Zalando SE — Call Transcript 2017

Mar 1, 2017

Q 4 / F Y 2 0 1 6 E A R N I N G S C A L L

E U R O P E ' S L E A D I N G O N L I N E F A S H I O N D E S T I N A T I O N

0 1 - 0 3 - 2 0 1 7

Certain statements in this communication may constitute forward looking statements. These statements are based on assumptions that are believed to be reasonable at the time they are made, and are subject to significant risks and uncertainties. You should not rely on these fo rward-looking statements as predictions of future events and we undertake no obligation to update or revise these statements. Our actual results may differ materiall y and adversely from any forwardlooking statements discussed on this call due to a number of factors, including without limitation, risks from macroeconomic developments, external fraud, inefficient processes at fulfillment centers, inaccurate personnel and capacity forecasts for fulfillment centers, hazardous material / c onditions in production with regard to private labels, lack of innovation capabilities, inadequate data security, lack of market knowledge, risk of strike and chang es in competition levels.

D I S C L A I M E R

R E S U L T S H I G H L I G H T S A N D B U S I N E S S U P D A T E

Z A L A N D O E X C E E D S F U L L -Y E A R G U I D A N C E

REVENUE & GROWTH

U p p e r e n d o f 2 0 - 25% - r a n g e

E B I T & M A R G I N ( 1 )

A d j . E B I T m a r g i n : 3 . 0 % - 4 . 5 %

N E U T R A L W O R K I N G C A P I T A L

• ~ 2 0 0 M C A P E X ²

(1) Exclusive share-based compensation ("SBC") and non-operative one-time effects.

(2) Excludes investments into M&A.

Z A L A N D O : T H E L E A D I N G F A S H I O N D E S T I N A T I O N F O R E U R O P E A N C O N S U M E R S

• (1) Includes Plus Size, Maternity and Petite.
• (2) Impressions from social media campaign content and social media always-on content.

Z A L A N D O : T H E L E A D I N G F A S H I O N P L A T F O R M F O R F A S H I O N B R A N D S

W E C O N T I N U E T O B U I L D E U R O P E ' S D I G I T A L F A S H I O N I N F R A S T R U C T U R E

F I N A N C I A L U P D A T E Q 4 / F Y 2 0 1 6

Z A L A N D O ' S R E V E N U E G R O W T H O U T P E R F O R M S T H E M A R K E T

H I G H Q U A L I T Y C U S T O M E R K P I s : S O L I D B A S E F O R F U T U R E G R O W T H

10 (1) Defined as the transactional revenue (incl. VAT and transactional volume of Partner Program) after cancellations or returns d ivided by the number of orders. (2) GMV (gross merchandise volume) per active customer = average orders per active customer (LTM in #) x average basket size afte r returns (in €).

Z A L A N D O ' S P R O F I T A B I L I T Y I M P R O V E S F U R T H E R

11 (1) Excluding equity-settled stock based compensation costs ("SBC") of €5.6m in Q4/16 and of €19.9m in FY/16, respectively, and non-operative one-time effects.

O P E R A T I N G C O S T S D R I V E M A R G I N I M P R O V E M E N T

COSTS AND MARGINS

excl. SBC¹and non-operative one-time effects

FY 16			Q4
2016		2015	2016	D e l t a
(55.6%)	0.9%	(53.7%)	(54.2%)	0.6%
44.4%	(0.9%)	46.3%	45.8%	(0.6%)
(23.2%)	(2.6%)	(23.3%)	(21.8%)	(1.5%)
(10.2%)	(1.6%)	(11.1%)	(10.3%)	(0.8%)
(5.1%)	1.0%	(3.6%)	(4.9%)	1.3%
5.9%	2.3%	8.3%	8.8%	0.5%

C O N T I N U E D F O C U S O N O P E R A T I O N A L C A P I T A L E F F I C I E N C Y

NET WORKING CAPITAL (END OF Q4)

in percent of annualized revenue

L I Q U I D I T Y R E M A I N S S T A B L E D E S P I T E S I G N I F I C A N T I N V E S T M E N T

CASH FLOW DEVELOPMENT (Q4/16)

in €m

• (1) Both Q3/16 and Q4/16 liquidity include investments into short-term deposits with maturity of more than 3 and less than 12 months of €220m.
• (2) Includes investments in fixed, intangible assets and payments for acquisitions.

(3) Includes financing cash flow (-€1.5m) and effect of exchange rate on cash and cash equivalents (-€0.4m).

O U T L O O K

A W I N N I N G S T R A T E G Y : F O C U S O N G A I N I N G M A R K E T S H A R E

Z A L A N D O M A R K E T S H A R E D E V E L O P M E N T

b a s e d o n G M V

(1) Source: Euromonitor International, January 2016, 2013 values based on actuals and estimates; fixed exchange rates. Data for Europe (excl. Russia) incl. apparel and footwear, bags and luggage, jewelry and watches. All market figures inclusive of sales tax. Company informa tion.

SEGMENT & TOTAL MARKET1	2013	2016
DACH ~ € 90bn	~ 1 . 4 %	~ 2 . 4 %
R E S T O F E U R O P E ~ € 330bn	~ 0 . 2 %	~ 0 . 6 %
T O T A L Z A L A N D O ~ € 420bn	~ 0 . 5 %	> 1 %

Z A L A N D O ' S S T R A T E G Y F O C U S E S O N T H R E E D I M E N S I O N S

No1 ONLINE FASHION DESTINATION

• Most fashionable, in-season assortment
• Best onsite and App experience
• Strong branding, targeted campaigns

• Most convenient post-order experience

• Ensuring flawless fulfillment and customer service

• Becoming the best fulfillment partner in Europe

• Driving our effort to transform the industry

• Building a highly scalable and reactive platform

SUPPLIERS

No1 ONLINE BUSINESS PARTNER

• Strong, interactive collaboration
• Attracting leading brands to PP
• Scaling Zalando Media Solutions
• Rolling out Fulfillment by Zalando

18 (1) Adjusted EBIT margin excludes stock-based compensation of 0.4% and non-operative one-time effects.

(2) Excludes investments into M&A.

O U T L O O K

O U R M U L T I -Y E A R O U T L O O K	2014	2015	2016	O U R O B J E C T I V E S 2 0 1 7
REVENUE GROWTH OF 20 - 25%				REVENUE GROWTH OF 20 - 25%
S O L I D P R O F I T A B I L I T Y				1 A D J . E B I T - M A R G I N : 5 . 0 – 6 . 0 %
F R E E C A S H F L O W : N E U T R A L W O R K I N G C A P I T A L + S T R A T E G I C C A P E X S P E N D				S L I G H T L Y N E G A T I V E W O R K I N G 2 C A P I T A L + ~ € 2 0 0 M C A P E X

2 0 1 7 O U T L O O K : R E V E N U E G R O W T H

G U I D A N C E 2 0 1 7

A D J . E B I T - M A R G I N ¹ : 5 . 0 – 6 . 0 %

S L I G H T L Y N E G A T I V E W O R K I N G C A P I T A L + ~ € 2 0 0 M C A P E X ²

# 1 P R I O R I T Y T O G R A B M A R K E T S H A R E

REVENUE GROWTH OF 20% - 25%

T A C K L E G R O W T H O P P O R T U N I T I E S I N R O E M A R K E T S

(1) Adjusted EBIT margin excludes stock-based compensation of 0.4% and non-operative one-time effects. (2) Excludes investments into M&A.

O U T P E R F O R M A N C E O F F A S H I O N O N L I N E M A R K E T B Y F A C T O R 2 - 3 X

2 0 1 7 O U T L O O K : E B I T M A R G I N

G U I D A N C E 2 0 1 7

I N V E S T M E N T S I N T O C U S T O M E R P R O P O S I T I O N A N D P L A T F O R M I N I T I A T I V E S

M A I N T A I N H E A L T H Y B A L A N C E B E T W E E N I N V E S T M E N T A N D S U S T A I N A B L E P R O F I T A B I L I T Y

A D J . E B I T - M A R G I N ¹ : 5 . 0 – 6 . 0 %

S L I G H T L Y N E G A T I V E W O R K I N G C A P I T A L + ~ € 2 0 0 M C A P E X ²

(1) Adjusted EBIT margin excludes stock-based compensation of 0.4% and non-operative one-time effects. (2) Excludes investments into M&A.

5 % - 6 % A D J . E B I T G U I D A N C E F O R 2 0 1 7 R E F L E C T S O N G O I N G G R O W T H I N V E S T M E N T S

2 0 1 7 O U T L O O K : F R E E C A S H F L O W

G U I D A N C E 2 0 1 7

REVENUE GROWTH OF 20% - 25%

S L I G H T L Y N E G A T I V E W O R K I N G C A P I T A L + ~ € 2 0 0 M C A P E X ²

A D J . E B I T - M A R G I N ¹ : 5 . 0 – 6 . 0 %

(1) Adjusted EBIT margin excludes stock-based compensation of 0.4% and non-operative one-time effects. (2) Excludes investments into M&A.

O N O U R W A Y T O A S U C C E S S F U L 2 0 1 7 !

E F F E C T O F D E F E R R E D T A X E S O N I N C O M E S T A T E M E N T

Type of Shares Ordinary bearer shares with no-par value (Stückaktien)

Stock Exchange Frankfurt Stock Exchange

Market Segment Regulated Market (Prime Standard)

Index Listings MDAX (2.3% share1)

Total Number of Shares Outstanding 247,255,868

Issued Share Capital €247,255,868

SHARE INFORMATION

I S S U E D S H A R E C A P I T A L

As of 31-Dec-2016

(1) Average Jan-2017.

(2) The AGM of 31-May-16 authorized the Management Board to grant options under the Employee Incentive Plan. .

SHARE STOCK OPTION PROGRAMS

As of 31-Dec-2016

EMPLOYEE INCENTIVE PLAN²

As of 31-Dec-2016

Strike price

Program	# Options outstanding	Strike price	Program	# Options outstanding	Strike price
Various	89,760	1.00	EIP 2016 – Summer Tranche 2016	110,964	1.00
SOP 2011	2,543,200	5.65	EIP 2016 – Summer Tranche 2016	562,810	27.10
SOP 2013	9,817,500	15.63	EIP 2016 – Summer Tranche 2016	173,919	32.52
SOP 2014 – Tranche pre IPO	5,147,490	17.72	EIP 2016 – Winter Tranche 2016	41,083	1.00
SOP2014 – Tranche Mar 2015	612,199	22.79	EIP 2016 – Winter Tranche 2016	153,810	36.83
SOP 2014 – Tranche May 2015	240,980	25.03	EIP 2016 – Winter Tranche 2016	41,881	44.20
SOP 2014 – Tranche Aug 2015	193,500	29.92	Total	1,084,467
SOP 2014 – Tranche Nov 2015	58,900	30.48
SOP 2014 – Tranche Mar 2016	342,450	31.60
Total	19,045,979

I N C O M E S T A T E M E N T

$\epsilon$ m
Revenue	2 1
% growth
Cost of Sales	(1,2
Gross Profit
% margin
Selling and Distribution Costs
Administrative Expenses
Other Operating Income
Other Operating Expenses
EBIT
% margin
Net Financial Result
EBT
% margin
Income and Other Tax
Net Income
% margin
Depreciation & Amortization
EBITDA
% margin
Share Based Compensation (SBC)
Adj. EBIT (adj. for SBC and non-operative one-time effects)
% margin
Adj. EBITDA (adj. for SBC and non-operative one-time effects)
% margin

€m	FY/14	FY/15	FY/16	Q4/15	Q4/16
Revenue	2,214.0	2,958.2	3,639.0	868.5	1091.6
% growth	25.7%	33.6%	23.0%	30.5%	25.7%
Cost of Sales	(1,255.3)	(1,624.0)	(2,029.6)	(467.3)	(593.1)
Gross Profit	958.7	1,334.1	1,609.4	401.2	498.4
% margin	43.3%	45.1%	44.2%	46.2%	45.7%
Selling and Distribution Costs	(793.8)	(1,118.9)	(1,223.7)	(301.8)	(353.5)
Administrative Expenses	(109.1)	(129.0)	(191.3)	(34.0)	(53.1)
Other Operating Income	12.2	10.2	16.7	3.5	10.4
Other Operating Expenses	(5.8)	(7.0)	(4.1)	(2.3)	(1.6)
EBIT	62.1	89.6	207.0	66.6	100.7
% margin	2.8%	3.0%	5.7%	7.7%	9.2%
Net Financial Result	(4.5)	(3.0)	(14.1)	(1.2)	(6.3)
EBT	57.7	86.6	192.9	65.4	94.4
% margin	2.6%	2.9%	5.3%	7.5%	8.6%
Income and Other Tax	(10.5)	34.9	(72.5)	37.3	(34.4)
Net Income	47.2	121.5	120.5	102.7	60.0
% margin	2.1%	4.1%	3.3%	11.8%	5.5%
Depreciation & Amortization	25.8	34.2	48.2	10.0	17.8
EBITDA	88.0	123.8	255.2	76.6	118.5
% margin	4.0%	4.2%	7.0%	8.8%	10.9%
Share Based Compensation (SBC)	19.8	17.9	19.9	5.2	5.6
Adj. EBIT (adj. for SBC and non-operative one-time effects)	82.0	107.5	216.3	71.8	95.6
% margin	3.7%	3.6%	5.9%	8.3%	8.8%
Adj. EBITDA (adj. for SBC and non-operative one-time effects)	107.8	141.7	264.5	81.8	113.4
% margin	4.9%	4.8%	7.3%	9.4%	10.4%

S H A R E B A S E D C O M P E N S A T I O N

Per Income Statement Line Item

€m	FY/14	FY/15	FY/16	Q4/15	Q4/16
Per Income Statement Line Item
Cost of Sales	4.4	4.5	5.0	1.3	1.4
Selling and Distribution Costs	9.6	9.0	9.9	2.6	2.8
Administrative Expenses	5.8	4.5	5.0	1.3	1.4
Share Based Compensation	19.8	17.9	19.9	5.2	5.6
As % of revenue	FY/14	FY/15	FY/16	Q4/15	Q4/16
Per Income Statement Line Item
Cost of Sales	0.2%	0.2%	0.1%	0.1%	0.1%
Selling and Distribution Costs	0.4%	0.3%	0.3%	0.3%	0.3%
Administrative Expenses	0.3%	0.2%	0.1%	0.1%	0.1%
Share Based Compensation	0.9%	0.6%	0.5%	0.6%	0.5%

Per Income Statement Line Item

S E G M E N T S

€ m	FY/14	FY/15	FY/16	Q4/15	Q4/16
Revenue	2,214.0	2,958.2	3,639.0	868.5	1,091.6
DACH	1,234.0	1,580.1	1,813.8	450.7	529.4
Rest of Europe	862.6	1,211.6	1,570.2	360.5	478.4
Other	117.4	166.5	255.1	57.3	83.8
As % of total	100.0%	100.0%	100.0%	100.0%	100.0%
DACH	55.7%	53.4%	49.8%	51.9%	48.5%
Rest of Europe	39.0%	41.0%	43.1%	41.5%	43.8%
Other	5.3%	5.6%	7.0%	6.6%	7.7%
EBIT	62.1	89.6	207.0	66.6	100.7
DACH	72.3	92.2	221.4	55.3	82.2
Rest of Europe	(18.6)	(10.2)	(6.2)	9.8	18.7
Other	8.4	7.5	(8.1)	1.5	(0.2)
% margin	2.8%	3.0%	5.7%	7.7%	9.2%
DACH	5.9%	5.8%	12.2%	12.3%	15.5%
Rest of Europe	(2.2%)	(0.8%)	(0.4%)	2.7%	3.9%
Other	7.2%	4.5%	(3.2%)	2.7%	(0.2%)
Adjusted EBIT	82.0	107.5	216.3	71.8	95.6
DACH	83.0	101.9	226.3	57.9	80.0
Rest of Europe	(11.6)	(3.3)	(3.3)	11.8	15.7
Other	10.5	8.9	(6.7)	2.1	(0.1)
% adjusted margin	3.7%	3.6%	5.9%	8.3%	8.8%
DACH	6.7%	6.4%	12.5%	12.8%	15.1%
Rest of Europe	(1.3%)	(0.3%)	(0.2%)	3.3%	3.3%
Other	9.0%	5.3%	(2.6%)	3.6%	(0.1%)

B A L A N C E S H E E T

€m Q4/15

		Q4/15 (% of total		Q4/16 (% of total
€m	Q4/15	assets)	Q4/16	assets)
Total Non-Current Assets	253.1	12.0%	392.6	15.5%
Thereof: Property, Plant and Equipment	128.2	6.1%	243.0	9.6%
Other Financial Assets	25.0	1.2%	44.1	1.7%
Non-Financial Assets	3.5	0.2%	3.0	0.1%
Other Non-Current Assets	96.3	4.5%	102.5	4.0%
Total Current Assets	1,863.5	88.0%	2,145.6	84.5%
Thereof: Inventories	493.5	23.3%	576.9	22.7%
Trade and Other Receivables	149.7	7.1%	216.0	8.5%
Other Assets1	244.0	11.5%	380.0	15.0%
Cash and Cash Equivalents1	976.2	46.1%	972.6	38.3%
Total Assets	2,116.5	100.0%	2,538.2	100.0%
Total Equity	1,16 1,271.4	60.1%	1,407.5	55.5%
Thereof: Issued Capital	247.0	11.7%	247.2	9.7%
Capital Reserves	1,140.9	53.9%	1,161.0	45.7%
Retained earnings	1.4	0.1%	(2.4)	(0.1%)
Accumulated Loss	(118.0)	(5.6%)	1.6	0.1%
Total Non-Current Liabilities	31.3	1.5%	32.5	1.3%
Thereof: Financial Liabilities	14.4	0.7%	11.2	0.4%
Other Non-Current Liabilities	16.9	0.8%	21.4	0.8%
Total Current Liabilities	813.8	38.5%	1,098.2	43.3%
Thereof: Trade Payables and Similar Obligations	645.8	30.5%	920.5	36.3%
Other Current Liabilities	168.0	7.9%	177.7	7.0%
Total Equity & Liabilities	2,116.5	100.0%	2,538.2	100.0%
Net Working Capital	(2.6)	(0.1%)	(127.6)	(5.0%)

C A S H F L O W S T A T E M E N T

€m	FY2014	FY2015	FY/16	Q4/15	Q4/16
Net Income	47.2	121.5	120.5	102.7	60.0
Non-Cash Expenses from Share-Based Payments	19.8	17.9	19.9	5.2	5.6
Cash Settlement of Claims from Share-Based Payments	0.0	(2.3)	0.0	0.0	0.0
Depreciation	25.8	34.2	48.2	10.0	17.8
Income Taxes	10.5	(34.9)	72.5	(37.3)	34.4
Income Taxes Paid, Less Refunds	0.0	(0.0)	(33.8)	(0.0)	(4.6)
Change in Provisions	1.0	(0.5)	0.1	(0.2)	(0.6)
Other Non-Cash Income	(0.2)	(1.0)	1.2	(0.3)	1.9
Change in Inventories and Receivables	(68.7)	(154.2)	(147.4)	101.8	(4.7)
Change in Trade Liabilities	94.9	154.9	264.3	(111.4)	(20.7)
Change in Other Assets/Other Liabilities	44.6	(16.2)	(69.7)	7.4	(24.0)
Cash Flow from Operating Activities	174.9	119.4	275.8	77.8	65.2
Payments for Investments in Fixed and Intangible Assets	(51.1)	(60.0)	(181.7)	(20.8)	(65.9)
Payments for Acquisitions	0.0	(16.8)	(30.4)	0.0	(1.2)
Cash Paid for Investments in Term Deposits	0.0	(155.0)	(65.0)	0.0	0.0
Change in Restricted Cash	(0.8)	35.3	0.0	(4.2)	0.0
Cash Flow from Investing Activities	(51.9)	(196.5)	(277.1)	(25.1)	(67.1)
Payments Received from Capital Increases	510.1	6.4	1.1	0.8	0.0
Cash Received from Loans	3.9	0.0	0.0	0.0	0.0
Other Cash Effective Financial Results	0.0	0.0	(0.7)	0.0	(0.7)
Repurchase of treasury shares	0.0	(1.7)	0.0	(1.7)	0.0
Cash Repayments of Loans	(3.2)	(3.2)	(3.2)	(0.8)	(0.8)
Cash Flow from Financing Activities	510.8	1.5	(2.9)	(1.8)	(1.5)
Change in Cash & Cash Equivalents	633.8	(75.7)	(4.1)	51.0	(3.4)
Effects of Exchange Rate on Cash & Cash Equivalents	0.0	0.9	0.5	0.4	(0.4)

Cash Flow from Investing Activities (51.9) (196.5)

K P I D E V E L O P M E N T

	2014	Q1/15	Q2/15	Q3/15	Q4/15	2015	Q1/16	Q2/16	Q3/16	Q4/16	2016
Site Visits (m)1	1,363.8	392.8	411.8	393.9	457.9	1,656.4	479.5	480.2	468.6	563.2	1,991.6
Mobile Visit Share (in % of Site Visits)2	42.3%	52.6%	56.6%	58.8%	59.9%	57.1%	62.3%	64.7%	67.0%	68.1%	65.6%
Active Customers (m) 3	14.7	15.4	16.4	17.2	17.9	17.9	18.4	18.8	19.2	19.9	19.9
Number of Orders (m) 4	41.4	12.0	14.0	13.8	15.4	55.3	15.6	17.5	16.4	19.6	69.2
Average Order per Active Customer	2.82x	2.84x	2.89x	3.00x	3.08x	3.08x	3.20x	3.32x	3.39x	3.48x	3.48x
Average Basket Size (in €) 5	66.6	68.0	67.4	63.3	72.1	67.8	66.5	66.2	62.8	70.2	66.6
Fulfillment Cost Ratio (in % of revenue) 6	22%	25%	28%	27%	23%	26%	24%	23%	24%	22%	23%
Marketing Cost Ratio (in % of revenue) 7	13%	12%	12%	12%	11%	12%	10%	10%	10%	10%	10%

• (1) Site Visits defined as the number of series of page requests from the same uniquely identified client at Zalando, including w ebsite, m.site and apps in the measurement period. A visit is considered ended when no requests have been recorded in more than 30 minutes.

• (2) Mobile is defined as tablets, mobile site and apps.

• (3) Active Customers defined as the number of customers placing at least one order in the last twelve months in the measurement p eriod irrespective of cancellations or returns.

• (4) Number of Orders defined as the number of customer orders placed in the measurement period irrespective of cancellations or r eturns. An order is counted on the day the customer places the order. Orders placed and orders delivered may differ due to orders that are in transit at the end of the measurement peri od or have been cancelled.
• (5) Average Basket Size defined as the transactional revenue (incl. VAT and transactional volume of Partner Program) after cancel lations or returns divided by the number of orders.
• (6) Fulfillment Cost Ratio defined as fulfillment cost as a proportion of revenue in the measurement period. Fulfillment costs ma inly include logistics, content creation, service and payment expenses, as well as allocated overhead. costs. Fulfillment costs therefore comprises all selling and distribution costs, exc ept for marketing costs. All numbers shown excluding equity settled SBC costs.
• (7) Marketing Cost Ratio defined as marketing cost as a proportion of revenue in the measurement period. Marketing cost mainly co nsists of advertising expenses including search engine marketing, television, online display and other marketing channels as well as allocated overhead cost. All numbers shown excl uding equity-settled SBC costs.

F I N A N C I A L C A L E N D A R 2 0 1 7

Date	Action
Monday, 6-March	NDR, Toronto
Tuesday + Wednesday, 7-8 March	NDR, New York + Boston
April-20171	Q1/2017 Trading Update
Tuesday, 9-May	Q1/2017 Results
Wednesday, 17-May	Citi's European Internet and Digital Conference, London
Wednesday, 31-May	Annual General Meeting 2017
Monday + Tuesday, 19-20 June	Capital Markets Day 2017
Thursday, 10-Aug	Q2/2017 Results
Tuesday, 7-Nov	Q3/2017 Results

June 2017
M	T	W	T	F
			1	2
5	6	7	8	9
12	13	14	15	16
19	20	21	22	23
26	27	28	29	30

	August 2017
M	T	W	T	F
	1	2	3	4
7	8	9	10	11
14	15	16	17	18
21	22	23	24	25
28	29	30	31

November 2017
M	T	W	T	F
		1	2	3
6	7	8	9	10
13	14	15	16	17
20	21	22	23	24
27	28	29	30

May 2017
M	T	W	T	F
1	2	3	4	5
8	9	10	11	12
15	16	17	18	19
22	23	24	25	26
29	30	31