Baby Bunting Group Limited (BBN) Earnings Call Transcript & Summary

Good morning, and welcome to the Baby Bunting Group Limited First Half FY '23 Results Presentation. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Matt Spencer to begin the conference. Matt, over to you.

Thank you, Pauly, and Good morning, and thank you for joining me today as we present the Baby Bunting first half financial results for FY '23. Joining me today is Darin Hoekman, our Chief Financial Officer. Welcome, Darin.

Good morning, Matt.

I'll begin today by acknowledging the traditional custodians throughout Australia and the connection to land, sea and the community. We pay our respects to the elders, past and present, and extend that respect to all original and Torres Strait Islander people today. We will allow time at the end of the presentation for questions. Let's turn to Slide 3. Supporting new and expected parents through their parenting journey is core to what we do each day. And before I begin, I'd like to acknowledge the hard work by our team throughout the first half of the financial year. Whilst the scorecard from a financial point of view is not where we would like it to be, we have supported many new and effective parents through this wonderful but a time changing period of their lives. I'm very proud of the Baby Bunting Team and thank them for their continued efforts to support our customers. On Slide 4. Our strategy to growing market share continued through the period with group sales of $254.9 million, up 6.6% on the prior corresponding period. While top line sales grew, the challenges we experienced gross profit margin in the first quarter impacted the overall financial performance for the half. Gross profit margin for the half was 37.2%, which is down 212 basis points against the prior corresponding period. The plans we put in place to recover margin are starting to really take effect in the second quarter, paving the way for further improvement in GP percent for the second half. The gross profit challenges combined with a challenging December period of sales resulted in a pro forma NPAT of $5.1 million for the half, which is behind the prior period, where net NPAT was 59% stronger. In the inflationary environment and increasing wage costs as a result of the national wage case and our investments to support future growth, including our investment in marketplace and New Zealand, are results to leverage for the period. The dividend of $0.027 per share has been declared, which is in line with our dividend policy, which is to pay 70% of pro forma impact. Slide 5. Throughout the period, we continued to focus on our strategy to growing market share and invest to support future growth. We opened 5 new stores, plus we relocated one of our heritage stores to the Eastland Shopping Center in Melbourne, which enabled us to create a second infill location in our largest catchment in Melbourne. We continue to focus on product differentiation through our private label and exclusive product categories and private label made up 9% of sales and exclusive national brands 35.4% of sales. These groups of products provide a level of margin protection, and we look forward to growing this group of products in the second half as exciting new ranges arrive in store. One of the most significant changes for the period was the significant growth in our Best Buy product ranges. Best Buy are products that we price at everyday great value to consumer. Best Buy product sales for the half were 53% of sales compared to 34.5% of sales in the first half FY '22. During the period, we moved our core carrier range, our cost and turns range and the remainder of our frames range to Best Buy. This change has the effect of smoothing out the flow of sales and assist with market share growth. The effect of GP percent is minimal, around 20 basis points in the first quarter. Our loyalty program, Baby Bunting Family, continued to positively develop through the period. We've been signing up around 5,000 new members per week, and our engagement is very, very high. The program works on a spend and earn basis where $10 loyalty awards are earned for each $200 of accumulated spend. During the period, we made some alterations to the program as part of our strategy for gross profit remediation. Late in the second quarter, nappies were removed from the program and a minimum spend of $50 for a $10 redemption was introduced. Engaged loyalty customers have continued to spend at historical levels after the changes were implemented. And I will elaborate on this later. We opened our first store in New Zealand during the period, which has been well received by the New Zealand consumer. Frustratingly, both the first store and the store and price church, which is due to open towards the end of the year, have been impacted by COVID and its after fix and due to some unexpected delays in local approvals. Our cost line includes the investment of $700,000 in our marketplace strategy, which is to build out Baby Bunting nursery sector to be the one-stop shop for all things baby online. And this project is rapidly taking shape, and we expect to see our first marketplace products and suppliers online in the fourth quarter. Our transformation program continues to build the underlying systems and platforms to support 120-store plus. That's 120-plus store network in Australia and New Zealand. This year, the focus has been on people systems, advanced order management and building out our business requirements for our ERP and point-of-sale replacement projects. We move to Slide 6. The Baby Group market remains highly fragmented with no other omnichannel national specialty retailers in Australia. From an omnichannel perspective, the discount department stores have the highest concentration of stores and, therefore, significant volume, but the nursery essentials range is limited and is a small component of their overall offer. There are also many specialist baby goods operator to have single stores that have a national reach via their website. We're also competing against marketplace such as Catch and Amazon. Of our top 250 products which make up a significant portion of sales, more than 75% of these products are not available on the marketplaces. Our online presence and physical store network, combined with our extensive range, personal advice, ancillary services and a focus on value backed by price promise to customers sets us apart from others in the nursery sector. Slide 7 sets up some further details on sales and some of the operating achievements, and I'll skip ahead to Slide 8. All stores remained open throughout the pandemic. And as we cycle the tail into the impacts of the pandemic, we're starting to see the normalization of shopping behaviors and the return to prepandemic consumer behavior. From a channel perspective, our in-store sales, which was 80% of sales continued to grow, up 12.2% versus PCP. This channel has grown 24.3% over a 3-year period. Online delivery sales grew 6.5% versus PCP and has grown 94.3% over a 3-year period. Interestingly, as consumers have reverted to pre-pandemic shopping behaviors, touches kicking click has fallen significantly in the first half by 30.2% versus PCP. It is still significantly up by around 225% over the 3-year period. Across these channels, our nursery Essentials, which is our core range, which makes up 68% of sales continue to grow strongly, up 12.7% on the prior corresponding period. The core range includes such things as car seats, prams, feeding, cotton furniture and highchairs. And nursery Essentials has grown 39.4% in the first half FY '20. The consumer staples range, which are products more widely available across general retail and made up around 22% of sales, has experienced a sales decrease of 4.7% versus the prior corresponding period. But again, it's still significantly up 28% over a 3-year period. The playtime category, which is 10% of the sales and includes player, is down 3.6% of sales in the first half. This category of product has grown significantly by 39.7% over 3 years, boosted significantly by play year sales with grew during lockdowns as infants needed entertainment at home. Play gear in particular has contracted, which not only affected sales, has had a GP percent impact as it's widely available through our discount department stores and marketplaces and has been subject to discounting across the market. I'll now elaborate on gross margin for further on Slide 9. We continue to focus on value, especially as economic times type. We have a price beat promise of 5% that provides confidence to the consumer that will offer great value every day in a revisit. Our Best Buy range, which offers low price every day supports our value proposition. Our price big promise remains at around 1% of sales. In the first quarter, we experienced a 230 basis points decline in GP, a consequence of several factors, including FOB freight, rapidly increasing domestic transport costs, better than expected engagement with the recently launched loyalty program and the impacts of the Plate department. I've been pleased by our GP recovery program that started to take effect in the second quarter and into January. And in the second half, we expect to capture the benefits of further reductions in international shipping from $7,000 to $1,950 per container. Excited to launch new private label and exclusive ranges as we head towards a target of 50% of sales from the selection of products and ranges. Our loyalty enhancements to the program are delivering improvements in GP percent and we're managing the fulfillment and distribution of online delivery orders more efficiently as a consequence of order management improvements, which is part of our transformation program. January, GP percent traded above the prior year as a consequence of our GP recovery plan activated to date. I'll now hand you over to Darin, who will talk about operating costs, transformation and financial metrics and performance. Thank you, Darin.

Thank you, Matt. I'm on Slide 10. Our cost of doing business increased in the prior corresponding period by around $10 million year-on-year. $4 million of that is driven by store network expansion where we have added 9 new stores over the last 18 months. In 1H FY '22, we added 4 new stores late in the first half. This year, we added 3 stores at the start of the half and a further 2 late in the half. Our stores take 5 years to mature and at maturity, they deliver strong capital ROI. And so from a growth perspective, we also incurred costs establishing the Baby Bunting marketplace and costs establishing our presence in New Zealand. These are overhead investments that will deliver earnings accretion in future periods. Specifically, on New Zealand, the breakdown is one-off establishment costs of $400,000 preopening, launch marking at around $500,000 and a further $1 million in overhead predominantly in relation to DC rent and operating costs in our Auckland facility. This DC will service the rollout of stores and enables fulfillment of the largest online range of baby goods available in the New Zealand market so a strategic investment will grow into. Looking at cost inflation, the 4.6% increase in the national wage case increased labor costs by around $1.6 million across our stores and in our distribution center. CPI in store support center was 3.5% of circa $500,000 to existing headcount costs, whilst we invested around $1.8 million in the scaling cost to support future growth and store rollout. These investments include expanding our digital team to support the new Headless architecture launched in January '22. Expansion of the buying team is we look to grow our SKU range both online and true marketplace and higher IT costs as the new operating systems added as part of the transformation rollout. Slide 12. On Slide 12, we have an update on our transformation program, which was defined back in 2018. It comprised a number of large investments to overhaul and modernize the business across systems, branding and supply chain. We are progressing towards completion of our next 2 programs of work, being the investment in a time and attendance system for workforce management and an advanced order management system to our orders and fulfillment across our distribution and store networks, noting we process around 700,000 online orders annually. We are also progressing planning for the final and most significant pillar of our transformation program being the swap out of both our point of sale and enterprise resource planning systems. We are currently working through the solution selection process of this project with progressive implementation planned throughout the second half of FY '24. I would like to turn your attention now to the financial schedules, starting with Slide 13. The P&L on Slide 13 reflects progression on our future growth agenda and the temporary contraction in margin that was absorbed through the first half. Our group in paid of $5.1 million is comprised of $6.8 AU NPAT, down 46% year-on-year and New Zealand loss of $1.7 million for the half as we open up for the first time in that market. In this half year result, we do expect earnings to substantially recover through the second half. Baby Bunting sales and earnings are skewed to the second half. This earnings skew will be further exacerbated this financial year due to the significant margin improvement in the second half and nonrepeating one-off costs in terms in New Zealand and the Australian marketplace build in the first half. It's worth restating the key drivers of second half margin improvement being changes made to our loyalty program to improve the profitability of redemption transactions. Efficiencies made with our supply chain to defray the higher road freight costs we are experiencing relative to last year, improving international shipping rates, which have already normalized significantly relative to their peak in 2022, not shipping rates are currently down over 70% relative to 2H FY '22 and further additions to our private label and exclusive product ranges that will start selling through in April. Looking to the balance sheet on Slide 14. The December balance sheet reflects the cyclical nature of Baby Bunting inflation capital requirements and further store network expansion of 5 new stores. Our inventory build of $16 million relative to June reflects the opening of 5 new stores and inventory from 2 further openings planned in Q3 2H, replenishment stock in our New Zealand D.C. and higher inventory volumes needed for the post-Christmas and February promotional events when imports are limited due to Chinese New Year. The new stores also increased our right-of-use asset and lease liability provisions. We continue to retain plenty of headroom in our $70 million borrowing facility and similar to every year, our net debt will reduce in the second half as we sell through the half year inventory build and profitability increases on the back of higher 2H sales and improved gross margins. Moving to the cash flow statement on Slide 15. Looking at the cash flow, the earnings impacts we experienced through the first half played through as a $10 million reduction in operating cash flow for the half year-on-year. This, along with the new store and transformation investments have been a drawdown of $80 million from our debt facilities for the half. This will mostly resume back through the second half. I'll now hand back to Matt who will discuss some exciting news of our future growth opportunities.

Thank you, Darin, and we're on Slide 16. We're in the final stage of preparing to launch a market-based offering on our website, Babybunting.com.au. This is an exciting opportunity as we seek to become the one-stop baby shop online, showcasing and offering a much larger range of products, more niche and upcoming brands and provide the opportunity for existing suppliers to sell a more comprehensive range leveraging off the traffic on our website. Baby Bunting marketplace strategy is another step in the growth journey and like other significant [indiscernible] retailers, both in Australia and across the globe, provides us with a capital efficient way to expand the range and increase market share in the broader addressable market. Third-party range we will have on our website will be -- it will be curated to complement our existing range and will meet the broader needs of parents and parents to be. We are proposing to test and learn and start with around 1,000 products working with key suppliers already experiencing marketplace operations and execution. Once we have the insights we're unable to refine the process and operations, we will add more marketplace participants. We expect that we will be able to service new ranges and identify new products and vendors that may seek an omnichannel relationship in the future. This is really an exciting growth initiative. On Slide 17, looking into the priorities for the second half and beyond. We will continue to focus on gross margin recovery without compromising value to the consumer. Our strategy to growing market share continues through our investment in digital and the opening of new stores. To drive revenue, we will continue to focus on our private label and exclusive sales offerings, supported by the strength of our loyalty offer. Working alongside our supplier partners, we will continue to work towards increasing our best buyer or lower drive everyday offer to consumer, which will flatten the sales cycle and drive volume and market share growth. To achieve this, we need to have appropriate systems and infrastructure in place, and therefore, we need to finalize our transformation program that is already well progressed. Turning our attention to the outlook on Slide 18. After a difficult trading period through December and January, where we were [ citing ] the impacts of the pandemic and in particular, Omicron, we were seeing the consumer continues to change the shopping preference to install or for online delivery. The reduction in ticking collect and the opening up of General retail has seen a softening of consumer staples and these products are more broadly available through general retail. We're seeing some recovery in sales for February and we have plans in place to drive further improvement in sales performance. Year-to-date sales growth is 3.3% with comparable store sales of negative 2.1%. Gross margin for January is in line with forecast and up on PCP. In relation to the outlook, we have maintained our guidance of pro forma NPAT to be in the range of $21.5 million to $24 million, with gross margin to be between 38% and 39% for the full year. The outlook assumes no significant deterioration of economic conditions that affect sales performance. Before we open up for questions today, we also put out an announcement in relation to succession plans for my role. I've led the company since 2012 and in collaboration with our Chair, Melanie Wilson, we have developed a plan for leadership renewal at abating, allowing sufficient time for a smooth transition. It has been incredibly humbling to be part of the Baby Bunting team over the last 11 years. I love coming to work each and every day and people make the difference real, and I believe we've assembled a great team of Baby Bunting. The company is committed to its strategy in value running as a very experienced and well-respected leadership team who are focused on executing the strategy. I'd like to thank you, our team members, our Board, our investors, our supplier partners and community key partners being Life's Little Treasures Foundation and PANDA for your support during my time as the CEO of such an exciting and purpose-driven organization. In the meantime, I'll be continuing on as CEO and Managing Director, providing leadership and continuity, and I'm committed to ensuring a smooth transition over the coming months. I'd like to thank you for your attendance today, and now I'll open up the line for questions. We remind you to please state your name and where you're calling on from. Thank you.

[Operator Instructions] And your first question comes from the line of Alexander Mees from Morgans.

Just firstly, Matt, on the news about your own departure and I'm sure I speak for a lot of people, Matt so that you will be missed. I'm just wondering why now is the right time for you to step down, please?

Alex, I've been talking with the chair over a long period of time now about renewal and succession in our business. I've got a significant workout period and these things take time. And I think it's appropriate as we get into the new form of growth or growth to bring in a fresh set of eyes to the role.

And just on those new areas of growth. I'm just wondering, firstly, what the investment we should expect in the second half in those new markets should be sort of New Zealand and Marketplace? I know it will moderate, will it be significantly down on the first half?

Yes. Thanks, Alex. I'll take that one. Marketplace will now largely be CapEx, a few more hundred thousand of OpEx. But I mean that whole investment for the year should close out around $1.5 million. Then for New Zealand we -- it will depend on the timing of the bill for the next door being Christ Church. So we're still sort of finalizing the timing around that. But other than that, all the start-up costs have been established and now it's about building the store network out and driving brand awareness and sales growth.

And just on New Zealand. You've got a target out there for 10 stores in NZ in due course. What are you planning for FY '24 once you've got Christ Church Shop?

We've already got a couple of leases locked up. So that's it at this stage, but we are certainly in other discussions, it will depend on where the commercials land really. So the process of Baby Bunting has always being very steady and considered making sure all the key operational requirements remain intact for our new store build and the commercials arrive as well. So we've got our eyes on a number of sites, and we are having conversations. So at this stage, it's 2, but that may build.

Excellent. And just finally on the current trading, and thank you for the granularity you provided. Just wondering if there's a significant difference between nursery essentials and consumer staples in the like-for-likes in January and February or whether the performance of the 2 starts to close up.

I mean, in January, our nursery essentials were positive again. And as the consumer staples, we basically saw an unwind of the growth that we saw in the prior year. It's always challenging to look at sales periods in small windows. But January essentially last year featured very strong online growth of plus 30% as the country was in Omicron you may have forgotten about that. That quickly normalized through February, but in the meantime we saw a high peak of sales through January which been flattened out in February. And then if you sort of look in the trading update, you can see that well there's been an unwind through January and then were moderately down year-on-year. I mean the broader trend for us has been that online has contracted year-on-year, and we've seen fall out through now 3 stables. And in particular, the online contraction has been click-and-collect and I don't think we're alone in seeing those trends through our business.

Your next question comes from the line of Sam Teeger from Citi.

Matt, especially congratulations on your tenure over a decade. It's a great achievement. I appreciate the comment that gross profit margin for January is in line with the forecast on PCP. But can you comment as to how sales and gross profit dollars are coming in versus your forecast for January and February to date?

Well, we've given an update on the January numbers, Sam. So the comp of negative 6.7%. We never aim to have negative growth in the business, but that's the way it was. I think that if we sort of look more broadly across the 8 months of trade to date, we can see consistent trends. And that is contraction in Click & Collect contraction and decline in consumer staples where -- which is products more broadly available in the market, growth in the engineering of the business, which is in our stores and in nursery essentials. I look ahead for the rest of the year, we'll be -- we need to cycle over a 3% comp. So -- and that gives me a great deal of comfort in our ability to ensure that our sales hold up and we -- and the outlook is delivered.

Okay. Can you talk to the time and quantum of price rises you put through over the year-to-date? And I guess when you incorporate price rises into the mix, what do you see is the most significant contributor to the anticipated second half margin improvement?

So look, just the contributor because there's a long -- a lot of questions there. I think we see a very big thing around loyalty, the change we've made in loyalty and the change we've made through our price policy has been a big driver as we cycle into the second half. As you know, we've got said not before, we've got a minimum spend of $10 for every $50 a redemption of $10 for $50 spend. So that's a big change to the prior year. And sort of I'll pick up on your pricing comments there. I think for us, it's a very strategic thing that we do in our business. And we could probably break it up into a number of aspects. One is just reminding me is around 6,000 SKUs in every store and therefore, you have to take a bit of a scientific approach and also strategic approach to how we price goods and what we've got is we've got a set of items that we call key value items that are pretty well understood across the sector in terms of these are the desired products in the [indiscernible] et cetera. And we always aim to set those prices at the best possible in the market. And those KPIs are quite a large cross-section of all our SKU range. Then there's also our approach to pricing at entry level, and that is where we look towards the volume end of the competitors, the discount department stores and Kmart, Target and Big W. And where we primarily want to make sure that we have every value every day of the visits, and we select products and select items relative to the pricing on those DDS and to make sure that we have a competitive offer at all those entry price points. And so essentially, we use our private label full baby range in the price finder and we put that in there, and we're quite scientific about that. And then we've obviously got a tail of products where some of them are available, more brand generally in the market, some of them are available just to us because they're exclusive. But with exclusive, we have to keep them in, I guess, a range architecture so that you can't just put up a price relative to another product just because it's exclusive that is compete product from the market. So effectively, what we do is we price those appropriately relative to market. And if we are out of kilter with the market, then we have a price bid guarantee that we will beat the product if it's stocked and identical by 5% and the consumer can well themselves in that. What we are seeing in that space is that it's very consistent in terms of our price begin factors come down of late and for the half, it was around 1% of sales. So what I see is that we've got some -- we want to make sure we keep the value at every level. We certainly focus on those key value items, but we do have a lot of items in store. Looking ahead, there are some exciting new products that are entering the market and some of them I can't disclose it out, but they're coming very, very soon. And so that's quite exciting to see and so that will also play into the second half. Does that help you Sam.

Yes. But I guess what I'm trying to understand with these questions is to what extent our recent price rises for either an improved gross margin percentage outlook, but maybe having an impact on the top line more than expected. That's what I'm trying to understand.

Look, clearly, we have to do, like others in the market, we have to recover in food cost increases. There's a certain point that you just need to move. And so there has been some of that, but as I said, we put prices down as much as well during this period. If you look at -- as recently as last week, our core range of car seats come down at the entry-level pricing level. The #1 car seats in the market has come down as well. We're actively managing that all the time.

Okay. And then just lastly, can you talk about what you're expecting to spend on the transformation program for the rest of this year and next and what's just between CapEx and OpEx and if there's been any inflation or cost increases from what you previously talked about, I think you said 4% to 5% this year and then 5% to 7% next year.

Yes. Thanks Sam. It's going to be relatively consistent with the first half. Not a lot of CapEx incurred in this year. So I think we're around -- so that should sort of see us up at around $4.5 million to $5 million for the year. Next year, I mean, there's been no change to our outlook relative to what we talked about at the full year. The unknown for us is where we land with ERP and point of sale. And that will be a project that will -- can range between $6 million to $10 million. We're already incurring costs we'll incur costs of around $1 million of that for this year, but that's really where it's sort of working at this stage. In terms of the split between OpEx and CapEx until you actually negotiate a deal because these will be cloud software products until you actually negotiate the deal and understand what are the customizations and where they sit in terms of the digital infrastructure, whether it's in yours, whether it's in the vendors, that changes the treatment of those costs. So that's to be determined. So I think that's when we can give further clarity on when we get to all this.

Your next question comes from the line of Rachael Harwood from Macquarie.

Just one for me. Just sort of category level, have you fully normalized the COVID comps now? And do you expect this mix to I guess, to normalize?

Right. Can you just repeat the question, we didn't quite -- it didn't come through clearly, Rachael?

Yes, sorry. So just at a category level, have you fully normalized for the COVID comps now or do you expect this mix to further normalize just in terms of the nursing category and those other categories?

Yes. I think that, yes, from a COVID perspective, that pretty much normalizes us. And there was a relative consistency in our growth in the second half of last year. So where we may -- where we think the fallout will continue will be through click-and-collect and consumer staples within that. And then also there is contraction in the plain category that will continue for -- through the second half also.

Yes. Understood. And just I guess just a follow-up on that. Do you expect any margin impact just from those 7 normalizing?

Not specifically. I mean the thing that's coming down the pipeline as we trade through our current inventory position, that will be replaced with lower cost inventory that's got -- it's been shipped into the country on a significantly reduced freight costs relative to the prior year. So that will become a feature of our margin through quarter 4.

[Operator Instructions] And your next question comes from the line of James Casey from Ord Minnett.

Just with regards to your comp store sales in the first half, obviously, your volumes are declining. Why do you think your volumes are declining?

Yes. So James, I mean, we've covered it through the narrative today in the trading update. [indiscernible] first half -- yes, for the first half, same story... And so what we're seeing is the continuation of this trend, which is click and collect has contracted. We saw extraordinary growth through online. By and large, we've held launch to that through the first half, Click & Collect was down around 30%. Within that, we've seen contraction in consumer staples. Consumer staples are product that are more broadly available and don't feature as predominantly in the specialty nursery goods retailers. And so I mean retail has been largely sort of closed up shopping centers and the like. And so we're seeing a normalization of consumer behaviors and consumer staple products that aren't necessarily foot traffic drivers for us. Things like nappies, even baby wear, they'll pick it up if they're in the store, but not necessarily come to the store to buy those items. And so that's really where we're seeing the contraction in those kind of items.

Okay. And then with regards to pricing, most companies increase their prices in the first half and continue to put price rises through. You actually increased the amount of products onto your Best Buy program from 34.5% up to 53% of sales. Do you think with hindsight, you've been too conservative on your pricing, particularly in a period of input cost inflation?

I think we know that value is a primary driver to purchase in our category. And so the idea is the consumer grade price every day we visit is very, very important. And therefore, giving confidence on pricing is very, very important in that as well. So I think at times, we sort of -- we certainly -- we offer a lot more value for an extended period of time, but that's all part of the strategy to make sure that we are seen as a value retailer in the market. So as you said, I mean it's more broadly, the retailers across the market has moved prices as input costs have increased. We're painting some of those and we're sort of moving away from this high low promotional aspect as by increasing our best by ranges and then giving that offer every day we revisit. I think it's probably for others to judge as to whether or not we've been too conservative. But I think overly -- over time, we need to ensure that we're growing market share, keeping our customers engaged. Remember, we're talking about young families that have not necessarily got -- they're not at peak any potential at that time. And so it's absolutely essential that we are offering great value every day, and there is some costs that everybody had to absorb very quickly. Things are normalizing through the other side and stabilizing. So I think the outlook is still looking very positive from these dumping perspective. Our new stores, we're very happy with how they're performing -- margins looking good for the second half and into next FY '24 as well, and we've got some exciting growth projects.

Your next question comes from the line of James Bales from Morgan Stanley.

Firstly, on inventory, you've called out that you expect that to improve. Is there an absolute dollar value or an inventory to sales that you're targeting to exit FY '23 on.

Inventory will land around or below $100 million. It also depends somewhat to the timing of these stores, but it will be around that level.

Okay. Got it. And then I also wanted to sort of understand your thinking on guidance. In the first half, a couple of things changed with domestic freight and the mix of products that the consumer was buying. And that meant a recalibration of earnings expectations, I guess, what's to stop something happening again in the second half that could alter the expectations for gross margins and ultimately, your NPAT guidance? And what levers have you got to sort of to counteract those.

Yes. So I mean, in establishing a guidance range, James, we need to deal with no data points. And we've seen positive trends in key elements of our sales and I think we've had a long enough look at the change around Click & Collect and categories within that to sort of understand what those sales trends look like also. Our sales are always skewed to the second half because we've got more promotional weeks in the second half, June is a big month for us. And this year, we've also got our new store revenue skewed to the second half also. Our cost of doing business is relatively flat first half, second half, noting that we did have some one-off costs that we incurred in the second half, we're not going to see anything of that like in the second half, and we've got a great sort of deal of consistency and confidence around across the new business management. DP, we've got a very good handle on that, and we've called out that we think that will land between 38.5% to 40.5%. The variable within that is really sales mix to a degree and the sell-through product that's coming in on those lower shipping rates. And also the continued uptake in loyalty, we made the minimum spend change to loyalty in December, and it's really around whether or not we retain the same redemption levels on loyalty rewards through the second half despite that change, which will be a great boon for sales, but it will be at a moderately lower margin. But that talks to that margin range.

Overall, if you could look at the -- one of the market elements that -- or the macro elements for consideration birth is pretty stable at around $300,000 a year. Obviously, there's been a big hit to interest rates, but really the impacts of those kind of things, we yet to see any sort of variation in terms of our product mix from that perspective, that may or may not change in the second half.

Your next question comes from the line of Ric Frith from APSEC Funds Management.

I just want to talk about New Zealand just briefly. Has there been any impact of the weather on your Auckland store firstly?

Maurice, thanks for the question. I'm pleased to report that all our team is safe and well, and there's no issues with our store or our DC side. Thanks for asking.

That's good to hear. And just on the Auckland store, can you just talk through how that performance has been to your expectations in the half?

Thanks, Ric. Look, I think the trading performance of the New Zealand store reflects our brand awareness in that market. The store in Albany is in the northern suburbs of Auckland. What we need to do is build out our store network to drive brand awareness. We also went into that market with an everyday low pricing approach and what we're seeing is we add events and promotions into that, then we see positive uplift. And so we see some real opportunities through the second half to drive our sales growth and get transactions into the store. We've also seen a good uptake in royalty within the store. So it's not going to be -- it's a slow burn, but we certainly we've taken on a lot of learnings, and we'll be implementing some activation in the second half that we'll see continued growth through the second half.

And I think also it's a complement that. I think we're seeing our brand in this online growing quite significantly and sales online going well. So the investments we're making around online digital marketing, et cetera, it's certainly a playing through. And what we do bring to that market is the broadest range by a long, long way. And with great customer service, and we're seeing that come through in our NPS scores, which are very strong also. So we brought some new things to market. Cotton furniture range is going really, really strongly, and we're sort of -- and we've got some opportunities also in car seats from what we've seen in the first half.

Okay. And just -- can you just walk me through the rationale in opening the distribution center before the physical store? I understand from sort of a stocking point of view, but just more as you touch on the brand awareness, obviously, there wouldn't be as much brand awareness online before the physical source. Can you just walk me around your [ thinking and thought ]?

Absolutely. I think that's a very fair question. Our preference was to open a 3PL or to go with a 3PL offering in New Zealand. Unfortunately, capacity to we wanted to also have a very strong presence online and have our full SKU range available online communities in that market. There was the opportunity to do that through a 3PL arrangement was not available in New Zealand. And so on the back of that, we elected for strategic purposes to go with a 5,000 square meter distribution center that we will grow into. So -- and we also -- at that point, it's meant that we're carrying a higher cost than we would have otherwise preferred, but it also gives us the opportunity to present our full range online. Growth is our presence online and that we know that, that actually feeds store funds as well.

Yes. But just a reminder, we weren't selling online into New Zealand before that, but we were limited by what range we could have, what we could ship, et cetera. So we really had some sales going through the market to see what was needed. And as you quite likely point out, Darin we needed to have our full range that and they're available in market, and that was the only way we could really get to mine with it, which is growth.

There are no further questions at this time. I would like to turn the call back over to Matt for closing remarks.

Look, just once again, thank you very much for your support. Thanks very much for joining us today, and we'll see you soon. Thanks very much. Darin?

I might also like to add that just on behalf of the entire Baby Bunting business that Matt's been an incredible leader was all for the last 11 years is been an absolute pleasure to work with and has got incredible value, brings an enormous amount of cash into the business and he leaves it in very good shape, but it's been an absolute pleasure to work with you for the last 8 years. So on behalf of everybody at Baby Bunting, yes, it's much lovely here and I'd like to say farewell and wish you all the best from us.

Thanks, Darin. But you're still going to put up with me for a few months.

This concludes today's conference call. You may now disconnect.