Adairs Limited (ADH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Adairs Limited FY '20 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Ronan, Managing Director and CEO. Please go ahead.

Good morning, everyone, and welcome to the Adairs' 2020 Results Call. Joining me this morning on the call is Ash Gardner, our CFO; and Jamie Adamson, our Head of Investor Relations. The second half of 2020 will be remembered as the most challenging period, with COVID-19 impacting every sector of the economy and forcing businesses to adapt to an ever-evolving environment. I am pleased to announce today that the results achieved by Adairs and Mocka through this period highlight both the resilience of our model and the strength of our brands. Adairs achieved sales growth of 4.5% for the year despite closing all stores on the 30th of March and reopening them progressively through May. This resulted in Adairs' total store sales being down for the year but up like-for-like after adjusting for the period they were closed due to COVID-19. The declining store sales was offset by the 61% sales growth achieved online, highlighting how Adairs' omnichannel strategy enabled us to adapt to the changing circumstances brought about by COVID-19. This sales result was supported by an improved final gross margin rate for Adairs. This was as a result of the continuation of the sourcing work done by the team in the first half, the deliberate decision to reduce the length and depth of Adairs promotional -- promotions and supported by the strong customer sentiment towards their homes over the last quarter. This culminated in the Adairs' business delivering a record underlying EBIT of $54 million. The acquisition of Mocka in December further enhanced the group's result, with Mocka outperforming over the half. Mocka total sales were up 30% on the prior year despite New Zealand being closed for 5 weeks and the business trading on low inventory levels through the fourth quarter. This sales growth, together with improved gross margins, delivered an underlying EBIT of $6.7 million for the period of Adairs ownership. The group achieved a record sales and profit result with total sales of $389 million and underlying EBIT of $60.7 million. This record result, together with the group's strong balance sheet, has allowed us to declare a full year fully franked dividend of $0.11 per share. I'd like to take a moment to acknowledge and thank our suppliers, landlords and business partners who work closely with us to share the impact of COVID-19. I would also like to acknowledge the Australian and New Zealand governments whose employment support packages enabled us to maintain the connection with and continue to pay our teams whilst they were initially stood down. I will now hand over to Ash to walk through the financials in more detail before I provide some more information on the strategies that will drive the ongoing growth of the group.

Thanks, Mark, and good morning, everyone. While we all know the world has been quite different since April, heading into Q4, both Mocka and Adairs were trading well, and we're well placed to continue to deliver solid growth for our shareholders. Though with the disruptions from COVID-19 led to some fundamental shifts in our focus. With the closure of all stores in Mocka New Zealand and the loss of up to 80% of our revenues for an unknown period, we moved to a cash preservation mode, standing down approximately 90% of our workforce, canceling the interim dividend and refocusing as online-only business. We operated as an online-only business throughout April and into early May and achieved results that were well ahead of our expectations. Adairs' online sales were up 228%, and Mocka Australia was up 139% in April. Pleasingly, we were able to sustain these high rates of growth as the stores began to reopen in May and June, with June online sales for Adairs up 66% with all stores open. During Q4, we saw many new customers and a large number of existing Linen Lovers shop online for the first time. Sales since stores reopened have also been very strong, with many of our Linen Lovers preferring to shop in-store. The impact of the store closures and the uncertainty in April did result in sales being well down on the prior year, which enabled the company to qualify for JobKeeper in Australia. So for FY '20, as Mark said, the group reported an underlying EBIT of $60.7 million, up almost 40% on last year, and an EBIT margin of 15.6%. Our underlying results that we've been talking to exclude the impact of AASB 16 and the Mocka acquisition costs. Adairs' underlying EBIT of -- sorry, Adairs' underlying EBIT was up 24% to $54 million, with total sales up 4.5% and like-for-like sales up 12.6%. Online sales were up 61% and stores were down 7%. However, store like-for-like sales were up 3.9% when we adjusted for the store closure period during COVID-19. Our online sales now represent 26.5% of total Adairs sales. Our underlying gross margin increased by 226 basis points to 61.4% with our ongoing efforts to manage the impact of the weaker Australian dollar with lower sourcing cost and active management of our retail price [ initiatives ] whilst also reducing the extent of promotional activity. During FY '20, we reduced the number of days the company was on store-wide promotions by 30. Cost ratios were affected by the store closure period with significant cost reductions in April and May, offset partially by higher online variable costs and increased investment in digital advertising. JobKeeper served to reduce our operating costs by $5.3 million, with a further $5.9 million passed through to eligible employees who were either fully or partially stood down during the quarter. As Mark mentioned, Mocka exceeded our expectations, delivering sales of $29 million and a profit contribution of $6.7 million despite the New Zealand operations being closed for almost 5 weeks. Sales growth and margin expansion accelerated during Q4, which is very encouraging. After taking into account the impact of AASB 16 and the Mocka acquisition costs, our reported NPAT of $35.3 million was 19% up on last year, and our earnings per share of $0.21 was 17% up on last year. Total online sales for the group now exceed $140 million on an annualized basis and represent approximately 35% of total sales, with growth continuing to be very strong with elevated contribution margins for both Adairs and Mocka online businesses. Our balance sheet is in good shape. Stock is well down last year whilst we are rebuilding inventory levels across the business at the moment to more normal levels and to support the continued strong sales. We closed the year with minimal debt and comfortably complied with all of our banking covenants. Now I hand back to Mark. Mark, you there?

Thanks, Ash. Apologies. As we've outlined, the business continues to perform well due to our focus on delivering on our underlying strategies. COVID-19 highlighted the benefit of our omnichannel business, with the combination of stores and online delivering sales growth despite closing stores due to health and safety concerns for our team and customers. This period allowed us to gain greater insight into customer behavior across stores and online. With stores closed, we saw strong online sales growth, with new customers to Adairs accounting for more than 30% of these sales. Further supporting our online sales growth over the store closure period were existing Adairs store customers buying online for the first time. Excitingly, there is material upside to our online business given that 63% of our Linen Lovers members have not shopped with us online. However, we also know that for some of these customers, they are unlikely to move online as they simply prefer shopping in-store. This was clearly evident in June as the largest growth in store customers came from returning Linen Lovers who elected not to shop while stores were closed. Adairs is well placed to both increase market share as more customers move online whilst continuing to support these customers who want the in-store experience. We firmly believe the home category is better with stores. They provide our customers with the ability to engage with the product and the team in an environment that allows them to be inspired to create the look that is right for them. Whilst online can allow you to easily find what you want, it is harder to recreate the experience of discovery that exists as you walk through a store, touching and feeling product. Our in-store team support this experience through their product knowledge and ability to help customers achieve and enhance their vision, providing the opportunity for improved conversion, cross-selling and loyalty to the brand. As highlighted on Slide 9, our stores are an asset that deliver solid returns. All stores are profitable, and our store formats continued to deliver strong contribution margins. Whilst customer preferences and habits are changing, we continue to ensure we have deliberately created a flexible store portfolio with 72% of store leases expiring within 3 years, with longer leases attributable to our larger, more profitable stores. This allows us to strategically manage our store portfolio through opening new stores, upsizing existing stores, obtaining more favorable terms on renewals or closing stores that simply do not meet our return hurdles. Whilst omnichannel is important, the combination of omnichannel retail with loyalty is what makes it truly effective. Adairs is focused on continuing to grow its market share, and the best way to do this is to both grow our customer base and increase our share of spend from our existing customers. Linen Lovers is the tool we utilize to achieve this. By focusing on improving our customer experience, in particular for our Linen Lovers, we can build customer loyalty and continue to grow market share. The Linen Lovers program today accounts for more than 75% of Adairs' sales, with members spending 1.5x more per visit than nonmembers. It is important to note that members pay for their membership, which implies a commitment to shop with Adairs again and highlights the benefit that customers see in the program. This allows Adairs the opportunity to enhance our knowledge of the customer and build a more personalized relationship. Our loyalty program was a key asset in bringing customers back into stores as they reopened as we could individually target those customers who frequented those particular stores. Further, during the store closure period, we introduced a lot of store customers to online for the first time, increasing our number of omnichannel customers who historically purchase more often and spend more with each purchase than those that only engage via one channel. Slide 11 outlines the addition of Mocka to the group, which increases our exposure to the fast-growing online segment of the market with the significant benefits of vertical integration. Mocka's passion for design-centric in-house product development allows us to offer our customers high-quality, design-led, value for money, differentiated product. This means we have control of the vertical supply chain and importantly, the pricing and promotion of our products in market, which delivers stronger gross margins and earnings. Excitingly, Mocka has been able to take advantage of the opportunity presented by COVID-19 to accelerate our brand recognition and growth rate in Australia where website visits have doubled since April and remain elevated. This takes us to our future drivers of growth that remain consistent with our existing strategies and have built upon our proven and resilient business model that has a high exposure to and capability of delivering profitable online sales growth. The strong brands that we own, combined with our vertical supply chain philosophy, allows us to build out our product offering with increased agility and control, delivering exclusive product and higher margins. Our strong brands, combined with our large and loyal customer base, enables a lower cost of customer acquisition and provide significant opportunities to enhance and build upon our relationships with our customers to deliver incremental returns. Stores provide a valued and trusted engagement point with customers. Adairs' profitable store formats enable us to maintain flexibility whilst optimizing our portfolio to take advantage of new store and upsizing opportunities. Our focus on larger stores allows us to showcase more products and categories whilst driving increased store contribution. We will also focus on accelerating our digital transformation to further develop our digital capabilities to support an enhanced omnichannel model. This will see us invest in customer experience and customer acquisition through enhancing our digital platform and team. We know omnichannel customers are more valuable, and we expect they will grow as a percentage of the market as more customers become omni. The acquisition of Mocka increases our exposure to online, and the opportunity is significant. We have seen an increase in our Australian brand awareness, and we'll invest in product category expansion, customer acquisition and infrastructure, including warehouse facilities to support this growth. And finally, the strategic review of our supply chain completed in FY '20 saw us appoint DHL as our 3PL partner to build and operate a new purpose-built National Distribution Centre for Adairs. Partnering with DHL provides us access to a global leader in the design, implementation and operation of flexible warehousing and distribution solutions to support our omnichannel approach. With the National Distribution Centre on track, we will continue to invest in our omni supply chain strategy through a number of initiatives that will enhance our inventory productivity and customer experience. Slide 16 highlights the significant opportunity available to our brands even if we only consider the addressable market in Australia. As online grows, our omnichannel business model allows us to address the entire market, and we have significant opportunity for growth across both channels. Whilst online continues to see new entrants each year, generally focusing on a specific niche or price point, we believe there will continue to be consolidation in the physical retail space. Our strategies are focused on enhancing our omnichannel model, bringing our stores and digital channels closer together and combining this with our product category expansion to enable us to both win more new customers and greater share of spend from our existing customers. We have successfully achieved this over the past 5 years and have developed a platform that, with additional investment, will allow us to continue to grow into the future. If I move to the outlook where we have provided a trading update for the first 5 weeks of FY '21. This has been a very strong sales period with group total sales up 32% and strong sales across Adairs and Mocka. We will continue to invest in our digital capabilities throughout FY '21 and support this by opening a further 3 to 5 new stores and upsizing a further 3 to 5 stores to take advantage of the current trading environment. Our National Distribution Centre remains on track to be operational by early FY '21. However, we will watch this carefully over the coming period given the potential disruptions to construction in Victoria. With the ongoing uncertainty created by COVID-19, the Board are not able to provide FY '21 guidance at this time. The closure of our Victorian metropolitan stores last week, together with our customer support office, is another example of how we must be prepared to react and adapt to the ongoing changes and challenges created by COVID-19. We are pleased that our Victorian distribution centers are able to continue to operate with reduced team members to continue to support the majority of our stores that remain open, our online business and, most importantly, our customers. Whilst we have seen a moderation in the sales growth as a result of these store closures, we are pleased that our online sales growth in the metropolitan Victoria has grown significantly over the last couple of weeks as these customers moved to shopping online. COVID-19 has reminded Australians of the importance of a comfortable home, and we believe this is motivating them to spend more on their homes at this time. We expect this behavior to continue whilst COVID-19 persists and other areas of the economy remain constrained. To finish, I would like to thank the Adairs and Mocka teams for their hard work and dedication across the year. Our teams are passionate about our businesses, and this has never been more evident than in FY '20. During the period stores and websites were closed, the majority of our team were asked to stand down, with a smaller group tasked with managing the online businesses. They did this with unwavering professionalism and understanding, ensuring that we successfully navigated the closure period and emerged well placed to manage and capitalize on the new and evolving retail environment. Shareholders should be comforted and pleased that in Adairs and Mocka, they have teams who are committed to their customers and delivering ongoing profitable growth. I will now hand over for questions.

[Operator Instructions] Your first question comes from Aryan Norozi with UBS.

Just a few for me, please. First one around the rental side. So can you give us an idea of how many -- how much rental concessions you guys booked in the second half of '20, please?

Ash, do you want to take that one?

Sure. So where we've got deals done, we did take out some concessions. But as I'm sure everyone appreciates, it takes time to get deals done, but it was in the vicinity of around $1 million worth of benefits taken up, but there's still a significant number of leases that continue to be negotiated and outcomes that still need to be finalized that weren't taken up because the auditors don't allow us to take them up until it's done.

Sure. And on rent, have you done any renewals during the period? And are you getting base rate reductions? Obviously conscious you don't have the exact number, but are you getting any sort of reductions on your renewals, please?

Aryan, I think the approach we've taken on a bunch of that is to take up some short-term renewals and work with the landlords to get us into a better environment to actually make a longer-term decision. So you'll see, obviously, with that 72% of stores in that 3-year period, over this time, we've probably extended a number of leases, but that will see us have a significant number of leases expire over the next 12 months. And during that process, we expect to reset some of those underlying base rents. But at this stage, we didn't take up significantly reduced rents. We have more work with the landlords to actually make sure we could all see ourselves through this period and put ourselves in a position where we understood the environment going forward.

Perfect. And the next one is around just online and the contribution margin. So it's -- obviously, the biggest contribution lies in channel, and online has practically grown from 4%, 5% sales 5 years ago to 35% annualized. Why haven't we seen that through the EBITDA margin over time? If online is steady, a significant driver in contribution margin, has there been significant investment in the fixed cost base to get us there? And now you should start to see that operating leverage flow through moving forward? How do we think about that?

Yes. So let's just be careful about the use of 35% because that includes Mocka, right? So let's -- when you start talking about 5% to where we are today, that's about 5% to 26% and was obviously accelerated during the second half when you shut stores for between 4 and 8 weeks, depending on the store. So the contribution margin is high. But over that time, we have invested in people and resources that we -- in terms of our overhead cost to support that growth, be that both in product, category expansion, design and development and also through an expanded marketing team, which we don't allocate necessarily specifically to channel and is included in some of those overhead costs. So whilst I think you will start to continue to see that contribution margin stay high, what we do know is that it does continue to require ongoing investment in building some of that out. And even our warehouse facilities, we've had to expand them over that time, and we don't necessarily attribute it specifically to online because it supports the entire business. So a lot of the investment that has happened is both to support our stores and online, but that has seen an increase in that overhead cost associated with that. So I think we do start to receive some of those rewards. And I think you'll start to see them more likely in FY '22 as we get the warehouse under control and those initiatives we've taken over the last year or so to put us in a position to truly capitalize on the omnichannel model that we're building out now.

Perfect. And last one for me, please. Just around your total addressable market. I think in previous presentations, you've mentioned the market is $4 billion to $5 billion, and now you're saying it's about $12 billion -- $11.9 billion. Is there any new categories that you're entering in that makes you expand that addressable market? Or is it just a change in definition?

There's a slight change in definition. But I think with the addition of Mocka, we talked about Adairs is a soft furnishings business that has an element of furniture, and Mocka is a furniture business with an element of soft furnishing. So we never really captured that entire furniture market in that space. And that's the biggest change to that addressable market from prior periods to now, is how much of the furniture market we think we can go after with the addition of the Mocka brand into the group.

Your next question comes from Aaron Yeoh with Goldman Sachs.

Just a couple of questions for me this morning. Firstly, on Mocka, I mean, it looked like the margin there well exceeded my expectations, and I think most others as well. Can you just talk about the key drivers of this? And whether you think at the EBITDA level, that margin that you're seeing at the moment from Mocka is sustainable?

Look, it exceeded -- I mean it exceeded our expectations. And I wouldn't want anyone to pump that number in as being the sustainable EBIT margin of that business. Obviously, it benefited greatly from the fact that a lot of retail stores were closed. People were more likely to be looking online. And therefore, our cost of customer acquisition came down significantly over Q4 as just more and more customers were using that as their only way of shopping and search tool, et cetera, et cetera. So therefore, we saved significantly there. But we did get the operating leverage out of those assets that support that business. But we know, to take that from where it is today to where we think we can get it to, we will need to invest some of that EBIT margin. But we talked -- when we acquired the business and have set and sorted it out, we are aiming at that 18% to 20%. And I still think that's the right long-term number for us to be thinking about, but there's no doubt it exceeded our expectations over the half and in particular, over the last quarter.

Sure. Great. And then just with regards to the Adairs Group gross margin as well. I mean very sort of pleasing results there. Heading into next year, can you talk about what sort of initiatives you have in place to manage the gross margin next year?

Well, I think we continue to do what we do in that regard. We've delivered a terrific result, and we said that -- 12 to 18 months ago, we set out with a very deliberate approach that what we wanted to do was work with our suppliers and improve, I guess, the inbound cost given the falling AUD and wanting to manage that piece. But also more than that, we wanted to really think about how we made sure we capitalized on the effort and work of our product and design team and actually stopped promoting as heavily as we once were to drive sales. We wanted to make sure we rewarded that team for their efforts and got the true value of that product. And I think for us, we will continue to operate with that as a key philosophy, and that should continue to deliver good EBIT margins -- now I'm -- good gross margins, sorry. I'm not suggesting that we could drive a similar increase into FY '21. But we certainly will look to maximize, as we've talked about in the past, like-for-like gross margin dollars rather than simply chasing like-for-like sales dollars because we think it's important that we manage the business for the long term and chasing sales at the detriment of margin is not a great way to play it. So we think the ongoing work that the guys have done and that focus that we've created in the business will continue to help us maintain a higher gross margin than perhaps we operated on in the past.

Yes. Sure. And then with regards to the strong sort of -- I think the new customers that you're seeing online, can you make any comments with regards to their sort of purchasing behavior in terms of frequency of purchase or types of products that perhaps might be sort of doing a bit better at the moment?

Well, it was an interesting period over that Q4. We saw a number of new types of customers. So that new 30% of customers sort of were spread across a variety of people: those looking for, let's call them, core product essentials, so bedding, so quilts and pillows, sheets, towels, those sorts of products; and then those that were looking for a change. So we probably saw a couple of distinct customer groups come through there. It's a bit early to talk about frequency of shop. We have a category that generally people shop 3 to 4 times a year. So with it being only in the fourth quarter, we're a bit early to actually see if they are significantly different customers, but we will learn that over the coming period. And the beauty of our Linen Lovers program and the way we're collecting that sort of information, we have the ability to actually trace those customers and whether we do see any significant change with them over the time. But I mean it was an interesting period, and we did certainly see a big push into some of those -- both categories. Initially, it was very much focused on setting homes up and getting comfortable. But then as COVID-19 has progressed, we've probably seen people really come back to really thinking about some of the fashion elements within their home, cushions, throws and additional pieces like that to build out their home and their space to create that look that they're looking, that they're after.

Yes. Great. And sorry, one last question from me. Just with regards to the 3PL supply chain investment you're putting in place. I mean obviously, you'll have increased capacity moving forward. How should we think of that in the context of, I guess, your online strategy? Just a bit of a less field one here, but would you ever consider adding a marketplace to your website?

We don't rule anything out. That's something that we consider. But I think one of the key strengths of our brands is the vertical nature of them and making sure that we don't dilute that vertical nature by trying to be all things to all people. So what we need to make sure of is that whatever we do, we continue to deliver for those customers and think about it as an omnichannel retailer, how we're ensuring our customers are getting the very best experience. And I think one of the things that we really focus on is making sure that we create a curated and ease of shopping as opposed to potentially some marketplaces where you blow out SKUs, you blow out with the range. And that can create a challenge for customers. You can argue it creates an opportunity to find everything you like and everything you want, but it also creates, for some customers, a difficulty in actually working out how do I get to that product. So for us, as I said, we don't rule out anything, but at the same time, we want to make sure it comes back to what Adairs is and what Adairs aims to be for our customers rather than just thinking about it as it's a good idea and work down that path. So in the short term, I can say that it's not something you'll see from us in the next 6 months.

Great. Congrats again.

Thanks.

Your next question comes from Mark Wade with CLSA.

Firstly, just curious, I mean what's prompted the early results release which was unaudited for the first time?

Well, I think when we finalized -- well, we haven't finalized the audit, but we got to a level where we thought the numbers were pretty solid and well up on perhaps consensus that we obviously looked at our continuous disclosure requirements and felt that it was required that we come to market a bit earlier given we now had a set of numbers that we were confident in and therefore, presenting to you guys.

Okay. Fair enough. And then just looking at -- I mean how are you kind of planning to run the business in this kind of environment? It must be very challenging. I mean you can't really travel, so finding stores would be hard. And then looking at just getting designs, normally, you'd look at what new fashions are coming overseas. So just how are you tackling that rather enormous challenge to think about setting the business up for the next 12 months and beyond?

Yes, I think you've just got to become adaptable, right? So in all of those elements, we've got other ways and means. I mean between us, within this management team, there's not a shopping center we haven't been to. So it's not particularly difficult in terms of new stores for us to understand where they are, understand whether we like the center, were they on list. We had a list 3 months ago, and I don't expect that to change. When you start to think about product, that does become more challenging. But at the same time, the guys have already thought about different ways of addressing that. So for instance, we've all got friends and relatives and others overseas, and we are engaging with some of those sorts of people that we trust to work with us on walking around stores and providing us with that input and feedback back into our design process. We obviously can work with our suppliers as well as to what they're seeing out there. So there's a number of ways in which we can adapt and address some of those elements that we would consider more challenging or might be considered more challenging. And I mean one of the great things about Adairs is our long history with a number of our suppliers allows us to work differently and come up with new ways of working with those guys to ensure that we get that right. So there's no single answer to that question. But I think we're just seeing different ways of doing it, and I think the beauty of a business like Adairs and others out there, no doubt, is that we just have to adapt. I mean you can't change the circumstances that you're operating in. So therefore, the only response you've got is think about it and how we're going to overcome it, and this business and this team are very capable of doing that.

Okay. And lastly, I mean, it's a $64,000 question, but look, how long does this real purple patch last for? Retailers, homewares retailers -- obviously, sales, we've seen it branches where sales have gone up to electronics and then -- how long can it really last? Is it just a matter of borders reopening and people travel again or they're back at work? What's the trend there on the longevity of this surge?

Yes, it's a good question. It is the -- you're right, it is the million-dollar question for everyone to consider. And I think when we look at it, we believe that whilst people are constrained from doing a lot of the things that they would normally do, including international travel, travel amongst the states, even -- all of that suggests that there will be more money spent in home over that period. So I guess that's the question for us all to answer, how long do we believe that to be? If you'd asked me just 4 weeks ago, I wouldn't have thought that this was going to be as long, but 4 weeks change a lot in today's world. So providing any real guidance as to how long that might be there is very hard to do. And I think that goes to our approach, which will be to maximize the opportunity that's being presented to us in as risk-free way as we can. So we're not going to sit here and blow out inventory. We'll manage our inventory closely. We'll do all the things that we normally do as a disciplined retail business to make sure that we don't get caught short or caught long if it comes off or if it continues for a longer period than we believe it to be. So I think if I look at what we've delivered over the last 6 to 8 weeks, I'm -- we're operating the business on significantly lower inventory than normal, yet our sales results are quite incredible. So with those two things, we know what we can do. We've thought about that, and we'll just manage to the best of our ability. So I think -- again, I come back to -- it's a bit like your previous question, Mark, it comes back to creating a business and a philosophy of adaptability and agility that as things get announced and as things change, we just move with them and work out how that impacts the way we were operating beforehand and the way we're going to operate going forward. And again, I really want to shout out to my team and the businesses that have been really good at working in what is quite a different environment given -- no doubt, those that have spoken to me for a long time, I talk a lot about executional excellence. And that's more challenging in a world where you change what you're doing every 4 weeks, but the guys have done a great job, and I expect we'll continue to manage that accordingly.

Yes. No, I think that whole philosophy on that one is it's something you guys have had for a long time, and it fills up really well. So yes, all the best. I think it will continue. Well done. That's all.

Thanks.

Your next question comes from Jo Little with Morgans.

Just firstly, just from a cash perspective, can you just quantify deferrals and make goods that will flow into FY '21, just on tax and rent, et cetera?

So obviously, you can see our tax -- provision for tax is a little bit higher. We've also got some rent deferrals where we're still in negotiations with the landlords to finalize. And then in terms of other taxes, they're minimal. And that's net of a JobKeeper receivable for June that we haven't got the cash flow yet. So there's not a significant amount of deferrals and rent's sort of $3 million to $4 million of deferrals, which we're still working through.

Okay. Great. And just on the inventory, Mark, which we're just talking about then, I guess, well, it landed at $43 million order at year-end. What's a more normalized level today for that? I know you commented that Mocka was probably 20% below at a [ quick ] kind of level. Is there a number you can kind of point to today that would be more normalized across both businesses? What's the rebuild, I guess?

Yes. I think it's somewhere between $10 million and $15 million. I mean that number there has significantly more stock in transit than perhaps normal because we had to get back into stock. So Adairs, of stock on the actual -- in the actual business as opposed to in transit and the like is probably operating about 25% below where I think it should be. And Mocka, obviously, we called out the 20%. So if you think about a rebuild of somewhere between $10 million and $15 million, that's sort of number I'd expect to flow back into that inventory line.

Great. And just on that, Mark, how are you positioning your inventory? Obviously, you're balancing the gross margin equation. But just for Christmas, balancing, I guess, what you're seeing today versus what might happen at Christmas, are you -- last time you had a conference call, I guess, you're a little bit more circumspect on Christmas and running it tighter. How do we -- how are you thinking about that today?

I think I've probably loosened it a little but not significantly. I think we can see what we can do with the inventory we've got today, which, as I said before, is pretty amazing. So therefore, we probably don't need to loosen too much to capitalize on the opportunities that might present itself over that quarter. And therefore, we can derisk as we approach that Christmas period by moving our inventory levels back to more normal. And if the customer is as buoyant as they are today and spending as much on home as perhaps they are today, then we'll take advantage of that opportunity with the inventory we've got coming. So we'll probably tweaked a few things and increase our purchases for this half to make sure that we put ourselves in a good position to capitalize on that but not such a position that we feel like we could end up way high on inventory should the consumer step away for any reason over that period. So we've tried to balance risk and reward, and I think the guys have done a great job in sort of positioning ourselves sort of down the middle of the fairway, which allows us to play up or down, depending on how the consumer is over that second quarter, which, obviously, is a great unknown at this stage.

Yes. And just on the trading update, which was obviously very strong. I mean -- but you're pointing out the lower inventory or you assume that, that was still, despite being very strong, constrained by the lower inventory position, particularly in Mocka?

Yes, for sure. Yes. There's no doubt that if we had more inventory today, we'd be selling more stock.

Perfect. And just on the Mocka earn-out, I think it's got in the account the max of kind of $30 million kind of gross carrying value. How much of that's payable in FY '21, again, Ash?

None. None in FY '21.

All in '22. Got it.

Yes. It's FY '22, '23. The payment is based on FY '21.

Yes. Depending on whether they extend it for the third year, it's sort of 30% to 50% in the end of FY '21.

Okay. Got it. And just lastly, just a couple of things around just state performance. If you can just give us a bit of a guide there and also the average Linen Lovers basket size, if possible, in that fourth quarter versus the PCP.

Getting into the detail there, Jo. Generally, I -- to be honest, across that fourth quarter, we were strong across all states. We didn't see significantly different results. WA is probably trading better than others. That would be the one that I'd call out that was above average. Linen Lovers basket size has probably remained about the same, but it's fair to say, probably lower items per sale -- per basket and a higher average retail price. So we haven't seen significant growth in ATV, but we have seen significant growth in both transactions and retail prices over that quarter.

Okay. Perfect. And I know -- I think I know the answer to this last one, but obviously, we've reached your online target well ahead of what was kind of expected. Is there any rough online sales targets you are looking at in coming years? Or are we just in such in a weird kind of period at the moment, it's -- you're not willing to do so?

Yes, I -- look, I'll come back to my comment of how do we just continue to enable customers to shop anywhere, anyhow and any way they want. But there's no doubt, you're right. We've achieved it beforehand, and now the trick over the next sort of 12 months for us is how do we make sure that we continue to grow that given that we -- the world that we are sort of operating in, and let us get to the other side of that, and we'll set some longer-term targets. But there's no doubt that we think there is still significant opportunity in both online and physical retail sales over the coming years, and that's what we're going to go after.

Jo, just one other thing on Mocka. Just remember, there's no maximum payout. The better they perform, the more they get paid.

Your next question comes from James Casey with Baillieu.

Just a question with regards to the JobKeeper payments, the $11-odd million there. You split those into 2 components. Can you just explain those 2 components, why you've split them in 2?

Sure. So the $5.3 million represents the direct cost saving that we received for the people that actually worked during that period, and the government subsidized the wage that we're paying them. And the $5.9 million is effectively us acting as Centrelink and passing monies through to our team that was stood down either partially or fully. So the $5.9 million has no financial benefit to us. It's us passing through the government benefits to our team. But the $5.3 million was a direct cost reduction that's reflected in our P&L.

Okay. I take it the difference between the cash flow statement where you've got receipts from government grants of $7.1 million and the JobKeeper payments, is -- that's just a timing difference on the receipt of the cash, is it? From the Keeper?

Correct. Yes. That's the June -- the 5 weeks of June that we haven't received -- that we received the money from the government in arrears.

Yes. And then going into first quarter '21, is a similar payment, $11.3 million, is that where you see the number landing?

Yes. They're there. There's...

And then beyond September, what happens then?

Based on our interpretation of the way the scheme is likely to evolve, we doubt we'll be eligible given how we've been performing. But it is an uncertain world, and time will tell. But we don't plan nor expect to be eligible post-September.

Okay. And then just lastly, on rental relief, are there any clawback provisions around the rental relief you've received?

Not directly. So some of the arrangements we've made with the landlords -- I mean the principle we engaged with landlords was to share the pain. So in some cases, to the extent that sales have bounced back faster than we expected, then the rents will be higher because we agreed to pay a percentage of sales as rent for a period of time. But there's no direct clawback arrangements where there's been an abatement or a rebate agreed as a [ fix all-around ].

[Operator Instructions] You next question comes from [ Jack Strudwick ], a private investor.

Most of my questions have been answered. The one thing I wanted to ask, though, was about the provisions. They're more or less flat on the current provisions, but the noncurrent provisions are down a bit. Can you speak what that -- to me about what that's about?

It's largely to do with the movement of employee provisions between current and noncurrent. There's nothing of any real significance in there, just making sure there's no IFRS 16-related things, which there isn't. So yes, it's just largely to do with the movement of employee provisions. So there was quite a few. Our team took leaves and were in paid leave during the stand-down period. And then there's other minor bits and pieces in there.

And so rent deferrals, say, in Victoria doesn't go through to your provisions, so you don't provide for that.

That's just a normal trade creditor.

Your next question comes from Aryan Norozi with UBS.

Very quickly, just around your cost base. I mean how much flexibility after -- post JobKeeper, if things do slow down quite materially, how much flexibility do you have on your labor cost base in terms of lowering staff hours, casuals, et cetera? I suppose it's a sensitive issue but any commentary or guidance you can give us around flexibility on your labor cost base, that would be great.

Look, I mean like other retailers, we have a significant portion of casual workers who we are capable of moving hours around with. So I think if you thought about our labor cost base, there's circa 30% to 40% of our store labor that is casual. But I would argue that some of that, depending on the hours of trade, you can't get that to -- so in a big hurry. You've got to operate the store, and we don't have enough team necessarily across the balance of the full time and part time to adequately staff the store over a full week. But I think what we've seen during this period is retail is becoming a bit more flexible and thoughtful around how we use things such as opening hours and center opening hours and all of those sorts of types of other levers that also help us manage that labor cost line to bring it into line with how sales and how the consumers are operating in a COVID-type world. So if you think about that 20% to 30% would be flexible in our store labor number, that would be where I'd sit today.

Sorry, that's 30% to 40% of your dollar cost and labor costs or your hours? Sorry.

No, I'd say 20% to 30% of our hours and our store hours as opposed to our total labor cost, which you would take out of the P&L, which will obviously include a significant amount of our customer support team, which realistically is not overly flexible. You would argue that is a predominantly fixed cost and would require restructuring and the like to significantly take out costs. However, I think we expect that those sorts of management is what we continue to do on a store basis and the opportunity presents itself at the moment in relation to the market and where we want to take the business would see us continue to support our customer support labor and our support office labor here to drive the future growth of the business.

There are no further questions at this time. I'll now hand back to Mr. Ronan for closing remarks.

Thank you, and I'd like to thank everyone for their continued support of Adairs and for joining us on the call this morning and, in particular, throughout this period where I know a lot of people have had a lot of challenges. And again, I'd just like to thank the Adairs team for the amazing effort that they've put in over this period and the way they approached COVID-19, and thank you again.

That does conclude our conference for today. Thank you for participating. You may now disconnect.