Dr. Martens plc (DRMTY) Earnings Call Transcript & Summary

Like I said, we've been busy, and I'm proud of what our people have been up to in the first half of the year. So let's get into it. I know you would have seen the statement this morning, so Giles and I will cover 3 things. I'll share a brief introduction, just frame a bit of what we're up to. And then Giles will pull out some of the key themes from our performance in the first half. And then I'll give you an update on the strategy that we introduced to you back in June. So I'm pleased to report, as we saw on the slide that we are on track with the execution of the strategy and are on track with our guidance for the year. I'll go into each one of the 4 levers later on, but I also want to be clear that we still have some challenges that we're addressing, particularly with boots and sandals, and with EMEA direct-to-consumer. Yet overall, we're doing what we said we would do, with good cash generation and cost control, driving good financial progress. And as I will keep telling you, I'm laser focused on execution and the work we've done to date gives me confidence that we will deliver our full year results as planned. Giles will go into more detail now on how we performed in the half.

Thank you, Ije and good morning, everyone. I'm here today to talk through our first half results, and I'm pleased to report good progress in all our key metrics. But before I go into any detail, I felt it is important to share with you how we are making decisions and how we're running the business. We are focusing on making the right decisions for the long term while making sure we control our costs and our financials in the short term, as evidenced through our cost action plan last year and our significant reduction in our leverage position. This means we have FY '27 and beyond at the front of our minds. We're making those decisions and the actions we are taking. A really good example of this is in our first half year results, has seen been a focus on improving our full price sales and reducing markdown volume, especially in the periods outside more normal promotional events. Therefore, making markdown directly related to those promotional events or as a tactical way to reward existing consumers and drive new customer acquisition. This principle has also guided our approach to U.S. tariff actions and to make sure we make optimal decisions for FY '27 and beyond. We have worked closely with our wholesale and our supply chain partners in timing of those actions. So turning to our key financials. And as I introduced last year, I will focus on constant currency comparison as this reflects the true underlying performance of the business. Just before I go into any detail and to flag at the outset, as you know, at the year-end, we changed the definition of adjusting items to include impairment of financial assets, and the H1 FY '25 has therefore been represented accordingly. So turning to the financials. Our revenue performance shows a small growth year-on-year, up GBP 2.7 million to GBP 327.3 million and crucially, revenue quality was better as we focused on full price sales and a reduction in our markdown sales. The impact of better quality of revenue and focus on our costs can be seen in our profit lines, especially in operating profit which swings by GBP 6.5 million from a loss last year to a GBP 3.4 million profit this year. After accounting for interest, our profit before tax is still a loss in H1, but a significant improvement on H1 last year. And as I'll explain in more detail, this is after accounting for a tariff headwind and demand generation timing headwind as well. Our dividend is declared at 0.85p which, as a reminder, is a formularic for the half of being 1/3 of the prior year full dividend. Finally, I talked to you in June about the focus we've had on reducing net debt, and we've continued to strengthen the balance sheet in H1 with net bank debt down by GBP 33 million. As a reminder, our net bank debt tends to peak around now as we build the inventory ahead of the peak selling period. With our continued focus on profitability and the strengthening of the balance sheet, this sets us up for sustainable success in FY '27 and beyond. So turning to the revenue. This bridge sets out the movement in sales by region and channel year-on-year. Starting with Americas, we see the business now return to growth across both DTC and wholesale. Following our return to growth in DTC in H2 last year, that has continued in the first half of this year with particularly strong performance in our retail stores, offset by our planned reduction in markdown volume in our e-comm channel, delivering an overall GBP 4.8 million year-on-year increase in DTC. Following the focus on reducing inventory levels in our wholesale partners last year, we're now starting to see wholesale partner orders improving, delivering an increase of GBP 2.4 million and we're also seeing further confidence in the spring/summer order book, particularly amongst our larger wholesale customers. Turning to EMEA. As highlighted at the AGM's trading statement, EMEA across DTC has been more challenging. And that, together with our focus on reducing markdown volume saw a reduction year-on-year of GBP 5.9 million in DTC. However, this was generally much better quality revenue. Wholesale in EMEA, as explained at the full year, was stronger year-on-year, and that is together with a more normal wholesale shipments in H1 saw an increase in wholesale revenue. Finally, in APAC, DTC saw continued year-on-year growth with a particular standout performance in South Korea retail and full-price e-comm across the entire region. Again, like other regions, we saw significant reduction in markdown e-com in sales, especially in China and South Korea. And therefore, overall, a GBP 1.2 million increase in DTC and better quality revenue. The wholesale revenue is in line with our expectations with some small changes in shipment dates year-on-year. So overall, our regional and channel performance was in line with our expectations. Though we're disappointed in the overall DTC revenue in EMEA, this was partly due to our own decisions to reduce markdown volume and the well-publicized weak EMEA consumer environment. We are really pleased with the continued DTC growth in Americas, the overall performance in APAC and the overall better performance in our wholesale sales, delivering on our strategic objective to reduce reliance on markdown sales. As we set out in the statement this morning, our gross margin has improved year-on-year, and I felt it was worth explaining a little bit more in detail. As always, there is lots of moving parts in gross margin. However, what this chart shows is the consistent resilience of our gross margin rate. So a slight headwind from our channel mix was fully offset by the average selling price. The average selling price was a combination of much better full price sales, offset slightly with the strongest shoes performance where the average selling price is slightly less. We saw a strong COGS performance with freight saving negotiated by our supply chain teams being one of the biggest component. And it is also worth noting that includes the H1 U.S. tariff impact as well. And I should speak a little bit more about that on the next slide. So turning to underlying EBIT bridge. And as I set out on the first slide, we see adjusted EBIT turn from a loss -- turn a loss back into a profit. increasing by GBP 6.4 million to a GBP 3.4 million profit. And actually, if you add the 2 headwinds of tariffs, the fourth box and the timing of demand generation, the sixth box that is a figure increases to GBP 9 million profit in the period, a year-on-year growth of GBP 12 million. The slide sets out the key moving parts. GBP 5.3 million gross margin increase driven by GBP 5 million from strong average selling price and better cost of goods, particularly freight costs, GBP 3 million from the increase year-on-year in volume offset by a GBP 2.7 million of U.S. tariff costs. We have continued to tightly control our costs. Within the GBP 2 million benefit from non-demand generating OpEx is to benefit of the cost action plan last year, partly offset by inflation. The full impact of more -- year impacts of more stores being opened and paying you all retail bonuses as retail stores performed better. Demand generation OpEx drove a GBP 2.9 million increase driven by the timing of our key stories campaign being in September this year versus October last year. This will vary year-on-year depending on when the right time is to support key campaigns. Year-on-year benefits in depreciation and other items. And finally, GBP 3.1 million of adjusting items which includes the lease impairment reviews following the accounting policy change and the carryover adjusting items from prior year for incentives and our global technology center. Before I move on to the next slide, I just want to come back to tariffs. As we set out in our statement, the focus has been to mitigate the effects of FY '27 and beyond. And we are pleased to say the action we are taking will do that. Those actions are continued tight cost control, flexible product sourcing and targeted adjustment to our U.S. pricing policy. These have started and will now phase in through to the end of the financial year. We have worked these actions thoroughly, both internally and with our customers and suppliers. The intention has always been to think of the longer-term impacts and make sure the actions we take are with that in mind. The net effect of all that work is that we see about half the high single-digit millions tariff headwind in FY '26 being offset this year. And most importantly, the tariff impact for FY '27 and beyond being fully offset. I have cleverly left the page over there, I'm going to get it. It was an important page because I can't remember it. So it's actually a final slide. So finally, turning to cash flow and our net debt. I'm really pleased to continue to report our significant reduction year-on-year in net debt both in terms of net bank debt reducing by GBP 33 million to GBP 154 million and total debt, including leases, reducing by GBP 46 million to GBP 302 million. As a reminder, our business builds up the inventory levels in advance of peak and the September net debt position tends to be the highest in the year. As we go through the peak period, the net debt will start to reduce. It is worth noting that included in our half 1 results is around GBP 4 million of tariff costs in inventory and this will grow to near GBP 10 million at the year-end. The bridge sets out the cash flows from FY '25 year-end position. The first 4 blocks just show underlying operating cash flow -- outflow of GBP 44 million, made up of delivering GBP 37 million of cash inflow from EBITDA, being invested into working capital as we build stock levels and then the spend on lease payments of GBP 28 million and interest and tax payments of GBP 13 million. CapEx accounts for GBP 6 million and our dividends in the year of GBP 8.2 million. Finally, our net debt-to-EBITDA finished at 2.1x, well below our bank covenant of 3x and an improvement year-on-year. We will continue to see those leverage ratios improve as we head towards the year-end. Our guidance remains for net debt of a year of around GBP 200 million, including leases. So to summarize before I hand back to Ije, looking forward into the second half, we are pleased with our performance in the first half, setting ourselves well up for our key peak period. We continue to see positive performance in our U.S. DTC business, and our order books across the business for SS26 are looking healthy. So with that, I shall pass back to Ije.

Thank you, Giles. So let me give you some color on how in the first half, we executed the strategy that we outlined in June. So you'll remember this slide. And after stabilizing the business last year, this is a year of pivoting the business towards the new strategy. The great news, by the way, that underpins this is that the brand is strong. The team is passionately committed, and we are already seeing results from our work. Importantly, the work we've done in this half has also set us up for the second half and particularly these big trading weeks that we have ahead of us in the next few weeks and provided a foundation for growth in the outer years. But we are in this period of pivoting the business. And what's that pivot about? That pivot is about moving from a channel-first mindset that was primarily about building out DTC to much more of a consumer mindset, giving people more ways and more reasons to buy more of our products and making sure the business is in a situation where any one market or channel or product or consumer segment presents an outsized risk to our success. We have a brand that resonates around the world, and it's a privileged traveling around the world and seeing consumers and partners. And our ambition, therefore, is to become the world's most desired premium footwear brand. As you can imagine, it's a motivated ambition and one that the entire team is united around. So in June, we shared our 4 levers for growth. And what are they? They are engaging more consumers, driving more purchase locations, curating market-right distribution and simplifying our operating model, so consumer, product, markets and organization. And we also gave you a set of FY '26 specific objectives in which we're going to use to make sure that we're on track on this and that we advise you to use to also keep an eye on what we're doing. We said in consumer, we would reduce reliance on discounted pairs. We said in product that we would drive those new product families that we've introduced to you, and I'll talk about it a bit later, Zebzag, Buzz, Lowell, they allow us to give the consumer a different way to think about the brand in different purchase locations. In markets, we guided that we would open with capital-light distribution in some new markets. And in organization, we said we will make concrete steps to simplify our operating model. So let me now share the progress we're making in each of these areas. And as you would expect, I'm going to start with the consumer. As I said in FY '26, we are focused on reducing the reliance on discounts and I'm pleased to say that we are making good progress on both wholesale, which we kind of paid particular attention to and DTC. Working closely with our American wholesale partners and under the leadership of Paul Zadoff, our new President in the Americas, we've achieved a good shift from discount in both in the current season, autumn 1 and '25, and in the order book, as we look forward to spring/summer '26. And as Giles said, we're really happy with that growth that we have in that order book in the Americas because that's the first time we've been able to say that in a while. And similarly, in our DTC, the shift is having a clear impact. DTC full price revenue is up 6% year-on-year. The mix of full price to clearance is up 5%. And we have a full 10% up in the percentage of new consumers coming to full price versus discounts. That's particularly important because if you remember, the objective is to attract new to engage more consumers and we're engaging them -- we'll engage more of them at that full price basis, really critical for us. And while our full price to, if you look at that graph on the right, while our full price to discount profile will go up and down in different times of the year. We will continue to make sure that we're offering the consumer the right thing at the right time. And we will continue to manage this as we go through the pivot. So for example, expect in the weeks ahead, we will participate in Black Friday and Cyber and we'll do some discount. We will reward the consumer with that. We will deal with seasonal product that we want to move quickly. But we will do that in very specific seasons and then return to that focus on full price. I would also say that our customer data platform is helping in this effort because it allows us to directly target consumers based on their buying behavior. So now, for instance, when we are targeting a consumer who is -- who has a high propensity to buy full price, we will not be targeting them with a discount -- with a seasonal discount message because we know that they are motivated by that full price offering, and I've got to say this is still -- and I'll talk a bit about CDP later on. This is early days of this work and a lot more to benefit from as we go forward. The push for full price, along with our focus on comforts, on craft, on quality is supporting overall momentum, and you can particularly see this in Americas DTC. America's retail revenue in the first half was up 15.7% driven by increased footfall. The consumer is coming in to really engage with that product we've been putting before them. In Americas e-commerce, while revenue is only marginally up full-price revenue is up 20%, offsetting a significant headwind as we've reduced and we knew we would get this as we reduced clearance revenue. So we'll share more on that reduction in discount revenue across channels, and our work to attract new wearers at full price when we report the full year in May. I do want to emphasize, particularly with the U.S. numbers that we are showing growth on weaker comps, and this is still work in progress. There was more work to do and significantly more growth to go after in that market. So that's consumer. Let's talk about products. On product, we said we will drive more wearing occasions and in this year that we will drive growth in those distinct family products, Zebzag, Lowell and Buzz. So as you saw in the statement, we have had a successful half with shoes. Pairs are up 20% in DTC and 33% overall. And a big part of this success has come from us being able to give the consumer different reasons and different ways to buy. Playing into those product families and the different wearing occasions and, of course, leveraging the individual customer profiles to give them what is really right for that individual. We talked to you at full year about our success with our more style-focused Buzz family. We're pleased that, that momentum has continued, that's that product to the left with the Buzz shoe being the best-performing new shoe of the half. Another product family that we haven't talked to you much about, but if you want to see it in real life, John is wearing a pair today, is the Lowell. The Lowell is more crafted and more elevated than the Buzz. And we introduced that just a year ago. We haven't really backed it with marketing and has already risen to be 1 of the top 5 shoes for us in EMEA. But let me just say, it's not just the new product families, our iconic 1461 Shoe has continued to perform well. In Asia, it is our best selling product. I'll share a bit more about the work we've done in South Korea and a little case study about how this product has done really well there. And maybe a product we don't speak about a lot, but one that's been on the line since 1992 is our Mary Jane and this is the #3 best-selling product in the Americas and a big part of the success we are seeing there. Let me make one important point. I said this at the full year, but this is important to keep making. This ability to give the consumer more choice, we are matching that with a reduction in SKUs. So this is not about the proliferation of SKUs. And in fact, in Autumn/Winter '25, what we're in right now, we have 45% less SKUs than we did in Autumn/Winter '23. This is about disciplined curation of choice for the consumer as opposed to proliferation of products used. We've talked a lot about the Adrian, and I think the Adrian Tassel Loafer and the success of shoes has really been driven a lot by Adrian as Giles mentioned earlier. This is a product that's been aligned since 1980. It is our second biggest selling product. So I present shoes to make the point that the brand is not just strong, it is relevant across more silhouettes than we really leveraged in the past, and consumer groups allow different -- knowing different consumers allows us to play the right product to the right consumer. And we're really focused on making sure that, that curated breadth is put to work for the brand. What I don't want you to think, though, is that boots are not important to us. Boots are important, and this is an area while we have work to do as they -- as we continue that decline in the half, we are committed to boots. And it's worth saying that decline has moderated and has been impacted by, as Giles said earlier, our planned reduction in discounting. Boots matter to us and the 1460 Black Smooth that everybody knows, remains our top selling product, and we're making progress in the category as a whole with an increased percentage in full price mix. That's really important to us year, and we're achieving that in boots as well. I'll also say we're pleased with the performance that we've had in some of those -- again, going back to the product families, some of the newer products that we've introduced to the line. Let me give you some examples here. The Kasey high boots was new to the line last year and is the best -- the third best-selling product in the line in DTC in the half. And so remember, the 1460 Black Smooth is the first, the Adrian Loafer and then it's the Kasey high. The Buzz Hi, the green one you see back there has been built on the success of the Buzz shoe that we've talked about and that we launched in February. The Buzz Hi was the best-selling new product at launch in EMEA DTC this year. And as part of our focus on comfort, this autumn, we introduced the Zebzag Laceless boots. Zebzag is a family that we've built around being lightweight and casual. We've done [ heels ]. We've done sandals. And now we've introduced a really comfort led easy on boot called the Zebzag boot, you probably -- especially if you're in London, you probably saw some activation around this. And while it's too early to quantify commercial success in this, we're really happy with how that's gone and how it's raised comfort as a topic for this brand. And then 2 weeks ago, we brought to market a new innovation that's built off the 1460 boots. [Presentation]

The 1460 Rain Boots is the first fully waterproof Wellington boots, utilizing our signature heat-sealed construction, that's how the bottom is joined to the top. And our Air Cushion sole -- if you've got the right -- if you got a sample size, it's worth putting your feet in this if you haven't yet, it is built for comfort, and we are getting great feedback on that already. It really captures the essence of what Dr. Martens is about comfort, innovation, craftsmanship functionality without losing the bold attitude of DOCS that our consumers love. This is a whole new wear in occasion for the brand, a real proof point of our strategy of increasing wearing occasions. It's an easy sell for existing customers. They love that silhouette, they love, they understand what the brand is about, but it's also a compelling product for new wearers of the brand. It's been fun visiting our stores and talking to consumers about it, people who came with somebody else and I never knew you did this and all of a sudden, they're getting on their feet. We've used our customer data platform to customize marketing messages based on the customer profiles. Some people are built more for style. And so you pitch a style message and from some other people, it's comfort and function, and we're able to do that as well to those people. It ticks all those boxes. And we've brought it to life in a really immersive way. These are some pictures on the screen, for example, a takeover of our store in Brooklyn, which is all merchandised just for the rain. And the wealth of press and social media coverage on this has been absolutely stunning. So we're thrilled how the launch has gone. I expect those of you in festival season from the summer to be wearing a pair of these, and we'll keep updating you on our progress. So now we talked about consumer, we talked about product, let's talk about markets. And the market lever is really about making sure that in each market, we have the right distribution, working in partnership with wholesalers and distributors. To get the right product in front of the right consumer in the places that, that consumer naturally wants to buy. And in FY '26, we've told you we'll focus on opening capital-light models with our partners. And I'm pleased to share now the progress that we've made. Much of this has been announced, but it's worth just encapsulated on one place. In the first half, we've announced new distribution partnerships in LatAm and in the UAE. Latin America agreement is with Crosby, and they will drive our reach in Mexico, Argentina, Paraguay and Chile. And this will include both wholesale and mono-branded Dr. Marten stores run by them. We now have 2 mono-branded stores launched already with Buenos Aires opening in August and Santiago at the start of October. In the UAE, we've partnered with Beside, who will launch and then grow the brand's presence in UAE, initially through wholesale with mono-branded stores planned very soon. And excitingly products that are arriving with that partner just last week. And in the Philippines, where we already have a great partner, we are accelerating that expansion on the back of this strategy. They have already operated 2 stores but they've now opened a third store again in Manilla, that's actually the picture that is here. And there are more planned. I also want to say, even though we've talked about capital-light models, this is not just about the deployment of capital, it's also about working with experienced and trusted local partners who have experience with global brands and who have deep market expertise and operating know-how. Working with them ensures our brand shows up in the right way for those consumers, whilst they'll be in 100% DOCS. And these are the first agreements of many that we will announce in the quarters and years to come. And while that is largely about new markets, it's worth saying the same principle applies to our existing markets. In Italy, we have 14 direct-to-consumer stores and we've been making good headwinds in Italy since we started building that strategy up. Now we're expanding through a combination of, yes, our own DTC, but also these partner stores with the first franchise store opening in Pompei in October 2025 with a great local partner. And we're really pleased with how that's gone. And as you can see from that image, it's a really great Dr. Martens experience. We have more stores planned for the future. We're taking a similar approach in China where we've opened recently in the half, new stores in Chengdu, in Chongqing and in Hangzhou. So this is an exciting growth lever for us. And it's worth saying, these capital-light models are a good example of our ability to create value in partnership with great businesses around the world. As I shared in June, we're excited about the skill, commitment, resources that our partners bring to our brand, whether it's through franchise stores as shared or in deep marketing partnerships with our wholesale partners. The images here is just a spectrum of -- some of the wonderful activations that our partners put out when we launched the Zebzag Laceless boot that I mentioned earlier. I'd highlight Zalando in Germany who really took over the big hub and held the biggest event there to date. And [ La Rinascente ] in Italy, which included the takeover of a metro station in the Milan that you see in the bottom right corner there. These close partnerships, along with the work we've done with them over the years to rightsize inventory are some of the driving reasons behind healthy order books for Spring/Summer '26. And curating this market right distribution with our partners is key to value creation for everybody. And so a few things take up more of my time than this, and we'll keep you posted on how we keep going to it. And so finally, let me talk about the organizational layer, which is lever, which is really about simplifying how we operate and focusing squarely on consumer. And here, we are beginning to reap early benefits of systems that we probably talked to you about in a bit, but that we've now really focused on executing, implementing and embedding the organization in the half and getting our global technology center in India up and running. I'll start with the customer data platform. The customer data platform is making it easier for our marketing teams, really simplify our marketing and commercial teams to reach the right consumer with the right proposition. I think I've given a few examples of that already today. So the focus to date has been on optimizing the consumer journey. That's how the consumer navigates through from social to a site to find the product they are looking for, driving repeat purchases and making sure that we're efficient when we do a discount that we're not cannibalizing full-price sales. And then we've also used it for our product launches, really tailoring the market, such as in the rain boot example that I gave you earlier. So again, early days, part of our business, but you can see how that really simplifies the way our teams can deliver value to each individual consumer. Our supply and demand system, as we told you, went live in the summer as planned and is already delivering greater visibility and accuracy between demand signals on one hand and supply orders on the other hand, you can imagine what that does for the efficiency of the business. For instance, our teams have started utilizing statistical modeling of past sales database on this platform to identify patterns, trends and seasonality, which then are used to predict future demand really on a 2-year rolling basis, that's new capability that really simplifies the way we think about things that and operate. And then finally, while not due to be fully operational until FY '27, our global technology center and actually the image in the background is the global technology center in India, is now up and running. And by bringing engineering in-house, which is what this does for us. We have already become much quicker in delivery and optimized customer journeys, allowing teams, for example, our retail teams to recognize the consumer and offer a more tailored store experience, such as an in-store pickup or a promotion for that individual consumer. So this is a muscle that we will keep pulling how do we simplify the organization, how do we equip our teams to be -- to make it easier for them to really deliver to individual consumers. Because again, that's what the pivot is about being much more consumer first minded. So that's the work we've been doing and the results we're beginning to see. In consumer, we're driving more full price in both wholesale and DTC. In product, we're growing those product families and alongside the icons, they've given our consumers more reasons and more occasions to buy. In markets, we're working closely with partners, whether that's capital-light models or deep market and product partnerships with major wholesale partners. And in organization, we're using technology to simplify how we work and how we serve our consumers better. So to wrap up, let me use one specific market to illustrate how this strategy all comes together as you see you get a picture of it. South Korea is still a small market for us and a proof of how we can grow in new markets. It's also a critical market, South Korea, because as you probably know, it really influences cultural trends around the world. So how does our strategy playing out here? In consumer, we've grown full price with that strategy. We've grown full price 65%, and we're increasing that mix of revenue by 25% in the year -- in the half over half. In product, we've leaned into that market specific demand for the 1461, which is really where that product is in more demand than any other market in the world, and really allowed our team to push that, while also significantly build a new equity around the Lowell shoe. So we know what the -- if you like, the major product is, but we're also able to start creating affinity around a product behind that so that we're not at risk of just one product lastly. The Lowell, as we started doing that is up, up in 90% half one to half one as we've done that. We're building exciting partnerships like this one in the picture shown here, which is with [indiscernible], who built out a major 2-week installation for the 1461 Shoe. And Giles and I were privileged to be in South Korea in the middle of those 2 weeks, and it's just a stunning experience, delivered entirely by our partner. And finally, by simplifying around the consumer, really making the consumer at the top of mind, it's allowed the career team to be liberated and deliver what works for their market. while aligning 100% to our brand. These are great experiences of Dr. Martens, but they're right for the South Korea market. As a result, revenue in South Korea is up 30% year-on-year in the first half. This is a growth market for us, and we're excited to see how the customer focus is helping them connect with more wearers and the learnings we can take from there to apply to other markets. So I hope that gives you a good sense of the progress we're making. We're focused on executing on the levers of our growth. We're seeing early results. But this is work in progress, and there are still key areas to address. We've set ourselves up well to deliver the plans in the second half. And along with our partners, we feel good about our plans for these big trading weeks that are ahead of us. And I have to emphasize there is significant opportunity ahead. That opportunity, as you remember, comes through the headroom that we still have to grow. Just in the 15 -- in our 15 top markets, we are only 0.7% of $180 billion relevant market in just those 15 countries. And we're in many places where the brand is still attractive and desired. And we're going after that. You've already heard us about Mexico in UAE and other places, and in our existing markets as you've seen with the U.S. or South Korea, we're also going after opportunities to grow there. So these early results and the significant headroom give us confidence in our medium-term value creation thesis to grow profitably and faster than our peer set. The operational leverage that delivers high to mid-teens EBIT margin and the underpin -- and the continued underpin of strong cash generation. This will create significant returns for shareholders. And that's why Giles, the team and I are laser-focused on this execution of the strategy. There's a lot of work ahead, yes, but the brand has never been stronger or more relevant and the green shoots are promising. So we're going after it. Thank you.

We will take questions now. We'll take questions in the room first. Please say your name and what organization you're from. And then we'll go to questions via the operator. I think I'm going to get John for us today.

John Stevenson of Peel Hunt. A couple of questions to get us going, please. On the product side, you mentioned sort of areas to focus on and mentioned sandals and boots. Can you talk about what the plans are for next year in terms of how you think you can address sandals and what sort of innovation or how we're going to develop that? Secondly, on EMEA, I don't know if we can have a bit of a sort of dive into the region in terms of trading. I mean, clearly, the U.K. has been challenging. Can you talk about sort of an overview of where the weakness in EMEA is coming from and what your thoughts are from here sort of going into the second half and a very, very quick one. What's the price change agreed for factory pricing for the year ahead?

I will take the first 2, and I'll pass you the questions on pricing. Yes, it's interesting. I have for simplicity loved the boots and sandals together, but I want to be clear that there are 2 different problem statements. And I'm confident about our boots plan. We have more work to do in sandals. I think sandals is a place where we need to drive more innovation, and we really have that work to do ahead of us. And I think that will take us -- to be very honest with you, that will take us a couple of seasons to get that right. But the team are working on it. I told you around innovation that we're working on lightweight. We're working on really making sure that our sandals proposition stands on its own and isn't just on the back of other things. But we're not starting from a standing start. We've had sandals in the line since '80s. Some of our top selling products in the season have actually come from America, if I take an example, we have a sandal called Dunnet Flower, which even 2 weeks ago, was one of the top sellers in America in November, right? And so we have strong sandal offerings, so we have -- we know what works. We now have to do the work to build that out over the next 2, 3 seasons, but it's work in progress -- it's an area of focus. With EMEA, the slight evolution on our analysis since the first quarter is that the U.K. isn't particularly the challenge anymore. That really was the case in the April to June quarter. But since then, actually, we've seen traffic return to stores. And I would say that the EMEA challenge is an EMEA-wide challenge. Of course, there are variances from market to market, but it's really about a consumer who is out shopping, but being a lot more considered. A lot more browsing and research happening. And they're doing 2 things largely. They are either looking for a deal. And so the market is promotionally led, but as we all know, there's only -- there's a bottom that you get in the market will have to fight back from just being promotionally led. But actually, more interestingly, there is also a flight to quality. There's a bit of a trade down from luxury into premium into craft and quality. And there's a bit of a considered purchase, which means I'm not just buying anything, I'm buying, I'm making -- I'm treating this purchase as an investments. I might actually spend a bit more because I'm getting the quality. And we see that come through in our more expensive products. We are actually doing quite well. What is the weekend of bag at EUR 300 -- over EUR 300 or whether it's something like the Kasey boot, which is one of our more expensive boots. So this is a consumer who is considered. There's nothing wrong with that and a brand that has quality, has opportunities. And that's what we're going after. We can, of course, control broader macroeconomic issues and the ways in which the consumer thinks but we feel we have enough levers. We planned into the headwind on discounts. We're not going to over chase that. We'll participate where we need to participate. That will remain a headwind for the rest of the financial year, but we still think we have opportunities to make sure that we are competitive in the market.

So your factory pricing, looking ahead, I mean, effectively, we don't guide specifically on factory pricing. I'm comfortable where the numbers are. There's nothing there. With the exception of tariffs, it's obviously a cost that we've given you views on. But overall, we have a good relationship with our suppliers, long-term relationships with our suppliers and actually some of the work that we've been doing specifically around tariffs has been working with them about where we source some of our American purchase orders from. So I think we don't normally guide on it, but there's nothing in there that I would be saying this particularly to pull out.

It's Anne Critchlow from Berenberg. I've got 2 questions, please. First of all, on the U.S. In terms of the perception of pricing power in the U.S., how confident are you that you can put through these price rises. Do you think they'll strengthen the brand? Or do you think you'll encounter some resistance? And then secondly, on EMEA, how confident are you that you can drive engagement and turn that sales trend around? And how important are the CDP capabilities within that?

I will grab both of those, but add anything if there's anything I miss out. So as I shared, and we've traveled a lot together. We were in a Boston store early in the year. We're not seeing any resistance in America to our higher prices. In fact, we have some anecdotal evidence that the price position in some products -- some specific products might be on the low side, and we have opportunity. It's worth saying we haven't taken price in the market for 3 years, right? And so the market -- we have headroom to go to and still to remain competitive. But we will be surgical about this. This is not a blanket price raise. We will look at individual products. We will understand how their benchmark and understand how the consumer sees them and that's how we will apply pricing. So to your question, do you see any resistance? Never take the consumer for granted, but this is strengthening our premium position to have the right prices at the right...