boohoo group plc (DEBS) Earnings Call Transcript & Summary

Hello, and welcome to the boohoo group plc trading update. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Mahmud Kamani, Executive Chairman. Please go ahead with your meeting.

Hi, everyone, it's Mahmud. Thank you for taking the time to listen and -- to our trading meeting, our trading update. Just a quick few words, I'd like to say that we are definitely on our job, and we're all fully focused on the agenda for change and strengthening our governance. We are proud of the results and proud of our business, and we carry on working hard to improve things. Thank you, and I'll hand it over to John.

Thanks, Mahmud, and good morning, everybody. So joining me in the room here today are Mahmud, you've just spoken to, Carol and Neil. So as normal, I will cover our financial and operational performance for the 4 months to the 31st of December. And secondly, I'm delighted to provide a further update on our agenda for change. I'll first talk you through the highlights of today's announcement, and then we will open up the line for Q&A. So firstly, group performance. So starting with the results, it's been another strong peak trading period for the group. Revenue for the group was up 40% to GBP 661 million for the 4-month period, having been consistently strong at over 40% for the year-to-date. This is a fantastic achievement during a challenging period as we navigate through the COVID-19 pandemic, new ways of working and an increasingly challenging consumer and economic backdrop. I'm particularly pleased to report that the growth was broad-based across our portfolio of brands, with both our established brands continuing to deliver strong growth and our more recent acquisitions contributing to the group performance. Revenues for Karen Millen and Coast over the last 10 months have now exceeded their online revenues in the year before we acquired them, which demonstrates the great progress we are making as we build out their product ranges. Overall, we're seeing further gains in market share in our focus markets and have continued to invest significantly to support the increasing amounts that customers are spending online. We've also continued to benefit from our test-and-repeat model, allowing us to keep pace with the fast-changing buying habits, as customers have adapted to different levels of lock down during the period. As you'll be aware, it was a very different Christmas season this year. And we were able to switch our product categories around to reflect a quieter party season as customers stayed at home. You will also recall, we announced the acquisition of Oasis and Warehouse in June last year. In line with our plans, we soft launched them in July, and they went fully live on our platforms in September. Since then, we've continued to build out the product ranges for the brands, and I'm really pleased with their progress to date and excited about what lies ahead for them in 2021. Looking at our geographical performance. The U.K. continues to grow really strongly for our platform of brands, with revenue up 40% to GBP 357 million year-on-year. International growth was also strong, up 39% across the territories. The U.S. delivered a particularly strong performance, up 52%, despite a very challenging consumer backdrop around the pandemic and the election in the U.S. pre-Christmas. We're starting to see real traction in that market now. And while we're still small in terms of market share, the opportunity is huge. Growth in the rest of Europe and the rest of the world also accelerated quarter-on-quarter, up 30% and 20%, respectively. Gross margin was 53% for the period, which is down 50 basis points year-on-year. This is a strong performance during a promotionally intense peak period, particularly around November when the High Street was reopened for business. Operationally, our warehouses performed really well during peak, managing significantly higher volumes than ever before. I'm also pleased to announce this morning further developments of our warehousing network within the U.K., which we are close to finalizing. In the first quarter of the next financial year, we are due to open an operation in Wellingborough. This facility will house our Nasty Gal, Karen Millen, Coast, Oasis and Warehouse brands, giving them the headroom to support their strong growth while we develop future options at our Burnley and Sheffield facilities. Additionally, I'm delighted that this development will support up to 1,000 jobs to be created at a time of great uncertainty for many people here in the U.K., which is on top of over 1,800 new jobs created in our current sites over the peak trading period. We also continue to evaluate options for international warehousing, and we'll update you on our progress in due course. Now moving away from our financial performance. I'm pleased to be giving you an update today on our Agenda for Change program. As you will have seen in November, we announced the appointment of Sir Brian Leveson to provide independent oversight of our Agenda for Change. In line with our ongoing commitment to increase transparency, we have published Sir Brian's first report this morning on our plc website. The report set out Brian's initial impressions of the group and his initial observations as we work through the recommendations from Alison Levitt's independent review, which we published in full back in September. The report acknowledges the significant progress the group is making towards our Agenda for Change, while at the same time, recognizing that there is still work to be done to implement long-lasting and sustainable change. We have made a significant investment into people, both independent advisers and internal hires. Alongside Brian, we have KPMG acting as an independent consultant to advise and monitor our implementation of the Agenda for Change. I was also delighted to welcome Shaun McCabe to the Board in November. Shaun is chairing the Audit Committee and a newly formed Risk Committee and is already making a significant contribution to the Board. We are also making good progress towards the appointment on an additional independent nonexecutive director. And as we previously announced, we are seeking candidates with ESG credentials. I look forward to updating you on that in time. Internally, we have made a significant investment in strengthening our teams, particularly in our responsible sourcing, compliance and sustainability teams, helping underpin the work we are doing internally to affect change in our management of our supply chain. The Board is benefiting from increased oversight of our U.K. and international supply chain, having established a new Agenda for Change Committee and a new Supply Chain Committee. As previously announced, Bureau Veritas and Verisio are overseeing the ethical audit process of our suppliers and subcontractors. In response to their initial findings, we have already begun the process of removing suppliers who do not meet our standards from our U.K. supplier list, with 64 suppliers having been removed to date. As we work through the audit process, we are identifying new ethical suppliers to onboard. In line with the timetable we set out in September, we expect to announce our U.K. Tier 1 and Tier 2 supplier list by the end of March this year and our global supplier list by the end of September. I really want to take this opportunity to thank all of our teams for their hard work over the last 4 months. We're making significant progress towards our objective to be a leader for positive change in U.K. manufacturing, and I look forward to keeping you updated on our progress in 2021. Now on to guidance. On the back of the strong performance year-to-date, we are updating our revenue guidance again today. We expect sales growth to be between 36% to 38% for the year, implying a range of 1.8 -- GBP 1.68 billion to GBP 1.7 billion, which is ahead of our previous guidance of 28% to 32%. All other guidance for this financial year remains unchanged. We continue to expect adjusted EBITDA margins to be around 10%, which is a standout performance considering the significant and ongoing inflation we are seeing in carriage costs, including the initial impact of Brexit as well as our investment in marketing costs to ensure we take advantage of the number of new customers looking to shop online. This implies that as previously flagged, the margin will be lower in the second half versus the first half as a result of the distribution cost headwinds and investments in gross margin and marketing relative to the first half of the year. All other guidance, including our medium-term guidance for 25% sales growth per annum and a 10% adjusted EBITDA margin, remains unchanged, which reflects the confidence that we have in the group's prospects as it continues to invest to support growth and raise standards across its supply chain. So in summary, it's been another fantastic trading period for the group. We're delighted with the progress of our newer brands, following successful acquisition and integration of Oasis and Warehouse earlier in the year. It's great to be announcing our new DC in Wellington and the resulting jobs that will be created. I look forward to providing further updates on our Agenda for Change as we demonstrate our ongoing commitment to transparency. We're in an excellent position entering 2021, which we expect to be another year of progress towards our goal of leading the fashion e-commerce market globally. And with that, thank you very much for listening. And now I would like to open up the call for any questions you may have.

[Operator Instructions] Our first question comes from Aneesha Sherman from Bernstein.

Congratulations on the quarter. I have 2, please. The first one is working backwards from your full year guidance, it would seem that you expect a much slower growth rate for Q4, about 10% to 15%. Why do you expect to grow much slower given that you performed quite well during the past lockdowns through the year? And then my second question is, during the course of the year, you mentioned the potential warehouse to be located in either Europe or the U.S. Am I right in saying that UK3 will now replace that? Or is that still part of the plan going forward?

So maybe if I take the warehouse question. So UK3 is totally separate to our global plans in terms of warehousing. So we're very close now to the work we are finalizing with regards to the first of our international warehouses. And it's looking like it's going to the U.S., but we hope to have that piece of work done very shortly. But to be clear, UK3 is totally separate, and it's really about maximizing our capacity for the growth across our platform of brands.

Thanks, Aneesha. It's Neil here. So on the guidance point, obviously, period 4 is only 2 months. And you're quite right that the implied guidance would give 10% to 15% growth in those 2 months. And of course, we're quite cautious about the consumer environment for these 2 months. But what I would say is that early days in January, we've seen strong trading, but it's very early days. This is the first time we've ever been in lockdown post the Christmas trading period. It's lock -- the third lockdown of the year. And so we know so much, but we don't know exactly what it's going to be like post this Christmas trading period. We were worried about the Christmas party season previously. I guess we're now looking at the next 2 months, and we're worried about whether there's going to be a Valentine's Day, whether people are still going to be more cautious with their purchases. So as ever, we're being conservative with our guidance. I think it's absolutely the right thing to do given the backdrop of the pandemic.

Our next question comes from Simon Bowler from Numis.

A couple of quick questions. First one, can you touch on how you've seen the competitive environment evolve? I guess I'm looking back on the second quarter and I'm wondering, with that bit of a moment in the sun where you were fast able to adapt your product versus some of your peers had a bit of a unique product offering. And you've seen others kind of more slowly to kind of catch up in terms of their supply chains functioning. And therefore, this is back to a more normal competitive environment. Any thoughts on that would be appreciated. And then secondly, you mentioned kind of upgrading some of your customer acquisition activity. And I was just wondering how that's -- or where that has been directed on a geographical basis. Is it broadly aligned with how we see your current sales split? Or are there particular regions or areas where you're seeing greater opportunities at the moment?

I think from a competitive environment, we continue to see a lot of volatility through the year across all of our markets. Now that's either whether it's lockdown, but even outside of lockdown, obviously, lots of restrictions. So the U.K. is a great example. Even when we come out of lockdown, where can you go, where can't you go? How many people are you just sitting only, who you can mix with? What we've seen right through the year is that casual has still remained as a clothing preference. And I think that's because most people are still working from home, where they can. But equally, Christmas is another great example. We haven't been able to do the Christmas parties, the Christmas launches, see friends, see family, the way we would have done normally. I think as Neil said earlier, we now enter sort of Jan, Feb, we're not sure. First time ever we've been in lockdown post-Christmas period, how does that look. The vaccine rollout would make us think that we're going to be in more normal times post-Easter, but I think we've got to see that. I think what we've been able to do is clearly continue to demonstrate our test-and-repeat model been and flexible right through the period, up 40% again, when you consider the level of party dresses, shoes, et cetera, that we would have sold last year and to replace that with the in-demand categories of athleisure, loungewear, knitwear, jackets, et cetera. So where is the competitive environment? I think everybody is into casual mode, I think it's going to be probably in the next quarter when we start to hopefully get back into more normality, what does that look like and how do consumers react on that. Answer your question on kind of customer acquisition, I think that the one -- U.K. is clearly fantastic performance this morning we're talking about. But the one for me really is the U.S., I think, at 52% growth. Considering everything that they've had there with COVID and the election, I think, is a stellar performance and really identifies a huge growth opportunity for us in the future.

Although I would say, Simon, it's Neil here, that we have started up that marketing activity across the board. And when I say across the board, I mean, in lots of different geographies in our more strategic markets and also with our newer brands as well. We did say when we spoke to you all back in September that we'd kind of delayed a lot of those launch activities for Karen Millen, and we owned Karen Millen for nearly a year. And we were conscious that we wanted to get on with building those brands, not just Karen Millen but Coast as well. And so we've invested into the newer brands, which are predominantly in the U.K. right now, but we'll be investing in those globally going forward. And then we've also invested in different territories. The big one in terms of size is the U.S. that John talked about. But also I think the big one in terms of potential is also Europe, and we've started to invest in some of the European markets as well for our bigger brands. So I think we were conscious that marketing costs were under 8% of sales in the first half of the year. That stepped up in the second half of the year. And we've taken advantage of the market for online, if you like, to invest in trying to acquire those customers while we've got a captive audience. And so it's been in quite a lot of different areas in terms of geography and brands.

Okay. Great. And one quick follow-up on that would just be any sense of kind of your active customers versus trends of customer in terms of how those kind of KPI drivers have been seen over this period?

So we've seen similar trends. You've seen the similar levels of growth and you -- the KPIs that we disclosed back in August showed an increase in active customers up 34% and growth in sales of 44%. And you can see from that, that we've had an increase in spend per active, which was a kind of a marginal increase in order frequency and generally an increase in transaction values with actually slightly lower average selling prices. We've seen continuance of those trends. So very positive on the customer engagement side, which has encouraged us to step up that marketing spend in the second half of the year. And I think that's going to stand up in good stead. But we'll -- we don't disclose the KPIs at this juncture. We'll disclose the full year KPIs. But you can see the very similar trends to what we saw in the first half of the year into the second half of the year.

Our next question comes from John Stevenson from Peel Hunt.

A couple of questions from me as well, please. Can you give a little bit more information of which brands are driving the growth in the U.S. we've seen this quarter? Second question is just on how things have sort of performed over the quarter. I guess, it's difficult to hone in one specific period given [indiscernible] peak Black Friday. But can you actually talk around what you see when specific territories go into lockdown and how that's affected you over the course of the 4 months? And finally, just on acquisitions and really what you're looking for now at this point. I mean, are we looking for sort of territorial advantage or maybe in a new demographic? Would you continue to add more similar brands to the ones you've got in the portfolio? You're actually now looking to sort of diversify whether that's something that's going to give you a territorial advantage or, let's say, a different demographic?

So on the brands that are driving the growth in the U.S., we've seen a strong performance from our 3 major brands in the U.S., which is boohoo, including boohooMAN and PrettyLittleThing and Nasty Gal. And then -- so I think it's been pretty consistent. The standout would be PrettyLittleThing. That has always resonated well in the U.S., and that's continued really. But overall, a strong performance there. The U.S. market itself was a bit strange during the period, and this is moving into the next part of your question, where you saw around the election and were people actually daring to go out and do things and were they shopping a bit less. It felt like that to us, hence the slowdown from the first half of the year, but still very strong growth. And then I suppose other patterns around lockdown, we saw the other lockdowns during the year, lockdown 2.0. And now we're into lockdown 3.0, just a bit less exaggerated than the first lockdown. For the first lockdown, when everybody really didn't know what the environment was and what this meant for the future, we saw a much steeper drop-off of growth going into lockdown and then a steeper recovery of growth. And so we saw similar patterns as the different markets went into lockdown. We did see the -- when lockdown restrictions were eased, people went back to the High Street a little bit. And then obviously, that reversed during lockdown. But overall, we're quite encouraged by the performance generally. Black Friday was quite a big, big period in terms of a weekend. And that was really the combination of Black Friday in lockdown. We were expecting Black Friday not to be as big of a phenomenon as it has been historically. But it was still a very, very big trading period. And -- but I think that was because we were in lockdown at the time.

And I think what we saw on Black Friday as well was a slow start of the week and then a real boom once we hit Black Friday. And I think that was because most people were at home, and lockdown, they didn't have much to do. So they were holding back to make sure they got the best offer. So it was really, really strong in there. And then on to your point on acquisition, it is equally important to us if it's territorial or demographic. But the bottom line, it's about adding value to our platform on our multi-brand strategy. That's the key and making sure that it's about a fit. So territorial is interesting and demographic is interesting, as is category. So we know we underplay, for example, in beauty. We equally know we underplay in sports. And equally, we've only got one menswear brand at the moment. So there's -- still outside of demographic and territory, there are still other categories equally that we could add to our multi-brand strategy on our platform.

Our next question comes from Anne Critchlow from Societe Generale.

I've got 2 questions, please. So first of all, for the Wellingborough warehouse, could you tell me, please, the sales capacity of that and what the impact will be on CapEx, presumably next year's CapEx? And then on supply chain responsibility, when do you think we might expect the really robust auditing processes to be in place in the supply chain globally and perhaps lower sort of controversy risk?

So if I take the supply chain one first. So in terms of robust audit, we have Verisio, obviously, doing our U.K. audits. And we have said that we will publish a full list of our Tier 1 and Tier 2 suppliers in the U.K. for the end of March this year. Equally, we have Bureau Veritas who have already started the work on our global supply chain. And again, we've committed to publish that supply chain globally, Tier 1 and Tier 2, by September of this year. So that should give you some indication in terms of where we are on that journey and the work we have to do. So even though we have other third-party audits from our supply chain globally, we have commissioned Bureau Veritas to do our own independent audit of those supply chains. So that's the sort of time scale we're looking at.

So just coming back on that, the publishing the list basically means that you'll be going into these suppliers on a regular basis to check everything's okay?

Yes. Absolutely. Yes. So we'll be -- well, obviously, those suppliers will do their own third-party audits. But then going forward, we will always have our independent third-party audit, which has been commissioned by Bureau Veritas.

On the potential new warehouse in Wellingborough, the capacity on that would be about 5 million units. So it's not as big as Burnley, which would have a capacity of, say, 17 million units. But it's about giving us extra capacity in the U.K., where we've really seen strong growth, as you can see from the numbers. And we'll be housing the newer brands there. So that gives the bigger brands, PLT and Sheffield, more headroom and breathing space; and likewise, boohoo in -- and boohooMAN up in Burnley more headroom and breathing space. So that's what that's about, and it doesn't impact any of our other plans. In terms of CapEx, it's fairly limited because for the purpose that we're using, it's in good shape. So it would be less than GBP 5 million of CapEx, and you can take that as being included in our CapEx guidance that we've already given.

Our next question comes from Adam from Citi.

A couple of questions from me. Firstly, on OpEx. You talked about some of the factors that were coming through from the first half, the drags on freight, the benefit from maybe lower returns, a drag from marketing. Would you think about these -- they've increased in the second half. Is this something that will annualize into the first half of next year? I know you've given the sort of midterm EBITDA margin guidance for both this year and for next year. In terms of the 1H-2H split that we've seen this year, next year, should we think about 1H being -- seeing some of these impacts carrying on, I suppose? Secondly, on Brexit, would you be able to give a very quick explanation of exactly what the moving parts around Brexit means for you and any quantification and then mitigation actions? I don't want the ins and outs of the legalities, but a brief explanation would be great. And then finally, the third question, on -- following on from John. On brand acquisitions, it seems like they're becoming a little bit more competitive in terms of other companies wanting to look at some of these acquisitions. Now this is just in the U.K. Is that something, as a trend, that you're seeing more globally in terms of looking at brands, that the markets become a bit more competitive?

I think I'll take the one on the acquisitions first of all. Are they becoming more competitive? I don't know. It -- there's obviously a lot of media stories continuously about who is and who isn't involved, but I'll leave that to the media. Look, as usual, it's -- for us, it's about the right acquisition for our platform and continuing our multi-brand strategy. And again, whether that's in the U.K. or whether that is overseas, it's about making sure it's the right fit for us, and equally, in terms of that is the right value when an acquisition opportunity comes up. So I think we consider all those factors together. Have we seen it heating up? I think we have is what I would say. But equally, what I would say in any of our acquisitions today, there are certain factors which we need to make sure we get right. And that is across kind of territory, demographic and the brand itself and the value for the brand and what we think we can make of it in the future. So we want any brand that we acquire really to go on the global path. So we're not looking for a brand that is really just going to be around one territory. And equally, as Neil described this morning, we're now just under 50% of our total sales now are outside of the U.K. So clearly, it is -- an important factor to us is what the U.K. market is.

On -- so I'll take the other 2 questions, Adam. On OpEx, so what we've seen from H1 into H2 is a continuation of what we saw in H1 on distribution costs, if anything, slightly more of a drag. So we've got the international shipments costing more. And that does go also for costs in -- on our margin as well. But that's been offset by the benefit from returns. But for us, our benefit from returns has not more than offset that drag on the international freight charges. So that's why we're very pleased that we've been able to produce a 10% -- or we're guiding to a 10% EBITDA margin for this year despite that drag, which is kind of COVID-related. Now those COVID-related elements are likely to continue into H1, but potentially not quite to the extent that we've seen so far, H1 of next year. And so while we've had a much higher EBITDA margin in H1 this year compared to H2, I think the differential will -- it will still be the same pattern with a higher margin in H1 than H2, but the differential will be -- dip lower. So -- and the other big factor on that is marketing, where -- in marketing, as recently just mentioned, was less than 8% in the first half of the year, and we played catch up to a certain extent in the second half of the year to make sure we've got that momentum going into next year. So overall, for the year, it would be more normal on the marketing, I would expect because that reflects the fact that in H1 this year, we really pulled back on the marketing. And so that's really what I'd say. And that's why we're -- underlying that, we've got a good -- we feel happy with that medium-term guidance of 25% year-on-year growth and 10% EBITDA margin. And that gives us the scope to invest in different areas and hopefully overachieve on the top line. And then on Brexit, the moving parts there are the -- we've mentioned in the release today that it's a small cost headwind. In terms of quantification of that, in the final 2 months of the year, it's going to be around GBP 2 million to GBP 3 million headwind. And that comes from a few different areas. So we have additional charges for our goods that we're shipping into Europe. Our parcels to customers shipped into Europe will cost a little bit more to -- on customs clearance. So that's just an additional cost that will remain going forward. And then we've got some issues around duties that we would pay on behalf of customers. That would only be where we've got non-U.K. or EU country of origin products that add up to over EUR 150 in the order going out. So it'd be a small proportion of orders there, but still a little bit of a cost headwind. And then the other thing -- the other headwind is around reclaiming VAT on returns, which our customers send to us. So -- and that will only last for 6 months when we implement a one-stop shop, which would enable us to be able to reclaim the VAT on returns. And so that overall, the GBP 2 million to GBP 3 million headwind, won't be at the same level for the whole of next year because of that ability to reclaim the VAT on returns. But I would anticipate, again, a small headwind for next year. In total, it would be high single-digit, millions of pounds. And -- but we have mitigating actions to -- as we are growing and trying to take the advantage of scale, we have mitigating actions, but in particular, around cross-border import duties. We've got -- we'll be operating a full bonded warehouse in the next couple of months, and that will give us a benefit going the other way. So that's why we're saying we're comfortable with the medium term guidance.

That's really interesting. Just one last one I've got you. In terms of the acquired brands, I know historically, there was a margin drag as you've acquired them. Is the -- I don't want the exact numbers, but is the margin drag from those acquired brands starting to diminish each period as we're looking forward?

A little bit. So obviously, what we had in the first half of the year, while those acquired brands were smaller and less of a percentage of the mix, they were not as loss-making as we thought. And then we've invested in those brands in the second half of the year, but they actually performed very well. So it hasn't -- the drag hasn't increased. And -- but we're going to be continuing to invest in marketing those brands because they're still in their early stages of evolution in the group, and we think they've got a lot of potential from here.

Our next question comes from Geoff Ruddell from Morgan Stanley.

Just the one question for me about the newer brands. If you take them in total, roughly what level of sales do they contribute, please, in Q3?

We don't disclose the actual level of sales for the newer brands. But what I would say is that in the last 4 months, the organic growth rate, which would be for all of the brands, apart from the ones that we've acquired in that period, if you like, that weren't there at the same period last year, was only 2% less than the overall growth rate. And through the whole period, the growth rate for the established brands, which outclasses boohoo, including boohooMAN, PrettyLittleThing and Nasty Gal, was only 5% less than the overall growth rate for the group. And that's been actually quite consistent for the 3 periods. So from that, you can work out roughly how much the less established brands are contributing. But we're also pleased that Karen Millen is definitely going to significantly exceed the -- what the predecessor company before we acquired it achieved online in the previous 12 months to the acquisition. And that's what we'd gauge as a successful post-acquisition performance.

Our next question comes from [ Anupa ] from Liberum.

I had a couple of questions. Firstly, if you could guide us on what level of returns did you see in the period? And if it was better or similar to what you saw in the first half? And then on the very strong net cash position you have at the moment, could you maybe quantify if working capital has -- would likely still be a cash inflow in the full year at around the same level as we saw in the first half? Or would you see some unwind happening there?

On the level of returns, we've actually seen -- while it has fluctuated, depending on what lockdown restrictions were in place in the market. So we saw in the first lockdown in H1, you go very low and then increase towards the end of the first half of the year. And then it remains an increased level, just slightly below a normal level for about 4 weeks. And then as lockdown restrictions came into play more, it then reduced back to the kind of lockdown levels of returns based on the product mixes -- the change in different product mix. So net-net, what's happened is that the returns rate in the second half is very similar, just slightly higher than the returns level in the first half of the year. And what we've said about that is that our normal returns rate is late 20%. So if you said at 28%, that's pre-pandemic. And then post-COVID or during COVID, we've seen return rates of low 20% as kind of a 6-month average. And that's the level of reduction that we've seen there. So with the -- our relatively low levels of returns compared to others, so that impact has been significant, but not as significant as you may have seen with other people who sell at higher average selling prices. And then on working capital, we would expect to see the negative net working capital cycle generate cash in the second half of the year, not quite at the level of the first half of the year. But it's not really a significant unwinding. It just reflects the fact that we have built inventory at the end of the first half of the year to put us in good shape for whatever lockdown restrictions were in place during the second half of the year. So we still see that negative net working capital cycle in the second half of the year, but we did see a stronger inflow in the first half of the year as a percentage of sales. But generally, what I'd say on working capital and cash is, we usually see similar cash levels at the end of February to what we have seen at the end of December.

Just if I could ask one follow-up on -- just on the returns rate. What would you generally put that low return rate compared to your peers down to? Is it because of the delivery proposition that you offer to the customer in terms of giving in fact a GBP 10 fee for the entire year and the free delivery for the entire year? And that just makes customers probably not order extra to meet a minimum order target? Or is there any some other -- any other reason that you put it down to?

I think there's a couple of factors. And one is that all our sites only sell one brand. So we're all one brand, and that obviously helps keep returns level down. So you've not got different brands with different sizes, et cetera. And then the other aspect is there's definitely a correlation between average selling price and higher returns rates. And our average selling prices are relatively low, and therefore, you get relatively low returns rates from that as well.

Our next question comes from Georgina Johanan from JPMorgan.

Just 2 questions from me, please. So first, just to follow up on all the moving parts on the margin. It had actually been my understanding that the freight drag was actually a bit larger than the return benefit. So just to be -- just so I understand, going into fiscal '22 or half of it, is that also -- when you are reiterating your medium-term guidance for a 10% EBITDA margin, are you explicitly reiterating that for fiscal '22 as well, please? And that's the first one. And the second one was just you referenced about onboarding new ethical suppliers in the U.K., which is great to see. Are you seeing any cost/price differential between the ethical suppliers that you're onboarding and kind of the average across your existing U.K. supplier base?

So if I take the supplier one first. So no is the answer on costs. Part of the ongoing journey anyhow as we increase in size and require more capacity is that more of our business continues to move overseas, which we haven't had previously. And obviously, from a cost point of view, better cost there. In terms of ethical suppliers, the being ethical doesn't necessarily mean cost. And obviously, that's not something that we're seeing. And we're very confident, again, when we gave our guidance this morning, around 10%, that we're not seeing any impact there.

Then on the moving parts on the OpEx. Yes, the freight drag is higher than the benefit from returns. And you could see that quite clearly in the H1 results where there was 130 basis points deleverage on distribution costs. If anything, that's slightly higher in the second half of the year. And we would expect that to continue. But what I -- what we are saying is that we produce -- or we're guiding for a 10% EBITDA margin for this year, where we've had that freight drag through the whole of the year. And so all other things being equal, we'd expect that to be the same next year. Having said that, we're not giving guidance for next year yet. And I think it's sensible to kind of hold fire on that because there's so much uncertainty around how the vaccine rollout is going to go, et cetera, that I think it's just sensible to wait until our next update before we give any comments on that. But -- so the key point is that we've managed to produce that double-digit EBITDA margin this year with that freight drag. So we should be able to do that in the future. But it's a changing environment. I would caution with that.

Our next question comes from Greg Lawless from Shore Capital.

Could you just talk a bit about cotton inflation? The first one. And then just as an -- I'll just breeze through the Brian Leveson report. He's talking about at the end in terms of the conclusions. "this will not be the work for a few months, it will require a sustained effort. You're on the right road, and it's a journey." When does he think you'll arrive at your destination, please?

So I'll address the cotton point, first of all. And we are seeing cotton prices going up globally. And there's 2 factors driving that. One is a lower crop than previous years, but number two was obviously the cotton issue in China around the forced labor and people not wanting to use, obviously, China cotton. In terms of cotton as a yarn for us, it's actually one of our smaller yarns. We're a much bigger user of manmade yarns like polyester. But we'll see. It's moving by the day at the moment, and we'll continue to monitor that though we're not seeing or not forecasting any impact at this point. In terms of Sir Brian Leveson and his report this morning, obviously, Sir Brian came on board just before Christmas in November. And his initial weeks is obviously understanding where we are today and starting his work. I think for me, and I think this is the case for any retailer, compliance is a continuous journey in terms of -- just doing an order as a point in time doesn't make everything right forever. So you've got to be continuous in terms of this journey and what we need to do. And we've just spoken about cotton as a great example. We wouldn't have spoken about that sort of 6 months ago or 12 months ago in the China issue and what that means for your supply chain. So I don't think we'll be putting a date in the line. But I think what you should take from us is that declaring our U.K. supply list in end of March and our global list by end of September should give you some view around when we're feeling very confident about the processes and the auditors that we have in place and the factories that we're working with.

And is he planning to update quite regularly? The fact you've made this transparent this morning, are we going to get every 6 months an update from him? Or what's the intention, please?

I think the next intention, the next date we look for is when we do our end-of-year results, end of April. So we think that gives him enough time again to make progress and get his feet under the table with the KPMG team. So we think that's probably the next appropriate time to do an update.

Unfortunately, these are the only time we have questions for. So I'm going to hand it over back to the speakers for any other remarks.

Okay, everybody. So thank you so much for dialing in this morning. Another fantastic set of results for the boohoo group on our journey to be the leader of fashion in the e-commerce market. And our Agenda for Change, as Mahmud has pointed out earlier, again, well underway and absolutely committed to delivering on this. So I thank you again and look forward to speaking to you all again soon. Thank you. Thanks, Mike.

Ladies and gentlemen, thank you for attending. You may now disconnect your lines.