boohoo group plc (DEBS) Earnings Call Transcript & Summary

Hi. Good morning, everyone. Thanks for coming. I'm going to keep it brief as usual. I'm very happy to see there's not many of you here, but there you go. And we'll pass -- listen, we've got a great business to whatever's going on in the external world, we have a super business, and we're just dealing with it. That's really the base of everything [ they'll say ]. We're dealing with everything. I'll pass it over to John and he can explain, and Neil and Carol.

Thanks, Mahmud, and good morning, everyone. Firstly, I'd like to take this opportunity to thank our teams across all of our brands for their continued hard work and commitment. Our people are crucial as we continue to invest in the business to ensure we have the right technology, infrastructure, and capacity to support our future growth. What we have achieved over the last 2 years is nothing short of exceptional. We have grown revenue by 61% across the group. We have increased our customer base by 43% to 20 million people. We have increased our market share by over 80% in the U.K. and U.S. And we have significantly extended our target addressable market with our acquisitions. We can now dress everybody from 16 through to 50 plus, and the opportunity is huge, with half a billion potential customers across our key markets. And we're investing for the future. We're increasing capacity across our U.K. distribution network to over GBP 4 billion and adding a U.S. distribution center to take capacity to over GBP 5 billion. We're driving efficiencies across our existing sites through automation programs, bringing significant cost savings in future years. We're optimizing our supply chain, taking advantage of our diverse base to flex sourcing to markets closer to home. We have integrated our new brands to position them well for future growth both in the U.K. and in international markets. Macro factors have created some short-term headwinds for the business. Our international proposition has been affected in overseas markets due to delivery delays. We're confident that we have the right product and price, which is demonstrated by our great performance in the U.K., driving market share gains. The only thing that is not strong enough currently in our international markets is our delivery proposition. We're investing in a new DC in the U.S., which will transform the delivery proposition with next day across our key U.S. markets. Carriage costs remain very high. On a like-for-like basis, they have impacted EBITDA by approximately GBP 60 million over the last year versus pre-pandemic costs. While we expect these costs to continue in the near term, over the medium term we expect them to trend down towards more normalized levels. We are moving sourcing closer to home markets and away from areas facing delays and higher costs such as China. We're improving our stock management, tightening our stock holding to give greater flexibility to react to changes in demand mid-season. And we're focused on cost management, leveraging central overheads across the group, scaling our newly-launched brands, and driving greater marketing efficiencies. The effect of higher returns rates annualizing will also have an impact over the coming year, with return rates increasing last year as we exited the periods of lockdown. Product mix has changed significantly, and Carol will come on to talk about this later, but the mix has skewed towards dresses more so than before the pandemic, and so associated returns are naturally higher. All of these factors are temporary, not structural, and will subside as the effects of the pandemic begin to ease. We've been investing into our newly relaunched brands, integrating them into our supply base, embedding the test-and-repeat model, and spending on marketing to raise brand awareness. This has had a short-term impact on our EBITDA margin but will contribute to future growth as the brands scale. We're also focusing on our wholesale partnerships, both in the U.K. and internationally, and have announced 3 over the past year and more to come very soon. Our focus remains unchanged: invest into the business to be well prepared for future growth opportunities. We are driving through ambitious automation programs which will bring material future cost savings. We're investing GBP 125 million in our Sheffield distribution center, with a payback period of under 5 years. We've invested in a new office in London for our London-based brands, and we have committed to creating 5,000 new jobs over the next 5 years as we continue to grow. Over the next year, there are some key areas we are focusing on with regards to our international business. We are currently in the process of opening a U.S. distribution center, which will be operational by mid-2023, driving a step change in our delivery proposition, enabling us to offer next-day delivery to our key U.S. markets. We are focused on building wholesale partnerships to complement our direct offering, increasing brand awareness across existing and new territories. This year, we announced partnerships with Alshaya in the Middle East, ABOUT YOU in Europe, and Very in the U.K. We have a number of other partnerships in the pipeline, and we will be announcing those very soon. Our marketing focus is moving back to driving engagement through key influencers and physical events such as Coachella in the U.S., along with big campaigns such as Megan Fox with boohoo, and lots more exciting events and collaborations over the coming months. We are focusing our investment in key territories such as the U.S. where we see huge potential for growth. We've increased our market share by over 80% in the U.S. in the past 2 years. Clearly, our product resonates with customers, and there is a massive opportunity there. So we are investing now to drive growth when we have transformed the delivery proposition. Over the past 2 years, there have been a clear structural shift to online. Key apparel markets around the globe are still down versus 2 years ago, including the U.K., U.S., and Europe. On this chart, there are some incredible businesses within our global competitor set, and we have seen leading growth over the last 2 years. So not only are we emerging from the pandemic in that group of structural winners, we're in the top set of those and are delighted with that performance. Now an update on Debenhams. We're making a significant investment of GBP 75 million in Debenhams, having relaunched the brand as an online-only digital department store. We have now completed phase 1, which saw the relaunch of the website, the relaunch of Debenhams in-house brands, the addition of boohoo group brands, new categories, prestige beauty [ being ] offered, and also third-party fashion brands through the marketplace. We're now moving on to phase 2, and we have the opportunity to add hundreds if not thousands of brands to the site. We're in talks with additional beauty houses to onboard their products and also a range of third-party brands to sign up to our marketplace. We've made significant progress over the last year, but there is still a long way to go to unlock the full potential of our digital department store. Moving on to strategy, there are 6 areas that we'll run through, covering everything from global opportunity ahead of us through to how our technology and infrastructure will act as enablers for us. Across our key markets of the U.K., U.S., Europe, and the rest of the world, apparel markets remain down versus 2019. The U.K. is down 3% versus pre-pandemic levels, the U.S. is down 9%, and rest of the world down 10%. Despite the macro issues facing us over the past few years, we've grown 77% in the U.K., 71% in the U.S., and 13% in Europe and the rest of the world. So that means we have grown market share across these core markets. And if we look at this through our customer KPIs, which Neil will cover in more detail later on, we are seeing different performances between our U.K. and international businesses that we attribute to the service challenges we are having in delivering goods to our customers overseas. Looking at the revenue retention metrics, by which I mean the percentage of total prior year net sales that are repeated by our customers in the following year, we have seen a significant divergence in performance between our U.K. and international businesses. In the U.K., our retention rates have remained close to 100% over the last 2 years. What this means is that, in revenue terms, we are seeing almost no churn from our customer base. We attribute this to the strength of our business model, which is resonating strongly with our customers as a result of our pricing, product, and proposition being exactly where we want them to be. Internationally, this picture is different, with retention rates lower than where they were pre-pandemic, which is driven by the impact of significantly extended delivery times negatively impacting our offering in these markets. As we progress our plans to transform the delivery proposition, such as through our U.S. distribution center, we will be aiming to drive those international sales retention rates back up to what they were 2 years ago, with the ambition of taking them even higher with a superior delivery proposition in the U.S., such as next day delivery, an example of that opportunity. As you can see, we have a large wholesale footprint internationally, and a key focus for us is expanding these partnerships. This year, we announced partnerships with Alshaya in the Middle East, About You in Europe, and Very in the U.K. We also have other wholesale partnerships in the U.K. and India being announced shortly. There is a huge opportunity to continue to develop these partnerships and enter new markets in a low-risk way but with significant potential to increase brand awareness. As you can see, we have a diverse supply chain. We began with our Leicester base in the U.K. and we have grown this throughout Europe, across North Africa, and into the Far East. Last year, our sourcing mix was approximately 42% short lead time and 58% long lead time. Over the last year, there have been well-documented issues with sourcing from the Far East, which has reduced this flexibility of our business model and our ability to effectively test and repeat products. Flexibility to move our sourcing closer to home, to Europe, and Northern Africa, enables us to shorten lead times and avoid increased air freight costs by trucking product back to our U.K. DCs, which is a big focus for us in the year ahead. Our sourcing mix now is roughly 51% short and 49% long lead time, evidencing that flexibility. And we aim to take that short lead time sourcing, from markets closer to home, up to 60% in the coming weeks and months. We currently have significant scale with 4 distribution centers in the U.K. We have ongoing automation projects in Sheffield and Burnley. In our Sheffield site, we're investing GBP 125 million to build a state-of-the-art facility which will lead to greater efficiencies going forward. To put that into context, that is 3 times what we invested in our Burnley site. We expect payback to be within 5 years, bringing significant cost savings into the future. And we have plans for other sites too, such as Daventry, where we will invest to see material cost savings in future years. When our U.K. automation projects are complete, we'll have over GBP 4 billion sales capacity. When the U.S. distribution center opens, that will take us to GBP 5 billion sales capacity across all of our sites. Significant capacity to support our ambitious future growth plans. We already have a significant business in the U.S. with sales last year of almost $600 million. In mid-2023, we plan to open our first U.S. distribution center, which will be strategically located in Pennsylvania in the northeast, close to our key U.S. markets. The site itself has over 1 million square feet, and all of the U.S. will be serviced from this new distribution center. The opening of the distribution center will transform our U.S. delivery proposition to the next day across those key U.S. markets, and 2 days in other areas. That compares to 8 to 10 days currently. We're experiencing delays to delivery now, but this is transformational even compared to our pre-pandemic delivery times. So we have a lot of opportunity to grow sales in this huge market. The takeaway from this slide is that our global offering continues to scale rapidly, and there are some incredible stats here. Today, we have 13 fashion destinations, compared to 7 two years ago. With these destinations, there are 83 customer-facing websites and apps, which will continue to grow. Choice for our customer is unrivaled. Our offer has trebled in the last 2 years, and our customer has more newness than ever before, with almost 1,000 lines launched daily. And our reach continues to grow, with 60 million social media followers and 20 million customers from around the world shopping across our brands. On the front end, we have expanded out our platform with upgrades across our Nasty Gal and boohoo brands with our partner Salesforce, and we have also launched Debenhams onto a new headless modular platform architecture, which differs to our existing multi-brand platform technology. Implementing a product inventory management system, PIM, has been a huge step, moving the business forward by standardizing and centralizing all of our product information. With 5 million SKUs across our brands, we are seen as a trailblazer on how to leverage the benefits of a modern PIM across the industry. Work on how we optimize our products to get them onto our website for a better customer experience has also been a key focus. The work in our auto-categorizer has streamlined the internal processes and provided efficiencies by removing manual categorization tasks. We are also focused on innovating content to drive further interaction with our customers. Examples of this are fitness content for our activewear ranges and gamification with new product launches. We've also been investing in back-office technology, implementing further digitalization to support the scaling of our platform. Developing our microservices continues into the next 12 months to allow for platform changes across the finance as well as enabling our growth plans with the opening of our U.S. warehouse in 2023. The implementation of our new PO service and integration with our third-party logistics carriers has unlocked the visibility of our goods in transit across our supply chain. Launching our supplier hub was a huge achievement, taking all our supplier onboarding into the 21st century, removing the manual onboarding processes, and implementing a digital platform that our suppliers can interact with us, and has also allowed for our supply chain to be streamlined, controlled, and auditable. We have completed our agenda for change, which has now become a part of business as usual, and our focus now is for driving further sustainability within our business. Earlier this year, we launched an in-house laboratory allowing for fast and cost-effective in-house garment testing, being one of very few retailers that have invested in this technology. It allows us to test fabrics to quality and durability, along with helping to meet sustainability goals. We're now a member of the Better Cotton Initiative, with great progress made to date in the sourcing of BCI cotton. And we're working with Cotton Connect to grow responsible environment livelihood cotton in Pakistan. We recently opened our Leicester manufacturing site, where we have begun producing clothing for a number of brands across the group. We have launched a collection of summer dresses with Dorothy Perkins that are all made at the site and proudly wear the logo "Made in the U.K." When at full capacity, the site is capable of producing 40,000 units per week. We have set out science-based targets as part of our upfront sustainability strategy, and we have verified the science-based targets initiative. We'll be publishing our 2022 sustainability report in a month or so, with our annual report, with further details of our goals and progress towards them. We're also entering the resale market with a PLT branded platform, further extending our target addressable market. The site will allow resale of any brand, but for PLT shoppers, they will be able to link their account and resell PLT product without the need to take and upload pictures or write a product description. It's a great opportunity to enter a rapidly growing market, and also increase the lifespan of garments. So to summarize, over the last 2 years we have seen strong sales growth across the group of 61%, growing our market share in our core geographies. Customers shopping across our brands have grown to 20 million people and we have extended our target addressable market to half a billion people with brands targeting all price points and age ranges from 16 to 50 plus. Looking towards the year ahead, we're focused on investing to position ourselves for future growth opportunities. We're increasing capacity in our distribution centers through automation and efficiency projects, we're adding a U.S. distribution center to transform the U.S. delivery proposition, and we're optimizing our supply chain, utilizing our diverse footprint to source from more closer to home to bring down costs and lead times. And we're continuing to invest to scale our new brands, defining the individual focus of the brands, increasing brand awareness and building out ranges and styles to offer our customers unrivaled choice and even more reasons to shop with us. So that's it for me for now. I'll hand you over to Neil now for the financials.

Thanks, John, and good morning, everybody. I'm going to move on to the financial review of the year. And as I go through, you'll see that we continue to include 2-year comparisons for some additional context following an exceptional year last year. I'm also going to share some insights into customer behavior and demand patterns, and then finally I'll take a look at guidance and outlook. So let's start with the income statement. Group sales grew 14%, compounding the standout performance last year, meaning that we've delivered 61% growth over the past 2 years. We've consolidated our already significant market share and extended our total addressable market. Gross margin was 52.5%, down 170 basis points year-on-year following significant inbound freight cost inflation and some increases in markdown in the last parts of the financial year. Adjusted EBITDA at GBP 125 million was broadly in line with the pre-pandemic figure 2 years ago, despite the significant additional pandemic-related freight costs that have impacted EBITDA by around GBP 60 million. Adjusting items total GBP 74.7 million, and that includes one-off restructuring and warehousing transformation costs totaling GBP 35.8 million. And those were a result of acquisition integration and investments for scale and efficiencies that the group will benefit from in the future. Looking at the results by geographical segment, as John mentioned earlier, we are delighted to have significantly increased market share in our 2 largest markets, the U.K. and the U.S. In the U.K. we've grown 27% in the year and 77% over the last 2 years, while in the U.S. we grew 4% year-on-year and 71% over the last 2 years. With the challenges that we've experienced due to extended shipping times, we've seen reduced growth on the 2-year comparison across Europe and the rest of the world segments. When delivery times improve, we expect to see a reacceleration of sales and growth across these markets, in addition to establishing wholesale partnerships that can support the brands in the regions in the future. And lastly on revenues, we just wanted to add a bit of further color on our established brand performance, who through the pandemic have delivered 36% growth, with the U.K. up 39%, reflecting the strength of our proposition, and our international business was up 33% despite those service challenges that have impacted performance. Looking at our customer engagement KPIs, we had around 20 million unique active customers in the 12 months to the end of February, 2022. That's a 43% increase over the last 2 years. In the last year, we've seen further improvements in key customer metrics, and that means customers are shopping more frequently with all of our brands and spending more as we continue to capture a greater share of wallet. Most of you will recognize this slide showing our cohorts of customers by vintage and the levels of revenue retention. As a reminder, we are defining the level of revenue retention as the percentage of total prior-year net sales that are repeated by those customers in the following year. At a group level, we can see that the exceptional customer acquisition achieved in the early stages of the pandemic has yielded some churn of customers in the last 12 months, with revenue retention at 78%, which was down from 91% last year. And the big driver behind that decrease is with our international performance, which is significantly behind the U.K. as a result of those service challenges we've spoken about. On the right-hand side though, we've got our cohorts for the U.K. customer base, which really illustrate the strength of our business model when our brands are able to deliver across price, product, and proposition. Our U.K. cohorts have delivered retention of 99% as we continue to drive market share growth with increases in spend per customer. So this gives us confidence that when we are able to replicate our U.K. offering internationally, we can reaccelerate our growth in all markets. For context, restoring international retention levels back to pre-pandemic rates would add around GBP 200 million to our top line. Our goal for the future is to go beyond that, get our international business up to those pre-pandemic rates of retention in the short term, and then to emulate the level of retention that we see in our U.K. customer base. On to operating costs, and this slide shows that we've seen a short-term step change in cost as a result of the pandemic, and also as a result of our investment in new brands. As we move forwards, we're focused on leveraging our costs where we can, recapturing marketing efficiencies as all of the brands scale up, and also landing key projects to drive efficiency and the benefits of scale. And we aim to deliver a targeted reduction in operating expenses as a percentage of sales as follows. Firstly, central administration costs, which have increased slightly as a percentage of net sales versus last year, we're continuing to invest in our multi-brand platforms and our recently acquired brands. We do expect to see leverage come through in future years consistent with our performance on a 2-year basis. Secondly, marketing has seen strategic investments into those brands that we've recently acquired so that we can fully capture the opportunity that they bring to the group. And in addition, trading has been a little behind expectations for some of the other brands, particularly in those international markets. So looking ahead, we'll be focusing on driving more efficient spend, and we expect our marketing costs to return to the 9% to 10% of sales corridor in the medium term. However, at the same time, we won't be afraid to continue investing in order to unlock the growth curve ahead of us. Lastly, distribution costs have increased year-on-year as a percentage of net sales. This is due to significant increase in international carriage rates, elevated levels of returns, and also significant labor cost inflation. Looking ahead, we've got a major automation project going live at Sheffield where we're investing around GBP 125 million, and that will unlock major operational efficiencies. And we'd expect about a 5-year payback on that investment. In addition, our U.S. distribution center will unlock significant savings on the distribution cost line when it goes live in 2023. So going into a little bit more detail on costs, we want to draw out the full impact of freight cost headwinds on our cost base. And those represent short-term temporary headwinds that will pass as the effects of the pandemic ease and supply chains normalize. Like-for-like, our costs are up GBP 60 million as a result of those pandemic-related issues. That's versus 2 years ago, and it's split across the areas shown here. Firstly, outbound carriage inflation is GBP 38 million higher than it would have been 2 years ago. This increase impacts our distribution costs line. Secondly, inbound freight inflation, which after mitigation was a GBP 22 million headwind last year. Most of that impacted gross margin in the second half of the year just gone. So looking at the impact of pandemic related headwinds, plus our brands and platform investments in tandem, we can really see the underlying resilience of our profitability as well as the longer-term opportunity. We're reporting GBP 125 million of adjusted EBITDA in the year. That's despite GBP 60 million of pandemic-related costs, which are equivalent to 300 basis points of margin compared to financial year 2020. In addition, we've invested heavily in our platform and our new brands, which have not yet scaled to the same degree as our more established brands, and across overhead and marketing efficiencies that represents a combined GBP 33 million EBITDA opportunity, as those new brands tend down towards the group's long-term average. So, this would deliver over 150 basis points of margin. So, to summarize the last few slides, looking through the cycle of the last 2 years, we've managed to maintain healthy levels of EBITDA despite the significant and unprecedented cost and service challenges posed by the pandemic, whilst at the same time investing in our multi-brand platform to capture market share. So this gives us a lot of optimism to continue investing for the future and in the long-term potential of the group. Moving on to cash flow, 2 main moving parts versus last year relate to working capital and capital expenditure. On working capital, we've invested in the new brands and operated with higher levels of inventory than expected because of global supply chain issues, and we believe that we'll be able to improve this in the year ahead. Capital expenditure totaled GBP 262 million in the year, primarily across freehold properties; that was at GBP 88 million. We also had GBP 120 million related to warehousing infrastructure, and then the remainder related to investments in the tech stack for our multi-brand platform and upgrading our offices. These investments are all about building a scalable platform, infrastructure, and working environment that can support our long-term growth. Post year-end, we've upgraded the GBP 100 million revolving credit facility to a new GBP 325 million facility, which will underpin our future investment programs. A large part of our CapEx last year related to the automation project in Sheffield which will go live later this year. Our approach to Sheffield mirrors what we did previously in Burnley, where we added capacity for growth, and then at the right time added automation to drive efficiency. Looking at Sheffield, we first operated out of the location in September 2018 with CapEx of GBP 17 million, which focused on the manual operation. Two years ago, we drew up plans for a GBP 125 million automation investment which, with added stockholding capacity, enables the site to support GBP 1.3 billion of net sales. More importantly, this will drive improved operational efficiencies, where we'll be expecting to achieve a payback of less than 5 years on that GBP 125 million investment. And we'll expect pick rates to increase more than fivefold from their pre-investment levels. So moving on to guidance, for the year ahead, we're focused on retaining the significant market share gains that we've made over the course of the last 2 years. We expect to continue to be impacted by pandemic-related factors that have impacted our international competitive proposition and our cost base. Therefore, we're expecting that revenue percentage growth will be low single-digits for the year and adjusted EBITDA margins will be expected to be between 4% and 7%. In the first half of the year, we expect revenues to be broadly flat as relatively high returns rates lead to net sales being down year-on-year in the first quarter, with a return to growth in the second quarter. And we'd expect adjusted EBITDA margins to start rebuilding from the level achieved in the second half of FY '22 in the first half of this year. We've also outlined other financial guidance on this page for completeness, which includes some warehouse commissioning costs for our U.S. DC that will also flow into the following financial year, FY '24, ahead of the go-live of that facility in mid-2023. So, in summary, we have a robust financial and operating model. We've delivered 61% revenue growth through the pandemic with EBITDA broadly flat, notwithstanding the operational and cost challenges presented by the pandemic. In the U.K., our largest market, our performance and strong customer metrics demonstrate the strength of our offering and gives us confidence in the long term opportunity, both in the U.K. and also internationally. For the year ahead, we're focused on leveraging costs and landing strategic enablers to prime the group for growth as conditions normalize, and as pandemic-related headwinds ease. Returning towards normalized growth rates of 25% year-on-year per annum that we'll see post-pandemic and also with the adjusted EBITDA margin rebuilding back to 10% in the medium term. I'd now like to hand over to Carol. Thank you.

Thank you, Neil, and good morning, everyone. This morning, I'm going to talk a little bit about our fashion, and how the recent years -- how in recent years our product categories have evolved, the ever-emerging trend. And then I'm going to cover off our brands and what they've been up to in the past 12 months and how our dresses have been the best-performing category, and lastly an update on Karen Millen. But before we get to that and get us started, I'd like to present to you a video to show what the boohoo group and its 13 brands have been up to in the last 12 months. [Presentation] A lot going on. So, in this next slide, you can see there's a selection of dresses that are available across all our brands. We currently have over 40,000 different options dresses available across the brands today, huge level of choice and for every occasion and taste level, catering for our casual, young Gen Z customers to our 20-something with our going out dresses, our tailored workwear dresses, our occasion dresses for weddings and day at the races. It's very different from the offering of old, and the choice is there for every demographic, from the age of 16 to 60. And not only are we covering off the various ages and styles, we are also covering off a huge amount of sizes, from petite to tall to curve, as well our leading price points in our boohoo and PrettyLittleThings brands, with entry prices as low as GBP 10, going up to Karen Millen with dresses of GBP 680 and in every other price point that's in between. So, if you just have a look at the bottom row, where you'll see there's an orange dress [ style ] from boohoo that's just GBP 12, and in the top right-hand corner there's the Karen Millen leather tuxedo dress at GBP 499. That's just to show you some of the diversity we have in terms of price points. Now, our collections are very different from what we would have looked like throughout the pandemic and even through the pre-pandemic times. As we've acquired new brands, broadened our proposition and appeal across the market, this just demonstrates how we have a very different offer from the boohoo group a few years back. Our core brands at the value end of the market are focused on our 16- to 24-year-old group. We aren't seeing these customers' wallets squeezed in the current inflationary environment. A large proportion of them aren't exposed to the price increases that many households are facing, and after 2 years of pandemic and lockdown, they want to go out, and they do want to refresh their wardrobe. And this is what we're seeing in the U.K., where we have the right product, the right price, and the delivery proposition -- and we get that right, as John and Neil have already talked about, the delivery delays faced overseas, so we feel confident that when we have, we call them our 3 Ps, right. We then can return to growth in our international market. So just a little on our products, so fashion and trends, they change all the time, but nothing more has highlighted this more than the pandemic. And I often hear, obviously, in our daily conversation, the conversation we're having with you guys, is the words pre-pandemic levels. To a large proportion of our customers, this seems like a lifetime ago. So it's very difficult to make comparisons to pre-pandemic levels when it comes to fashion trends. Of course they've changed, and that's to be expected. Life has changed and so have our social habits. As a result, this has a huge impact on the categories we are now seeing performing, and some areas that aren't performing as well as they used to. As I've demonstrated on the previous slide, dresses are now outperforming pre-pandemic levels. We didn't stock as much tailoring offer a few years ago, but brightly colored tailoring is now huge. You can see I'm wearing some today. And this reflects the trend of the season. Athleisure, which was huge throughout the lockdown, has a lower mix, as has denim, as skinny jeans have now slowed. So I mention this because it does have an impact on the number and the metrics within our business, and especially our return rates that John and Neil have already talked about this morning. Fit-critical areas such as dresses of tailoring have a high return rate compared to less fit-critical areas, such as joggers and hoodies. But this is a seasonal trend, and as we grow our inventory to suit demand, these product mixes will vary too. What we can see with the introduction of newer brands selling at a higher price, we're also seeing a different behavior. Customers are returning items at a higher rate, or they're just buying 2 sizes to try on at home. We don't necessarily see this as a negative. We have increasing brand loyalty and an increasing average selling price. So once again I'm going to say it's very difficult to compare return rates to pre-pandemic levels. Fashion has changed. Customers have grown across demographics and our average selling price has also increased, and today we have a very dominant U.K. business. So on this slide, I've just pulled out 2 of our brands, Coast and Burton. Over the past 12 months, we've seen a shift towards occasion wear. Coast is a destination for bridalwear, bridesmaid, red carpet, or a day at the races. We relaunched this brand just before the pandemic began, so you can imagine it was a challenge through lockdown, but now with the focus clearly on dressing up, we've re-established the brand's destination, and we're seeing some fantastic results. Burton was only relaunched just last year. It's returned to its heritage roots, with over 50% of the sales in formal menswear and tailoring, a very different offer to the one we took on a year ago, with tailored suits at great value starting at GBP 99. So now moving on to marketing. We continue to optimize our marketing spend across all our geographies, with a clear focus on where we're getting the best return for our investment. Collaborations are still a big part of our business as our usual marketing strategy. It's become part of our DNA and synonymous with the group. We'd be here all day if I had to list them because there are so, so many, but here's just a few. At Karen Millen we just launched a collection with a '90s iconic supermodel, Helena Christensen; boohooMAN has collaborated with Jack Grealish, the U.K. footballer, over the Euro tournament, and we've got further collabs with him to come throughout the World Cup this year. We've also started our journey into the metaverse and launched NFTs. And at boohoo, we worked with Paris Hilton on a virtual Fashion Week; PrettyLittleThing, their first virtual model in the metaverse; and boohooMAN launched an NFT collection. For now, it's not about monetization; we're driving further engagement with our audience. We're seeing it as a way to be innovative and a disruptor in the space. And we're thinking about future NFT collections, collaboration, digital fashion pieces, games, and how we can acquire customers that may not have shopped with boohoo in a traditional sense before. It's a growing world, and we're just starting to utilize it from a marketing perspective. Personally, I'm new to it, and last year I didn't even know it was a thing. So here we are at the beginning of the journey. None of us know what this virtual world is going to look like, or what it could potentially mean to us. But of course, we're establishing ourselves at the forefront of this emerging trend. And back to the real world. As we have collabs, we've continued to participate in physical marketing events, such as New York Fashion Week, where PrettyLittleThing did a show. Recently, Coachella for boohoo, PrettyLittleThing and Nasty Gal. And something new to us is national wedding fairs across the U.K. where we've been repositioning the Coast brand. So here we are 2 years on. Karen Millen, we've navigated the relaunch through several lockdowns, taking a premium brand and proving our test-and-repeat model can be applied. I have to say it's doing really well. And even when the world was working from home and wearing jog pants, the Karen Millen brand was selling her style. Really lots of strong sales in the U.K., a successful launch in the U.S., and now over a third of Karen Millen sales are international and the sales are up 70% on last year. The categories are ever-expanding, with over 3,000 lines to choose from versus a few hundred when we just took on the brand. And Karen Millen has a unique style like no other in the market. Apart of its success, it's at the 100% designed handwriting. I've touched on the collaborations with Lydia Millen before, they go from strength to strength. The tailoring and work we're offered become part of the brand's signature. Our crafted cruisewear holiday collections are exceptional, and recently we've introduced an offer like no one on the market with some of our leather pieces. And what's truly been part of this success story is that we've successfully implemented a test-and-repeat model. This allows us to be brave with our fashion choices, and who else has a yellow -- bright yellow it is -- blazer at GBP 399 modeled by the iconic supermodel Helena Christensen. But with all of this, we have some commercial fashion too. We've stretched our pricing architecture with entry price points on some jersey basics at GBP 20. So every customer can now own some of our Karen Millen pieces. And so to summarize this morning, we've seen some fantastic growth over the past 2 years in our key markets, the U.S., the U.K. and Europe, and in the U.K. specifically, where we have the right product, price and delivery proposition, there is a very strong demand for our products, and we're bringing customers back to shop with us time and time again. Our focus in the 12 months is to build on our international infrastructure, enabling us to offer the same competitive proposition to our international customers as we do in the U.K. and to return to growth in the U.S. and Europe. We are investing in automation and efficiencies for our U.K. network that will bring material cost savings in the future. And we're focused on optimizing our supply chain network, bringing sourcing closer to home while improving our lead times and bringing costs down. And we're investing in the future to enable our brands to scale above and beyond what they've already achieved this year. We're very excited about all of the opportunities that lie ahead. Thank you very much. And now we'll take questions.

Ben Hunt from Investec. Just a couple. Firstly on the stock position, if I could just touch on that a bit. It looks very elevated, and just wondering how confident you are that's clean. And secondly on that, to what extent is having to bring in stock these days earlier affecting your ability to do test and repeat? And then secondly, on your guidance for the, obviously, the recovery of EBITDA margin, how much of the 60 million in freight costs are you relying to fall back as well or that 300 basis points that you mentioned during the presentation?

So if I take the -- I'll take the stock one. So in terms of bringing in stock early, the only time that really happens is the Chinese New Year. So that was the first of February. And obviously, China, with COVID, that was pretty much [indiscernible] 3 to 4 weeks. So that's the only exception I would say in terms of bringing stock in earlier. So that's a little bit around your stock elevation as well. Really, the kind of test-and-repeat model is absolutely intact and stronger than ever. The key really is what we've experienced more around peak, I'd say, particularly, again, coming out of China. It was even on air freight, which is normally a 72-hour process, actually was turning into weeks. And that was literally queuing to get into an airport then queuing to get on an airplane and get away. So not just a crazy price, but a really poor service as well. So what I spoke about is really sort of bringing -- even though we have a high mix of closer-to-home product and country sourcing, it's taken that up to 60%, and that's all truck dependent. Which again, just takes us away from that kind of pressure on aircraft, pressure on sea, not just in service, but obviously on cost as well.

And on the freight costs included in the guidance, so we're expecting all of that to recur this year. And that's one of the messages behind the guidance is that these pandemic-related issues, while we're leaving the pandemic behind now, we're not leaving those issues behind just yet, so those elevated costs are going to continue through the full year in terms of that whole 300 basis points that we've seen in the last year.

Charlie Muir-Sands from BNP Paribas Exane. I've got three questions or topics, please. The first one is just on the gross margins. I just wonder why you aren't adjusting your bought-in margins to reflect the higher cost of returns rates. Is it inherently that dresses are a lower EBITDA margin as it were, you just can't offset the higher handling costs with higher markup? And kind of related to that, does this shift to more proximity sourcing squeeze your bought-in margins, or do you compensate for that? The second question -- actually, sorry, it's only really 2 topics -- is on the U.S. DC. I appreciate it's probably far easier said than done, but given the challenges around serving those overseas customers, why is it taking you until the middle of next calendar year to get something up and running which can compress those lead times? And when you do that, will you be replicating the whole test-and-repeat model over there, or how will that work in practice in terms of getting the stock there and running that cycle?

Okay. I'll take the warehouse one first. So in terms of time frame on the U.S. DC, so we're literally imminent, days, maybe weeks maximum away from signing. It's in Pennsylvania. We'll be taking possession mid-summer of approximately 1 million square feet. It's built, car parks, everything ready to go, but clearly a million square feet internally is quite a bit of work to fit out. So, between now and Christmas, effectively, we'll be working on building out storage, racking, et cetera, warehouse management system, getting staff on board and ready to go for the early part of next year. We're a little cautious on timing because, as you can imagine, ordering steel today is not what it was a year ago, 2 years ago, So we want to build a little bit of lead time into that. So that's that kind of half-year really, what takes this up is really sort of ordering and building what we need internally. And then in the first half of next year, we can run the key brands. And as you can imagine, you'll take a low-risk one first, just in terms of making sure everything's up and running, and then build into the bigger ones. But the brands we'll put out there will be boohoo woman/man, PrettyLittleThing, Nasty Gal and Karen Millen. And then in terms of the test-and-repeat model, the test is exactly the same except, so, let's say we order 250 pieces, so, let's say roughly 200 goes to the U.K., 50 will go to the U.S. And then really the kind of skin in the game is on the repeat, because they're going to react differently in terms of parts of stock, sizing, color, et cetera. And that's really what we spent a lot of time in the last sort of 18 months, making sure process internally was able to be just as fast. And then clearly there will be some categories and some products which we'll sell in a market and may not sell in another market, so again, as we learn to live with that. So initially we're not going to do anything in terms of sourcing from Central America or Mexico, but clearly we're working through lots of options there in terms of what that will look like for the U.S. market. We've just taken on our first U.S. product person based out in our offices in LA, and we see that expanding as well, as that DC opens and we begin to trade from there. In terms of -- I'll take the sourcing one and margin as well. Actually, what we're seeing at the moment is we're seeing, because of the cost pressure in China on labor, on raw materials, on freight, we're moving any categories we can out of there. And we're seeing in a lot of cases, actually, where even North Africa is better value than China because of those increased freight charges now coming out of China. Obviously, it's very, very quick as well, in terms of what we're doing. So we're not really seeing any margin impact because of the cost pressure within China. Look, we've got to be flexible, because will China sit back forever and just allow that to happen? I'm sure they'll want their economy, so we need to be ready to flip back when that happens. But for the moment, I'm happy on the margin with the closer-to-home sourcing hubs. But there are categories like footwear, would only come out of China, we just can't get those in the volume and styles and the prices, so...

But inherently, [indiscernible] dresses, [indiscernible] my concern [indiscernible] price [indiscernible]?

I think we do, we do price that into the [ PIM ], if you like, on dresses, and you price in the impact that returns has, so you do know you're going to get higher level of returns, but you can only price it in so much as the market will stand at any one time. But it's not really impacting the gross margins so much, the high returns rate, it's just impacting the kind of net sales growth. But it does impact your distribution costs as well when you get high levels of returns overall, because you're just paying for those orders to come back, if you like, those products, rather.

Simon Irwin from Credit Suisse. Three questions for you, two really just following up on where we've already been. Just on this freight issue, you talked about next year, but what about further out? Particularly in terms of both sea freight and air freight. Why are you so confident that those levels are coming down? You know, if you've signed a 5-year deal with Maersk, you're not going to get a kind of big reduction from current rates, and certainly there are lots of arguments out there to suggest that air freight rates were structurally low and will now be structurally high because of a lack of belly capacity. So I'm just curious as to why you're optimistic that there is this medium-term opportunity beyond the current year. Secondly, on the U.S., firstly, are you confident that all of your product will fall under -- be okay with the Uyghur Forced Labor Prevention Act? And how are you going to actually get product into the U.S.? Are they going to be flown out of Europe, given that that's presumably where the bulk of your product is going to be manufactured? And then thirdly, why are you so confident the second half is going to be better than the first half this year? Most people would probably argue that the basic economic outlook for the second half is probably worse.

So if I take U.S. on the freight and China. Yes. Basically, wherever we're sourcing from in the world, we'll fly into U.S. predominantly. If that's coming out of Europe, we may not fly out of every country; we may have a U.K. hub and fly from there and do the volume that way. In terms of China and Uyghur cotton, we source very little cotton out of China. Clearly, we're like every retailer operating in China, we're very clear what our suppliers and what our fabric mills around the use of that cotton. So we can be as confident, I think, as anybody else with regards to that not getting into the supply chain. But our high cotton products like t-shirts, sweats, et cetera, we don't make really any of that in China. That all comes out of countries like Bangladesh, Pakistan, when it's in Asia. And again, what I'd draw your attention to there, if you look at Pakistan, we're actually growing our own cotton in Pakistan with farmers there, and right through to ginners, spinners, into the mills, and then into our factories. So I think we can be pretty confident there. On the kind of freight prices overall, we've clearly built in no change for this year. We don't think there'll be much of a change this year. But on the air, the big issue on air freight at the moment is if you look at the numbers internally in China, internally in Europe, and internally in the U.S., actually we're almost back to 2019 levels in terms of plane usage, but actually what we're not seeing yet is the intercontinental. So let's say China into Europe, and then Europe over to the USA, will that get better than where it is today? Because it's all about capacity, it's all about more planes flying. It will get better than where it is today. Will we go absolutely back to the previous rates? Probably not, but will it come down considerably from where it is today? I definitely believe so. If that isn't the case, I think then we'll need to be moving and looking again what else we can do. So maybe it comes an opportunity time for us to -- do we need our own aircraft, in terms of to be in control of that in terms of what we do there? But we feel at the moment confident that those prices will come down, but rather than the kind of months away, we now I think that's going to be '23.

And then I think there's a few factors that lead us to believe that we're confident about the second half of the year being better than the first half of the year, and for us they're probably different to what is out there. So we're expecting, and you've seen in our guidance that it's conservative, and we're expecting to see on a lot of the more established brands continued pressure, and we've got those challenges around the international business. But still, we've been building up the portfolio of brands over the last couple of years and we've got a big portfolio that are producing rates of growth that you're not seeing from the more established brands. So that's going to start to come through in the second half of the year. We've also been reestablishing the wholesale business, and again, those more recently acquired brands have got great potential for wholesale, which we're starting to realize now, but that's accelerating through into the second half of the year. You can actually see the benefits that wholesale has brought to the international business in the last 2 month figures, where we've seen Europe and the rest of the world return to the growth just from that boost from the wholesale business, where we're selling the brands on other platforms. So those things are going to come through. We knew though that we had tough comps in March and April in the U.K. and the U.S. If you look back at last year's comps, we had 50% growth in the U.K. and significant growth in the U.S. And so, now, we're actually through those tougher comps in May. So that's starting to impact us and we're starting to see that acceleration as we sit here today. And then on the cost side, we've got a lot of things in the second half of the year that we've got, cost reduction programs as well as just those newer brands leveraging their costs as they scale up, and then of course the automation project going live in Sheffield as well. So there's actually a lot of factors that are coming through throughout this year, but particularly as we go into the second half of the year, that are moving in our favor, shall we say.

Okay, so, Adam Cochrane, Deutsche Bank. A couple from me. When you look at the 4% to 7% EBITDA margin guidance, what are the assumptions to get to 4% and what to get to 7% What are the moving parts within that when you've given a relatively tight range on the sales performance? So I'm assuming it's not sales going from -5 to +5. What are the other moving parts within that? Secondly, if you look at your sales on a pre-COVID basis, you're up, you know, 50%-60%, what would you have expected the operational leverage to have been from sales that much higher? I know you can call out the COVID costs, et cetera, but I would have thought there would have been more underlying operational leverage in the business than appears to have been the case. Did you ever expect there to be any operational leverage? Should we expect there to be some in the future? And then the third question, in terms of wholesale you just mentioned, when you look at companies like About You, particularly in Europe, I understand going to India and places where you're not really having a presence, but is going to a very competitive, almost opposition, in Europe a signal that your European business is maybe not going to see as much of a focus as your U.S. and U.K. business? Thanks.

I think on the wholesale point in terms of the competition piece, I mean About You is all about third-party brands. If you look at -- you know, we are [ worried ] about creating, all of our brands creating all of our product internally, so it's for us, I think, a good partnership in terms of some third-party wholesale partners in Europe or in Asia or in the U.S. or Middle East, in terms of getting our brand awareness out of our brands. So, you know, for me, it's not a competition, because they sell hundreds of third-party brands not like us. We create our own brands internal. I don't know if you can take the margin point here?

Yes, on the margin guidance, the range, it's a big range, 4% to 7%, but that reflects a range of potential outcomes. So we're seeing a lot of uncertainty ahead, shall we say, but at the top end of the margin range at 7%, those factors that I just outlined in the last question, those would be all coming through, and then all other things being equal. But then on the bottom end of the range, if in the second half of the year we feel like we're going to be pushing -- we see the demand there but we want to put the foot down on marketing and invest, give us more momentum going into the following financial year, then that could be an investment in marketing or price, that could come through to get us to the bottom end of the range, but without seeing that momentum starting in the period. So it's a scenario where you'd make those investments, but you don't see the momentum coming back until right towards the end of the year going into the following financial year.

[ That would ] be implying another year of negative free cash flow. Is that something that you're happy to wear, another year of negative free -- I know you got a new RCF and things, but I'm assuming that's not the intention, to dip too far into it?

No, it's not. And that 4% is the downside scenario, isn't it? We're not expecting that. And so we wouldn't be too pleased if that was the case. But having said that, we've got to do the right thing for the business and we've got to make sure that we're -- and the whole thing that we're -- the whole year this year is going to be about being poised for when those factors ease and we can put the foot down, whether it's investments in marketing, in the brands, and really get that growth going, because we're seeing that path back to 25% year-on-year growth, and we might need that wiggle room. But having said that, we'd only be making that investment in cash if we see a big payback coming shortly. But we would do it in that case because that's the right thing to grow the business.

And on the leverage point, I'd probably -- you've got to look at the last 2 years. We've acquired 8 new brands. We've got 2 new warehouses in the U.K., Wellingborough and Daventry. We've automated Burnley, we're in the process of automating Sheffield. We've also got all the pandemic kind of costs of freight or whatever. So do we expect leverage? Yes. But you know, we're not going to let that stop our growth. So that will come through. And automation, I think we pointed out earlier, is sort of, in Sheffield is GBP 125 million investment, but will pay back in under 5 years, so definitely getting leverage.

John Stevenson of Peel Hunt, 2 or 3 questions as well, please. First up, just in terms of the U.S., thinking about the lead times for this year, I don't know is there anything you can do when you look to those sort of service levels and look towards peak? I don't know if you're thinking about sort of returns consolidation or how you'd approach peak in the U.S. this year? Second question just on Debs, I think at the time of the acquisitions you talked about sort hitting a sales target of 1x sort of acquisition EV? Can you maybe talk about that? I mean, you've alluded obviously, there's massive scale opportunity through the brands you've acquired. Can you talk about sort of what level of scale we're at now currently? And the last question, just on distribution costs post-U.S. opening, how should we think about that sort of mix of costs at the moment, I mean, forgetting that the one-off, you know, freight rates that are in there, if we're on a like-for-like basis to today, what does it look like?

So I'll take the returns in terms of the U.S. and service levels. I mean, I'd like to think that we'll have returns up and running operationally in the U.S. warehouse pre-Christmas. That will be probably step one in terms of what we're offering there. In terms of other service levels, assuming nothing changes between now and then, you know, you can potentially step up to express. Capacity is not huge, but it's an opportunity. There's clearly a further cost to what we're currently paying, which is almost double pre-pandemic level. So there is an opportunity on that as well. But, you know, I'd hope we will see some increase in volume of aircraft going across the Atlantic from where we are now in that time. But returns is something we would look and aim to have up and running pre-Christmas and pre-peak this year.

And then on the Debenhams, the revenues of 1x the consideration, so we've been at that scale, that's what we've done in the year just gone. But, you know, we'd set that expectation back in January, and actually the way the pandemic played out and the way the Debenham's receivership played out, we started a bit later than we would have liked. So in a way, we were ahead of that, but we wanted to be ahead of that, if you like, because it wasn't as ambitious as we would have thought. And then U.S. distribution costs, we've said, I think, in the pandemic, we've seen them up more than double, 2.5x times what the cost of shipping a parcel to the U.S. was. And then, once we've got the distribution center, it will be about 60% of what it was pre-pandemic, so it's a massive saving. But we also have, when we have the warehouse up and running, we're importing everything into the U.S. and paying significantly more import duties as well. So those 2 things offset each other, and the big benefit from having the DC is being closer to the customer, and that will be the big boost, is what we see in terms of sales, increased sales, and getting the growth going back in the U.S. business.

And just on Debs, I appreciate it was kind of a low target. I don't know if you're willing to sort of comment on what the actual sales figure was for the first year.

No. We don't disclose that.

Tony Shiret from Panmure Gordon. A couple. First of all, can you give us some idea of the impact on profitability of the new brands versus the established brands? I guess the new brands are somewhat lower level of EBITDA than the 6.3 declared? And secondly, a lot of chat on LinkedIn about ERP at boohoo. Just wondered exactly where you stand in terms of ERP, and whether, you know, you are as fully integrated with the new brands as you indicate?

Yes, I mean, on the profitability, you saw the slide in the presentation that showed that in the year just gone, we've invested GBP 22 million in the multi-brand platform investment. So, that's really the high level of costs that we've put into the new brands before they've scaled up. And that's the opportunity as they scale up to similar profit margins to the more established brands. And then the elevated level of marketing on those new brands as well is about GBP 11 million pounds. So we've had GBP 33 million of investment in those new brands in the year just gone, and now they're going to be scaling up to the breakeven point. So it's quite -- that's another factor actually for this year, I suppose we did allude to that in there, as what's going to be better in the second half rather than the first half.

[indiscernible]. Same as the rest.

Yes, exactly. And on the ERP system, we're constantly evolving our IT systems. John talked about all the improvements on the back end, so that's an ongoing program there.

And you questioned are the brands fully integrated. Yes. And we've got more work to do on Debenhams, because it's obviously very different to the other brands, yes. And that will continue to build on that. But GBP 22 million last year It's a good sign of what we're spending on tech, and keeping up with -- as the tech environment is moving as well.

Maybe you could give a bit more detail in future presentations, it'd be helpful.

It's Anubhav Malhotra from Liberum. Firstly, on the level of price increases, if you have passed through anything so far this year, or if you plan to do anything for the rest of the year. And then secondly, on the U.S. distribution center, can you put the location in perspective on how much you get from the eastern part of the Europe, how much from west, and what it will do it your delivery proposition in terms of how much sales would be delivered next day, and how much within 3 days, once the operation is up and running?

Take the U.S. distribution center, I mean, our sales, like in most countries, follow population. So if you look at the population on the East Coast versus West Coast, and then if you take out sort of some of the other key categories. So it's very similar to the population stat. So in terms of sort of 3-day delivery, we're really getting sort of 95% of people within 3-day. Next day, obviously, is high in the 50%s. Pennsylvania is a great location for us, and again, from a trucking next day, in terms of that East Coast and what we need to do there. Obviously, eventually at some point -- the U.S. is quite a big country, you'll probably end up with a second warehouse over there. But ultimately, you know, in 3 days, we're getting 90%-plus of consumers across the U.S. in terms of what we're doing there. In terms of the question on pricing increase, look, our first focus is on consumers, and trying to prevent any price increases that we can there. So we've talked about efficiencies, we've talked about sourcing countries, we've talked about investment in automation. So we're doing everything we can internally to make us more efficient so that we can protect our consumers from the environment out there and everything that's going on, in terms of what they're seeing. But, you know, we've also got to remember our competitive position within the market. So, you know, we've got to make sure we hold on to that, and not lose that competitive position in the coming months and year as consumers face that inflation. We watch our competitors, and we watch the retail market daily to look at pricing. We're seeing price movements across every competitor and every retailer. So where we can, you know, we may take some opportunities, but ultimately we look internally, first of all, to make sure we can do the efficiencies we can do and make sure we're as efficient as we need to be before we start or have to pass on any prices to consumers.

So a good number of questions from the webcast. First question is from Georgina Johanan from JPMorgan: please can you provide color on the churn of the U.K. cohorts acquired during the pandemic?

I think the best thing we can give on that is that what we've seen with the U.K. cohorts, you can see from the presentation that we've seen really strong retention in the U.K., in the first part of the pandemic in particular, and then -- but it's still continued to be strong. So what's happening with the churn there has actually been relatively low levels for the last 2 years in the U.K. And we're just finding -- and you can see that from all the customer engagement measures that it's a really strong customer base, that U.K. customer base, and that's what gives us confidence about the international side of things, that once we've got all of the 3 elements, the product, the price and the delivery proposition, right, those 3 Ps, that we know we can get that group emulate a similar thing in the international customer base, but the U.K. customer base has been very strong, low levels of churn both before the pandemic and during it, and as we leave it as well.

Thank you for that. Next, questions from Georgina from JPMorgan again: given the elevated stock position at the year, should we expect some elevated promo activity to weigh on the Q1 gross margin? And what would you classify as the differential in lead time between short and long lead?

In terms of short lead time, short lead time is more about country of source, so closer to home rather than the lead time actually taking longer. So if you look at Europe, our average lead time across all brands and all product categories will vary from a week, 2 weeks, to up to 8 weeks. And if you look at Asia, Asia's been impacted really about freight, I would say, more in terms of adding on there. So Asia's, again, looking at sort of 2 weeks to probably 8 10 weeks. But some of that is now about freight and getting on planes, rather than the actual lead time itself of manufacturing and getting it on the website. That's kind of the -- what I'm looking at there. So lead time for us is more about the sourcing country.

I think, on the promotion in Q1, with the elevated stock position, the elevated stock position was more about the timing of Chinese New Year and delays and also getting other goods in from other sourcing markets. So levels of promotion are going to be normal in Q1 and Q2 as far as we are concerned, but we did see a high gross margin last year, in the first quarter particularly and the first half of the year around that lockdown period. And we'd expect the gross margin to be lower than last year in the first half of the year, but normal patterns of promotion, it's nothing to do with the elevated stock position at the end of the year that you saw there.

Thank you for that, Neil. The next question is from Anne Critchlow from Societe Generale: where do you think the returns rate might settle versus the pre-pandemic level?

I think in terms of return rates, what we're seeing really driving that is the dress mix at the moment. And dress mix is above pre-pandemic. I think that's about pent-up demand, really, in terms of really, you know, people haven't been able to socialize. They haven't been able to go to those occasions and people have been drifting back to the office as well. So I think, you know, once we pass the summer, because a lot of it, I think, is that built-up demand in terms of weddings, going to the races, celebrating that birthday, et cetera. So I do think they'll come back down to normal. It's probably because again we didn't quite have a Christmas last year, I think you'll see them elevated right up to Christmas because there will be that pent-up demand again for the Christmas party. But I think in '23 we will get back down to normal. But primarily it's been driven by dresses, it's that trend. It's formal trend as well, jackets, blazers. So it's much more formal than what we would've been even pre-pandemic…

So you've got to remember we -- pre-pandemic and today, we've got a different set of brands as well. You know, we've got additional brands in the mix, so there is a little bit of the new norm to come as well. Maybe, you know, better than we're seeing today, but not necessarily down to the value brands, because if you're looking at pre-pandemic, you're looking at a collection of value brands, you've got higher price points added to the mix, which will naturally fit at a higher return rate.

Yes. And if you look at, you know, like you've got dresses trading 100% on the year, you've got jeans, athleisure, down, sort of, 50% on the year. So you know, one is much more fit-sensitive than the other in terms of what's driving that. But it will come back around.

The next question is from Kate Calvert from Investec: which brands in your brand portfolio have underperformed the most in the U.K., and why do you think this is?

I mean, again, if I took Coast as an example, at the beginning of the year, we were still in that kind of lockdown mentality and Coast is an occasion brand, and clearly people didn't have occasions to go to. So that's probably an example of that's really around timing, but if I look at it, its growth on the year at the moment, it's our highest growth brand percentage-wise year-on-year, because again, weddings are coming up this summer, the races are on, people are sort of celebrating those. So it kind of, you know, it varies, I would say, around timing, equally, you know, Nasty Gal is very dependent on the U.S. in terms of its market there, and obviously aircraft not being able to get your package in quick enough time. So if you're a younger customer of, kind of, 18, you know, having to plan 10 days is like 2 weekends, which for most is just too far away to plan that. So I think it depends. There's variable circumstances in there around performance by brand in terms of where we are.

Thank you, John. I'd like to hand back to you for final remarks and closing remarks.

Yes. Listen. So look as we're very, very confident in terms of the business model. We've demonstrated huge growth in the last 2 years. And clearly what you've got to take from that is that we're holding onto that market share growth, particularly in the U.K. and the U.S. So lots of people are expecting people to go back to the stores, and that's not the case. So we've seen a structural change in retail. We're holding on to that. If you look at the U.K. in the last year, we still had 27% growth, plus over 70% in 2 years. So in the market, where we've got the brand, we've got the product, we've got the marketing, the pricing, and the delivery proposition, we continue to grow. We just have a temporary issue in international, where we just cannot get that parcel. And remember, our international business is predominantly our young fashion. And I'd just go back to that one point about, you know, if you're 18, having to plan 2 weekends, it's just too much, you know, so once we get either the DC opened in the early part of next year, or if there's more frequency in aircraft and we can get that parcel, that will recover. So we're really, really confident about that. So thanks, everybody, for coming this morning and see you all again soon. Okay. Thank you.