Adairs Limited (ADH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the FY '24 Results Call. [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 2024 financial year results call. Joining me this morning on the call is Ash Gardner, our CFO; and Jamie Adamson, our Head of Investor Relations. The 2024 financial year was challenging with the macroeconomic environment impacting many households and a significant component of our customer base. However, as this was the environment we expected to be operating in, we planned accordingly, and we're focused on delivering against those elements that were well within our control. Group sales were down 4.3% with the higher cost of living pressures seeing a reprioritization of household expenditure and a decline in customer traffic. Disciplined purchasing and pricing strategies across the group, supporting less clearance activity and driving more profitable sales drove a 170 basis point improvement in gross margin to 60.3%. Our costs of doing business were well controlled with cost management initiatives and cost-out programs across the businesses, helping to offset ongoing inflationary pressures from higher wage rates, rents, utilities and freight. With inflationary pressures of between 3% and 6% across our major cost lines, the flat CODB result was a significant achievement. This resulted in underlying group EBIT of $57.6 million, which was down 9.8% on the prior year. Whilst the financial results were well managed, each business took good steps forward to build capability to support future growth. At Adairs, taking over the NDC from DHL allowed more operational control, delivering improved service and cost outcomes for the brand. This delivered supply chain cost savings of $4 million and there is potential for more to come in FY '25. Adairs also continued to build out the store portfolio with the focus remaining on larger store formats that provide a wider range and superior store economics. In FY '24, Adairs opened 7 new stores, upsized or refurbished 6 stores and closed 7 smaller stores, which collectively delivered a 3.9% increase in gross lettable area. Across the year, Focus opened new stores at Helensvale in Queensland and Prospect in New South Wales, which are both trading well. In addition, the store refurbishment program saw 2 existing stores in Victoria updated to the new layout. This new layout sees an investment in store design and in-store lighting that elevates the way the product can be presented and supports an improved customer experience. The relative uplift in sales performance across the refurbished stores continues to support ongoing investment in updating stores across the network. To support the store network growth, our Queensland distribution center was established, allowing Focus to increase the number of direct supplier container deliveries into Queensland, reducing costs and providing a better customer service to this region. Excitingly, this was done by reconfiguring Mocka's Brisbane-based warehouse providing Focus with the improved operational capability at no incremental cost to the group. Whilst at Mocka the work undertaken across FY '23 across core product ranges, overall product quality and improved customer delivery experience provided an operational, stable platform and increased profitability. With a stable operating platform, this provided us with the opportunity to consider what was required going forward and led to the successful replatforming of the Australian website and backend supporting systems in late FY '24. This has resulted in the majority of Mocka's technology platforms being upgraded to support a range of medium-term initiatives, as well as enabling future growth options. Off the back of the replatform, Mocka has seen improved website performance and functionality, which is delivering better results. Whilst across the group, we also continue to work towards improving the sustainability credentials of our business. We continue to increase our targets and capability in this space. In FY '24, we reduced emissions by more than 6%, diverted 46% of all waste from landfill and continued building our plans across the group to target net 0 by 2030. Throughout FY '24, each business successfully delivered against their medium-term strategic objectives, whilst managing their key controllables in a challenging environment. I will now hand over to Ash to walk through the financial results in more detail.

Thanks, Mark, and good morning, everyone. As Mark said, it was a challenging year with the group delivering total sales of $594.4 million, which were down 4.3% on last year. However, we did see improved margins and material cost savings delivered to mitigate the impact of the lower sales in the group's underlying EBIT. The group achieved an underlying EBITDA $57.6 million with an EBIT margin of 9.7%. I'll now turn to each of the brands. Adairs reported sales of $413.4 million, down 4.1% on the prior year. However, gross margins improved by 130 basis points in response to the focus on disciplined promotional activity, sales conversion and customer service both in-store and online. The cost initiatives during the year fully offset the impact of the inflationary pressures on the cost base with an absolute reduction in costs of more than $7 million on a 52-week basis relative to last year. Taking over operational control of the national distribution center enabled net savings of $4 million, whilst other programs across stores and customer support center achieved savings of more than $3 million. These and new efficiency initiatives that will be implemented throughout FY '25 will result in further savings moving forward. Underlying EBIT for the year was $31.7 million, with an EBIT margin of 7.7%. Focus on Furniture sales of $129.6 million were 11.1% down on last year, which was largely in line with our expectations, as the business came off a very strong FY '23. Margins improved at Focus as well, increasing by 60 basis points to 53.2%. 2 new stores were opened during the year, and both are trading well and are already profitable for that part of the year that were opened during FY '24. Focus reported an underlying EBIT for the year of $19.5 million and an EBIT margin of 15.1%. Mocka reported a strong result for the year with the turnaround work over the last 2 years reflected in those results. Total sales of $59.4 million were 3.8% up on last year, but margin of 58.4% was 790 basis points or 7.9%, up from last year and was the primary driver of the improved results with improvements across our ranges, improved stock turns and disciplined promotional activity delivering that outcome. EBIT of $6.5 million was $5 million ahead of last year and EBIT margin of 12.6%. I'll now turn to the balance sheet, total inventories declined year-on-year by 5%. However, we did invest in core stock availability in Adairs in the second half to reduce out of stocks, which are seeing some early positive signs. Mocka stock reduced by about 20% with improved stock turns, which will be maintained moving forward. And inventory at Focus was in line with last year. However, the order book sits 10% up on last year. The takeover of the national distribution center was completed during the year, in line with the planned total project spend of $20 million. This included the acquisition of the plant and equipment at the NDC from DHL for $12.5 million; transition costs of $2 million and the cost to implement new warehouse management system is $6 million. You will note that approximately $3.1 million before tax of the project cost for the new warehouse management system are expensed upfront in the year due to the accounting treatment for cloud-based software solutions. This cost has been excluded from underlying earnings. We also continued our investment in digital initiatives, completed the Mocka systems replatform that Mark mentioned, invested in new stores across Adairs and Focus, as well as refreshing our existing estate. We continued our planned reduction in debt, with net debt at the end of the year of $64.1 million, a reduction of $10 million on the prior year despite the material one-off costs associated with the NDC. We also completed the refinance and extension of our $45 million term debt facility, which is now available until January 2027 and continue to have the $90 million term debt facility available until January 2026. All covenants we comply with, and we retain significant headroom. Board declared a final fully franked dividend of $0.07 per share, bringing the annual dividend to $0.12 per share or 67% of reported net profit after tax. And I hand back to Mark.

Thanks, Ash. Given the expectation that the macro environment remains challenging over the near term, each business is looking to grow sales in FY '25 off the back of the work done in FY '24 and in a similar manner, look to deliver against a number of initiatives to support short-term profitable growth. At Adairs, the implementation of a new warehouse management system has occurred over the last 4 weeks. This is the final step in taking full control of the NDC. With the implementation going well, Adairs is now in a good position to deliver further material productivity improvements through more efficient processes and put in place a continuous improvement program to pursue further supply chain efficiencies in the coming years. The ongoing investment in bringing together Adairs Linen Lover data has enabled a single view of customer that supported a series of personalization programs, delivering an incremental $3 million plus in sales in FY '24. With the initial trials working well, Adairs will continue to build out additional personalization trials across FY '24 that both improve the customer experience and deliver incremental sales growth. Further, the foundation of single view of customer will enable Adairs to look at different ways of evolving the Linen Lover program to ensure this continues to deliver both value for Adairs customers and drive those ongoing sales. Across FY '24, Adairs identified some key product growth opportunities within the fashion bedlinen, kids and fashion furniture categories to drive FY '25 revenue growth. In our fashion bedlinen category, we have put in place a strategy that will deliver a range that will have a broader appeal across the Australian and New Zealand market. By optimizing the bedlinen range, we expect this to require a relatively small investment in inventory, which will support more customers being able to get the look that is right for them. Adairs kids continues to be a market leader in kids' bedrooms and we'll look to drive this by building out both the existing ranges and introducing a number of new collaborations to deliver ongoing customer interest. This will be supported by a greater investment in the kids' furniture range that will enable customers to put together the complete kids' room with Adairs. Furniture also continues to be a growth category for the Adairs business, where it plays a supporting role to the major categories. With ongoing success from the more fashionable ranges, Adairs will build out the fashion furniture options to provide customers with new and differentiated options. Supporting this, we will also increase the number of smaller furniture options, as we see customers continuing to want to be able to shop in store and take those items home immediately, as opposed to waiting for home delivery. As part of managing the business in a more challenging environment, Adairs controlled inventory tightly throughout the FY '24 year. This resulted in stores at times not having the product offering customers expected across some of our major categories. To combat this, as Ash mentioned, Adairs will continue to increase its investment in key lines to support in-store availability. This is being done gradually across the year to ensure that this investment is driving sales growth. And finally, at Adairs, whilst growing the profitable store network remains a critical pillar of the strategy. Whilst all stores are currently profitable, we see a number of the smaller shopping center stores coming under pressure from reduced foot traffic, increased rents and an inability to support the wider product offering. The optimization of the store network will see Adairs continue to upsize or close these smaller underperforming stores, whilst building out the largest store portfolio and overall driving increase in GLA to support ongoing growth. Our focus on furniture, the growth is all based around opening more stores and building out the national store profile. Whilst the homemaker space continues to be tightly held, the pipeline of opportunities is growing slowly with 3 stores expected to be opened in FY '25 and our longer-term target portfolio remaining at 50-plus stores. Given the good results from the updated stores, Focus will also look to refurbish 3 to 5 stores each year to continue to update the complete store portfolio over time. Further, the Focus team are looking to continue to enhance the product range to enable the range to appeal to a broader range of customers, and we'll look to build out our geographic product ranging strategy store numbers growing Queensland and New South Wales. At Mocka, after a very good FY '24 that saw the business stabilize the operating platform, we are now in a position to look to drive growth. We have always focused on profitable growth. And in FY '25, this will be supported by Mocka's ongoing strategy around delivering efficiencies across the backend operations and supply chain to maintain the higher profit margin. Initially, this will be supported by the website replatform that as I previously mentioned, has resulted in the majority of Mocka's technology platforms being upgraded. With Australia completed, New Zealand will follow shortly with the full replatform finalized by the end of September. Not only does this enable us to continue the work on optimizing the customer experience to deliver improved website conversion rates and average transaction values, but it will support improved more efficient processes across the entire business. This will provide Mocka with the opportunity to leverage the new operating platform to deliver sales growth, whilst optimizing the cost base. This will be supported by our product strategy. After the good work of the past 12 to 18 months that have seen the business refocus on being a provider of good quality, great value flat-pack furniture across the home, which has delivered better sales and improved profitability, the team looked at how we build out the product offering going forward. This work identified a number of gaps in the current product offering, where we weren't providing customers with a complete range that enabled them to buy into each of our categories. In some instances, this reflected opportunities across the pricing spectrum with not enough options across the different price points within a category, whilst in other areas, it is a lack of width in the product offering that meant customers have to shop elsewhere for a component that potentially lost the entire sale. This strategy will see Mocka provide more customers with the complete look and in time have an option for everyone, delivering both increased basket size and customer conversion. Finally, at Mocka, we will start to trial a number of new channel opportunities. Ultimately, we are looking to create a physical presence for the Mocka brand, and we'll be trialing shop-in-shop and wholesale opportunities to bring this to life in 2025. These will start as low-cost trials with a focus on ensuring that we understand what customers are looking for before we look to deliver them at scale into the future. We believe each business within the group have good growth opportunities, and through these opportunities, we will look to deliver revenue growth across FY '25, whilst maintaining a disciplined approach to both cost and inventory management. And finally, if I move to the trading update. From June, the group has seen an improvement in sales momentum with trading being stronger throughout June and into July. Overall traffic continues to be soft with customers remaining very value orientated. This can be seen through transaction conversion declining significantly when promotional offers are reduced. All brands continue to manage promotions and promotional margins to deliver growth in gross margin dollars rather than simply driving unprofitable top line sales growth. At Adairs, the first 8-week sales are up slightly. However, to manage the implementation of the new WMS at the NDC, the depth and width of promotional offers were reduced against the prior year for 2 to 3 weeks. This resulted in a decline in the sales momentum over this period with a stronger gross margin. With the implementation now complete, Adairs is returning to more like-for-like promotions, and we expect to see an improved sales result over the coming period. Focus is also largely flat on last year and continue to see stronger sales momentum when driving sales through their promotional activity. We expect this to continue throughout the first half and continue to review our promotional calendar to maintain our existing sales base. And as you can see, we are seeing significant differences in the Mocka results in Australia as against New Zealand. With the new website now established in Australia, we have turned our attention to rolling it out in New Zealand, which we expect to help reduce the impact of a tougher trading environment in the New Zealand. Whilst the group is achieving continued gross margin improvement across the start of FY '25, the decline in the Australian dollar and normalizing import costs are headwinds that we will need to continue to manage across the year. I've spoken today around a number of the initiatives that we have delivered in FY '24 and we'll deliver in FY '25 that will enable each business to focus on driving sales and profitability growth in the coming year. It's worth calling out that the work undertaken across the prior year in cost management will support FY '25 through the annualization of initiatives implemented together with ongoing work around driving supply chain efficiencies across each business to support a disciplined approach to CODB management. Whilst inflationary pressures remain, these initiatives will help significantly to mitigate these ongoing cost pressures. This disciplined approach will be supported by revenue growth from continuing to improve each business' product offering, opening new stores with the group targeting 6 new Adairs stores and 3 Focus on Furniture stores in FY '25, and at Mocka, the completion of the website replatform, enabling us to complement delivering improved conversion and basket size in our owned online channels with the shop-in-shop and wholesale trials delivering new revenue channels. Off the back of this, we see the group is being well set to deliver EBIT growth in FY '25. I will now hand over for questions.

[Operator Instructions] The first question comes from the line of Apoorv Sehgal with UBS.

Good morning, Mark and Ash. First question, just on Adairs brand top line and gross margins. So if I interpret it correctly, am I right in saying that like-for-like sales growth is probably back to positive in August. And if so, if you could just give a rough sort of quantum of what that is like low single digit or higher? And then on gross margins, presumably you mentioned promotional activity has returned back to more kind of normal levels in the last few weeks. So would gross margins for Adairs brand now be tracking up less than the 300 bps per the trading update?

Yes. So I think as we look across the period, I would expect that like-for-like sales in Adairs, if we didn't have the WMS change would be up in the low single digits. And that gross margin would be more like 150 bps to 200 bps up as opposed to the 300 bps. So that's the impact that's had over the short term of the last 8 weeks.

Got it. And those numbers you called out, Mark, they'd be fairly representative of what you might expect for the full year '25, more or less?

It's hard to predict. We're not putting the future there, but that's -- we're targeting to grow like-for-like sales growth across the year. And I think there's a good opportunity to do that and continue to drive the margin, particularly in the Adairs brand. So what I think we're seeing is a normalization. We've obviously traded through now the period, where the business has returned probably to a baseline that we think is a fair comparable period, and we should be growing like-for-like sales off the top of that. So low single digits is a good starting point. And I'd like to think that if we get the product offering right and the customer perhaps gets a few green shoots their way that we could deliver more than that, but that's our target over the medium term or the short term of this year.

Yes. Got it. And with the gross margins, any observations on freight cost at the moment, headwind or tailwind to '25?

It's probably a headwind, but it will be an issue more for H2. It's not massively material. We've got contracts in place that protect us to a large extent, where we're seeing the headwind is more in the surcharges that the shipping lines are trying to bring in that are coming in earlier than normal. So the peak season surcharges that usually come in around sort of September, October, they kicked them off in July. We managed to avoid or negotiate out of a lot of them, but we're still going to be exposed to some of them. And then that portion of our shipping that's not on contract, which will sort of flow through into the P&L in H2. But I don't see it being massively material, but it will be a slight headwind.

Yes. Got it. And just one final one for me, please. If I round out the Adairs brand, you've typically talked about 10% EBIT margins for brand Adairs being feasible as long as you have positive like-for-like sales growth, which is what you're expecting for FY '25. So is that 10% type EBIT margin mark fair?

It's definitely the target. I think we're going to see how the consumer is over the course of the year. But yes, ultimately, our longer-term target would be that to see Adairs back towards that 12% EBIT margin, but it's going to take us a couple of years to rebuild that bridge and rebuild those like-for-like sales to get back there. So 10 to 12 is definitely the target that we're going for. Whether we can get there in FY '25 in one big leap is probably a bit optimistic, but we should see an improvement in the EBIT margin in the Adairs business, as we roll forward into FY '25.

The cost out will land as relatively flat in total sales dollars -- total cost of dollars again in FY '25. So we expect about to offset all of the inflationary pressures coming through. So it really comes down to like-for-like sales and margins. So margins slightly up, like-for-like sales then becomes the driver of the margin gain.

Next question comes from the line of Edward Woodgate with Jarden.

I appreciate it's a tough environment there, you're doing better than a lot of other retailers. Can I just clarify the comment you made that OpEx being flat year-on-year. Is that just for Adairs or is that for whole group?

Adairs.

Okay. Got it. And then apologies if you already talked to this, but just with the store guidance of 6 Adairs and 3 Focus, are there any -- are you looking to close certain number of Adairs stores in FY '25, so just would be helpful to understand what that figure might be?

Yes. I think we'll probably close somewhere between 5 and 8 stores depending on how they go. I think what you're going to continue to see similar to what we saw last year is that we'll continue to grow GLA overall, but the smaller stores, whilst still being profitable, we think we can deliver better store economics out of larger stores. So some of those will be closed and we've upsized. So an example last year is, we closed 2 stores in the Carindale shopping center that we're in. Now 7 closed for FY '24, and we'll open a larger store in Carindale this year, as part of the opening stores in FY '25. So primarily, we think we can continue to upsize stores, where it makes sense. But we'll probably see that sort of 5 to 7 Mocka of stores closed across the year, but they'll be the smaller stores, as we've called out.

And then just the phasing or weighting of the rollout will that being more first half, second half, and can you talk to the terms like, do you think you're getting landlords paying more reasonable than I will say a year ago? Have you started to see any potential pressure from other players exiting service sites, I know you talked about the tighter home market -- homemaker market. So maybe if you can also just talk to where your -- which states you find particularly difficulty to get sites in.

I think if you -- I'll break it up by brand. So in the Adairs business, I think, will be weighted sort of 50-50, as you think about those stores. We might even get a couple more heavy weighting into the first half than the second half. So Adairs is like that. Focus will be -- the store openings will be more weighted towards the back half of the year. We've had a few developments delays that we were hopeful of having on the books towards the back end of this year. So they've been pushed into the second half of the year. So we see that. I think as you rightly point out, there's a difference in -- across the market, as to what's going on in Overall, I'd say space still remains pretty tight. There's not -- with no really significant developments in shopping center world coming on stream, there's a lack of space and brands continue to move things around and change out. We're probably seeing shopping center landlords being pretty reasonable. I think it's about even at the moment. I don't think -- I think it's a fair market. They're not having to push hard to get people to space, but equally, they're not pushing rents, as hard as perhaps they once were. In the homemaker space, it's still really tight. There's -- we continue to see a lack of new sites coming or being developed. And if those developments are happening, they're taking longer to come to market and are harder to get access to. So I think in the Focus and Adairs businesses, we're doing a lot of work on getting our names down into future development because that's the way to get there. It's just taking longer for those developments to come to fruition. And I'd probably still say in those spaces, again, the rental market is pretty reasonable. I think it's a fair operating market. Landlords and retailers are getting a reasonable deal. There's no significantly great deals out there. And equally, there's not a big push on the rental space the other way. So I think everyone is sort of operating in a BAU-type environment.

Okay. Great. And then can I just ask on COGS. We've heard a lot about excess capacity in China, it's potentially more in the furniture space. But just with any of your COGS, are you seeing any sort of benefits there or expect to see any benefits into '25?

None that I'd call out. I think it depends on the supplier, and it depends on the product, and we're getting some. And in other areas, we've got a significant challenge in something like feather, which is getting more and more expensive in the market. So we're seeing probably some excess capacity offsetting some higher input costs in terms of feather cotton and the like. So those 2 playing out against each other is probably seeing COGS stay relatively flat at the moment.

Okay. And just on the NDC, so you've done a -- and just the general cost out, you've done a great job implementing that. You've highlighted the WMS launch in July. Can you get -- if you look beyond that, is there anything that you've identified for further efficiencies other than say, operational average [Technical Difficulty] for '26, is that you've a NDC road map that you've got in the back of your minds, can you talk to that?

Yes. So we've got an ongoing CI program, both within the shared and across the network generally. I think the focus over the last 12 months has been in taking control of that shared, which is critical to the Adairs business, settle that down, get the new WMS in, which we're in week 5 now, and that's all going to plan. And then I think as we move into both the balance of this half will be about realizing the productivity gains and settling everything in with the new ways of working out there. And then, as we move into FY '20 -- calendar '25 and beyond, there's a bunch of sort of network consolidation opportunities. We've got a few things we're working on around the layer of the network across the country. Shipping stuff to Perth from Melbourne is very expensive. So looking at different ways, we can manage that and obviously pulling in Mocka and Focus, where it makes sense. The shared DC in Queensland between Mocka and Focus is an example of some of the things we're thinking about from a group perspective to reduce the overall network cost of supply chain moving forward. So it remains a big cost pool and remains an area that we need to continue to drive efficiencies through in order to get it as cost effective as possible.

Next question comes from the line of Tom Camilleri with Wilsons Advisory.

Just a quick question on the CapEx guidance. So could you just break apart the $14 million of CapEx that you're guiding to next year? Maybe just in terms of the growth initiatives, CapEx versus the BAU. And you've commented on the, I guess, the incremental gains that you're getting from Focus CapEx. Can you just talk about, I guess, the uplift in sales that you're seeing as part of that refurb program were expected to see?

So on the CapEx, it's probably 2/3s -- it's 2/3s. 60%, 70% of it is growth in areas such as store openings in Adairs, store openings in Focus and some of the digital initiatives we're driving through within our online platforms, which are explicitly targeted at improving customer experience and conversion. And then the balance is on maintenance and some other, I guess, keeping the lots on thought, IT and physical expenditure. The big variable within that is, as those stores come online, as Mark talked about before, so we'll have more -- we can update that in the half year. If we see stores coming faster, we can and makes the return, then we'll invest more in the store growth area. And that's probably the main variable. In terms of returns, the Focus stores, as I said, they've been opening -- operating for between sort of 4 and 7 months the 2 new stores, and they're both profitable at the store level and comfortably profitable, which is good. They're the first stores that we've opened since we acquired the business, and they'll make a good contribution into FY '25. The refresh stores are also improving their rankings within the portfolio, and that's sort of the best way for us to benchmark the value that those investments are giving us. So we're confident that, that is something that is driving improved returns, and we'll continue to invest in those refreshes once we make sure the lease terms in those stores, we want to refresh are sufficient. And then likewise, there's a program of digital initiatives that will continue to drive, where we'll invest to drive returns.

Thanks, Ash. Sounds like good momentum. And then just a follow-up on Focus. The trading update commentary implies a strong July, but then a weak August. If August catch you by surprise? Or is it more of a case of post-sale normalization and activity there for Focus?

I think it's more of the latter. It's definitely -- we expect August isn't a big month in the Focus world. So we expected it to come off and probably came off a bit further than we thought when the promotion, but equally, July was better. So you've got this sort of shift between the months more so than August take that momentum going forward is just what we saw as customers took the opportunity to buy on promo in the July sale period a bit more than they had in the prior year, and then they stepped away when we went back to more full price offering. So that's why I talked about in there that as we look forward, we're just reworking the promotional calendar to make sure we've got that well balanced to drive a good outcome across the half.

Next question comes from the line of Allan Franklin with Canaccord Genuity.

Just sticking with Focus, just wouldn't mind just doing a refresher on the profitability stack there noting you did say that it would revert down from a margin perspective. We're now at that call it 15-odd percent EBIT margin. Gross margins have been sort of creeping higher into the 53s. Is it fair to sort of run with that broad brush narrative, where we are now sort of gross margin in the 53s and obviously, CODB will change depending on top line, but that's sort of mid-teens EBIT percent, all else being equal, feels about the normal profile or you think there might be a bit more downside?

Yes. I think it's a reasonable position. I mean, obviously, the variable is like-for-like sales growth and how much if we don't assume that how much can we get back through margin, which is where the team have been pretty effective in mitigating any sales fallout. I think the sales, as we look at the portfolio, we look at the things that are happening within it, we feel pretty good that we've got a good portfolio of stores. They've all got plenty of growth potential, product range, execution is all pretty solid. So I think the current sort of metrics, ratios stack up pretty well. If it gets tougher, the pressure comes on the top line. We don't have as much room to move in the fixed cost base in Focus because there is -- sort of isn't really an overhead of any significance in the business. So we are far more exposed to negative or positive leverage, depending on which angle you want to take on it. But I think if we sort of sustain the current momentum around sales per store and so on, the margins are sustainable. Cost base will be manageable and sort of the 15-odd-percent EBIT margin is reasonable base.

No, makes sense. And I think this has been sort of skimmed overall in different comments. But just in terms of digital initiatives, just noting with Adairs, you have, call it, 28% of sales online and obviously trying to shave down some of the footprint, just in terms of how you think you can recover some of the lost sales from those closed stores and just relate -- just rolling it into the fact you do obviously have 1 million Linen Lover members, I mean, to what extent can you continue to grind higher on the digital front?

Yes. I think there's 2 elements to that. As we think about the stores that we close down, what we've seen is a good propensity given the Linen Lover database to actually move those customers to a nearby store. So in a lot of instances, when we close the store, what we've found is that one of the reasons that store has seen that tougher trading environment and isn't delivering as much as we'd like it to is because it's got a homemaker store very nearby. And therefore, we've got that opportunity to move those customers to a nearby store, and we've got a series of trials, as I mentioned earlier, in the personalization, we're also trialing a bunch of stuff about how do we help move those stores -- those customers in a store that we might be closing to either a nearby store or equally to the online channel. I mean, the online channel is there every day. But it's also about thinking about what we do see is there's a number of customers remain within the portfolio, who significantly prefer to shop in-store. So we want to make sure that we look after them and they've got another home that they can move to. So in most instances, with those closed stores, we're certainly not getting out of a geographic area. We're just rediverting those customers to another store and theoretically helping the like-for-like sales growth of that other store. So it's a good point that the Linen Lover database certainly protect us to a degree, and we've seen some good success in stores and in other stores, some lesser. So it's trying to work out what the right measure is to try and -- or what the right lever is to actually move those customers across to a different store when we do look to close a smaller underperforming store in the portfolio.

Yes, helpful. And sorry, just in case I missed it. But just in terms of New Zealand, a little bit of detail there on Mocka and just in terms of -- just a reminder, the proportion of sales for Mocka coming out of New Zealand and just the extent to which you can sort of reverse course on that trading update?

Yes, it's about 50-50 is the way that you think about the Mocka business, New Zealand and Australia. And I think as we've said there, I think there's an element, where it's definitely a tougher trading environment just at the moment. It's certainly over the last sort of 7 or 8 weeks hasn't been particularly easy in New Zealand. But equally, as we think about it, replatforming, running 2 different websites, so one in Australia and one in New Zealand, we're really pleased with the way that's gone in Australia. New Zealand had a few more complications to it, which meant that, that's one of the reasons it's been a bit delayed off the back of the Australian -- successful Australian rollout. So I think if you think about that decline in sales in New Zealand in Mocka, we sort of sit there and say there's a bunch of stuff that we know that when we get the website up, we'll be able to reverse course on that just by getting the new website up and starting to simplify the processes across the business by only running one website or the same website in both markets. And then equally, I think that, once again, we're sort of seeing this first 6 to 8 weeks, just trade, particularly tough in New Zealand, and I don't expect that to sort of be the ongoing place. But I think if we get the website up, we'll definitely be in a better position to actually fully understand the impact of what we have done by running 2 websites versus what's the market.

Next question comes from the line of [ Hamish Blunt ], Private Investor.

My question -- my first question today is around same store sales growth, probably not what you referred to is like-for-like but is in stripping out GLA and just looking at existing stores from one year to the next. So from the presentation, on a 52-week basis, Focus on Furniture look like its declined 11% in FY '24 and Adairs on 7%, and this is with an additional 4% GLA. So my estimate is the same store sales decline is in the order of 10% for Adairs and 18% for Focus. Would that sort of be broadly correct?

I think Focus is too high. Focus is probably more sort of in the 13% range. So the stores that opened, they are only opened for an effective 5 months between the 2 of them, and they're not top performing stores. They're trading below the average per -- average sales per store or the average sales per meter because they're sort of early in their growth phase. And so, we think as we move forward, they'll move closer up that path. And obviously, hopefully, with rest of the estate moving in a positive direction. And at Adairs, I think that the like-for-like sales for the year are probably more like 5% with the second half performing much better than the first half. First half was more like high single digits, and the second half was more like low single digits when you compare half on half. So Adairs' like-for-like sales growth across the year was probably more like 5% down because you've also got the impact of the closed stores, Hamish, that will impact that because GLA up, and you've got closed stores, obviously, new stores and then -- then the like-for-like, which is probably just playing into the way you've worked that out.

Well, I suppose I was also working on the base of the 52-week comparison rather than the 53-week, but sure, understood. So -- and then given those figures, I mean, 13 down, and I guess, we can sort of say between make 5 with your figures around Adairs. But why is the group planning on rolling out an additional 6 stores in FY '25. I realize you might be looking at different formats and so on. But I mean, is that sensible in the current environment for that CapEx, while sales are sort of declining in the bricks-and-mortar network to continue on the store rollout or could that be paused for a period until it all sort of evens out?

Well, I think the piece for us there, Hamish, is it's about optimizing the portfolio and thinking about what stores -- how does that portfolio evolve over a period of time. So you don't ever want to step out of the market fully. There's stores you want. I used the example earlier, we should be in Carindale shopping center, we closed those stores, and we should definitively have a store in there, and it will be a profitable store for us going forward. And I think it's this piece around moving the sales around, as we think about that. So that's why there's equally, as we open up those stores, we also close some of those smaller underperforming stores and move the customers to the higher-performing stores and the larger stores. So it's also about the refresh of the portfolio. So you -- whilst you don't want to necessarily continue to invest, we're also thinking about where should we be, how does that portfolio look in 3, 5 years and then making sure that we don't miss those opportunities because one of the other pieces, particularly in the homemaker space, as we've mentioned earlier, is with that tight homemaker space, you sort of only get one opportunity. If the opportunity comes up and you think that's a center you should be in, you've got to take that opportunity then, otherwise, you're potentially locked out for another 3, 5, 7 years before that space becomes available or may never become available, as you go forward. So that change in our approach, I think, has been more around optimizing. So we think it's the right thing to do on the basis that you always want to reinvest in your portfolio because you might have these -- there's an economic cycle that plays underneath, but you want to be well positioned when that cycle turns back your way because when it turns back your way, those opportunities aren't necessarily going to be there to move and take advantage of those stores that you potentially have in this period. We've also spoken throughout this time that in the event that it gets -- it got tougher and there was a bunch of homemaker space that became available, particularly for the Focus store, we'd be very keen to take up a series of stores within that network to make sure that we got our hands on them and built out that national store portfolio. So there's a real opportunity at the Focus brand. And when those opportunities become available for stores, we're definitely looking to jump on them, and it comes back to each store being overall profitable. So every store we add -- adds actual profitability to the group. So one of the things we don't do is run unprofitable stores. So overall, that contribution from each store must be positive to drive that end outcome. But it's a good question and something that I believe us, we continue to look at what do we want, and what store do we want and how do we then optimize our portfolio rather than just open stores when the opportunity becomes. We probably knock back if you think we open 6 Adairs stores next year, we'd probably knock back 100. So that's -- we're very selective about what we do.

Okay. Okay. Sure. That makes sense. And I understand your points around the very low vacancy within the homemaker space, right, that's sure it could be a long way to get in because they're probably pre-committed prior to development. And if I could just round out finally around the cost of doing business because there's obviously been some progress there, a slight reduction on a 52-week basis last year, though it looks partly due to a reduction in advertising spend. But are you able to -- I mean, you've spoken in great depth about the DC consolidation and bringing that back in-house. But do you have any activity or like any details that you can add around FY '25 about what sort of initiatives will be in play?

Yes. So in addition to some of those additional supply chain initiatives I touched on earlier, within the support office, a number of changes were made to ways of working structures and so on in the second half of FY '24. So the annualization effect of that will carry through into FY '25 and particularly, obviously, H1. The marketing spend you referred to, we align our marketing with our sales expectations. So whilst marketing came back a bit, it came back in line with how we planned and expected the sales to play out for the year. And I think the other important thing on that is we had the view that we would talk to the customers that we already know. And it's obviously a lot easier and cheaper for us to talk to Linen Lovers and existing e-mail subscribers than to spend a lot of money above the line, looking to acquire new customers. So that was a deliberate strategy. Now whether that cost us foot traffic in stores are not throughout the year, we won't know. But we deliberately took that approach because we felt that, that was the more cost-effective and strategic way in which to engage with our customers. And then things like transport and sort of other downstream supply chain things continue to be a priority. So supply chain will always be an important cost bucket for us to target because it is so significant. But a number of our other fixed costs that we've addressed over FY '24 will continue to be tackled and then stores, we adjust our store labor roster and store hours in store -- hours in store based on our expectations of sales. So with the sales result that we saw, yes, we've been tuning those store rosters continuously maintaining our service levels, but ensuring that the right hours are in there at the right time when the customers are there, which is typically the weekends.

Next question comes from the line of Simon Evans with Australian Financial Review.

Mark, earlier you just mentioned that in the Adairs bedlinen inside of things you were looking at sort of more fashionable with the right look and broader range, et cetera, et cetera, in a tougher environment. Are there particular sort of colors, prints, styles that you're going to bring out that you expect to do well?

Yes. I think it was short answer to that. But yes, no, so what we have done is we've had a look at how we think about the market over the course of the last 12 months. And I think some of that was reflective of the prior years. And we see quite a significant difference in the -- what the online customer wants to buy versus what the in-store customer wants to buy. And I think over the COVID years, we actually moved the range a bit too far towards the online customer, given that's where a lot of the customers were shopping at that point in time. And we stepped away a bit from that fashion bedlinen range for the in-store customer. So when we think about it, we think about it from a range of we call them home styles because we don't think of customers depict your age probably plays a way in how you think about your home, but equally, you can be quite -- like quite a traditional home if you're young, but equally, you could be a bit more modern and the like. So when we think about the home styles, we think we can expand the number of homes that our bedlinen will sit well in by offering some additional options and reducing some options that we're perhaps targeting the same customer across that way. So I think you'll see the range will continue to evolve. I think you'll see what we're seeing in the market is more print will come back into the market. It got a bit stale there through COVID with a lot of stripes and check and these sorts of elements being a big part of it. But I think print will become a bigger part of our range and will become a bigger part of ranges more broadly across the -- both women's fashion and homewares markets. And I think that's a real opportunity for us. And the team are very focused on delivering against that opportunity, as they look forward.

Okay. And what about colors? What are the hot colors at the moment?

I think we continue to see green, as a real color that has almost become core. So if I went back 5 or 6 years ago, something like we think about where the green was on trend, not on trend and what we're seeing is that continues to be more of a core color going forward and actually playing a bigger role in something like blue that would have traditionally been a bigger player in this space. So I think you'll see -- as we look forward, you'll get a bit more bright, as you always do, as you roll into that November, December period. So a bit more bright colors coming through. Some pinks and berries and those sorts of areas to sort of give the room a bit of pizzazz, whilst being well looked after by those core colors. And as I said, including something like green that continues to be a growing category or color within our business across lots of ranges, furniture included and right through things like bedlinen as well.

Okay. And just kind of [indiscernible], you mentioned in your costs earlier, I hope, I heard correctly, did you talk about feathers.

Yes. I did.

So can you just explain, so sort of everyone's focused on inflation, on sort of wages and sort of other raw materials. How much did feathers go up by when sort of inflation was at its peak? And is it on -- is it still going up? And what caused it?

Yes. I can't give you the exact -- how much it's increased. But where -- what is causing at the moment is bird flu. So the bird flu going through Asia is actually causing a reduction in the supply of feathers. And as you've seen over the last -- if you went back over the last 5 years, I don't think there's anyone -- any one of us that don't own a puffer jacket now. So all of them, we've seen an increase in demand, particularly coming through the clothing businesses into that feather and down area. So bird flu has been the primary driver of a spike in pricing in that sort of area, which I think is, if you look around the market, and you'll see that feather and down quilts and pillows will all be seeing some price increases coming through off the back of the higher cost price of feather, as a result of lack of supply.

Okay. And is there a ballpark figure for how much feather and down pillows and doonas will go up by?

In our business, I think they're often between 10% and 20%, so significant when you think about a lot of them are also higher value items. This is a synthetic fiber. So you're seeing quite significant price increases being pushed through into those options across the year. And obviously, we always think about that from a different price points within that range. And we're trying to support a lot of the customers at the lower end. And we perhaps short margin those and increasing the prices at the higher end, where those customers that are looking for the ultimate quilt or pillow in the feather and down range are prepared to spend a bit more.

Simon, please rejoin the queue for more questions. Next question comes from the line of Edward Woodgate with Jarden.

Just a quick question on marketing. It's been somewhat answered, but I was hoping to just get a bit more clarity into the FY '25 strategy. Will you look to do more above the line marketing, you actually look to grow and will the percentage of sales you spend pickup appreciate. It seems like it's a bit down versus '23. And then, as there been any change in your mix of traditional and digital spend?

So overall, let's start with -- we really target our marketing, as a percentage of sales. So therefore, we shouldn't see -- or we won't see a significant change. I don't think unless if anything, it will be down and that the marketing becomes more efficient and therefore, we deliver more sales on the same marketing spend. We're playing around with a bunch of stuff above the line, new initiatives. We are -- an example of that is we -- we've partnered with Channel 9 to do an open house piece with a house in the Mornington Peninsula on the last weekend, which appeared in a series of their publications, print publications and will feature online. So there's a bunch of different above-the-line strategies together with digital marketing that will continue to drive that piece. We're probably seeing more is a focus on lots of testing and trialing, as opposed to significantly change the dial to try and do something in the hope that it works. So we're definitely playing around with probably an [Technical Difficulty] approach like where does that go? Does it come back? We're sort of traded against the COVID years now, where it was all about digital and how can we play around with some other opportunities to engage customers, identify new customers and drive that foot traffic to store. So we play around with that. Will catalogs be a part of our business going forward. I mean, up until COVID, we ran 4 catalogs a year since COVID, we've run none. So I think what we're continuing to do is play around with different opportunities and different trials to see what resonates with customers, what can drive foot traffic and how we do that on the back of obviously good product being the primary focus for the business as well.

That's very clear. And then just one final one for me. Sorry, average transaction values, you saw increase, I think with Adairs, has that continued into the July and August trading update?

Yes.

The next question comes from the line of Aryan Norozi with Barrenjoey.

Just a clarification on the gross margin comment. So fiscal '24 gross margin was 62.7% for Adairs. And then you said in the first 7 weeks, it would have been up 150 basis points, excluding the promotional impact. But if I just think about fiscal '25 on '24, how do I think about the moving parts relative to that base, considering I think the second half of '24 exited at a lower rate, just you've obviously got FX headwinds right. Can you just quantify maybe the bridge between '24 to '25 gross margin.

So from a trading perspective, it's obviously, always subject to market, but our approach to trying to be disciplined on promos and offer value to customers when they're out will continue. So subject to mix, the trading margin will be similar. And a little -- the feather thing is a bit of a side show, even though it's interesting. It's not going to shift the dial in any meaningful way. And that is how we manage currency and freight, I think they are headwinds. So there's downward pressure. But our job and what we're working through, through a bunch of initiatives and mix within the group is to try and offset that at a total level. It might mean that we have a little bit of drag on Adairs. We still think there's growth in Mocka margin and looking to hold on to Focus -- Focus margin. It's also got some exposure largely to the freight cost. But we don't see it as being massive, but it is a drag. So I think if you look at the margin moving forward, and it's slightly down on FY '24, then that's probably a reasonable position to have for the Adairs business, which reflects the exit rate, as you noted.

Yes. So how do I reconcile that with the fact that the first 7 weeks, I know it's only 7 weeks or 8 weeks apologies, but like is up 150 basis points is that because [indiscernible] you're right, you're right. But again, it comes back to picking times of the year like exactly.

It's a different time of year. This is more a full price sales period normally as well, like July and August. We come out of June sale at Adairs in sort of the first week of July, and then you've sort of got a real trading base across there. So good work done on pricing and promo and all of that was probably always, I think, that's where don't over index it across the entire year because we'll get back into more of the traditional spring sale period, then obviously into Linen Lover events, Black Friday and all of that, as you run into Christmas. So you're really picking a time of the year that's less promotionally driven in the Adairs business and picking up those numbers from there, but you can't sort of roll across the entire half.

Awesome. So basically, the message is, Adairs -- brand Adairs gross margin, slightly down on '24 is reasonable don't extrapolate the first 8 weeks of 150 basis points given time, that's said in the message.

Yes. And that actually hold on to a bit of that growth. But if you're extrapolating it out, that's a reasonable expectation.

And then the Mocka EBIT margins, it was 12.5% fiscal '24, second half '24 is about 11%. I don't think there's a lot of seasonality half to half and apologies if this has already been asked. But how do I just think about the '25 sort of EBIT margins and beyond, please?

I think you should -- I mean, we see the 12.5% is sort of the normal floor. There's a bunch of things that we're doing, which will be interesting trials, the shop-in-shop and the wholesale stuff, which theoretically have a slightly margin dilutive, but they're entirely incremental in terms of sales contribution. But in terms of the core online business, that sort of baseline level of profitability I believe is sustainable. And if we can get a bit more growth on the top line, we can potentially expand it a bit.

And last one, just Focus impact. So when we're thinking about first half '25 year-on-year in Focus revenue, same time last year, there was about a $4 million headwind from the deliveries. So basically, the way to think about the half-to-half is in first half '25, there's going to be a catch-up of that; and in second half '25 you have to unwind it because you booked the revenue in second half '24. Is that fair? Is that right?

Yes. There'll be a little bit of timing between the halves, and as well as December to January is probably more significant than July.

Exactly. So basically, don't extrapolate the first 7 weeks or 8 weeks sort of Focus because that growth should actually get much more positive because there's going to be if cycling the period, where you missed out on $4 million of revenue because of those delays, so the growth should actually accelerate over the rest of the half.

Yes. In terms of delivered sales, yes for H1.

The actual revenue, right, your bookings.

Yes, yes, which is our sales revenue.

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

Thanks. I'd just like to take a moment to thank all the team, who put a lot of hard work into FY '24. The hard work isn't over, but we know we've taken good steps forward towards delivering on our ambitions for each of our businesses. Thanks again, for joining us today.

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