City Chic Collective Limited (CCX) Earnings Call Transcript & Summary

Good morning, all, and now thanks for joining us for the presentation of CC Collective's FY '20 results. I'm Phil Ryan, CEO, and with me on the call is our CFO, Munraj Dhaliwal. Let me start off by saying how pleased I am with City Chic Collective's performance in FY '20. A year which any number of challenges we turn at our business, our team and our customers. Today, I'll be providing a summary of our business's strategic and operational performance in FY '20 before handing over to Munraj who will cover the financials in more detail. I'll then conclude with an update on FY '21 before opening up to questions. It was a big year in the evolution of City Chic Collective from an Australian bricks-and-mortar retailer to a global digital plus-size business. We are set up structurally, operationally and financially for this journey to continue. As I've said before, our 3 strategic pillars are plus size, digital and global customer acquisition. With 65% online penetration, up from 44% last year, growth of 278,000 or 72% in active customer numbers to 663,000 globally. And 42% of sales in the Northern Hemisphere, up from 20%. This focused strategy has delivered results. And it goes without saying that everything we do is to lead the world of curves. That is the key. We've achieved a lot operationally this year with the successful acquisition and integration of Avenue as the highlight. We also launched our new global e-commerce platform, a new customer relationship management system and consolidated our U.S. warehouse and logistics structure to allow all brands and products to be sold across all website locations. At a product level, we now produce over 750 options a month, giving us the widest variety of product in the plus-size global market. Avenue really expedited segment expansion to the more conservative end across all lifestyles, and it gave us a material shoe business. In City Chic, we increased our casual offerings significantly in line with customer demand. We grew the intimates and sleepwear business, and launched our playwear brand, Fox & Royal, which grew from the Hips & Curves acquisition. And our biggest achievement in FY '20 was the successful navigation of COVID-19. We have traded profitably and managed our inventory position well coming out very clean and with product in the right season. Our reactive model, operating model and nimble supply chain is what allowed us to achieve this. We redesigned garments in real time, with customer demand moving casual, we changed the tone of our business to suit the customers' needs. We move product globally through our various channels to maximize its value and minimize purchasing requirements to manage cash flows. We work with all our factories as partners to get through this situation together. We did not cancel any orders, we paid all our bills on agreed terms, and we held cost where appropriate for later season and moved inventory to match demand. But I'm most proud of the way we manage the impact on our people. No one was stood down without pay, and all casuals not covered by job keeper were paid 4 weeks to store closure and then offer assistance to navigate the many government packages available. We offered training and development for all team members during the quite times and run mental health workshops to help the team deal with this new world. I've actually just finished introducing a workshop for the Victorian store teams on mental health before the call this morning. In July, we were named Stalking Horse for the e-commerce assets of Catherines, a plus sizing business in the U.S., which I'll talk to later. The experience we had with Hips and Curves and then Avenue gives us an operational blueprint for this acquisition and some key learnings around customer focus, IT operations and product integration. Most importantly, it has given me the confidence that our customer-led lean and reactive operating model can be successfully overlaid to a strong brand with an outdated business model. As announced, alongside the Catherines opportunity, we successfully raised over $110 million by institutional placement and expanded share purchase plan. We are delighted with the support received from investors through the equity raise and the endorsement of our 3-pillar growth strategy. Our team will continue to work hard to deliver returns for our shareholders by executing on these opportunities. If you move to Page 2, despite the unprecedented trading environment, we've had a good year. Revenue is up 31% to $194 million, comp sales are up 0.4% or excluding the period stores were closed, 6.4%, with underlying EBITDA growth of 6.6%. Please highlight our understanding of and deep connection with our customer. Our GM percent decrease from 57% to 48% due to the increase in the lower GM online business due to logistics, an increase in lower GM percent Avenue business and increased discounting during COVID. To counter this, our cost of doing business dropped from 41.3% to 34.4% as the online channel is a much lower cost model. This year, currently some big discount did reduce the EBITDA percent to 13.6% however, we see this normalizing in time. In light of our strategic priorities and various opportunities available to drive global growth as well as the current uncertainty caused by the impact of COVID, the Board has decided not to declare a final dividend. Turning to Slide 5. Our vision has always been to lead the world of curves, and our objective is to extend this vision across multiple segments, channels and geographies by acquiring customers and broadening our reach for an unmatched 750 plus products monthly. More than ever, our aim is to be where she wants us to be, when she wants us to be there. The U.S. plus size market is our largest global revenue opportunity. The current shifts in retailing with the ongoing decline, excuse me, in the traditional channels and business structures, these create exciting opportunities for us to continue our growth. The potential acquisition of Catherines will enable us to accelerate our customer numbers, further expand our presence in the conservative product segment and fast track our digital growth to be over 70% of revenue. We are also continuing our trial with wholesale partners in Europe and see this as a key next to rising growth opportunity. Slide 6 shows what I continue to believe is the key to our success. Our customers are at the heart of every decision we make. We own the customer, not the category, so we can change and move with her. And because of our agile operating model, we can react quickly to our changing needs. As I said earlier, during COVID, we shifted the tone of our brand, CC in Australia to casual and have seen this continue into FY '21. Last year, this time, 8 out of 10 garments that were bestsellers were dresses and this year, it's all jeans and hoodies, as she's got nowhere to wear a dress. We're continually repeating into the styles and lifestyles she's telling us she wants, and we get back in the stock in 5 to 8 weeks. We will continue to follow her as she's in charge. And given the global volatility, we are keeping ranging decisions as close to the market as we can, so we can remain reactive to her needs. In Australia, stores remain a key component of our omni-channel offering. We'll continue to open new stores where the economics stack up. As reported, we closed 14 stores last year as we could not agree the right rents. And since then, we've already opened 4 new stores that were at the right rents. To own a market, as we do in Australia, stores are necessary and enable the digital domination. In the U.S.A. market, this is different and online is more advanced. We are also not looking to own the U.S.A. market as we do in Australia, but get greater market share in a market 30x bigger and leverage off our fixed cost base in Australia through the lower cost digital channel. Turning to Slide 7. The global plus market is estimated over $50 billion. And is forecast to grow at around 4% per annum, with online sales projected to increase only faster. We have a leadership position in this space with a global collective of brands from our youth casual CCX to the more conservative Avenue customer, which enables us to reach the majority of the plus-size market. The potential addition of Catherines will further broaden our customers in the U.S.A. The current economic uncertainty and challenging retail environment is expected to provide City Chic with further opportunities to expand our brand collective, and we are well positioned to leverage our lean customer-centric operating model to drive scale. We have a template for and deep experience in integrating e-commerce assets into our business following the acquisition and successful integration of Hips and Avenue in the past year. Slide 8 shows our growing collective of plus-size brands that cover mid-market fashion, conservative, youth and intimates and playwear segment on the market. What is special about our brands is they meet the needs of an underserved plus-size customer who really values the quality of fit she finds, and that produces a deep and lasting connection. As I've said, we design over 750 styles a month, assuming we are successful in our acquisition of Catherines, this will increase to over 900. Catherines fits well within our strategy and product suite. And will allow us to leverage product streams across a growing customer base. We have a disciplined and considered approach to any acquisition, and Catherines ticks all these boxes. It's plus size, global and digital and is well within our process and product capabilities. Slide 9 provides an overview of our acquisition of Avenue. In October 2019, we purchased Avenue's e-com assets out of bankruptcy. It was a very compelling acquisition at a strategic level, providing us with a conservative segment expansion and U.S. plus-size customer growth. Since acquiring Avenue, we've implemented our customer centric, agile and reactive operating model and worked hard to rebuild inventory to a commercial level. Since February, all product has been designed and produced through our supply chain. As a result of these measures, Avenue has traded profitably since acquisition, but most importantly, I've been blown away by the continued support from our new customers. Turning to Slide 10. There are a lot of similarities, not only between the Avenue and Catherines brands, but also in the acquisition process. In July, we announced that we have been nominated the Stalking Horse Bidder for the e-commerce assets of Catherines out of bankruptcy. At that stage, I gave a quick rundown of the brand that is Catherines. It's geographic focus in the south. It's 60-year history, and the trust and awareness it has with a plus customer that was driven by their 300-plus stores. The potential acquisition of Catherines makes our strategic objectives of plus, digital and customer growth. It is well within our process and product capabilities, and we have a blueprint and successful track record following our acquisitions this year. As Stalking Horse Bidder, we've entered into a binding asset purchase agreement, which is subject only to us being the highest bidder at the auction and approval by U.S. bankruptcy court. If we are successful, the expected date of completion would be late in the third quarter or early fourth quarter of 2020 calendar year. This is progressing well, and we'll keep you updated through the proceed. I'll now hand over to Munraj to go through the financials in more detail.

Thanks, Phil. So Phil's already really covered off a lot of Slide 12, 13 and 14. So I'll jump straight to the numbers on Slide 16. And before I get going, I think it's worth reminding everyone that our comp sales growth number includes owned channels. So it excludes wholesale and online marketplace revenues. And that sales from the recent acquisitions, Avenue and Hips and Curves will be excluded from comps until they've been within the group for a full year. So therefore, at this stage, and in FY '20, our comp growth number largely reflects our southern hemisphere business. I still mentioned comp sales growth for the year was 0.4%. In the first half, comps were at 11.3%. But in the second half, they were down 13.5% as we felt the impact of COVID. So if we exclude stores, while they were closed in April and May, comp sales growth for the year was 6.4%. And in the second half, it was down 2.1% versus that 13.5%, I just mentioned. So at top line sales, March through to June was tough. But we're pleased to navigate through the initial impact of COVID and see material improvement from the lows in April through to June and now into FY '21. The top line sales growth of 31% is significantly higher than that comp number of 0.4%. And that's because the noncomp sales contribution from Avenue and Hips and Curves far outweighed the reduction in noncomp sales from our U.S. partners during COVID. Moving on to gross margin. And so gross profit margin for the group was a 48.1%, and that reflects a material shift in our channel mix to online as well as the higher levels of discounting since COVID. I'll explain the shift in the channel mix first, this was the bigger driver. So we've talked to the market before about how online is a lower gross margin channel. Due to the higher logistics expenses, which are included in the cost of sales. Avenue and Hips and Curves are lower gross margin businesses because in addition to being online only, they have lower average sell prices and smaller basket sizes. With Avenue contributing a full year in FY '21. The group's gross margin is expected to decline slightly. Whilst the EBITDA margin improves, and that's because the online channel is the most profitable channel. Gross margins for the respective channels were lower in the second half with higher levels of discounting. As we really focused on managing our inventory and cash and our customer wanted a discount to shop during a period of broader economic uncertainty. So we had to really recalibrate the price volume trade-off to maximize gross margin dollars. So what does that mean? Means that a reduction in price drove higher gross margin dollars during that period, which is actually the opposite to what we would expect in normal trading conditions. But again, the focus being on maximizing gross margin dollars. Our City Chic website in the U.S., which is weighted towards the dress category experienced the highest level of discounting. I think it's worth giving a little bit more detail on the Avenue gross margin. So we were delivering a material increase in average selling pricing, gross margin after taking control of the brand in October last year, and that continued into January and February. Although some of that momentum was lost during COVID, I'm pleased to say that we achieved a higher gross margin versus the prior year and the previous ownership. We have been pleased that the consumer environment and our shifting category mix to better suit the COVID restrictions has allowed us to move back towards more normal gross margin levels across the business in FY '21 so far. There's still a way to go there as conditions continue to improve. Moving on to costs. We have a lean operating model that Phil has mentioned before that we've talked to you all about before. And our costs were managed probably more tightly this year than ever, particularly given COVID. You'll see the absolute dollar cost of doing business increased, which was driven by the enlarged business with Avenue. And it's also an investment in our operational base to support our continued international expansion. However, we expect to see costs as a percentage of sales trend down. And that's driven by the lower cost online model. And we saw exactly this with the change in the channel mix to online in FY '20. The cost of doing business as a percentage of sales was down to 34.4% from 41.3% last year. There is a $2.8 million noncash share-based expense in the year compared to $1.1 million in FY '19. This is included in the underlying cost of doing business and EBITDA number. If we stripped out the share-based payments, the underlying EBITDA would be a $29.3 million this year versus $26 million last year. And the underlying cost of doing business, as a percentage of sales, would be 33% this year versus 40.9% last year. Two key cost lines impacted by COVID were rent and wages, despite receiving some rent concessions for April and May, with very little sales during those months, the rent paid as a percentage of sales was still very high. And that was also the case in March and June, so March heading into the closures in June, coming out of the closures. As Phil mentioned, we didn't stand down any employees in stores or head office during the period. And the $3.9 million of JobKeeper and New Zealand wage subsidies that we received for the FY '20 year will pass-through to team members in their entirety. And a majority related to unworked hours while stores were closed or as top-up to staff that worked less than the amount offered under JobKeeper. So they will really direct pass-through to our team. The statutory cost base includes $2.4 million associated with the execution and integration of the Avenue acquisition. And just under $1 million relating to the consolidation of our U.S. logistics operation to 1 warehouse in Dallas, and these costs were treated as underlying adjustments. We achieved underlying EBITDA of $26.5 million, and that represents 6.6% gross and an EBITDA margin of 13.6%. If we adjust for the share-based payments, underlying EBITDA growth was 13% and an EBITDA margin of 15%. Now at the time of our interim results pre-COVID, our expectations for the full year were clearly materially higher than the 6.6% earnings growth figure. And whilst the team did a great job to get the cost down in the second half, a combination of the fixed costs in the business, lost sales and higher discounting resulted in the earnings margin being squeezed versus the prior year. But having said that, delivering an EBITDA margin in the mid-teens, given the circumstances, I think is a testament to the flexible cost base of the online model. Below the EBITDA line, I think it's worth explaining the tax expense of $7.5 million. As it represents a high effective tax rate. The tax expense includes a one-off derecognition of a $1.9 million deferred tax asset, which related to U.S. state corporate tax losses in California due to the exit of the warehouse facility out of that state. The tax expense is also impacted by the permanent difference created by the share based payment. As there is no tax deduction when accounted for as an equity payment. Finally, on this slide, I wanted to clarify that I've presented the underlying EBITDA on a pre-AASB 16 basis. So it's like-for-like with the prior period. And I'll run through the key changes and the reconciliation with that standard a little bit later. Turning to Slide 17, which shows the cash flow movements. And the business generated strong operating cash flows of $20.9 million on a normalized basis. The reported figure of $25.2 million does not include all of the rental payments. They mostly sit in financing cash flows per AASB 16. The reported figure is also impacted by the transaction costs that I mentioned earlier with the Avenue acquisition and building Avenue's working capital to commercial levels that we've talked about at the time of the Avenue acquisition at the interim results as well. It also includes earlier receiving of stock to the U.S. business, cash collateral that was paid to U.S. factoring companies and the deferment of taxes. CapEx presented of $5.5 million is prior to the receipt of landlord contributions, net of landlord contributions, CapEx for the year was $3.7 million. The key buckets of CapEx spend was ongoing investment in our IT infrastructure and the upgrade of the global e-com platform as well as on new stores and refurbs. We paid approximately AUD 25 million for the Avenue business, and that was funded with debt of $17.5 million and the remainder from our existing cash at the time. In September, we paid a $2.9 million dividend, which was the final dividend for the FY '19 year. So as a result of that, we finished the year with $21 million of cash and $17.5 million of debt. And now to wrap up on the financial position. If you can turn to Slide 18. I'll start with our debt facilities. We had to move quickly to execute the acquisition of Avenue out of bankruptcy back in October, and we received a short-term acquisition facility of $12.5 million, which is on top of our existing $5 million facility at that time. So that's the $17.5 million of debt that I mentioned earlier. In February, we successfully refinanced those debt facilities to better align with the, really, the requirements of the business following the acquisition of Avenue. And the existing $17.5 million of debt facilities were replaced with a 3 year $35 million facility. And then we further bolstered that by exercising a $5 million accordion in March, which took the total facility to $40 million, and that's where it's sitting at the moment. And subsequent to year-end, we completed an $80 million placement and a $31 million share purchase plan at an issuance price of $3.05. I'd like to take this opportunity to thank our existing shareholders with the enormous support and welcome our new shareholders as well. The equity capital will be used to fund the potential acquisition of Catherines, to pay down our existing debt in full and give us the balance sheet strength to accelerate our growth globally. Look, we have a clear vision and strategy to grow our plus-size business globally, and we will drive that growth through our existing business. What we have seen is a noticeable escalation in potential inorganic opportunities since COVID. And these could provide a lever for us to accelerate that strategy. We need to be ready to move quickly for the right opportunities. Our cash balance, as of a couple of days ago, was $112 million and no debt. So since the year-end, we received the proceeds from the placing and the SVP we repaid our debt of $17.5 million, paid the deferred tax payments of $4.7 million and also made a deposit on signing the asset purchase agreement for Catherines of USD 1.6 million. Moving on to inventory. You see inventory management has been a key focus in the second half with COVID restrictions, which changed the channel the customer was shopping and the category she was buying. Our inventory is almost $19 million higher as at June 2020 versus the end of FY '19, and the increase is driven largely by the acquisition of Avenue in October. Store stock is flat year-on-year. And online stock in Australia is growing in line with sales. In the U.S., with a drop in partner sales for the City Chic brand, we repositioned some of that stock back to Australia and online. So I'm very pleased to say that our stock position is clean and seasonally appropriate heading into spring in Australia and fall in the U.S. Just finishing up quickly on the rest of the balance sheet. The majority of the increase in the intangibles relates to the Avenue acquisition, of course, the remainder relates to our investment in the e-com platform. The increase in the trade and other payables is also largely due to the working capital associated with Avenue on a like-for-like basis, but those payables are in line with last year. So in summary on the financials, I'm pleased with our solid earnings performance and cash conversion in the context of the challenges of FY '20. We are well capitalized to navigate the uncertainty created by COVID and positioned very well to pursue opportunities available for the business to continue our global push. I was going to skip ahead to Slide 22 to talk about the impact of AASB 16, but I'm conscious of time and getting on to questions. And I'm sure everyone's not too excited about talking about accounting standards. So I'll hand it back to Phil to finish out on the outlook.

Thanks, Munraj. I was really excited to talk about AASB 16 made -- shame we missed that one. But turning to Slide 20, guys, the business has continued to trade well with positive comps and strong positive comps through July and August. And Avenue customer base has continued to show resilience throughout the first few months of FY '21. However, I acknowledge that the economic impact being caused by COVID globally and that there is an uncertain outlook for customer demand. That said, I believe our company is very well positioned and capitalized, and we remain focused on the execution of numerous growth initiatives. These include the potential acquisition of Catherines, improving engagement with the Avenue customer base, improving the product mix as we learn more and migrating the store customers to the online channel, continuing our expansion of lifestyles and categories online, expanding our Avenue brand and conservative product stream into the southern hemisphere, customer acquisition and driving brand awareness through organic channels and marketing programs in the U.S., building on our trial in the U.K. and Europe, our ongoing review of our store portfolio and the assessment of the individual store economics, and really ongoing investment to enhance all our customer touch points from website to live chat to customer service and really enhancing that digital experience for our customers. While I started with how challenging these market conditions are, they also are very opportunistic and will present some favorable opportunities for us as the landscape is changing globally. With our agile, lean and customer-centric operating model and strengthened balance sheet, we're well positioned to take advantage of opportunities that arise and drive scale as we expand our global footprint. Thank you. Operator, I'll now hand over to open it up for questions.

[Operator Instructions] And today's first question comes from Marni Lysaght with Macquarie.

To make a start, I just wanted to maybe get color around, I guess, your ambitions to roll out stores. I note that you've got like gold stores, which seem to be like premium style stores and much larger. But kind of what are you seeing now in the current climate with landlord contributions. And I do note that you do back out the landlord contribution as a note to the cash flow statement in the presentation.

Look, Marni, stores are an important part of an omni-channel market controlling position like we have in Australia. And my position on that hasn't changed. I think CAGR is open. Each store will be looked at based on its retail economics. And if they start-up, and if they're right, that includes rent and contribution, then we will open the store. And if they don't, we won't. And we will remain disciplined. We are not behest for our growth to restore rollout. So we have the luxury, unlike many other retailers of really picking the ones that are right. And the 4 we've opened this year are all on the right deals, we've funded fit outs. So stores will be 30% of our business, Marni. And this year, excluding wholesale, and that will -- as Avenue annualizes and Catherines hopefully comes in, that will become even less material to our business. It's just a small part, but one that I haven't changed my mind on the strategy. I think if the economics are right, they facilitate, as I said, in my speech a dominant online position in the market.

So that's all clear. Maybe one for Munraj. You've spoken about your tax expense including, I guess, in particular, the impact of the tax effect of the U.S. warehouse exit. I've gone through the accounts. Are they going to look to disclose, I guess, that kind of detail? And how do we think about this?

Well, it's one-off in nature. Those income tax losses in the U.S. The way it works there is you've got your federal corporate income tax and your state level. Those losses were incurred, while our physical nexus was in California. And now it will not be. It will be in Texas and New Jersey. So the state corporate tax portion of that, which is about 6% in California, won't be able to be accessed until we once again have a physical nexus there. So given that it's not going to be in the foreseeable future, we derecognize those deferred tax assets. The other component of it is the share-based payments, which is not deductible, given we account for them as equity. And that means that the effective tax rate or the effective statutory tax rate will be higher than 30%. And of course, the tax paid will be less than 30%. And I'm conscious that Phil and I spoke for quite a while. So if we could limit it to a couple of questions per analyst, that will be great.

[Operator Instructions] Today's next question comes from Grace Fulton with Goldman Sachs.

I just wanted to follow-up a bit more on the previous store question. You mentioned you've opened 4 new stores. Can you just talk about the rental discussions you're having, whether there are any changes in the lease agreements you're coming to? For example, more focused on a percentage of sales.

We're very happy with our rental agreements, and we see the landlords as partners and each deal is each deal, and we don't sort of disclose what those are, Grace.

Okay. You mentioned the trial in New York a couple of times during your presentation. Is there any more comments you can make on that? And any key milestones we should be looking out for?

Yes. You can see in the wholesale numbers that given, obviously, the partner business was challenging during the COVID period, our online -- the online nature of our partners in Europe continue to show growth. And I'm really pleased with Zalando and ASOS' performance. We've opened a very small trial with Amazon Europe over there. It's nothing massive, but it's another way of getting product into market. And we're exploring all potential partnerships and other opportunities to learn from our U.S. entry, and the time we spent managing our own business over there. And then the huge uplift we saw when we started with our partners. And we're taking those learnings, and we are looking to do that again in Europe.

And our next question today comes from John Hynd with Wilsons.

Let's touch on Avenue. Can you perhaps give us some color on where -- on the target for gross margins for a business like that? And then walk us through how we should think about perhaps the cost of doing business with these sorts of assets as you acquire them? How should we think about the synergies that are available to you, please?

Yes. Look, I think the first question, John, I'll answer by saying we don't see that an Avenue business at the EBITDA level would be decretive at a percent level. It's probably the best deal I can give you. Munraj, is there any more you want to sort of throw at that level?

Look, at the gross margin, I mean, that's the ultimate outcome. What Phil has mentioned at the gross margin level, what I said earlier is that the -- it is a lower gross margin percentage business versus our City Chic business, given it is a lower average selling price. Now having said that, it's a higher UPT, or units per transaction, business as well. So...

It's more prepared to pay freight in those businesses with those prices also. I think there's an expectation when you're outlaying a lot more per garment the value-add in logistics is a lot more. I think the net result is the most important.

No, I completely agree with you. I guess what I'm trying to understand is, you've obviously -- you've raised a fair bit of money in the last month or so. You've got more of these types of acquisitions coming down the pipes, I would assume. How do I -- how do we get our heads around the cost of doing business profile for these types of businesses as you absorb them?

Munraj, do you want to take that one?

Yes, sure. So when we think about the cost of doing business for an online-only business, there's really only a couple of key buckets of expenses. One is, is marketing costs and the other is, is employee and head count. And then the other is maintenance of the website and other costs that go with that. So if you think about those 3 kind of key buckets of costs, marketing, there's a wide range of marketing costs that you can assume, depending on what growth in sales you're assuming and how aggressively you're chasing that customer but we don't see that being in the double digits as a percentage of sales. We think that we can drive a healthy level of growth in the high single digits as a percentage of sales. Employee head count, and we've talked about before how we can leverage our existing operating structure. We took the pro forma Avenue online headcount from 70-odd down to a dozen. And we see a Catherines business adopting a similar sort of headcount structure. And then your maintenance costs and your transaction fees, I mean, that's pretty standard. Then your merchant fees, a couple of percent of sales and so on. So what -- given the low -- the synergy or the benefit of leveraging our existing operating structures the head count, employee costs are relatively low. Marketing I've talked about. And what that means for cost of doing business is that there's a high level of relatively variable costs. And as a percentage of sales is materially lower than, say, our store business.

Great. That's really helpful. Last one from me. Sorry, it is still -- at a gross margin level, the stores are still very much the highest contributor from a percentage point of view?

Yes.

Our next question today is a follow-up from Marni Lysaght with Macquarie.

Sorry, this will be a quick one. Just about your strategy with warehouses. So I understand California is being shut, a diversion to the existing facility in Dallas, Texas. Can you speak about New Jersey, just to understand what brands each facility will service, and how we think about the cost of doing business?

Yes. The only facility we are running logistics in is Dallas, Texas today. We took a decision -- I took a decision that during COVID with our partner business slowing right down and our CC business given it's better and in U.S.A., more challenging than others, we took the opportunity of a quiet time to consolidate so that we could offer all products especially the City Chic product to the Avenue customer seamlessly. And it's starting -- it's all very new, but it's starting to be very positive. So Marni, there is only 1 warehouse facility in New Jersey, is a small office that's currently not an office because no one is not working there anyway, but 3 people only, Marni, there's no logistics.

And our next question is a follow-up from John Hynd at Wilsons.

Let's talk about pricing in this environment, and how you're reacting to the trends that you're seeing. I mean I think Munraj, you mentioned that the City Chic U.S. business was more focused on dresses. What are we seeing at the moment? I'm assuming it's more of a move to denim and sweats, which is utilizing some of the new -- the new brands. Are they -- do they have similar sort of profiles? And does it help you build out and reach new customers?

Look, we are -- I'll answer the first question first, John. At the start of the COVID period in sort of March, April, May, especially there was significant discount required all around the world to drive revenue. And we were very lucky that given the online percent, we can keep that going and that we had the ability that we own the customer, not their sort of category in both Avenue and in CC Australia, which are our 2 biggest channels to market and geographies that we're able to move towards sleepwear, intimates, playwear works well, but most importantly, our casual businesses in those brands. The CC USA business was challenging, guys. So we were now actively driving our strongest point of difference, which we believe and had been up to in our dresses. And we said the growth up until sort of February was 65% directly, but it became very challenging straight away, and we dropped the price accordingly. I mean if you haven't got some way to wear something, the price becomes the only really driver in many ways and we adapted to market conditions.

Great. And one other question I had was we know you guys have got a really solid product and it resonates really well with your customer base. And you talk about your online -- strength of your online offering. Can you -- what do you do differently to peers? Like what is your secret sauce? And what makes -- what do you think makes you guys special in the online offering and the online marketing that you guys do? What makes it different?

John, is there someone else listening on to this call, mate, are you trying to get me to tell you what we do so others could do it? Or is that it...

Well, it looks like is on. Right.

That was a joke, mate. I was trying to get a bit of humor in. I heard the crickets everywhere else. Thanks, guys. Look, I would say that most people put design and themselves and ego in front of everything. We put the customer at the middle. It sounds overly simple. I don't worry about what -- the best indicator of what work last week is what works -- sorry, what works this week is what worked last week, structure your business around that have a core group of people that have a high level of trust and dependencies that are able to work at pace and make decisions fast. Like I spoke to Catherines team, their Head of Design, right? She's -- we're a lean operation. We have 23 people in design. I said, well, do you own any of the product? And she said, no. I said, well, what do you do? Right. We have not even that many in the whole of Avenue design and production team because the decisions are made fast. If we make one bad decision at a product level, it's never going to hurt us ever. There's no one -- even there's no 10 products. We just keep doing more and then react to what she likes. Call it, fishing, right? Throw out as much as you can, when you get a bite move the boat over there, right? Don't try and cast the net in the whole ocean and drag yourself slowly to nowhere land and have 5 people and then have 10 sign off. I still sign off every product. In practically no time because we have good solid people who understand what we do and can really react in our way. It's trust and empowerment. And it's sound simple. But it works for us. And when I say a lean, customer-centric and agile operating model, we shifted our whole product mix in 8 weeks, to what she wanted. We're bought forward. We told them to stop cutting all the dresses. And bring forward all the jeans, all the other neat tops, right? We actually did something about it in the moment, and our partners in our factories trust that and when I say to them, I will pay you for it. They don't go -- well, you haven't done that before, I do it. And yes, I might lose a little bit, but I win way more than I lose, way more, and I'm able to keep -- spin the business on a dime. And that doesn't change -- online, what online does, and it's why, although store is important in Australia because we have that infrastructure. An online business is completely flexible. I can change the message next hour, right? Now we have a 12-month plan. That becomes a 1-month plan. That becomes a today plan, and we are very highly aligned and are good people that have been with me for an extended period of time that are empowered to make decisions. And the hard thing is that's not something you can replicate quickly. A good thing from my point of view and for the other person listening I was talking about before.

Maybe other person might be also be interested in a little bit of color on the share-based expenses, Munraj. Sorry, I should be more more fluent on that. Can you just give us a little bit of color on where that number comes from? And why do we sort of still include it as a number above the line?

Look, it's above the line as it's an expense. And we're pretty transparent about the number. So people can treat it however they want to treat it, but we're making it clear, it's noncash and share based. Where it comes from is the long-term incentive plan, which is performance rights and loan funded shares, which are provided to the executive management team. And so that is -- the expense represents how we have to account for those performance rights and the loan funded shares.

What's it based on? Is it based on share price performance or EPS or...

EPS.

EPS. Cool.

And our next question today is a follow-up from Grace Fulton with Goldman Sachs.

I was just wondering if there are any comments you can make about how you're thinking about the promotional calendar, coming up running into Christmas, just because it's changed around a little bit this year and the extent to which it...

That's a really good and pertinent question, I think, in Australian retailer today. Look, we're looking at really the headline being Black Friday, I think. I think it will change is my short answer to that and will change our promotional and sale credence around that. I can go into much more detail, but at a headline, that was what I see happening.

Okay. And maybe just in the U.S., I think Amazon is doing Prime Day in October and you've got the U.S. election as well. Just any more comments around that?

Yes. Look, I haven't lived with as material a business as we have had in the U.S. through an election year. However, last time our experience was definitely challenging in the 100 days, as they will call it over there. We're seeing it now, but she's holding up quite well. And there's a lot of variables in that. Right now, you've got the state of the country from a political viewpoint, but also from a social viewpoint, there's a bit of disarray. And then you overlay COVID, yet we're still seeing pleasing results. So I can't impact that. What we have to do is keep following what she likes and try and make a little bit more or less of it. I guess what I have seen is, I don't know if you guys saw nordstroms came out today and like guide, Philip Nordstrom said she's just not buying better end clothing. We're definitely seeing that shift. But apart from that, I haven't really traded long enough to make political or impacts of political discussions well. So why am I comparing myself to the Nordstrom's boys? I don't know. That was interesting.

And our next question today comes from Sam Haddad with Bell Potter.

Just as a follow-on to all that, with all the moving parts around Black Friday, the elections in the U.S., how do you actually plan in terms of investing in inventory? And also risk to further lockdowns with COVID and so forth. What are you thinking in that respect?

Another great question, Sam. It's my life at the moment, right? You've just got to remain reactive. What we're looking at is when we put ranges together, we've really shifted the tone of our brand around what we think will be appropriate for the period and dramatically increase, intimates has been very strong. And the good thing is with online being so much of a percent of our business. Even if all the stores were to close, heaven forbid, we would be able to reposition the inventory, move other's out and cut to different ways. So it's definitely a top level concern for us. We're lucky that we are able to be reactive in the way we are with our supply chain. However, we're very mindful of the shift to casual. But we've not cut out the occasion dress business. We can't cut it out because there are still people that want to buy it, but we've really changed that percentage of our range.

And just on the CC U.S. website. What levers can you pull to sort of improve the resilience of the -- of sales through this difficult period?

Yes. No, it's a good question, Sam. I think I'm looking at the U.S. as one business, right? And although our history has come up as a better dressing business, the Avenue customer doesn't really know us yet. So we are positioning ourselves as much more than that into the Avenue customer. And that has initially showed pleasing results because now we can put our entire product range in front of them. I think I've said at half results that we've said that initial set down in Dallas, and it had been pleasing, but it was the first 2 weeks, then COVID happened and that dress business went away, and that's all we set down. Then we integrated all our warehouses. So now the entire range is for sale, and we are getting a much more diverse lifestyle purchasing through the Avenue customer than we were. And although the price is -- we've sort of discounted a little more than we would have on the CC side, it's still significantly more profitable than partners are, materially.

And our next question is a follow-up from Marni Lysaght with Macquarie.

Just maybe understanding moving forward the working capital. So obviously, I've noticed a decline in receivables relative to the end of December. Just, I guess, how do you manage the exposure to wholesale partners and ensuring I guess, credit quality? And I guess, are you still flagging -- the adding -- you're going back to looking at the trial in Europe, how should we be thinking about, I guess, working capital and particularly receivables?

Do you want to take that Munraj?

Sure. And the drop in receivables is really just an outcome from our partners shutting down during the initial impact of the COVID period and us also being proactive in stopping our sales to them. With that exact concern in mind. So what we've continued to do is provide product to the online -- the strong online players being, Zalando, ASOS co edition. They have continued to prosper during this period. With Amazon as well, Nordstrom is strong online. So they're coming back now, and we're going to start back -- ramping back up with them. But more traditional bricks-and-mortar retailers like your Macy's are taking a bit more time to come back, and we'll be more cautious with starting back up with them. And making sure that we're comfortable about recoverability. But the fact that the receivables balance has come down, is reflective of the fact that we've -- we did continue to receive payments through this period. And we haven't had to take any material provision against recoverability. So yes, but -- and then we'll just continue to be cautious around that. We know all the guys. We're not doing business with small unknown players. These are all pretty large transparent companies, some of them listed companies. So we have a pretty clear view on their credit quality when we're doing business with them.

I think the good thing that's come out of this, Marni, is that the deal and the commercial arrangements that we have been able to negotiate given our suite of products has come off their site, and we were, for example, Nordstrom's biggest. I've just played very hard ball to pull off a deal with on our terms now or we don't. And they are in a position -- we are in a position we haven't been before, where the ball is in our court, and we hold the strength, which has been great.

And our next question today is a follow-up from John Hynd at Wilsons.

Perhaps from a top down, very broad sense, can you give us some color on recent trading by region, please? Is there anything that's surprising on the upside and the downside?

I'll take that one, John. So starting with the Australian business, given a large part of our customer base is omni. We really look at that business together with the stores and online. In April is that of lows. We saw big improvement from April right through to August. So it's been improving month by month. And when stores are closed, our online picks up, and we've seen that noticeable trend. So we're seeing that now in Victoria. And really, that's just the southern hemisphere business. The U.S. business with City Chic U.S. it was the hardest hit part of the business in kind of April, May. That has continued to improve in 2 ways: one at the sales level; and also the gross margin level. So the gross margin isn't quite back to where it was pre-COVID, but it's materially improved since the lows of where we had to go in April and May. And what Phil alluded to earlier was that now we've got that City Chic stock sitting in the 1 warehouse in Dallas, we're able to sell that stock on our Avenue website, not all of it, but some of the more appropriate styles, and that's getting good traction as well. The Avenue business, we haven't owned it for a year. So it's difficult to compare to this time last year because it was in the middle of bankruptcy and previous ownership. But it's continued to hit and exceed expectations at both the sales line and the gross margin line. We were certainly seeing more traction at the gross margin line before COVID. But even with the drop-off in gross margin since COVID, we're still ahead of where it was this time last year.

Right. Just maybe some color if you can on Europe. What -- from, I guess, from a top-down perspective?

Yes. Europe.

You go ahead, Munraj.

Sure. So Europe, it's ASOS and Zalando. The partners are strong online so they have continued to trade as a business as more generally online. So Zalando had a bit of a hiccup for a couple of weeks as they will try to take stock and assess what the COVID impact would be, but very quickly got back on to ordering with us. So I think given the nature of the type of partners that we're using in Europe at the moment, we've continued to see growth there. And really, what's important right now for us there is that growth in brand awareness.

And they're profitable, though they are better businesses with able to make -- to deliver some profit through those channels.

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Ryan for any thoughts.

Yes. I just want to say thank you all for joining us today. I'm sorry, my little man ran into my office just then so I apologize. I had to diverge somewhat, but we're very excited by the future and the opportunities that are going to present out of this time. Everyone talks about how tough the COVID period is, and it has been. But my mind now turns to -- with the support of the capital raise, how do we take advantage of these circumstances and really embed our vision of leading the world of curves. Thank you, everyone.