Adairs Limited (ADH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Adairs Limited FY '23 Results 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 2023 financial year results call. Joining me this morning on the call is Ash Gardner, our CFO; and Jamie Adamson, our Head of Investor Relations. 2023 financial year saw the group deliver record sales despite the more challenging trading environment encountered over the back half of the year. The group delivered sales of $621.3 million, up 10% on FY '22 on the back of strong product execution across the brands, uninterrupted store trading through the year with no COVID-related store closures in FY '23 and a full year contribution from Focus on Furniture. Across the year, we saw a normalization of the sales between stores and online channels with group online sales coming back to 28.6% of sales as customers returned to stores. The group saw price increases helped maintain product gross margins with gross profit impacted by cost increases across the domestic supply chain, and in the case of Adairs, the ongoing impact of the inefficiencies of the National Distribution Centre, which resulted in the decision to take operational control of the NDC that was announced a couple of weeks ago. CODB was up 15% on prior year with the additional costs of uninterrupted store trade, a full 12 months of Focus operating costs against 7 months in the prior year, both compounded by cycling COVID-related rent rebates and cost increases across most areas of the business. Given this result, the group has undertaken a cost out project to reduce the group CODB given the current trading environment. We saw the group deliver EBIT of $63.9 million, down 16.4% on last year with net debt reducing to $73.6 million. Despite this net debt reduction, the Board have made the decision to not pay a full year dividend given the recent decision to take over the NDC and the capital commitment that accompanies this, together with an ongoing desire to maintain a strong balance sheet. I'll now hand over to Ash to walk through the financial results by brand in more detail.

Thanks, Mark, and good morning, everyone. As Mark said, the group reported a record sales result of $621 million. The profit was impacted by lower margins and higher cost of doing business. EBIT for the year was $63.9 million, was down 16% on last year with an EBIT margin of 10.3%. If I turn to the brands now, I'll start with Adairs. Total sales were up 2.9% with store sales up 7%, cycling the prior year, with store closures due to COVID continuing to impact in the first half. Online sales were down 6.7%, but still represented 27% of total sales, up from the 17% contribution pre-COVID. Gross margin was down 170 basis points to 61.5%. More promotional activity than in the prior year. The benefits of lower inbound container freight rates began to be seen in Q4 and will continue into FY '24 to offset the impact of the weaker Aussie dollar. Costs were higher across the business, albeit the cost out program that commenced in the second half reduced the extent to which costs would otherwise have grown. We agreed an interim pricing agreement with DHL that commenced in January and implemented an across the board cost realignment process. As a result, the rate of cost growth reduced from 17% in the first half to just 4% in the second half with the cost realignment process continuing into FY '24. Adairs EBIT of $35 million was 37% lower than last year. Focus on Furniture had another excellent year with strong execution and a compelling value proposition, delivering growth in sales, gross margin and EBIT. Overall sales of Focus increased 5.3% in FY '23 to $142 million. Margins improved by 60 basis points to 52.6% with the benefits of the lower container rates in the second half retained, and like Adairs, providing an offset to the weaker Aussie dollar moving forward. Focus continues to operate with a lean cost structure, with the costs increasing only as a result of stores being opened for the full 12 months and performance related incentives. EBIT for the year for Focus on Furniture was $27.4 million and slightly ahead of last year. Mocka reported sales of $48.6 million, down 24% on last year. Whilst we didn't see a major shift in the sales run rate in the second half, we did see the underlying business metrics improved significantly. Gross margin in the second half increased to 53.4%, up from 47.7% in the first half and almost 15 percentage points higher than the second half last year as a result of clearing excess inventory and well managed pricing and promotional activity. Operating costs were also lower and this combined to deliver a second half EBIT of $1.3 million. More importantly, these underlying improvements will be retained as we move forward. If we now look at the balance sheet, the group continues to maintain a strong balance sheet with inventories 11% lower than June last year and 17.5% lower than at December. The supply chain risk related inventory buffer is now being removed. Net debt was $73.6 million at the end of the year, $20 million lower than the same time last year and represents leverage of approximately 1x. The group continues to maintain significant headroom with its covenants. And I hand back to you, Mark.

Thanks, Ash. Over the past 12 months, all brands have taken good steps in advancing their strategic priorities. Let's start with Adairs. And as many of you who will have followed Adairs for a number of years would know, the strategy always starts with product. A continued focus on refining our offering of exclusive product with a strong value proposition is a starting point for our strategies. Over the past 12 months, we've seen good growth in our fashion furniture range, which looks to leverage our on trend positioning to provide those more interesting pieces customers are looking for to deliver their individual visions. We've also seen ongoing growth in our Adairs Kids ranges supporting our position as the place to shop for kids bedrooms across a range of categories. There remains a good opportunity to grow our Kids business through both range expansion and market share growth. These initiatives are being supported by the ongoing development of new products within a number of categories that look to create that new reason to shop on top of our trend design and great quality at Adairs. This ongoing focus on both the trends within home and product innovation remain the fundamental building blocks of growing share in the category. To support the product strategy, Adairs has continued to build upon the strength of our loyalty program Linen Lovers, utilizing this program to drive our customer acquisition and retention. I think it's important just to remind everyone that the Linen Lover program is a pay-for program with members paying $19.95 for a 2-year membership that entitles them to everyday savings across stores and online, free standard delivery, extended return periods and access to our VIP shopping events. With more than 1 million members, our Linen Lover program delivered 83% of sales in FY '23 and enables us to continue to talk directly with our customers. Using the data from our Linen Lovers, across the year, we launched a new website in November '22 that has provided us with the foundational platform to deliver an improved customer experience. The new site has improved customer conversion. And with ongoing enhancements, we believe we can continue to make it the logical starting point on any customer's journey to creating a home they love. Off the back of the new website, we are currently rolling out click and collect functionality across the store network, which will replace our previous call and collect service. This will then form the foundation to look to optimize our inventory holdings by moving towards a single pool of inventory that can be accessed by all channels. On top of this, over the past 12 to 18 months, Adairs has invested in bringing together the variety of customer or Linen Lover data we have access to into one platform to enable us to create a single view of customer. This foundational piece of work now enables Adairs to start to deliver at scale the personalization of content for our customers. Whilst we're just commencing trials of a number of initiatives, the early signs are positive, and with the investment made, the opportunity for us to identify and test different scenarios and then move successful trials quickly into ongoing programs is a great opportunity and will be a key focus moving forward. Across the year, we've also seen customers come back to store and benefit from the ability to touch and feel product and talk to our store team members, which drives stronger conversion and growth in average transaction values. Over the year, we opened 2 new stores, upsized 4 and closed 3, with 2 of those closed stores being absorbed within an upsized store. As we look forward, there is a solid new store pipeline with our ongoing preference being to opening larger stores whilst maintaining our convenience for customers in their local shopping centers. Store space growth is a key driver of sales and Linen Lover growth supporting our ability to both expand our product ranging and customer reach. We remain committed to growing our GLA and expect the pipeline developed through FY '23 will deliver 5% GLA growth over the coming years. Finally, for Adairs I wanted to touch on the recent announcement to take operational control of our NDC. The last 12 to 18 months have been incredibly frustrating as we have not been able to deliver the experience Adairs customers expect from us as a result of the issues within the NDC. This has seen us impact customers via our poor delivery experiences and stock outs in store. Unfortunately, when working through our 3PL, the changes we need to make were always going to take time, and whilst progress was being made, it was simply going to take too long. Whilst this decision comes with a significant capital investment of $20 million, this is largely in line with the investment we would have made if we had elected to operate the NDC ourselves at inception. Further, operating warehouses is not new to Adairs as up until we moved to the NDC, Adairs operated all of our own warehouses, and importantly, a lot of the team that led these warehouses have remained with the business working with DHL on attempting to improve the output and efficiency of the facility. Across the last 12 months, our team have identified the most immediate areas of priority and had the benefit of observing how the technology utilized within the facility works, which has provided us with a clear road map of what needs to be done. Importantly, with us taking over the facility, we will deliver ongoing improvement in both service and cost. We will see improved order picking accuracy and faster dispatch times leading to less refunds and more repeat customers for online. And in stores, we've improved product availability by faster store replenishment delivering both a better customer experience and increased store sales. In retail, we know that supply chain speed is critical to today's customer and by having the end-to-end supply chain operated by Adairs, we will be able to constantly drive this requirement. If I move on to Focus, where our growth will be primarily driven by delivering the national store rollout. Whilst we're working for obtaining new sites for Focus, we shouldn't overlook the importance of continuing to deliver a strong underlying customer proposition. Focus had another very good year with the team successfully developing and delivering new on-trend products that support our ongoing best sellers with strong price points. Within Focus, the combination of new product that enables us to showcase current trends for the middle market customer combined with a higher in-stock position to offer faster delivery and a knowledgeable store team delivers our strong customer proposition. We are constantly looking to enhance these key aspects of the business, which are then supported by our other growth drivers. Hoppers Crossing store refurbishment was completed during the year, delivering the first store with the new fit out. Initial results have been very promising with sales up 6% against the store network since it was refurbished. I think for anyone looking at the investor presentation, you will see that the images showcase our strategy to have the new store design reflect the modern Australian home, with increased lighting and a simple color palette really enabling the product to shine, increasing the customer's value perception. Our Focus store rollout has started slowly due to the tight market for homemaker space. Saying this, we've made some good progress with 3 stores confirmed to open and a number of other opportunities in advanced discussions. We remain focused on opening stores across Queensland and New South Wales and we'll also look to utilize space within our Mocka warehouse in Queensland to support this initial phase of the Queensland store growth. If I move on to Mocka, where after a disappointing 12 to 18 months we delivered a much improved second half, as Ash outlined. Clearly, the last 12 months has been heavily focused on delivering a stable operating platform that sees us execute the fundamentals week to week. The team have done a good job in delivering this, which has seen us restore customer confidence, reduced refunds and inbound customer inquiries. As with all of our brands, product remains critical to our success. Over the past 12 months, Mocka has been working through identifying the core product options and bringing the range back to being primarily better designed and highly functional. Flat packed furniture option is a good value for money. This has seen Mocka significantly reduce the number of home decor options, and this will continue as we look forward. This reduction has seen an improvement in our product gross margin through less markdowns, improved supply across processes and increased retail price points. With the initial work completed, Mocka will look to continue its plans to build out great flat packed furniture options across the home with a real focus on the young family and value orientated customer, driving on-trend furniture options for the lounge, dining and bedrooms to support our very strong kids and nursery business. This good work done throughout FY '23 will support our underlying EBIT growth in FY '24, with the higher gross margins, lower delivery costs and stabilized CODB all supporting improved profitability. Given the improvement in the product range and gross margins, Mocka is now in a position to explore a variety of different customer channels across FY '24 to support the top line sales growth. We will look at a number of options, including a physical presence to enable Mocka to access the 70% of home customers who shop in stores today. We don't expect this strategy to play a large role in our FY '24 result, but it will remain a key point of our longer term plan for the brand. With all the significant work going into the underlying brand results, the group also remained committed to continue to upgrade our focus on our environmental, social and governance priorities. We've called out in the presentation a number of initiatives in this space, but I thought I would highlight a few today on the call. Across the group, we've completed the work on measuring our emissions with an 8.5% reduction in Scope 1 and 2 emissions achieved and 560 tonnes of waste diverted from landfill. Our teams are continuing to work on improving the recyclability of our product packaging across all areas of the business so that we can look to reduce the amount of waste ending up in landfill. Adairs also took a leadership position by removing plastic bags from all stores across the course of the year. This will eliminate more than 2.3 million bags potentially ending up in landfill each year. And we are also in the process of finalizing the recycling of the remaining plastic bags within the Adairs business. I'm also very proud of our partnership with Orange Sky. They are an amazing organization that work with people experiencing homelessness and hard times across Australia and New Zealand. The Orange Sky team do an amazing job and unfortunately are experiencing an increase in demand currently as we see the cost of maintaining homes continuing to rise. With how important homes are to our customers, we see this as a way we can play a small role in assisting those in need get back into accommodation. And finally, if I move to the trading update. The first 7 weeks of FY '24 have largely been in line with our expectations with sales down 8.9% against the prior year. We anticipated sales to be softer particularly after we came out of the traditional July sale period and have developed our FY '24 plans and budgets around this expectation. Interestingly, we've seen online driven largely by offers perform better over this period with customers electing to take advantage of those offers via our online channels. Overall, we see that center traffic is down with Adairs and Focus obtaining a higher share of passing traffic than last year, and in store conversion declining off historically high rates. Given this reduced center traffic, the brands have focused on gross margins over these period which are ahead of last year with customers visiting stores continuing to shop traditional offers and more aggressive offers not delivering enough additional customers to justify them. This is in line with what other commentators have been calling out in the market currently that there are a number of different customers within the Australian market today and the current cost of living pressures seem to be impacting them all differently. In this background, the group expects to continue to maintain a focus on those customers that are shopping with a strong emphasis on the profitability of each transaction. The near term trading environment is likely to remain challenging with all brands focusing on strong product execution and providing a new reason to shop, supported by ongoing offers to enhance the customer value proposition. Material cost reduction initiatives has been implemented across all brands to manage the underlying businesses in line with the current environment, whilst maintaining our culture of customer service. This will deliver savings in our cost of doing business across the group with reductions occurring both in store networks and the brand support offices. As you can see from all that I've said so far that the brands are very focused on profitability and maintaining that profitability through gross margins, optimizing inventory levels, reducing our cost of doing business, whilst maintaining our focus on the longer term strategic priorities, in particular those that have the opportunity to improve productivity. Given the uncertainty of the trading environment over the next 12 months, the Board does not consider it appropriate to provide guidance for FY '24 at this time. Before I finish, I would like to thank the team. We know that our commitment to delivering both great product and an outstanding customer experience across all brands is the foundation for delivering ongoing growth for the group. I'll now hand over for questions.

[Operator Instructions] Your first question comes from Alexander Mees from Morgans.

Just firstly on like-for-like sales in FY '23. I think I found a number at the group level of minus 10.9. I'm just wondering if you could give us those numbers for Adairs and Focus.

No, we haven't put them out there, Alex, because there's so much moving around in those numbers as always. So we've run with the update as it is.

Okay. That's fair enough. And then just secondly, I wonder if you can comment on the outlook for new stores and store refurbishment next year. And then specifically with Adairs Kids, you mentioned, Mark, that there's some good opportunities in that brand. But I noticed we're only down to I think, what, 6 Adairs Kids stores. I'm just wondering what the future for that format is, please.

Yes. So I think more and more what we're seeing is driving customers to a larger Adairs store which incorporates a better Kids offering is the way to do it, and we get the efficiencies of the upsized store. So in terms of labor and the like being shared across a bigger space rather than having the standalone formats. However, we are continuing to trial a couple of standalone formats that -- where we haven't got enough space in some of those homemaker centers and they're delivering good results. So -- but our primary aim on the Kids business is to continue to grow the range and see it take up a larger amount of space within the Adairs homemaker store and support the ongoing growth of that format from a from a Kids' perspective. So rather than trying to drive customers to specific Kids destinations, I think we will have a few of those as we look forward, but more and more the bulk of the sales will come out of the larger Adairs formats that enables us to showcase it in line with the rest of the range.

Excellent. No, that makes good sense. And then just finally -- I'll keep it to 3. With regard to stripping out of warehouse-related costs and putting it into gross profit, just wondering can you just comment on the rationale for doing that and whether that's going to be the disclosure going forward, please?

Yes. So basically, we've reclassified it in FY '23 and FY '22, pretty much in line with consultation with the auditors. The costs of warehousing are costs that are associated with getting stock to its final point of sale. So they're eligible to be included in the cost of inventory. So by including them in cost of sales, that sort of reflects the fact that they're in inventory. But you'll see in -- the investor deck has called that line out more clearly. And I think it will also provide a useful reference point for you all moving forward as we progress the improvements at the DC. And we expect to see that those costs are reflected in reductions in that line in the investor deck.

Your next question comes from Aryan Norozi from Barrenjoey.

Just some from me around the cost out you're talking to. Can you just give us some quantification about how much cost was actually taken out in the second half of '23? And how do we think about the extra cost out in fiscal '24? A rough range would be just helpful in terms of bringing out earnings, please.

So most of the cost out program has been focused on Adairs because it's got the biggest cost base. So as I said in my notes, we're running at double-digit rate of cost growth in the first half. We brought that back to almost 0. And what I'd expect to see in FY '24 is that we maintain that level of very little cost growth. So if you think about our cost base, we've got wage rates going up by almost 6% and we've got rents going up across the board at 3% to 4%. So we're offsetting all of those and looking to hold costs at 0 in absolute dollar terms.

Okay. So flat cost growth mainly for brand Adairs, and then the other businesses do what they do around store openings and what not. Is that fair?

Yes. Our focus will just be store openings. There's no other real cost in there that will increase. And Mocka expect cost to remain pretty much the same as sales, reminding that a lot of the costs are variable.

Perfect. And then if I just look at the Focus EBIT margin, it was 21% in the first half, 17% in the second half, still very strong. How do we think about EBIT margins into '24 and '25? Just sustainable sort of run rate of margins, please, for the business.

I think the variable -- apart from the general sort of market view, and you can form your own view on what you think that's going to go, the Focus cost base is pretty lean. So on the basis, we can maintain the current level of sales. Then we'll be able to maintain a margin that is in the sort of mid-teens. And then as we look at opening new stores, that will be margin dilutive in the near term, partly because to take those stores a bit of time to get up to speed to reach the average margins achieved by the existing stores. And secondly, just by virtue of you take an order and then you deliver in 6 weeks later, there's a natural lag. So in simple terms, we'll open stores and in the first 12 months of their operations we'll only get the benefit of 10, 10.5 months of actual sales, but the costs will all be there. So that will sort of self-add in year 2. But in year 1, it will be dilutive. But I think long-term, our objective would be to maintain EBIT margins in mid-teens [indiscernible].

Sorry, long-term objective is to maintain mid-teens or the 17%?

15% to 17%. I mean in a good year, it will be higher. In a bad year, you'd like to hope it stays at [ 17% ]. So I think -- yes, it is highly leveraged. There's not a lot of variable cost in this business. So when sales come back, EBIT margin will be directly impacted.

Perfect. And so just on the dividend. So obviously, second half no divi. How do we -- like -- is this just a 6-month thing and the next sort of half, obviously, you'll start reintroducing that dividend -- or the interim dividend? Or is that obviously subject to Board discussions. But how should we think about dividend, please?

Well, I think it's always subject to Board discussions, trading at the time, profit, all of those sorts of elements. But I think what you can take from this one, Aryan, is obviously a fairly unique circumstance around the stepping to the NDC that impacted the short-term capital requirements of the business and weighed heavily on that dividend decision. So as we move through the -- taking control of the facility and that sort of one-off capital cost that was not expected at the time until such times we made the decision, that obviously played a bigger part. And so I'd expect that -- and we haven't moved our dividend policy in any way. So the Board will obviously make the discussions and have those discussions at the time. But there's some pretty unique circumstances around the decision made at this point in time.

Your next question comes from Ben Gilbert from Jarden.

Just on the cost side you sort of talked -- spoke it, Ash. Is that all else equal, you're hoping to keep them flat because -- or are you assuming sales declines in the -- it's a pretty good outcome if you are just assuming all else equal. But obviously, if your sales going backwards, you guys have probably got more flex to adjusting for labor, et cetera?

It's always taken a view moving forward that the environment will be pretty tough. So variable costs, obviously, move for sales. We brought our store wages back to reflect the lower level of base team hours and to the extent that traffic is maintained and we'll see higher levels of productivity from those team hours and we'll feed it back in. But we've just got ahead of it. Our objective is always to grow sales. But if we plan on that basis, the cost base is too high. So that's not a very clear answer for you, but our expectation is that we'll hold costs flat. And if sales are stronger, then we'll get more leverage. If they're weaker, then we'll continue to churn up the cost base as is appropriate.

And how are you seeing the competitive backdrop at the moment because it seems there are sort of mixed messages coming through around how people are seeing competition? Are you seeing it more aggressive now your inventory is pretty clean? You think you're going to pull that back a bit through next year and continue to sort of lean on and leverage Linen Lovers a bit more. How do you think about the promotional backdrop going forward?

Yes. I think the promotional backdrop is it's noisy. I think that's the term that I'd use and there's a variety of offers being thrown around in home. We're probably seeing a couple of the bigger players play deeper and longer into the promo in sale and the like. We've largely tried to hold the line. And to your point there, what you'll see from us is more of those offers being directed towards Linen Lovers. So if we're going to provide an offer and try and drive sales by the offer, that offer will be provided firstly to Linen Lovers in an effort to make sure that they feel rewarded for being part of the program. So I think noise is the word I use. There's lots and lots of offers. Often, there's not -- at times it doesn't feel like they keep the stock behind them. I think at this point in time, a lot of us internally, most of us are sitting here saying, right, well, what way do we control our controllables. So how do we think about that rather than react and respond to everything that's going on out there in the market, set our goals each week and make sure that we're delivering to those and react according to what we expected as opposed to what else is going on out there. So I think, yes, I think there's a variety of brands using different techniques, and it's just become pretty noisy would be the way that I describe the competitive market at the moment.

Right. And just a final one for me. Just following on around divi. So in terms of the decision for the second half, was it purely just sitting on the fact you got the NBC cost or are you thinking now just moving forward structurally, the business is probably something that should be moving or operating closer sort of net cash ex borrowings? It's interesting now if you look at sort of 5 years ago versus today, most or big chunk of these discretionary retailers are look to operate around sort of net neutral or positive from a net cash standpoint ex leases. How are you thinking about sort of the optimal balance sheet position for the business?

I think primarily you could -- you say the NDC was the biggest factor in that decision. It's interesting when you start to think about what's the right net debt position and the like. We think the business can comfortably carry debt and it should probably carry some debt. Now when you hit trading periods like this, then everyone tends to move to the extreme and say, right, we'll actually -- I only want businesses with no net debt. And then when times are good, we come back to the other side and we have the conversation around you've got a lazy balance sheet. What are you thinking about that? So we think there's a right balanced position. It should be south of 1x. And we took the opportunity here. We made the decision here on the back of the NDC that if we did the NDC and paid a dividend, then we were probably thinking that our net cash position or our net debt position gone a little further or a little higher than we would have liked. So this gave us the opportunity or we took the opportunity to make sure we maintain the strength of the balance sheet that we think is there by not paying the dividend in this instance, and we know that will impact some shareholders or will impact all shareholders and it will impact some more than others. And -- but we made that in a medium-term sort of mindset. So it's -- we're not sitting here thinking we have a -- we run an aggressive program to bring the debt down to 0. We just think that at the time, given the NDC that it was -- the prudent decision was not to pay the dividend for this second half.

Your next question comes from Allan Franklin from Canaccord Genuity.

Just hope it would be good to get a bit more detail on foot traffic conversion across a couple of different brands, please, and also a bit of commentary just around state-by-state patterns. Are you sort of feeling anything different about the Victorian consumer, say, relative to New South Wales and Queensland, please?

Well, let's start with foot traffic. So I mean, foot traffic is down year-on-year from our data. So year-on-year, foot traffic down well north of 10%. So when we look at our results, what we're seeing is that foot traffic is down significantly more than our sales results are down. And that's coming off the back of -- we're maintaining the higher share of people coming into store. We're seeing conversion in store come off slightly, but not heaps. And that sort of points to this consumer out there. The customers that are out there are shopping. It's more that -- there's a selection of customers or a group of customers that have decided not to shop that aren't out there at all. So what we're seeing is -- and that sort of comes back to our thoughts around how we operate the business that when we -- if we drive a harder offer, it's got to deliver a lot more customers to actually make that offer worthwhile when you think about it from a gross margin dollars perspective. So what we have seen and played around with over the last 6 to 8 weeks and even before that as we came through May and June was that when you ran a harder offer, you didn't see an uptick in -- significantly in customers. You might have got a slight uptick in conversion, but net-net, you weren't making a lot more GM dollars. So it didn't make a lot of sense. So we've been playing a bit more of a margin game across all brands and making sure that we maximize the customers that are out there shopping as opposed to think that there's an ability to drive -- hit more into store by running a deeper, harder offer. On your state-by-state question, well, I think it's -- Adairs is probably the brand that has the biggest reach when we start to think about states given the focus is largely Victorian-based. I would suggest that we've seen probably better trading in WA for Adairs, that's traded up more strongly over the last sort of 3, 4 months. And if anything, New South Wales is the weakest of the states, which for Adairs a sort of -- it's a historical thing that we often see when times get a bit more challenging. The New South Wales customer tends to step away a bit faster. But they're probably the 2 stand out, New South Wales being a bit weaker and WA being stronger as in a state-based view.

And just on Mocka, maybe just half a step back, please, how to think about that business. Are we -- and what we're cycling in terms of if you have trimmed that offering back, do you think that is mostly out of the numbers now and the sort of a broadly clean revenue base moving forward from just the flat packed offering? And then just putting a lens over the top in terms of where your target for that business was getting to $150 million. I mean just help us bridge that gap, please, sort of what else do you need to roll into that offering? Or does it now materially need store footprint to help to get to that 5-year target of yours?

Yes. Well, I think you can say that, as Ash mentioned, you can take the second half results and we should continue to see the improvements we got over the second half play out through first half '24 and probably deliver a bit more as we look forward. On the back of the second half, it was a good half, but we got more in the last quarter than we got in the Q3. So I think you'll see that result continue to strengthen. And as I talked about, all the work done will help build the profitability of that business at or around the similar sort of sales levels. And as Ash mentioned, a lot of the costs in there are variable. So what we've managed to do, I think, is now put that back where it's got the option to start to think about what are the right distribution channels and how do we go to market and what gives us the opportunity to build out towards those targets that we've set the brand over a longer-term horizon. And I think what we've seen off the back of COVID is we do need to think about what -- how customers can interact with the product in a physical sense. We know that we've not shied away from the fact that we think omni-channel retail works. But we are giving consideration to what's the right way to enable that in the Mocka business. I mean there's many ways -- there's many brands out there that don't have their own store and customers can still access that product. So we're thinking more broadly than the only way to do this is open stores and start rolling them out. And one of the great pieces of work that the team have done over the last 12 months is by improving the gross margin of that business, that gives us more options when we start to think about our channel strategy and our distribution strategy to customers on the back of -- even if you think about stores. Physical stores are not cheap things to run. So you need a reasonable product margin in there or a lot of turnover to make sure that you're driving a profitable outcome. So the work done today puts us in a good position. We think about the different distribution channels. We probably are in the process of reviewing whether $150 million is the right number off the back of COVID and what we've seen is the customers have gone back to store. And equally, we've seen the cost of digital marketing only continue to grow. So there's a thought that you could get the $150 million if you really pushed hard on digital marketing, but I'm sure it wouldn't be profitable. So getting the balance right between driving a profitable business and driving that top line sales growth is what we're reviewing over the course of FY '24, whilst banking the profitability gains that we've got in place from the good work done over FY '23.

Your next question comes from John Sanford Hynd from Wilsons.

Just a couple of just a couple of quick questions on how are your shoppers responding at the moment? Is it more sheets and less sort of plastic plants and homewares? And then following on, I think, from earlier questions where was the weakness in New South Wales? Is that because that the New South Wales customer is more of Sheridan or more inclined shopper? What do you think there?

Yes. Okay. First one, we're probably seeing the sales come off relatively consistently across departments. So we're not seeing a big change. There's not a big swing out of 1 department into another or huge changes going on in terms of our percentage of sales overall by department. So we certainly haven't seen a move back to the thought about a needs based customer buying more towels and sheets and less home decorator items. We've probably seen the customers more continue to shop in line with the historical percentages and follow the trends. So as you pointed out both plants were huge a couple of years ago. We see them continuing to come back off the back of -- that trend is starting to dissipate. And more and more people are putting live plants inside their houses and these sorts of things. So we're seeing some -- the trends probably drive that more than the consumer and the way they're behaving. And when you think about the general consumer that -- what we've seen is that step back has been pretty consistent across most categories within the business. The New South Wales customer, I think we find that the outer regions of New South Wales tend to decline faster. So when you get out outside of the CBD and surrounds and the inner suburbs is where you really see the decline come in, in the New South Wales customer. So I'm not sure that makes them a Sheridan or my customer, but it's -- but that's -- it's probably more aligned to mortgage belts, higher cost of living type challenges and a lesser want to keep updating their home and other things taking priorities, I think, more so than what we see in some other states.

Just one more. Given, I guess, the movements we've seen with Mocka and Focus, can you talk to average sales prices for those two businesses on a year-on-year basis? Are the shoppers, I guess, responding to the product that you're putting up well and, I guess, the appetite for promotions in this environment for those two?

Yes. I think about -- I'll do them brand by brand. So Focus would be able to -- we've probably seen a slightly -- slight reduction in average transaction value in Focus off the back of an element of people choosing to spend a little less. And equally, we've also sharpened up a few of our prices off the back of what the reduction in international freight rates. I mean at one point was costing us more to ship a sofa from China to Australia than it was to make the sofa. And obviously, now with the decline in the international freight rates, that's come off a bit. So we've handed back a portion of that to customers in some of our newer product, while still maintaining a higher gross margin and we've seen customers respond well to that. But overall, Focus is probably seeing a small decline in their average transaction value. Mocka, on the other hand, we've gone the other way. So with the reduction in the decor items, the reduction in the number of options, increasing prices more generally to make sure that we maintain the order economics within the Mocka business supporting the -- what we're seeing that higher local delivery costs and the like has meant that we've actually -- whilst the traffic numbers are down at Mocka, our ATV is up and our average price per unit is up. So that comes back to us really focusing on making sure that we're thinking about the quality of the transaction and the profitability of each transaction in each of those brands. So where Focus has probably got a bigger advantage on the international freight rates, they've been able to think more holistically around some of the prices that we've put up over the course of the last couple of years we've maintained and some others we have been able to sort of brought in some new product, we've actually given a bit back. Whereas at Mocka, we're really focused on the furniture piece, higher ATV, higher gross margin per order, which obviously allows us to recoup some of the costs in relation to the local delivery charges that we've seen increase over the last couple of years.

Just last one. With Focus in particular, I think one of the strategies was to perhaps move some of the Adairs product through those stores. Is that taking place yet? How have you found responses there?

Yes. So what we're keen on in Focus is to make sure that Focus remained very clear on delivering that furniture offering. And then one of the reasons we obviously acquired Focus was at the time we thought long and hard about whether Adairs would build out a furniture type business. And when you think about that traditional furniture type business, dining room tables, chairs, lounges, et cetera. And what we thought was we wanted a team that were really clear on making sure that was their primary focus and that they were all over it and the Focus team are very, very good at that. What we've done then as we've thought about it and work together is there's a range of items from Adairs that complement what's going on in the Focus store. So if you go into most Focus stores today, you'll find Adairs cushions on a lot of the sofas, potentially some throws and we'll move into some home decorator items. And our primary focus isn't to move products and sell those items. It's actually more about -- that's how it comes to life. And in some instances, we've seen good work between the 2 stores in sharing customers where our stores are co-located in similar locations. So we're more thinking about it that way than trying to put a whole lot of home decorator and smaller value items in Focus that end up confusing the team and more looking at it as it's an easy add-on if that customer loves those cushions that are on that sofa. They've got 2 choices. They can sell them straight out of Focus and a way they go or alternatively, they can point them in the direction of Adairs, which in most instances, is not very far away in order to access those and the Focus team know the cushions, know which ones they're looking at and have that ability to transfer that sale, so to speak, or recommend that sale to the customer. So I don't see there being a big place for lots of Adairs' product being sold through Focus. It's more about giving them the highlights and enabling that to then -- to cross-pollinate between the 2 brands.

The next question comes from Mark Wade from CLSA.

On the state of play in the macro environment, is that really -- is that entirely what's driving you think your result? Or is it something more internally you could be doing with the offering?

I think primarily, the foot traffic, the big one, Mark, I think -- I mean, you and I have spoken a lot. There's no doubt that we continue to look at product and there's a number of new initiatives that are being rolled out. It's always early in the season. I love these 7-week trading updates because generally, you have July and August are big months in most retailers' calendars. So we don't tend to launch new -- too many new initiatives in that period of time. But across all the businesses, I think the foot traffic is the biggest driver of the result at the moment, but that doesn't mean that we're not continuing to think about how do we grow share and how do we bring it back into our own accountability to try and maximize the results. So Adairs has got a couple of new initiatives coming up. I think they've got a great -- we've got a great spring sale offering, which brings back a bunch of color and real excitement where at Adairs, the focus is on a lot of new product and looking to really upweight new versus ongoing because I think when you get to these sorts of times where the consumer is a little tougher, you need to give them a reason to shop. If you just deliver them another white bed linen design, they go, well, I've already got 3. I don't need a fourth and that's an easy spend decision versus putting something new in them. So I think you'll see -- I know that it is, you'll definitely see a lot of color and the like over the next 3 months as we see that as a key vehicle to driving the result. The last 7 weeks is sort of you're still in the midst of winter, particularly down here in the southern states. So we tend to see a lot of that start to launch over the next 2 or 3 weeks. And I'm hopeful that, that delivers good results from the product perspective. So you're right. I think at the moment, I don't see execution as being a problem, Mark. I don't see that I wouldn't -- I'm sitting here going, we're not doing that well or we're not doing that well. But I equally think upweighting execution and really delivering on product is an opportunity for us every season, and this season is no different, and we'll be -- there's a lot of newness coming in the Adairs business. And Focus has done the same thing. I mean they've done a terrific job of cycling through products over the last 12 months to make sure that despite really good top line sales and a really good result, we're not growing number of options. So we're being really disciplined there. There's only so much space in the store. So how does -- and what that means is net-net, each option on the floor becomes more productive. So they're getting this efficiency gain as they start to think about it. So there's good work being done across all brands in that respect. And unfortunately, if you've got an overarching macro environment, it's one of the things that we sit here and balance is making sure that -- and particularly internally, where we're doing a good job in some areas that, that team know they're doing a good job, even though that may not be reflected necessarily in the overarching results of the brand given some of the macro environment conditions.

No, I think that's right. I mean it feels a bit like you've taken one step forward and 2 steps backwards. I don't know if there's so much on your plate trying to get Mocka right initially, then integrating Focus, the macro period, the NDC. There a lot on. I mean, do you feel like you can kind of commit to the company for the next 5 years and then really get through this?

I think there's some really good work done, as I said over the last couple of years, which we'll now start to benefit from over the next couple of years. So yes, the wins have perhaps moved in terms of the macro environment. But there's no doubt, as we work through the NDC over the next 12 months, that becomes a big catalyst for us to not only improve the profitability, but becomes -- removes an impediment to us doing a bunch of stuff that had become whilst it was operating as a 3PL. So I think that's a big win. The Focus guys, as we start to roll out stores, we start to see the upside on that brand on top of just that great underlying proposition that I talked to. So yes, I mean I'm super excited about what comes. I mean it's a shame that the macro environment is what it is, but that equally is a good opportunity for good retailers to still continue to perform reasonably well, regardless of what's going on around them. And I think it also might provide us the opportunities to accelerate some of our store rollout and those sorts of things as that space has been really tight. But when it gets a bit tougher, potentially, it frees up a bit and we start to get the opportunity to get some of those stores away that we've been looking for over the last couple of years.

Your next question comes from Chami Ratnapala from Bell Potter.

So you did talk a bit on the online sales performance earlier. Just curious to know within trading update for the first 7 weeks, how has online performed? I mean, for Mocka, you provided that maybe within Adairs how has that online to offline performed?

Yes. So online has performed better than stores over the last 7 weeks in all brands, Focus Adairs -- Focus and Adairs, obviously, Mocka doesn't have the offline. But largely, that's on the back of people taking advantage of the promotions. So what we see is the online -- particularly if you're running anything with an end date or creating a little bit of urgency in there, the results have tended to pick up towards the back end of those offers. So we've always seen the online customer is looking for a bit more value. I think most people would appreciate that often. People at the shopping online are bouncing around from one site to the next and looking potentially for the best offer and how can they access that good offer. So if you're running some of those offers, which we have done across all the brands over the last 7 weeks, just to keep the customer engaged and interested in it. We've seen the opening up of those offers and the close down of those offers both deliver pretty good online sales over that period of time. So we're not talking online is up 20 and stores are off more. They're marginally better in terms of -- and maybe slightly up in a like-for-like sense over the first 7 weeks versus the store network that's obviously being impacted more by that decline in foot traffic.

The next question comes from [ Peter Cooper ] from [ Teaminvest ].

Just a couple of questions on the National Distribution Centre. Firstly, when you step in and take over the operations next month, are you taking over the entire workforce, including the management team? Are you expecting any sort of attrition in that group? And what do you -- what are your top 2 key priorities for the next 12 months for the NDC reset?

So an answer to your first question, Peter, we're not taking over all the workforce. However, we have been able to offer roles to a number of people that are currently familiar with the site who have accepted those roles. So we expect to have an experienced workforce there on day 1 plus the added experience of our own team and a number of other people from outside of the existing operation that will assist us in running that shed moving forward. In terms of the things that we're looking for to see as the priorities over the next 12 months, the first one is going to be around obviously settling the operation down and ensuring that we deliver on a better customer experience, both in terms of faster online fulfillment of a batch of orders as well as making sure that we maintain stock levels in our stores to an acceptable level so that we reduce the impact of stock-outs in stores and the sales that we lose as a result of that. And then as we move into next calendar year, we'll be looking to really pursue operational efficiencies within the shed. We don't think costs are going to go up at all in the interim period. But once we get our warehouse management system in that really relieves us of all the legacy DHL processes and allows us to actually operate the shed in line with our product requirements, our customer requirements and our business requirements. So we'll start to see those benefits in Q4 of financial year '24 with the WMS schedule to go in prior to that.

Your next question comes from Aryan Norozi from Barrenjoey.

Just a quick one around the gross margin. So if we look at these brand Adairs gross margins before freight or warehousing product margin, how do we think about FY '24 in the context of all these moving parts, like you've obviously got a stronger effect -- a weaker Aussie dollar, but then you've got better freight rates negotiations from sort of offshore manufacturers that are favorable. So is a flat FY '24 on '23 outcome as sort of a reasonable base case?

Yes, I think so. I think the currency, we've hedged a fair chunk of our FY '24 commitments sort of circa $0.70. So I think we've got 2/3 of it covered, so with the rate where it is at the moment, if it stays there, we're exposed to that at the back end of the year. But freight and the improved materially reduced costs of inbound freight largely offset any currency costs that we incur. So it really then comes down to product. There's some benefits coming from offshore in terms of sourcing and production cost pressures are not as significant as they once were. So then that's an important part. And then just quality of product and how we trade the business is always the biggest variable. And I think we've established different tools within our toolkit to manage margin through difficult trading periods. We'll continue to use those so that we can maintain, if not improve, our trading margins over the course of the year.

And then your online trade on the gross -- online trade as a percentage of online sales, that stepped up a lot in the second half of '23. Obviously, carriers are putting up their rates as well. Like for example, for brand Adairs, it's gone from 15% to 17% of online sales in the first half to second half. Like is the second half of '23 run rate is the right number we should be thinking about structurally for your business? Or will it go back to sort of being up to the 14% to 15% of online sales?

I don't think it goes back to 14%. I mean, what we've seen over the last few months has been that Australia post costs, particularly have increased significantly, and they're still cheaper than an alternative, but they're filling that gap with the way in which they're raising their prices. The other part that isn't as visible in this but is contributing is the growth of our furniture category within the Adairs business. So there's the fashion furniture offer, which has been one of our faster-growing categories, and that includes a large proportion of big and bulky furniture items that need to be delivered through specialized delivery networks and not Aussie-based. And the cost of delivering a sofa or an occasional chair is significantly different to delivering a satchel of bed linen, satchel also flowing through within that. But I think as we look ahead, getting control of the NDC gives us the opportunity to look at different solutions for packaging for our online orders. And the less air that we ship, the cheaper the overall cost of shipment to customers will be. And by having direct control of the shed and the operations out there, there are things we'll be able to do quite quickly in order to try and offset any further increases in -- whether it be Aussie post costs or other factors that are beyond our control.

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

Thank you. And whilst the current environment is more difficult, the group is well placed to navigate these times with strong underlying businesses, a loyal customer base and proven management teams, all brands are well-positioned to maximize the short-term sales opportunities whilst continuing to build out those medium-term strategic priorities. I'd like to thank you all again for joining us today. Thanks.

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