Adairs Limited (ADH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Adairs Limited Interim FY '24 Results. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Ronan, Managing Director and Chief Executive Officer. Please go ahead.

Good morning, everyone, and welcome to the Adairs first half 2024 results call. Joining me this morning on the call is Ash Gardner, our CFO, and Jamie Adamson, our Head of Investor Relations. Whilst the first half of 2024 was challenging from a sales perspective, the group successfully delivered on a range of short-term objectives to reduce the impact of the sales decline on the group EBIT. Sales were down across Adairs and Focus, with both brands impacted by reduced customer traffic and port delays that resulted in stock shortages towards the back end of the season. Across the group, online outperformed stores on the back of key events such as Black Friday, where urgency drives a high conversion for the online channel. As a group, all brands look to deliver an improved gross margin result, benefiting from the reduced shipping container rates and running a disciplined pricing and promotion trade calendar across the half. Given the anticipated sales decline, the group undertook a comprehensive cost out program that delivered a reduction in total CODB despite significant inflationary pressures. Pleasingly, the successful transition of the National Distribution Centre to Adairs management has further supported this reduction, with results to date delivering both improved service levels and lower costs. The Mocka brand has delivered a good half, as we expected, with the clearing of excess and underperforming inventory in FY '23, enabling Mocka to deliver an improved product range and EBIT of $3.5 million for the half. Overall, the group EBIT of $28.6 million was down 19% on prior year. However, with the good work done across the brands on reducing the impact of the sales decline and the strong operating cash flow, the Board have resumed the dividend payment with a $0.05 fully-frank dividend to be paid in April. I'll now hand over to Ash to walk through the financial results in more detail.

Thanks, Mark, and good morning, everyone. Before I get into the numbers, I'd just like to remind you all that this half is a 27-week half, with the year being a 53-week year. All the comparisons we'll talk about today to last year will be on a 26-week basis, as is in the deck. So I now turn to the brands. Mark's provided a good overview of the results. So I start with Adairs, where sales were down 9.3%, but gross margin improved by 70 basis points. With traffic soft, promotional activity was carefully managed to ensure we didn't give away margin unnecessarily when there was limited demand. Lower inbound container rates offset the impact of a slightly lower hedged U.S. dollar, which also supported the gross margin for the half. As Mark mentioned, the takeover of the operational control of the NDC has progressed the plan with net cost savings of $2.8 million, noting that the operational cost savings were $3.5 million, offset by around $700,000 of depreciation now that we own NDC assets. More importantly, we saw significant improvements in service levels to both online customers and stores, with material reductions in refunds due to online order dispatch issues, improved customer feedback, and more volume dispatched to stores over the last quarter since we had control. We are on track to deliver the cost savings outlined when we took control of the NDC, and expect operational improvements to continue as we complete the next stage of the project with the implementation of a new warehouse management system in the middle of the year. In addition to the lower costs from the NDC, a focused cost out program across the Adairs business or other costs of doing business fall by 5.3%, despite the inherent escalations built into wages and rents and the additional government charges imposed this financial year. Adairs reported an EBIT for the half of $13.5 million. If I now turn to Focus on Furniture, where we saw another solid result. While sales and profits stepped back on the prior year, the performance of the business continues to remain well ahead of our expectations. Sales of $66.2 million were down 15.8% on the prior year, however written orders were only down 6.9%. The industrial action at Melbourne Ports throughout Q2 delayed deliveries to customers and resulted in the order book being well above planned levels at 38% higher than it was in June. Gross margin increased by 320 basis points to 54.6% as a result of the disciplined pricing strategy, which allowed most of the benefits of the lower inbound container rates to be retained. An EBIT of $11.7 million was down on last year, but with an EBIT margin of 17.7%, a strong order book, and the benefits of new stores flowing through into the second half and then into FY '25, we remain pleased with the performance and the results of Focus. If I now turn to Mocka, as Mark said, we are pleased to report a material improvement in the performance of this business. Mocka reported an EBIT for the half of $3.5 million, $3.2 million ahead of last year. The result was driven by an increase in margin to 58.2%, up 10.5 percentage points on the prior year, with a tighter product assortment and less clearance activity leading to higher average selling prices and lower cost to deliver. If I now talk to the balance sheet, stock holdings across all 3 businesses were lower than at both June and December last year, with in-country stock levels down by 26% compared to December last year. Whilst providing some benefits to operating cash flow in the half, stock was a little lower than planned, which impacted availability of core lines in Adairs, and deliveries in December at Focus. Capital expenditure for the half was $22.2 million, which includes the acquisition of the NDC assets from DHL for $12.5 million, other CapEx related to the step-in at the DC of $2.2 million and investments in new stores and ongoing technology initiatives across the group. As previously advised, total CapEx to take over the NDC is expected to be approximately $18 million and will be completed by the middle of the year. Non-NDC related CapEx is expected to be consistent with prior years and in the range of $12 million to 14 million for FY '24. Net debt across the group reduced to $58.6 million, in line with our objective of continuing to reduce debt and with the benefit of week 27. During the half, we extended the expiry of the $45 million term debt facility until January 2027, and we continue to have the $90 million term debt facility, which is available for another 2 years and expires in January 2026. All covenants were complied with, and we retained significant covenant headroom. I'm going to hand back to Mark to talk about our key priorities.

Thanks Ash. Given the expectation that the current consumer environment continues, the brands have put together clearly established short to medium-term priorities that will continue to support delivering profitable growth. At Adairs, the focus remains on key priorities that drive sales whilst reducing costs. From a sales perspective, Adairs continues to build upon its Linen Lover program, with successful personalization trials providing a pathway to look to evolve the program to improve customer value that is expected to drive both improved customer conversion and frequency. And whilst Adairs sales declined over the half, mixed performance across categories highlighted opportunities within the range to deliver sales growth going forward. Good performance in the kids and furniture category showcased the potential for future growth, whilst a disappointing season in fashion bed linen provides an opportunity as we look forward into the second half of the year and more importantly into FY '25. Given the supply chain challenges and to support the work being done on enhancing the range and improving customer experience, Adairs will make an investment in core stock levels to improve in-store stock availability, supporting in-store sales. Adairs has also continued to open stores, and as we look forward, we'll continue to open them with a focus on larger stores and continuing the upsizing program, as there's no doubt that the larger stores are delivering a more profitable store portfolio. And as Ash mentioned, the NDC transition has gone well, and we know there remains opportunity to drive further improvement through ongoing processes and disciplines. The implementation of a new WMS will finalize the NDC transition to Adairs and will provide the next opportunity to improve both service and cost within that facility. And finally, Adairs CODB remains critical within the brand with cost-out initiatives continuing to be implemented across the year to reduce fixed costs and deliver a sustainable EBIT margin of more than 10% at a brand level going forward. At Focus on Furniture, the store rollout continues to be our key priority, with a pipeline of opportunities slowly being built, despite the tight homemaker market. In the first half, Focus opened one new store in Queensland and refurbished the Springvale store with both stores delivering to expectations. Focus expects to open up to 3 new stores and refurbish a further 3 stores across the next 18 months, with Queensland and New South Wales remaining that priority. To support this, Focus has also taken the opportunity to utilize space within the Mocka warehouse to support direct containers flowing into Queensland, which will lower last mile delivery costs and improve the customer experience in Queensland. Whilst at Mocka, the good first half highlights the success of the work done to-date, which will continue moving forward. On top of this, Mocka will re-platform its website to Shopify over the second half. This will enable us to both improve the existing customer experience and also enable Mocka to consider other opportunities such as store concepts or wholesale opportunities moving forward. We've provided a trading update for the first 8 weeks of second half FY '24, which has seen the trading pattern continue across this half, as I mentioned previously, with sales down 9.6%. Given this decline started in May 2023, we expect that the sales decline will moderate over the half. And with the expectation that the trading environment remains subdued, we are confident that these initiatives that I've just walked through will provide profitable levers for growth across the half. I'll now hand over for questions.

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

Just on the cost out, please. I mean, can you just give us a quantification of what the cost out was delivered for the first half of 2024 and maybe the split between how much of it was from the NDC versus just other initiatives, please?

So Aryan, the way that we presented the P&L makes it pretty easy. The warehousing related costs is the DC cost line. So that's where that $3.5 million comes through, and we just need to add back that $700,000 of depreciation that I mentioned. And then the CODB line, which has stepped back in Adairs by 5.3%, that's the rest of the cost out. And within that, we have the wages and rents, which are going up by 3.5% to 5.5% over the last 6 months. And then the cost savings that are offsetting all that to a net reduction of 5.3%.

Okay. And then so the warehousing cost NDC, so that's you're now annualizing that $4 million benefit that you sort of sought when you sort of took over that control, is that correct? So that's all flowed through this half, because I think that was going to take up to 12 months.

Yes, so that $4 million that we're looking at is net of depreciation, and we're expecting to see that in calendar year '24. So that $3.5 million, or net $2.8 million is the savings that we achieved in the -- since we took control. But I think the thing that you need to remember is that we were on a different pricing arrangement with DHL for this period last year. The new pricing arrangement came in January, where we saw a reasonable reduction in costs. So we won't see the same level of savings per month as we saw in H1, moving through into H2, it will still be cheaper, but the rate of savings will be less, but we'll still deliver circa $3.5 odd million in the half and well on track to deliver the $4 million for this calendar year and then more after that once we get the new warehouse management system in.

Perfect, and then in terms of extra costs out for the other sort of part of it as business, like apart from what you've taken out in the first half, is there extra step up, step down in costs in the Adairs cost space in the second half, please?

Yes, we'll continue to implement cost savings. So a bunch of the things that we did in H1 sort of carry through with sort of more benefits in H2, just because you've got the benefit of time. And then we've implemented another round of cost efficiencies in the last sort of 6 weeks, which will continue to see us focus on keeping our costs down and offsetting all of the inflationary impacts we've got in the business.

Okay. Can you quantify that is that just enough to offset 4%?

It will be more than enough to offset that. So it will be more than enough to offset the cost of inflation. So you should expect to see H2 costs down on H, on last year again. Yes, and we'll continue to push that as far as we can whilst we see cost, our sales growth being challenging.

Okay. And then into fiscal '25, just basically the extra animalization of the efficiencies that you put through now, how much -- how do we think about cost growth into fiscal '25 and the operating leverage benefit you'll get from an expected sales recovery, potentially?

Well, that's sort of the intent. So there's a -- we're not bringing everything back to bare bones on the base and then removing the potential for future sales growth. So I'd expect if things remain as they are now and we see the recovery in sales to, I guess, longer-term average growth rates of 3% to 5% next year, then we should see operating leverage flowing through. There will be cost initiatives that flow through into H -- into FY '25, whether they're -- the most significant one will be the DC, whether they're sufficient other than the DC to offset all the inflationary pressures. Time will tell, but that's certainly our focus. And getting sales growth is our focus.

Great. And so just in terms of the sales line, I mean, same time last year in Jan, Feb, your sales were up 2% and then it's declined sort of 10% for the rest of the half. Just mathematically, there's nothing stopping us from putting sort of flat sales growth for the rest of this half or even better, just given the fact that the comps you're cycling are maturely easier. Is that a fair comment?

We cycle a week of comps in Q4, so I think everyone sort of has to make up their own mind as to what they think the broader environment will be, but we certainly see opportunity from May, as Mark mentioned in his talk, where we can -- we should see growth and we're doing a lot adding, putting more stock in and we'll support it again. That will be more of a Q4 benefit than earlier, and then just continuing to trade the business and focus on conversion and margin.

Your next question comes from Edward Woodgate with Jarden.

Can you hear me again?

Yes.

And yes, appreciate the tough environment you're navigating. So look, I just wanted to touch on the Jan trading update relative to the first half. So can you just talk to like -- how that's trended?

We continue to see foot traffic overall is down. So across the brands, we've seen foot traffic be the largest driver of the sales results. So conversion up, both in-store at Focus and Adairs, overall about square in a digital sense. So foot traffic didn't, we saw relatively good foot traffic through November, December, January was returned to a more, I guess, traditional or in line with the model that we've seen across the balance of that first half continue was good through the early weeks of January and then return to it sort of that neg. We're seeing anything in terms of shopping centers from 15 sort of across the front of the store and sort of that neg 10 to 12 in-store traffic. So conversion is holding up and ATV is not too bad, but realistically, it's a traffic issue that's the biggest impact on the sales result at the moment.

Okay. So conversion in January is up relative to the first half of '24, would you say that you are cycling a stronger comp in the first half of '24 relative to what you're cycling in January?

Probably about the same.

Okay. And then just on, it's a bit specific, but actually maybe firstly, so on the NDC CapEx, you previously guided to $12 million. Now it's $12 million to $14 million. Can you just provide a little bit more color what the incremental step up is? Sorry if you've already touched on that.

No, so we guided to $18 million total, which we're on track to deliver the $12 million to $14 million you're referring to as the non-DC CapEx, which is sort of our normal sort of range of CapEx spend if we didn't have the DC in the mix like we have this year. But we spent $12.5 million already, or spent about $14.5 million, $15 million across paying DHL and the work on the WMS to-date. And we expect to spend $18 million, which is exactly what we guided to back in September.

Sorry, I might have mumbled, I was saying the non-DC, NDC CapEx, you previously guided up to $12 million at the FY '23 result. And now you're saying $12 million to $14 million. What's the difference?

Just potential new stores. But yes, I think it will probably end up closer to $12 million unless we nail every one of those new stores, which typically we don't. But they just fall into the next half.

Yes, okay. And in the NDC, is there much excess capacity? Is that part of the reason for Focus on Furniture going in there or?

No, it's a Focus on Furniture is not in the NDC. That's an Adairs only facility. Focus is sharing warehouse space with Mocka up in Brisbane, which is a great outcome, because it doesn't cost us anything extra to accommodate Focus up there. And the Adairs NDC has plenty of excess capacity and we're sort of working through how we use that capacity to further reduce our costs with things like big and bulky within the Adairs business.

Yes, apologies. I misheard that. And then just on you, yes ROU, right-of-use depreciation, up $2.6 billion with rent inflation, taking over the NDC, little space increasing by a similar amount. So can you just marry that up for me? How do we bridge that? I guess also just looking at your cash lease costs, they don't seem to be up too much when you're taking over the NDC. Yes, what's going on there?

The NDC has been included as a lease within the Adairs lease portfolio, lease right-of-use assets and lease liabilities since we started the process with DHL because we occupied the majority of it and had effective control. So the lease for the DC is not a cause for any of the changes. And then in terms of the rest of the lease portfolio, there's sort of the usual flow of holdovers and renewals and so on. But I wouldn't say there's anything unusual other than the underlying change in the space, which is up 2.5% year-on-year.

Are you seeing any rental resets on a per square meter basis when you roll over or re-negotiate leases?

It depends on the store type. So definitely an opportunity in B and C grade centers in terms of retail stores. But there's not a lot in terms of the homemaker or even just premium shopping center space. But they continue to maintain those face rents as we roll over those leases.

Okay. And then, sorry, last one for me. I've already taken up quite a few. But how much was your inbound freight as a percentage of sales in the first half in the PCP? And what are you seeing in the year-to-date as far as freight rates?

Inbound freight as a percentage is lower. It's not a number we shared publicly, so I'm not planning on doing that now, but it is lower. But I think from a -- when you look at the impact of the lower hedge rate, so we averaged last year PCP at around $0.73 and this year we're sort of around $0.69. That sort of $0.04 dodged on the U.S. dollar was offset by the lower container rates. So as we look ahead, the dollar is going to come, we're still fully hedged for the balance of this half at sort of circa $0.69. We've got container contract rates across the group, which will sort of allow us to continue to benefit from the same freight rate over the course of this half. And we'll then work through what we do with rate and currency into next year as we move forward in the normal way.

Your next question comes from Mark Wade with CLSA.

Just wondering what it might take to reignite foot traffic. Is it merely just that macro and waiting for that tide to turn, the greater consumer confidence? Or is it something to do with the attractiveness of the category as a whole, which maybe hasn't quite found a natural equilibrium post-COVID? Or is there something internally you can do about it?

I think it's a combination always of all of those things, Mark. There's no doubt, even like within the, I guess you use Adairs as the primary business when we think about this, we've seen that substitution or customers electing to opt for a cheaper option within the Adairs business. So we've seen sort of that trade down happen within the Adairs business. So I think there's an element of foot traffic that has declined out of the Adairs business off the back of thinking that they're looking for a cheaper option. So some of that is thinking about our product range, our product mix, and even just the fashionability of some of our ranges, which I called out probably weren't as good as I would have liked over the half. And we definitely saw a mixed result. If we got the product right, price becomes less of an issue. So and if we get it wrong, it's always the issue. So making sure you get that blend right. So I think what you would expect from us and what we will be doing is how do we reignite that ourselves through inspiring customers through product and making sure that we've taken some of the opportunities that we've seen across that first half, a great result out of the kids team. And we've seen some real wins off the back of that. So how do we drive that, which equally sees a consumer potentially less price sensitive in terms of I'll spend on my kids, I may not spend on myself. And the furniture range continues to do a good job. And then as I called out, I think we've got some opportunities in our fashion bed linen within the Adairs business to put some different stuff in front of the customers to drive a different outcome. So I think there's an element where there's things within our control that we will continue to work on, which often comes back to product. That in-store stock availability definitely hurt us over the back half of the half in terms of Q2 with I think the Q1 results meant we pulled back a little bit far on inventory. We've talked a lot about making sure we manage that inventory tightly and probably pulled back a bit far and then got impacted by some of the shipping issues around port delays and the like that saw that have a bigger impact on the half than it probably otherwise would have if that had all flowed through as per normal. So I think the foot traffic piece for us is a combination of product. It's a combination of getting out there in front of the customer. Some of the personalization pieces that I called out in the Linen Lover program are a good opportunity. So across all brands, I think we're seeing it. Mocka has done a good job of even just tightening up that range and being really clear on that customer value prop. And they're getting a good outcome off the back of that, which is helping drive conversion. But equally, we're starting to see that potentially flow through into traffic as we rebuild the confidence in that brand. So there's a number of things within our own control. But net-net, it would also be helpful if the environment got a little easier. And equally, I think if we can maintain where we are today, what we've seen over the course of the last 12 or 18 months is if rates at least stay, mortgage rates stay still for a period of time, the customer builds more and more confidence that they're not having to reset their personal budgets again. And every time that changes, we see a bit of a decline as people pull back from our category and delay that purchase, because we know that they can. But if we can maintain, even if we just maintain stable mortgage rates, I think people rebuild the confidence and understand their personal budgets. And we start to pick up on the other side of that. So they're sort of my headline views of how we reignite traffic and how we start to think about making sure that we drive that top line.

Yes. And hopefully, I suppose on this side of the fence, we can't look it out into the back end of this year. Maybe it's picked up macro-wise and that should provide some upside for your business. So take that when it counts. All right, that's great. And secondly, just on the -- some of these operational hiccups you've had over the last few years are hopefully behind you now. But even so I mean, given there's been pretty minimal brand synergy so far and just the extent of the disruption you've faced, does it still make sense strategically to have 3 different brands in the portfolio?

Well, I think there's 3 different brands work on servicing different customers. I think you'll start to see now that we've got supply chains more under control. I could talk about some of the operational challenges, Mocka getting back on track, Adairs working through its NDC challenges. So a lot of the brands that you're right have had to be very internally focused. But I think we do have an opportunity to think about the cross-pollination of some of that and how that would work and what are the opportunities there now that we're starting to put some of these into a spot where we can look forward, and don't have to fight the fire that's right in front of us. So I do think they serve different customers. I'm very comfortable with the 3 brands we've got and the way they go about it. But I think there are opportunities for us to think about how we leverage the strengths of each of those brands to either enhance the product offerings within each of the brands, or equally think about how we leverage them to work together more collectively going forward. But that's probably something as we think about into FY '25, because to your point, there's been a few things that have distracted us from being able to get there. And there's no doubt that as a business, something like Adairs is very focused on making sure the final transition of the NDC and the implementation of a warehouse management system that goes well and that finalizes that chapter, and we can start to move forward with knowing and confidence that the supply chain will work, because ultimately, across all the brands, if the supply chain is challenged, it makes it hard to execute on any of those opportunities. So we've got a pretty clear focus on that. But I think you'll get a little more, we'll be able to provide a little more color on that as we move through the half and probably after the end of the full year. But there's definitely merit to the 3 brands, what they offer to customers. It's just how we leverage those, I think, as we look forward.

Okay. I just thought of 1 more. Who's running Mocka now? It looks like Vanessa's moved on.

Yes, Vanessa has moved on. And we have a new CEO commencing today. So we'll introduce the market to Kat as we move forward.

Okay. Onwards and upwards.

[Operator Instructions] Your next question comes from Apoorv Sehgal with UBS.

First question -- just wanted to check on the outlook slide. At the bottom, we talk about the initiatives on cost out and supply chain ranging help provide levers of profitable growth. Is that a suggestion directly for the second half of profit to be up year-on-year?

We'd like to think it's up half-on-half, with the exception of the week. But, our view there is how do we keep driving the business forward in the challenging trading environment, AP? So we're just clear that we think those levers actually give us a good opportunity to deliver that subject to the top line. I mean, everything's subject to the top line. But there's some real near-term focus from each of the brands to making sure that we're trying to maximize the top line in the environment we're operating in whilst managing the cost tightly to deliver on the bottom line, which I think comes through in the confidence of paying the dividend and the like, that we're happy with where we've got all of that, too. And we've got good controls over the top of it. And those levers should help us drive growth.

And then on the comment that sales, the prior year comparables for sales get easier by May and June. What about for gross margin comparables? Anything there we should be considering in the context that it's currently tracking up 200 bps at the moment? But so sort of over by May, June, does a comparable change at all?

Well, I think the biggest area in gross margin that we should be that we're focused on is the impact that forward looking currency rates and the changes in the container rates as we look forward are going to have over the half, I think that continues to be an opportunity for us to maintain sort of the gross margin growth we've got year-to-date. So it doesn't get particularly harder or particularly easier. Mocka starts to lessen over the over the course of the second half because we obviously had made a lot of those changes and the biggest impact on Mocka was first half last year. And then we started to, obviously, see some of the benefit of the trading that we'd done. So and we said at the half, at the full year result that Mocka would get significantly better. So I think there's opportunity to maintain the gross margin growth. But obviously, I'm seeing we're sitting here thinking further ahead than that. So as we roll into FY '25, obviously, there's a bit of a step down on the currency and I expect some of the container rates gains will have been washed through by then. So we're probably operating on more of a level playing field that we need to think about as we look forward.

Got it. And then 1 final question, just again, with the outlook Focus, tracking down 14%. Any observation you can make there?

We had a really good January last year, to be honest, and equally, there's a -- so they really delivered a terrific January. So it's probably going up against a pretty tough comp and a bit like the Adairs business. They'll start to comp some easier prior year over the course of the balance of the half. So it's probably one of the more challenging times to give you an 8-week comparison, but we'd like to see that. Well, we expect to see that probably improve over the half.

Your next question comes from Tom Camilleri with Wilsons Advisory.

Just quickly, a follow-up question on your comments on the being short inventory, especially during that second quarter. So do you have a general idea or can you talk about a general idea of the -- I guess, the dollar value in lost sales over that period in both the Focus and Adairs brand? And I guess, is this continuing to impact, given those trading updates provided for the first 8-weeks?

Yes, I'll do Adairs and I'll let Ash talk to Focus a bit more, because that impacts more your delivered sales sort of concept within the Focus business. But at Adairs, I think, well, we definitely left money on the table across the second quarter with, particularly in some of our core lines, they just, they ran a bit late. We were out of stock for 2 or 3 weeks at a time. Thankfully, we had, we'd taken over the NDC, which meant we were at least able to process stock quickly through the facility once it came in. Have we put an actual number on it? Not really. But I think it's, in the context of bed linen and in particular, where I think we ran really lean in some of our core, it's relatively -- there's a bit in it, like there's easily, sort of somewhere between $2 million and $5 million of sales across the first half, that I think we potentially left on the table. It has impacted us through that period, I'd say. Well, I think we get back into a better stock position, or we're heading back into a better stock position now. And as I said in my update there, that was a combination of, I think, we pulled back a bit harder in Adairs, and as we saw the customer be there, we couldn't then move it through with some of the port challenges and then impacted, obviously, containers actually coming out of China and blank sailing started to get a higher proportion as we rolled into December, January. So it definitely impacted Adairs and has impacted Adairs over that period that's in the trading update. So I expect that, particularly over Q4, and even as we get to the end of Q3, we'll be in a better in-stock position, and we should be able to maintain that with the changes we've made, which is effectively meaning we're going to up inventory in-country slightly. So you know, we've got a significant step down in inventory there at Adairs, but equally, we expect to reinvest some of that, but definitely not to the same level that it was in the prior year. And Ash, do you want to cover our Focus?

Yes, I think Focus is more just around timing of deliveries as to stock out. So they've probably missed $4 million or $5 million worth of sales between December and January, and that stock just arrives and then gets shipped to customers. The real-time written order's is the proper way to think about it, and, as we said, that was sort of down only half as much as the delivered orders because of those delivery delays.

So in January, is written sales orders down about half, the 14.5% you predicted?

No, for the half, the real-time, the written orders is down 14%. So that's the trading update number.

Right. Yes.

But the written to delivered orders were down by a lot more than the written orders in H1, because of those delays through December, January. Yes, and we're chasing that down, but you can see that in the higher value of the order book as a result of the timing of those deliveries.

Yes. Got you. Maybe just a quick follow-up there on the Adairs comments, Mark, is -- I guess, what's giving you -- like, is there anything specific giving you the confidence to lean into inventory again in the Adairs brand?

Yes, we saw stock-outs in-store impact the sales, so we could -- and it's in core line, so we're not leaning into inventory in fashion options, we're leaning into inventory in white sheets and double-sized quilts and things that we know have longevity in the business because what we saw was in a world where less customers are shopping, their propensity now to wait for that product to be shipped from the warehouse has reduced when they have other options, particularly in shopping centers, to go and acquire that from another retailer who has it in stock now. So if you're out shopping, I think instant gratification has become a greater piece. There's less people shopping. Those that are out there want to walk away with the goods, so we're happy to put that in. Equally, the other change that we've made over the last 12 months is the introduction of a proper click-and-collect process enables that stock to go into store but also still be available for an online purchase and collection in-store, whereas historically, once we put it into the store, the only way, realistically, for a customer to get that was to go into that store. So we've -- like, opening up that channel, I'm equally comfortable that that stock doesn't limit us to what we're potentially able to do online and with click-and-collect sort of heading towards 10% of online sales, that inventory will all be available to support a better customer experience in that world as well where you want to go and collect it and it's at a store near you. So I think it serves dual purposes and is a relatively minor sort of investment. We're sort of sitting here saying it's somewhere between $2 million and $4 million of inventory that is in-country. So the number that you're seeing at the moment has far too much of stock in transit because we'd ordered it but we hadn't got here. So there's a rebalance of that that probably sees inventory up slightly. But the vicinity we're talking about is sort of $2 million to $4 million.

Okay. That's really helpful. And then just quickly, you've got 3 new Focus stores on the way in the next 18 months. What can we expect near-term by way of an Adairs rollout?

Adairs has got 3 that they're opening. We're opening 3 stores in the next sort of couple of months and we've got a number of larger stores on track for the second half of calendar year '24. So Adairs -- at Adairs we'll continue to focus on -- we've talked a lot about growing GLA, but effectively it's growing larger stores and then managing those smaller stores within our portfolio. We're probably seeing the smaller stores have been most impacted by the traffic decline and some of that is the traffic decline but equally their ability to convert when they have lesser of the range instantly puts them at a disadvantage compared to a larger store within the same sort of environment. So Adairs will continue to open stores. We've got a series of stores that will think about their role going forward. There'll be a few closures over this half. Some of them are waiting for an upsized space to become available and some of them are more permanent in terms of the store is too small to actually meet our objectives. So we're better to step out and then think about whether we go back into that shopping center with the right larger format store in the right location as we look forward. So we're probably playing a sort of a medium hand there in terms of just making sure we get the right stores and the right-size is becoming more and more important to that portfolio play as we look forward so. But I'd expect that GLA continues to grow. It might be, I think, over the second half with some of the closures due to the waiting for the stores to get the upsized space. Probably, stays pretty flat on GLA over the second half.

Yes, that's really interesting. How many of the, I guess, 170 store network would be the smaller stores that you hope to upgrade?

There's probably 20 to 50 in there that I would suggest are too small, but how small they are varies depending on that portfolio. So there's probably 20 in there that are way too small and they're the ones that we're primarily focused on. Others, we'd like an extra 30 or 40 meters, which is a lot of work to go and find 40 meters in a shopping center next to where you are, but you've just got to keep playing that game. So in terms of upsizing, we still think there's 10 to 20 stores that should be upsized comfortably across the portfolio over the next 3 to 4, well, as quickly as we can, but ultimately it comes down to lease terms and space becoming available. But, one thing we continue to see is as we upsize the stores, the performance we get out of the stores and the profitability of those stores continues to showcase that that is a strategy that is now well-understood and equally continues to deliver.

Your next question comes from Aryan Norozi with Barrenjoey.

Just a quick one around the sustainable EBIT margins. Obviously, you sort of talked about 10%-plus for Adairs. Maybe just firstly, the timeframe to get to that, because you can't just -- it's not like you're flicking the switch. It takes a bit of time. And second, it's even margins for Mocka and Focus, sustainable. Can you give us an update around that -- in the context of your first half, please?

I think in terms of Adairs, our objective is to get it back to that sort of base of 10% minimum through the cycle, so 10%-plus. And I think what will get us to 10%-plus is our ongoing focus on costs. And then as the cycle turns and we start to see some top-line growth. In terms of Mocka and Focus, our objective for Mocka was to get it back to profit and then back to a 10% EBIT margin. We've done that a little bit quicker than we were expecting, which is great. So we'll continue to build on that. And I think Mocka, as we look ahead, and subject to some of the success of these trials that Mark referred to around store concepts and other channels, we'd like to see the Mocka margin sort of sitting around sort of the 12% to 15% range. And then Focus, I think it's still well ahead of where we expected it to be. I think we should -- we think as we open up more stores with Focus and with the lag that you see just in written orders, so where we incur a cost in these new stores, we don't actually get any sales for sort of 6 to 8 weeks in accounting terms, that that'll be a bit of a drag on Focus margins. But it was sort of sitting at that floor of sort of around 15%. We think it still is okay and as well ahead of where we thought it would be when we bought the business. And again, Mocka's, sorry, Focus's operating leverage is quite high. There aren't many costs in the office and a lot of their cost base is fixed. So we're very conscious that continuing to roll out shops will be a key part of sustaining the profitability of that business. Over time, we'll be at the margin, might step back a bit, back into that sort of mid-teens.

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

Thank you. Thanks everyone for taking the time this morning to join the call. And I'd also just like to thank the Adairs, Focus and Mocka teams for all their efforts over the half. No doubt it's a -- we've outlined it's been a challenging environment, but I think the team have done a good job of focusing on those short-term priorities to enable us to track the path forward from here. So thanks everyone.

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