Zalando SE
XETRA:ZAL
Earnings Call Analysis
Q3-2023 Analysis
Zalando SE
The company continued its drive for sustainable efficiencies, particularly in fulfillment costs, which led to an overall improvement in profitability. This improvement more than offset a decline in gross margin. Administrative expenses increased, partly due to non-personnel costs and an impairment for lease assets as part of consolidating the company's office space. Despite headwinds, the focus on efficiency has successfully contributed to the bottom line.
Net working capital remained neutral in the quarter. A cash inflow of approximately EUR 130 million was predominantly driven by reduced inventories, which are down 10% year-over-year. The fashion store inventory is notably lower from last year's figures due to a decrease in wholesale purchases and effective inventory management; this came at a cost to gross margin, but the company aims for additional improvement in inventory position for the full year.
The company's cash and cash equivalents stand strong at EUR 1.9 billion. Q3 saw a small reduction of EUR 170 million due to seasonal changes in net working capital with the acquisition of inventory for the upcoming season. Capital expenditures amounted to EUR 147 million over nine months, demonstrating financial discipline while still investing in logistics infrastructure and future growth opportunities.
The company continues to invest in future growth, with the roll-out of new luxury boutique spaces for designer brands and a personal fashion assistant powered by ChatGPT set to launch in four countries. With the initiation of B2B brand sales and expansion of Zalando Plus to eight countries, the company is harnessing new technologies and platforms to enhance customer experience and brand partnerships.
The objective to strengthen gross margin has proven to be more challenging due to the current market environment, preventing significant year-over-year gross margin improvement. Nonetheless, strategies like focusing on prudent wholesale buying, driving full-price sales, and enhancing the relevance of the assortment are all steps towards supporting this objective.
The company has adjusted its top-line outlook for the year in response to continuing pressure on demand. Gross Merchandise Volume (GMV) growth is now projected to range from minus 2% to plus 1%, down from the previously forecasted lower half of plus 1% to plus 7%. Revenue growth expectations have also been adjusted to minus 3% to minus 0.5%, modified from the lower half of minus 1% to 4%. Despite these changes, the adjusted EBIT guidance remains unchanged at EUR 300 million to EUR 350 million, affirming the commitment to profitable growth.
With 50 million active customers, the company is well positioned in the European fashion and lifestyle market. By making strides with innovations and investment in customer experience, combined with empowering brands through enabling capabilities, the company is poised to accelerate growth as soon as market conditions improve.
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Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Zalando SE publication of the Third Quarter Results 2023 Conference record. [Operator instructions] I would now like to turn the conference over to Mr. Patrick Kofler, Director, Investor Relations. Please go ahead.
Thanks, for the intro, and good morning, ladies and gentlemen, and welcome to our Q3 2023 earnings call. Today, I'm joined by our CFO, Sandra Dembeck and Sandra will briefly walk you through the presentation and is available for questions afterwards. As usual, this call is being recorded. The live webcast as well as a replay of the call will be available on our Investor Relations website later today. Sandra, I will now hand it over to you. Please go ahead.
Thank you, Patrick. Good morning, everyone, and thank you for joining today's call. I got a bit of a cold, so please excuse my voice. Let me kick off. In 2023, we set ourselves 2 key priorities. The first one was profitable growth and the second one, selectively investing in future growth. The bulk priorities continue to guide our strategic decision-making and are reflected in our first 9 months results. Let's look at how we performed in the first 9 months before we dive into the third quarter. In the first 9 months, we improved our profitability year-over-year by more than EUR 120 million. That's a significant step up. We delivered an adjusted EBIT of EUR 167 million, and that's despite quite some headwinds. We saw ongoing normalization between offline and online. Pressures on consumers' disposable income continued, and we experienced adverse weather conditions, particularly in September. And despite these top line headwinds, we managed to maintain our pandemic peak GMV. Our business model mix continues to inject resilience with our brand partners continuing to grow their direct-to-consumer business on Zalando. In the first 9 months, partner business share increased to 39%, a 6 percentage point increase year-over-year. This was fuelled by an increased adoption of ZFTS with the ZFTS share now at 64%, an increase of almost 4 percentage points year-over-year. And at the same time, we continue to selectively invest into strategic areas of our business in September, we launched stories by Zalando. But before I talk more about this, let me update you on our latest full year guidance. We continue on our path of profitable growth, and therefore, our adjusted EBIT guidance for 2023 remains unchanged. We are committed to deliver EUR 300 million to EUR 350 million. However, we expect pressure on demand to continue throughout the upcoming peak trading season, which is why we revised our top line guidance for the full year. So let's move on to Q3. For Q3, we continued our focus to selectively invest in future growth. And on Page 3, let me highlight one of our strategic investments, Stories on Zalando. We believe that adding more inspiration and entertainment is a crucial next step in the evolution of our customer experience. That's why last year in collaboration with Highsnobiety, we started our discovery journey. And now in September, we launched the next iteration Stories on Zalando. Here we completely redefined the way our customers can discover exciting fashion trends. So what are we aiming for?Firstly, we want to capture the attention of our customers so that ultimately, they spend more time with us and they come back more frequently. Secondly, we also want to attract customers, those that have a higher discretionary spending and a more fashion are them. And thirdly, the experience creates a strong halo effect also for our brands. But it’s still early days on our discovery journey, but the first results have been very encouraging. So keeping in mind our strategic efforts of investing in future growth, let's now move on to the Q3 financial results. Let's start off with our group financials on Page 4. The market environment in Q3 remained challenging and limited our ability to grow. In this environment, we maintained the necessary balance between short-term sales and strategic business objectives. And as a result, we improved our profitability by staying on track with our inventory sell-through targets. So for Q3, we report a muted top line performance, July and August showed small but positive top line growth. However, the unusually warm temperatures in September date consumer demand for the winter merchandise.And with that, our GMV came in at EUR 3.2 billion, down 2.4% year-over-year. Revenue at EUR 2.3 billion is down 3.2%. On profitability, here, we again show an improvement. Adjusted EBIT increased from $14 million to $23 million, and this corresponds to an adjusted EBIT margin of 1%, a year-over-year improvement of 0.4 percentage points. Here our continued efforts to drive efficiencies and fulfilment costs offset the decline in gross margin. Now looking at the first 9 months, our financial performance translates into slightly negative GMV and revenue growth, while adjusted EBIT came in at $167 million or 2.4% margin, so a significant increase compared to last year.Let me now walk you through our customer metrics on Page 5. And as always, this is on the last 12 months basis. So let's start on the left. Our active customer base stands at $50.1 million, showing a flat development year-over-year. And the main reason for this is the lower new customer acquisition, which is due to the subdued demand environment and our continued focus on profitable growth. Moving over to the right. Order frequency could decrease by 3% from 5.225. The average basket, however, increased by 5% to EUR 59. And this is due to a higher average item value as a result of a bit of price inflation, but also our work on the assortment mix in wholesale and partner business. GMV per active customer increased by 1.5% to almost EUR 295.So let's turn to our segment performance. Starting with the top line performance on Page 6. Let me walk you through the chart from left to right here. Fashion Store GMV is down 3.7%. Revenues declined by 4.4% as the apartment business share continued to increase to 39%. Top line in DACH region was particularly impacted by the delayed fall/winter season start. It was more pronounced there. While in rest of Europe, we actually saw positive development in Eastern Europe and also in some of our mature markets.The offshore segment grew by 4%, and we already indicated that last time, we see a normalization for off-price. It's a dynamic we also expect to see in Q4. [Indiscernible] from more attractive in-season stock being available in the sourcing market were reducing. And coming to the other segment, this is including Highsnobiety, Tradebyte and [Indiscernible]. The revenue declined by 12.1%. For ZFT, we saw that in the current market environment, brand partners and more cautiously. And given the delayed season start, they also cancelled or postponed start of season campaigns.So turning to the segment profitability on Page 7. Let's start with the fashion store. We see a strong improvement in adjusted EBIT as a result of the improved profitability of the DACH segment. In DACH, adjusted EBIT more than tripled to EUR 48 million. Adjusted EBIT margin significantly stepped up from 1.7% to 6%. The main drivers here are improved order economics and lower fulfilment costs also benefiting from scaling our partner business. Rest of Europe show an adverse development with adjusted EBIT at minus EUR 29 million and margin declining from minus 1.6% to minus 2.8%. Efficiencies in fulfilment only partly offset the decline in gross profit and the higher marketing costs. Off-price saw a decline in adjusted EBIT to EUR 3 million, and this was driven by lower gross margin due to the assortment mix and the promotional environment in the full price channel. And the all other segments delivered an adjusted EBIT of EUR 6 million. Let's move on to the P&L on Page 8, and let's focus on the Q3 development, which is on the right-hand side of the table. Our gross margin declined by 2.4 percentage points to 36.7%. And there are 2 main reasons for the decline. First, in this promotional market environment with subs demand, the effectiveness of additional price investments remains reduced and such comes at the cost of margin. And secondly, due to the delayed fall/winter season start, pressure on sell-through rates increased. So we chose to provide us reducing overstock early on, meaning in September, we actively managed the sell-through of our for winter stock by additional price investments, and this will mitigate any potential over the risk at the season end. On the positive, our partner business remains margin accretive and helped to offset a small part of the margin decline. Fulfilment costs improved by 3 percentage points to 24.9%. This continues to be the result of favourable order economics and the scaling of our partner business with a growing sets share. Improved order economics from higher basket sizes as well as several efficiency measures more than offset the inflationary cost increases. Marketing costs at 7% developed broadly flat year-over-year.We deliberately decided to not push for more marketing spending throughout the quarter in light of the continued subs demand. And admin expenses increased by 1.2 percentage points to 5.6%. We saw an increase in non-personnel costs and made an impairment for lease assets as we consolidate our office footprint here in Berlin. So summarizing the P&L, our continued drive for sustainable efficiencies, particularly in fulfilment costs resulted again in improved profitability and more than offset the decline in gross margin. Let's turn to Page 9 for net working capital. Net working capital was neutral in Q3. Looking at the year-over-year development, we see a cash inflow of around EUR 130 million, and this development is primarily driven by lower inventories. And let's talk about inventory. At the end of Q3, our overall inventory position is at around EUR 1.9 billion. So it's down 10% compared to last year. The fashion store inventory is significantly below last year as we reduced our wholesale by and we effectively managed any potential overtures throughout Q3, albeit at the cost of gross margin. And for the full year, we expect a further improvement in our inventory position.Turning to cash on Page 10. Our cash and cash equivalents remained strong at EUR 1.9 billion. Compared to the second quarter, this is around EUR 170 million less due to the seasonal changes in our net working capital as we received inventory for the fall winter season. In regards to investing cash flow, we invested roughly $17 million, of which $50 million was for CapEx investments in our logistics infrastructure for the new distribution centres in France and Germany as well as for existing logistics sites. The CapEx spend of EUR 147 million in the 9 months reflects our financial discipline in the current environment, while we continue to selectively invest in setting us up for future growth. And our cash position, as such, remains strong. It continues to provide us with financial flexibility and allows us to invest in future organic or inorganic growth opportunities.So this concludes the Q3 financials. Moving on to Page 13. As in previous quarters, let's be quick check in on our 3 main objectives for 2023. So here on this slide, you will see that apart from one boutique, it's all great. But let me walk you through the slide and this time let's start from the bottom. Selectively investing in future growth. So earlier, we already talked about Stories on Zalando, but there are also other examples worth I'm mentioning.So mid-October, we started rolling out a new luxury boutique size space for designer brands in fashion store. And the brand feedback is already very positive. In the second quarter, we talked to you about our personal fashion assistant powered by ChatGPT. This one will shortly be live in 4 countries on time for Cyber Week. And we launched our B2B brand sales. It will enable brands and retailers to manage the multichannel business across Europe within one unified platform. But now we have around 30 brands and retailers such as Pepe Jean, Marks & Spencer, and Casa already on board.And lastly, Zalando Plus. In Q3, we expanded our offering to Belgium and Luxembourg, so Plus is now available in 8 countries. We are also well on track with our second objective for 2023, which is to simplify the speed of execution. So here, we finalize our program to simplify our organization, and we're continuously working on improving our operating model towards a more localized shopping experience, whether that is through locally relevant assortment or convenience, and we are live with the first pilot in Sweden. So coming to the third objective, strengthen gross margin. So this clearly has proven to be more difficult this year than what we had initially expected. The current tough market environment prevents us from showing positive year-over-year gross margin development.Nevertheless, it's important to mention that the actions we are taking around more prudent wholesale by driving full price sales to focusing on assortment relevance or through creating inspiration on our platform. The new commission table, the growth of the partner business, all these efforts that we are making are ultimately supporting this objective of strengthening gross margin. So in summary, despite the temporary headwinds we experienced, we are delivering against our objectives. And with that, we are all well positioned to not only deliver on profitability, but once the momentum in the market returns to accelerate our growth.So with that, let's have a look at the outlook on Page 12. We expect continued pressure on demand throughout the rest of the year. Hence, as you saw, we adjust our top line outlook for 2023 and expect GMV growth in the range of minus 2% to plus 1%. So this is from previously the lower half of plus 1% to plus 7%. Revenue growth is adjusted accordingly and is expected to be in the range of minus 3% to minus 0.5%. So from previously the lower half of minus 1% to 4%.It's really important to note that our adjusted EBIT guidance remains unchanged. We are committed to deliver EUR 300 million to EUR 350 million as we continue to focus on profitable growth while we continue to selectively invest. With regards to CapEx, we have already adjusted the speed of our spending throughout the year to reflect the macro dynamics. And now we calibrated the time lines of our investments in distribution centre in France and Germany, and therefore expect CapEx to be between EUR 260 million to EUR 300 million from previously the low end of $300 million to $380 million.So this concludes the outlook. And before we move to the Q&A, let me conclude with the key takeaways of today. Both of our key priorities: profitable growth and selectively investing in future growth continue to guide our strategic decision-making, and they are reflected in our first 9 months results. Here, we delivered a significant improvement in profitability of more than EUR 120 million to EUR 167 million. And we are committed to deliver EUR 300 million to EUR 350 million in adjusted EBIT for the full year, and that's despite the temporary top line headwinds. And at the same time, we are progressing well along our strategy. With our 50 million active customers, we are well positioned in the European fashion and lifestyle space. We make strides to unlock the future potential of new innovations, and we invest in inspiration to elevate the customer experience on our platform. And at the same time, we continue to empower brands to grow their direct-to-consumer business by leveraging our enabling capabilities, whether that's on or off Zalando.And while we cannot change the current adverse market conditions, we can prepare so that once consumer sentiment and online growth return, we can best capture the opportunities and we can accelerate. So let's now open up for Q&A.
Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator instructions] The first question is from William Wood with Bernstein.
Two please. The first one is on the drivers of the margin compression in the rest of Europe and in off-price versus Germany, Austria and Switzerland, what are the different factors that play in the different regions from a margin perspective, please? And then the second one is on the partner program. It looks like you've had a slight deceleration of the partner program despite you pulling back on the wholesale buy for autumn/winter, I think it was at 38.7% in H1, 39% in Q3. Why do you think the partner program acceleration is slowing down slightly.
So I think the first one, the drivers of margin comparison in the rest of Europe and in off-price. I think it's important to point out that we saw a significant increase in the profitability in the DACH region, and that was benefiting a lot from fulfilment cost benefits, but also from the increasing share of the partner business with [Indiscernible] share. In rest of Europe, we saw a slight different dynamic whereby they had to do higher price investments. And we saw still good efficiencies on fulfilment, but because of inflation rates, some of the cost items like especially carrier costs are actually increasing faster than we would see in the soft region.So it's a bit of that effect whereby the gross margin decline was higher and the fulfilment cost efficiency is not as high as in the South region. On off-price here, it is a matter of gross margin. Basically, the demand, or the supply of attractive in-season stock that you can sell at a higher gross margin has gone away as the inventory levels in the market are normalizing, yes? So it's the supply of those in-season off-price merchandise as supply is not there. And as such, the merchandise that we have on show comes with a lower gross margin, yes, because it is what you usually have in off-price, the preseason merchandise. And that is what is impacting the profitability there.The deceleration of the potencies wholesale that actually has to do with a decision we made in September, which may be the partners not all followed in the same way. So we talked about the delayed season start, the delay for winter season start. And we took a conscious decision to early on address potentially risky overstock positions and discount them. And we saw that some of the partners did not follow the same approach, and therefore, you have a slight deceleration in the partner program in what you may have seen? I mean they suffered from the same delaying season start than we did this earlier.
The next question is from Adam Cochrane with Deutsche Bank.
Two questions, please. The guidance for the full year gives quite a wide range of outcomes for the fourth quarter. Given October's started strongly back into positive territory, why are you assuming such a significant slowdown in November or December? Is there anything from the comps from last year from marketing? Is there anything that we should just be aware of thinking about the trend throughout the quarter? And then the second question is, not only exactly 2024 guidance, but let's call it 2024 outlook. You've cut your CapEx guidance with regard to logistics spend and phasing. And it sounds like you may be cutting your marketing spend for the third quarter.You originally were going to increase your marketing spend for the fourth quarter. Is that still a plan? Or could you give external conditions be more cautious on the marketing spend? So with lower CapEx and lower marketing spend, does that sort of look like the 2024 outlook is going to be slightly weaker rather than slightly stronger as you see things today?
So first of all, around the guidance range, basically in the first 9 months, we delivered GMV growth that is slightly negative. And when you look at the new guidance that is basically the midpoint of the guidance, the range then really is defined by what will be the consumer demand that we see in the fourth quarter all as you rightly say, during the peak trading events of cyber in the holidays. We have to keep in mind that last year, there was a big step-up in momentum in the market over cyber and over the holidays. So if we do see something similar like that, that defines the upper end of the guidance.But we also have seen a lot of volatility still on the demand side. So if that is not happening, and we see a step down in demand, then you get to the lower end of the guidance. So this is a bit that what explains the range. But what I want to say there as well is, and that combines -- brings a little bit to your second question, but we said for this year, we want to do profitable growth, and we want to selectively invest in future growth. So the reason why we dropped our top line is because it exactly allows us to do that. So it allows us to continue in the fourth quarter to invest in the areas that will secure the future growth.So we can continue to invest in marketing for growth in the future, because if you take your growth, that's in oversight or anything, that's very costly, and that doesn't deliver the growth next year. So we want to be very wise about that. So there is an increase in the marketing spend, which will support the future growth.And so then 2024 outlook, on marketing, I already referred to, yes, we are investing more. We are extending the payback period. We are increasing the brand marketing spend. So you will see that increase in Q4. Last year in Q4, we also did a lot of that, so it will remain at a similar level, but that will help the growth in 2024. On CapEx, don't forget, we haven't stopped any investment in any warehouses. We are still opening up all of these distribution centre, all of these warehouses. What we are changing is the ramp-up, the speed with which we are ramping up the capacity because we don't want to carry unnecessary overcapacity. So that is not a signal for -- that has anything to do now with, I would say, the growth outlook.
The next question is from Andreas Riemann with ODDO BHF.
Two topics. One is the inventory position. I mean it's down 10% year-over-year. So my question would be, can you manage the return to growth with such a low level? Or do we have to expect a massive increase in the partner program in the coming months? That's the first topic. And then the second one about luxury. Can you maybe say whether you have already a few brands on-boarded? Or what's different now compared to previous attempts to enter the luxury space?
So in regards to return to growth and buying, so we are buying for growth in wholesale. In spring summer or winter by when you took stake holders together 2024, we are buying to growth. So you're right that the partner program will come back on now over the last 2 years and accelerated its growth, you will see a more balanced picture there next year. On luxury, we alluded to that, I think, a lot last year when we saw that we have a target audience that actually even during these times, you have proved to be very interested in the higher price points here in our premium segment. And we found out that there is quite a strong audience that we can address through a more dedicated luxury proposition. In order to get the brand on board as well as the customers, you have to create a specific environment, and that's what we are doing with that.
The next question is from Monique Pollard with Citi.
Two questions from me please. The first was just on the gross margin progression for the fourth quarter. Just wondering if we should think about that gross margin being stable year-on-year in the final quarter of the year? And then the second question, just on the customer numbers. Obviously, we're still not seeing stability there sequentially or year-on-year. But you've also talked about the marketing ramping back up in the fourth quarter and increasing that customer payback period to support that. So should that be the thing that leads to that stabilization in the customer base, presuming that it's the new customers that are still a bit weak.
So on gross margin in Q4, we do expect this intense promotional environment to stay with us also in the fourth quarter. And as such, you're absolutely right, we expect a stable gross margin for the fourth quarter. In terms of the customer numbers, as we return to growth in 2024, of course, we will also see a sequential increase in our active customer numbers. So the ambition, of course, is to, on one hand grow active customers through new customer acquisition, and this is where the marketing comes in. And on the other hand, at the same time, we also want to deepen customer relationships to ensure that actually they spend more with us. So these are the 2 levers, and that's what we will see in 2024.
The next question is from Benjamin Kohnke with Stifel.
The first would be on gross margins again. And Sandra, I was wondering if you could be by any chance, quantify the negative impact of the disproportionate growth in ZFS on grow margins in Q3? And if you sort of expect that to continue in a similar way, going orders to continue to invest into ZFS, obviously, zeros and so on. The second would be on your current thoughts around shareholder returns. I mean, it all seems to be going in the right direction. You sit on $1.9 billion in cash. You kind of seem to have good flexibility on CapEx spending, net working capital going in the right direction. So going into 2024 I would expect a little more pressure on you by investors, maybe to the asset but shareholder returns. I was just wondering about your current thoughts around that topic.
So on gross margin, the best way to explain it is, the decline you see is really driven by the current promotional environment as well as us deciding to early on go into the one of the winter merchandise. The ZFS impact, we don't disclose it individually, the way we package it up in the partner programs, and that is to a small extent offsetting that margin decline that we are seeing. The vendor partner program, of course, ZFS is gaining importance because it's growing faster vendor partner program right now. But when we package it together, it is more generative.On our cash position, yes, we have a very strong cash position, and I think that gives us the necessary financial flexibility, especially in times like this, that's very good to have because it allows us to continue to invest in our strategy as well. And that's what we plan to do. We are looking at shareholder, returns, of course, all the time. At the moment, this is not -- like if you ask me about share buybacks or anything, it's nothing we have on the radar because we believe that at the moment, it's better for us to invest it in the business.Opportunities exist here organically, inorganically in the past, we have primarily done organic, yes. However, have acquired like Fision which you now see we are benefiting on with our advice. And we have acquired Highsnobiety, which we are benefiting a lot from now trying to bring inspiration to the platform. So yes, we are also screening, of course, the opportunities there, but it has to be the right opportunity.
The next question is from Anne Critchlow with Societe Generale.
I have 2 questions, please. The first one is actually on division size and fit tool. I just wondered whether any early learnings are here. And have you seen any improvement in the return rate? And then the second question is about the new partner commission table. I just wondered if that had affected partner participation or availability of particular brands or products on the site.
On fitting & size and tool, we are still in early days here. So we're still trying to extract all the learnings. What is interesting for us with this product is that we can really create a virtual silhouette of the body of our customer. And so we don't need to have each individual customers’ body silhouettes in order to actually use the data to help other customers with size recommendations. So we are now in the space where we say like let's learn as much as we can because when we then want to really apply it at large scale, it will be for all our customers, not just those who upload photos who give us the data, but also for those that have, based on their behaviour, a similar shopping or return patterns than those that gave us the data.And so we are very positive about it. I think it is revolutionary for the industry. And yes, it does help on return rates. On the partner commission table, so the implementation here has worked very, very well. We have seen a stronger participation from, I would say, those who want to be on the platform. So I would say those who casually -- like if we talk about retailers, also casualty sold, items sold, they are much more engaged now since we have introduced the fee. And on the other partners, like we have really created now a more relevant assortment, like managed to change the assortment mix we offer on the platform through the new commission table. So all in all, I would say the customer experience through the introduction of the commission that has increased a lot.
The next question is from Warwick Okines with BNP Paribas Exane.
I've got 2 questions really about the consumer, please. The first is on product segment performance. Can you say anything on that? Is it still mostly the young fashion segment that's under pressure? Or have you seen any changes in premium or sports? And then second question is, is what evidence do you have that investing in inspiration is working both for the customer and for your economics?
So on product segment performance in Q3, this was lesser question of categories. It was really a question of the delayed seasons. So what you saw performing well there were all those less exposed categories like accessories like footwear, like travel, those things really performed well in Q3. Other than that, the trends that we alluded to earlier, where we see premium street via sport performing Balan young fashion, maybe to a lesser degree, but still performing those trends haven't changed. But Q3 is more predominantly driven by the weather than by anything else.On inspiration, it depends on what angle you want to look at it. Ultimately, what we see is 70% of generation set they get inspired. They decide on their purchases while being on social media while it's getting inspired. And so the question is how do we create an instillation on our platform so that the purchase decisions are being taken on our platform, and therefore, the transaction is happening with us. So ultimately, this is what we want to achieve. The stories on Zalando, what we see here is basically a customer comes back more frequently to browse and to discover. And I think this is the important first that because you see it in our customer data, customer transacts 5x a year, yes. But they come to discover and browse and get excited and inspired a lot more frequently. And that allows us to keep in touch with them to stay top of mind. And that's first the positive proof point why we think this investment is the right thing to do.
The next question is from Georgina Johanan with JPMorgan.
I've got 2, please. The first one, just with regards to 2024. I guess I'm sort of slightly confused as to what the strategy is into 2024. You said you're sort of buying for wholesale growth. So are you still hoping to be in sort of attractive growth again by the end of the year? Was that supported by marketing spend, should we therefore be looking for sort of broadly flat margins next year? Or would you expect to see gross margin recovery? If you could sort of just remind us about how you're thinking about 2024 more broadly, particularly given that the consumer backdrop sort of continued to be difficult and volatile a reminder that would be really helpful, please. And indeed, as well, if it does turn out to be more difficult than host, are there further OpEx levers that can be pulled to support margin? And then my second question, apologies, is very short term. Would it be possible just to confirm where you are trading in October, please? And how much more difficult the base becomes into November and December.
So about 2024. So for 2024, it's about a return to growth, and let's hold the business important growth. We will increase our marketing spend, and we have promised to continue our margin progression, yes. So you will be looking at increased profitability. On current trading, so in October, we saw a significant step up, yes. We are at the level where we would have to be in order to get to the upper end of our guidance. But the problem now is really November, December where we are lapping really strong comps, especially in December. And this is why we feel most comfortable with at the moment, the midpoint of our guidance to say realistically, the demand patterns that we have seen in the underlying, the consumer sentiment hasn't really stepped up significantly. We believe this is where we would end.
Maybe because you're combining current trading with the 2024 outlook.
Just to reiterate what I said earlier to Adam, we are in this phase of 2023, where we have profitable growth and investing in future growth, yes. So Q3 now with the more prudent top line allows us to continue to invest in the marketing for growth next year in the strategic initiatives for next year, like we talked about assortment, bringing the right assortment on board. You talked about the process, I mean last time, and you talked about inspiration. So all of that, we are getting ready so that we can return to growth next year. And of course, we also launched our sales brand. So we will see B2B happen as well next year.
The next question is from Yashraj Rajani, UBS.
Two from me, please. The first one is on fulfilment costs. So again, can you give us some colour on how much of the improvement was actually due to the lower volume handling in the fashion store. And again, given you continue to, in some sense, expect volumes being down for Q4, I mean, again, do you sort of still see meaningful improvement in fulfilment costs in Q4, even though you are lapping some of the efficiencies from Q4 last year? And my second question is on just a follow-up on marketing costs again. Can you give us again some colour on with the launch of Zalando Stories, how much of that has actually materialized in terms of marketing to sales ratio? And again, sort of giving that costs will annualize next year, I mean, do you expect marketing to go above the 8% mark.
It's a lot of questions. So let me start with the fulfilment cost. So, you're asking about like how to best demonstrate to you what was actually, the improvement because of lower volumes versus what is really the improvement we're actively pushing for? And I think the best way maybe to demonstrate is the cost per order. So if you just take our GMV and divide it by the orders, I think you see a clear improvement. So we're talking here like the mid-single digits. And I think this is really what sells the strength we have in our teams here to effectively and efficiently drive cost savings in those fulfilment cost lines.The next question was around Stories on Zalando. So inspiration is nothing that translates straightaway into GMV. So, I think with inspiration, what we are aiming for is customers spending more time with us. So staying longer on our platform and coming back more frequently. So these are the measures that we are looking at here. And I think we will talk more about that at the full year. So please be patient here with us. We come back to you on that one. And then on marketing cost ratio, I think we have improved our internal processes and everything in a way now, whereby potentially we will next year not yet hit an 8% more yes. But again, let us come back to you at the full year with exactly how it will be. I think the most important message to take away here is that we are investing again in marketing, in new customer acquisition that's in brand.
The next question is from Clement Genelot with Bryan Garnier & Co L.
Two on my side, please. So the first one, back on the previous question. How do you approach that when you form between the need to generate growth versus the need to really improve the gross margin? My second question is rather on the prices. As you are already in negotiations with suppliers, you see small inflation? Or was the deflation in action next year?
So on the price inflation, we do still see a bit of price inflation. So that's also still continuing into next year. It has reduced significantly, from report like double digit, but it is more now between in the low single to mid-single digits. On your first question about what are the growth drivers for 2024 and now the securing gross margin. What we're trying to really do is to put different drivers in place. One is around assortment. And so we are now turning through inventory. So the next year, we can offer fresh assortment. We have worked with the brands to on-board for example, in sport, we on-boarded very strong brands like Lululemon, like now Raffa. So we're working on that.We are working on inspiration, what we talked about earlier. We're working on becoming locally more relevant. So that basically the assortment is more tailored to the local customer, the convenience office more tailored. So there is a lot of stuff going on that is actually supporting the growth in 2024. I think you asked that we are sacrificing gross margin for that. Now that is not the ambition. It's the other way around, actually. And then, of course, yes.
The last question today is from Anubhav Malhotra with Liberum.
I had a couple. Firstly, on the GMV performance in the third quarter. At the stage, I think you had mentioned July, you had seen some signs of improvement. And today, you highlighted September was particularly weak. So maybe if you could talk about monthly GMV performance in the third quarter, just qualitatively. And if July and August were in positive GMV growth in the third quarter? And then a second question on the guidance. If you look at the midpoint of guidance, the revenue guidance has been cut by around 3 percentage points, but clearly, you have made no cut to your EBIT guidance. So maybe just you could tell us where you have been able to find those extra efficiencies or savings that you had not previously budgeted at the start of the year or even at the first half stage.
So GMV development over Q3. So we saw positive growth in July and August. And then we saw a significant negative growth in September. And the quarter is as such that the season though, of course, is worth more than in the end of season sale period, July, August. On our EBIT guidance, let me go back to Q2 here, we actually elevated the flow of our EBIT guidance. We took it from 280 to 300 million because we felt very comfortable with the progress we had made on our ambition to improve profitability. And we continue to have this conviction and this level of comfort because we see that all the things we are doing, especially around the fulfilment cost, is continuing, but it's also allowing us to be flexible. So we have seen that on fulfilment costs, we can significantly improve year-over-year. And with that, really stabilize our profitability and that get to the profitability that we're at EUR 300 million to EUR 350 million. So I think very confident about that, fulfilment costs being the main guidance.
The real final question is coming from Paul Rossington, HSBC.
Just one you. if you've downgraded GMV guidance for this year, albeit it was quite a wide range for Q4. Does that mean we should now be thinking about a slower start to the first half of next year as well? And on that basis, are you able to give us any kind of view or thought as to what GMV -- what a good starting point for GMV growth guidance might look like for 2024?
Paul, I would love to be able to give you the answer. I think the reality is, going back a bit to looking at the Q4 GMV guidance range, you see it's a very broad range. And I think that signals the question that is there around the consumer demand Yes, when they pick up, how will it develop? And therefore, the starting point for 2024 Q1 or first half will heavily depend on that. So let us go back beyond that one at the full year.
So there are no further questions at this time. I hand back to Mr. Kolfer for closing remarks.
Thank you, and thanks, everyone, for joining today's session. If there are any further questions, do not hesitate to contact the numbers. In that case, wishing you all a great Thursday. Bye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.