to last year. So it's fairly constant, which has to do with the or even despite the aggressive warehouse clearance that we did in the Q3, the gross margin is at the same level as it was in the Q3 of last year. Year to date, the improvement in gross margin is, I think, very strong with 3 percentage points improvement.
So I think on the gross profit, which is, of course, our most important P and L line, the trend looks still extremely positive for the full year. Now the fulfillment cost line, I think this is where you see most clearly the investments that we have made both year to date where there's, of course, also a significant impact from the fraud issue of the first half of the year, but also in the third quarter where we invested significantly in fulfillment cost. Let me comment maybe on those factors. So first of all, a lot of the investment went into accommodating the superfast growth that we saw in the Q3. So we had to find a way to deal with this very high demand in a way that is not compromising customer satisfaction.
This was the most important element to us. So we were able to actually do this 40% growth on such a high volume only by acquiring additional temporary capacity in our warehouse facilities, which, course, by nature always is a bit less efficient. But we were willing to take these additional inefficiencies in order to generate this growth because we think it was a strong opportunity to acquire new customers and to acquire additional growth. So this was the first area of investment in the fulfillment cost line. The second one was the additional customer proposition investments that we made.
I mentioned some of those at the beginning of the call. We have been adding throughout the year, I think, many features, faster delivery, more reliable delivery, more convenient return processes. We have continued to invest into the customer proposition also in the Q3. Then we had, as a third element, some additional cleanup from the payment issues we had in the first half of the year, where we have a single digit €1,000,000 effect in the payment cost lines from the first half due to lower than KPIs for Q3 and also in the 1st weeks of Q4 look fine from everything that we see. So we are confident that this topic is now really dealt with, but we had some additional cost effects that were booked in the 3rd quarter.
And then last but not least, we mentioned that we are heavily investing into our tech capabilities, for example,
on the mobile
side but also on cost line. So also here, we see the additional level of investments. And as we mentioned at the beginning of the year, a lot of these investments are backloaded as the tech hiring is ramping up throughout the year. Now when we come to the next cost line, marketing costs, here we also see year to date an improvement of about 1 percentage point. In the 3rd quarter, we see an increase in marketing cost relative to sales by about 1 percentage points, which is, I think, interesting and can be quite well explained.
I think the main reason for this is that we actually moved the season start campaign. In this year, we moved it to September. So last year, actually, because the season started so late, we pushed a lot of our campaigning into October. So we pushed a lot of the marketing costs from Q3 into Q4. This year, which is, I think, a positive development, we were able to do the campaign earlier and start into the season.
So also some of the marketing cost was now in this year shifted from Q4 into Q3. Plus, we continue to invest into app downloads quite consciously, which is also an additional investment we made relative to the last year. So on the marketing cost line, I think the increase that you see in Q3 is quite clearly temporary. In the Q4, we will again see marketing as a percent of sales coming down compared to last year. And we'll continue to operate on such a trend.
So when we on the administrative expenses and others, I think the trend continues quite clearly. So we are scaling our sales faster than we have to scale our administrative functions even though some of the tech investment also falls into this cost line. Here, we continue to see leverage from gaining scale.
So all
in all, I think the negative margin that we saw in the 3rd quarter is mainly driven by the investments that we did to make use of this unique growth opportunities that we saw this quarter. Plus you also have to keep in mind that the Q3 is seasonally the weakest quarter of the year since you have summer holidays plus the end of season sale. And so for the full year, we are clearly on track to profitable growth. So we don't see a temporary decrease in our margin in 1 quarter as a big issue. Actually, we see it very much in line with the strategy that we put out at the beginning of the year.
Now let's briefly move to our working capital. So we actually improved our working capital when you just look at the Q3 year over year. In terms of capital expenditure, we spent SEK 20,000,000 in the Q3 with around 60% of our CapEx going into property, plant and equipment. And in addition, we spent another €5,000,000 on M and A, which we include from our CapEx analysis a year because we really only focus on the pure CapEx items. Please note that M and A is also excluded from our annual CapEx guidance from roughly €75,000,000 for 2015.
A quick look at our liquidity. I think there's not much of an update here. So we see liquidity at a bit more than €1,000,000,000 When you look at cash and cash equivalents on the balance sheet, you see only
€925,000,000 here. You have to add up
the short term deposits of 1 €1,000,000 euros So with those comments, let's move to the 3rd section, which is for the full year 2015. From our trading statement, you know that we have changed our full year guidance. At the midpoint of the guidance, we have added roughly another €100,000,000 in revenue. So we have increased our growth, and we have reduced adjusted EBIT by about €25,000,000 We think all in all, this is a very positive trade off, especially when you keep our long term strategy in mind. On the revenue side, based on the strong growth momentum we have seen in the 1st 9 months of this year and the early visibility that we have on the fallwinter season, we have been increasing our 2015 revenue guidance to 33% to 35% for the full year.
Our EBIT guidance driven mostly by the reacceleration and growth and the associated investments plus the long term tech investments that we are doing, we expect our adjusted EBIT margin to be between 3% 4% for the fiscal year 2015. This would mean that we roughly keep our margin constant at the level that we have seen in 2014. And on capital efficiency, we'll continue to focus on capital efficiency, and we continue to expect neutral working capital at year end with some movements during the year as we go through the seasons. We also continue to expect around €75,000,000 on annual CapEx in 2015, which is excluding M and A activities. Here's one quick sneak preview I would like to give you on 2016 CapEx outlook because it is impacted by the decisions we have taken a bit earlier this year to accelerate our warehouse build out in order to be prepared for future growth.
We expect that the CapEx in 2016 to be higher than the level in 2015 due to our faster warehouse capacity expansions and more capitalized software. So on the CapEx for additional warehouse investments for the project in La, we expect total CapEx of around €130,000,000 which is higher than for our prior warehouses due to the increased automation that we are building into these warehouses, with most of this CapEx coming in during 2016 2017. I think for now, we should assume roughly a fifty-fifty split between those two years. We have commented before on why we think an increased level of automation makes sense because long term, it will help us to drive efficiency in our fulfillment cost line and to drive speed of delivery to our customers. We also discussed the full buildout of our facility in Monchiemplattbach, which also will be accelerated and take place in 2016, where we will be roughly doubling the capacity from currently 3 sections to 5 sections.
On the software side, we as we are increasing our tech recruiting, more and more tech staff will start to work on specific software development projects, and more of that work will be capitalized in 2016. So to conclude on the guidance, I think these are very strong numbers with a very unique combination of more than 30% growth at scale and very clear profitability. With the long term view, we believe it is the right strategy to continue to deliver profitable growth with an emphasis on growth. We still have a very unique chance to capture market share in our European target market. Even though we are clearly leading in our segments, our market share is still less than 1%.
And we think winning market share now will give us a more sustainable competitive position in the future. It will drive our margin through scale. It will defend us against the competitive disruption, and it will set the basis to successfully implement our platform strategy. We will provide our 2016 guidance in the New Year, so in the call where we also present the full year numbers for 2015. But I think our general approach, our D and A and our focus will continue into 2016, which means we are very committed to a profitable growth path, but rather with a focus on growth and market share gains than a focus on increasing margins.
And yes, with those comments on the outlook, I would like to close the presentation and move to your questions.
The first question comes from the line of Magnus Frohmann of Handelsbanken. Your line is now open.
Thank you. As you mentioned here, there is a strong trend to push faster delivery and easier returns. In
light of
this, do you still regard the long term target of fulfillment cost at low-20s as viable?
As we said on the last call, currently, we don't see a need to change our long term target model. As you said, we're currently investing a lot into these initiatives. At the same time, we think there's also long term potential for efficiency gains driven by several factors such as scale, such as additional automation. So I think there will be opportunities also to make fulfillment cost more efficient again in the future. However, right now, the focus is really on going ahead in making shopping at salonu even more convenient.
And I think and this is very much what we like about the growth that we see currently that it's clearly not only driven by performance marketing as it maybe was 3 or 4 years ago, but we see more and more that really growth is driven by the improvements we make in the customer proposition, not only in terms of fulfillment but also along all the other lines that I mentioned.
The next question comes from the line of Charlie Muir of Deutsche Bank.
My first question relates to your full year guidance, which obviously you have increased for the year a month ago, but nevertheless implies a slowdown in the Q4. Your inventory looks like it's up around 40% year over year. So I wondered how we should think about reconciling perhaps of implicitly 30 ish percent targeted revenue growth versus 40% inventory. That's my first question.
Sure. Yes. So our full year guidance with 33% to 35% growth, you're right, implies a slightly slower growth in Q4 compared to Q3, which I think is reasonable. I tried to explain that we see a lot of underlying growth drivers where we are confident that they will also sort of continue going forward. And obviously, it's going to be our focus to make sure that they continue going forward.
On the other hand, I think also there was a very specific situation in Q3 that allowed us to bring growth to such high levels as 42%. And I think this is something we should not expect to continue. I think it also would not be reasonable. With respect to the inventory levels, as I mentioned, we have, in some cases, tried to get an inventory slightly earlier in order to ensure very good availability, especially at the beginning of the season. But in terms of the season, I think this is very much in line with the guidance that we have given for the full year.
The next question comes from the line of Clara Klas of RBC.
Hi. It's Claire Haupt here from RBC. Three questions, if I may. The first one, I wondered if you could give any color on KPIs by region. I appreciate you didn't officially report them, but just wondered whether you're seeing an increase in the number of orders per customer outside of the DAC region as well.
Second question on same day delivery. Just interested in the take up of this in Germany and whether you have any plans to trial this elsewhere? And then the final question, whether there were any standout growth markets in the quarter? I think you'd said previously that you'd been prioritizing U. K.
Orders in the Erfurt warehouse for faster delivery time. So what the response to this was like, please, and whether there'll be more of a push into the U. K. Going forward?
So on the first question, as you know, we don't really disclose KPIs by country or KPIs by region. In general, what I can say is that we were very happy with the growth KPIs, both in terms of customer acquisition but also in terms of customer frequency across the regions. So while there are, of course, differences in the level of KPIs, I think the trend really has been positive across the board. With respect to your second question, same day. So we are testing it right now in Berlin and Cologne.
The feedback that we get is extremely positive. Actually, I delivered some of the same day orders here in Berlin myself. And it's quite amazing what the customer reaction is. So they are very surprised and very positively surprised to get their merchandise so quickly. So we are right now assessing sort of how this also changes customer behavior and what the cost structure of such an offering would be.
And clearly, if it is successful, we intend to roll it out to further cities and further regions. On your third question, in terms of standout growth markets, I commented on the growth by region. And I think it was quite clear that both regions were performing very strong. And I think also the underlying individual countries were performing quite strong in terms of growth. So this something that we saw really across the board as many of the improvements really like assortment also are applicable to basically all the markets.
You're right that we have been doing quite some improvements in the proposition for the U. K. Customer in terms of speeding up our delivery and making sure it is on par with the level of service that we see with different competitors in the U. K. The K, the customer reaction has been very positive and growth numbers also have been very positive in the U.
K. So while it is a market where we are still at a very small scale because never has been a focus in the past. We do indeed see the opportunity to maybe step up our game a little bit in the U. K. But this is also something that I think we'll work on step by step over the next quarters.
The next question comes from the line of Jamie Merriman of Bernstein.
I have a couple of questions. The first one is, I think during your prepared remarks when you were talking about the fraud issue in H1, you said that it was a single digit million cost. Is that right? And then just on that topic, I was surprised in the release to see that it had also spread to rest of Europe because I thought most of the invoicing issue was related to the DAC region. And just one separate question, which is on mobile.
I know appreciate that it's growing as a percentage of traffic, but could you give us an indication of where you are as a percentage of sales? Thank you.
Yes. So the first piece on fraud, you're right. It is a single digit €1,000,000 amount. On the second question, yes, fraud topics, especially when they relate to invoice, typically have the biggest effect in the DACH region. But also in Rest of Europe, we have some countries where invoice is a quite popular payment method, for example, in the Nordics, but also in the Benelux countries.
And with respect to your third question, mobile, the we don't disclose percent of revenues. However, it is scaling with also the traffic scaling. And especially since within mobile, you see that the app is the fastest growing piece. And since the app actually has quite good conversion rates, this, of course, also helps the mobile conversion overall. So also on those KPIs, we think the progress is quite positive.
And we also think it will continue to be a growth driver over the next quarters.
The next question comes from the line of Christian Schwenchenhuysen, Algonquinauzer.
Some questions from my side. Actually, the first one on branded and brand solutions. You mentioned that this is going off quite nicely actually. And I would just be interested on your comment that you made in terms of scaling this service further in 2016. So how should we think of your ideas and your considerations about monetizing the service with your brand partners going forward?
That'd be question number 1. And then question number 2, industry dynamic, a broader one, on the sector, which you might have seen in Q3. I would be interested what items and what trends you saw here that was selling off quite nicely? And is it fair to say that the dynamic for you is quite beneficiary? So given that when POS retailers kind of struggle in terms of volatile in store traffic, then you actually see a positive spillover effect in terms of increased cherry picking and better access to products?
That'd be question 2. And just the last question on mobile again. And the qualitative statement would be also appreciated here. If you could just let us know what were the regions that were particularly strong in terms of mobile penetration in this quarter? And that would be it for now.
Sure. So in terms of Brand Solutions, our general direction is that we want to interact even more closely with our brand partners. And I think you see already quite some examples for that. So in terms of the TV campaigns that we are doing jointly, in terms of the content, the brand partners are able to upload directly into our store in terms of those brands that work with us on the partner program already able to decide which part of their assortment they want to show and in what way. So I think this is really going into a very positive direction, and the feedback from our partners is also quite positive.
I think in terms of monetizing on this trend, I think the biggest example is really around the turn media solutions, which is clearly a model where we also charge our brand partners for the services that we provide and where we think we have quite an attractive product. And that will lead to a strong win win situations for the partners to benefit from
or now with Calvin Klein, I think also there
we have Shop or now with Calvin Klein, I think also there we have a quite direct payoff, although it is, of course, hidden in our overall commercial performance. So we see this as a great direction in terms of strengthening our positioning with the brands but also in terms of driving our commercial results. On the second topic, industry dynamics. Well, I think first of all, the most important thing that we observe again and again is that e commerce is a real true cycle trend. So even in months where the overall fashion market is struggling quite significantly, which I think was the case especially in July August, we were able to show very significant growth.
So we think that the development of the e commerce market, to some extent, and in some cases, actually decoupled from the trends that we see in the industry overall. To some extent, when the season is going in a mixed way in the offline world, we actually have the opportunity to benefit from our very strong brand partnerships and to make sure that we actually can reorder flexibly within the season the most attractive pieces of merchandise. And I think given all the data capabilities that we have and how we are able to observe performance of different category segments very early in the season, we are also able to make better bets that are supported by data and to really make sure that we go strong in those segments of the assortment that are really showing great performance and by that have a lot of flexibility in our buying, which I think is a general advantage of e commerce that you have all this data and a lot more flexibility. On your third question, in terms of mobile, I think clearly, there are some markets that stick out in terms of how they use mobile. I think one example is Italy, where mobile penetration is very high.
For app usage, I think Switzerland is a very strong example. So there are some markets that stick out in terms of their affinity to mobile as a new channel.
The next question comes from the line of Georgina Johanan of JPMorgan.
Just a couple of brief questions for me, please, really sort of on the gross margin and around the clearance in July August. Can you just please clarify, when you say strong clearance, do you mean kind of high levels of sell through, a lower level of discounting? Or do you actually mean a higher level of discounting year on year, which pushed strong sales growth? And if it indeed was a higher level of discounting, where the offset in the gross margin was for the quarter, please? And then just following on from that, if you could give us your level of open to buy for the quarter, it would be very useful, please.
Thank you.
Yes. I mean with regards to the stock clearance in Q3, it was actually that we pushed a bit harder than last year in order to clear the stock with a discount level, which was comparable to somewhat last year. But we were better able somewhat to cover it due to further improvements we had in that line. With regards to the open to buy, yes, that was obviously something we were also able to profit from. With that level, we've also seen comparable to the first half of twenty fifteen.
The next question comes from the line of Simon Owen of Credit Suisse.
Three questions for you. Firstly, can you just talk
a little bit about segments, product segments in the quarter and what worked well and what didn't? In particular, can you tell us what happened to your sportswear in terms of kind of year on year growth and whether that was a significant driver in the quarter. The second is just thinking about the fulfillment issues, and I appreciate the breakdown that you gave us in 3Q.
Can you just talk a
little bit about 24, I. E, what we should be thinking about the proposition investment and the tech investment going forward over the next few quarters? I appreciate that, obviously, 1 and 3 are kind of relatively temporary. We can take our own views on that. But are the other 2 going to continue to delever a little bit going forward?
And the third, you may have
answered this, but I got cut off. But can you just give us the gross margin impact from additional clearance in 3Q year on year in terms of basis points?
Sure. So on the different segment performance, so the performance we saw in the 3rd quarter was really quite strong across the segment. Our biggest segment, obviously, being women apparel, women's shoes but also men apparel, men shoes, all performed quite well. And I think we had a specifically strong performance, again, in the fast fashion segment. We especially on the new customers, we attracted a lot of young customers that are also specifically have been to the mobile channel.
So I think those were the underlying trends in the bigger categories. Sports continues to be a big trend and continues to perform quite well. And as we said also in the first half of the year, we have been trying to really identify smaller segments where we can show really great growth. I mentioned on this call already, underwear a couple of times, which is close to 100% growth year over year. So we see some of these small segments really delivering quite fast growth and quite good results.
On your second question, which I understood relates to the drivers of additional cost and fulfillment cost, specifically customer proposition and TekInvest and how this is going to continue. So I think on both sides, we'll continue to invest. In terms of TekInvest, I mentioned that we want to recruit or we want to get to more than 1,000 tech professionals positive and because quite positive and because we think it's really at the heart of our proposition to offer superior technology solutions
to enable customers to shop online
and to enable brands to sell their products online. So I think this will continue. On the customer proposition, I think there are also many things that in the long term we can do that don't necessarily always lead to additional cost. But I think clearly also on the customer proposition, we want to continue to invest. And I think overall, it has been a good strategy to become less aggressive in terms of marketing, which means we over time, it goes lower as percent of sales.
And we, to one extent, benefited from that in the margin development we have seen over the last years, but we are also reinvesting some of this into better convenience and better assortment. And I think the numbers this year show that this has been a good shift in our investment strategy. And for the 3rd question, I would like to hand over to Jan to comment in more detail on the gross margin. Yes. Maybe a couple of points on the gross margin.
So first of all, on the when we look at the overall discounting level, so the level for springsummer 2015 overall was lower than springsummer 'fourteen. What we did now in July August, we took the conscious decision actually to increase discounting in July August in order to clear stock. And their discounting was roughly higher, 3 to 4 percentage points. But it actually paid off in September where then discounting was much lower as we were able to sell off pretty much the new stuff that came in with a fresh assortment. And that effect then from September actually covered the higher discounting in July August, which brings you out to the aggregated number for Q3, which is roughly in line with the prior year.
The next question comes from the line of Jurgen Kulp of Kepler Cheuvreux. Please go ahead.
Thank you. Three questions. First of all, having talked about the discounting now for quite some time, could you please tell us a little bit how you're dealing with the discounting? When do you usually put products at a discount? If I remember correctly, last year, you were one of the earliest to discount winter articles, which according to some press articles made brands maybe a little bit unhappy.
But what's your general policy? Do you want to be the 1st in the marketplace to be aggressive on prices in order to be clean on the inventory side? Secondly, you mentioned also that the value for money share in Q3 was obviously a driver. What's the percent of sales that you have in this category now? As I understand, I think you wanted to increase that.
And lastly, just to better understand and if I understood it correctly, CapEx for 'sixteen, the EUR 130,000,000 for that you mentioned, is that just for LA? Or was that something that we should see as a total number for 2016? Yes. So maybe just start off with the discounting. Just to be clear because my impression is it too high sort of share of attention on this call.
So in general, as Jan just said, our discounting level in the springsummer season has been lower than last year. And I think very clearly, we are not a red price player, and we are also not using discounting as a major lever to push our sales and we are also not specifically eager to be the 1st in the market to discount. I think we just wanted to say that specifically in July August, which is the season like which is the part of the year where everybody is discounting, we made a decision to really make sure that we move out all the old stuff from the springsummer season to really start into the next season with a very clear warehouse, which I think from a retailing perspective is a great decision to do. And we had the leeway to do it and also drove some of the growth. But also a lot of the growth in the Q3 was driven by September, which is completely price.
So I think it's an effect we wanted to mention. But as you can see from our gross margin cost line has been improving a lot compared to last year. In Q3, it now was stable because we invested a bit more into discounting than we thought. Otherwise, we would have seen an improvement. But there's no it's not a major change in what we do.
It's just be consequent at the end of the season to really make sure you move out everything that's left over. On the second point, value for money, we don't break that out as a segment also because it's not always super easy to differentiate what is now value for money item, what is not because there's many things in between. But clearly, it has helped us to acquire new customers. Clearly, it also has helped us to acquire younger customers. So I think it has been a good step for commercially for us to go into this direction.
As you also can see, it has been driving order frequency, we believe. So I think it was a positive step. And for the CapEx question, I'll hand over to Christian. Yes. As Rui mentioned beforehand, we'll come out with an explicit guidance for 2016 on the next earnings call after Q4.
But to break it out, the €130,000,000 are explicitly for LA. And we expect for now that roughly 50% of that will come in 2016 and 50% will come in, in 2017.
The next question comes from Dan Holman of Citi. Please go ahead.
Good morning, guys. Couple of questions from me. First of all, just on the fulfillment costs, the 4.40 basis point increase in the quarter. Could you just clarify the amount that was due to the one off within that, particularly the fraudulent payment cleanup? And then second one also related to the fraudulent payment.
Was there any impact on the KPIs that you can share with us? Has active customer numbers been overstated at all?
Yes. On the first part of the question, as we mentioned, the cost that relates to payment, the additional cost is a single digit €1,000,000 amount that was booked in the 3rd quarter. Towards the second part of the question, so in the first half of the year, also some customers that turned out to be fraudulent are included in the active customer numbers because by definition, it is that set of customers that has ordered in that period. However, we have seen in Q3 where we in the numbers don't see a major impact from Ford that the customer growth has remained quite strong with 800,000 additional active customers in the Q3. So I think you can see from that, that fraud has had an impact on our customer numbers but not such a significant one that it put also the trend that we have seen in especially in growing our active
customer base. The next question comes from Rausch Strauss of Arete Research.
Two questions. One, we see warehouse expansions in LAM and Cincla, also Italy playing into this. I was just wondering where you are standing in terms of addressing delivery times, especially in the periphery, meaning Scotland, Southern Spain, Eastern Europe, etcetera. Should we expect to see some further warehouse additions here also coming through in 'sixteen and 'seventeen? And the second question, can you provide any color on how private label is playing out in the 1st 9 months of 2015?
We kind of think with Gap Brands and Topshop being in the revenue mix now fully, is it fair to assume that private label is becoming a lower percentage of your sales?
Sure. So on the first question in terms of wealth expansion, From our view, we see Italy now really as a pilot for this hub and spoke type of system. And for sure, if it turns out to be a very positive pilot, we might decide over time to launch additional local satellites that can improve our local delivery experience. I mean you mentioned clearly on the periphery like Scotland or maybe also the north of Norway, our delivery experience is not as strong as it is in Central Europe. However, you also have to consider that those customers typically are also used to having to wait for a longer time because I think very few e commerce players have specific warehouses in, for example, Northern Norway.
So I think that is something that's where the customer expectation also is a bit different. Something that's where the customer expectation also is a
bit different.
But we will see how our first pilot in Italy goes. And based on that, we'll take our next decision on next steps. On the second question with respect to private label there, I think our strategy really has not changed. In our view, We want to offer the best for the customer. And we think the best for the customer we offer if we give him or her to the entire fashion universe, which, of course, means we want to offer a very attractive set of third party brands.
And that is really the focus of our offering. And our private label then competes with those other brands, yes? So for sure, some of our private labels compete with some of our 3rd party brands for the customer. And this is for us how it works. And this is also why we think private label will never come to a huge share like 50% like you see with some competitors.
I think for us, the direction is different. Nevertheless, in the springsummer season and also in the fallwinter season, even though we have brought on board many new attractive brands, we also have seen private label performing quite strongly. And they have roughly kept their share and which means they actually also show some very amazing growth because they are keeping up with the very fast growth that we see overall in the platform. And in some areas, even we're able to extend their share. So we are happy with the development, and we'll continue to drive it in such a way going forward.
We have two last questions. One follow-up question of Charlie Muir Sands of Deutsche Bank.
Yes. Thank you. I actually have 2 questions. First one is that the margin in the DACH region fell a lot more than the margin in your Rest of Europe region in the Q3. Mathematically, I guess, a little bit of that can be explained by the fraud allowances.
But I wondered if you could just give some color on the other reasons for the differential. And then the second question was on FY 'sixteen CapEx. Obviously, very helpful to have color around the specific additional projects. But I just wonder, what would you consider to be your normalized CapEx base we should add those extra numbers onto? Or put more simply, can you give us a ballpark number for FY 'sixteen CapEx?
Yes. On the first question on the DACH margin, let me quickly take it. So I think it is sort of ultimately driven by all of the levers that you also see on a general level when we walk through the P and L. So DACH is a bit more impacted by, of course, the fraud topic because it has a very high invoice share. So there, it has maybe an over proportional impact.
But also, it is impacted by what we discussed on marketing, for example, that we launched the campaign actually earlier. For example, in Austria, we did a local campaign, which, of course, is then also a bit more costly, but we think has a great long term impact on our brand KPIs. So but this also is accounted for in the DACH region. Obviously, also when we do a warehouse clearance more aggressively since it is our largest market also, a lot of the volume goes also into DACH. So I think it is the levers that we discussed and maybe a bit more on like a bit higher share on the payment side.
For CapEx, I'll pass on to Jan. Yes. I mean as we said historically, some of the area of 2% to 3% of revenues as a CapEx level is something we consider some also like the like a steady state level, so to say. As Rubin pointed out, we might, over the next year plus, see somewhat higher numbers, especially as we're investing into more automation for some of the facilities as in LA and also testing a bit with hub and spoke system. We are putting the numbers together and we'll deliver like a specific number for 2016 and potentially thereafter in the next earnings call.
But the rough indication, if you're simply summing up the numbers saying coming from La where we said like 50% of it. And you know we already commented on during the last two calls what roughly goes into Minshing Gladbach and Airfoord. And if you sum those data points up, you can already see that it's elevated compared to the numbers we've seen in the last 2 years. Specific number, we'll give in the next earnings call.
The last question comes from Simon Owen of Credit
Suisse. One quick follow-up. Now that you've presumably done most of your buy for springsummer, what kind of increase in bought in costs are you seeing for next year given the dollar, etcetera?
Yes. So we do see some impact from the dollar, but we don't expect a huge impact on our spring summer numbers.
There are no more questions in the pipeline. I hand back to Birgit Ober.
Thank you very much all for joining today. Replay will be available as usual on our Investor Relations website later today. Our next touch point will be our Q4 trading update, which we will schedule ahead of our regular earnings release. Like this quarter, we will let you know about the exact date in advance. Afterwards, our regular Q4 earnings call will be on March 1.
So please mark your calendars. Thanks and bye bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.