Earnings Call Transcript - HEPS Q4 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. I am Gail, your Chorus Call Operator. Welcome and thank you for joining the Hepsiburada Conference Call and live webcast to present and discuss the Fourth Quarter and Full Year 2021 Financial Results. All participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. At this time, I would like to turn the conference over to Ms. Helin Celikbilek, Investor Relations Director. Ms. Helin Celikbilek, you may now proceed.

Helin Celikbilek, Investor Relations Director

Thanks, operator. Thank you for joining us today for Hepsiburada's fourth quarter and full year 2021 earnings call. I'm pleased to be joined on the call today by our CEO, Murat Emirdağ, and our CFO, Korhan Öz. The following discussion, including responses to your questions, reflects management's views as of today's date only. We do not undertake any obligation to update or revise this information except as required by law. Certain statements made on today's call are forward-looking statements. Actual results may differ materially from these forward-looking statements. Please refer to today's earnings release as well as the risk factors described in the Safe Harbor slide of today's presentation, today's press release, the 6-K, our prospectus filed with the SEC on July 1, 2021, and other SEC filings for information about factors which could cause our actual results to differ materially from these forward-looking statements. The earnings release has been filed with the SEC on a Form 6-K and is currently available on the SEC website and on our Investor Relations website. Please refer to today's earnings release as well as the Risk Factors described in the Safe Harbor slide of today's presentation, today's press release, the 6-K, our prospectus filed with the SEC on July 1, 2021, and other SEC filings for information about factors which could cause our actual results to differ materially from these forward-looking statements. Also, we will reference certain non-IFRS measures during today's call. Please refer to the appendix of our presentation as well as today's earnings release for a presentation of the most directly comparable IFRS measures, as well as the relevant IFRS to non-IFRS reconciliations. As a reminder, a replay of this call will be available on the Investor Relations page of Hepsiburada's website. With that, I will hand it over to our CEO, Murat.

Mehmet Murat Emirdağ, CEO

Thank you, Helin. Welcome, everyone, and thank you for joining us today. 2021 marks an important milestone in our company's over 20 years of history as we went public in July. As the national champion in a highly competitive market with significant growth potential, we laid out three strategic priorities. First, accelerate growth drivers such as adding more customers, driving product frequency, attracting more merchants, and expanding our selection. Second, differentiate via logistics and technology capabilities to offer best-in-class customer experience. Third, expand our strategic assets such as HepsiPay. As part of our continued focus on accelerated growth drivers, we achieved 53% annual growth, which was instrumental in our GMV growth. Such order growth was on the back of 3% to 5% annual growth in active customers and 3% annual growth in order frequency. By leveraging our robust logistics and technology capabilities, we continued our expansion in the Turkish e-commerce market with a 58% increase in December 2021. We believe that this underpins our superior customer experience on our platform and our ability to drive service quality further even during the high seasonal Q4 2021. We are glad to see that we recorded higher GMV than our guidance. This was possible through our strong execution of our product and services in line with customer needs and expectations throughout the year. Our revenue growth in 2021 was 19% with a 7.1% growth contribution margin. It is worth mentioning that our focus on sustainable growth has also resulted in a 2.7 percentage points improvement in the gross contribution margin in the fourth quarter compared to the third quarter of 2021. Now, let's take a closer look at the fourth quarter dynamics and our actions. Next slide, please. We faced several challenges in the fourth quarter, including currency volatility, supply constraints, and a highly competitive market environment. We navigated through these headwinds successfully with our hybrid 1P and 3P business model, strong execution experience through our nationwide logistics network, and data-driven marketing, as well as diverse affordability solutions addressing the needs of our customers. Our 1P retail operation has served well, particularly at a time when rapid price changes were inevitable, mostly due to imported merchandise and added supply shortages from global supply chain issues. Our diverse affordability solutions, such as credit card instant customer loans, and our ability to offer installments were strengthened by the 'Buy Now Pay Later' campaign in November, which we delivered through our collaboration with banks. We also achieved a broad and active merchant base and wider selection, resulting in improved availability across more products and services. Our investment in growth, brands, selection, and exceptional customer experience paid off well, showing strong momentum in all key growth drivers. The active customer base grew by 25%, reaching 11.3 million. Our order frequency grew by 23%, reaching 4.7. Active merchant days grew by 68%, reaching 75,000. The total number of active users more than doubled, reaching 90 million as of the end of the fourth quarter. Next slide. 2021 was a year during which we accomplished a great deal towards ensuring fast, reliable, and frictionless customer experience through our services, selection, and convenience solutions. Having our own robust logistics capabilities provides us with a competitive edge and flexibility to introduce and deliver differentiated services to the market. One example is our frictionless return service, in which we pick up returns from customers' stores at their preferred schedule and do this across the country. By doing so, we observed a 40% higher contact ratio through all our after-sales channels due to return requests in the fourth quarter compared to the same period last year. Next, the fulfilled product feature highlights the availability of products for next-day delivery. In 2021, HepsiJet delivered around 79% of our orders through our retail operation on the next day. In 2022, we plan to enlarge the selection available for next-day delivery and enhance our capability to do so. Furthermore, we began to offer our customers an exchange option for products purchased from our 1P operation for another size or color. New convenience product features, such as drop-off at a neighbor store and changing the delivery address while shipments are on the way were introduced by HepsiJet in early 2022, making life easier for our customers. The availability of a wide selection on our platform is highly critical for us. Having onboarded over 30,000 merchants in Q4, we ended the year with approximately 90 million SKUs. During the fourth quarter, we launched new digital products and services including gamified lotteries, which is a first in the market. These have resonated well with our customers and contributed to our engagement with them. Ensuring our customers can find what they are looking for quickly is equally important. For that purpose, we have redesigned our Hepsiburada app, increasing the visibility of our non-electronics categories and on-demand grocery service. Moreover, we invested in our technology to personalize the content, better ranking, and recommendations, increasing the order completion rates. Last but not least, our diverse affordability solutions fare well to facilitate financial flexibility for our customers. I will talk more about our Buy Now Pay Later solution in the upcoming slides. Before I do that, I would like to give an update on the experience of our merchants. Next slide. Our value proposition for our merchants is designed to serve their entire lifecycle and encourages us to be their end-to-end solution partner, maximizing returns for both sides. It all begins with a smooth onboarding process. The improvement in the process throughout the year has reduced the average onboarding speed to half by February 2022. An efficient interaction with our merchant base is crucial to ensure fast service for our customers. The deployment of HepsiPartner, our merchant app, has enhanced that interaction. Through HepsiPartner, our merchants can view their transaction summaries, handle inventory management, respond to any customer questions, review their financial summary, and connect with customer services, as well as access our training portal. All of these have contributed to the rise of the number of active merchants from 45,000 in Q4 2020 to 75,000 in Q4 2021. Besides, our comprehensive suite of value-added services for merchants has continued to penetrate within our base. I would like to share some data points here. HepsiJet delivered 52% of total marketplace parcels in the fourth quarter, totaling 43% in 2021 versus 16% in 2020. HepsiLojistik served fulfillment to approximately 191 merchants at all seven distribution centers located across strategic locations in Turkey. Nearly 25,000 merchants used our sponsored ads through our advertising platform HepsiAd in 2021. Our collaboration with Facebook and Google regarding advertising and technology solutions contributed to the growth of our ad services business. Over 58,000 training sessions were completed on our training portal Hepsi Academy during 2021 and were instrumental in activating the integration of our merchants into our platform. In 2022, we will continue our focus on attracting more merchants to our base by further improving merchant lifecycle management, value-added services, and widening our selection in long-tail products on our platform. Next slide, please. We invested in strengthening our logistics footprint in 2021, including our fulfillment centers, transport hubs, and cross docks. Our total service area reached over 190,000 square meters in 2021, up from 135,000 square meters a year ago. Instrumental to our strong performance, fast and on-time delivery, HepsiJet has partnered with 2150 carriers. HepsiJet's expansion has been strategically planned across the country, including nearly 2700 drop-off points. This year, HepsiJet delivered roughly half of our total parcels, up from 27% a year ago. In addition, HepsiJet continued to raise the bar in customer experience and introduced a two-person handling cargo service under the name HepsiJet XL, addressing the need for a high-quality and reliable service in that particular segment. Recently, this service became available in all 81 cities in Turkey. HepsiJet XL's service quality is evidenced by a 98% customer satisfaction score in the fourth quarter of 2021 according to our internal reporting. Initially starting with our retail business, HepsiJet XL will serve the merchants on our platform, which is expected to contribute further to customer satisfaction, given its service quality and easy return options. Now let me elaborate on another strategic update in our portfolio, HepsiPay. Next slide. HepsiPay is one of our most strategic assets in terms of addressing a sizable market opportunity in payments. Since its debut, HepsiPay has displayed strong momentum with the uptake of customers reaching 5.2 million open accounts by the end of the year. This resulted in around 37% of total GMV passing through HepsiPay orders in the fourth quarter. During the year, HepsiPay signed collaboration agreements with two prominent entities. One of those is Paycell, the FinTech subsidiary of Turkey's leading telecom operator Turkcell, to enable direct carrier billing capability in HepsiPay. Turkcell subscribers are able to shop at Hepsiburada without a credit or debit card up to a certain monthly limit and pay back through their mobile phones. The second is Istanbulkart, by Istanbul Metropolitan Municipality, which is a contactless prepaid card used for public transportation payments in the city, estimated to have around 18 million users. Istanbulkart will soon become another payment method for Hepsiburada, bringing the e-commerce experience to a broader audience. Another exciting development is the first market launch of the Buy Now Pay Later solution by HepsiPay. This new feature is an important milestone for the Turkish e-commerce industry in terms of innovative, affordable distribution. The user's limit at Buy Now Pay Later is defined based on credit scoring records at the Credit Bureau of Turkey and shopping history at Hepsiburada. The initial demand has been encouraging. Buy Now Pay Later has resonated well with our audience, particularly in an environment where affordability solutions are more vital than ever. Our plan is to scale it gradually as we continue to learn and improve. Additionally, we will also continue to focus on advancing with new features in 2022. As disclosed, we have taken the first step to tap the consumer financial sector by acquiring and licensing holder companies. We are in the process of taking the next steps to launch our consumer financing solution in addition to those offered by leading banks already present on our platform. By doing so, we aim to further diversify our affordable solutions. As shown on the next slide, these actions reflect our strategic roadmap for HepsiPay moving forward. Next slide, please. In 2021, we made good progress on HepsiPay. It was the initial step in our journey to evolve into a best-in-class payment companion across online and offline. Going forward, we intend to build on the momentum and expand the use of our already launched solutions as well as develop further FinTech capabilities in 2022. We believe HepsiPay is very capable of enabling a frictionless platform experience across payment, money transfers, and other FinTech capabilities for both online and offline. Next slide. Another strategic asset, HepsiExpress, continued its expansion in 2021 through the integration of strong retailers and a wide selection of products while making solid steps towards a unique customer experience. Its ecosystem now includes over 60 brands from both leading national and regional retailers across roughly 2100 stores. Along with advancements in its user interface, HepsiExpress provides grocery, water, and flower delivery in a localized experience with easy product discoverability and price comparison features. During the fourth quarter, HepsiPay wallet was integrated into the HepsiExpress experience, contributing to convenience at checkouts. HepsiExpress contributes to our platform by acquiring new customers, increasing order frequency, and engaging strategic segments such as women. While we remain focused on the customer journey and end-to-end experience, we will gradually optimize our service model to reduce dependency on our delivery resources. On the next slide, I would like to elaborate on our strategy for 2022. In line with our strategic priorities, we aim to deliver strong and sustainable growth in 2022. Operating with disciplined cash and cost management in mind, we will continue to strengthen our value proposition in the market with our hybrid 1P and 3P driven model, our household brand name, our strong customer experience, robust nationwide logistics network, diverse affordability solutions, innovative gamification tools, efficient marketing with segment-based initiatives, including women, family, and youth, targeted marketing campaigns, in-house data science capabilities, and finally, our super app ecosystem of integrated services. Before I finish, let me summarize how we see the current outlook on the next slide. Let us remind you that Turkey offers an attractive market with a sizeable, young, urbanized, tech-savvy, and growing population. With a majority of retail still being offline, the online penetration within total retail is expected to exceed 20% by 2025, indicating great potential for growth. In 2022, despite the inflationary environment, we have started the year with solid performance and we expect GMV growth in Q1 to be higher than the rest of the year in 2022. Based on our current view of market dynamics and the macroeconomic environment, we expect to achieve around 50% GMV growth compared to 2021 for the full year of 2022. As we grow, we currently have no plans to raise capital during the next 18 months. On our path to profitability, we expect to improve our margins by accelerating growth drivers, differentiating through logistics and technology, and expanding our strategic assets while maintaining disciplined cash and cost management. With this, I would like to thank you all for listening and leave the floor to our CFO, Korhan.

Halil Korhan Öz, CFO

Thank you, Murat, and welcome, everyone. As Murat highlighted, the continued growth momentum in our key growth drivers in 2021 was encouraging. Rising active customers and higher order frequencies were instrumental in increasing the total order volume growth of 63%. These robust trends in our key growth drivers give us confidence moving forward. Let's move to the next slide where I would like to highlight some growth analysis. To check our customer growth and engagement, we perform growth analyses. In this growth analysis, we group our active customers based on the year of their first purchase through our platform and check the GMV generated per cohort, as seen on the left. We also monitor order frequency in a similar fashion, as seen on the right. Since 2013, we have observed consistently improving trends in GMV per cohort of active customers. In the first year of purchase, GMV per cohort of active customers in 2021 increased by approximately 7% compared to 2020 on a strong pace from last year. The average growth of our older cohort in 2021 was approximately 26% compared to 2020. Similarly, we also observe a consistently improving trend in our order frequency per cohort of active customers since 2013. In the first year of purchase, frequency per cohort customers in 2021 increased by roughly 19% compared to 2020. The new cohort is making more frequent purchases than the prior one. The continued growth in frequency is also supported by our online grocery business, HepsiExpress, which plays a significant role in attracting and engaging customers to shop on the HepsiGlobal platform. Let me first share insights on the last quarter. In line with our order growth, our Q4 2021 GMV grew by 52% compared to the same period of last year to 9.4 billion. This solid growth was registered against an already strong fourth quarter of 2020. Considering this strong baseline effect last year, our three-year CAGR growth rate was 81%. During the fourth quarter, the share of marketplace GMV reached 65% compared to 60% in Q4 2020. When we analyze on a quarter-on-quarter basis, on the contrary, the share of 1P increased by 5 percentage points. Strong 1P operations have met the customers' demand amidst currency volatility and sourcing issues in Q4 2021. In full year 2021, our GMV grew by 64% compared to year 2020. At a two-year compounded annual growth rate, this corresponds to 80%. The share of Marketplace was 68% in 2021, up from 59% in 2020. Since launching our Marketplace six years ago, we continue to see strategic advantages within it for our business in the long term, contributing to improved selection, availability, and competitive pricing. With that said, 1P will remain one of our strategic competitive advantages in the market. Next slide, please. Before discussing our revenue performance, let me give you some details on our GMV breakdown. In 2021, while we see a similar 60% to 40% GMV split in favor of electronics, the growth in units sold was higher for non-electronics due to an expanded selection with longtail products. Revenue on the right-hand side increased by 25.4% in Q4 2021 compared to the fourth quarter of last year. This was mainly driven by 23% growth in 1P operations, 30% growth in our Marketplace revenue, and a 35% increase in our delivery service revenue. For the full year, revenue grew 18.5% compared to 2020, driven by 15.7% growth in marketplace operations and 66% growth in our delivery service revenue against nearly flat Marketplace revenue. The difference in annual GMV and revenue growth rates is primarily a reflection of the 9 percentage points shift in GMV in favor of Marketplace, higher campaign costs, and customer discounts, particularly during Q3 2021. Next slide, please. Let's look at the key factors that helped us better understand the dynamics behind our gross contribution margin trends. First, our commission rates. Our commission rate that we charge to our merchants on the Marketplace remained at around the same level in the fourth quarter compared to the previous quarter. As previously mentioned, this is at a high single-digit level on average. Second, customer discounts. This was a tool we heavily relied upon in the third quarter of 2021 to stimulate customer demand during relatively slower market conditions. During the fourth quarter, although there is an increase compared to the same period last year, we significantly cut down on spending on such discounts compared to Q3. We used data-driven and targeted campaigns more effectively and worked on generating within the ecosystem through our in-house growth engine. Q4 is typically not the best quarter to realize the full impact on effectiveness due to the existence of peak shopping occasions, such as the legendary November. Nonetheless, in Q4 2021, our gross contribution margin improved significantly by 2.7 percentage points compared to Q3 2021. Higher 1P operations, with early secured inventory, also contributed to this margin performance. Compared to the same period last year, our gross contribution margin declined slightly from 7.5% to 7.1%. For the full year, our gross contribution margin declined 1.9 percentage points to 7.1% year-over-year, particularly due to low margin performance in Q3 2021. Now let's have a look at our operating expenses in the next slide. Our net operating expenses as a percentage of GMV reached 14.3% in the fourth quarter, up from 10.5% a year ago. In 2021, the 3.8 percentage points rise in net operating expenses as a percentage of GMV was mainly due to a 1.9 percentage points rise in advertising expenses, as we continued to invest in our brands and growth drivers. These advertising expenses became costlier, particularly in the second half of last year, as both the need for advertising and the unit cost of advertising continued to increase. A 1.4 percentage points rise in our general and administrative expense is mainly due to talent onboarding and share-based payment expenses. A 0.5 percentage points rise in shipping and packaging expenses was driven by a 53% increase in the number of orders and a 5% rise in unit prices applied by our delivery partners. Let's move on to the EBITDA margin bridge on the next slide. As a function of the formation drivers, EBITDA as a percentage of GMV in Q4 2021 showed a 4.3 percentage points year-over-year decline but remained flat on the upper part you can see, and yet it improved by a solid 3 percentage points compared to Q3 2021. For the full year, the EBITDA as a percentage of GMV declined by 5.7 percentage points year-over-year due to a 1.9 percentage points decline in gross contribution margin, a 1.9 percentage point rise in advertising expenses, a 1.4 percentage points rise in payroll and outsourced staff expenses, and a 0.5 percentage points rise in other operating expense items. Finally, I would like to say a few words on our cash flow dynamics in the next slide. In Q4 2021, net cash provided by operating activities decreased by TRY 214 million, reaching TRY 45 million, mainly as a result of a higher net loss once the positive impact of the unrealized foreign currency differences is eliminated. For the full year, the 352 million decrease in net cash provided by operating activities is due to an increased net loss. With the TRY 77 million CapEx in the fourth quarter, the total for the year reached TRY 216 million. Our CapEx was mainly for product development efforts on our website and mobile platforms as a result of growing operations, as well as the purchase of property and equipment. Free cash flow was negative TRY 32 million compared to positive TRY 221 million in Q4 2020. For the full year, our free cash flow declined to negative TRY 124 million from positive TRY 341 million in 2020. The decrease was primarily driven by the decline in cash flow from operating activities and higher CapEx expenses in 2021. We continued to operate with negative net working capital during 2021. The change in net working capital in Q4 was TRY 230 million, whereas it was TRY 1 billion for the full year 2021. I would like to end my presentation by saying that we remain committed to our focus on strong and sustainable growth in 2022 onwards with disciplined cash and cost management. With this, I end our presentation. Thank you for listening. Operator, please open up the floor for questions.

Operator, Operator

The first question is from the line of Josiah Miriam with Morgan Stanley. Please go ahead.

Miriam Josiah, Analyst

Hey, good afternoon, everyone. Thanks for taking my questions. And firstly just going back on full year results, obviously your guidance was set in November, so I just wanted to get a bit more color on what has changed in the last couple of months for you to be so significantly higher. Obviously, higher inflation has been an issue, but I wanted to also get a bit of a sense of what you've been seeing in the last couple of weeks given your statement you made around Q1 growth to be higher than the rest of the year. So, have you already started to see some weakness in consumer sentiment and trading in the last few weeks? Any more color on that would be great. Then secondly, if you could just give more detail on what you're seeing at the moment in terms of inventory on the 1P business? How difficult is it to get stock at the moment? How much of the price increases are you passing through? Finally, if you could just give a bit more color on EBITDA and your expectations for this year and perhaps any color on the trajectory of that as we move through the year. Thanks.

Mehmet Murat Emirdağ, CEO

Hi, Miriam. Thank you so much for the question. To my understanding, you'd like to understand the consumer sentiment and how much is actually behind the recent trend in Q1 period trading, if I'm not mistaken, right? That's the first question. Let me take that one and maybe Korhan, you can address the others. In terms of our Q1 performance, despite the inflationary environment and macro challenges, it actually started off very strongly, which is very encouraging for us. But with that said, also, let me clarify a few details behind this growth momentum we experienced, which we believe is strongly driven by strong growth drivers, including customer and frequency, as we also had seen last year in Q4 as well. So basically, we see continued momentum of our growth drivers also being healthy in Q1. With that said, I can also give some flavor on the inflationary environment and how it actually impacts our consumers in Turkey in general. First of all, let me just say it's unfortunate that we are experiencing high inflation in Turkey right now. However, Turkey has gone through high inflation in the past as well. Our management team here is experienced in handling this kind of environment. Currently, we haven't seen any extreme behaviors up to this point. When I say extreme, I refer to two potential behaviors. One is people starting to consume less, which we haven't seen; or people focusing on stocking up and piling up, which we also haven't observed. So basically, we haven't seen those two extremes. Additionally, we also believe customers tend to come online more to check for price comparison because it's crucial to understand pricing transparency and being able to compare it. These are several dynamics that I can reiterate regarding customer behavior. Furthermore, we also realized that the affordability of our solutions is now even more important than before. That said, we believe we are well-positioned to address that need with our instant customer loans, Buy Now Pay Later, and many more. Our ability to offer bundled offers is also available for affordability seekers. Lastly, our 1P model proves to be strong. When there is high volatility and a need for price consistency and access to inventory, our 1P has been very relevant and we've seen the benefit of it, just like we did in Q4. Customers see us as a trusted brand with over 20 years of history, and we believe we are a good choice for them. Our after-sales support and credible customer experience also positions us well. Let me stop here. Perhaps Korhan, you can take the other two.

Halil Korhan Öz, CFO

Thank you, Murat. Miriam, thank you for the question. On the inventory side, we have been directly sourcing with our 1P arm. Since October, we have been buying necessary inventories to prepare for the November period and even the first quarter. Although there have been some sourcing issues on the 3P side, we've been able to compensate with our strong 1P arm. Our current inventory level is sufficient for us for the next quarters, and we don't see any major sourcing problems for the time being. I can say that vendors are asking for shorter payment terms or even instant payments for those inventories. However, with our negotiation skills, we've been able to handle it with the vendors and so far, we haven't faced any major issues. On the EBITDA side, we have a plan for positive profitability. Would you like to start, Murat, or should I continue?

Mehmet Murat Emirdağ, CEO

Yes, I can give some insights on that and you can take the question to ensure we address it fully and completely. When discussing our path to profitability, it's fair to say profitability is more important than ever in this macro environment, and we understand that need. We have a clear view on our path to profitability. While we acknowledge there are uncertainties in the market, it may not be the best time to communicate a specific calendar at this point. However, we've begun taking solid actions as visible in our Q4 results, and also our current momentum in Q1. Once the macro situation stabilizes, we may consider disclosing more details on our path to profitability calendar. With that said, maybe Korhan, you can take the question on EBITDA.

Halil Korhan Öz, CFO

Yes, thank you, Murat. Toward our path to profitability, we intend to improve our margins by selling more non-electronics through increased longtail selections and leveraging our current merchant base. Additionally, we aim for efficient, data-driven marketing, disciplined cost and cash management, and incremental monetization from our strategic assets and initiatives. Therefore, you can anticipate that as we advance along this path to profitability, our EBITDA will improve over time. Meanwhile, we target to reduce our cash flow.

Mehmet Murat Emirdağ, CEO

Did that address your question, Miriam?

Miriam Josiah, Analyst

Yes. Just two follow-ups. On the first one, regarding your guidance for Q1 to be higher, are you saying that you have not seen any weakness in the last couple of weeks?

Mehmet Murat Emirdağ, CEO

Yes, as you said, our year-to-date momentum is promising and encouraging for us. However, based on the current uncertainties in the macro environment and our commitment to disciplined cost and cash management on our path to profitability, we believe around 50% is the prudent guidance at this moment.

Miriam Josiah, Analyst

Got it, thanks. Additionally, in terms of the 1P/3P mix for this year, should we take the Q4 mix as a broad indication for what you'd expect, or do you think 1P will be even higher?

Halil Korhan Öz, CFO

We take the 3P questions from time to time. If we foresee any sourcing issues, then we actively start buying on the 1P side, but under normal circumstances, we keep it as is. So there's a healthy balance between 65% to 75% depending on the sourcing.

Hanzade Kilickiran, Analyst

Thank you very much. I have three questions. The first one is related to your working capital and the impact on the margin. You also ended 2021 with a very strong inventory buildup as far as I can see on the balance sheet. Could this mean that there is also another positive quarter ahead in terms of margins because inflation is still ongoing in Turkey? So do you see some sort of extra room in first-quarter margins? The second one is, again, inflation related. On your 50% GMV growth guidance, what inflation assumptions do you have? The third question is about the competitive environment. Have you observed a better competitive environment, particularly after surging inflation, which I presume could accelerate the cash burn in periods or a shift of focus to other platforms? I would appreciate any comments on that. Thank you.

Halil Korhan Öz, CFO

Thank you, Hanzade. Let me take the first one, Murat. On the working capital side, our negative net working capital keeps increasing. One major reason for this is that our trade payables are rising due to inventory procurement. As I mentioned, we started procuring inventory from October onwards, especially the last two months to prepare for the first quarter and mitigate inflation's impact and currency volatility. Yes, we have a large amount of inventory available at year-end, and we'll be utilizing that benefit in Q1. You can expect our margin improvements to continue slightly during this period. Also, on the inventory side, our assumption is that costs will be around 40% to 50% depending on the nature of the costs.

Hanzade Kilickiran, Analyst

Sorry, Korhan, do you base your 50% GMV guidance on a 40% to 50% average inflation expectation?

Mehmet Murat Emirdağ, CEO

I will take the competition question. Hanzade, it's fair to say there are three major impacts that we have observed regarding competition right now. First, competitive dynamics remain strong in Q1, just as they were in Q4. Secondly, we have noted increased competition in the online food delivery business with multiple players competing for market share. Lastly, the COVID-19-related tailwinds are fading away, making organizations like ours—who have invested in long-term value propositions—even more relevant. This gives us the opportunity to distinguish ourselves through our strengths, such as our hybrid model, logistics capabilities, superior customer experience, brand trust, and affordability solutions.

Hanzade Kilickiran, Analyst

Thank you. You briefly highlighted your strategic expansion. Could you please elaborate on your capital allocation strategy for 2022? How should we think about you allocating capital? Are you going to invest more in HepsiExpress or is HepsiPay going to be more focused, and will Buy Now Pay Later take more capital? How should we think about this?

Mehmet Murat Emirdağ, CEO

Yes, Korhan, please start.

Halil Korhan Öz, CFO

On the investments, especially on the CapEx side, Hanzade, we have budgeted for substantially higher CapEx in 2022 compared to last year for several reasons. However, I won't be able to disclose the specific number, but I will provide some relevant data points. Firstly, roughly half of our CapEx is allocated for website development costs, which is mainly due to the cost of engineers working on this initiative in our R&D department. This year, we will onboard many merchants at these R&D centers and our spending for this purpose will significantly increase. On the other hand, the remaining 50% will be allocated to hardware and our strategic assets going forward.

Mehmet Murat Emirdağ, CEO

In terms of our gating of strategic assets, Hanzade, we are optimizing our search model for HepsiExpress to lessen our dependence on delivery resources. This modular system allows us to deliver through our partners, optimizing that value chain. Our focus is now on providing exceptional customer service while maximizing long-term sustainability. You'll see us continually optimize our operations and work with our partners, which may reduce our reliance on delivery costs.

Hanzade Kilickiran, Analyst

Understand. Thank you very much.

Operator, Operator

Ladies and gentlemen, there are no further questions at this time. The conference has now concluded, and you may disconnect your telephones. Thank you for calling, and have a pleasant afternoon.