boohoo group plc (DEBS) Earnings Call Transcript & Summary

Good morning, everybody, and thank you very much for joining us today. Joining me on this call are Carol Kane, Executive Director; and Neil Catto, CFO. Today is an extended results presentation to allow the time to go into some more detail around the changes we are making around sustainability and in response to the independent review. I'm also delighted to be presenting a very strong set of results for the 6 months period to the end of August. A lot has happened over the last 6 months. We're a much bigger business and a significantly strengthened business compared to where we were at the start of the financial year. It's obviously been a challenging period of intense scrutiny. I want to be balanced today. I'd firstly like again to thank our team who have worked hard to help the group deliver the half year result. I also recognize that there is a lot the group still needs to do to improve its corporate governance, compliance and monitoring processes. In terms of the running order, I'm going to start by providing an update on our sustainability strategy. Neil will then talk through the economics of our supply chain before moving into the half year results. Carol will finish by providing an update on the group, our 9 brands and the progress we've made with our most recent acquisitions. I will provide a summary, and we will then move on to Q&A. So starting with a recap of Friday's announcement. On the eighth of July, the Boohoo Group Board announced it was undertaking an independent review of its U.K. supply chain to be led by Alison Levitt QC. The findings of the review were delivered to the Board on 24th of September. On 25th of September, we published a review in full to demonstrate our commitment to increase transparency and communication around sustainability matters and our supply chain. It's a long and detailed document, which hopefully you've had a chance to go through in full by now. In short, the review identified many failings in the supply chain. While steps for improvement were in progress, the Board and I recognized that we should have acted faster to remedy problems in Leicester. As I said on Friday, boohoo has a huge influence on the U.K. textile industry. Our ongoing commitment, both to U.K. manufacturing, but also to working in conjunction with local partners to improve standards in the region means that we have the ability to be a real driving force behind positive change. Today, I'm going to provide further color on all of the steps we are taking to ensure that these issues will not recur, and to rebuild confidence in the Board's oversight of such matters. Today, I want to demonstrate how sustainability is key to our strategic and financial ambitions. The independent review has identified supply chain issues, which are significant and unacceptable. The impact of the review has been to highlight to the Board, areas where the group needs to strengthen. Its governance and oversight and its supply chain compliance processes. Put simply, we are aware that we will not achieve our ambition to be the fashion e-commerce leader, not be a strong investment proposition and not succeed if we do not get this right in terms of compliance and sustainability. In response to recent events, the group has accelerated its planned investments. These will significantly enhance its internal audit and compliance procedures and the Board's oversight of these matters. The critical output from this is that we intend to rebuild all shareholders' confidence that these matters will be dealt with appropriately and sensitively and that they will not recur. The upside of this investment is the growing and positive contribution we will continue to make into the U.K. textile industry and economy as a whole. As I said on Friday, we will get this right, and all our stakeholders will benefit. Our customers can take that our suppliers have been treated fairly. Our colleagues will feel greater pride in working for the group. Our shareholders will have greater confidence in the Board's oversight. And our investment will benefit the Leicester region and the U.K. manufacturing industry and its workers as a whole. Before we get into the detail around our supply chain, I wanted to touch on our culture at the boohoo group, particularly in light of some of the more recent press. The Board will ensure that all of the points raised by Ms. Levitt around our corporate culture are investigated sensitively and with due care. However, I'd like to give my personal view today. I have now been CEO for 18 months and something which really stands out alongside our great people is our culture, energy and drive to be the leader in our sector. We hold ourselves and our stock to the highest standards. As a group, we're ambitious and keen to drive positive change. We're collaborative, perhaps best demonstrated through our ongoing commitment to U.K. manufacturing and the support we've shown to our suppliers during the COVID-19 pandemic and before, with 14-day supplier payment terms that we introduced last year. Our founders are both actively involved in the business, and that entrepreneurial culture extends throughout the business. We're not afraid to make bold decisions and act quickly as shown by our fast response to recent events. Our culture is and always has been inclusive, and this is reflected in our brands and our products. We have one of the broadest fashion ranges on the market, covering size 4 to size 24 and over 70,000 styles. And lastly, I wanted to emphasize on behalf of the whole Board, how committed we are to rebuilding the trust in us and the business to act in a responsible manner. I'd also like to touch on the group's broader contribution to the U.K., which extends far beyond our financial success since our IPO. We've grown significantly with sales of nearly GBP 1.5 billion and adjusted EBITDA of over GBP 150 million over the last 12 months, up from just GBP 110 million sales and GBP 12 million adjusted EBITDA at our IPO just 6 years ago, quite incredible growth. But the positive impact of this success is far greater. We've created over 5,000 jobs within our operations across the group, including our 3PL warehouse in Sheffield. And far more indirectly if we consider our broader distribution network and supply chain. We've some famous British heritage brands, saving and creating over 200 jobs that would otherwise have been lost as they went into administration. Half of those colleagues are current shareholders in the group, meaning they are sharing in our success as a public company. And in total, almost GBP 40 million of wealth has been realized for those employee shareholders since we floated. We've consistently contributed in terms of tax. For example, we have a corporation tax rate that's above the headline rate. Since IPO, we've contributed more than GBP 80 million in the form of corporation tax. Our supplier base has naturally evolved as the group has grown, and we have an increasingly international sourcing mix. This is both in response to the growth in our product ranges as certain products like shoes, jeans and jackets are not manufactured in the U.K., but also in response to our growing number of brands with our new brands like Karen Millen and Coast, producing more detailed and tailored products. The types of products manufactured in the U.K. tend to be more basic products with very simple cuts and trims. Reflecting the shift in our product mix and brands, approximately 40% of our products are manufactured in the U.K. today, down from over 70% at the IPO in 2014. We're increasingly sourcing in Asia as well as Europe, which is a key market, particularly for our newer, higher price point brands. Over the next few slides, what the group is doing to audit its U.K. and international supply base and get comfort over its existing suppliers. We've set out processes we're putting into place to ensure that the issues identified over the last few months will not recur, and provided an anticipated time frame over which we will work through these processes. Starting with Phase 1, where I'll cover off the planned audit and compliance enhancements, which were already in progress from the start of 2020 before we commissioned the independent review. Phase 2 covers the accelerated audit processes in response to the independent review as well as that reviews findings. Phase 3 sets out a road map for how we plan to address the initial findings and reports recommendations. And Phase 4 will cover how we will roll out these processes internationally. Supporting this road map is a significantly strengthened team. Since I started working with the boohoo group, part of my focus has been building out our team in the areas of sustainability and compliance. And we've made some fantastic experienced hires. I've created 2 key new roles which are the Director of Sustainability and the Director of Responsible Sourcing. Supporting these directors are multiple new hires with experience covering compliance, audit, sustainability and stakeholder management. Starting with Phase 1. We are due to launch a full -- we were due to launch a full U.K. compliance program review at the start of 2020. This was signed off with our compliance specialist partner Verisio, in February, would have viewed commencing with a supplier conference in at the end of March 2020. This was to educate suppliers around our compliance processes and what the review would entail covering. The boohoo group code of conduct, which sets out the relevant requirements of being a supplier to boohoo and the group supplier guidance too, which sets out clearly what suppliers must do to ensure that they comply with the code of conduct. The object of this program is to carry out a deep dive into the group supply chain, including a full mapping exercise of all U.K. suppliers and their manufacturing subcontractors. This was intended to improve our supply chain visibility and ensure compliance would enhanced standards across the U.K. manufacturing base. We chose to work with Verisio as a partner for this program as all Verisio auditors are full-time social compliance auditors. Verisio committed to a forensic review of wage payments, and they planned on announced visits. And we felt Verisio would provide a higher benchmark for standards from our suppliers with uniformity of standards across the supply base. The launch of this program was postponed due to the outbreak of COVID-19, and we subsequently launched a program on 29th of May. Moving now into Phase 2. Following the allegations raised earlier this summer, the group took a decision to accelerate the audit work that Verisio was doing. On the 8th of July, we announced the independent review of our U.K. supply chain led by Alison Levitt QC. We made an initial commitment to invest an incremental GBP 10 million to eradicate supply chain malpractice. We accelerated our independent third-party supply chain review with ethical audit and compliance specialist Verisio. And we brought in another international specialist Bureau Veritas on board to assist with this. We took the decision to focus the immediate work on the core areas addressed in the allegations. These included COVID-19 risk assessment, right to work, working hours and wages, furlough validation, contracts, health and safety. Verisio allocated a further 6 auditors for initial period over 3 weeks to enable us to quickly review a higher volume of suppliers. The initial work conducted by Verisio has identified around 150 suppliers and around 400 subcontractors to date. Over half the suppliers and subcontractors have been visited by Verisio. Ms. Levitt's review identified issues at a higher proportion of the sample of suppliers her team reviewed. This is consistent with the findings of Verisio. Our supply chain compliance department is considering each supplier on a case-by-case basis. To date, the group has terminated relationships with a handful of suppliers for material breaches of its code of conduct. However, our approach will be to work collaboratively with suppliers on a case-by-case basis to remedy issues as a first step rather than terminating relationships. Our Phase 3 focuses on our response to our own review as well as Ms. Levitt's report, which was published last week. As we said on Friday, we plan to implement recommendations in full. And these are set out in detail in the appendix of this presentation. To recap, the most significant actions we are taking are: plans to strengthen our purchasing and buying practices, including strengthening the sourcing team through further experienced hires and implementing a new set of purchasing principles. We will also increase the level of transparency of our supply chain through consolidation of our approved supplier list. A smaller number of larger, more efficient and well-managed suppliers should result in increased productivity, better quality control, compliance and reduced wastage. Completing our audit process across Tier 1 and Tier 2 suppliers in the U.K., after which we will publish a list of our suppliers within the next 6 months, an update on this annually, and extending our independent audit program across the rest of our U.K. and global supply chain. The last phase, Phase 4 is about rolling out our compliance program internationally. First to China and our Asian sourcing market, and then to our main market, international, for example, Turkey and Italy in Europe. We will be working with a third party, Bureau Veritas, on this, who are recognized internationally as a leader in sustainability and compliance. We plan to publish our international supply base within the next 12 months when this work is complete. Turning now to our supply chain. And some of the steps we're taking to improve our processes across the value chain, including our buying and merchandising practices as well as our compliance processes. We thought it would be helpful to map out the product journey before getting into the detail. Our sourcing model is based around speed to market. The benefits of a quick and reactive sourcing model are that we are continually stocking and restocking products which customers want. This keeps our brands relevant at the forefront of fashion, and we reduce waste that is prevalent in traditional retail models with excess inventory and unwanted product that's marked down. The product ideas are generated in 3 ways: our in-house design teams who are coming up with unique products to reflect our brands; our buying teams, who are selecting products from multiple sources, particularly around social media; and our suppliers, we have a very collaborative way of working with our suppliers where they make recommendations based on what they're seeing in the marketplace. Once a product has been generated, a sample is marked up by the supplier and agreed by the buying team. A purchase order is then generated, and the initial order is completed. Our sourcing model is centered around test and repeat, meaning we only ever trial a lower initial order quantity, typically 300 of product. Once manufactured at factories in the U.K., Europe and Asia, the product is shipped as quickly as possible to our U.K.-based distribution centers in Burnley and Sheffield. We ship products in the most time-efficient way possible. Products reach Burnley from Leicester in a couple of hours. We air freight from Asia, meaning products land overnight. The longest lead time will come from Europe, where it takes a few days to reach us by lorry. On average our lead times are 4 to 6 weeks, and this includes our Asian manufacturers. We've also been investing in technology through the course of this year to enhance our compliance procedures. This technology will help ensure full compliance from an audit and product quality perspective, while also making our processes more efficient by reducing manual administration and paperwork. We have moved from a paper-based ordering system to a purchasing app. The app enables a simplified and digital order process, a single and real-time view of POs. It has an approved supplier list, meaning it's not possible to order from a supplier who hasn't been placed on that list unaudited. And through this, it would ensure that any subcontractors need also to be approved. We are also launching a new supplier portal. This is a one-stop shop for our buyers and suppliers to manage orders. It provides the buying teams with a single view of suppliers, including the ability to check their audit status and certification. This will go one step further than where our ordering app is today by identifying where a product will be made and what the audit status is on that facility. Turning now to our new state-of-the-art manufacturing facility in Leicester. In June of this year, we purchased a former car dealership in Leicester. We plan to develop this as a center of manufacturing excellence in the city. The site is intended not just to be for boohoo, but be beneficial to the Leicester textile industry as a whole. As I said last week, this is not a move towards vertical integration. Instead, our objectives for the site are to educate and demonstrate our model manufacturing processes; to showcase how our products can be made legally, ethically and safely; to work closely with the local authority and local organizations to drive investment and change in the region; to help nurture talent in the textile industry, working closely with local educational authorities to train new apprentices; and provide opportunities for career progression. The site will create up to 250 new jobs and enhance skills in the local region. It will also provide a new offer for our enlarged U.K.-based compliance team. We wanted to be a community orientated space, and we provide free access to other not-for-profit organizations. The site is expected to go live in 2021, and we'll provide further detail as our plans progress. We're also keen to showcase the facility to our investors, analysts and stakeholders once it's live. We have said as a group that we are committed to manufacturing in the U.K. and in Leicester, and we mean it. We are aware of our obligations to workers in the supply chain and the negative impact it would have in likelihood by moving production elsewhere on We will consolidate the long tail in our supply chain, working with fewer suppliers in more volume going forward. For example, while we had 200 Tier 1 suppliers as per Ms. Levitt's review, the top 50 account for the significant majority of our U.K. volumes. Consolidation of this base will allow some greater volume throughput to drive efficiencies and consistent order flows for our suppliers, and it will crucially allow for better oversight and governance of our suppliers in Leicester, which will remain a significant part of our manufacturing base going forward. This will, however, decline in our mix over time, as we scale some international sourcing markets and expect our newer brands to increase in the mix, who do almost all of their sourcing from our overseas markets. We are setting up a garment and textile community trust. This will be governed by independent trustees, and we will provide it with start-up funding, an ongoing annual support. We will provide professional support to establish the trust objectives and activities, including a grand giving function to address hardship experience by those working in the garment industry. Lastly, from a compliance transparency and governance perspective, we are committed to disclosing our U.K. supplier list. This will be done in the next 6 months. We are strengthening our sourcing team, including key hires such as our group responsible sourcing director, who has just started, and I'm excited about the difference he will make. And we're establishing purchasing print builds for our buying teams who will receive mandatory education to help them better understand our supply chain and improve our buying practices. I thought I'd break down some of the things we are targeting over the next 12 months, including embedding our audit program with a complete auditing of all of our U.K. suppliers this financial year; disclosing our U.K. supplier list within the next 6 months; rolling this audit program out across our global supply chain, which starts with Bureau Veritas next week; set up our manufacturing center of excellence in Leicester, creating 250 jobs in the progress and targeting 30,000 to 50,000 garments per week of production. More importantly, we will be using this as a hub to showcase processes for our suppliers and education and training to our teams. Launching our supplier portal, helping us to put technology into the heart of our buying and auditing functions. Complete our global supply chain audit program and publish our global supply chain list. Implement all of Ms. Levitt's recommendations, further developing our sourcing and compliance teams, and completing our GBP 10 million investment across manufacturing, compliance, training and education. As a board, we always maintained a very open and regular dialogue with our investor. We've had extensive conversations over the last few months, and we have listened and taken on board your feedback. In response to this feedback as well as the finding of Levitt's review, we are planning substantial enhancements to the Board's corporate governance and oversight. This will include adding 2 new nonexecutive directors. We're advanced in our search for an Audit committee chair, and I expect to be able to update you soon. We're also making progress with our search for a new board member with ESG credentials. Supply chain compliance becoming a mandatory item on every board meeting agenda with immediate effect. A new risk committee on the Board reporting is a new supply chain committee, headed up by our recently appointed responsible sourcing director, who joins us from a major global apparel retailer. We are close to appointing a highly experienced and respected individual to provide independent oversight of the implementation of our change agenda. We also plan to work with external consultants more extensively in the future, particularly around the nominations and remuneration. And our nonexecutives led by Brian Small, our Deputy Chair, will be undertaking annual roadshows to give shareholders the opportunity to have an independent discussion and voice their views. This presentation and our upcoming investor meetings will be a great opportunity to listen to our shareholders and take further feedback for communication going into 2021. And I'm very much looking forward to continuing that dialogue over the coming days. Now I'm going to hand over to Neil, who will walk you through the financials in relation to our supply chain. Neil will then talk you through what has been a fantastic first half of the year for the group. As I already acknowledged, our teams have worked incredibly hard during the COVID-19 pandemic to maintain fantastic service levels and to keep delivering for our customers. We delivered record sales and record profit. And I'm keen that, that hard work is recognized today alongside the broader focus on our business. So thank you. I'll see you later. I will now pass you on to Neil.

Thank you, John, and good morning to everybody watching and listening. Before we move on to the financial review of the first half, I wanted to talk about some of the economic considerations that have been addressed in the Alison Levitt review and in the lead up to it. I'd like to say, first and foremost, that everything I'm going to say is in the spirit of the findings of the review and also in the spirit of the recommendations from the review that we'll be continuing to implement in full in the coming months and the longer term. I'd also like to say that as part of those recommendations, we are committed to driving real change in our supply chain. And that change will be to the benefit of all of the group's shareholders, stakeholders, whether they be customers, employees, shareholders and suppliers as well as employees at those customers, shareholders and suppliers. We all have a vested interest and a desire to ensure a sustainable future for the group. We want to support our suppliers and their employees in partnership as we implement the recognitions of the review. This will include making sure that working conditions and wages are fair for everyone in the supply chain, wherever they are in the world. So in that spirit, I'd like to address some perceptions that have been prominent in the last few months. The review found that allegations of poor working conditions and low rates of pay in some factories are not merely well found substantially true. But the report also says that Ms. Levitt does not accept the boohoo's business model is founded on the exploitation of employees in Leicester. And it also goes on to say that boohoo and Leicester can flourish together. And with that in mind, we believe that the perception that products can't be sourced ethically and legally from the U.K. is not true. And that in reality, this definitely can be achieved. Our intention is to work with suppliers in accordance with the Alison Levitt review recommendations to ensure that the required standards for working conditions, safety and fair wages are met globally. Some have suggested that if there is a reduction in our purchasing from Leicester, then our margins could suffer. In reality, cost prices are much lower from other sourcing markets. However, we recognize the benefits of the speed to market that the less the supply base can give us. We don't want to lose that, but we are not prepared to sacrifice the safety, working conditions and fair wages of anyone in the supply chain. Some have also suggested that our gross margins are higher than our peers for those reasons. And I'll show quite clearly that, that's not the case. I'm also going to touch on the issue of the GBP 5 dress. Another perception is that we rely on the sale of low-priced items, which can't be sourced responsibly. I'll show that low price items represent a very small fraction of our business, and that we believe they absolutely can be sourced responsibly. So on this slide, we've shown the landed product costings from overseas sourcing markets relative to the U.K. cost prices for the following items. A very low cost short, a basic jersey top and a pair of jersey bottoms. All of these items are below our average cost price for the boohoo brand. And in all cases, the key point I'd like to make is that all of these garments require relatively little labor time to produce across all of the process of cutting, sewing, and hands, labeling and packing. We should remember that several hundred items can be cut per hour, and for garments with a simple makeup, tens, and indeed, sometimes many tens of items can be sewn per hour by a skilled machinist. What this slide also shows is that sourcing all of these garments from overseas sourcing markets can be significantly cheaper versus the U.K. prices. The overseas costings are based on factories in Morocco, Turkey, Bangladesh and Pakistan. The tool sew supplies some of the world's largest and most reputable retailers, and these are landed costs after using the appropriate transportation to reduce lead times to those associated with the test and repeat model. I'd also point out that fabrics overseas can be relatively more expensive. And what this means is that, in some instances, a higher quality garment can be sourced from these overseas markets. So we could ask ourselves the question that if we are paying higher cost prices for U.K. sourced garments, then how can we offer lower prices than the competition. This is also one of the perceptions we've seen or heard recently. The first part of the answer to this question is that we actually don't. Our average selling prices for boohoo brand are substantially higher than other retailers offering similar quality standards, such as high-profile price leaders in the U.K., Europe and the U.S.A. and supermarkets with well-established clothing lines or brands. However, we can offer competitive prices compared with the largest high street brands as our levels of markdown using the test and repeat model can be substantially lower. But as you can see on this slide, our gross margin is at the lower end of our peer group as we offer great value in spite of those much lower levels of markdown. We should also state that our gross margin includes carriage revenues, which don't form parts of product gross margins, and therefore, our product gross margins would be somewhat lower than we show on this chart. As far as the GBP 5 dress is concerned, what we've seen so far go some way to show how dresses can be sold at low headline prices. But we should understand that for the boohoo group as a whole, this represents an extremely low proportion of our dresses sold. Here's the raw data for the Boohoo brand in the U.K. and we can see that 4.5 million dresses sold, only 370,000 were sold at GBP 5 or less. That would include markdown items at the end of their life cycle. So the proportion that were initially merchandised for sale at GBP 5 is much less, around 110,000 units, in fact. That's about 0.3% of our total units sold in the U.K. last year. The bar chart on the right-hand side of this slide puts this in proportion and shows that by value, most dresses sold are, in fact, in the GBP 15 to GBP 25 category, and much more of the dresses are sold GBP 35 than GBP 5 and below. You'll also notice that the gross margin on dresses sold for GBP 5 or less is minus 12%. And what that reflects is the fact that most of the products are marked down at those price points or lower margin loss leaders or hero SKUs that will be sold in an order -- higher price point items. So you can see that the reason we're famous for the GBP 5 dress is more related to our marketing strategy than a reflection of our impact on the environment. We're at the end of this section, but I'd like to restate our views that, number one, our fashion is not disposable fashion. Secondly, we firmly believe that our products can be sourced ethically and sold at competitive price points. And finally, the U.K. supply chain will still have a significant part to play going forward as we look to be a "force for good" to quote the Alison Levitt review and improve the conditions and wages of all workers involved. So now I'm going to move on to the financial review of the first half. Here's the group income statement summary. The first half of the financial year were a number of challenges posed by the onset of the COVID-19 pandemic. But in difficult times, we've delivered another exceptional set of numbers. Group sales grew 45% to GBP 816 million as we saw strong demand in all geographies. This was achieved with a healthy gross margin of 55%, an increase of 70 basis points on last year. Adjusted EBITDA came in at GBP 89.8 million with a margin of 11% of sales, 20 basis points ahead of last year's 10.8%. At the EBIT level, we delivered GBP 79 million of adjusted EBIT, which was up 54% year-on-year, with adjusted EBIT margin up 60 basis points as we leverage our depreciation and amortization expenses. Adjusted items increased by GBP 4.6 million to GBP 11.3 million due to an increase in share-based payment charges as a result of the inclusion of more participants in the group share schemes as well as the management incentive plan announced in June. Adjusted diluted earnings per share increased 56% year-over-year to 0.0453p. We expect earnings per share to continue to grow healthily through the second half of the financial year as we annualize the acquisition of the remaining 34% stake in PrettyLittleThing which completed in May. The next slide shows our sales by geographical region. We've changed our segmental reporting to reflect the fact that our most important view of the business is by geographical market, and our primary objective is to increase market share in all geographies across all of the brands. This is especially true now that we own outright all of the brands in the group. And you can see from this chart, revenue growth was very strong in all regions. U.K. sales grew 37% in the first half of the year. That was an acceleration in growth from 30% and in Q1 to 42% in the second quarter. That was a great performance against the increased competition as U.K. retail stores reopened in June and July. In the U.S., we've seen a standout performance with sales of GBP 202 million, up 83% year-on-year. All brands are showing great potential in the U.S. market and lockdown gave us the opportunity to acquire new customers. We've also seen encouraging growth in the rest of Europe region, reflecting our focus on certain key countries, and we've continued to see healthy growth in the rest of the world segment. On to costs. Overall, we saw 10 basis points of deleverage mainly due to increased distribution costs, which represented 24.3% of sales compared with 23% of sales in the same period of last year. While distribution costs have benefited from a reduction in returns rates, this has been more than offset by significant increases in international freight costs as we ship products to customers around the world since the COVID pandemic led to less passenger flights and increased demand for freight lanes. Marketing costs reduced as a percentage of sales by 140 basis points to 7.9% as we planned more cautiously on marketing campaigns in the early stages of lockdown and we also saw strong returns from that reduced spend. Other admin costs were 13.1% of sales, up 20 basis points compared to the first half of last year, as we annualize increased investments into the new brands and their teams that were made in the second half of last year. And you can see in the graph that they actually improved by 60 basis points versus that period. On to cash flow. Cash flow for the group was extremely strong. We generated GBP 147 million of operating cash flow, driven by the group's profitability and a large working capital inflow, with our negative net working capital cycle, although we were able to achieve a significant inventory build by the end of the second quarter. CapEx at GBP 27 million reflects increased spend related to infrastructure investments, and I'll come on to that in more detail shortly. Acquisitions of GBP 167 million reflects the buyout of the noncontrolling interest in PrettyLittleThing, which completed towards the end of May for an initial consideration of GBP 270 million, and that was split GBP 162 million in cash and GBP 108 million in shares. We believe this transaction represented exceptional value for the group shareholders by doing this now rather than in 2022. And we have seen and we'll continue to see significant earnings enhancements for the group shareholders. In June, we also acquired 2 womenswear brands, Oasis and Warehouse for just over GBP 5 million. I'm pleased to say that these brands have been fully integrated and relaunched on our platform recently. And in the process of this acquisition, we've been able to create over 100 new roles, which may otherwise have been lost. The group acquired GBP 25.7 million of shares for its employee benefits trust in order to satisfy future share option awards. And in May, we raised just under GBP 200 million from shareholders as we look to make future acquisitions that can add value to the group and leverage investments in our multi-brand platform. We ended the period with just under GBP 345 million of net cash, which is up GBP 138 million from GBP 207 million 12 months ago and up GBP 104 million from the end of our last financial year in February. On to customer KPIs, it's been another period of improvements in these KPIs. With more customers being acquired and existing customers spending more frequently and in larger amounts with our portfolio, the number of active customers in the last 12 months increased by GBP 4.4 million versus the previous year, with a 34% increase in orders. Average order value was up to 7%, with items per basket increasing 10%. We're encouraged by the initial performance from the customers that we've acquired in the lockdown period and purchasing behavior in terms of aspects such as churn or speed of second purchase has been consistent with cohorts that we've acquired in prior periods. As far as CapEx is concerned, we're continuing to invest in our future with significant spend across warehouses and operations, our offices and IT systems in order to give the group sufficient headroom to continue to deliver on its potential. We're increasing our CapEx guidance, now expected to be between GBP 80 million and GBP 100 million, up from our previous guidance of between GBP 60 million and GBP 80 million. This increase is as we accelerate investment programs to stay ahead of the growth curve. As part of this, I'm pleased to announce a GBP 125 million automation project at our Sheffield site, which will increase efficiency, capacity and throughput and will result in significant cost savings. The expenditure will span 3 financial years, culminating in the calendar year 2022. And the anticipated payback period will be between 3 and 5 years, and that's similar to our automation project that we completed in Burnley last year. By the end of that project and along with other capacity expansion plans, we have -- we anticipate having warehousing capacity in excess of 45 million units across the locations in Burnley and Sheffield, and that would equate to over GBP 3.5 billion net sales capacity for the group. Lastly, on to guidance. We've had a very strong first half, and momentum has continued into September at the start of the second half. That said, there's still a long way to go and we're cautious about the backdrop of the COVID pandemic and the impact that this could have on the peak trading season. So far, along with other online businesses, COVID hasn't impacted sales negatively. And indeed, at times during lockdown, we've seen a boost in certain areas. Distribution cost increases have been offset by the benefits of lower returns rates. However, it's prudent to plan for the rest of the year to be mindful of the highly uncertain economic and consumer outlook. As well as the unique challenges posed by the COVID-19 pandemic. Taking all of those back into account, we're upgrading our sales growth guidance to between 28% and 32%. And we expect adjusted EBITDA margin to be around 10%, and that's up from our previous guidance of between 9.5% and 10%. That guidance is also prudent anticipates ramping up marketing spend in the second half, continued headwinds on shipping costs and the fact that returns rate could increase to the levels that we saw before the pandemic. CapEx will be in the region of GBP 80 million to GBP 100 million, as I've just mentioned, and we expect our effective tax rate for the full year to be 22%. Adjusting items of approximately GBP 23 million is split between the amortization of acquired intangibles of GBP 4.5 million to GBP 5 million, with the balance being share-based payment charges. Our medium-term guidance of 25% sales growth per annum and an adjusted EBITDA margin of 10% remains unchanged. We're committed as a group to continue to invest across our business and into our people, infrastructure and supply chain to deliver industry-leading rates of growth, and we remain excited about the group's potential. We have flagged previously an incremental investment of GBP 10 million into our supply chain, and we do not expect this to impact our guidance. Likewise, as we continue to grow and scale, we will also see growth from international sourcing markets with a potential reduction of the U.K. sourcing mix. We expect the net effect to be neutral to gross profit margins without sacrificing lead times. So this should support margins in the future. And on that note, I'll pass over to Carol, who's going to run through developments across the brands that have happened in the last 6 months. Thank you.

So thank you, John, and thank you, Neil, and good morning, everyone. This morning, I'd like to give you an update on our brands. But before I do so, I'd just like to reiterate some of John's words. As a cofounder of boohoo, I'd like to stress how incredibly seriously we are taking the findings of the independent review. We care deeply about the influence we have as a group on the U.K. manufacturing industry. And I want to stress how committed we are to doing things better and to be more transparent as we work through improvements to the way we work with our suppliers. I have absolute confidence in the ability to be a positive influence for change. So on a lighter note now, I'm going to turn to what our brands have been up to over the last 6 months. So 6 years ago, we floated with just 1 brand boohoo. And now with 9 brands, we're very excited about the opportunities that lie ahead. In June, we welcomed both Oasis and Warehouse to the boohoo family. Adding to our other recent acquisitions of Karen Millen and Coast, we now have a portfolio of strong British heritage brands, complementary to those value brands we have already established e-commerce. I'm also going to be covering off our evolving customer demographic and how we're repositioning our newer brands to make them more accessible to a wider audience and relevant to modern-day shopping habits. And as usual, I'm going to -- as usual, I'm now going to play you a short video showcasing what our brands have been up to in the past 6 months. [Presentation]

So as you can see, there's lots going on, and quite incredible what our teams have managed to achieve in what's been a very challenging year for all of us in retail. Now 9 brands, recent acquisitions have significantly extended our target market. With entry prices starting at GBP 3 in our value brands, and exit prices at GBP 1,400 in our premium brand, Karen Millen, and lots of varied product in between. We feel now we're in a position to offer real choice for all our customers. We now target young women in men from the age of 16. And with the addition of our newer brands covering off the middle and the premium market, we now extend our customers to the age of 45 and above. And on previous updates, I've talked in detail about our established brands, boohoo, boohooMAN, PrettyLittleThing, Nasty Gal, MissPap. Today, I'd like to take this opportunity to update you on what we've been doing on our more recent acquisitions, Karen Millen and Coast, both acquired in August 2019, and Warehouse and Oasis acquired in June this year. They're all heritage British brands. Warehouse was established in 1976 and Karen Millen in 1991. So they have lots of brand awareness. Buying them out of administration, we're also being able to continue that fantastic heritage of what may have been lost otherwise. The opportunity to develop them in their market the opportunity is immense as we take them from large bricks-and-mortar retailers to pure-play online retailers with all the global opportunities that will present themselves in the future. And of course, we'll maximize our already developed brand identity and all our British heritage. For all our brands, social media is one of the larger channels for us to communicate with both our customers and our following. Now with 28 million followers across Instagram and 36 million across all our social media channels. The past 6 months have seen a completely change of approach with a lockdown period. Big events, larger collaborations have been a challenge. However, this hasn't stood in our way. We still work with celebrities and highly regarded influences. And now with a portfolio of brands that -- this has just spread the net even further to the extent we're now creating relevant content for lots of consumers of all ages. And of course, each brand has its own signature style of their own, and it's very clear through all the content we produce, which brand is which. So just to name a few, boohoo enhanced the TikTok craze with its recent Move Me campaign, taking the TikTok format to our TV screens with dance choreographer Christiana Rehana. BoohooMAN strengthened its athleisure range when it collaborated with U.S. rapper Quavo. PrettyLittleThing collaborates with Alexis Stone, a makeup and drag artists for pride. Nasty Gal put edited collections together with Paris Jacobson and Brittany Xavier, both global influencers. And I'm happy to announce a new collaboration for Nasty Gal just next week on the 7th of October with EmRata. MissPap, a collaboration with Missé Beqiri, a model and TV presenter. Karen Millen has also now started on its influence journey with influencer Lydia Millen. No relation. And Coast, a collaboration with Amy Neville star by TV presenter markets. And of course, there's loads more to mention. With all these 9 brands, we're now covering off what is a much wider demographic with clear focus now from this 16- to 45-year-old age group. Our useful brands of boohoo, boohooMAN, PrettyLittleThing, Nasty Gal and MissPap, acquiring customers from the age of 16 to 20 somethings, appealing to the fashionable and value-conscious customers. However, you can see from the chart, the reach of these brands extends to both younger and older customers, reflecting the breadth of our product ranges. Traditionally has been an occasion where brand. This range is evolving, and I'll cover that off in the coming slide. It has the broadest target market from teenagers buying prom dresses and then onto bridesmaids dresses, and then 40-something-year-old women may be buying an outfit for the races. Karen Millen has a very clear target market of the age of 25 to 40-year-old professional women, where you're also attracting younger and older customers. Both the new acquisitions of Warehouse and Oasis, which are just bedding in, have further extended the representation of our target market to that 25 to 40-year-old customer. The ambition is simply growing our portfolio of brands. We're able to capture an increasing share of wallet, keeping our customers for longer and shopping within the group. This chart demonstrates how we're positioning our recent acquired brands, making them more relevant than ever before. Our established value brands are largely similar in that they're all targeting a fashion conscious customer at the end of the market. Karen Millen, however, our premium brand, we have reduced its price point and made it more affordable than the old Karen Millen, but at the same time, keeping increased its fashion authority, bringing a broader and regular world product updates. Coast. We have also reduced its price point, while maintaining its occasion wear field and further injecting new casual ranges. For warehouse and Oasis, the plan is very new. The price points will largely remain unchanged. But there will definitely be a shift to making both these brands more trend led. Warehouse. For now, I'm going to refer to it as our London rock and roll brand. It's edgy and very fashion. Oasis also trend led, but with a much softer feel, more soft feminine feel, I'd call it. And now I'll come on to talk about both of those in the coming slides. So turning to what we have achieved on Karen Millen and Coast. We're now 1 year on. And achieved so much considering part this year be a lockdown. It's been really encouraging. Achieving so much when it feels like all the odds are against us with COVID. We really are disrupting the market with these newer brands, offering fantastic quality tailoring, amazing dresses, occasion Coast, luxury lounge with working from home, a huge achievement in just a short period of time. We launched Karen Millen with just 60 styles a year ago, and we're now carrying 1,500 options. Where Karen Millen used to stock about 500 products this season, we're now launching 150 new styles every single week. We've proved that the concept that our test and repeat formula can work with offshore production on premium products, taking our previous 6 to 9-month lead time down to 6 to 8 weeks. And at Karen Millen, we've extended the product ranges and just recently introduced Curve, making the brand yet more accessible to more customers carrying more sizes. Design and product development sits at the heart of Karen Millen with a very talented and buying design team. Investment dressing is key. The product offering with pieces that are still relevant today as they were many years ago, like dress and you'll still be wearing it for years to come. In addition, we've added new product categories like lounge accessories and jewelry. And on Coast, historically in occasion brands, we're extending the ranges to transform into a pure-play that will have something for everyone from day to not -- from morning to day to night, lots of new casual ranges, loungewear, footwear, denim, t-shirts, et cetera. It's a real move forward and the recent campaigns of the tagline fashion for women kind was launched this summer. Both brands have launched the -- on TV for the first time this summer, and we've started on their journey to open with influencers and fashion stylists. We've seen a fantastic response from traditional press and lot of pot placement on leading celebs. Our most recent additions to the group, Oasis and Warehouse acquired in June, we did a soft launch in July. Just recently, mid-September, launched both of the websites onto our platform. The integration has been very similar to Karen Millen and Coast. It's a little easier. We already had our learnings from last year. And we've now taken on, as Neil said earlier, over 100 employees from the original teams, and that's really to ensure the continuity of the brand image. It's early days. So not too much to talk about it yet because we're just a few weeks in, but I'd like to give you flavor of the brand identity and what to expect. With Oasis, we're targeting that everyday woman, and it's a really big audience to go for, one we're very excited about. Tells the story of color and print and feminine fashion. Soft and easy to wear pieces for every occasion from laurels to sharp tailoring and lace to leather. The brand has an overriding feel of a confident woman curating her own personal style and one that is of sophistication and femininity. Our warehouse woman has more edge, a style is more urban with strong London and she travels to cities like Berlin and Paris and Milan. A style, as I said earlier, it's certainly more rock and roll, think leather and floral dresses with an oversized smoky eye. It's brand that I kind of I don't know worn through my 20 something, I think. But her identity is really about late nights, bright lights and all that the big cities bring. So just a final word for me. We have achieved so much in what has been very challenging months in so many ways. Our ambition and our plans haven't changed, and we are looking forward to addressing all women around the world one day. And on that note, I'm going to hand you back to John. Thank you.

Thanks, Carol. Thanks. So just a summary for me. So it's been a longer presentation than normal, but I wanted to take that time to provide further detail around who we're developing the group's sustainability strategy, demonstrate our commitment to greater transparency, show how seriously the board has taken the findings of the independent review. I want to reiterate the Board's commitment to driving the agenda for change in U.K. manufacturing. As part of this, we will be making significant enhancements to our corporate governance and supply chain compliance processes. I look forward to updating you on our progress against Levitt's recommendations over the course of the next 12 months. We should not forget that we have a very strong platform through which to deliver change. We are in a very fortunate position to be growing strongly and profitably. We're close to exceeding GBP 1.5 billion of sales over the last 12 months, which is a huge milestone for the group, having hit GBP 1 billion of sales this time last year. We now have nine 100% owned brands, and we're targeting a much wider demographic of 16, 45 year olds. Our recent acquisitions of British heritage brands have helped save and create over 200 jobs. We have a strong cash position and continue to look to grow through further M&A as well as our own brands. It's an exciting time for the group and our stakeholders. We're looking forward with a strong financial position and strong mindset for change, which should create, not just a leader, but a sustainable leader in fashion e-commerce.

Alistair, would you like to start the Q&A?

Thank you, John. So first 2 questions today from Aneesha Sherman. Do you expect you'll use more ground in the second half of the year to offset the rising cost of a rate? And what impact would that have in terms of lead time? And the second question, with regards to the supply chain review and audits that are going on, when would you expect that to conclude for the U.K. and be in a position to have a fully compliant U.K. supply base?

Okay. So I'll take 1 of the U.K. audit. So we hope to have the U.K. audits complete by the end of this financial year. And then, as I stated earlier, we hope to be able to publish a full list of our U.K. supply base in 6 months.

On the freight's question, we're not really anticipating more ground freight over the next coming months. But we'd look at that if it made sense financially, but also from a lead time perspective. So we're continuing with airfreight. And the main increases in costs have been on the outbound side, so delivering parcels to our international customers, particularly in the U.S. and some of the further afield territories. And those costs are likely to remain higher as we progress to the other side of the pandemic, they should go back to more normal levels, but it's quite uncertain as to how that's going to pan out. But not on the inbound side with products, we'll continue to use airfreight as we have them.

Okay. Next question from Matthew at Nplus1. Please could you elaborate on the benefits from lower returns rates? Roughly, how much did it add to the net sales growth in period? And how much of this was a function of category mix versus consumer buying changing?

So I can take that question on the financial side of the returns rates. And it really depends how you look at it. But I don't look that net sales growth has been aided by lower return rates. Because what we're doing is we're sending parcels out there, less have come back because the customers like the product for one reason or another or haven't returned it for one reason or another. What you do -- what happens when people do return product is then order something else to replace that. So it doesn't really boost sales growth as such. And so I wouldn't quantify that. What it does do is enable you to leverage your distribution costs more effectively. So you haven't got the costs of bringing as many customer goods back. And you also don't have the cost of then sending out those additional items that people are ordering in the place of it. So it's a more efficient supply chain with the customer. That's the benefit of returns rates. And so that's the way I'd look at that. The best way to quantify the impact of the efficiencies by looking at the distribution costs and what those have been as a percentage of sales. But all I'd say on that is that we've seen the leverage on distribution costs because of those higher shipping charges. But we've -- those higher charges offset by a benefit in distribution costs from the lower costs associated with returns. And potentially that deleverage could have been a bit higher, about 1 percentage point higher if we haven't seen the lower returns rates.

Okay. Next question from Simon Bowler at Numis. Can you give a sense of how much focus and attention is on continued M&A? And secondly, can you give a sense of margin impact from that lower returns rate offset by the higher freight costs?

Should I take the M&A one? And I mean, look, we've been very clear in the summer with regards to the monies we've raised just under GBP 200 million. We purchased Oasis and Warehouse for GBP 5.25 million, which clearly has a good balance outstanding in terms of further M&A. We're looking at M&A globally, not just in the U.K. market, but in Europe and the U.S.A. It's one -- we have been. It's one we'll continue to look at, and we think there will be opportunities.

And on the margin impact of the lower returns rate, obviously, it doesn't impact our gross margin. As such, and I've just spoken about the impact on distribution costs, where we've seen higher distribution costs offset by that benefit of returns rates -- lower returns rates.

Okay. Two questions now from Wayne Brown at Liberum. Just firstly, with regards to Leicester being a significant part of your supply chain, how are you confident that the gross margins aren't under threat from the supply chain review? Second question is just in terms of your gross margin dynamic, you source from a high cost sourcing market in the U.K., and how are you able to achieve a comparable gross margin versus your peers at?

So we've spoken about those 2 points in the presentation, actually. But on the gross margin impact of any investments we're making in Leicester, as we're getting bigger and scaling, you get benefits from scale generally through resourcing. And that's why the guidance that we've given on the GBP 10 million operating cost is not necessarily going to impact our gross margin. Now obviously, we get -- we, first and foremost, want to work with all of the suppliers in Leicester to make sure that we reach the required standards. If there are impacts on cost prices that can't be offset by efficiency in their operations, which I think there's definitely potential to do that. So that's going to help as well. But we -- what we do anticipate from the review and it's clearly documented in the review is that there will be a kind of rationalization of the number of suppliers in Leicester. And therefore, what we can do is offer the suppliers that are able to work with us going forward more consistent volumes of order throughput, and that will lead to some quite high-efficiency gains for everybody. And that's going to be a positive impact, we hope. And we're confident about that. And then as we maintain volumes as much as we possibly can in Leicester, we're also -- and this is happening, we'll be growing our sourcing overseas. And as we saw in the presentation that, that can have a significantly higher gross margins -- gross margins. And if we can achieve the lead -- similar levels of lead time that we do with the U.K. supply chain, then we also have low levels of markdown with those products. So overall, we're saying, and we said it quite clearly that net, we think those puts and takes are going to be neutral on our gross margin going forward.

Okay. From David Holmes at Bank of America. Can you comment on the Q2 slowdown in the rest of Europe? What drove this?

On the Q2 slowdown in the rest of Europe, that was what we saw in selected markets were just what happened as those markets came out of lockdown. So we've seen some superb growth in Q1, and then the market started coming out of lockdown and we felt that some of the customers in certain European markets did go back to the High Street stores. And I think we've probably seen that in some of the results that other retailers have provided. And then in addition to that, we -- our shipping times were slightly elongated in Q2. So hopefully, we'll be able to remedy that as we go forward. And I think people get back in those markets to more normal patterns embracing online shopping.

Okay. Ben Hunt at Investec with 2 questions. The implied H2 sales slowed down from your guidance. How much of this anticipate supply chain disruption? And secondly, does the significant inventory buildup at the half year reflect confidence ahead or provisions for potential supply chain disruption?

So the implied slowdown in the second half guidance is really about what could happen and therefore, with the backdrop of COVID-19, there's a lot of economic uncertainty out there. And therefore, what is going to happen to demand through the Christmas party season. So we were sensible to be prudent in these unprecedented times, I think. And in terms of supply chain disruption, we've not necessarily factored that into the guidance. We're not expecting our supply chain to be disrupted in the second half of the year. And -- but it's -- I think it's sensible to assume some impacts of the pandemic, but not on the supply chain disruption side for us. If there's -- it does factor in caution generally, and you could argue that supply chain disruption i.e., slower delivery times to certain markets affected in there, but that's not a material part of the guidance. But overall, the guidance is prudent. I think it's absolutely sensible to be so in this environment.

Okay. And 3 questions from John Stevenson at Peel Hunt. On your U.S. sales growth, which brands have driven this? And does this change any of your thinking in terms of international distribution, development and timing? Secondly, from a marketing and collaboration perspective, have there been any delays to campaigns through the first half of the year? And third question, can you give some sense of brand-by-brand performance or growth highlights?