B&M European Value Retail plc (BME) Earnings Call Transcript & Summary

Good morning everyone, and thank you for joining us this morning. I am, of course, about to present with Alex, our 6 months trading period to the 25th of September 2021. So we'll start with some highlights. You'll see that over the 6-month period, our group revenues were held steady at GBP 2.2 billion, and that represents an extremely pleasing 26% growth on where we were prior to the pandemic 2 years ago. Our core face is, of course, the B&M feature here in the U.K. And in that business, on a 1-year basis, we were at minus 5% like-for-like, but on a prepandemic comparison, the business was plus 16.8% versus the same period 2 years ago. Within B&M U.K., we opened 14 new stores, and we had 9 closures. I'll come back in further detail on what we mean by closures later in this presentation. They are, in fact, relocations as much as closures. In the Heron business, our convenience food chain here in the U.K., we opened 8 new stores and had 7 closures/relocations. Our French business had the priority of rebranding its estate. Over the 26-week period, a 45 number of stores were rebranded from Babou to B&M France, which meant that by the end of the accounting period, some 100 out of the 104 estate were trading under the B&M banner. I'm pleased to update you that actually as of today all bar 1 store is now trading as B&M in France. Turning now to earnings. This business has the DNA of the belief that turnover is vanity and profit is sanity. We're very pleased to announce this morning that at the group level, our adjusted EBITDA was GBP 282 million, which was an 86% uplift on the pre-pandemic level 2 years ago. Now there's an important accounting point to land before we start this morning's presentation, which is the fact that in the numbers that you're about to hear on costs and earnings, we're not comparing apples with apples. This financial year, we are incurring business rates across our U.K. businesses, whereas in the comparative period last financial year, we haven't incurred those costs in our P&L because we were of the opinion that the business rates relief would apply. Of course, as we got into Christmas 2020, and we saw that we were trading remarkably strongly, we decided that the right thing to do was to forego that relief. And therefore, a whole year's business rates was incurred in H2. And obviously, that will unwind as we get to the full year. But the bottom line, of course, is that whereas you'll see over the course of this presentation that the year-on-year EBITDA was minus 4.6% on a statutory basis actually on an underlying basis, when you adjust for the fact that business rates was not charged previous year's first half, actually, the group EBITDA grew by 10% year-on-year. This meant that our earnings per share are up 18.7p, which is effectively a doubling on the earnings per share 2 years ago. The business continues to generate cash, and you'll see that our leverage is down at 1.1x, a very modest level of leverage for a business that is cash generative and as in a period of growth as the B&M was. We're proposing today an interim dividend of 5p, and we're very explicit in sharing with investors that the Board has an ongoing review of any opportunity to return surplus capital. I know you're all be interested on our supply chain and how we're currently set up for the golden quarter, and I'm delighted to confirm that our stores are fully stocked, we're well set up. And as we look into the golden quarter, we do so with cautious optimism. So I'll pass it over to Alex to run through the numbers in a bit more detail. Thank you.

Thank you, Simon, and good morning, everybody. So we go straight to Slide #4, which is group P&L, just a couple of points of detail which are important to run through slowly. So I think the key numbers on this page is really -- the half 1 EBITDA margin of 12.4% for the 26 weeks of the half. And the key numbers really to bear in mind is that although that's slightly lower than half 1 last financial year of 13.2%. I think it's important to remember on the right-hand side at the top on that page that actually pre-pandemic level, half 1 had a group EBITDA margin of 8.5%. So if we look at that 2-year progression, the 12.4% is almost 400 basis points improvement on EBITDA margin. Actually, the exit position in the half is pretty much where we expected it to be. And as Simon and I have basically spoken in the past with you, we always maintain the position on the economics and how we saw the sales performance evolve that we would be much closer to FY '21 than FY '20. And I think that half 1 position on a 1- or 2-year basis in terms of margin cost structure really brings it to life because it's actually a confirmation that the assumptions are correct. As Simon rightly says, let's remember that the GBP 295 million of last financial year, half 1, basically had the benefit of roughly GBP 40 million of business rates in the half that we had not incurred. So if you basically correct that, you can really appreciate the extent of performance that we've had in the half, both in terms of gross margin and will expand a bit more in the next few minutes, and clearly, cost leverage and discipline. So we go to Slide #5, which is a bit more detailed by facia. Just a couple of points to note. Look, we have to have on performance, which is the first column, and I will again go back to the right-hand side, which is FY '20. So B&M facia, a 2-year basis, total sales have grown in excess of 31%. And you can see Heron in France actually quite remarkably consistent at 7.9% total sales growth on a 2-year basis. If you look at the group gross margin at 37.4%, again, against FY '20, that's just over 300 basis points improvement on that level of performance. And that's fundamentally driven by B&M U.K., performance of general merchandise, high sell-through that has continued to have and clearly, the level of mix benefit impact. If you go to the bottom part of the chart, look at the group EBITDA percentage. Again, it's a 400 basis points, almost 398 compared to FY '20, but let's look at the facia. So B&M executed at 13.5%. That's just over 400 basis points compared to 2 years back. Heron is remarkably consistent actually to the prepandemic levels. So that business has done a pretty good job despite annualizing very tough comparatives during the pandemic to maintain a very strong level of cost discipline France really speaks for itself. And I mean that business basically had no profitability in the first 26 weeks, 2 years back, and that business has exited incredibly strongly in half 1, okay? So the key point I will emphasize in here disciplined cost and cash control has been well executed across the 3 facias. And despite the relative sizes of the business, every single fascia has [indiscernible] to deliver the half 1 position. We go through Slide #6, I will concentrate on the right-hand side. I think you see the evolution on sales, it's clear. And you can see, Simon says 86% 2-year growth from GBP 151 million, 2 years back to GBP 282 million. And you can see really what is the impact of the EUR 40 million in the middle. Although we reported GBP 296 million really on a comparative basis, last financial year half 1 was really GBP 256 million. And you can see the EBITDA margin progression actually landing where we needed it to be. Slide #7 again, at a group level, I think the first box on the left-hand side is really dynamic, which is clear. We basically had an impact on the minus 5% 1 year LFL, that's roughly GBP 92 million of sales that you take from the pace but we more than offset that by very strong performance on new space. That's basically FY '21 and '22, which totaled GBP 113 million, which is important to highlighting here is that the cohort of stores opened during this time continue to perform strongly. Contributions are actually ahead of our own internal expectations, and we expect that to continue in the months ahead. Heron had a tough sales performance. Clearly, the guys are annualizing against a very elevated transaction value. But I expect that business will start to turn the corner very rapidly in Q3. And I think France speaks for itself. France has added GBP 15 million in the half despite having had 6 weeks of soft lockdown at the start of the year. So I think the execution of that business is incredibly strong, heading into half 2. We go to Slide #8. Again, let's look at the bridge, what does the minus 5% LFL translate on profit in terms of B&M, that's a GBP 21 million that comes out of the base, you start basically getting the GBP 13 million plus GBP 2 million EBITDA contribution in the new space. Why is it not the same as sales? I think there is a natural opening program but basically ones that start annualizing that performance will fit into the second half of the year. You can see clearly the Heron food impact on a year-on-year basis, but again, more than offset by France at plus 9.5%. If you look at B&M fascia, I will keep reminding ourselves, we are a 13.5% exit in the half, which is a significant improvement post the pandemic transition. We go to Slide #9. So how is B&M trading in the first 2 quarters. Look, the key bars are the great ones. In Q1, we had just over 21% on a 2-year level basis. And our face value, actually, if you look at Q2, it looks like a big decline. Well, it is and that is in the subtlety of the first 3 weeks of the financial year. Remember that we had a very elevated level of Easter. So if you were to strip out those first 3 weeks in the financial year, which actually distort the picture, you will realize that the 2-year Q1 versus 2Q are much closer. Roughly speaking, that Q1, if you take those 3 weeks, it's basically around the 16% LFL. So you can see a very stable level of performance, which we don't expect that to fundamentally change into Q3 and Q4, okay? Sales densities I think are sticking. You can see that coming on the cost structure of the business, that level of productivity despite the minus 5% LFL, is what's driving the P&L. And as I said, the contribution of out-of-town new space is incredibly accretive. LFL performance has been very strong on grocery and nongrocery. Season has performed very well in spring/summer. And I think it's important to remember that although nongrocery is helping on the mix element on gross margin, let's also remember that grocery continues to perform well ahead of market, on a 1- and 2-year LFL basis. We go to Slide #10, a bit of detail by facia in terms of gross margin. Look at a group level, you can see the improvement of 308 basis points on a 2-year basis or 164 compared to last year. So what's driving this underneath. On the right-hand side, you can see that B&M has increased 153 bps year-on-year. I think if Simon and I would have gone back 6 months. I think that is incredibly pleasing. I think it's more strongly than what we would have anticipated. Mix continues to be strong intake, continues to perform well. And actually, we have a very high level of sell-through. So we haven't incurred that markdown. And we are well set up heading into golden quarter as a consequence. Gross margin actually in FMCG is probably slow. And I think that is critical because the price position continues to be incredibly strong against all the relevant competition where there are discounters or grocers, and we will maintain that discipline in the second half and the year ahead. Heron margins are actually quite flat year-on-year. And I think that's a good position given the dynamics in the market. And Babou I think again speaks for itself, that business has increased basically 400 basis points on the half. So you can see the common buying and the ranges on non-grocery feeding through the team and the Board. We've spent 2 or 3 times literally in the last couple of months in France, and you can see the execution coming through in stores. And actually, that's what is driving those numbers. Slide #11. So what's happening on cost, look, let's go to the bottom again. As a percentage of revenue, I think let's go back again to FY '20. On a total group basis, we have improved the cost structure, 90 basis points. B&M has basically improved it 76 basis points on a 2-year basis, which is very, very strong. And that is despite having a level of cost last financial year through pandemic that the business has had to absorb. So I think that's a very strong performance. The fact that Heron Foods on a 2-year basis has improved. I mean it's 20 basis points, but I would say it's almost flat. I think despite having had the level of annualization in the current year, I think the guys have done a very good job on keeping the cost tight and well disciplined. And France, it's a very strong improvement from 39.7% cost base to 38.5%. Look, in terms of transport distribution, you have seen the headlines. It's been fairly marginal impact in the business in the current year. I think the economic model has been able to absorb this, and we don't see this dynamic fundamentally changing throughout golden quarter. We post and then concentrate [indiscernible] interest and lines look at the key point. We're in a very stable position. You can see interest lines fairly flat year-on-year at GBP 12 million for the half. I think you can assume that our adjusted net interest expense is going to remain on a run rate of GBP 24 million per annum on the balance of the year. And you can see that the level of liquidity of the business despite the disruptions that we see in the market continues to be incredibly solid. We don't have any refinancing priorities until 2025. So we're comfortable with the level of cash generation in the business. Slide 13, I think the key point here is a negative GBP 170 million outflow in working capital in the half. This was a conscious deliberate decision. We have got the stock early. That explains the outflow. I think it looks subject to what will happen over the next 2, 3 months. I would like to think that we have reached probably the low point of the outflow. I expect this to marginally start more rating in the balance of the year. But what it means operationally is that we are incredibly well set up for golden quarter. The stock is not only in the system. It's actually in the shops already. So I think when you go to a specialist or some of the competition, I think the availability Simon will expand on this is much sharper than 1 or 2 years ago. The stock is in the right place. The distribution network has coped basically with all of these early upstream shipping remarkably well. And I think this will be a very strong position for us heading into November and December. In terms of CapEx, it's steady. We don't see any major infrastructure expense outside of run rate on the balance of the year. And you can see maintenance CapEx is actually remarkably consistent, sub 1% of sales in the half. That's slightly higher than last financial year, but that's basically because of the COVID disruption and how we faced it in the last financial year. I'll hand it over back to you, Simon.

Thank you, Alex. And so perhaps we could start with some commentary on our core facia, the B&M U.K. business, on Slide 15. And these numbers relate to the B&M U.K. business. So the first thing just to do is a bit of housekeeping as to acknowledge that the half year did have a little bit of noise for the first 3 weeks of the 26-week period, where nonessential retail was closed in the U.K. But I would emphasize that for the core categories that matter to B&M at that time of year, such as gardening, home improvement, all our competitors were deemed essential retailers and were similarly open. So it's actually a relatively clean trading period. We delivered a plus 16.8% growth in like-for-like sales on a 2-year basis. which I'm delighted by. And what's driven that are 3 different things. First of all, we do believe that we've held on to shoppers who discovered us for the first time over the previous 18 months. Secondly, we're seeing that B&M is increasingly a destination for general merchandise rather than discounted grocery in FMCG and of course, general merchandise on average, has a higher ticket value than groceries, and that helps the average basket and the like-for-like sales. And then thirdly, but by no means least, we've been working very hard on in-store execution particularly around home products and home decor as well as the range architecture and making sure that we've got good, better, best at various different price points appealing both to our traditional core shopper that might have been on a low income household, but just as much appealing to now a middle-income household that's drawn to our design, handwriting and value for money. So how has that LFL evolved over the 6-month period? So on Page 16, we share with you a monthly view of that LFL. You'll see there that April was exceptional. Those first 3 weeks, there's a lockdown. If you wanted to socialize with people, family and friends, you have to do so in your garden rather than your house. And frankly, the sum is out, and we had bumper sales. In a normal year, some of those sales would have been seen in the subsequent months. But this year, they were brought forward into April and indeed, to a large degree, the last couple of weeks of March. But the key point from this slide is that once you get past the noise of Easter and that exceptionally strong April, on a month-by-month basis, it's a relatively stable performance when you look at the pre-pandemic levels. It's between 10% and 15%, and that consistency is what gives us reason for optimism as we look into the remainder of the financial year. If we turn the page to Slide 17. You'll see what's driving the 2-year LFL performance. It isn't footfall; it's a very material increase in average spend. Our average transaction value is plus 24% higher than the average basket of prepandemic. As I mentioned previously, what's driving that is general merchandise, being a destination for seasonal and the work that the buying teams have been doing around price architecture. So the reality is that whilst footfall hasn't yet recovered to pre-pandemic levels, shoppers are coming out less often, but buying more when they do come out. I know that many of you will have front of mind what's happening in terms of international supply chain and indeed, domestic supply chain, whether that's shipping from Asia or HGV drivers here in the U.K. and all the other headwinds that are very well reported in the press. So on Slide 18, we set out how we believe we sit relative to those various headwinds, but in some cases, tailwinds that face us in the months ahead. I think the first thing to say is that when you think about our imports from China and Asia, we have some significant competitive advantages. One, we source directly with the manufacturers and factories in Asia. We don't go through middleman. Two, we've got very strong supply relationships that, in some cases, date back 10, 15 years. We buy deep volumes across a narrow product range. That makes us a very attractive order for a factory that's perhaps got too many orders or is constrained in its capacity. Specifically on shipping, we have a very long-standing relationship with our shipping partner and our scale, our 40,000 containers a year give us buying power and also just as importantly, get to the level of service that perhaps isn't available to smaller competitors or those who have ad hoc arrangements rather than contractual arrangements. The way we think about that supply chain disruption from Asia is that it's a level playing field. For the products that we sell, all our competitors are buying these products in that part of the world, and they all have the same headwinds. Our scale and the nature of our proposition a range is that we're better placed than those competitors to navigate the choppy waters ahead. On inflation, the reality is that we're a very agile retailer. The current environment does not to me feel that dissimilar to a previous shock. That previous shock was when the U.K. voted to leave the EU, the Brexit vote, and the pound-dollar exchange rate moved very dramatically over a few weeks. So the cost pressures we're seeing on the product to be that raw material or shipping cost is actually not that dissimilar to what we experienced with the change in exchange rates. And we have the tools in our armory to be able to deal with those, whether that's reengineering the product, the pack size, changing price points, delisting products that we don't feel offer good value for money anymore because they're too bulky. We have that agility that perhaps some of our competitors don't. Turning then to our operating costs. It's very well reported that whether it's for warehouse colleagues or for HGV drivers, the market is seeing a very tight labor market and wage inflation. The key point, though, of course, here is that for us, the cost of the HGV driver labor or the cost of picking in a warehouse are so much less significant as a proportion of our total cost base than, for example, an online retailer. To put it very clearly, one of our HGV driver colleagues is typically driving around GBP 60,000 worth of product from a depot 3 hours down the road. That's very different to a delivery driver that's delivering individual units to individual households where that cost of delivery is so much higher as a percentage of the sales line. So let's now talk about the different categories that have been driving the like-for-like growth on a 2-year basis. So if we go to Slide 19, I have a couple of messages. First of all, the strong performance on a like-for-like basis is both across nongrocery, the dark blue bars as well as the orange bars shown as representing the grocery categories. But I'm happy to share with you that what's driving our performance are the categories that you'd expect, products for the home, the garden, furniture, toys. And that's what's also helping, of course, our gross margin. Because if you look at the gross margin on the right-hand side of this slide, you'll see that some of those general merchandise categories are really outperforming on a cash like-for-like gross margin basis because the rate of sell-through has been so strong. When you get a great rate of sell-through, you find yourself in the August sale as having very little left to mark down, and that means that the majority of your sales, the vast majority of your sales have been at full price. Let's now turn to grocery. It is about just under half of what we sell. And the adjective I'd use is that part of our business is stable. I'm pleased with our ability to maintain the price gap versus the big supermarkets. We're all under that. We have a basket of goods that we compare against the competition on a fortnightly basis. And yes, whilst we fully expect further inflation to feed through on food and grocery, the reality is we see our competitors [indiscernible] rational. We see very few of them, if not any, if any, having any appetite to absorb those cost pressures -- And so we expect further stability in our grocery business for the remainder of the half year. Just as a point of detail, yes, there is some noise around HGV driver shortage amongst the supplier base for this sort of product. We manage that on a weekly basis. But the big picture is that our stores are stopped, and we have generally good availability. Let's now turn to Slide 21, which talks about general merchandise. So Alex talked you through some very pleasing performance on gross margin, and it's largely driven by this half of our business. This is actually mostly about self-help, it's about execution. So whether it's how we put our ranges together and deliver a product that's on trend and aspirational, just as much as a middle-market full-price retailer, or whether it's how we merchandise it in stores so that you can shop the look and you can buy the cushion that matches a mirror or matches a candle or indeed a piece of canvas wall art. We allow our customers to achieve an aspirational look but at great value for any prices. The other dynamic, and it's been happening for a few years now is this phenomenon where we are being seen as a destination for seasonal goods. So we've had our bumper gardening season after a previous bumper gardening season. And the reality is that for those guarding enthusiasts or people with a garden, they are seeing B&M as the go-to place for their products every year rather than the fuller price or the expensive independent garden center or category specialist. If you turn to Slide 22, we just want to share with you some research that we acquired from an external agency called BrandView. They conduct a very large number of online surveys on a regular basis across a large number of national retailers. And what you see here is that from their customer responses or their online survey responses, the average frequency of a purchase from B&M is at 10x a year, 9.7. And what I'd say is that that's very different to a category specialist that sells, shall we say, only electricals or only home or only stationary or only toys, where frankly, you're only going to go 3 times a year. But rather unique mix of products in our stores, everything from your toothpaste, to your cornflakes, to a patio set to some bed linen to a part of Dulux paint that mix of products across a broad spread of consumer goods is what drives that high frequency of visit and a sales and profit density that is market beating. Let's now turn to our U.K. store rollout. So you heard earlier that in the core U.K. B&M business, we opened 14 new stores. That's mildly disappointing. I would like to, of course, open more, but one of the reasons we are hampered in the speed of opening is that currently here in the U.K., there is an emergency piece of legislation that prevents landlords from evicting tenants who haven't paid their rent over the course of the pandemic. That moratorium on evicting landlords and taking recovery action is in place until March 2022. And as a consequence, as we think about the remainder of this year, we expect some 5 stores probably to slip into the first quarter of the next financial year. But the big picture here, of course, is that we closed the period at 686 stores in our B&M U.K. business, and that's versus a U.K. store target at 950. And as you can see from the slide on the right, plenty of white space to go after over the years ahead. The other thing to remark is, of course, that at these elevated sales densities, which we've been holding on to now for 18 months, the financial economic of one of the boxes changes. It's improved. That greater share of [indiscernible] from the low shopping population means that arguably a B&M would be successful in a smaller catchment of, say, 15,000 people as opposed to requiring a catchment or a population of 20,000, 25,000 people, which was our previous mindset when assessing new store locations. If you turn the page to Slide 24, we provide some data on the quality of our new store openings because the mantra in the business is that it's all about quality of new stores, not quantity of stores. So what this slide is showing you is that if you look at the stores that we opened over the 6 months, the 14 stores, which is the bar on the right of the chart, they had a store contribution of 21.9%. Both that cohort of stores and indeed the 43 stores that we opened in the full 12-month period prior to that, both those cohorts of stores are delivering store contribution margins better than the company average. So we're getting better openings and profitability for those new stores rather than diluting returns as we continue our store rollout. I mentioned earlier that I would explain why we closed some stores. So here's a slide on Slide 25 to explain why we do this. So you'll see that in the half year that we're reporting on, we had 2 stores that relocated. And we had 7 stores that closed where actually the relocation had taken place already in the previous financial year, but it made more financial sense to allow the small legacy store to carry on ticking over until the end of the lease and at the lease expiry, that's when you lock the doors and return the keys, rather than having a store closed and having avoid rent and rates and burden. But the net effect of those closures and those relocations is actually positive to EBITDA. The way to understand that is to reflect -- just to go back to Page 8, if we just flick very quickly back to Page 8. This, of course, was the EBITDA bridge year-on-year. And if you look at the box that's to the right of the dotted larger box, which is the EBITDA impact of relocations and closures, that's in the light blue, you'll see that the EBITDA impact of those 9 closures was actually an extra GBP 1 million of EBITDA as opposed to costing us anything on EBITDA. So what I'm trying to get across here is that I would ask you to anticipate a similar number of closures. Some years it might be just a handful, 4 or 5. Other years, like this year, it might be up to 10, where we're closing some legacy stores because we have found or already previously relocated to larger, better premises in the catchment. But they aren't a bad thing. Those closures are not a bad thing from an EBITDA perspective, they're actually accretive as you saw in the half year just gone and indeed in the previous full financial year were exactly the same was the case. And while we're on the topic of these store closures, on Heron, it's exactly the same thing. When you think about the 7 closures at Heron, 4 of those were relocations in the same financial period to larger, better located premises and the other 3 were legacy stores that actually were never profitable and were acquired by the business many years ago as part of a package of stores and never made money, and they were simply waiting for those leases to come to an end. Let's now move to Slide 26, if we may, which provides you an update on data in relation to our social media presence. We acknowledge that we don't transact online, but we are very proud of our engaged and successful social media presence, be that on Facebook or Instagram. You'll see that we now have 1.4 million Instagram followers, and the success of that growth is all down to the tone of voice. It's down to the fact that we're very happy to tease ourselves, where we use humor and we connect with our shoppers at the right level of frequency, not too often, but at the same time, sufficient to keep them engaged. Let's now move away from the B&M U.K. fascia and talk about Heron Foods. You've heard the adjective Satisfactory. The reality is that, that business only sells grocery. It doesn't send general merchandise. And therefore, when it's been compared against a period where everyone is working from home, people are stockpiling for their pantries and ladders and fridges, it was always going to have an uphill battle in terms of average basket spend. But as Alex said, as we work through the remainder of this financial year, we expect that to recover and the reality is the business delivered a 6% EBITDA margin, which for food retailing is as good as it gets. Let me now turn to France, where I think there's a lot of positives in this morning's update. First of all, from a sales perspective, the sales were plus 5% on a 2-year basis. But let's bear in mind that within the 26-week period for the first 6 weeks, there was a lockdown in France, which significantly hampered the business. Our French stores were allowed to be open, but there were very strict measures in place about only selling essential goods rather than everything that we sell. But what we've been working on is evolving the product range. And as we think back to when we acquired this business 3 years ago, when almost half the sales were in clothing and footwear, I'm pleased to update you that today, clothing and footwear are only 14% of sales. Migrating the product range in that dramatic fashion over that period whilst retaining your customers and a level of sales is a real accomplishment and testament to lots of hard work by the team out there. What's driving the sales that replaced the planned reduction in closing are the products that have been bought from the B&M supplier base, particularly around home, seasonal, DIY, et cetera. As mentioned earlier, the operational priority over the 6 months has been the rebranding. And as I said earlier, some 46 stores were rebranded in a 26-week period. So the team is similarly, just like the U.K. business, very focused and very well placed for a successful golden quarter. They also have full shelves with all the seasonal products having arrived early and now in stores ready to be sold. And as we look forward, for us, there's a bit more refinement around the product range. We see some further modest plan reduction in clothing participation, and we're starting to think about how we ramp up new stores over the 1 or 2 years ahead. On Page 29, I just want to share with you something that's not a financial metric, but certainly something that gives us a great deal of pride in the business. And indeed extremely successful work, the buying teams and the stores have done in our French stores over the last 12 months. Every year, there's an online survey that's called best store of the year in France. It has 655,000 online respondents, and you'll be unsurprised by some of the winners in the obvious categories. So little one best supermarket, IKEA one best furniture retailer, and Action who, of course, have got some 600 stores in France one of the best discounter. But we were really delighted to receive the news that despite B&M as a brand being on average, less than 12 months old, half the state were only rebranded in the last 6 months. Despite that relatively new presence in the market, B&M was voted, second in terms of the best discounter, but actually the best store, #1 for our core strength in that business, which is home decorations and gifting. And that absolutely reflects the success of the dual sourcing or the shared sourcing supply chain that the B&M France and the B&M U.K. business have out in Asia. Turn now to our capital allocation. This is a slide that you have seen many times before, and the key message is that it's unchanged. We will continue to open new stores. We'll pay out our ordinary dividend at the top end of a progressive range. We're not currently thinking about M&A. We're entirely focused on ongoing organic growth, both in the U.K. and France. And as a consequence, as the businesses delevers, the Board has an ongoing process of evaluating the potential to do returns of cash to shareholders. Let me now turn to ESG. I'll keep this relatively brief because we plan to have a much larger section on this at the full year, but the key messages are as follows. As we think about our customers, we take great pride in the fact that we are providing households on stretched or low-income budgets to buy essential goods for their home and their families at great prices, and our LFL performance suggests we are holding on to new customers that have discovered us during the pandemic. Our new store program continues to create new jobs. And as we remain committed to our store target of at least 950 stores, we see that as an ongoing feature of what we'll be doing as a business over the years to come. We invest in our people, whether that's store manager promotion or whether that's the warehouse to Wheels training program for would be HGV drivers or indeed getting people who are younger into stores and onto the career ladder of retail. We're doing lots of different initiatives. From a carbon footprint perspective, we continue to roll out LED lighting and building energy management systems in order to reduce our carbon emissions. I'm also happy to share that the next time we talk to you at the full year, and if not before then, we will be disclosing our Scope 1, 2 and 3 carbon emissions and setting long-term science-based targets for each of those. So that takes us to the golden quarter and the outlook. As you've heard both Alex and I say, we're well stocked. We're in good shape. Please go to our stores, you'll find a full range of Christmas, a full range of toys and all the Christmas confectionery and drinks that go alongside that. We're pleased with trading so far this quarter. They're up 14.7% on a 2-year basis. And I ask you to think back to that slide where I showed you the monthly evolution of LFL. And as if you ignore April, you'll see that, that plus 14.7% and for the first 6 weeks of Q3 is remarkably consistent with May, June, July, August and September. What's going to drive our EBITDA outturn for the year will, of course, be how well those seasonal goods sell over the next 6 to 8 weeks. As we look at the competition, as you look at the gaps on the shelf that the competition, that gives us cause for optimism. But of course, the gross margin all comes down to how much stock is left over in stores on Christmas Eve and has to go into the January sale and time will tell. In terms of the longer-term or medium-term headwinds around raw material inflation, shipping rates and operating costs for transport distribution, we're well placed. It's all down to the competitive environment. And actually, fundamentally, a key point, of course, is that if prices are going up, that's when price becomes front of mind for the shopper and that's, of course, when the discounter wins as opposed to the full price alternative. The new store program is healthy, albeit as a point of detail, perhaps you could model 5 of the 45 stores that we think will open this year, Model 5 of those falling into the subsequent year. But I think overall, the key message of this that these elevated EBITDA margins that we're achieving relative to prepandemic levels. As we currently talk to you today, we are cautiously optimistic that we can maintain those margins over the months and years to come. Thank you. And perhaps we can now go to questions.

[Operator Instructions] And our first question comes from Richard Chamberlain from RBC.

Just a couple of questions to kick things off, please. First of all, I just wondered if you can update us on what proportion of colleagues have paid the minimum wage or close to the minimum wage in the U.K.? And what's sort of generally happening to labor costs at the moment for store colleagues? And the second one is, I wondered if you can just give a bit more color on the new store outlook for the second half. I presume you're still opening or planning to open sort of larger more productive stores. And in that regard, should we expect a sort of similar conversion ratio to sales from new stores that we saw in the first half of the year?

Richard, yes. So in terms of labor costs, I think there are 2 elements to this. First of all, availability of colleagues. Obviously, there are some sectors where it's not a question of cost. It's just you can't get the people. And for us, that's not really an issue. Our stores aren't in Central London, Central Birmingham, Central Edinburgh. Our stores are out in spread across the country, not in those sort of -- those parts of the country where the labor market is extremely tight. So we're somewhat insulated from those issues. So getting people at store level isn't a problem. In terms of labor costs, yes, we acknowledge that the 5%, 6% increase is going to apply some pressure, but there are 2 ways to think about that. First of all, our competitors have exactly the same cost pressure. And as you think about the other discounters, be that the German discounters or be that the mainstream supermarkets, we can't see any operator that wants to absorb that cost pressure within their EBITDA margin, we actually see prices going up as a consequence. So some pass-through of that cost pressure in retail price. But then, of course, the other point to mention on that is that the people who benefit from that little bit extra money in their wage packet every week or every month, those are B&M shoppers. So actually, it sounds like nothing to say, but some of that money is going to come back into our tills because without putting too bluntly, those members of the public are not going to spend that money in Harrods. So it's not something that really worries me that much. In terms of your second question on openings, the openings are going to come thick and fast in Q4 -- financial Q4. We try not to open stores in November and December for obvious reasons. It's not too distracting for the store teams. So we're going to have a very busy period, January, February, March. But in terms of the nature of those stores, very similar to the averages that we've already delivered in previous years.

Next question from Andrew Porteous in HSBC.

Yes. Team, couple from me, if I may. Nonfood cost inflation. I mean, obviously, you've talked a lot about sort of supply chain and the appetite of the industry to sort of absorb or pass it through. Can we just talk about sort of quantums here? And obviously, I guess you've gone through your shipping renegotiations. I mean are we talking about sort of 15% cost inflation and you've got maybe 10 versus the industry? Or is it more like the industry has got 5 and you've got 3? I'm just trying to understand just how much prices are likely to go up on the nonfood side next year?

Andrew. So unfortunately, it's not a straightforward answer because there are so many other moving parts to what we do to the product when you think about price inflation. So what I can share is that -- as a whole, the shipping cost from Asia to the U.K. is about 10% of the landed cost of the product as an average. However, behind that average, there's a very wide spread from anything as little as 3%, 4% through to 20% if you've got some bulky piece of furniture that is relatively low cost. And so -- what we do as a business is we on a line-by-line basis, figure out what do we do about any given product. At one extreme, we can delist it because we think it's no longer going to represent good value for me. And the beauty of our model is that our customers don't expect us to stock anything. They're very happy for us to have any bargain you like. It doesn’t have to be any particular bargain. So that's one thing can do. The other things we can do are change pack sizes. So a packet of 6 socks might become a packet of 5 socks. But frankly, if that packet of stock is only GBP 4, if you need a packet of sock, you need to packet at sock. It's not something that people are going to stop buying. And I think the way to sort of think about it in big picture terms is my earlier observation about the shop that we experienced when pound, dollar changed after the Brexit vote, the impact of shipping rates stepping up is less than the shock that that presented. And if you look at our gross margin performance over that period, you'll see that we were able to pass on the price pressures, albeit it's not simply a question of putting prices up. It's reengineering product, changing the proposition, moving to less bulky lines, more compact lines rather than high-volume lines, actually big volume lines.

Yes, that color is very helpful. A couple of quick follow-ups, if I may as well, additional questions. France, the margin is obviously 7.3% in H1, very impressive. I think above the sort of 7% target you were talking about. Because France has been a bit sort of over the past couple of years given the restructuring, can you talk about seasonality there? Is the H2 margin naturally a bit higher or similar levels?

Look, I think you will be fairly similar, consistent -- and I think we are well set up heading into the second half. I think the fact that the team has delivered that margin already in the half, I think it gives us a bit of a strong confidence indication that the second half will be strong, yes? So the shape should be similar. .

Next question is from Ben Hunt in Investec.

I just wanted to touch a bit on your operating leverage. Obviously, over the last -- and this is on a 2-year basis. it's up sort of 400 basis points EBITDA margins. That's largely pushed by gross margins. But given sales densities are up, some variation of 15%, should there not be more operational leverage coming through? You've called out, obviously, COVID cost is one reason why that's potentially held it back. But once they start to dissipate, should we expect sort of perhaps more benefits to come from the margin on -- from having higher sales densities? Or is there sort of an aspect of where you're investing some of that slack as it were?

Ben, it's a good question. So one of the things I should explain is that our stores experienced elevated sales. We reinvest some of that into additional store hours at the store. We don't want to sweat the asset too hard and allow checkout queues to get too long or shelves to remain unfilled or floors not to be mocked as frequently as they need to be. So in some way, we believe that's the way to sustain we grow the business and allow our store wages to be a variable cost of sales rather than a fixed cost of sales that delivers further operating leverage, but we think that's the right thing to do for the business in the medium term. And of course, the other key driver of the variable costs that absolutely follows the top line is transport and distribution. Frankly, if you're selling more, you're putting a much more money into picking, packing and transporting that product to store level, so you don't get -- you don't really get operating leverage of that variable cost structure.

Okay. And then secondly, in the statement, I don't know if it's been touched on before, but the talk of sort of online trial beginning in 2022, calendar year 2022. That is just wondering if you had any further thoughts as to the range that you're going to expose online and what we're going to be doing click and collect, whether that potentially takes away the impulse buyer they're not visiting stores? Any thoughts on online?

Yes. So I think the first thing to emphasize that it's going to be a trial. We're looking to learn from the experience and don't have any preconceived ideas, but the trial will start with our higher ticket items where the cost of picking and dispatching of product is justified. It will be general merchandise, typically bulky or awkward goods that shoppers can't get home from a shop in the back of a car or on public transport. . So that's where we'll start, and it is very much focused on home delivery rather than click and collect. The reason for that is that we see the browsing experience within a B&M store is actually fundamental to our proposition and to our appeal. And having a click and collect counter where the shopper comes in, picks up a product and leave straightaway without browsing our proposition, browsing our new offers, we see that as being perhaps counterproductive.

Okay. And third question, if I may. Just a sort of quick reassurance on how clean your inventories. Obviously, it's up quite substantially this year. I suspect there's an element of catch up and obviously, we're wishing to be having good availability. But if you could just reassure us that that's within categories that can be carried over if demand does take a bit of a full?

Yes. Look, it looks like a big number, but let's remember that it's actually 1 week. So it's fairly clean. We've exited spring summer in a very good position. So all of this is absolute fresh heading into golden quarter and Christmas. That sounds like a big number, but this will move very rapidly.

Your next question from Alexander Okines in Exane BNP Paribas.

Yes. Two questions, please. The first is on France. To what extent are you building a pipeline for the outer financial year? And do you need to relocate stores, do you feel like you are in the U.K.? And secondly, on costs. Are there any initiatives in store like self-checkout or in-store tech that you might be using to mitigate staff costs over the next year or so?

Absolutely, yes. In terms of building a -- or filling a hopper that's going to feed a new store pipeline in France, that work is underway. But there is, at the same time as that, an equal focus on in-store execution, getting better operating stores because one of the things I haven't mentioned but I should do is that we now have 18 stores out of the 105 stores we have in France that are company operated rather than being the quasi-franchise model that we inherited, that we acquired when we bought the business. So there's some learning and transfer of best practice from the U.K. business to the French business around that as well as opening new stores. So and there's lots of operational initiatives taking place. But your question is correct. We are building a hopper for future store openings. And on the second half of that particular question around store closures, and no more than a handful. So maybe out of the 105 stores, there's 4 or 5 that over the next 5 years, you might exit them, but that's no different to the U.K. business where similarly, 1% or 2% of the stores might be relocated in any 1 given year.

Alex here. To your question on stores in the U.K. and B&M specifically, look, it's fairly marginal in terms of investments. Clearly, we have productivity plans in place, a bit of IT around the edges, nothing substantial. But I would just emphasize the point that the flexibility and the way we can basically move those hours -- If you look back 1 year ago, store standards at this point in time, heading into Christmas has improved significantly. So productivity is high. I think we are running it at the right level, and it's all around refining it around the edges. .

Next question from Lorenzo Margiotta in Bank of America.

Two questions for me. One of them is on back on the supply chain. So I think you've given some really good color on the rest of this financial year. As we maybe look out longer term, could you give us a scale of sort of headwinds you may or may not expecting to face in that business and in terms of just absolute number, I understand the things you do to deal with them? And then secondly, on sort of general merchandise, obviously something that's been doing really well for you. Some of your competitors and some industry are talking about expectations of a slowdown there. Is that something you've seen yet? Or are things still going very much strongly in that category?

Lorenzo, it's Alex here. I'll answer your first question. So I think the dynamic on supply chain we have covered in the second half, I think it's consistent on what we will look in the first half of '22. We don't expect any material changes on top of that. I think the flexibility and the relationships are in place and in terms of downstream capacity, logistics distribution level were well set up to basically moving to '22 and '23. So it's basically business as usual. Simon, your question General Merchandise.

So the gross margin on general merchandise?

Yes, on the growth dynamics.

So yes, if you look at the category performance over the last 6 months, some of the obvious categories like paint are down on the previous year when the country went crazy on DIY projects. But as you can see from the numbers, where you have a category that's underperforming, you always typically have plenty of other categories that are overperforming. And at the moment, we're still seeing very strong strength on home textiles, home adornment and the early indications on the Christmas decoration range is very positive. On a season-to-date basis, Christmas decorations are up 10% on the same time last year. And of course, last year, we had a bumper Christmas. So that's why we say we're optimistic. And when we think about inflation and the supply chain pressures, I really need to emphasize that we're not a big-ticket purchase retailer. So we're not talking about a GBP 500 television going to GBP 600 and losing a lot of its appeal to a consumer. We're talking about a GBP 3 product going to GBP 4. We're talking about a 6 pack going to a 5 pack or a duvet set that might be GBP 9.99 goes up to GBP 11.99. And yes, you might see the volume slightly dip. But in terms of the amount of money you take through the [indiscernible], that's hopefully typically more than offset by the price going up. So yes, I can only repeat what I said earlier. This is no different to the shock of the Brexit vote when actually the headwind was actually more significant than what we're seeing in terms of next year's shipping costs.

What I would add to that, to your question Lorenzo and Simon is, if you think about the overall market at a macro level, we have plenty of runway ahead in terms of the size and opportunity to disrupt particularly a lot of the specialist segments in the market. And that will not just come from space. I think the stores are well set up to continue to take densities up over the medium term. So there is a lot of runway ahead of us.

I think I'd also point out that one of the dynamics about what's currently happening in the market, and it's not something I take pride in. It's just stating it as a matter of fact, is that the retailers that are most at risk or under pressure from these dynamics are the independents? So the independent is buying from a U.K. wholesaler that is then buying from a trading house or a factory in Asia. And frankly, just doesn't have the buying power to, a, get the product they need or be to do something about the product to make it fit within their range architecture. So whether it's the independent garden centers or whether it's a category specialist or a homeware shop or a home textile specialist on the high streets, they just don't have the flexibility of the agility that our scale and our model allows us.

Next question is from Adam Cochrane in Deutsche Bank.

I just a couple of questions from me. Firstly, on the gross margin, would you be able to indicate what a normalized gross margin might look like? I'm trying to work out how much benefit is in the gross margin from lower than normal levels of markdown. And when you'd expect that to go back to a normal level, whether that's a mix towards grocery or whether it's just the markdown coming out? And then secondly, you showed a chart where you came third in terms of frequency of visit versus 2 other discount retail. I don't know which the other 2 are. But is there an opportunity, if others are seeing more frequent customer visits, that you can actually follow that lead as well and see customers coming more often given peers are doing it? And then the final question is, you were talking about online as a trial at this stage. And you mentioned in your remarks that the dynamics of having a delivery driver, taking GBP 60,000 worth of product rather than a GBP 40 cabinet to a customer's house that was more attractive, is this going to be a challenge for you in terms of the dynamics and the profitability of an online offer given that comment?

Alex here. I'll answer your first question on a normalized gross margin. I think I would repeat what we've said in the past in terms of EBITDA following through. I think it's structurally higher than what we would have had in FY '20 pre-pandemic. If you want to have a color whether it's mix settling down or mark down, I think, a halfway point on FY '21 versus FY '22 is probably not far off. Clearly, that will move by system. It will be highly dependent on weather and markdown. But I think you can confidently assume that structurally, it is well above FY '20. So I would go for a halfway point at this point in time.

Yes. And in terms of your question about frequency of visit, you'll be amused to hear that on that Slide 22, we're at 9.7 visits per year, and there are a couple of other discounters at 10x and 11x per year. Those 2 businesses are the ones that are more similar to ourselves in terms of that mix of general merchandise and grocery. And in fact, the retailer that's on the far left has got more like 60% to 70% grocery and FMCG and only 30% to 40% general merchandise, and that drives more frequency visit. Because if you're focusing on toiletries and food and soft drinks, clearly, you need that product more frequently than bed linen, toys or small domestic appliances. But we don't see that as a bad thing because we get a massive gross margin benefit from having that great participation of general merchandise. And then in terms of your question on the online and the cost of delivery, I'll be very clear with you that when we do launch the trial, we'll be starting that trial on the basis that we charge consumers for delivery and we'll only be putting those products in there where the cost of the product and the profit on the product justifies the picking and delivery process. So again, I think I mentioned it really early on, on this call. The business is very focused on profit at sanity and not turnover as vanity. So we won't be chasing sales just for sales' sake through the online proposition. It's all about accretive earnings rather than just the top line.

It's also important to remember that whatever trial and earnings come, this will be a fairly limited SKU range of the right items. So we will basically extend the offer to what is not available in the shop, but the idea is not to take it away from the shop. It's around strengthening the offer on what is maybe not convenient or ideal at the shop right now. And the physical nature of the business will never change. That's the essence of B&M.

Can I just ask one quick clarification? You mentioned that 10% of cost of goods sold were related to freight. In terms of -- and you are already captured for calendar '22, the freight rates. When was that calendar '22 freight rate agreed? Will that go up significantly for calendar '23. So it's just about the timing of when it was agreed, if you can share that at all.

No. So what we will be paying in calendar '22 will reflect current market conditions. So there's no sort of deferring of pain until the following year. And the work has already been done to make sure that product has been reengineered, products have been listed, delisted with in mind the new world of the elevated shipping costs from Asia to the to Europe.

And those input costs basically are consistent with the way to think about gross margin as a halfway point.

From my perspective, on the gross margin, it's a great question, isn't it? To what extent is the fact that you've had limited markdown at the end of setting some and indeed limited markdown at the end of previous financial year. To what extent is that sustainable? I myself have been pleasantly surprised by how strong the sell-through has been on seasonal products. And when I say, I mean not just gardening, but also homewares or home decor items that are launched just for a 6-month or a 5-, 6-month spring/summer period. Actually, if the team continue to do the great work that they've been doing now for a couple of years, why wouldn't they continue to have high rates of sell-through. But we don't budget for that, but it's certainly something we aspire to deliver. Good. I'm mindful of time. And of course the silence at 11 o'clock for remembrance today. So perhaps one more question if there is one. But -- If not, we perhaps could close there. We are, of course, available for questions over the course of the next few days. You've all got our details, please do reach out to us. Moderator, do we have any more questions or shall we close there?

We do have another question.

Let's try and get it in, but we do need to finish a couple of minutes before 11 o' clock, please.

Okay. So the last question is from Simon Irwin in Credit Suisse.

I'll keep it quick then. Alex, a year in to your time, particularly with your food retail hat on what have you kind of learned and where do you think the biggest opportunities are from your perspective?

Simon, great question. I will keep it super simple. It's around speed flexibility, a small team and the commerciality of a business that is very much driven by the buying floor. That is the main difference.

Thank you, Simon. And thank you for the question. And thank you all for listening in, and we'll see you again soon. Thank you.