DFS Furniture plc (DFS) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the DFS Financial Year '21 Results Presentation. I'm Tim Stacey, the Group CEO, and I'm here with Mike Schmidt, our Group CFO. We're pleased to present a record set of results in a challenging operating environment, representing another year of progress on our strategic agenda to lead sofa retailing in the digital age. Now our presentation today will cover 3 areas. Firstly, I'll begin with a brief summary of our progress in the year. Secondly, Mike will deliver the financial overview. And finally, I'll present my strategic update before finishing with the Q&A. So I'm pleased to report a record set of results in terms of revenue, profits and cash flow, reflecting a very strong bounce back from FY '20s COVID-impacted performance. We've delivered another year of progress on our strategy to lead sofa retailing in the digital age with gross sales via our online channels increasing by over 184% compared with a year earlier to over GBP 400 million. Now the strength of our online performance remains a key driver behind our 2 percentage point market share growth over the year as a whole. While showrooms were closed for around 21 weeks in the financial year, consistent surges in demand as we emerged from government lockdowns highlight just how much customers appreciate our integrated retail offer. We strongly believe that the combination of a digital and the physical channels is the right long-term approach to address consumers within the sofa market. Beyond our core upholstered furniture market, we're successfully accelerating our push into the beds and living room furniture markets, targeting a GBP 5 billion TAM opportunity. In terms of current trading, demand for our products remain strong, with better-than-expected order intake so far this financial year. That said, we're clearly facing a challenging operating environment, and I'll come on to talk about that in a moment. Reflecting this financial performance and our outlook, we're also resuming distributions to shareholders with a proposed final dividend of 7.5p. Now these results are only possible due to the supreme efforts of our colleagues, and I want to take this opportunity to thank them all for their incredible support during this year and also thank customers, in particular, and other stakeholders for their patience and loyalty due to the external challenges that we faced. Now just taking a step back, I wanted to give you a sense of the current market environment. In broad terms, we're seeing a very resilient demand, which continues to outstrip an unpredictable supply environment. Market demand has been stronger and more sustained than we expected, with consumer spending still focused on the home and underpinned by better-than-expected consumer confidence and a resilient housing market. In addition, our Group continues to outperform the market, achieving at least 2 percentage points incremental market share growth from, we believe, the successful execution of our strategy. Now on the supply side, as I'm sure you're all aware, companies around the world have been struggling to cope with the strength of the recovery, having scaled back their operations during the peak of the pandemic. Now for us, this is resulting in a range of challenges from input cost inflation, manufacturing and logistics bottlenecks as well as continued COVID disruption to supply chains around the world. That said, we're leveraging our structured advantages to mitigate these challenges. And these include leveraging both our scale and our experience of mitigating cost inflation wherever possible. We've also secured additional manufacturing capacity, which will come onstream in half 2. And finally, we're investing in our own logistics platform and key suppliers to increase our delivery capacity. In overall terms, this means that we're working hard to meet these high levels of customer orders while managing the greater demands on our colleagues and our infrastructure. So what does this environment mean for our Group? Well, we believe that the Group remains very well-positioned due to the fundamental attractions that we set out in detail at our recent interim results. As today's record results show, with our market leadership, our integrated retail business model, a sustainable approach to business, supported by a favorable homeware market, we are unlocking and delivering sustainable growth. This growth comes on several fronts: market share growth in our core sofa business; enhancing existing scale economies that generates healthy cash flow to fund future investment; and we believe, the significant medium-term opportunity in the GBP 5 billion non-sofa home market. And there's future opportunities to leverage our asset base. Looking ahead, it's been over 2.5 years since we set out our strategy to lead sofa retailing in the digital age. And we are well on the way to delivering the GBP 40 million profit uplift by FY '23 that we identified back in 2018. We are pleased with the performance and resilience of our integrated retail business model, particularly during the last 18 months, which has placed exceptional demands on our infrastructure, but also underlined the importance of the combined showroom offer and digital presence. We're pleased with the performance to date of the Sofology acquisition, which is integrating well with our Group platforms. And as we get closer to FY '23, our strategy is set to evolve from the current 3x3 digital age model to a new model, unlocking new growth from our evolving pillars and platform strategy. Now we've been building our platforms for the past few years, and these will underpin the retail brands of DFS, Sofology and our emerging home business. Leveraging our scale and the platforms of technology and data, logistics and operations and our worldwide manufacturing sourcing capabilities will enable us to accelerate our drive for sustainable growth. We've also integrated our ESG strategy into everything we do, and it is our intention to lead the industry in this space. So I'll now pass over to Mike, who will present the financial overview.

Thanks, Tim. I'll begin with some overall context on the year that we've had. So we've delivered an unprecedented revenue performance. Looking back comparing against the 2019 financial year pre-pandemic, we've seen growth of 9.7%. And so this has been achieved both through order intake, but also the benefits of a high order bank beginning of the year. Notably, though, despite seeing up to 21 weeks closures for many of our showrooms, order intake across the year has actually been well above the revenues that we've delivered in the period, and this trend has continued into the first 12 weeks of this financial year. Our strength of trading has meant that our order bank has grown significantly, and it creates a resilient foundation for our positive outlook for the current financial year as we'll come on to. As with many retailers, we have significant operating leverage within our model, and the drop-through of the additional revenues has driven strong profit growth, with underlying profit before tax reaching GBP 105.8 million. And with these strong profits and order intake has come good cash flow, reducing our bank debt to near 0 and our leverage to 0.2x. Even excluding temporary working capital benefits, we still believe our leverage is well within our target debt range. And with the return of lower leverage and the greater certainty on trading environment, we felt comfortable restarting our dividends with a final payment of 7.5p. We published very recently our revised dividend policy, I think that was back in March time. And as a reminder, this highlighted that we would look to pay out as ordinary dividend, 40% to 50% of underlying cash generation with an intention to hold or grow these payments over time, in line with the earnings growth and the prospects of the business. So diving into the results in a bit more detail. Looking at gross margins by brand, both DFS and Sofology have held or grown retail gross margins in each channel despite cost price inflation pressure. For Sofology, this performance is immediately visible on the chart, with margins now up to levels broadly consistent with the DFS retail brand. It's very much helped by the scale and the Group relationships that we hold on sourcing. For the DFS brand, there are 2 mix effects going on in the reported numbers shown on the graph that I feel distort our true performance. Firstly, as expected, we saw the percentage mix of margin accretive internal manufacturing decrease and then furthermore, the strong web performance by DFS in the year, particularly through the second half during the lockdown period has also depressed the margin through a sales channel mix effect. We do see a lower margin in the web channel, albeit given the cost to serve is lower and the overall profitability of a digital transaction is similar to in-store, we remain broadly channel agnostic. And if I look at the margin earned by the separate channel, for in-store transactions and the digital transactions, we have held the DFS margins by channel, offsetting the cost inflation that we have seen. And looking forward, we've seen some significant cost price inflation across all our finished goods products in the 5% to 15% range, but we do believe that we're better positioned than most in the industry to manage these effects, given our scale and the fact that we can monitor trends across both 2 retail brands, but also our own internal manufacturing. We are mitigating these cost inflation trends through range optimization. However, we're also able to look at passing these costs on while maintaining the same cash profit per transaction. We do expect that the pass-through of some cost price increases will slightly depress retail reported margins in the 2022 financial year, probably by up to 100 basis points. However, the cash margin for the transaction will be unchanged. So now moving on to our operating cost base. We have seen a step-up in underlying operating costs of approximately GBP 10 million, which, for context, is around a 2% increase in our operating cost base. This is a combination of some investment in our digital capabilities, some higher costs to support higher volumes but also COVID-linked costs, such as sick pay, PPE and increased cleaning. Notwithstanding the increase in absolute operating costs, it is important to note that the operating cost margin is coming down by 3.5 percentage points, which drives our PBT margin and which we believe is a trend we will sustain into the 2022 financial year with absolute operating costs growing, but costs as a percentage of sales reducing slightly. So turning to cash generation. We have seen a significant reduction in our net bank debt. The 2 key factors behind this, firstly, the significant operating profit, and then secondly, a total of GBP 85 million of working capital inflow, which is largely underpinned by an increase in customer deposits and also an increase in trade payables. We do recognize and expect that around GBP 70 million of this working capital inflow will likely reverse as our lead times normalize across the future financial periods. In terms of other movements, alongside our expected cash capital expenditure, we took advantage of an exceptional opportunity to acquire the freehold of one of our store leases. This is actually a top 10 trading location for the Group and a situation where our legally binding future rental payments over the next 9 years were actually greater than the acquisition price that we paid for the property. The initial yield on the GBP 12.7 million acquisition cost is 13%. And this yield will actually grow into the future as we avoid a fixed rental uplift that was in the lease contract; clearly, a very attractive opportunistic situation that we took advantage of, but actually not one that we expect to be repeatable. We also made progress on our financing structure in the year, introducing an ESG-linked pricing element based on existing external targets into our RCF agreement, which gives us a beneficial interest cost as we make progress against our stated ambitions in our ESG plan. Finally, I think a big picture reflection that I really felt was worth drawing out from this slide. Our free cash generation across financial year 2021, excluding the exceptional working capital release, was GBP 68.7 million, and that actually would have been even higher excluding the store lease acquisition. Notably, that is a 9.8% yield based on the market capitalization as it stood at the start of this week. This business has outstanding cash generation that we believe we can use to drive value for shareholders, either through reinvestment or through capital return. So a core part of our approach to good cash generation is disciplined capital investment, where we are constantly measuring and testing the returns, and we're adjusting our approach on the investments that we're making. We will only deploy significant capital if it's essential maintenance spend or if we've got the clear evidence to support strong future returns. That being said, we do believe we've got some excellent investment opportunities available that strengthen our competitive position and drive future profits. Our cash capital expenditure spend last year was GBP 36.5 million, excluding the lease acquisition. And we see a slightly lower level of cash spend around GBP 35 million or so this year. We do also expect to sign up to around GBP 10 million of leased assets. Principally, this is the replacement cycle on our vehicle fleet, where we saw some deliveries of vehicles deferred from the prior year. Our logistics activities utilized around 1/3 of our annual overall spend, split broadly 50-50 between maintenance and new capabilities. We secured some great recent efficiency on our leased vehicle maintenance spend through switching to operational routers through the Sofa Delivery Company, which increased the working hours of our final mile vehicle fleet by over 40%. And in terms of new capabilities, in addition to significant space growth, we are adding a consolidation center to allow us to trial ranges from new suppliers that otherwise would struggle to efficiently distribute products through our network. It will also give us a stockholding capability; one that we're already using to trial offering short lead time products and to sell our sofa-in-a-box proposition. Our showrooms account for another 1/3 of the spend overall. Half of that showroom spend is on fitting out new locations, where we expect to get within 2 year cash payback. The remainder is on maintenance and on optimizing the current footprint format, bringing in new home product categories and introducing strong branded base. Finally, in terms of the areas of our spend, we remain committed to continuing to invest in our technology, which accounts for 1/3 -- a final 1/3 of our spend and is an important part of our growth strategy. Tim is going to come on and talk about the power of our online presence, but it is something we're really excited about. We're also investing heavily in the efficiency of our platforms, with plans for an upgraded warehouse management system and the middle mile logistics system, which will be combined with a stronger customer data platform. And we do also have some significant interesting new innovation spend well underway to create a differentiated customer proposition in our category, but we won't be saying more on that quite at this stage. So turning to our current trading and our view on the 2022 financial year. The strong customer demand that has been evident, together with the 2 percentage points market share gain that we experienced through the pandemic has very much continued into the current financial year. This has actually driven order intake well ahead of the previous expectations we shared. And therefore, we have uplifted our previous case -- our previous order intake guidance in the medium case from 7% to 15%, with performance over the first 12 weeks having been well above that level overall. It does also mean that our order bank stands at a record high as demand has outstripped our capacity to produce. We're making progress in increasing capacity with existing third-party suppliers. And as Tim will talk about, we will shortly start delivering products from additional new suppliers. However, in the year-to-date, production has once again been impacted by COVID; absences and well-publicized disruption in logistics. This does mean that our revenue performance will likely be half 2 weighted as more supply capacity comes on board through the year. We have also been experiencing material cost inflation in parts of our business, and we expect to incur cost of goods inflation and higher operating costs, including logistics across the remainder of the year. While we believe that we can protect absolute operating profits through range optimization, we do expect that average order values will be higher than previously expected, while our expected cash profit per transaction is unchanged. This means that the 3 scenarios for the current financial year that we previously shared back in June have been updated. The increased average order values that we're expecting feed through to higher revenues. However, profit before tax in each scenario remains in line with previous guidance. And while we're pleased with the order intake that has been above expectations, it has delivered revenues that really will drive our profits and the global disruption that we have seen in logistics has prevented above expectations performance on deliveries to date. Of course, the uplift in order intake in each scenario offers a positive sign for the closing order bank in 2022 financial year and the resilience that we may hold going to the 2023 financial year. And finally, I think recognizing that the 2021 and '22 financial years are being distorted by the buoyant consumer market and strong order intake, I'm going to conclude with some thoughts about the sustainable financial model that we expect to operate with from 2023 onwards. And to try and give a simple-to-digest view, we'll compare our thoughts on the drivers back to a pre-pandemic normal operating environment, which is financial year 2019, when we had approximately GBP 969 million of pro forma revenues and approximately a 5% profit before tax margin. On revenues, in our core upholstery category, I think we already see evidence of 2 percentage points of market share gain, which when combined with the AOV increases, equates to over 10% of sustainable increase in like-for-like sales from 2019 levels through to 2023. So that's an additional GBP 100 million or so of revenues. By 2023, we will also would have added 20 new showrooms as well, which should also give up to around GBP 100 million of additional revenues as well. And so looking at that in aggregate, we think, therefore, a realistic revenue base in 2023 could be over GBP 1.15 billion, with growth from there coming from continuation of above-market growth rates, driven by structural advantages and also growth from our new beds and living room accessories categories. Of course, if we still have an elevated order bank entering the year to convert or if we see additional market growth, then we may find revenues are higher than this level suggested, but we do believe that we already have evidence for the sustainability of that GBP 1.15 billion level. So moving on to profit before tax. Looking at that line, we've previously shared our 7 percentage point plus PBT margin target. We believe that this should be deliverable in 2023, underpinned by the cost efficiencies our strategy has driven, but also from the increased revenues that we've touched on, combined with our operating leverage. And of course, on cash generation and capital structure, we believe that we're already within our target leverage range, and we believe that over 75% of profit before tax will be converted to cash, which will underpin our ordinary dividend policy and will also likely give us a choice on how we may deploy remaining cash generation to drive value for our shareholders. Finally, we do focus on return on capital employed, and we believe that we'll be achieving return on capital employed at our targeted high-teens levels. So while we're, of course, truly pleased by our 2021 results and positive about our 2022 progress, it is actually the sustainable financial performance that we see for the future for 2023 and beyond that is particularly exciting as well. So I'll now hand back to Tim to talk about the operational and strategic performance that is driving the financials.

Well, thanks, Mike. I will now provide an update on our strategy. So you're hopefully all familiar by now with our 3x3 strategy matrix, and our strategy has remained broadly unchanged since early 2019 and is focused on 3 core pillars: Drive the DFS Core business, Build the Platforms and Unlock New Growth. I'm pleased to report that we've remained focused on the execution of our strategy despite the challenges of the pandemic. And indeed, post-lockdown 1 in the U.K., we accelerated execution on a number of fronts. We continue to target a GBP 40 million incremental profit before tax benefit from this range of initiatives, and I'll highlight our progress on the next slide. So this slide highlights how we're progressing towards our GBP 40 million target. And we now estimate that we have achieved a net GBP 33 million benefit -- incremental benefit to date compared to around the GBP 20 million that we reported at the interim stage. Particular highlights include the strength of the DFS brand performance overall, driven by our integrated retail offer. The efficiency benefit of our marketing transformation program, which has been driven by our data platform we've built and a greater shift towards digital marketing has improved the returns on marketing investment. And finally, the progress we're making as we unlock new growth from Sofology's geographical expansion. Our targeted GBP 3 million-plus logistics savings from the development of the Sofa Delivery Company remain on track and are expected to be achieved from the end of FY '22 onwards. Now I'll take a more detailed look at progress on our 3 core strategic pillars, starting with Drive the DFS Core business. Now the DFS brand is the largest and most profitable in the Group, and the key priority for this pillar is to drive growth across all channels. Our DFS brand delivered strong growth in revenue and profits in the period relative to both the previous year and the pre-pandemic FY '19 financial year. We've extended our market leadership in the period, and we estimate a 2 percentage point market share gain for the year as a whole. Now we believe that this market share gain reflects the strength of our integrated retail proposition and the successful investments we've made in recent years, which have proved their worth, particularly during the pandemic. In relation to our seamless customer journey, we've delivered on a range of initiatives, including faster page load speeds for our websites, improved imaging, the rollout of shared customer baskets, which enables the integration from website to showroom channels. Turning to our product portfolio. We've continued to innovate in the year, launching attractive new ranges that combine design appeal with a greater focus on sustainability, such as our Grand Designs collection pictured here, featuring fully recycled or recyclable materials. And finally, we're constantly refining and improving the DFS showroom proposition. We took advantage of the showroom closures in lockdown 3 to refurbish 14 showrooms into our latest format. The new format features more sofa base and improved customer experience, which has driven average order values and conversion. We're planning to refurbish 16 more showrooms in financial year '22. Now when we talk about leading sofa retailing in the digital age, the DFS brand is very much leading the way. Now over the years, we've built a truly integrated retail business model, and we believe for the upholstery category, it's the combination of physical and digital channels that is the winning business model. Highlighting our strength in the digital channels, it's worth repeating that DFS is the #1 search term on Google in the Sofa category, well ahead of both sofa and sofables. Our marketing transformation and investment in digital marketing means that DFS has a far greater share than all of our shared competitors from a visitor point of view at around 40% of all visitor traffic. Our historical investment and innovation in our websites means that we have a greater market share online than we do offline. We do continue, though, to see our showrooms as critical to our offer, given the nature of our products and the sit test that we've talked about before that customers enjoy; the brand experience that we can bring to people with our inspirational living room settings. So continued investment and innovation in our website is driving conversion and AOV. And it means that DFS websites over the years have delivered a CAGR of around 20%. And this online strength supported the DFS business during the lockdowns and resulted in a record year of over GBP 350 million of revenue in FY '21, up 184% year-on-year. Moving on to Build The Platforms, which is our second strategic pillar. So this pillar focuses on capturing Group-wide benefits from leveraging existing infrastructure, systems, processes and data. In financial year '21, our focus was on achieving cost savings and efficiency targets across our showroom estate; our property costs. It's also about driving a range of marketing efficiency improvements and continuing our plans to develop the best 2-person server delivery company in the U.K. With regard to property cost savings, we've achieved a further GBP 1.3 million of annualized savings in financial year '21. This takes the cumulative savings since the start of this project to GBP 5.6 million, and we remain on track to achieve, as a minimum, the GBP 6 million to GBP 8 million annual savings targeted by FY '23. And recent lease re-gears are still running at over a 30% saving. We also expect to achieve further significant savings in the medium-term as leases expire beyond FY '23. Turning to logistics. We're progressing well with our objective of building a leading Group-wide supply chain platform known as the Sofa Delivery Company. Now following the completion of our colleague consultation process and the creation of an independent subsidiary, the Sofa Delivery Company now offers Group-wide extended hours delivery to customers 7 days a week, which is increasingly important, given our revenue growth and also customers' busy lifestyles. We're also completing the rollout of our new branding and vehicle delivery across our CDCs. Our plans are on track and as we work towards achieving annualized savings of GBP 3 million, which will come into place by the end of financial year '22. Finally, our ongoing marketing transformation program continues to move ahead at pace. Now we're using data and insights to increase the return on investment of our marketing spend and extending that best practice across the Group in order to support the development of our Sofology brand. Following a review of the DFS retail brand activities, we've also appointed a new communications agency to help support and drive the next phase of DFS brand marketing. In overall terms, we've now achieved around GBP 8 million of net cumulative marketing efficiencies, and we're confident in our ability to drive further returns as we increase our mix of investment towards digital marketing. Our third strategic pillar is to Unlock New Growth by driving incremental revenue and profit, particularly at our Sofology brand and our emerging home business. Now following a pause in new store openings in financial year '20, as we appraised the property market conditions around the pandemic, we've opened 5 new Sofology showrooms in FY '21 on favorable lease terms. We plan to open another 8 showrooms in the current financial year, we've already opened 5 of these so far. We continue to invest in the brand and in retaining a clear differentiation versus the DFS retail brand. Sofology's latest advertising sees Helena Bonham Carter encouraging customers to 'bring imagination to life' in the way that they make their homes, and it's been incredibly successful. In terms of product, building on Sofology's reputation for style and sustainability, launch highlights this year include the Pioneer eco sofa in the first half, which features zero foam, 100% recycled spring, sustainably sourced timber and fabric made from recycled yarns plus a 20-year guarantee. We've also recently launched a uniquely-sized capsule range designed by the singer-songwriter, Paloma Faith. We remain very positive on the potential of Sofology and see the opportunity to grow the brand to 65 to 70 showrooms in the medium-term from the current, at the end of the financial year, 50, as I stand here today, to 55. We're targeting annual revenues of over GBP 300 million and a pre-tax profit margin of between 6% and 7%. Now within the interim results, we set out a clear medium-term opportunity to extend into the beds and living room furniture market, where we have less than a 2% share in a total addressable market of about GBP 5 billion. Now we're focused initially on the online bed market, leveraging our existing strengths in our DFS digital channels, our supplier relationships to create unique products and our existing manufacturing partners who already manufacture upholstered bedframes. With new partners such as Silentnight, we're also testing in-store space in DFS to grow our share in the medium term. And this is an image of our beds proposition in a DFS showroom at Leeds, Birstall. We remain very positive on the beds opportunity, and have been investing in our infrastructure to support the next stage of growth. We've now fully integrated Dwell into the DFS platforms and are leveraging Dwell's supplier relationships and infrastructure to expand the Group's offering into the adjacent living room product areas, such as coffee tables, lighting and accessories. During the year, we also re-platformed the Dwell standalone website utilizing the DFS technology stack. And we've recently switched to free delivery for Dwell. Both of these things are driving incremental conversion and profitability. So just stepping back to give you a bit more color on what's happening in the end-to-end supply chain, given the well-documented global challenges that many businesses are facing. Now we're setting out here, from our perspective, the key market factors that are impacting our industry, the structural advantages that we have to tackle these challenges and the actions that we have already taken or are taking right now to ensure delivery of performance and also delivery to customers. Now there are several sources of market-wide disruption, well documented, raw material shortages and price volatility, increased shipping costs from the Far East, but also in the U.K., driver shortages in the U.K. and limitations on worldwide manufacturing capacity, given the higher-than-average global demand. But we believe our Group has a number of structural advantages that leave us better placed than our competitors in order to tackle these external challenges. And specifically, our economies of scale due to the U.K. market share of being around 3x our nearest competitor, gives us an ability to negotiate with suppliers. We've got long-established relationships with our key supplier partners around the world, and we're working in partnership with them. Our own vertical integration in the U.K., both in terms of our own manufacturing and our own logistics is also a key factor, especially with the current U.K. driver shortages. We also have a wealth of experience in maintaining our gross margins across a range of macroeconomic environments, such as when the Brexit vote happened and we had a weaker pound. On the right-hand side of this chart is listing some specific actions that we've already taken in the last few months to preserve our competitive advantage and also ensure delivery of performance. As I've said, we've been working closely with existing but also new exclusive suppliers to meet our higher order intake and have recently signed exclusive contracts with the largest furniture manufacturer in the world, and we'll bring them in as a key new supplier delivering products from half 2. We're investing in our logistics teams with a view to having some of the best working practices in the industry. And finally, we're pulling a range of pricing and product optimization levers in order to manage our gross margins. Look in conclusion, it's clear that the external challenges are going to remain for the rest of the financial year and probably beyond. But we think we are relatively well-placed to outperform the market despite the disruption in the supply chain, and we are very focused on delivering for our customers and facing into these challenges head on. Now our ESG strategy only officially launched a year ago. But as you can see from this slide, we've made good progress on a number of fronts. Our environmental highlights in the year include our progress on our Phase 1 sustainable leather and textile sourcing targets and the introduction of targets for other materials and chemical products. We hosted our first ESG Supplier Conference in March, which set out our intent to work collaboratively with our suppliers to innovate and develop new ways of making our products and our business even more sustainable and transparent. In June, we also completed our formal materiality assessment in order to identify and prioritize all of the Group's sustainability risks and opportunities. Our Phase 2 ESG targets include an increased focus on social criteria and incorporate our work on diversity and inclusion. We've been listening, learning and educating ourselves around the different races, genders, abilities, sexual orientation, disabilities, religions and nationalities, with the aim of being a Group where everyone is welcome. We've also strengthened our main board credentials with the appointment of a Diversity and Equality expert Loraine Martins. And governance is an area where the Group has traditionally performed well, but we continue to strengthen our processes, and we've just established a responsible and sustainable business committee to ensure board oversight at the execution of our ESG strategy. We've also embedded both environmental and social elements into management remuneration targets across the Group. Looking further out, on the right-hand side of this slide, you can see the commitments that we've made in relation to a number of key environmental targets. As I mentioned earlier, we are committed to building the leading sustainable business model in this industry. So in summary, we have delivered record revenue, profits and cash flow and increased our market share by over 2%, driven by our scale and our integrated retail model. We've delivered another year of progress on our digital strategy, and we are well on our way to achieving the GBP 40 million incremental profit target we set out back in 2018. We've created a sustainable base for further growth in market share, for further growth in cash flow to fund our investments and to accelerate into the GBP 5 billion TAM non-sofa home market. We're examining new opportunities to leverage our asset base. With this target in sight, we're evolving our strategy towards the pillars and platforms model, and we'll look forward to sharing more details with you in the spring of 2022. I'd like to end by thanking, again, our colleagues, our customers and our wider stakeholders for their support during this incredibly challenging sort of last 18 months. As a group, I feel fundamentally that we emerged from the pandemic stronger than ever. Thank you very much for listening today. And I'd now like to open up for questions. I've got Hollie here to facilitate some questions. So over to you, Hollie.

Thanks, Tim. And we've got a few people on the line here with some questions and first is Andrew from Jefferies.

Two from me. Obviously, there's plenty to ask about supply chain, but I'll leave that to the other guys and go. First of all, I was going to ask, in terms of your FY '23 base scenario, it's GBP 1.15 billion of revenue, you talk about there. But looking at that scenario versus FY '19, that -- so all of the different -- well, the difference is really driven by the like-for-like gains that you've got, the new showrooms that you've made, that you know you've made over that period. So within that, you're not assuming that the market is sustainably bigger, which it could be? And is it fair that FY '19 wasn't that great a year for the market anyway? I mean, it was sort of GBP 3.3 billion, wasn't it? So I'm just interested as where you think the market should actually be bigger than that, shouldn't it?. I'm interested in your thoughts on that. That's the first one. And the second one is, in terms of adjacent categories, just thinking about the biggest unlocks that you've got coming up to progress that journey and what are sort of timescales until those adjacent categories really start to move the needle on the like-for-like, given it's a relatively small part of the business at the moment?

Yes. So maybe if I do the adjacent categories one, Mike, do you want to just talk a little bit about the first question around the base in the market?

Yes. So I mean, I think what we were really trying to do is recognize that the 2023 environment is going to be different from '21 and '22 and give almost a clean read of a normal environment, Andy. And so we haven't assumed, particularly any market growth between 2019 and 2023. We do believe, fundamentally, this is a market that does grow, driven by just structural demographic factors. We've consistently seen a 1, 2 percentage points growth rate in the market. But we're not sort of presuming that. Clearly, there are some sort of broader uncertainties around where the world will be in 2023 and we'd rather people form their own view. I think what we would say is that in the long term, the market is driven by consumer confidence, and it is driven by, to some extent, housing transactions, consumer confidence in the replacement cycle being probably about 80% of the driver of demand. And we do see those trends at the moment sort of holding up pretty well. So although we are benefiting clearly from a bit of a shift in consumer mindset in the short term, what we're not currently anticipating is any sort of sudden drop-off in that.

And FY '19, just to be clear, was not -- certainly not a high point in terms of that replacement cycle? Was it?

No, no, no. But I think it's quite early for giving sort of specific guidance on '23 because there could be quite a shift in consumer spend back towards holidays, et cetera. I know we're all desperate to go on holiday. So proper holiday is not Cornwall. So -- sorry, anybody from Cornwall? So yes, I mean, it could change again, Andy. So I think what we're trying to say is we're not reliant on that. The things that are within our own gift, the things that we're doing, we feel underpin the kind of the baseline that we put out there. I think in terms of your second question around adjacent categories, the biggest unlocks on the timescales that our priority and focus is online beds. The biggest unlock there is coming this autumn in terms of where we're investing quite a lot in changing our website to cater for people searching for beds in terms of how they search for beds and what attributes they look for relative to sofas is different. So that's coming in the autumn and also new ranges, new product developments that we're working on, we just launched 16 new bed frames, exclusive branded, et cetera. So it's very much an online focus in the rest of this half. We're trialing and testing, as you can see from some of the images, in a few stores, probably half a dozen stores, some bed centers, which we'll learn more about in half 2. So it's beds pretty much the focus for this financial year. In the background, the third unlock is around building a warehouse stock management capability to fulfill the living room furniture because it needs to be a stocked category as opposed to beds, which is more akin to sofas, the negative working capital-type model. So for this financial year, focus on online beds and building the infrastructure for living room, which will drop into '23. I think what we're talking about is materially, we will see gains coming through probably more like '24 onwards, it will take us a number of months to kind of get some of these foundations in place, but we're looking forward with sort of optimism around the opportunity really, Andy.

Thanks, Andy. And next should be Jonathan from Peel Hunt.

One on the manufacturing capacity, you've struck a deal with the world's biggest manufacturer, what's the backstory there? Why weren't you dealing with them before if they are the U.K.'s biggest -- world's biggest? And then on Sofology, sort of the road really, 55 now, growing to 70. Any chance that 70 could be a higher number, broader format, bigger formats. You're probably going to be on the [Technical Difficulty] Any opportunities there? Just the brand voice there. You've gone from Wedding Crashers to somebody like action films that I might not have watched, but quite high end. How was the response to that base? You said it was quite positive, but just where is that [Technical Difficulty] where the brand is moving to?

Hi, Jonathan, I think your connection is a little challenged and...

I've got the first 2 questions. The third question, I didn't quite hear, Jonathan. So could you repeat that, please?

From Wedding Crashers to Helena Bonham, what's that saying about the sort of brand voice?

Good question. Good marketing question. Let me think about that one. So on the manufacturing side, so I guess the partners that we've had for a long time, the Far East partners and our U.K. partners have been more than capable from a design, a quality and a capacity point of view to meet the demand that we've always had. I think we've had conversations with the company that you're referring to for a number of years. But in terms of giving them the volumes that they would need because they are a massive volume player, that would mean changing our mix of suppliers quite dramatically. So we've not really had that opportunity to push the volumes that they would want to have with us. I think what's changed is volume. So -- and what's changed is we're also increasing the amount of sofa bays in the DFS stores. I know you've been to Milton Keynes. As part of our reformatting, we're moving from an average of 60, 65 ranges in-store to 75, 80. So we're growing our sofa space, growing our volumes. And with our existing suppliers pretty much at full capacity, it gave us the opportunity and sort of need to engage with this company. And they're a great partner, working with us, co-creating designs, spotting gaps in our range, and they have a number of different approach, whether it's recliners, whether it's leather, where it's fabric. So they offer a very broad spectrum of products. So we've got a number of models on the shop floor now in DFS that are coming from China. And then in the -- towards Christmas, we'll have more models coming from Europe. So they've got operations worldwide, which helps with lead times, et cetera. So I think we'll start to see big capacity increases coming through half 2 onwards. And hopefully, the start of a long-term relationship that keeps everybody happy with the new volumes and new base that we've been talking about. So hopefully, that answers the first one. In terms of Sofology, yes, as we sit here today 55, we've got another 3 to open in this financial year. And then we've got a pipeline of another 10 that we can see in clear white space around the country, which I think will take us another 18 months. At that point, we will assess where we still think there is white space. So for example, in the Republic of Ireland, there's no Sofology presence, and we have a number of stores with DFS that trade incredibly well. So I still think there's a possible opportunity beyond the 70, but that's a conversation we'll have with the new MD who's coming in at the back end of this financial year -- back end of this calendar year, I should say. But I do think there's more road to go there, Jonathan. And that includes looking at slightly smaller formats, for example, in Cheltenham. We've got a slightly smaller format that unlocks some of those smaller towns and cities, which has proven quite successful. So, I think I'd probably come back with that in the spring as to whether we can go beyond 70, but I probably think we could.

We've certainly had a lot of experience of doing that with the DFS estate using the data that we hold on where each customer for each showroom lives to spot that white space opportunity and to really drive the profitability of the DFS showroom estate by taking it up from probably about 75 up to over 100 as it sits today.

Yes. I think the last one on Sofology marketing. So I'm not a marketing expert and Jan and the team at Sofology will be watching this answer, so I'll be very careful. I think, Owen Wilson and he is kind of a personality around Sofology was an incredible cut through and very memorable in terms of an ad. But I think what we felt was we wanted a quintessentially British and really stylish, and just a little bit different person. Helena is fantastic. It's the brand scores that we're seeing coming through in terms of stylish and innovative and different are really strong. So I think -- and also being a really strong female, well-known British actress as just perhaps it reconnects people, is a bit more accessible. She's a bit more accessible to people in the U.K. So I think that was the change. What we're trying to do is clearly differentiate between the Sofology brand, which is a bit higher end, a bit more stylish, higher average order values. DFS team is the biggest in the market, got a credible style credentials. But we're just trying to push the brands to make sure we get 2 and 2 equals 4.

Thanks, Jonathan. And next, we go to Michael from Berenberg.

I have 3, if that's okay. Firstly, on capital allocation. I think if we put together your guidance and cash conversion targets, it looks like the leverage range looks very manageable indeed. I wondered if you could update us on your priorities for capital allocation, whether that be M&A, activities, buybacks, what would your preference be there? Secondly, in your FY '22 central scenario, could you give a ballpark figure for what FY '23 tailwind that would result in, in terms of the heightened order bank? And thirdly, could you just give us a reminder piece on why the AOV increases you've seen should be sustainable?

Do you want to take the first one, capital allocation priorities?

Yes, sure. So we do have a published capital allocation policy that I think just says the order of priorities for us is, firstly, to invest in the needs of the business; secondly, to look at an ordinary dividend; and thirdly, to the extent that there is additional capital free cash flow available, which we think is likely there will be, to look at how we deploy that potentially through returning it to shareholders in some way. And I think very much in terms of where we are today. I think the guidance we've given today around the capital needs of the business is our view on the right investment level organically within the business in terms of what we want to drive. And so it does imply that there will be additional capital. I think we've shown with the store lease acquisition that we made, which has been a really strong financial return, that we are willing to act opportunistically if the right sort of case presents itself. But in terms of the needs we see strategically, it's all covered by the CapEx guidance that we have. And so there really will be potentially a question in due course. We're not there yet, but there will be a question in future as to how we deploy our excess cash flow that we start to generate.

Yes. On question 2, in terms of the tailwinds from FY '22 and '23, I mean, obviously, it depends on a couple of factors, isn't it? So as we -- factually, as we sit here today, the order bank is probably double what it would normally be. So it's a couple of hundred million pounds more. It depends on our ability to convert that. From a manufacturing point of view, I'm not concerned. It's more about the middle mile being able to transport those products from, particularly the Far East into the U.K. and then the U.K. into distribution centers. So the middle part of the -- of our supply chain is the key, key challenge that we're focused on. The last mile in terms of our capacity to deliver to customers through our Sofa Delivery Company, I'm not worried about. We're investing heavily. We're taking on more warehouse space, more people. We've got great conditions for our drivers, and we look after them as best as we possibly can. So that's where we are. It's going to depend on our ability to convert. Secondly, it will depend on the level of order intake that we see going into the autumn and beyond. And then I think, depending on that, I think we'll get to spring, and clearly, we'll have a better view. Our ability to convert GBP 200 million by the year-end, I think it's going to be challenging. I still think we'll have a higher-than-normal order bank at the end of financial year '22. But I generally couldn't quantify that at this moment in time, Mike, just given the variable factors that we have going on. But I suspect that we will be a little bit of a tailwind, that I don't think we'll have fully caught up by then. Is that fair?

Yes. It will be a gentle tailwind into 2023 based on our -- based on the scenarios we've got.

I think in terms of average order values, Mike, we've -- a lot of it is structural. So it's not a transient price rises that will drop back down. They're structural changes to our hierarchy. So the teams across Sofology and DFS has been working really hard on the classic entry good-better-best and making sure that we've got the right product innovation, particularly at the top end, which frames the range. And so I think what we're seeing is just -- I genuinely think is sustained AOV growth from where we were in '19. We've added a lot more exclusive brands, top-end ranges. In fact, if you look at the front of our presentation today, you'll see fantastic new products in DFS, which is flying. So these sorts of ranges are proving incredibly popular. People -- consumers are trading up into the better ranges. So I think there's a trend that we've seen start post-lockdown 1 where people are actually trading up into the better ranges that we're putting out there. And therefore, we're innovating in that space, as well as holding our entry levels wherever we can. So I think structurally, it's built into the hierarchies now, and I don't necessarily see the cost price inflation that we're seeing dropping back off. I think there are structural changes in the way that timber is produced, particularly if you're looking for FSC-sourced timber, which is scarce. If you're looking for some of the foam, which is -- we've had foam challenges. I think that's -- the price of that is baked in now. So I don't think we're going to go see a deflationary environment. If anything, I think as part of the guidance of '22, we're seeing more of an inflationary environment. So hopefully, that answers the question, Mike.

Thanks, Mike. And now we move to George at Numis.

First one is, you're talking about a couple of investment initiatives and increasing your kind of stockholding base. So am I coming through a bit accurate?

A little bit breaking up -- investment in stockholding, I think you said.

Yes. So just wondering what your capacity is going from to? Second one is around marketing spend. I presume at the moment everyone is being very low customer acquisition cost, it's really more about having as shorter lead time as possible. In a more normalized environment, are these limited by your thoughts to dominate the online channel kind of easing your scale advantage rather than having 40% share, having 70%, 80% share kind of underpin market share and easing your scale advantage there. Third one was on smaller competitors. Just wanted to kind of hear how you think they're dealing with the supply chain issues, discuss lead times. If they are less hedged, are they having to put prices up more than yourselves? And then final one was just a quick comment on international. I don't think you really spoke too much there. So I just wanted an update.

Good ones. So briefly on stockholding, really the only sort of stockholding that we'd be looking to invest in, in the future is in the living room furniture and accessories area. So all of us focus, as you know, on made to order. We do have stock in terms of clearance stock or return stock or ex-showroom, but that's just part of run-of-the-mill business. So specifically, the difference going forward in the future will be investment in stockholding for things like coffee tables, lamps mirrors. At the moment, that's a relatively small number, probably GBP 4 million, GBP 5 million. I think it will grow as we develop our ranges. We're investing in warehousing space in Milton Keynes with a stockholding system, which will be summer of next year, that will be on stream. But in terms of the quantums, in terms of tying up working capital, we're not talking much more than maybe GBP 10 million, GBP 15 million of that. And looking for a relatively curated range and then churn quickly, and then we'd look to do more of a drop-ship type arrangement with third-party vendors, so we don't hold the stock risk. That would be common in marketplace-type approaches. So that will be -- hopefully, it kind of give you a sense, Georgios, what we're thinking. So we're not talking about hundreds of millions. We're talking a small amount of stock investment on a few SKUs, which turn quickly and the longer tail being drop-ship. Marketing spend. I think what we're seeing is, I think the levels that we're investing now are sustainable in terms of the returns on investment we're getting. We've shifted quite dramatically into digital more and more as we get better and better data about who's in market and targeting them appropriately. I'm sure our digital marketing teams were delighted to hear that they want -- you want to get to 80%. But I think it's competitive out there. There's lots of players out there bidding from a digital marketing point of view. But yes, if you look at DFS plus Sofology, we'll be probably pushing north of 50% share. I think the 40% number was just DFS. So I think we've continued to push hard on that because in the end, if you come into the website, you're interested, you're in market, so the more we can get eyeballs onto our websites, the better, and we'll probably be pushing that higher -- as high as we can. Smaller competitors. It's really challenging. If you haven't got forward contracts with the shipping lines and you're having to buy spots -- a container from China today at spot rate is probably, what, $15,000. It makes it ridiculously unprofitable to bring products over from China for the smaller competitors. And I know that a lot of them have either stopped selling those types of products or massively pushed their lead times out in the hope that the rates come down. So I think it is impacting us from the independents. And that's -- it's not good for the industry because the independents thrive when -- and they have a broad range. From our perspective, we have forward contracts with the shipping companies. We have long-term relationships with them, and we'll be looking to do that again as we roll into calendar year '22 to protect our supply and our margins. So I think it's really challenging for people who don't have those forward rates locked in. I don't know if there's anything else you'd add to that?

No, I think that's right. I mean, I think it is the structural advantage of scale in this industry that we do hold.

Yes. And then I think on international, obviously, the last 18 months we have been impacted as much as the U.K. and so it's difficult to take a read on anything in terms of what's happening there. We have added a new store in Breda in the Netherlands. It's trading well. Every new store that we have is marginally profitable. So it contributes to the P&L. We see it as a -- as we said before, a medium-term option for growth. We don't want to close that option down. We see the teams have worked incredibly hard to make the range appropriate for the Dutch market and also the Spanish market. We've learned a lot. We continue to learn. They're incredibly dedicated. So we need to keep that option open for the future. That's our view. Mike, anything to add?

I think that's well said. Yes.

Thank you. Thanks, George. Hopefully, that answered the question, George, is that okay?

Yes. Great. .

Thank you, George. Now we move to Eleonora from Shore Capital.

Yes. I had 2, but then Andy stole one. So thanks, Andy. I just want to clarify a little bit and just look at the future demands. So I do think that you have been a bit conservative. But on the other hand, what gives you the confidence that the demand will be there in the first place? You know that consumers might be travelling a bit more than spending experience is? Is it just about the replacement cycle? And the second part was, given that the last-mile delivery has become an increasing point of conversation, how long would it take a front competitor to replicate the infrastructure that DFS has?

It's a good question. Do you want to take the first one around future demand, the consumer confidence point?

Yes, absolutely. So, that was touched on earlier, Eleonora. Over the long term, the market has always been underpinned by a replacement cycle, which does sort of fluctuate slightly, driven by consumer confidence and the number of house moves going through. I think in terms of what we've seen in terms of our read of consumer data, it shows very little evidence of overtrading or pull-forward. I think actually, all of the demand that we've been seeing coming into the business thus far just seems -- largely seems supported by the market share gains that we've seen in the AOV growth that we've been seeing. So that's really an indication that consumers feel that they've got more money in their pockets. And so they're willing to spend more on getting the home right for them. But in terms of pull-forward demand or acceleration of replacement, the sort of the best read of the data we have shows that that's quite limited in terms of that cycle. And certainly, we haven't seen a big shift in terms of what consumers are saying in terms of their replacement cycle at this point in time. So I think that means we don't foresee a cliff edge in 2022 or 2023. But we do know that this is a market that's sort of -- they can pause over time in the short term. And we're just used to absorbing that and dealing with that. But actually, we're focusing on the long-term and doing the right thing in the long term.

Yes. And I think it's important to look at the long term. You will get fluctuations, you'll get warm spring or warm summer and football events. It kind of doesn't matter in terms of the long-term trend. The long-term CAGR in the market is about 2%. We intend to grow above that. So from our perspective, the order bank that we now have gives us that ability to smooth our deliveries and make sure that we've got everybody working at full capacity with maximum efficiency. So I think, yes, there probably will be a shift towards consumer spending on holidays and leisure, et cetera. But long term, we're well placed to win in the market, I think. Last-mile delivery, how long would it take competitors to build the infrastructure? I think that's a challenging one. It's been years and years of investment. We're operating nearly 307.5-tonne vehicles, 1,000 people. We've invested in systems, AI systems to help dynamically route our vehicles to be super efficient, which is good for the green agenda. We've got warehouse space all over the country, which we're adding to. We train our people. We give them physio. We've got all sorts of initiatives in there to look after them. We've just shifted to 4 on 4 off-shifts, which gives a 7-day coverage for customers, late-night deliveries. So I think it's hard to replicate in the short term organically, internally for some of the competitors. Clearly, you've got really excellent 3PLs, third-party logistics players who are out there, but they're all full, everyone is busy. So I think it's -- we think it's a real source of advantage. I think that -- and we're really proud of our delivery teams. We go into customers' homes, 10 or 12 customers every day, and it's that brand experience that they get, that last brand experience, which I think is really important. We use recycled packaging. We're looking at electric vehicles. It's a source of pride. And putting the 2 teams together and the 2 fleets together over the course of last year and the systems together is not without challenges. We're going to have challenges for probably the rest of this year. But in terms of the assets that we're building, both from a financial point of view, operational point of view, but also brand experience point of view, I think it's quite hard to replicate. And therefore, hence, why we've done what we've done, if that makes sense.

Thank you very much. And next, we have Saranja from UBS.

I have 3, if I may. The first is on digital. The second is on the footprint of stores. And the third one is a follow-up on the share buyback question. I hope my line is coming through clearly. So on digital, in the medium term, where do you think online might settle in, in terms of contribution to sales? And thank you for sharing the Google trends, but what about other platforms like Instagram or Pinterest, which might be quite popular as well with millennials and competitors like made.com and swift are quite prevalent on those platforms. The second one is on footprint of stores. You mentioned a couple of locations in the press release and on the presentation. But what type of stores do you think you might be focusing on in terms of format and where the biggest white space opportunities are? And the final question is on share buybacks. Obviously, you have your capital allocation policy. And what I'm trying to get at here is the kind of preference between specials and share buybacks. Are there any covenants around limitations like free flow on share buybacks?

Digital, so that's a good question. So pre-pandemic, the digital -- the percentage of transactions that were closed through digital channels were about 20%. Obviously, FY '21 is an anomaly, given that we have 21 weeks where stores were closed. So I think what we're seeing post lockdown 3 is that settling at about 22%, 23%, so slightly higher, but not a fundamental shift. And what we've always said is that about half of that is what we call pure digital, so e-commerce out to basket. And then half is customers who have been into the store, sat on the product, thought about it, gone home and then closed through the digital channels. So the pure-play element of our business will probably be about 11%, 12%, something like that. Will it grow dramatically from where it is? We don't think so. It probably has grown about 1 percentage point a year. So that's kind of structurally how we see it. I think I'll come back to the point that we've got a greater share online than we have offline and continue to invest in the website, big investments going in, this autumn. I think in terms of things like digital marketing, you're absolutely right, around Instagram, Pinterest, Facebook and part of the growth that we've seen and the marketing transformation that we're seeing is a bigger push into that space. We have great brands, great ranges, exclusive ranges, and we can target very specifically the different customer demographics who might want those ranges. So I think you'll see increasingly us push more into that space over the next sort of -- well, from now on -- well, we've been doing it for a while, but accelerating there. So we see good opportunity there. Store footprint, I think be very clear now, we're very clear that we focus on the larger footprint, creating real destinations for people -- for customers to visit. What we've seen interestingly post-pandemic or post the lockdowns is that where consumers used to go around maybe 5 or 6 furniture stores, they're now shortlisting 2 or 3. And we need to be on those 2 or 3. And therefore, we need to create destinations. They're typically edge-of-town parks, they're typically 20,000 square feet. We found through the brilliant work of the commercial teams, both in DFS and Sofology that the ranges that we have can comfortably fill 20,000 square feet. So I think we're more focused on that size than perhaps where we were in the past, which is looking in a city-type stores, et cetera. So I think we're more focused on that format and some great new stores opening recently in Giltbrook in Nottinghamshire, which demonstrate where we're headed. I think white space, as I come back to, is probably Sofology is the biggest opportunity, currently at 55, will go to 70. And I think, as Jonathan alluded to earlier, we then need to have a look at where else could we go. So I think there's probably another at least 15, but possibly a good level more on maybe a slightly smaller footprint in some of the smaller cities. Anything to add on that? No? So that leads you to share buybacks preference, et cetera.

Yes. I mean, I think we all have to recognize it's a very early stage to be asking that question. But I think what I can say is that we will have a choice if we were to look at capital returns. Clearly, we know our cost of capital. We understand our cost of capital. If you are running that analysis now, then potentially a share buyback would look particularly favorable, particularly accretive. And I think that's something we're sort of well aware of. But we also do recognize and do know that a lot of our shareholders do have a preference towards dividends and dividends are helpful. And so we'll take into account both that sort of cost of capital calculation and the value accretion calculation, but also where our shareholders' views are likely to be if and when we reach that stage of capital return conversation. I think the -- clearly, any shareholder that does receive a dividend also does have the choice to reinvest in the shares as well if they agree with the valuation opportunity. I think the final thing -- the final part of your question was whether there are any constraints around that. And no, I think, is the simple answer. I think -- we think both options would be fully open to us based on all of the agreements we have in place.

Thank you. And now we move to Caroline at Stifel.

I have a few questions around ESG, please, and then a few more questions around the home expansion strategy. Starting with ESG, I just wondered if you could give us some more color on the Grand Designs sustainable range that you launched earlier this year and what you're seeing in terms of consumer demand for sustainable materials? The second question related to that is how quickly do you think you can incorporate sustainable materials across all your ranges, noting, of course, you did say that there is some supply constraints around FSC timber and foam and so forth? And then the third question on ESG was you mentioned that there were ESG targets for management across the Group. And I just wondered if you could give us some color on how you're perhaps incentivizing store managers in this regard. I'll start with that, and then I'll come back to home.

So good questions, Caroline. And so on Grand Designs, we're seeing good demand, I would say, in the DFS stores. And also, we have another couple of models. So there's a modeling French Connection that's got similar credentials, which is doing incredibly well. I think what you find is the first thing is the model. The model has to be right. It has to be stylish and sit right. One of the things we've found because Grand Designs has 200 recycled plastic bottles as its interior and so -- and it's a soft -- it's quite a soft sit, which suits some people, but not everybody. So we're working on innovating to create sort of a -- as well as a softer sit to medium and a firmer sit, but you have to use recycled materials. So that's a challenge on which the suppliers are working with us on and innovating. But the demand is good. We just need to be able to broaden that. I think we found that you can't really charge a super premium for it. I think if the model is good, it sits well, but it's a super premium, it won't sell. So you've got to fit it within your hierarchy. So these are some of the lessons we've learned. And actually, the French Connection model is doing incredibly well, fits within the hierarchy, has all those criteria and has a slightly firmer sit as well. So there's a lot of things we're learning positively, and we're using it as a way to then think about how we then democratize those types of materials across our range. I think that's going to take longer than we perhaps anticipated because some of the materials we need, they're just not mass-produced in that way at this moment in time. So we're working with all of our suppliers. We had our Supplier Conference in March, and we're talking to them about how do we move forward that agenda. But clearly, with the volumes that we've got on the manufacturing capacity issues that we've got, getting the focus on that, as well as doing everything else is proving understandably challenging. So -- but we want to innovate, we want to lead and we welcome partners to come and help us with that. I think it's going to take a bit longer, Caroline, than we thought. Targets across the Group. What we're talking more about there is, so for example, Mike and I have got targets within our bonus, which is quite substantial. For example, mines around making sure we've got science-based targets for all of our products from a carbon footprint point of view. You've got carbon reduction across the whole store estate, et cetera. So we've got it at the management level, director level. And then we incentivize our store managers, for example, on Sofa Rescue. So what percentage of products or that service that we offer to customers in terms of rescuing sofas from landfill and ensuring that it doesn't go through landfill. So it kind of goes deep within our organization. Our buying teams are incentivized on hitting things like FSC targets and recycled leather targets. So it's quite specific depending on the role, if that makes sense, which I think is the right way to embed it into people's jobs. We've always had -- if you broaden the ESG targets, we've got targets around gender diversity, we've got targets, which is at the store manager level. So I think it's now getting deeply within our business, embedded into the way we do things, which we think is the right thing to do, rather than make it an initiative over the top. It's just how we go about doing things, if that makes sense.

If I can just follow up with a couple of questions on home. And apologies, this might just be for my clarification. Thinking about, first, beds and then living room furniture, who is the target customer? My sense is that, in beds, it might be the DFS customer, but in the living room, it might be the Sofology customer, so I could be wrong. And who are you taking market share from? I know there's been some high-profile exits in the market, but where do you see the market share opportunity? And then just finally, following up on some of the earlier questions on marketing, how does the customer acquisition cost compare for both beds and living room furniture versus, say, sofas, and I'm assuming you've obviously got some synergies from selling to existing customers?

Good questions, aren't they? So beds, primarily, at this moment in time, is focused on the DFS customer demographic, which is very broad, as we know. So part of the reason why we're looking at extending partnerships in it from favored like Joules and French Connection, et cetera, is there's a clear read across from customers that are coming in to buy those types of brands and then seeing the design cues and the fabrics and the style. So there's a -- it's a cross-sell opportunity is the obvious thing to say. And of course, if you're buying a new home or you're doing up your home, there's a real opportunity if you bought the sofa to them and offer an adjacent category into beds. And given the eyeballs that we have on our website and the product ranges that we've got there, it's primarily a cross-sell opportunity DFS customers. A lot of sort of CRM within -- involved with that digital CRM. So cost of acquisition low, quite low in both living room furniture and beds. Living room furniture is really both brands. So if you go and see a sofa room set in any of our showrooms, what we want to be able to do is you can buy the whole lot. You can buy the room set. And that will be the coffee table, the lamps, the mirrors, the rugs, et cetera, that accessorize that -- those bays will be specific to the brand. So Sofology would have a slightly different design, stark handwriting than DFS. But in the end, we want people to buy the whole lot. So it's basically another obvious cross-sell opportunity, particularly when you've got interest-free credit as a tool to help customers access that. So I think from a cost of acquisition point of view, we see it as relatively lower than trying to get new customers in. We're trying to -- we've already got a good 0.75 million, if not more, customers a year, that we can offer those sorts of things, too. Who are we taking share from? Do we want to talk about that? I think clearly, the bed's the opportunity, A, it's a bigger pound notes opportunity in terms of the TAM and, B, we think we can do a good job online with beds, and we think in the store trials that we've got, we can present the beds in a pretty stylish and interesting way, perhaps a bit different. So I think we'd be looking -- I mean, the bed market is -- there's a couple of dominant players there. So we see an opportunity to take share probably from that middle market, not the entry level, not the high-end level, but probably from the middle market is probably the best way to say it. Living room furniture, it will be -- again, that is a hugely fragmented market with lots of players doing a great job. So we only need a small percentage of attachment to sofas to make a dent into that GBP 1 billion opportunity.

Well, thank you, everyone, for some terrific questions. We have had a few coming via the website. So I think we've probably got time to squeeze a couple in. Just a quick one. So the first one was really from a consumer perspective, how do we see demand changing in the next year? We talked about previous market drivers of consumer confidence, housing market and so on. Is that still relevant? Or is it something else to think about?

I think we tried to touch on this earlier, it is still relevant. So the fundamental drivers in the long-term of the market remain consumer confidence from a replacement cycle point of view, housing transactions, which is about 20% and then the availability of credit. And those 3 things, if you look at them relative, and I think Mike asked the question about relative to '19, they're quite strong. So fundamentally, it underpins the kind of long-term CAGR of 2%. In the short term, I think we see good tailwinds from demand from home and the housing transaction has been quite high at the moment. But I expect in '22, that might settle down as consumer spending shifts a little bit more towards back tools, holidays, et cetera. So we don't see a cliff edge. We see a long-term structure in this market being in growth, low growth, which we would like to hopefully outperform.

Great. Thank you. And I think our last question then is around -- it feels like the management priority in the short-term is on operational execution and investment in manufacturing and supply chain rather than omnichannel. Do you think most of the hard yards in digital retailing has been achieved?

No. I think if you -- it's not either/or, it's both ends. So we've got to focus on when -- I think Mike outlined where we invest our money is in 3 areas. And we -- you have to continue to invest in omnichannel and digital to pace and ahead of the market probably because if you stand still or you distract from that, then you fall behind very quickly. So you have to keep going on that. The hard -- yes, we've done lots of hard yards, but there's always more to do, more to innovate. The focus is on operational execution. It's on delivering for customers. It's on dealing with some of the logistics challenges that exists in the market, but we've got a big team, and we divide and conquer and try and make sure that we have a balanced approach to the way we do business, clearly. And hopefully, that answers the question. Anything to add?

No. I think we've long said that the -- we believe the winners in this market will be those who are able to offer that integration between the physical and the digital channels and the physical and digital experience. And I think the results of the performance we're seeing across recent years just start to evidence that.

Thank you very much. That's all our questions.

All right. Well, thanks very much for tuning in, and have a great rest of the day.

Thank you.