boohoo group plc (DEBS) Earnings Call Transcript & Summary

Hi. Good morning, everybody. I'll introduce -- well, they're all with me -- the guys with me Shaun, John, Carol. It's been interesting times. Really looking forward to the future. We've had days and days of a year of every day, there's higher cost, so we've got to deal with this and it's like the [ Dungeon cars ] were just moving and swerving. And now as it opens up, it's not only exciting, it's fun because the opportunity is opening up everywhere for us. And I'm really looking forward to the next part of the journey. So I've said enough. I'll hand over to the guys. Thanks.

Thanks, Mahmud, and good morning, everyone. I'm going to give an update this morning on our group and performance last year, how we are navigating the macro backdrop and getting the business back to growth. Shaun will talk through the financials, and I will then come back to talk in more detail about the initiatives we are taking. After which Carol, Shaun, Mahmud and I will take any questions that you guys may have. What we've seen has been significant growth over the last 3 years, with sales plus 43%, and we have taken meaningful amounts of market share. More recently, trading conditions have been tougher for the sector, with supply chains disrupted and inflation impacting costs and dampening consumer demand. During this period, we've made substantial progress with operational priorities. Macro conditions are improving, and we're reinvesting into price and lead time to reinforce our value credentials and our test and repeat model. Inventory is leaner, lighter and turning faster. Significant progress has been made with key infrastructure projects, including automation and our U.S. distribution center that goes live later this year. And this is all geared towards ensuring that we are well placed, so that the group can rebound strongly as headwinds ease and we get back to growth. Macro headwinds are improving, and this gives us a good degree of confidence for the year ahead. Inflationary cost pressures remain, but the outlook into the second half of the year looks more promising. Freight costs have been reducing from record highs, particularly within sea, and we have been reinvesting gains into more expensive air routes to improve speed to market. That said, consumers continue to face cost pressure right now, and we have to navigate the business carefully through this period. Looking at the markets we operate in, we remain optimistic about the huge opportunity ahead with a target addressable market approaching 0.5 billion customers across the U.K., U.S. and Europe. In the U.K. and U.S., there has been a significant acceleration in that online channel shift with more than 40% of spend taking place online today, and that will continue to grow in the coming years. In the U.K., we've materially grown our market share from 6.2% to 6.9% of spend online. The right price, product and proposition has resonated strongly with our customers, and our focus is to replicate this at scale in key overseas markets where we have low levels of market share today with massive potential. There are 3 areas that I want to outline on how we get boohoo back to growth. And between Shaun and I, we are going to share the details of the strategic programs that we are putting in place to deliver this. Customer first, investing for growth and delivering sustainable ROI. We have a clear list of priorities, the execution of which underpin future growth. Firstly, our customer. We are getting back to our tried and tested test-and-repeat model now that we are seeing a degree of recovery in supply chain disruption. We will be using tailwinds from lower cost inflation to drive speed and enhance our value offering and through continuous investment to upgrade the user experience, we will focus on driving lifetime value. Secondly, investing for growth. Key enablers will unlock our growth potential. The U.S. distribution center is a significant game changer for our U.S. proposition. Our automation projects are delivering exceptional results and there is more to come here. Elsewhere internationally, we see wholesale and marketplace partnerships as key for growth, and we'll be investing in the brands to expand our global reach and awareness. Lastly, we want to deliver sustainable ROI for our shareholders. We will drive a leaner, lighter, faster inventory model with a focus on rebuilding profitability where we can deliver a return to growth, combined with the significant improvements in profitability. Before I hand over to Shaun to present the financial review, we have a short video, which I want to play for you to demonstrate the strength of our group. [Presentation]

Okay. Thanks, John, and good morning, everybody. It's great to be here for what is my first boohoo results presentation. I'm now going to walk you through the financial review as well as talk to delivering sustainable return on investment as we get the group back to growth. My focus is on 4 key areas. Firstly, on stock management, we made great progress, bringing inventory down significantly with a 36% reduction year-on-year and more than GBP 100 million in absolute terms, and we see further opportunity to move this further. We're prudently managing all of our costs in our business, ensuring that the cost base is appropriately sized. It's lead and rightsized for the current environment and gives us the right platform as we get back to growth. Cash is queen, and careful cash management is a key focus area. And the cash that we are generating is then being selectively invested to support future growth opportunities, of which there are many. Sales for the year totaled GBP 1.77 billion, down 11% year-on-year, albeit slightly ahead of what we previously guided in January. Performance in the year was impacted by consumer demand softening due to the cost of living challenges as well as reflecting the shift back towards off-line channels following the pandemic. Gross margin at 50.6% was down 190 basis points year-on-year and a resilient performance given the significant cost headwinds facing us last year, along with the work done to proactively bring the inventory position down in H2. Adjusted EBITDA was GBP 63 million as operating costs have been impacted by rising inflation as well as the ongoing elevation of international shipping costs. We have a robust liquidity position with GBP 5.9 million of net cash at the end of the period, which was better than expected due to the positive actions we've taken on CapEx, on working capital and costs, and we finished the year with GBP 331 million of liquidity headroom. And on inventory, we've significantly reduced this, down 36% year-on-year as we manage through a period of uncertain demand. A key driver of unlocking cash is the work we're doing on our stock management as we push to drive a leaner, lighter, faster boohoo. As mentioned, inventory is down 36% year-on-year. Our lead times are improving 3 weeks faster alone in April compared to a year ago. We've accelerated our stock turn, delivering an additional turn improvement to date. And whilst we're pleased with the progress made in recent months, there's more opportunity ahead as we look to unlock further lead time improvements. Speed matters and shorter lead times are critical in our drive to get back to growth. The execution of our strategy and specifically, the focus on inventory turn has driven significant working capital inflows over the last year. We've continued to make significant investments with GBP 91 million of CapEx in projects we believe underpin our plans to get back to growth. We generated GBP 30 million of free cash flow and ended the year in a strong liquidity position of GBP 6 million of net cash and GBP 325 million of committed credit facilities via our RCF, giving the group over GBP 330 million of liquidity headroom. We've taken steps to rationalize costs. Pre any reinvestments, we'll reduce overheads by over GBP 50 million through headcount reduction and other initiatives, all of which are in flight. This ensures that the business is rightsized for the current environment and is the headroom to selectively invest in key growth initiatives. The percentages we share here are cost as a percentage of net sales, excluding D&A. You'll find it no surprise to hear that marketing is absolutely vital to the success of our business, 10.8% of net sales in FY '23. And as we look out to the medium term, we will continue to invest in marketing to ensure that we continue to acquire customers and build excellent brand awareness across our U.K. and international markets. Distribution costs in FY '23 were 23% of net sales as fulfillment costs remain elevated in the teeth of a global supply chain challenge. Looking ahead, with the existing automation we have in place an optionality for U.S. automation as volumes grow, we expect to be able to benefit from operating leverage in the medium term. Finally, admin costs of 13.2% of net sales in FY '23 are expected to reduce as we leverage overheads through efficiencies and scale. And we exited the financial year on an improved trajectory. By the end of the summer, the first phase of our 1 million square foot U.S. distribution center will go live. Opening the DC in the U.S. will help unlock our growth potential, providing a delivery proposition that can service 95% of the U.S. within 3 days compared to 7, 8 or even 10 days that we've been facing over the last couple of years. And as we grow, this will provide the additional capacity that the group will need. We're in a key focus market with proximity to our customer. However, as with any operation, one thing I can tell you for certain is that we will see some initial operating inefficiencies. As we open the distribution center and as we expect, the group will also incur additional freight and import duties as a result of the shift to the U.S. local fulfillment. Therefore, we expect the site to be investment for us this year, but of course, it unlocks that growth potential. Over the medium term, we expect this to become neutral as we scale. But from day one, this investment fundamentally transforms our capability to service the U.S. market and unlock growth with the right product, the right price and the right delivery proposition. Where we stand today, we have an EBITDA margin of 3.6%. As we look forward, we see a clear path to profitability. We believe 6% to 8% EBITDA margin represents a realistic ambition coupled with getting back to double-digit growth in the medium term. I've detailed key areas to support this. First of all, input cost deflation. We've already started to see deflation in areas such as inbound freight and raw materials prices like cotton coming down. This will clearly take some time to fully flow through. But even after we reinvest into pricing and lead time, there is a clear opportunity. We saw the cost prices of our products increase as inflation bit into raw materials, into energy prices, into freight prices. And now we see all of those input prices decreasing, and we need to capture that deflation. Returns have risen through the pandemic. Our focus is on taking steps to lower returns in a way that doesn't negatively impact the customer experience. For example, through a focus on size and fit improvements with our suppliers, quality checks further upstream our supply base and improve processes in our supply chain. Volume, growth and overhead efficiencies from our back-to-growth strategy will drive operating leverage, supporting margins alongside tightly controlled costs. And international growth, we're well underway with our U.S. distribution center, and we have many of the markets internationally where we see growth opportunity. For example, through wholesale and marketplace partnerships. This gives us clear line of sight to an EBITDA margin of 6% to 8% in the medium term whilst investing in price, in product and in proposition in a manner that will deliver a return to double-digit revenue growth and sustainable ROI. Moving finally on to guidance. The group's focus for the year ahead is on rebuilding profitability and getting back to growth. For the year ending 28th of February 2024 FY '24, revenues are expected to be between flat and a decline of 5% versus the prior year, with increased emphasis on driving profitable sales. In the first half, revenues are expected to decline by 10% to 15% as a result of this action being taken. In the second half of the year, the group expects to return to revenue growth as it brings -- as it benefits from the investments being made across price, product and proposition under the back-to-growth strategy. Adjusted EBITDA for FY '24 is expected to improve year-on-year as a result of operational gains, cost efficiencies and cost deflation in our supply chain with adjusted EBITDA margins of 4% to 4.5% and adjusted EBITDA of between GBP 69 million to GBP 78 million, in line with market expectations. CapEx will be GBP 80 million to GBP 90 million and year-end net debt to adjusted EBITDA of approximately 1x. So to summarize. We have a strong financial and operating model. Right now, we're focused on getting the group back to growth through self-help in the delivery of our strategy. And with that, let me hand you back to John.

Thanks, Shaun. The boohoo group was built on the test-and-repeat model. In an industry where customer tastes and preferences are constantly evolving, we need to stay on top of trends and ensure we are offering the right product to customers at the right price. We then need to get that onto our platform and deliver to our customers as quickly as possible. Over the last year, we have seen a worldwide supply chain crisis, which impacted how we execute our test and repeat model. As market conditions have shown signs of improvement, we want to ensure we reinforce the strength of test and repeat as the world gets back to normal. For example, investing into airfreight to drive down lead times and investing in pricing to uprate our entry price product mix, all of which is geared towards building a leaner, lighter and faster model. At the heart of boohoo's DNA is fashion. It is crucial that whatever market we find ourselves in, we have a fantastic fashion offering across our brand portfolio, appealing to everyone from 16 to 55 years, old of all sizes and demographics. We visually wanted to show you here how the product mix has changed over the last few years. Of course, 2019 was our last year comparison point, where we had a traditional mix of products across all lines. As COVID hit the years of 2020 and 2021, we're all about athleisure and all things jersey as people stayed at home. Then in 2022, as the world started to open up again, we saw resurgence in premium and occasion wear with no restrictions for the first time in 3 years. Now finally, in 2023, we are seeing a return to normal with strong shifts into swim, beach and holiday wear, with more normal product mix as compared to the last 3 years. Crucially, we are approaching the first summer holiday season, which has had no COVID impacts for 3 years. The key takeaway here is that we are always at the forefront of what people want. We are leaner and faster and will always remain agile, thanks to our test-and-repeat model. At the end of the year, we had 18 million active customers and over 65 million followers globally across our brand's social channels. We work with high-profile celebrities on big name campaigns. And for example, in the last year, we have partnered with Kourtney Kardashian through boohoo, Liz Hurley through Karen Millen, Jayda Cheaves of PLT and Trippie Redd of boohooMAN, amongst many others. We also work with hundreds of influencers who allow us to target huge audiences that are specific for our brands and geographies. The combined reach of influencers that our brands work with totaled in excess of 400 million. We recently launched on TikTok Shop, enabling followers to purchase directly through the platform. And we are focused on engaging our customer base across the platforms relevant to them as well as through our customer journey such as our apps to upgrade the shopping experience. Infrastructure plays a key role in our proposition. At our Sheffield site, we have invested GBP 125 million to build a state-of-the-art facility, which has -- which will have doubled our capacity, driven significant increases in throughput and comfortably delivered savings in double-digit millions of pounds. This summer, we expect the first phase of our U.S. distribution center to go live, launching with one brand and then rolling out the group brands later in a considered and phased approach. We already have a significant business in the U.S. with over $400 million of sales last year. The distribution centers opening will transform our proposition, allowing for next and express delivery across key states with 95% of the U.S. covered within 3 days compared to the 8 to 10 days we currently have. This, we believe, will be a real game changer, ensuring our product, price and crucially, our proposition is as strong as possible. Moving on to Debenhams, our digital marketplace. Our strategy is to add more partners, more brands and more products and through this, to grow our customer numbers. You can see in the table the rapid progress we have made in growing our customer base. The number of brands available for consumers and the impressive number of products available across fashion, beauty and home. Looking forward, we want to accelerate Debenhams, focusing on premiumization, turbocharging our marketplace and accelerating beauty. This will allow us to capitalize on Debenham's huge brand awareness and significantly scale its capital-light stockless model, which at scale, can deliver superior margins. Our partnership strategy is focused on working with partners that can extend our global reach through their direct-to-consumer platforms and help raise our brand's awareness in a manner that offers complementary and incremental revenues in a low-risk way. In turn, our wholesale partners get access to our fashion, our newness and our short lead time model. Our sales portal allows them to select from the same ranges that our teams are buying and benefit from the group's buying scale. We have today a large wholesale footprint around the world with 5 key partners as outlined on this slide. Looking ahead, we are working on partnership opportunities across new regions to continue to expand this offering, elevating our brand's presence across existing and exciting new markets. So to summarize, we are focused on a leaner, lighter and faster model, and we're focused on getting this business back to growth. We are putting the customer first, we are investing, and we are looking to deliver sustainable ROI as we get back to growth. Looking ahead, we will continue to invest selectively where we see clear opportunities to support these strategies. These include reinforcing the strength of our test-and-repeat model to deliver amazing fashion and great value to our customers. Our digital marketplace, Debenhams, expanding our wholesale partnerships and developing our global infrastructure network. We're extremely confident in our medium-term outlook as we continue to offer customers unrivaled choice, inclusive ranges and outstanding value, giving them even more reasons to shop with us. So thank you, and we'll now open up the floor to questions.

It's Caroline Gulliver from Stifel. My first question just relates to international. And in particular, can you give us some of the catalysts to getting back to growth in rest of Europe and rest of World? You've obviously talked about the U.S. and the U.S. DC, but what's it going to take in rest of Europe and rest of world?

I think if I take that to start with a couple of things. I think we talked about our overseas partnerships. So in terms of getting our brand awareness in Europe and rest of the world, we're working on some new partnerships, which we hope to announce in the next couple of months. That will be one in terms of our brand awareness. Like other parts of the world, we're seeing lead times improve in terms of getting our product to consumers in a more in-time fashion. So U.S. still been our longest one at 8 to 10 days. But if you look at rest of the world, Australia, as an example, we're now getting key cities in Australia in just under 5 days. So it's really about being able to -- for the first time in a couple of years, been able to push some of those markets again, sort of probably 2 of the key in terms of getting that back to growth.

And my second question just relates to beauty. Just if you could give us some examples of how you're intending to accelerate beauty. I know you've had some wins, but just a few more examples would be good.

So if I take Debenhams to start, Debenhams now carries, I would say, 85% of the premium beauty brands. So obviously, Debenhams is making huge progress in terms of their beauty business. We're equally -- we're not very strong, I would say, in our core brands in boohoo, PrettyLittleThing, Karen Millen, Nasty Gal, as an example, and with big ambitions in terms of own buy and own brand in terms of development there with those brands. And then obviously, we've kind of recently invested in Revolution Beauty, and that's obviously given us more insight into the beauty market and what potentially we can do with our internal brand. So quite a lot actually going on in the beauty space.

It's Anne Critchlow from SG. A question please on current trading. What have you seen in March, April, May, and particularly in the U.K. where I think the fourth quarter was quite weak. And then secondly, are you still sourcing 60% from nearshore countries? How is it trending?

So let me take the current trading question. So we haven't shared an update on current trading, but what we have done is given you some guidance around first half performance. And we've pretty consistently said I think now that our expectations are the first half remains challenging. There's -- if you think about a year ago, we were coming out of Omicron. We're seeing a lot of pent-up demand, John spoke to that, around occasion wear. And year-on-year, the gaps that we see right now are all about occasion wear. Everything else, is there or thereabout, puts and takes, but there or thereabouts. And the gap is occasion wear where -- and that really speaks to the strength of occasion wear last year. So we're not going to give you an update on current trading, but we have given you the first half, which should give you enough to sort of understand where we currently operate in.

And then on the sourcing point, I would say, yes, pretty much kind of, let's say, 60-40. But what I would say is that everything is back to normal. So the global supply chain crisis where goods were taking double-digit weeks to get. So back to our test-and-repeat model, we could, in a lot of cases, test, but we couldn't repeat because basically the lead time wouldn't allow us to do that. So if I look at China today, I can order in China, and I can have air freighted in 48 hours in a couple of weeks. So kind of what we had to pivot to in COVID to get more near sourcing because of expensive freight out of Asia, but also slow freight out of Asia. Actually, that's all back to normal. So depending on the product category now, we can pivot quite easily. But there's no delays anymore. And everybody talks a lot about sort of the $1,500 container going to $15,000. But we don't talk so much about actually the impact on lead time. And particularly for somebody like us, the test and repeat, been able to do the test, but in most cases, not been able to do repeat was quite a big impact.

Miriam Adisa from Morgan Stanley. Just a question firstly on the guidance. Could you just talk about what gives you confidence to be able to get back to growth in the second half from sort of minus 10%, 15% you're expecting in the first half? Is that purely driven by the pricing investments you've mentioned or are there other factors as well? And how you're thinking about macro in that as well? And sort of linked to that, I guess, how much flex do you think you have in your OpEx base to be able to hit that guidance on top line if demand is slightly weaker? Are there areas that you perhaps could cut further? Because I know you said that the cost base is sort of rationalized at the moment.

Miriam, Nice to see you. So let me give you my perspective on that. I think there's probably 4 reasons that give us confidence that we can get back to growth in the second half, a couple of them external and a couple of them internal. So if I start with the external. The first part is the comps. The comps are just easier in the second half. And I spoke earlier about that first half comp against the occasion wear. So second half comps are easier. Also, I think as we segue through this year, what I expect to see is headline inflation coming down. And so I think just consumers will feel better as we get back down to what I expect to be kind of mid-single-digit inflation, not double-digit inflation. So they're kind of the macro factors. And that's pretty consistent with what the banks and commentators on the market are same. And if you think of the internal factors, we are investing for growth, right? We are -- John talked about, we're investing in price for -- to drive growth. And we're investing in our proposition. And we speak to our U.S. fulfillment center capacity. And so we are investing for second half growth. So I feel that there's a lot in the tank for us to run at. And this is a great business, and we've got a ton of headroom. And so yes, I do feel confident about getting back to growth. And the second part of your question?

Just on the [indiscernible].

The cost base. Yes. Look, I think we've demonstrated over the course of the last few months our ability to manage the cost base accordingly. So this business was set up for growth. And during a period of decline, managing decline, we've adjusted the cost base accordingly. And that's right across all the costs. So I think our ability to be agile around costs, I think, is -- we've been able to demonstrate that. And I absolutely see more opportunity there if that's where we need to go. Right now, our focus is on getting back to growth, but we can pivot and adjust as necessary.

John Stevenson of Peel Hunt. A couple of questions, please. First up, just on the U.S. launch. Can you touch on sort of plans for marketing and also plans for sort of local supply chain, I don't know how quickly we hope to start testing something a little closer to the U.S.? And second question, just on Debenhams. If you can talk a little bit about how Debenhams performed last year and what you're looking to achieve coming to peak this year, whether that's in terms of number of brands or the profitability of the platform and sort of the progress that you think you can get to?

Yes. So if I kick off with the U.S. and local supply chain. So we're already active is what I would say, in the U.S.. So that's working with partners in the U.S. who may be making in China, Asia, in some countries, but importing directly in. And that's mostly in L.A. and in New York. We're looking at Mexico. We're looking at Central America, Guatemala in terms of what's coming through there. So we're active. We've already opened up. We're already working with suppliers in advance of that and ready for when our first brand PrettyLittleThing goes live sort of towards the end of summer. So all happening there. We've got actually our own team on the ground. We're beginning to build a team in Los Angeles. So that's all progressing really, really well. And in terms of U.S. marketing plans, clearly, we want consumers to know that you can now get a parcel within 3 days, and in some cases, next day. So we'll be actively communicating that. We have some events planned as we go into September, October, particularly on PrettyLittleThing to really begin to build that brand awareness again. I'll hold back on those plans for the moment, just sort of we kind of give those to the consumer first. But obviously, yes, we're preparing in terms of marketing for that as we come through. And then finally, just a question on Debenhams. Look, we're really pleased with Debenhams. You'll have seen some of the numbers that we've got. I can say it's a profitable Debenhams already. Really now it's about onboarding more brands. We're way ahead of a number of brands that were on old Debenhams. And clearly, having online-only allows us to do that. It's really about scoring more and more brands, getting more customers, but we're excited. You can see we mentioned that it's one of our key brands, one of our key focuses. And it's from an investment point of view, Shaun's very happy. It's stock-light, less, in terms of infrastructure, but we just see a super opportunity ahead for us on that brand.

I love a good marketplace.

But we'll see sort of decent sort of traffic growth as people sort of rediscover.

Yes, yes.

It's Nicolas Katsapas from BNP Paribas Exan. I have a couple of questions, please. The first question is just on the net debt expectations for the full year '24. It looks like those have gone up versus 23%, but you're expecting slightly better profits. And it sounds like there's still more to go on working capital. Yes. So could you explain what the bridge is there? And then secondly, you commented on the neutral impact in the medium term of the U.S. distribution facility. But could you expand a bit more on the puts and takes on the gross margin versus the fulfillment leverage you expect?

So let me start with the net debt question, the bridge for '24. So yes, we've guided to kind of 1x EBITDA from net debt for this year. And from where we are, I think we delivered a good performance for FY '23, got to a net cash position, a lot of that about the improvement in inventory, the work we've done on the cost base and on cash and working capital more generally. And all of those lessons that we've learned and all of those muscles that we've started to develop, we take forward. And the real driver, Nick, of the net debt increase is simply the CapEx that we're going to spend on U.S. fulfillment, but also on Phase 2 of automation in Sheffield, which is about increasing the capacity. So it's those -- those are the 2 big infrastructure initiatives that we've got in the plan for this year. On top of that, of course, you've got some exceptionals, cash exceptionals in the U.S. As we launch, there's going to be some building up the team, there's going to be some split shipping as we get the proposition and the inventory and the stock in the right place. So there's cash exceptionals as well. There's a bit of interest as well. Interest will be a bit higher in this year. So yes, it's those typical things. And the second question was on gross margin, what was the specific...

So the question was on the neutral impact that you spoke to in the medium term for the U.S. distribution, but how does that work between gross margin and fulfillment?

So yes, there's some puts and takes, of course. So as we move into the U.S., what we'll definitely expect to see straight out of the gate is inefficiency. I mean, we've got a big shed and we're going to start with one brand and maybe we'll get the second brand up and running pre-peak, but it's a lot of capacity for one brand, and we're not at scale. So the cost per unit is going to be a drag for this year until we get to scale and get the rest of those brands launched. There's going to be a higher import duty and a higher inbound cost of freight as well, moving product indirectly into the U.S. but offset against that is the benefit that we get to outbound shipping. So instead of shipping from Sheffield to the U.S., as John spoke about earlier, we'll be shipping from Pennsylvania to the U.S.. And so we get the -- so on a cost basis, as we scale, we expect the costs overall to be broadly neutral. But of course, the win here is that we get the opportunity for local fulfillment in a much better proposition. And John spoke to 95% of U.S. households within 3 days, it just gives us the opportunity to compete in the U.S.. And we talked about how, for us, this isn't really optional. If we are serious about growing our business in the U.S., and we absolutely are, then we have to have a local fulfillment and local proposition. And this is the step. And so I'd rather make that step and then work to optimize the cost base and optimize the speed and the delivery times and all of those things and just get out the gate and get going with that.

It's Simon William from Credit Suisse. Three questions for you. Following up on your guidance for next year, can you just tell us how much exceptional cost then there is going to be next year, either or both P&L and on a cash flow basis, it's clearly going to be quite a large number that you're going to be declaring to be exceptional.

Yes. John, should we take the questions one by one.

Yes. So we'll do one at a time.

So I would say expect mid-20s order of magnitude on exceptionals. It will almost all be to do with the U.S. distribution center launch. And it is things like the building of the team prelaunch. It is the split shipping cost, which is probably the largest single cost. And if you think about that, what we're trying to do there is we'll put as much inventory as makes sense into the U.S. for launch. And so that will be all of the continuity lines, all of the best sellers, all the new stuff from a moment in time. So we'll split our inbound and newness will go into the U.S. and also into Sheffield. But what we won't do is we won't move end-of-range products, products in markdown into the U.S.. So there will be a period of time where we service a proportion of U.S. demand from both Pennsylvania and from Sheffield. And so we'll create those split shipments, and it will be for a period of time. And so that creates some exceptional launch costs.

More broadly, why is deflation a competitive advantage? That seems to be the core of your optimism around future margins is that costs are coming down, and therefore, your margins are going to go up because you're going to invest. Why isn't everyone else going to do the same thing?

I can't answer for everybody else, but I can't answer for us. I think if you look at shipping rates, it's a clear example, we're -- I'm going to say, $1,500 for a 40-foot from China, most ports in Asia into the U.K.. That would hit $15,000 at its peak. If I look at airfreight even in last year versus this year, airfreight today is what sea freight was a year ago and has come down dramatically. If I look at raw materials, cotton polyester, again, come over the top of the mountain, they've come down substantially versus last year. They're still higher than 2 years ago, but they've come down a lot there. If we look at energy, again, well documented in terms of where energy prices are. So there are just some examples of where deflation is happening. Our job at the top of this table, we paid on the way up is absolutely to make sure we grab it on the way down, and we're being quite aggressive on that.

Could I just rephrase that then. I'm saying of all the benefits that are coming through, how much do you think that you'll take to the bottom line? And how much do you think you'll invest in price and proposition.

So we're not going to give you a split of that because actually, we don't know the answer to that. But it will be about investing in price, so improving the price for the customer, and it will be about taking some to margin, but it will also be about investing in lead time. And your question was about why is it competitive advantage. And let me just give you an example of why I think it does give us a competitive advantage. So when we capture that deflation and what we'll do, what we saw a year ago, Simon, is airfreight was so egregiously expensive that we shifted a whole bunch of our inbound to see. And of course, that adds the lead time. And John spoke about how the test-and-repeat model is very difficult in an environment where you can test, but you can't repeat. You just don't have the lead time to be able to get the product back fast enough -- but in a world where we can invest those deflation, those savings back into airfreight that allows us to get the test-and-repeat model really working for us again. And that's why I think it's a competitive advantage because the test-and-repeat model is the kind of life blood of our buying model.

Tony Shiret from Panmure Gordon. A couple of things. First of all, Debenhams. You talked about turbocharging Debenhams and the slides got a few brands on it, quite a few brands admittedly, but doesn't really come across as very turbocharge. I just wondered if there's something else you're going to do. Is there going to be a sort of big marketing push on Debenhams at some point, refocusing more of the marketing on Debenhams to get behind it. And the second thing is, I sort of appreciate your presentations a bit different this time, and I've missed the slides on product and stuff. And I just wondered if you could give us some sort of ideas about what you're planning to do in the launch of the autumn/winter just in terms of themes and stuff like that, just so we can hear from the person on the table who hasn't spoken yet.

Okay. So I'll take dividends. Do you want to take the autumn...

Yes.

Yes. So in terms of Debenhams, look, we're in discussions with lots of other brands. And we're launching new brands on Debenhams every week is what I would say. We clearly have a lot to go in terms of brands that we want to attract and get on. And it's a slow process. But actually, if I think even in the next month, the number of new brands, well-known brands that you'd be very familiar with, that will have on board. So we continue to push brands. Marketing spend continues to increase. Obviously, as we get more consumers and we get more brands and we look to attract more people. So we've got ambitious plans for Debenhams for this financial year. And obviously, that's going to be through more brands and further marketing spend in Debenhams.

And in terms of the 10.8% marketing spend, what would that figure look like for Debenhams?

We -- well, we don't break down our brands by marketing spend, but we have different spends depending on brand and depending on region in terms of this what I would say. So some of our more mature brands in the U.K. have got our lowest marketing spend as an example, and some of our newer brands have got higher percentages. And equally, if we go into the U.S. or go into Europe, the percentages tend to be a little bit higher. So clearly, we see the opportunity as well, I would say, in Debenhams, and we'll be making sure we get behind that opportunity.

Yes. Just to add on to John on the Debenhams question. We have actually already just launched TV campaign, which is our bigger, better, bolder campaign, which is -- it's about relaunching and actually telling the consumer that Debenhams is still here. It hasn't gone away. It is a pure play, is online. But we have done quite a lot in terms of inventory with our partners. We have just landed some of the big premium brands, which Shaun said earlier, which is really, really helping drive that positioning of Debenhams becoming more premium than I think it was when it was on the high street. Certainly, if you looked at the store -- the online shop today, you will be able to see that it's actually getting a much more premium feel than the old Debenhams that we used to know. So there is quite a lot of marketing going on in the background. And I think when we get all our new partners on board, it's just -- that is going to turbo that growth. Just in terms of fashion going forward, going back to test and repeat, we're not a business that forecast so far in advance into autumn/winter because we're actually currently landing in summer. But obviously, there's going to be all the traditional categories that we do buy in advance, obviously, outerwear and our jackets or knitwear and the occasionwear pieces, the stuff that's got beating and everything else that comes out of China that we have to buy in advance. So all of that is business as usual. What we are doing is going back to -- depending on the brand is what we're really in terms of what -- how we're working. So likes of boohoo and PrettyLittleThing are working on really fast leads. Karen Millen is probably working on a slightly longer lead. And with Karen Millen, we've seen a return to working on collaborations. We've just worked with Karen Millen, the founder. For example, collection launched last week, absolutely flew out. I'm actually wearing it today. But -- so we've done that. And then we've worked with [indiscernible]. We've worked with Liz Hurley. We've worked with loads of iconic kind of people on Karen Millen. But equally, on the boohoo brand, we've just launched with Pantone. So we're seeing these collaborations really come through is quite a fresh approach as well. So that's enough leisure collection. PrettyLittleThing we've just launched with Kappa just last week in L.A.. But there's quite a lot of marketing. And I can't give those marketing kind of fashion collaborations to you at this stage that will be second half loaded and will actually come into play for the U.S. launch...

It's Simon Bowler from Numis. I've got a couple. I'll go one at a time in terms of theme. First around the U.S., how long a period of time do you expect to be doing split shipping in the U.S.? And whilst you're doing split shipping, I assume you're not going to be able to present kind of next day through to consumer, given some of the items may be coming from the U.K.. So how do you plan to kind of communicate that through the consumer out to the point of basket or before?

So the consumer when they come on to PrettyLittleThing, do their order, they'll be -- it will be very clear in terms of what's going to be within 3 days and then what's going to come from the U.K. that will be 8 to 10 days. So that will be a very clear message in terms of -- as part of that process. In terms of split shipping, look, clearly, we want it as short as possible. You don't really want to be running it very long. So it's a temporary while we get up and running. But the shortest period we can make that effective, the better for us. So the teams will be working. It's good because the consumer can get their full order, but equally, it could be a little bit frustrating because something may take 8 to 10 days and something takes 3 days. So it's a temporary is what I would say, in the initial stages. And we'd like it to be weeks and to months rather than any longer than that.

The way I think about it, Simon, is we'll launch -- we'll put the inventory in the U.S. from the start around the best sellers around the continuity and the newness that will have moved in. And then over the period of next few weeks and months, we'll be just adding more newness in and more newness in until we get to a point where actually almost all of the range is then available in the U.S.. So my estimate is it's probably 3 to 4 months. That's how long it will take us.

It's a bit late for that. And just regards to the idea of the U.S. DC being kind of cost neutral, does that require automation and kind of local lower-duty inbound sourcing? Or do they offer kind of further upside on the cost profile of it there?

Yes. So expect us to optimize every part of that facility, whether it's import duties and making sure that we're sourcing product from the right location, it's interesting when John mentioned Mexico earlier. Mexico looks a lot like Lester, friendly enough. It is -- yes, look, it's small quantities and it's short lead time. And it's also low/no duty into the U.S.. So finding these sourcing locations that allow us to optimize duty is helpful, I think, but expect us to optimize all of those costs as we just get up to speed in the U.S.. And I don't expect us to get it right straight out the gate, but we will do over time.

Okay. And then one final one, if I may. Just I think your guidance for next year kind of implies CapEx to sales of around about 5%. Is that kind of a sensible number to be thinking about over the mid-time and aligning with that EBITDA guidance that you've given?

So yes, I would say -- I mean, I don't think about it as a percent of sales, typically, Simon, because some of our CapEx is a bit lumpy. So I would say if you look at the 2 big things, CapEx spend this year will be U.S. fulfillment, and it will be the U.K., the Sheffield second phase automation, which is a capacity play. And then ongoing, we've obviously got a capitalized development time as our engineers are always building new products and features. So our CapEx can be a bit lumpy. But of course, the guidance that we've given GBP 80 million to GBP 90 million, I think, puts us in the right space for next year. I expect the following year to probably be lower than that because we won't have some of those lumps. So yes, look, you could say 5%, but I don't really think about it as a percent of sales because of that lumpiness.

It's Adam Cochrane from Deutsche Bank. A couple of questions, please. You mentioned you have a clear line of sight to a 6% to 8% EBITDA margin. Can you share what sales base is required within your clear line of sight and what the gross margin that is really embedded within that 6% to 8% is, please?

Yes. So I'm not going to give you a breakdown of what sort of margin improvements we might make or where exactly we're going to get those EBITDA improvements from. But the sort of things that we're going to see, John spoke to the capturing of deflation in our product cost prices, whether that's raw materials, as we've seen cotton prices dropping, whether it's freight, whether it's energy costs, all of those things, we need to go and get that. So that is a big chunk but there's other stuff as well. So in the supply chain, we've gone from -- we went from 2 fulfillment centers to 4. And now we've reduced back down to 3 as we've closed our Wellingborough facility. So we've made ourselves more efficient in the supply chain, for example. As we've managed through a period of decline, we've seen some inefficiency in our marketing. And so we'll make sure that we drive that efficiency back into our marketing spend and use our customer acquisition cost versus lifetime value of customer equation to make sure we're in the right place, by brand, by territory. So there's just a lot to go at. And I think Miriam asked the question earlier about OpEx. There is more for us to go at if that's what's required. We're always looking at the cost base. It's been we've had this narrative over the last 6 months, which is really about control the controllables. And that's what we've tried to do in a period of demand being difficult, then we've tried to control the controllables. So the cost base, inventory, cash, all of those things, lead times. And so I think we've put ourselves in a good place to be able to pivot now back to growth. And whether that is later in the first half or the second half, our expectations are very clear that we expect to get back to growth and certainly by the second half.

And so to get to that number, you're saying it could be some gross margin increase, but it could not be. It could be some OpEx increase as a percentage of sales. Is it sales really the driver here of that margin recovery?

No. The key driver -- so sales volume obviously helps. I'll take it. But the key driver is the capturing of the deflation because that was a -- if you look at the -- if you think about the bridge that took us from FY '21, shaving the 10% EBITDA margin to 3.6% EBITDA margin for FY '23. If you look at that bridge, the biggest component of that bridge was a gross margin headwind as we saw those cost prices go up. What we could have done is we could have taken those cost price increases that we got and we could have pushed them all through to retail prices, and we didn't want to do that, right? We wanted to stay as competitive as we could on retail prices. And so we took that haircut on margin as a result. And also, there was investment in making sure we came out with clean inventory, and so we were marking down product to come out clean. I think it's important that we're in a position that once demand starts to turn, and it will, that we are able to pivot straight back to growth. And so it's that agility, I think, is important. And so it's a particular focus for us to make sure that our inventory position is clean, that we're able to bring product in. Our lead times are shorter. We're able to bring product in faster. We're able to repeat the winners, all of those things that make our model a great model that we're able to operate those effectively as we segue into this financial year into the second half, in particular.

Okay. Just 2 really quick ones. Share-based payments was -- grew a bit this year. Can you give us an estimate of what it will be for next year at all?

Sort of mid- to high 20s.

And then secondly, the actions that you've taken on to preserve profitability during the year and into this year. Are you able to ascertain between all of those actions that you've taken, what the impact on sales has been so that when they annualize, we can think about effectively adding it back, if that makes sense.

Yes. That's obviously a hard question, as you know. We -- of course, we try to do that, right? We try to say what -- when we do any of these initiatives, we think about the business case, we think about the impacts on sales and ultimately on profitability and the cost base as well. Some of this is hard to take the sugar out the tea. And so I'm not going to give you a -- what upside possibilities on volume. But I think the key one is as we -- we've talked about this getting back to growth and the strategies behind that, particularly around lead times. So as we get shorter lead times, just having that ability to repeat the winners and that has some massive impact benefit for our business that we're able to see the winners and then get back after them very quickly and get them back on the shelves. So that, to me, is a clear growth driver. Of course, U.S. fulfillment is a clear growth strategy. The whole wholesale international expansion is another growth strategy. Marketplace is yet another. So there's lots of them. But I think if I was to pick my favorite child, I would say it is really about getting that lead time back down to something that allows us to operate test and repeat effectively.

So it was a bit more like what was the impact paid for returns...

In terms of more questions [indiscernible]. Thanks very much, everybody, for coming this morning. Thank you.

Thank you, everyone.