boohoo group plc (DEBS) Earnings Call Transcript & Summary

Hi. Good morning, everyone. I'll keep it brief as usual. Joining me, Carol, Neil and John. It's tough out there but we're dealing with it. We're managing the business, managing the costs. The opportunity is still global, the opportunity is still massive. We're in control of more or less everything internal, its external factors change. In COVID they're changing daily. Now they change weekly. We deal with it. And we're very -- still very happy with where we are. And we move forward. Over to John. Take it easy. Thanks.

Thanks, Mahmud, and good morning, everyone. I'm going to give you an update this morning on our group and performance in the first half, some of the headwinds facing the sector over the last 6 months and how we are navigating these headwinds whilst also investing selectively in key strategic enablers. In the current environment, what we're seeing are transient inflationary headwinds from the pandemic and macroeconomic backdrop combining with dampened customer demand which is creating a tough operating environment for the fashion e-commerce sector. During this phase, our focus remains on optimizing operational performance and improving profitability through efficiencies and cost savings. We also continue to invest selectively where we see clear opportunities to ensure we are well placed for growth into the future so that the group can rebound strongly as headwinds ease. Macro factors continue to create headwinds for the business. And on this slide, we've highlighted how these have trended over the past 6 months. Our international delivery proposition is largely unchanged, particularly in key markets such as the U.S. But it is still taking 8 to 10 days to deliver a parcel versus 3 to 5 days previously. We have, however, seen some small improvements, for example, in Australia, where delivery times are returning to pre-pandemic levels, and we have seen some improvements in demand. This gives us confidence in our other international geographies that as the delivery proposition improves, top line momentum will return, especially in the U.S. when we open our new distribution center. Freight costs remain elevated. And whilst we haven't seen any material improvement over the last 6 months, there are signs of improvements in the rate, which gives us confidence that whilst we expect these costs to remain elevated in the near term, over the medium term, we expect them to trend downwards to more normalized levels. As has been well publicized for all industries, inflationary cost pressures have built throughout the period, and this is set to continue in the second half, given the upwards pressure on energy prices alone, for example. FX pressures are building as well, particularly within sourcing markets given recent starting weakness, particularly against the dollar. Return rates remain elevated when compared to pre-pandemic levels, but have been broadly flat through Q1 and Q2. And we haven't seen a negative impact on performance since the introduction of charging for returns. As expected, the annualization of these higher rates has had an impact in the first half of the year on net demand but is expected to be more comparable in the second half. And finally, demand and consumer sentiment have softened as consumers themselves face increased cost pressures and uncertainty. In the first half, we reported GBP 882 million of revenue, down 10% year-on-year, impacted by the headwinds we've just discussed, but up 56% over the last 3 years. In the U.K., we've seen significant market share gains over the last 3 years, coupled with a very strong growth in the U.K., outperforming both the online and total market. Our international revenues are up 35% over 3 years, notwithstanding the negative impact that extended delays to delivery times have had. We have 19 million active customers, which has increased by 6 million people over the last 3 years. And as Carol will touch on later, a large part of these shop with multiple brands driving greater share of wallet as part of our multi-brand strategy. And we clearly have a lot of opportunity with a target addressable market of almost 0.5 billion people across key markets in the U.K., U.S. and Europe. Since the start of the pandemic, there has been a clear structural shift to online. From this chart, we can clearly see that the online players have seen industry-leading growth over the past 3 years. Emerging from the pandemic, we are in the group of structural winners and stand out as one of the leaders in terms of growth. As a group, we want to lead the fashion e-commerce market. We've made great progress on this in the last few years, significantly extending our reach with 65 million followers across our social media channels with our global offering focused on offering our customers choice and accessibility. In turn, we have converted this following into 19 million unique active customers across all of our brands, and as a result of our multi-brand strategy, we have a huge target addressable market of almost 0.5 billion people across key markets that was just 100 million a few years ago. With our acquisitions opening up multiple opportunities for growth, and we have barely scratched the surface yet. In our view, the potential opportunity for the group is significant. And we view our performance in the U.K., our largest market, as the clearest sign that we can successfully capitalize on this on a global scale. This is evidenced most clearly in the U.K., where we have materially grown our market share online from 5.6% to 8.4%, where we see that the right price, product and proposition has really resonated with customers across all age groups and demographics. There are several macro factors affecting both demand and costs, which we have discussed on previous slides. Here, I want to focus on the action we are taking on the factors within our control to improve performance, and we have a clear plan in place to achieve this. Firstly, within our supply chain. We have a diverse sourcing base across the U.K., Europe, North Africa and the Far East. And the embedded relationships we have with our suppliers give us the flexibility to move sourcing close to the home markets and away from areas facing delays and higher costs such as China. Year-on-year, we have increased our nearshore sourcing mix by 10 percentage points. This improved lead times, increases flexibility and helps reduce exposure to volatile inbound freight costs, which is vital against an uncertain consumer backdrop. We are also managing our inventory better, tightening our stockholding to give greater flexibility to react to changes in demand. And we have seen a significant reduction in inventory units in the first half with approximately 15% fewer units at the end of August versus the end of February. We are also focused on cost management and not planning for high levels of growth near term. We are working hard to operate with a tight control on overheads while ensuring investments can support the brands and key projects that will enable future growth as conditions normalize in the future. We are extremely confident in the longer-term outlook for the group and continue to invest selectively to capture future growth opportunities and drive self-help measures to improve profitability. Through automation, we are increasing efficiencies and will be driving material cost savings across our distribution network. We continue to add wholesale partnerships, including Berry in the period, with these now spanning the U.K., Europe and the Middle East, with many more planned. We're in the process of opening a U.S. distribution center driving a step change in our delivery proposition and enabling us to offer next-day delivery to key U.S. markets. We continue to build up our digital department store, Debenhams, with a focus on signing new third-party brands and building out the best choice for our customers. In our Sheffield side, we will have invested GBP 125 million to build a state-of-the-art facility which will lead to greater efficiencies and increased capacity going forward. The first phase has successfully gone live this month with the second phase early next year, adding more capacity and throughput capabilities. We're delighted that this state-of-the-art facility will drive best-in-class efficiencies with a fivefold increase in PIK rate anticipated, driving savings as we progress through the rest of the year and towards our targeted 5-year payback on the project. In mid-'23, we expect the first phase of our U.S. distribution center to go live. The site is over 1 million square feet and all of the U.S. and North American market will be serviced from here. We already have a significant business in the U.S. with strong sales, customer numbers and a huge following across our social media channels. And the DCs opening will transform proposition, allowing for next-day delivery across key states with 95% of the U.S. covered within 3 days compared to 10 days we currently face. This is a real game changer for us, giving a service in a key market that is comparable to leading industry players and ensures our product, price and proposition can be as strong as possible. We have a large wholesale footprint internationally, and one of our focus areas is expanding these partnerships, allowing us to enter new markets and increase brand awareness within those markets while also offering a new route to market for the group's brands. In turn, our wholesale partners get access to our short lead time model and our diverse and established range of suppliers with our sales portal allowing them to select from the same ranges that our teams are buying and benefit from our short lead time model. We have partnerships with Alshaya in the Middle East, About You in Europe and Veri in the U.K. and are working on partnership opportunities across new geographies to continue to expand this offering. Moving on to Debenhams, our digital department store, firstly, I look at the marketplace model more generally, which offers us another opportunity to take share of wallet. What we see is that marketplaces offer consumers around 50x the choice and deliver around 2x the rate of growth of pure-play offerings while accounting for around 60% of online revenues. This is clearly a great opportunity, and a huge and rapidly growing market to tap into. Putting that into context for Debenhams, our philosophy is about more partners, more brands and more products. By refining and speeding up the onboarding process and investing in the back-end technology to enable us to do that, we are able to rapidly onboard new partners to increase the choice available to customers and drive growth. We are creating a platform to showcase brands to our ever-growing community of customers, and working closely with partners to ensure their needs are at the forefront of the service we are offering. We're really pleased with the progress made to date on Debenhams and remain on track to replicate its historic online sales over the medium term and remain excited about the opportunity it has to its high-margin, capital-light stockless model. The key for the success of Debenhams will be in creating value for our partners who can leverage off Debenham's 98% brand awareness. What we have seen to date is that for our own brands, 80% of customers transacting through Debenhams are purchasing from our brands for the first time. And also for those customers, we are seeing a 35% increase in spend. So for our brands, the customer shopping via Debenhams are complementary, and this is driving a material increase in spend per customer. Coupling these starts with the very high recognition of Debenhams means we are well positioned to create value for our brand partners on the Debenhams platform. We have recently launched PLT marketplace, a resale platform, further extending our target addressable market and working towards improving sustainability across the fashion cycle. The site allows the resale of any brand. And for PLT shoppers, they will be able to link their accounts and resell PLT product in a streamlined way. It's a great opportunity to enter a rapidly growing market and also increase the lifespan of garments, and we already have over 100,000 people signed up and downloaded the app in the first few weeks. And we've reached #2 in the App Store for downloads. So to summarize, our focus for the near term remains on optimizing performance and improving profitability. Looking ahead, we will continue to invest selectively where we see clear opportunities for future growth. These include wholesale, automation, our international distribution network and Debenhams, our digital department store. Whilst we recognize the challenging trading environment that we face today, our confidence in the group's prospects are unchanged, and we remain very confident in the long-term outlook as we continue to offer customers unrivaled choice, inclusive ranges and great value pricing, giving them even more reasons to shop with you. Thank you, and I'll now hand you over to Neil.

Thank you, John. Good morning, everybody. I'm now going to move on to the financial review of the first half. As we go through, I'm also going to share some insight into our customer engagement KPIs as well as the impacts of cost headwinds on regional profitability and why we believe we could improve that profitability in the future. And then finally, I'm going to take a look at guidance and the outlook for the rest of the year. So let's start with the income statement. Sales declined 10% impacted by higher levels of returns compared with abnormally low levels last year. We saw continued softness internationally as a result of a challenged service proposition, and we also saw softening consumer demand in the U.K. in the second quarter as a result of the cost of living challenges that consumers are facing. And performance was softer in the U.K. towards the end of the period in August in line with what we've seen elsewhere in the industry. Nonetheless, we've delivered 56% growth in sales over the past 3 years, meaning we've consolidated our already significant market share, and we've extended our total addressable market as we've acquired new brands over the last few years. Gross margin was 52.5%, down 210 basis points year-on-year. And that was a really resilient performance given the effects of annualizing significant input cost headwinds. And it was a step up from what we achieved in the second half of the previous financial year. We are optimistic that those cost headwinds I've just mentioned will ease in the future, and we're already starting to see some reductions in freight rates although they still remain significantly elevated compared with pre-pandemic levels. Adjusted EBITDA was GBP 35.5 million as operating costs have been significantly impacted by rising inflation as well as the continued elevation of international shipping costs. Within adjusting items, you'll see that we incurred GBP 2.3 million of exceptional costs in relation to the automation project in Sheffield. That's just gone live with the balance of those adjusting items made up by share-based payments and amortization of acquired intangibles. We have a really strong liquidity position with GBP 315 million of cash at the period end, and negligible net debt, that stood at GBP 10 million at the half year following years of significant levels of investment in capital expenditure, including approximately GBP 100 million in the last 18 months that we've spent on freehold assets, and those are unencumbered. Looking at the results by geographical segment, we've included 3-year comparatives to demonstrate the tremendous growth that we've seen over that longer-term period and despite the current macro landscape. In the U.K., gross demand remained healthy at plus 12% year-on-year, but sales declined 4% in the first half as a result of returns rates being up significantly on the prior year levels and ahead of pre-pandemic levels. But over the last 3 years, we've made huge progress in the U.K. market and gained significant market share. Sales have increased 73% over the 3-year period, and that's well ahead of the overall clothing market and also well ahead of the online segment of the market. In the U.S., sales decreased 29% year-on-year. But again, over 3 years, we've seen a 60% rise. Our U.S. performance has been hampered by the change to our delivery proposition, but with the distribution center due to go-live in mid-2023, we fully believe that the overall quality of our U.S. product offering will return the segment to growth, enabling us to capture the huge long-term opportunity ahead. With the challenges that we've experienced due to extended shipping times, we've seen lower levels of growth on the 3-year comparison across Europe and the rest of the world regions. But those segments are now benefiting from establishing wholesale partnerships. And you can see that from a more stable performance in the first half. And we've seen some recent improvements in Australia as delivery times have shortened, and that gives us a lot of cause for optimism about the future of our international business. Looking at our customer engagement KPIs, we had over 19.1 million unique active customers in the 12 months to the end of August 2022. That's a significantly larger active customer base compared to 3 years ago. It's actually 47% higher in terms of the absolute number of active customers. Over the last year, we've seen further improvements in the key customer metrics, meaning our customers are still spending more with our brands, and we're continuing to capture a greater share of wallet. We've also recently introduced a charge for returns across some of our brands and territories. And to date, we've not seen a negative impact of this on our engagement KPIs, with performance consistent for the brands that have introduced the charge compared with those that haven't. Most of you should recognize this slide showing our cohorts of customers by vintage and levels of revenue retention. At the group level, we can see that the exceptional customer acquisition achieved in the early stages of the pandemic in FY '20 has yielded some churn of customers in the last 12 months with revenue retention at 73%, down slightly from 78% last year. Group revenue retention continues to be adversely affected by those international service challenges that I've just mentioned. But as service levels improve, that gives us an opportunity to drive material improvements in this metric in the future as we look to replicate -- in the overseas markets the strong retention rates that we're seeing in the U.K. And those are shown on the chart on the right-hand side of this slide. In the U.K., our cohorts really illustrate the strength of our business model when we're able to deliver across price, product and all aspects of the customer proposition. Our U.K. cohorts have delivered revenue retention of 91%. However, we've seen some softening here as a result of high returns rates, which are ahead of pre-pandemic levels, and the more recent reduction in consumer confidence that the market is currently experiencing. On to operating costs. And this slide shows that our total overheads decreased 3% year-on-year, with the GBP 22 million decrease in marketing spend through targeted efficiencies driving an improvement as a percentage of net sales and distribution costs have dropped GBP 11 million due to lower volumes. These are offset by investments into brand acquisitions to support the group's long-term growth ambitions as well as those cost pressures due to macroeconomic conditions in areas such as wages and salaries, insurance costs, business rates and energy costs, which together have seen other admin costs increased 14% year-on-year. Looking ahead, we're planning for lower operating costs in the second half of the year and that reflects the following: firstly, our major automation project in Sheffield that will drive major distribution efficiencies with that targeted 5-year payback of the GBP 125 million investment. The automation is now live, and volumes handled by it are going to ramp up in the coming weeks and months. We remain focused on continuing the marketing efficiency gains seen in the first half of the year and also reducing our fixed cost base to better leverage those central costs and exit the year with a leaner cost base. Going into more detail on costs, we've drawn out the full impact of external pressures on our contribution margin for our value fashion brands over the last 3 years and looked at this both in the U.K. and for the international business as well. In this analysis, we're defining contribution margin as gross profit margin, less carriage costs and warehouse operating costs. And from this, we can see over the last 3 years, the contribution margin has declined by 7 percentage points. That's been driven in 3 areas, and we believe these pressures can be alleviated both through self-help in the short term as well as when headwinds ease in the medium term. Firstly, on gross margin, we've seen persistent inbound cost pressures impact all regions. But we do expect these headwinds to ease in time. And today, we're starting to see some reductions in freight rates. Although they still remain significantly elevated but that gives us some cause for optimism. In addition, we are live with a new customs warehousing solution, which offers a duty saving for some of the brands going into the second half of the year. Secondly, elevated carriage costs have had a significant adverse impact on international distribution costs as seen on the right-hand side of the graphic here. But the U.S. distribution center opening next year offers a huge opportunity to alleviate that impact. Finally, elevated returns rates and labor and energy cost inflation have added additional distribution costs, but the investment in automation, like the GBP 125 million Sheffield project, will drive material reductions in future reporting periods. So that you can see while contribution margin has been impacted globally by external factors, internally driven developments as well as the easing of those pressures, offers clear upside and gives us confidence that margins will rebuild over time. Looking at cash flow. We ended the half with GBP 10 million of net debt compared to GBP 1 million net cash at the end of February. Free cash flow totaled GBP 2.7 million following GBP 38.7 million of capital expenditure on the platform and infrastructure. At the end of the half, we're in a really strong position with significant liquidity and GBP 315 million of cash in the bank, with a new GBP 325 million revolving credit facility. That gives us significant financial headroom and flexibility and supports our selective investment program for long-term growth. So moving on to guidance. As a result of the impact that the macroeconomic and consumer backdrop has had on the group's revenues in the first half, if these conditions continue, our expectation is for similar rates of revenue declines to persist over the remainder of the financial year. However, the agility of our business model means that we'll be able to take advantage if factors impacting performance reduce, in particular, around customer sentiment and those international delivery time frames. At the EBITDA level, increases in inflation-driven costs, as well as the results in operational deleverage from lower sales, mean that the adjusted EBITDA margins are likely to be in the region of 3% to 5%, and that compares to the previously guided range of 4% to 7%. Other financial guidance is outlined on this slide for completeness and is largely unchanged. So quickly to sum up, we have a robust financial and operating model. Right now, we're focused on improving profitability and financial performance through self-help in the delivery of key projects, achieving cost efficiencies and hopefully the easing of those macroeconomic headwinds. And with that, I'll now hand over to Carol. Thank you.

So thank you, Neil, and good morning, everyone. And this morning, I'm going to cover off our brands. So you can see some of our recent activity. Then I'm going to look at our ever-evolving approach to marketing with the spotlight on our most recent big-name collaboration and the sustainability conversation we've been having. And finally, our customers, the styles they love, the price points for all demographics. So let's start with the video, highlighting what our 14 boohoo group and our now 14 destinations have been up to in the last 6 months. [Presentation]

So we are delighted to have partnered with Kourtney Kardashian Barker for the 2 exclusive collections over a 12-month period. This is more than just putting a celebrity face to a boohoo collection. It's a start of an upfront and very firm conversation with our customers on the whole topic of shopping more sustainably for the future. As a value fashion brand, we feel very well positioned to have a large reach with our customers. And if you combine this, what's called is huge risk -- reach, sorry, of circa 200 million followers. We've started to change the conversation from the misconception that value brands cannot address sustainable practices within their business. Our initial findings with our customers were confused what sustainability and fashion meant to them. Overall, the view was only expensive brands can be sustainable, and that part of the special project is to address some of these misconceptions. We started to open up the conversation with our customers and made a 6-part documentary series, we've highlighted our journey across all our social channels, which will be featuring experts from the industry talking very frankly about the whole fashion industry, Hope for Justice and Global Fashion Exchange to name just a few. The first collection launched at New York Fashion Week, you saw a little bit of that in the video, I hope. And it's made up of 46 unique pieces priced between GBP 60 and GBP 75. As part of this collection, we've included vintage pre-loved pieces, and this is the first time for the boohoo brand to actually sell vintage on the website. We've used recycled materials and recycled packaging throughout the range. And shopping sustainably sat at the very heart of the design process with many of the garments that are featured within the collection have multi ways to wear them. So for example, there's a long puffer coat. It has a zip in the middle. It zips off into a short puffer jacket. And then there's a dress that can be restyled as a top and arms removed and bottoms removed and so on. And the whole point is really putting design into the collection that garments can be worn many times, kept in your wardrobe for many years to come. Certainly be one of the fastest moving collections and many, many of the pieces were sold out within 48 hours. That's just Kourtney's reach of talking about the collection actually how that really got that moving. And of course, we've received some criticism for teaming up with Kourtney, and the accusations of greenwashing. But we've been very, very comfortable to face into these. We truly believe we're taking the right steps in the right direction with our customer alongside our customer on this journey. Overall, the response from our customers on social channels has been overwhelmingly positive as well as it has been with the external partners that we consulted with. As said earlier, with over 200 million followers, her reach is almost unmatched. Affordable fashion is the biggest driver in the sector at around 85% of fashion sales. So through this collaboration, we hope to start to generate progress for the industry that we work in. John has also talked about the PrettyLittleThing resale website and that's encouraging customers to resell and reuse their garments to further their lifetime. This is part of our strategy where we think more broadly about what the fashion industry might look like for us in the future, and we're really proud to be part of this conversation with Kourtney and more broadly, the sustainable conversation with our customers. So moving on to the next slide, we have a huge target addressable audience of around 500 million people. And we're proud to be making fashion accessible, not only in terms of price but also in terms of sizing. We have our exclusive ranges across all our brands which are really well received by our customers, and enable them to access the latest styles, trends, whether that be in petite, tool or plus sizes. And having multiple brands targeted at each age group at different price points has allowed us to generate significant traction for each brand, which allows us to take greater share of wallet through our multi-brand strategy. Across the group, we now have 19 million unique shoppers. And of these 4.2 million of them shop across multiple brands. In turn, these shoppers generate 3x more spend than a single brand shopper, proving that each brand has its own defined identity. And as a group, we benefit from significantly increased levels of spend. Collaborations are part and parcel of boohoo's DNA and we love working with all the big brand names around the globe and across our brands. So just recently, Iconic, I'm sure you've all remembered this early from back in the day and that dress she wore, but we've launched a coat range with her. Here you'll see it just priced at GBP 355. And at Dorothy Perkins, we unveiled a collection with Kimberley Walsh just this week, and you'll see it priced at GBP 99. And at our value price point, we have the puffer coat I mentioned earlier, from the Kourtney collection just at GBP 25. It's sold out instantly. Obviously, a great price point. And it gave our customers the opportunity to shop price unsustainably. The broad range really emphasizes our ability to cater to all price points and styles and we have an incredible collection of coats for this season across our portfolio. So just on to our focus areas, John has covered off the economic environment. So I'm going to talk about what we're doing to ensure we address these needs for our customers. We're reinforcing value across our brands and adopting the focus of marketing to highlight the value for each -- to each of our customers. We're looking at price and accessibility for customers, ensuring we're offering the best price and making sure that these trends are accessible to all. So just to add some color, in our value brands, 80% of new products this season will be priced at GBP 25 and under. We're also emphasizing our value credentials at a time when our customers are feeling the pressure, which we believe is the right thing to do. We're adapting the product mix to make -- to meet ever-changing demand at a challenging time for our customers, focused on offering the right product, the right price and allowing us to react to an ever-changing environment. So just to summarize this morning, the wider environment remains challenging, uncertainty around consumer demand is out there. We're adapting our business in light of this and in the near term, are focusing on improving our operational performance, optimizing our supply chain, tightening our stock management and bringing our overheads down. We remain confident in the future prospects for the business, which is why we're also selectively investing where we see clear opportunities for future growth. Thank you. And now I'll take back to the team for questions.

John Stevenson at Peel Hunt. You've seen, I suppose, a relatively short drop off in U.K. activity over summer. Can you give some more color on the exit rate, and how that's progressing into autumn? Second question, just on the Germany contribution margins, given the movement in sea freight, U.S. warehouse, your automation projects, are you confident that the contribution margin will start to improve again next year? And then finally, can you just quote what the wholesale mix is at the moment?

All right, John. Thank you. I suppose. On the U.K. exit rate, we've seen it being fairly similar trading conditions in September to August. We've seen glimpses of improvements, but it's been quite a strange period into September as well. But actually, more recently, I think the most interesting part is going to be the payday week, this week because it's been hard to get a bit -- much of a read on September. Last few days looked better than they did earlier in the month, but we had the bank holiday and so what. So it's a strange month. Contribution margins, like we said in the presentation, we expect those to come back. As the market conditions generally normalize, and we're starting to see that. We're starting to see things get back to more normality in terms of delivery times to Australia, for example, that we've called out. And therefore, as that happens, I think supply and demand factors are going to normalize. It's going to take time but prices are going to come down as well. Costs are going to improve. And we're seeing it on the inbound side as well, which is in our cost of sales line that we've just started to see shipping costs come down. But there's still way above pre-pandemic levels, but they're heading in the right direction, which is a major step forward from where we were 12 months ago. Then what was the last -- the wholesale mix is still very small. So it's going to plan. And we're actually developing the wholesale business, its generating EBITDA but it's still less than 5% of sales.

And listen, on the contribution margin point, I mean, I guess you've got enough visibility on your initiatives and what's happening on freight to give you confidence in directional travel for next year.

Absolutely, yes. Yes. It's difficult to see that visibility next year. Are the costs going to come down straight away? But it's heading in the right direction, as we said. So we're starting to get visibility whereas we've had none so far .

So if you look, if it's similar on raw materials, if you look at raw materials, they've kind of hit despite the coming back down. But if you take cotton as an example, it's still 84% more expensive than 2 years ago. So while they're going in the right direction, they're still very elevated versus where they were previously.

Mike Benedict from Berenberg. I have 3 as well, please. Firstly, could you remind us of the economics of the PLT marketplace, how you're monetizing that? Secondly, are you able to quantify the improvement you've seen in Australia as your lead times have normalized in terms of sales momentum? And then lastly, just in terms of the U.S. DC, how much disruption do you think is likely or indeed possible when that DC comes live, please? .

So in terms of -- I'll take the U.S. DC, first of all, in terms of disruption, we currently, today, we run 4 warehouses. We've just gone live in automation in Sheffield and we've automated Burnley. So we're quite good at getting DCs up and running. Obviously, you've got to put stock in we'll start with one of the smaller brands from a risk point of view just to make sure everything is working. So we've got a good plan in place and all set to go live in early summer next year, I would say, and we'll continue to monitor that. So I'm not saying disruption really in terms of what happens there. Obviously, trading in products and we start to see a little bit more in terms of trend of what U.S. customers prefer versus Europe and how we trade into that. So a good plan there, and I'm confident in terms of how we improve that. On the Australia improvement, we have been seeing that, and that's really what we've seen is that lead times, delivery proposition has sort of got back to around 4-ish days. Sort of what looks like pre-pandemic. And costs have reduced. Of course, there's still hugely elevated. And that's what I was actually telling the customer about that. So we've seen automatically that trend going in the right direction. So we'll start marketing as we go forward and get more confidence around that supply route being consistent on those delivery times. So we'll begin to push that as we go forward. In terms of economics and PLT...

At the moment, we're providing that facility for people to sell products on the marketplace for free. And then going forward, it will be like a depop type of economic model. But at the moment, we're just happy to see customers using it. And they can sell product get the money in the bank and spend it on PLT or the rest of the group website. So we've concentrated on building that facility up, and it's not cannibalizing the rest of the business. I think quite the opposite. It's enabling people to get cash from their old items and spend them on new items. So it looks promising so far but very early days.

But to get 100,000 sign-ups, I think, in the first few weeks, I think, is really promising in terms of the future of that site.

Simon Irwin from Credit Suisse here. A few things. Firstly, can you just talk a little bit about kind of nearshoring your supply chain, what percentage we're at now? And what kind of inflation are you; seeing in nearshore inflation? I mean how much of that is kind of semi-dollarized anyway through raw materials, et cetera? Secondly, can you just talk a little bit more about the net sales retention outside of the U.K.? I mean, it looks as though it's well under 50%. So what does that do to your customer acquisition costs and the profitability outside of the U.K. generally? And thirdly, just can you talk a little bit about the RCF, how much of that's drawn down at the moment and what the covenants are?

So if I take the nearshoring, I'll take that one. So we've roughly got about 60% at the minute across all of the brands in that category currently. We've said kind of in our presentations, we want to remain very flexible and very agile. So if you look at China at the moment, China is back to its lead times than it was prepeak last year, but still is a very expensive freight charge. So actually, China is as quick now as what it was 12, 15 months ago. So it's a moving piece, I would say, and we'll just remain flexible. And really, it's all about agility, keeping the stock low and being able to chase into it. So roughly 60% is nearshoring. The good thing with the nearshoring is it's all truck. So whether it's North Africa, whether it's Turkey, et cetera, it's all coming by trucks. So you don't have that expensive sea freight or air freight. But yes, we'll continue to be adaptable because kind of Asian markets can be just as quick as the nearshoring when everything is working efficiently.

And what kind of cost pressure are you seeing in initial sourcing?

Look, everybody is facing the same. So energy is applicable to every country as an example. So everybody is facing energy. Everybody is facing labor as an example. So everybody is facing fuel. So I don't think anywhere in the world you are, nobody is out of the inflationary pressure. So that's something because we continue to evolve on where can we buy yarn in bulk ? Where can we buy fabric in bulk? How can we actually make our efficiencies and our margins and our costs as best as possible?

So our net sales retention outside of the U.K. Yes, obviously, you can tell from the difference between the U.K. cohorts and the international -- group cohorts. The international retention is nothing like the levels that we've seen overall, which is 73%, and we've seen 90% in the U.K. So yes, you're in the right ballpark there. And that's everything that we have been talking about the challenged service proposition. So that can change quite quickly. And we're starting to see that in Australia. We're starting to see that in some European markets. And actually, we're starting to see that clear correlation between the delivery times and that's starting to pick up. And so that's where we've got that optimism. And particularly, the way we haven't seen that, we've seen the deterioration is in the U.S. But at the same time, we saw quite good levels of behavior early on in the pandemic in the U.S. and then it's just, we're still 60% above where we were 3 years ago when that happened. So once we've got the fast service to the U.S., which it looks like it's going to be when we've got the warehouse mid next year, then we'll start to see those cohorts come through very strongly. But we'll also start to see the new customer acquisition come through very strongly as well, where we can do the marketing and acquire new customers in a -- is a huge market, whereas at the moment, we can't acquire those customers because people don't want to wait the 8 to 10 days that we quote. And then the RCF, that's fully drawn, as you can see at the moment. Where we've been is we want the most flexibility in our -- to give us the most agility around our working capital, our CapEx and with the projects that we've got going on. Now what you'll notice from the financials is that our working capital position has improved quite markedly in the first half compared to the second half of last year. And again, that gives us optimism, and whether we can optimize the position on the RCF later in the year, I think that looks like it makes sense to try and save some interest costs. But at the moment, we want maximum flexibility in most difficult time. But actually, now we're seeing with global supply chains, getting back to more normal levels, things speeding up. We're able to getting more visibility of demand, and we can manage our inventory much better. The working capital has become a negative cycle again, which is really promising. And so that enables us to still make the investments that we run selectively in expanding the U.S. business, investing in Sheffield. But at the same time, we've not got that drag from working capital that we saw last year.

It's Charlie Muir-Sands from BNP Paribas Exane. Three questions for me, please. Firstly, you mentioned new WMS will allow you to save on duty. I wondered if you could sort of share what that figure would be, you estimate on an annualized basis? Secondly, when you opened the U.S., I appreciate, obviously, it's going to be a phased ramp-up, but how should we be thinking about contribution margins changing? I guess, obviously, you're going to save significantly on the delivery costs not flying across Atlantic, but will there be import duty costs? Will the warehouse be as efficient? How are those things going to sort of net out versus the service model today? . And then thirdly, just on Debenhams. You obviously talked about aiming to ramp up the range as best as possible, as quickly as possible. Could you just call out what are some of the most pleasing new signings you've had in terms of third-party brands you've brought on board in the last 6 months?

Let's say, the Debenhams well then I'll...

Yes. So Phase 1 of Debenhams was ready to get the brands that were in Debenhams on to the website. And we pretty much have all of that now outside of 1 or 2 on prestige beauty that we're still working with. In terms of new brands, a good example of onboarding in the last 120 days, we've on-boarded 150 brands on to Debenhams. Some of those are well-known U.K. high street footwear retailers as an example. But really, the opportunity is about the thousands of brands that we can onboard on to Debenhams. We still have work to do on the tech -- on the platform in terms of the customer journey, et cetera but everything we've seen so far on Debenhams. And we gave some of the stats in my presentation in terms of what we've just seen on the Boohoo brands in terms of what it's done for us is very pleasing. And we've said again, in the medium term, we do remain confident of getting back what was the previous Debenhams online sales, which was a pretty decent level or whatever. So lots more to do, but everything definitely going in the right direction. And clearly, the higher the brand you want to attract the more work that's involved in that. So some of them are 150 brands in 120 days, and some of them actually you talked to now, but actually it might take 18 months before we get them on board. So all of those conversations happening at the moment.

On the new custom solution, what that means is we know exactly where our product has been bought and exactly where it's been sold to, and then we can optimize the end-to-end duty payments on that and the new systems interface with HMRC, et cetera. That's all that is, and the savings are actually quite significant, hundreds of thousands of pounds every month and sometimes high hundreds of thousand of pounds. So -- but that's all I'd say about what it does for us, but it's a good thing to do. Well, it's one of those efficiency savings, one of many that we're implementing every day in the business. On the contribution margin, as we open the U.S. distribution center. Well, we're going to have some one-off costs, and we're guiding for those as exceptional items, the overall contribution margin should be similar in the U.S. as we go through. So we've mentioned this before, where we can see a lower gross profit margin and -- but that we also get lower distribution costs as a percentage of sales because of the faster -- the cheaper services where we're -- we've got a more efficient end-to-end logistics solution for the U.S. customers. And so the contribution margin, we're expecting to be similar. And then you do get the efficiency, we'll build over time, but that's taken care of, we'll talk about the dual running costs, et cetera. Overall, the costs are going to be beneficial at the contribution after warehousing costs. We think it's borderline, but we've got to also get all the brands up and running that have a significant U.S. presence there to get to that point. But overall, on contribution margin, after warehousing costs, even though labor costs are higher there and we won't have our automation, whereas -- so if you're taking PLT out of Sheffield, which has now got the highest level of automation to the U.S., there'll be a lack of efficiency there, but that's made up for from the end-to-end logistics, cost savings even though you've still got a lower gross profit margin because the import duties could be 10% to 15% higher on the cost prices.

It's Anne Critchlow from SocGen. I've got 3 questions, please. First of all, on inventory. In pounds millions terms, what was the increase or decrease year-on-year? And then secondly, you talk about selective investment for CapEx. Just wondering if you've deselected any projects or had to prioritize? And then finally, if you could talk about recently which brands might have been more defensive in current trading and which might be struggling more?

So inventories, what you can see in the balance sheet, is that we had lower levels of inventory at the half year, where it was GBP 270 million compared with the year-end, which was GBP 280 million. But it was higher levels in absolute terms than at the previous half year-end. But what we've got there going on is, we've got a faster cycle in there, and the working capital cycle that you've seen has improved. And actually, all of the brands have improved their stock covers over the last 9 months. And we've been putting a big effort on that despite the fact that sales have been challenged, should we say, and they were lower than expected in the second quarter. So we're in a leaner position. We've talked previously about the stock cover at December into January after last peak, with high levels of returns, et cetera, which you don't see necessarily in there is was -- we were talking about that as being up to 12 weeks of cover. And while you don't see it in the -- necessarily in the balance sheet number at the end of the period there, -- we've got -- because we've got things like inventory in transit there. We've got lower levels of cover, and brands are able to be more agile as we go through. So that's down now for the group around about 8 weeks. And that difference is what we're seeing on the working capital side coming through. So that was the inventory question.

On the -- brands, I'd say the theme we've seen is that whether it's Karen Millen at the top end or the young fashion brands, every consumer has been squeezed. So nobody's got an exception on inflation at the moment, is probably the best way to describe that one. And then in terms of selective investments, yes, absolutely. Look, we're looking at everything. Neil and I daily, weekly, we look at every spend and even the ones that we do select then in terms of getting the best efficiency and the best value out of those. So we know it's a tough trading environment, how long it's going to last. I don't think anybody really knows. So in that period, we want to really look after our cost and protect our cash. That's really key to us.

We're in a great position from a balance sheet point of view that we can make those investments in the U.S. DC. But next year, we would anticipate being a lower level of CapEx for next year. I think where we -- we've built a great flexible distribution network. And now we want to leverage that as much as possible, but we'll have the international distribution network with the U.S. DC. But we won't press the button on automation in the U.S. until we see that we're able to see the significant gains that were expected on sales there. . So while previously, we may have thought that we starting the U.S. automation next year, it could be the year after. And hopefully, by that point, we'll start to see the real gains in the U.S. market. So a lower level of CapEx next year as we just complete the manual operation in the U.S., the Sheffield will be up and running. And then we're -- so we're in a good position in terms of capacity in the distribution network.

Rebecca McClellan, Santander. I've got 3 questions as well, please. If 50% of your sourcing is nearshore, what is the dollar influence in your COGS space? And how are you going to tackle the sterling deflation or the dollar inflation in your future sort of sourcing costs? My second question is you mentioned about morphing the product mix according to consumer demand. What shifts are you seeing in the product mix as demand has weakened? And my third question, please, is about the promotional environment. If demand is slackening, what are you seeing in promotions? And how are you intending on sort of what's your promotional strategy over the next couple of quarters?

So in terms of sourcing, I would say, on the dollar impact, even what's made in Europe, a lot of the fabric would come from Asia, which is dollar dominated. And most Asia sourced is in U.S. dollars, So again, it's another inflationary pressure. We've got to look at where we can get fabrics that are from Europe because obviously, that's much, much better for us. So we've got 60% pretty much of our sourcing now, let's call it, in Europe. So obviously, that allows us quite a flexible model in terms of trying to get as much fabric and yarn that we can possibly get from Europe. In terms of where it is dollar and it's $1 a dollar, and we need that fabric. So if you look at shoes, for example, they're pretty much all coming out of China, and that's mostly in dollars, that's just playing with our volume. So again, trying to get the brands focused as one group in terms of our capacity and our bulk purchasing. So every brand will buy something different, but actually, we can be strong with a supplier. And then looking at everything from container load. Is it 100% full before it gets on that chip. So we don't want to ship any fresh air. So we're looking at lots of ways that we can kind of minimize the impact of the dollar. But ultimately, it's a huge currency around the world and lots of trade gets done in it. So it will be a lot done, more work to do on that one, I would say. In terms of the product mix shift, we've talked before about that big dress and occasion, the pent-up demand, kind of weddings, 21st data rises over the summer. That kind of naturally tails down at the end of summer into winter as people trade into jackets and trade into knitwear and boots, et cetera. And then generally, it comes back for party season when sort of dresses type up again. And we'll just need to wait and see because that's such a big impact on return rates. But equally, I think there's still a bit going on in the background of, people are returning to the office and what it's like to dress in office where, again, having not been in that maybe for a while. And I'm sure equally on returns, there is -- I've spent GBP 20 or I've spent GBP 40 on that dress. And am I absolutely confident about that dress and I absolutely do need it. So I'm sure there's a little bit of that playing in as well. But I think trend-wise, it's following the seasonal at this point. But I think the big tail will be when you come to party season because that's the next real kind of up on the kind of going out and dress mix again. And then in terms of commercial environment, we're staying very lean. Carol talked about pricing and how yes, yes.

Yes. So obviously environment, we're playing our marketing strategy very, very close to the season. We're not deploying spend. We're deploying spend week to week. But instead of spending so much on marketing and on customer acquisition. We're going to be mining the customers we've got and talking to them about price. So if you are coming into the new season, and I mentioned coats there, do you need a new coat? Well, can tempt you to buy a new coat because it's a great price point. So the bulk of sales are still sitting in the value end of the proposition. So it's really about mining those customers and getting them to shop with us and being the best price in the market for your coat, for your boots, for your new dress, whatever you're going to buy this season because there's fear out there. I think we know that right across the sector, rising costs, mortgage costs, bills, electricity costs, so on and so forth. So they are being really, really careful how they spend their money. And we just need to do our job from a marketing perspective to make sure that they figure when they have got that GBP 50 a month to spend that they're trying to spend or one of our brands.

We're very agile on stock, and I'm not sure competitor-wise how agile others are, and it's expected with long lead time. So we'll just keep watching. We watch out daily and look at that. But key entry price point is the key.

Miriam Adisa from Morgan Stanley. Just a few questions on returns. So I think you mentioned that you're not seeing any difference in consumer behavior. So is there any reason why you wouldn't introduce it across other brands? Is that something that's already baked into your guidance? And I guess, given returns being elevated now for close to a year, how are you thinking about this being sort of permanent change, a structural change? And if so, would will paid returns be more of a permanent feature as well? And then secondly, just on your marketing spend, you sort of touched on it already, but how should we sort of think about that for the second half but then also specifically for the newer brands you talked about the investment into Debenhams as well? So how are you thinking about deploying investment for some of those new brands?

I think on the returns charge for other brands, for all of the brands, the -- where we have returns charges, and it does vary different brands, different markets, it's part of the overall proposition. So you could charge for returns on a brand that doesn't currently, but you'd want to offer the customer something as well as part of the overall proposition. What we've seen is that I think customers are quite happy with the transparency of paying for return. So could it be a long-term thing? It could be. But it's so early days for us yet. But I suppose, overall, the experience that we have in different markets has been -- customers can appreciate that transparency. And then on marketing spend, we're thinking -- what we've said is we're going to continue to drive the efficiency on the marketing spend in the second half of the year. So as a percentage of sales, think of it in a similar range to what we've seen so far in the first half. But if we get even more efficiency, could go down a bit, and that's the higher end of the guidance. If we get less efficiency, things get more tricky. That's the more towards the lower end of the guidance range.

Yes, Tony Shiret from Panmure Gordon. A couple question on marketing. Could you give us some sort of more description about the mix of your marketing between various categories, year-on-year sort of performance above the line influences, anything else you might like to categorize and whether you're seeing changes in productivity of those marketing sort of categories? And the second question is also related to marketing. I see your AOVs up 26% and your orders are down 10%. Are you actively trying to encourage customers to trade up through your marketing? Because, obviously, there are some advantages to that from the point of view of your P&L, I would have thought.

So on the mix of the spend, it's fairly similar year-on-year, but we've just got -- we've been able to get more efficient. We've spoken previously about, it's been a tricky market for marketing where returns have got lowered. They're starting to improve a little bit as we've kind of navigated an uncertain environment, and we're trying to refine and use the learnings that we've seen over a period when the learnings have been difficult. So we're always doing that with our marketing spend, but it's heading in the right direction. But obviously, we want to be able to invest in the right areas. We've kept the brand spend going is what I would say, compared to others in the market. And I think we've still been able to get better returns from that. And we've seen what Carol was talked about with the co-ordinate campaign.

Yes. I mean all brands are at different stages of brand and digital mix. So it's very hard to average. I mean we have an average obviously in the P&L. But Boohoo, which you would expect to have a lower brand spend because it's quite an established brand, just this season because we've done the co-ordinate, it's got a high brand mix, and that will change again. And it's never changing, monthly mix on each brand we're not saying 50-50. And then you've got newer brands unlike Dividends, which is going to need a lot of brand spend to reestablish Debenhams going forward in the mix. So that will have an increase in brand spend as well. So it's very, very hard to average that because they're all at different stages. There's 14 destinations now.

And on the AOV, as you say it's up 26%, orders down 10%, but units per basket are kind of flat a little bit. So the average selling price is up. And are we encouraging people to trade up? We're not. I mean, we -- you'd actually think that people would be trading down, but the average selling price is higher. Now there's inflationary pressures in the market generally. And I think the market average selling prices are up 10% to 15% year-on-year, but it's difficult to see what that was. And we saw a big cost inflation on the input costs in the second half of last year. . So I think what we're seeing is not unusual, but we've seen people buy higher price points but send more back on the returns. So if you look at the engagement KPIs, people have been shopping at higher price points, and it's more woven products on the dresses mix. And that goes hand-in-hand with the higher returns rate. So that's why we've been seeing that growth in gross sales but not in net sales.

Okay. So we've had a few questions from the webcast. First question is from Eleonora Dani from Shore Capital. First reactions to the new sustainable collection in collaboration with Kourtney Kardashian.

I'll take that one . It's incredible. It went on to kind of like 1 week's cover in a couple of days, we're just trying our best not to trade back into it. We have got second collection planned. We're hoping to do it equally as well, but early stages with that kind of reach and putting that big face behind something. We've done it before. It worked for us before, and it's worked for us again. And we are hoping that, that will help the U.S. going forward. I think that was part of the strategy. We know we've got the DC coming on board, 2023. So this is just the brand marketing of really getting the Boohoo brand working again strongly in the U.S. It's worked in terms of not just sell-through of garments, but in terms of brand awareness there as well.

And thank you for that, Carol. Ben Hunt from Investec. With freight rates where they are today, how much of the FY '22 GBP 60 million freight cost headwind, would you expect to reverse in time?

That's a difficult question in time. I mean we've said that they're heading in the right direction, but it's early days. You'd want them to reverse, but obviously, we've got macro factors there with energy costs being higher in the world generally that are causing issues that we don't know where that's going to be. Now we'll -- things will adjust in the market. The market for clothing is going to adjust. The prices have gone up a little bit for the first time in years. And those things will adjust, and we would expect everything end to end to fully adjust over time. But when and whether how much is on freight rates, how much is on prices that we're able to charge, we don't know.

One thing to notice well, that while inbound freight rates, and we all talk about container rates coming down, and that's well documented. A big mix of our freight cost is actually outbound and there's no change there. So we send a lot of parcels in the belly of passenger planes. And if you go back the transatlantic route as an example versus 2019, you're still double digits down volume of aircraft versus 2019, but also demand in air freight has gone up about 20%. So there's no movement really there at the moment. And we're coming up to -- if you think of the U.S., we're coming up to almost 12 months since kind of Europeans were allowed to travel back into the U.S.

A follow-up question from Ben Hunt from Investec. If demand continues to worsen, what might be the effect on working capital? And what opportunities do you have to improve working capital in such an environment?

So the working capital, I think the big takeaway from these results is that it's actually got to a neutral position in the first half of the year, whereas it was a big use of cash for us last year. It's now or not. So that's been good. So we've been able to finance our CapEx without dipping into debt too much. So that's a really good sign. And that's happened as global supply chains have got faster, again, getting back to more normality. They're still not there yet. We used to see good levels of negative working capital. And hopefully, we'll get back -- improve that in the future. But what that means is if we see declines, then working capital doesn't get sucked out of the business. And likewise, if we see an acceleration in growth, we're not seeing a massive inflow from it. So it's -- in a way, it's quite good to be in that neutral position. So that's where we are. If we see further declines in sales, then it's not going to stop working capital out of the business where it is in a fairly neutral position. So what we do have to do though is make sure that we're still lean and agile on the stock position so that we don't end up with a worse working capital position because we've got too much stock for the level of sales, which is where we had been a little bit last year as well but with also slow supply chains generally, which we're all part and parcel of the same issues. Things are getting better, and the working capital is in a much better place. So we're in quite a good position on that in that respect.

Our next question is from Georgina Johanan from JPMorgan. Can you comment on EBITDA margin for next year? Also depreciation implications as automation launches, et cetera. would you expect a step-up in the charge into FY '24?

On the EBITDA margin for next year, we're not giving guidances. We're only just halfway through this year, and there's a massive period of uncertainty at the moment and going ahead. So what you've seen come through very clearly in the presentation today, hopefully, is that we're working on building that EBITDA margin. But we also want to get back to that position of growing the business and we've got the U.S. DC going live. So I think let's give more guidance as we go. So in reality, we're happy to be still making a profit, and the working capital is in a place where it is. And now we can build on those other 2 things, getting the growth back in the business and improving profitability through efficiency going forward. And so that's what I'd say on EBITDA margin for next year. On depreciation, depreciation will go up because we've got the Sheffield automation live for the whole of next year. It's only live for half of this year. So there'll be some of that. But if you think of the GBP 125 million investment in Sheffield over 15 years, for example, that would be where you're looking at the big change on depreciation next year. You also have some depreciation on the U.S. DC next year that we haven't got this year as well. But we'll see those cash savings come through from automation in Sheffield, and we'll hopefully see that resurgence in the U.S. business as well. So we'll start to leverage that depreciation in the future years.

We have our final question from Matthew McEwan from Singer. Has the macro stroke consumer deterioration altered your development plans at Debenhams at all? And how much is the EBITDA pathway you envisaged at the start of the year altering?

I didn't hear the second one, but I did Debenham. I'll answer that one. No, it's not slowing down our investment in Debenhams. I mean we highlighted in the presentation across both Neil and I in terms of the selective investments that were going ahead. And you'll see that Debenhams rank up there with the U.S DC. So again, we see a massive opportunity in Debenhams, and we're not holding back anything to make sure we achieve that.

Superb. We've got no further questions at the moment. So John, I'd like to hand back to you for closing remarks.

Yes. So quick for me. So hopefully, everybody has seen this morning. Look, it's a tough environment out there in terms of trade, but we're taking all the necessary steps that you would expect us to take. So we've been very agile on our stock, and we'll be even more agile as we go into the key Christmas trading period. We're protecting our cash, and we want to keep a strong balance sheet. So thanks, everybody, for coming this morning, and we'll see you all again soon. Thank you.