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

Thank you for standing by, and welcome to the Baby Bunting Group Limited FY '24 Results Presentation. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mark Teperson, CEO. Please go ahead.

Good morning, everybody. Thank you for joining us as we present Baby Bunting's full year results for FY '24. Darin Hoekman, Baby Bunting's CFO, is also here.

Good morning, everyone.

We'll be going through the presentation that was lodged with the ASX and there'll be time for questions at the end. Before diving into the results, I'd like to touch on why I think Baby Bunting has strong foundations and why I'm confident that we'll return the business to growth. Baby Bunting is Australia's leading specialty retailer. We have a market-leading omnichannel ecosystem comprised of 70 omnichannel stores in Australia and 4 in New Zealand. We enjoy an 85% unaided brand awareness and we have more than 800,000 active loyalty customers generating over 90% of our sales, which provides us with great insights into how our customers shop. We operate in a large addressable market with enormous potential to grow our share, particularly in the $3.4 billion soft goods market, that's where we're currently underrepresented with just a 3% market share. We've hit the ground running implementing the strategy we announced in June, which is designed to deliver sustainable top line revenue growth and enhance our gross margins into the future. Moving to Slide 3. It's pleasing to see the improving momentum in our performance as our strategic initiatives take effect. For FY '24, we reported a pro forma net profit after tax of $3.7 million, within our guidance range of $2 million to $4 million. Pleasingly, our cash conversion from operations was up -- sorry, was 86%, up 430 basis points versus the prior corresponding period. We've taken a lot of action in terms of being disciplined with our capital management. We've made positive progress against our inventory and labor productivity initiatives and to support our disciplined approach to capital management, the decision was made not to pay a final dividend. This will help support future growth to drive shareholder returns. Moving to recent trade. As I mentioned, we've been hard at work executing on our strategy. Pleasingly, this is translating to improvements in trade. The first 7 weeks have seen total sales growth of 3.5% and comp sales growth of 2%. A key driver to this improvement was our range innovation with new products featuring strongly in our best-performing subcategories and we're seeing the benefits of our change to the way we go to market. Our July 2024 gross profit percentage was up 180 basis points, reflecting the benefits of removing spend and earn from our loyalty program in Q4 and our trading term renegotiations also materially progressed through June and July with further work underway. I'm pleased to confirm we're on track to deliver our targeted 40% gross margin for FY '25. We continue to advance our new sort of design, which is on target to open with 3 refurbished large format stores and 3 new small format stores. We've got a lot to execute on this year. Our FY '25 capital expenditure program will see an investment of $10 million to $13 million, which we expect to be fully funded through our operating cash flow. Moving to Slide 4. Baby Bunting's experienced some challenging conditions this year as young families sit within the demographic that is most affected by cost of living pressures. And that's had an impact on performance as reflected in the heightened price competition in national brands. Against this backdrop, we've been working hard on executing on our strategy to future-proof our business. And as I mentioned earlier, you can start to see the improved execution translating into stronger trade. We continue to expand our reach and footprint by opening 4 new stores; 1 in New Zealand and 3 -- sorry, 1 in Australia and 3 in New Zealand. Additionally, we made the strategic decision to close our Camperdown store at the end of its lease in Q2 of FY '24. We've enhanced our go-to-market strategy by significantly increasing our investment in performance and social marketing and elevating our execution across our customer touch points. This change has been complemented by the implementation of online fulfillment across all our stores, ensuring that our entire inventory is now available for all customers online. We've done a lot to simplify our price architecture. In addition to retiring the Spend & Earn element of our Loyalty program, we've also removed price beat on items less than $50. We did that in July and it's contributing to margin improvement without compromising our transaction volumes. Working capital management has been a key focus, driving a reduction in comparable stores' inventory levels of $7 million. This has improved the age and quality of our inventory as we reinvest in newness and innovation. This work will continue into FY '25 as we seek to further optimize our ranging. To support our growth, we renewed our $70 million NAB debt facility, extending it to September 27 with the existing pricing maintained. We've also commenced our store redesign program with The General Store. The first cohort of refurbished stores expected to be in the market towards the end of Q3 of FY '25. In July last year, we executed cost-out initiatives at our Store Support Center, which has improved our operating leverage. And we've been investing in capability with an expanded data and analytics team to better leverage our rich customer data set. This capability is enabling more informed strategic decision-making. We've done this to elevate how we execute customer experience and utilize data and analytics across the business. I'll now hand to Darin to talk to the financials in more detail.

Thank you, Mark. We're on Slide 6, which gives a bit more detail on the company's sales performance and some relevant drivers. Our comparable store sales trend has improved over the course of FY '24 as we've transitioned our go-to-market strategy with a focus on new customer acquisition growth and increasing return frequency of our existing customers. Our first half comparable store sales growth of negative 7% improved to negative 0.7% through the May, June trading months. This momentum has continued into the new financial year where comparable sales are now tracking positively at 2%. During the year, in order of execution, we have increased our investment in digital performance marketing, elevated our unique selling points, such as price beat, range breadth and providing trusted service in our always-on marketing channels. And we've got to work on exiting less productive inventory lines to allow us to dedicate more of our open to buy to new range introduction. We have also completely reset our trading calendar, moving away from 7 annual catalog campaigns to a program of consistent end-market activity. This has allowed us to simplify our price architecture and provide consistent value to customers at the same time as improving our operating margins. While the trading environment remains challenging, the results we've seen on the back of the changes made are giving us confidence for the year ahead. Outside of comparable store sales performance, we've grown market share through the addition of 4 new stores during the year plus sales growth from the annualization of the 7 stores opened in FY '23. Our online sales, which include Click & Collect, grew by 5.6% year-on-year and now represent 21.8% of our total sales. Our Marketplace had its first full year and generated $3.1 million in GMV from third-party orders. In addition to providing additional range to our customers, it's become an important incubator of new products and brands. We've seen the transition of several Marketplace brands into our store network at our 1P range, contributing around $1 million in sales in the second half of FY '24. Turning to the P&L on Slide 7. Having discovered sales, we will focus the discussion here on gross margin and cost of doing business. Gross margin was 36.8%, down 56 basis points versus PCP in a highly competitive market, which saw elevated levels of discounting in core categories. Margin was also impacted by the work undertaken to declare our less productive stock lines. Pleasingly, however, and counter to the full year trend, we saw positive gross margin improvement in the fourth quarter following the changes made to our Loyalty program. The full benefit of this change can be seen in the first month of July 2024, which saw our gross margin up 180 basis points year-on-year. Importantly, the results seen in July is expected to continue to improve through the course of the year as the benefit of the renegotiated trading terms start taking effect in Q1. Our cost of doing business was $167.7 million for the year. The $6 million year-on-year increase in this line is primarily attributable to the 4 new stores added in FY '24 and the annualization of the 7 stores opened in FY '23. These 11 new stores in combination also contributed $12 million in sales growth on last year. Regarding our existing store and cost base, the business worked hard to offset the significant labor and cost inflation, delivering $3 million in overhead cost outs and $3.5 million in labor productivity savings. The business also invested in marketing during the period to drive top line sales. For the FY '25 year, we'll be focused on completing trading terms renegotiations to drive gross margin improvement and non-people cost reductions across all lines within the business. Turning now to Slide 8. Our balance sheet highlights disciplined management of our trade working capital. The focus was on deranging unproductive inventory lines and resetting inventory cover on core range in line with our trade trajectory. This delivered an overall reduction in inventory of $7 million from existing stores, partially offset by the investment of the $3.4 million in new store inventory. Looking to FY '25, there is more work to go in inventory optimization with the 6 new stores planned for this year expected to require minimal to no additional investment in inventory. Finally, our net debt balance stands at $12.9 million at the end of the year, highlighted by the successful renewal of our debt facility, which has been extended to September 2027 with existing pricing maintained. This ensures we retain significant headroom and financial flexibility as we move forward on the execution of our growth strategy. Moving to the cash flow statement on Slide 9. Looking at our cash flow, the effective management of our working capital helped deliver an operating cash conversion ratio of 86%. Investment expenditure for the year totaled $9.5 million. Of this, new store CapEx of $4.6 million was invested, including spend on the Maroochydore store, which opens this weekend. Additionally, $4 million was directed towards ongoing operational and IT renewal CapEx and $900,000 was invested to complete the upgrade of our people systems in the business. On dividends, we paid out the FY '23 final dividend of $0.048 per share in September and the interim dividend of $0.018 per share in March. We will, however, not be paying a final dividend for FY '24 to preserve capital as we prioritize investment in growth initiatives. I'll now hand back to Mark to provide a strategy update.

Thanks, Darin. Moving to Slide 10. As a reminder, aligned with our new strategy unveiled in June 2024, we've also redefined our vision, the best start for the brightest future. This is driving everything we do as we strive to be the most trusted partner for families during their most important journey, parenthood. Our mission is to support and inspire confident parenting from newborns to toddlers. We aim to empower parents with trusted products, expert guidance and a community of support. Through every milestone, we're here to help families grow, thrive and succeed with confidence. This vision and mission provides an exciting platform to engage with customers and to drive shareholder returns into the future. We're on Slide 11 now. Let me take you through our growth plan, which we unveiled in June. This new growth strategy focuses on 3 key pillars to drive us back to a plus 10% EBITDA margin business. Our first priority is expanding our market share. The second pillar focuses on growing EBITDA, a key part of which is growing our gross margin. And the third pillar is aimed at improving our return on invested capital. Ultimately, this strategy is focused on enhancing the customer experience and delivering shareholder value. Moving to Slide 12. I want to delve into the 5 key initiatives driving our strategy to achieve a 40% gross margin in FY '25 and beyond. Our focus on simplifying our price architecture has been fundamental. Previously, layered promotions such as catalog discounts, spend and save offers and our Loyalty program eroded margins due to overlapping effects. By retiring our Spend & Earn program, which created friction for customers with complex redemption rules, we've improved our gross margin by 150 basis points without affecting transaction volumes. This change has allowed us to enhance our market position and we aim to further evolve our Loyalty program later in FY '25. Another critical initiative is the renegotiation of trading terms with our supplier partners in Australia and New Zealand. As I mentioned, this program is already underway and is on track to deliver targeted gross margin improvement. We're very pleased with the early results and we'll continue to focus on our top suppliers in the first half of FY '25 to optimize our terms and achieve mutual benefits. We're also amplifying our exclusive brands through recent agreements with Nuna and Bugaboo. These exclusivity deals effective from 1st of July give us the ability to further differentiate our product offer and in-store experience to the customer while delivering margin improvement to the business. We're currently working with more brands who are keen to leverage our platform to achieve reach and grow scale. We should be seeing these additional brands come through in the next few months, which validates our efforts in this space. Scaling our private label business is another key focus. We've introduced new price points in cots and furniture, leading to strong initial sales momentum. Our goal is to double our private label share from 10% to 20% over the medium term. This expansion will help reduce supply chain costs, improve margins and deliver better value to our customers. Lastly, we're optimizing inventory management and product performance. By intensifying our focus on underperforming brands and products, we've been able to reinvest in newness and product innovation, which has been very effective in driving top line and margin growth. Together, these initiatives are central to achieving our margin goals and driving sustained growth. Moving to Slide 13, a progress update on our strategy. Since we announced our strategy around 7 weeks ago, we've delivered on several initiatives aimed at achieving the objectives of growing our market share. We've driven growth and reinforced our market leadership through new brands and product innovation. In July, we launched several exciting new brands, including Bibs, Subo and Bunjie, and we have 5 new premium prams scheduled to launch before September. In leveraging the marketplace, we're providing customers with more choice and convenience. At the end of the year, there were 17,000 products and 90 sellers published on our Marketplace, which continues to be a great incubator for discovering new brands and high-demand products. As part of our omnichannel strategy, we signed agreements with Uber for same-day delivery. Testing is set to commence in late September and we're also developing a pilot for one-on-one personalized appointments and a pram cleaning service pilot set for early Q2 of FY '25. Moving to Slide 14. This is our second strategic pillar, growing EBITDA. Since June, we've made headway towards our gross margin target of 40% in FY '25. We're renegotiating trading terms with our suppliers, we're progressing exclusive brand opportunities, and we've been active in private label, including the recent launch of 2 new JENGO prams. JENGO is one of our private label brands and it's among our top-performing brands overall. We're building a new revenue stream for Baby Bunting and that's retail media. We are focused on unlocking the full potential of our platform. We've engaged Sonder Media to do a comprehensive audit and valuation of our physical and digital assets. We expect to have their final report in the next month. Once we have that, we'll be developing a media rate card to strategically capitalize on our media opportunities. These initiatives will lay the groundwork for the launch of our media business to brand partners in late Q2 of FY '25. In New Zealand, we're progressing trading terms with key suppliers and we've established dedicated marketing, merchandising and supply chain teams. We're seeing some good signs in New Zealand and the business is very close to breakeven at the retail contribution line. We're also currently reviewing our supply chain and distribution network in New Zealand to drive productivity in this space. Moving to Slide 15. The third pillar of our strategy is focused on growing return on invested capital. We've also made progress in this area. Our network growth includes plans to open a new store in Maroochydore this weekend plus stores in Belmont, Perth in Q2 and Westgate, New Zealand, which will occur in Q4 of FY '25. We've also secured the location of our first small format store, which is really exciting. We're also expecting that to open in Q4. We're revitalizing our store network with a new design to enhance the customer experience. We've identified the first 3 stores to be refurbished in this new format, marking the start of this transformation. In terms of inventory productivity, we've been implementing new benchmarks across our reporting suite and maintaining a strong focus on continuous improvement in aged inventory management. We made some good progress in FY '24 and we'll continue to really focus on this part of the business. Let's go to Slide 16. For me, one of the most exciting aspects of our new strategy is reimagining our store experience. This is crucial for driving comp sales growth in our existing fleet. I passionately believe that retail stores are not just experience centers for customers, they are also distribution centers for product through omnichannel fulfillment and a stage for our brand partners to bring innovation and new product to life. We need to create dynamic environments that enable our brand partners to present new product. By doing so, we enhanced the opportunity to secure exclusive rights and partnerships, making Baby Bunting the preferred choice for launching innovation. And while it's early days, we're seeing exciting brands really respond to this opportunity. Our goal is to attract customers not just for their initial purchase, but for every subsequent transaction. We've got a unique opportunity to transform the customer experience. We've developed a comprehensive plan with The General Store who we've been working with for the last 5 months. Our new approach will not only redesign the in-store experience, but also revamp our internal service design. Currently, items like cots, mattresses, sleep suits, linens and other essentials are dispersed throughout the store. This fragmented layout is not ideal for our customers seeking convenience or trying to shape category. Our new store format will shift from a category-led approach to an activity-based consolidated layout. This change is designed to better meet customer needs by grouping related products together, for example, enhancing the shopping experience for items related to sleep and bed time. I'm excited about this program at the G Store. This initiative, which encompasses full design will be completed by the end of Q2 and our first 3 refurbished stores are expected to launch towards the end of the third quarter of FY '25. Darin will now talk to our FY '25 capital investment plan.

Thanks, Mark. We are on Slide 18. Our capital investment program for the coming year is projected to be between $10 million and $13 million, funded from operating cash flows. We will maintain a disciplined approach to capital management throughout the year. The key features of the FY '25 program are the 3 store refurbishments launch in Q4 that will bring to market our new store design, 3 large format openings and the piloting of 3 small format stores in the market. The capital injection this year is all about laying the groundwork for a bright and successful future. We've got a phased approach to investment in the strategy roll-out, we will test the new concept first ahead of scaling, which will be informed by financial return performance. Mark will now talk to outlook.

Moving to Slide 19. I've mentioned the improved trajectory of our sales and margin performance in the first few weeks of FY '25 and it's driving confidence in the work that the team has undertaken over the last few months. Looking ahead, we're expecting our FY '25 pro forma NPAT to be in the range of $9.5 million to $12.5 million. In that range, we expect comparable store sales growth between 0% and 3%, gross margin is at 40% in FY '25, and cost of doing business increases include new and annualizing store costs, wage inflation of 3.75% and additional roles and marketing to support strategy execution. Our capital expenditure is $10 million to $13 million, which we expect will be fully funded through operating cash flows. We'll continue to optimize our market-leading position through our new strategy, future-proofing our business and delivering for our customers and investors. Slide 20. Before I open up to questions, I want to underline some key points. We have a clear strategy, which we are executing on at pace. That strategy is already delivering results. We have a great platform and we have a disciplined framework as to how we deploy our capital. At the heart of everything we do is a focus on providing a great customer experience and driving to deliver shareholder value. Thank you.

[Operator Instructions] The first question today comes from Tom Camilleri from Wilsons Advisory.

Just firstly, there's some gross margins to start the year, 180 basis points up year-on-year in July. From memory, the first quarter of FY '24 was stronger than the second quarter. So, does that imply a gross margin of about 39.5% to start the year? And then also, your guidance for FY '25 implies 40%. What exit gross margin do you expect for FY '25?

Tom, we're not going to call out Q1 margin or margin achieved in July, but the key point is to highlight that the 180 basis points achieved in the first month is a sustainable base from which we expect to further grow through the course of the year as trading terms come into effect. Similarly, in terms of like a full year basis, we're happy to call out achieving -- targeting the 40 basis -- 40% gross margin that we're expected to achieve. Thinking more longer term, our long-term target is to get our gross margin up to 42% over the strategic outlook period.

And then just a follow-up for me. So, New Zealand lost $4 million I think, at the EBIT line this year. What's the, I guess, medium-term game plan there and the time horizon to get that business to breakeven? And then secondly, you called out a review is underway of the New Zealand supply chain. What does that exactly evolve? Like is there something that's, I guess, been identified that is working at the moment?

Okay. Look, I'll take the first question on New Zealand. So really, we're pretty comfortable where New Zealand sits, yes, it's a $4 million EBIT loss, but we are seeing our sales trajectory growing. We've just put 3 new stores into the market. 2 of those are currently run rating above $4 million to around the $3 million mark. As Mark pointed out in the call, we were close to breakeven at the contribution line for the month of July for New Zealand. What needs to occur there is as we continue to sort of invest in marketing and to lift our brand awareness in that market that will help drive sales maturation in the catchments that we're in and our forward sales growth in the stores already opened. In addition to that, we are confident that we can lift margin considerably from where it was in the financial year of FY '24 and we've already seen lift in that space. Beyond that, new store growth into that market over time, we should see us getting towards a positive profit contribution into the FY '27 year. That's what we're targeting at this stage.

Just picking up your second question, Tom on the New Zealand supply chain. We've undertaken a full review of our end-to-end supply chain right from FOB. So, Port of Origin, such as China right the way through Australia and into New Zealand. We're looking to do that to -- I mean, given the size of our growing network in New Zealand and what we have learned since we have set up in that region, we've identified the opportunity to reduce costs in our supply chain operations in New Zealand by optimizing our supply chain. So that work is underway. We think we'll -- we've also got some lease renewals on our third-party warehouse agreements coming up over the next 12 months and we're looking at how we can optimize our supply chain moving forward from that point.

Thank you. The next question comes from Alexander Mees from Morgans.

Mark and Darin, well done on some really good progress. Three questions. Maybe the first one, just with regards to competitive discounting. You called it out as one of the key reasons for the gross margin compression in FY '24. Just wondering what you're seeing now and whether your guidance assumes any improvement in the trading environment, please?

Competitive discounting has really been fairly consistent for the last 6 months. I think what we're starting to show is that our strategy around exclusive brands and products, the way that we've simplified our price architecture and the work that we've done on our go-to-market strategy is really connected with consumers. Fundamentally, the consumer environment hasn't changed. The macroeconomic conditions are the same. Competitors are still finding it very challenging in this market. But we've been executing on our strategy to turn the business around and we've started to see some really good progress in recent months of those changes.

Then just secondly, thanks for the helpful chart on Slide 6 around the comparable sales growth. Just wondering what that looks like on a 2-year stack if you've got that data.

So, for which period?

All the ones that have...

So in the first half, the 2-year stack was negative 6.5% and the second half stack was around a negative 13%. In terms of where we're at, at the moment, we're a negative a stack of negative 7%. So, plus 2%, cycling a negative 9%. Now in [ FY '22 ], we did have a considerable strong start to the year in terms of the comp sales that kicked off FY '22 anyway.

And then just finally, the Marketplace, so just wondering if you can give any color on the performance of that from a sales perspective.

As I highlighted, I think, in Darin's note and coverage, we've done just over $3 million in GMV for the last 12 months. That's obviously run rating at a much higher rate. The amount of sales that we generated from converting Marketplace products into in-store in-line products was about $1 million, which was virtually -- which was only in the second half of the financial year. So, as we touched on, Marketplace is not just generating top line growth opportunities for us. I think importantly, the incubator and the intelligence that it creates for us with a very, very low capital intensity, given that we don't have to hold the inventory has been really good progress and the sales continue to grow. So, very pleasing to see those results.

The next question comes from Rachael Harwood from Macquarie.

Mark and Darin, firstly, you've spoken to renegotiating the trading terms to support the gross margin. Could you maybe just talk to what this involves a bit more? Is it mainly on the pricing side? Or is there something else we should be thinking about?

Sorry, Rachel, the line was a little bit muffled there. Can you repeat the question?

Yes. Sure. Just around the renegotiating of the trading terms. Could you maybe just talk to what this involves specifically a little bit more? Is it mainly on the pricing side?

Yes, it's -- I mean it is wide ranging. So, the terms negotiation touches many aspects of the way in which we do business with our supply partners. That includes trade discounts in addition to payment terms. Other parts of our negotiations have included things like volume rebates in addition to the way that we do business. So, brand development initiatives in addition to freight recovery. So, it's been wide ranging across the board depending on the size and scale of the brand and how they choose to do business with us, supplying us in our first-party warehouse or using our distribution network across our third-party DCs. The negotiations have been varied but reflect the change in the cost of doing business, our continued growth trajectory and the growth of their brands within our business.

And then just secondly, on store rollout, could you maybe just talk a little bit more about your rationale of opening the small store format? And what size these stores are expected to be?

Yes. The small format stores is designed to really take advantage of 2 market opportunities. The first one is in high-value catchments that couldn't sustain one of our large format stores. So, if you think about regional areas of Australia and parts of New Zealand, which have high-value catchments, but just simply couldn't sustain a 1,500 square meter box. The second use case or strategic rationale is in certain metro markets and areas, we see an opportunity to be closer to the customer to help us grow lifetime value. So effectively being in more convenient locations with smaller format stores that have slightly different ranges that allow us to provide customers with high-frequency purchase categories is really the objective there. In regards to the size of the stores, we're obviously going to be doing some testing of this, but I expect store sizes to be somewhere in the range of between 400 and 600 square meters in the main.

The next question comes from Wei-Weng Chen from RBC Capital Markets.

Got a couple here. So, I guess with guidance, you've given a range of 9.5% to 12.5%. But within your assumptions, you've assumed, I guess, 0.3 -- [ 0% to 3% ], sorry, of comparable sales growth and 40% gross margins. Just wanted to better understand whether the NPAT guidance range is just comparable sales growth driven or at the extremities of guidance, are you actually assuming something lower or higher than 40% gross margins?

So, thanks, Wei-Weng. It's Darin. Over the course of the update today, we've talked about the 6 stores that we're opening and this financial year. And in addition to that, we've got 4 stores we opened last year that are annualizing. So, there's an overlay of additional sales growth plus the comp sales base. The thing about the comparable store sales base is that new stores give us a pretty high degree of predictability with regards to their revenue profile. Our comparable store sales base is the predominant. It's by and large, the majority of our sales number. And so variation in this sales number is material to the overall performance of the NPAT result.

Yes. Okay. The 40%, is it moving up or down either, either way?

Absolutely. The gross margin also.

And then the other thing I was going to ask you was you guys have pretty good margins in FY '22, especially if not for freight rate. So, how does present elevated freight rates sort of pays your ability to achieve that 40%?

So, the freight rate today relative to the freight rate in FY '22 is about 1/4 of where it was. So, it's -- whilst there is additional levies being charged by the shipping companies, the delta in terms of the shipping rate today relative to what it was in FY '22 is in the order of like $6,000 a container.

Yes, okay. So, it's not that big. And then the other thing I was going to ask you about the cost of doing business, that seems like it's maybe a little tracking more -- you said it's going higher. Can you give some indication on how much higher we should be thinking either in terms of total cost percentage increase? Or how we should think about it as a CODB as a percentage of sales?

So, I mean we've given a fair bit of color there. We've -- if you talk about productivity in our cost base, we did a considerable amount of heavy lifting in FY '24 with what we achieved in terms of our operational efficiencies in store but also in the DC, given that we had to counter a 5.75% increase in the fair work labor rate. So, we're very happy with the work that we did around cost productivity and there was also the cost down at head office. In the current year, I mean, we've optimized our labor productivity. And so we will have to absorb the 3.75% increase in labor rates this year. So that will lift up our cost of labor in stores and in DC. So that's a big driver, plus you've got the annualization of the 4 stores opened last year and the 6 stores that we're opening this year. So, they are the material components of our cost increase. In addition to that, Mark talked about some new roles that we are investing in our data and analytics team and also to support the rollout in New Zealand.

Thank you. The next question comes from James Bales from Morgan Stanley.

Just a question on comps. Over the past few years, they've been pretty bumpy. And obviously, if you sort of look back at the question relating to stacking those on top of each other. You also pointed out that the seasonality should be changing given that you're going to move away from the traditional catalog promotion periods. So, should we think about the year-to-date comps that you've reported as being indicative of the underlying trend?

James, thanks for the question. When we look at the performance that we've seen over the last 4 months, bearing in mind that the changes to our go-to-market strategy really started to take effect part of the way through half 2 of FY '24, as we have removed the 7 catalogs and gone to a more consistent level of promotion, there is a smoothing effect that we see across the time period. So, if I look at the period from May to August, we've seen a much more consistent level of comp performance coming through the business at an upward trajectory. So, it's improving modestly as we go, but it's been more consistent. That gives me good confidence that the changes that we are making are having the desired effect and moving away from this lumpy comp results, which has been driven by heavy promotional cycles in key parts of the year. So, we're retraining customers, and that takes some time. Customers have been conditioned to the way the Baby Bunting has gone to market for a long time. We are starting to see the effects of our changes to the go-to-market calendar, smoothing the effects on our comps. So, I'm feeling confident about the changes that we've made. Obviously, market conditions still remain unpredictable and challenging for consumers. But in that environment, our strategy seems to be cutting through with customers.

And so when you talk about the -- obviously, it's [ dancing around ] and your cycling numbers that aren't reflective of how the business is going to work going forward. When you think about the improvement in comp sales say, versus late in FY '24 versus the first 7 weeks, are you seeing a pickup in traffic? Is it -- is there any change in average basket or average selling price?

Yes. We've seen improvements in selling price metrics in addition to transactions. So that's why I say -- so if you look at average selling price going up, transactions going up and our gross margin going up, we're not driving the transactions through discounting, simplifying our price architecture is really cutting through with customers and we are starting to see improvement on all of those key metrics consistently. So again, just go back to informing my level of confidence that we can continue to deliver at the comp level that we forecast in our guidance.

And maybe just one last one on the media opportunity. Firstly, is there any contribution baked into guidance for this year? And secondly, with a rate card out at some point in -- late in the first half, what should we -- how should we think about the ramp in revenue and earnings from that opportunity?

Yes. So, we haven't included any additional revenue from the media business into the plan for '25 thus far. The reason being is we're still in the very early stages of valuing our assets and developing the media rate card. And as I said in the results release, we expect this to launch towards the end of the first half. We are -- we currently generate several million dollars worth of contributions from suppliers at the moment in regards to catalog fees. That will be converted into the media business in the first instance and then building revenue over and above that. So, the current contributions are currently baked into our projections, financial projections. It's the incremental that we expect to deliver over and above that, that we haven't yet forecasted or given guidance on, we just don't have enough information to provide that at this time.

Thank you. [Operator Instructions] The next question is a follow-up from Tom Camilleri from Wilsons Advisory.

Just a question on inventory. It's nice to see the balance come down on a year-on-year basis on a per store level. What's been the top line impact from rightsizing the inventory base? Have you seen any -- like in that 2% comp number you're printing now, do you think that could have been better if you were holding, I guess, that previous range that you had in store?

Yes. Thanks, Tom. Look, we've done a lot of work on our inventory quality since my joining and specifically over the course of the last 6 months. We've effectively converted underproductive inventory or aged inventory into new lines. Those new lines have fundamentally what's been driving top line growth within the business. So, the continued focus in that space gives me confidence. I think in previous calls, we have also highlighted opportunities just in the way that we merchandise within the stores. So, our merchandising in stores goes up some 2.4 meters, which is unreachable for customers in stores. We carry a few million dollars' worth of inventory to create that effect for customers. And we're actively looking at ways that we can be smarter in the business around providing great merchandise experience without compromising customers' ability to access product. We regularly monitor our in-stock availability of all of our core lines right across the business. And in fact, we're actually driving improvement in availability of core lines as a result of the productivity work that we've been doing in the business. We've highlighted some additional work that we want to do on some aged inventory. We took some great action and some very effective steps through FY '24. And there's still a small balance that I'd like to work through in the early part of '25 to get us -- to get the inventory into even better shape and continue to reinvest in new lines.

So, call it -- so at the moment, call it, $1.3 million worth of inventory per store. Is that kind of a steady-state number now? Or do you think you have more to rightsize? And then in the smaller format stores, how much stock do they require in order to roll out?

So Tom, I mean, within that inventory number, you've got a DC inventory that is a significant holding within that. So, in terms of the in-store stock number, it's lower, but you've got the -- with regards to the small format stores, that will be informed by the work that was -- is being done by the design team, so The G Store team, so that will be informed in terms of the level of inventory hold there. But I would imagine it would be in the order of not potentially $300,000 or $400,000. No more than that. In terms of what's going to happen to our in-store inventory, I mean the $3 million alone in that -- I mean, our current inventory levels are around $850,000 to $1 million depending on the stores turnover. So, in the order of $6 million we're targeting to pull out of our like-for-like store inventory this year to complete the program overall.

Thank you. The next question comes from Hamish Burns, Private Investor.

Mark and Darin, I suppose what I'm interested in is the store rollout in your strategy there, which is 4 stores last year and you've got 6 targeted for the year ahead. That seems -- and you've spelt out in the guidance, your CapEx around that. I guess my question is, that seems like a fairly aggressive store rollout and CapEx program in the current environment of very weak sales growth or negative last year in moderating at the moment. But could you just, I guess, explain the Board's I guess, focused on such an aggressive store rollout ahead of perhaps other initiatives?

So, the -- I mean 3 of the 6 stores are small format pilots, which will have a low CapEx investment. But we see an exciting opportunity there for the business that we want to understand and pursue. We get very -- we've got a long consistent history with regards to what our new stores deliver. Our new stores have historically had a bit over a 2-year payback and have been EBITDA positive in their first year of trade. So, we've got a clearly defined road map in terms of where we want to put stores. We're very disciplined around sort of negotiating the operating cost environment within which we go to in those stores and we're confident of the returns that they will deliver, as they grow towards maturity. So, it's not more aggressive. I mean we opened 7 stores 2 years ago, 4 stores last year. We're pretty comfortable with regards to the level of investment that we're putting into the new store rollout.

Thank you. At this time, we're showing no further questions. I'll hand the conference back to Mark for any closing remarks.

Thanks very much for joining us today, everybody. We look forward to updating you again next time.

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