Dusk Group Limited (DSK) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Dusk Group Limited 1H FY '25 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Vlad Yakubson, CEO and Managing Director. Please go ahead.

Good morning, everyone. My name is Vlad Yakubson, CEO of Dusk Group. With me today is our CFO, Gordon Squire, and we welcome you to our first half FY '25 results briefing. The first half has been an exciting time as we rejuvenate our product range, greatly enhance our omnichannel offering and transformed our marketing approach. The operational changes made by the new management team are gaining traction and our existing customers and importantly, new customers are responding favorably. The most significant changes have been driven by a shift in our product-led strategy. We are in early stages of implementing our new strategy and are encouraged by the results in the first half. Dusk delivered 12.3% sales growth during this period, our best first half result outside of COVID. We are confident that we have reinforced our leadership in the home fragrance category. This has been driven by strong growth in sales at our stores and a dramatic improvement online. It also reflects strong growth in non-member sales as new customers experienced Dusk for the first time. Slide 4 shows the headline numbers for our 1H FY '25 result. Total sales of $87.4 million were up 12.3% on the prior corresponding period or PCP as our customers responded well to our rejuvenated product range and significantly enhanced omnichannel offering. Like-for-like sales were up 10.6% on PCP. Online sales were up 68% and represented 7.9% of total sales, a notable improvement on the first half FY '24. Gross profit of $56.9 million was up 13.4% versus PCP. Gross profit percentage of 65.1% was up 62 basis points on PCP due to the realization of efficiencies across our supply chain. Pro forma EBIT of $13.8 million was up 20% versus PCP. Inventory of $14.4 million was well below $17.6 million at the end of first half FY '24, reflecting strong sell-through on new product ranges and much improved productivity. Net cash closed at $38.5 million compared to $31.1 million at the end of the first half FY '24. The Board has declared an interim dividend of $0.05 per share and a special dividend of $0.05 per share. These are both fully franked. Slide 5 provides an overview of key operational achievements during the past 6 months. We saw significant progress made across the product, online and marketing areas of our business. We are seeing our brand turnaround taking shape. Our new executive team had a positive impact on both tactical and strategic decisions within the business. We have seen the success of our strategic approach to new monthly product drops and our Christmas product range performed exceptionally well, exceeding our expectations with strong sell-throughs. Our new price architecture and innovation within categories work well with new trial product items often selling out. We'll now turn to the next phase of our range build, which is our core product. Over the next 6 to 12 months, we'll be updating our core range with an emphasis on quality, packaging design and superior fragrance, which will further enhance our value proposition and product uniqueness in the market. We made significant progress in delivering a better omnichannel experience with a strong performance across all channels. This was highlighted by the growth in Click & Collect, which was launched in December 2023 and accounted for 27% of digital sales in the first half of FY '25. We've invested in marketing with a focus on building brand awareness through various channels and have seen a positive response in terms of site traffic and conversion rates. We're pleased to finish the half with an increase in gross profit dollars and a gross profit margin that was well ahead of PCP. Both of these were our best results outside of COVID. This reflects the work we've been doing to realize efficiencies in our supply chain as well as the tactical control of our promotional calendar in a highly competitive market. Importantly, Dusk is in a strong financial position with a closing cash of $38.5 million and no debt. We have demonstrated tight control over our inventory as we rejuvenated our product and increased the frequency and breadth of our product offering. Costs have been well managed as we invested in brand and customer acquisition. Before going through our financial results in more detail, I wanted to discuss our strategic priorities for the rest of FY '25 and beyond. Turning to Slide 6. We have made strides across FY '25 with our strategic initiatives and are on track to exceed our internal goals. In the first half FY '25, we continue to build on our customer frequency strategy by delivering product newness on a regular basis with monthly injections of new seasonal and trend lines. We expanded into new product categories such as Bath & Body and delivered a gender-neutral product range throughout the first half. The expansion into Bath & Body category has resonated extremely well with our customers. And in the first half, it represents over 5% of our sales mix compared to 1% -- under 1% in PCP. Following the success of the Allen's collaboration, we decided to increase the frequency and type of product collaborations that we bring to customers on an annual basis. We have several exciting collaborations planned in calendar year 2025, beginning with our White Lotus x Dusk collaboration as part of our Bath & Body category expansion that was launched this week. New customer acquisition is an important driver of future growth as we broaden our customer demographic to include younger customers, male shoppers and continue to grow our overall market share. One of the ways that this will be achieved is by leveraging our social media and digital marketing channels and providing value to different customer cohorts at various price points. Some of the products that we brought to the market during Christmas trade have shown very positive signs and engagement levels with our younger customer. We are particularly encouraged by Personal Care and Bath & Body products that sold out during December. Our pop-up trial has been successful during the Christmas period and we believe we're able to introduce the Dusk brand to many more new customers. We have analyzed our pop-up data and believe that we have gained market share with pop-up stores not significantly impacting traffic or sales in our stand-alone stores. We continue to ramp up our new product development and innovation to capture events throughout the year. Lastly, we'll continue our strategic approach to redefining our brand identity. We have invested in above-the-line marketing campaigns to make Dusk the top-of-mind destination for home fragrance all year round. In this half, we've invested in product launch campaigns, street posters, transport hub ads and relaunched our digital marketing channels. Our first half FY '25 marketing initiatives were a reset of our base and underpin our omnichannel store approach. The returns seen in traffic, new customer acquisition and digital revenue continue to show favorable ROIs. We are proud of the key trading results in November and December and are now looking ahead to the Easter and Mother's Day, our next key events. We remain focused on smoothing the sales curve, reducing the seasonality that currently exists across the financial year and building sales volume in the second half of the year. Turning to Slide 7. A reset of our product strategy has been at the heart of our turnaround. In the first half of FY '25, we delivered new products and ranges to our customers more often, increasing the cadence of product innovation and newness in our range. We expanded into new categories and leveraged our data and IP to enhance our range differentiation and drive sales productivity improvements in our stores and online. We have also aligned our procurement process and supply chain to better identify and translate key product design trends to unique ranges for our customers. Slide 8 provides a summary of our second half FY '25 priorities, which will underpin the delivery of our broader strategy. These will center around ongoing product rejuvenation, CODB discipline, store productivity and the optimization of our systems and supply chain. Furthermore, we'll continue to invest in upgrading our systems, business intelligence tools and digital marketing appeal. We remain disciplined and laser-focused on ROIs whilst we continue to build the foundation to enhance our ability to maximize trade decisions and soundproof our business for future growth. We'll continue to optimize our online site to improve conversion rates and drive new traffic to our site with a digitally-led marketing campaigns. Improvements in store productivity will come from a roster optimization and our incentive program for our store teams. We have seen our store allocation of hours become more productive and we continue to engage with our retail leaders to improve our store experience to ensure we have the right team at the right time throughout the year. Finally, we continue to implement systems that facilitate data-led decision-making and drive a digital omnichannel mindset. As highlighted previously, we continue to create a test-and-learn culture, innovate and invest into areas of the business that are showing significant return on investment and preparing our business for future growth opportunities in the coming years. Turning to Slide 10 and our sales results. At the end of the first half FY '25, Dusk had 151 stores, including 2 online stores, which is flat versus PCP. We delivered our second highest sales result for the first half with sales up 12.3% as our rejuvenated product and omnichannel strategy resonated with our customers. Like-for-like sales increased by 10.6% in the first half on PCP with stores up 7.4% and online up an impressive 64%. Turning to Slide 11. The strong growth in our online channel reflects the changes made over the past 12 months with a new digital team and website upgrade that has driven improved customer conversion rates and better trading of the channel. Online sales of $6.9 million were up 68% on PCP with online sales penetration of 7.9% compared to 5.3% in the first half FY '24. Click & Collect has proven to be popular with our customers and accounted for 27% of online sales during the half. This provides customers another delivery option and lowers our pick, pack and delivery costs. Our priorities in the online channel relate to further improving the online experience through AI deployment, better use of data analytics and customer personalization to deliver improved conversion rates. In conjunction with this, we'll continue to elevate our digital content, online imagery and optimize our mobile experience to facilitate a faster and simpler way of browsing and shopping for our customers. In the second half of FY '25, we'll also trial online exclusive products that will continue to ramp up as we head into FY '26 as we expand the digital channel offering. Turning to Dusk Rewards on Slide 12. We have 661,000 members at the end of the first half FY '25 with member sales representing 48% of total sales. The decline in Dusk Rewards members numbers at period end reflects 2 primary factors; cycling the very high number of memberships, which are initiated in the July to December '22 period and therefore, lapsed in the current period, that is the 2-year membership period churn. And 2, while sign-up of new customers to Dusk grew strongly through the period, we found also newer customers to Dusk likely to sign up to Dusk Rewards as they begin their customer journey with our business. We'll continue to enhance the exclusiveness of our memberships and rewards throughout the year. Slide 13 compares the average transaction value of Dusk members and non-members. It shows that over the 5-year period, Dusk members have consistently had a higher average transaction value or ATV. In the first half of FY '25, Dusk members had an ATV of $56 versus non-members of $45. The growth in Bath & Body category is naturally a lower price point. And as part of our product rejuvenation strategy, we'll continue to explore new product options. We're also constantly overseeing local and international markets to ensure we remain on trend, working through our product price architecture and looking for innovative product-led ways to grow our basket size and an add-on business at the counter. I'll now hand over to Gordon to take you through some of the financial results in more detail.

Thanks, Vlad. Slide 14 shows Dusk results on a pro forma basis, which is pre-AASB 16 and excludes any impairment or one-time adjustments. In 1H FY '25, total revenue was up -- was $87.4 million, which is up 12.3% on PCP. Gross profit increased by 13.4% to $56.9 million and our gross profit margin improved by 62 basis points to 65.1%. Our cost of doing business or CODB was $41.1 million, which is up 12.2% on PCP. This is largely driven by mandatory increases in wage and occupancy and also the investment in digital marketing and brand awareness. Dusk remains focused on a disciplined cost control approach whilst ensuring key strategic initiatives with a strong ROI are fueled with the right level of investment. Noting these key P&L drivers, EBIT closed at $13.8 million, which is up 20% on PCP. We remain a business that operates a lean structure and every new project or initiative will continue to meet strict financial hurdles prior to deployment. Turning to Slide 15. We delivered strong growth in gross profit dollar and a 62 basis point improvement in gross profit percentage due to the realization of efficiency gains in our distribution channel and supply chain optimization. Slide 16 shows the movement in the CODB rate. CODB dollar increased by 12.2% on PCP, mainly due to the higher employment and occupancy costs and the additional investment in brand and marketing expenses. This also includes accruals of STIs versus 0 accrued in PCP. The CODB rate was 47.1% in the first half of FY '25, which was flat on PCP. Dusk continues to demonstrate tight cost control with productivity gains partially offsetting inflationary pressures despite ongoing pressure from landlords and the mandatory wage increases in the current year. Moving on to the balance sheet on Slide 17. Dusk continues with a strong balance sheet with closing cash of $38.5 million, which was $7.4 million higher on PCP and no debt. Inventory levels of $14.4 million were $3.2 million lower on PCP, reflecting strong sell-through and improved productivity. Inventory remains clean and well balanced. The Board has declared an interim dividend of $0.05 per share and a special dividend of $0.05 per share, both are fully franked. I will now hand it back to Vlad.

Thanks, Gordon. Turning to the trading update and outlook on Slide 19. We've had a solid start to the second half of FY '25. Total sales for the first 8 weeks of the second half are 3.7% higher on PCP and 4% higher on a like-for-like basis. Our sales rate has continued to improve with February sales trading at 6.4% total and 8.8% like-for-like sales versus PCP. Our trading margin, which is sales less product costs and excluding non-selling expenses such as FX adjustments and shrinkage is in line with PCP. We remain focused on margin management strategies. We continue to expand our Bath & Body category. Our latest product collaboration, White Lotus x Dusk leans into wellness and spa as subcategories of Bath & Body. This provides us with another test and learn opportunity in this new category. In the second half of FY '25, we expect to close 2 stores and open 1 new store. We're also in the process of developing a new store design and anticipate a test and learn in the first half of FY '26. We are well prepared for the upcoming Easter and Mother's Day events with a new and exciting product range that will engage with current and new customers. Although the macro conditions remain uncertain and our customer continues to navigate cost of living challenges, we are focused on providing value to our customers as we continue to rejuvenate our product and maximize our newly acquired customer cohorts. I'll now hand back to the operator to open it up for any questions.

Thank you. [Operator Instructions] Your first question comes from Allan Franklin with Canaccord.

And apologies, I have missed most of the call, so it might be walking over to grasp. But just to talk about the sort of the loyalty program. I guess a statement of fact, but yes, it is obvious that you're acquiring new customers and I guess sort of being impacted by the lower ATV of a new customer versus a loyalty customer. Just intrigued in terms of how you can try and drive that number higher from the new customers coming in, if so, and just when we might start to see the loyalty lapse rate borrowing?

Yes, it's a good question. And look, I think as we continue to accelerate our new customer acquisition and particularly with the younger customer cohort, which is the 15 to the 22-year-old, we do expect it to normalize in the next 6 to 12 months and really get back to growth in the database. We also feel that as the younger customer, particularly in the Bath & Body category relates well, they'll become a recurring customer with our business. So, it's part of our strategic approach to bring in a lot of new customers to our business and grow the overall database. And I think now that in the next 6 to 12 months, we get past the COVID cyclical churn that we had and the what you'd call unusually high sign-up rates in back end of calendar year 2022, we should start to get back to growing the database. But I also think what's really, really exciting for us is that how much the new customer continues to be engaged. And as we continue to innovate with product, we've got great opportunity to find the add-on basket value options. And we are continuously testing and learning with things that we can add on at the counter to increase our ATV. On a really pleasing note, you'll see that the ATV decline has actually stabilized over the last half versus the prior years. So, whether it was dropping by $3, it's now down to $1. And that's in lieu of us swing into more of a naturally lower price Bath & Body versus having a higher category mix and diffuses from the COVID days. So, I think the team have done an outstanding job in maximizing the transaction and maximizing what our customers are there for. And we expect that the next 6 to 12 months, that will normalize and we'll get back to growth.

Okay. Helpful. And sorry, just on that Bath & Body, just the sort of experience so far, it looks like it's been successful. To what extent can we expect you to obviously roll it out much more materially and just sort of where you think it sits in the sort of product suite on a 2- to 3-year view, I guess?

Yes. Bath & Body is absolutely a strategic part of our plan to continue expansion. It now represents 5% of the mix versus under 1% historically in the business. So, we do expand -- we expect to expand that continuously as it grows our share of the mix within the store. Again, the beauty part about Bath & Body, it allows us to capture a customer that once they love a personal care type of product, they'll come back for it. So, it leans into our strategy of getting our customers back more so throughout the year, increasing the customer frequency. And I think we'll -- it's almost past the test and learn stage now. We'll continue to grow this category until the customer tells us otherwise. And we're excited, but we've used a collaboration to continue to test and learn with this category and excite the customer in different ways with Bath & Body. So, we're expecting it slowly, slowly to keep making ways into our business.

Maybe just sort of timing and how to think about some of the sort of moving parts on how the months have been playing out. I mean it looks like December was a solid month. I think other retailers have sort of pointed out that December may have been weaker and then January better. It almost looks like the inverse view where December was fine, January might have been weaker, but now you've seen a bit of momentum come back in February. Just wanted to sort of check some anecdotes there, please. And just the second part, how to think about the sort of timing of Easter this year. Does that play into your favor? And/or how are you thinking about the sort of Easter versus last year?

Yes. So to answer the December question, we had an outstanding Black Friday period. And what other retailers have probably seen is similar to us. It sort of brought a lot of sales forward, but we were again very, very strong towards the end of December. Our stock mix is geared that way as well. And historically, with Dusk post a big event, there's a little bit of a quiet period until the members start to shop again until the customers are drawn back to the mix, particularly because we've seen such an influx of new shoppers to our business takes a little bit of time. And what we found is the minute we delivered new product ranges towards the end of January, which we launched summer fruits. It's a monthly promotion. We started to be able to pick up a customer at a high margin again towards the end of January. And as we delivered more and more product newness in February, sales started to pick up again. So I think for us, it's multifaceted why January is a bit quieter because that is a little bit historical with Dusk and post obviously selling through real great sell-throughs on our new product ranges in December. And then by the time the new stuff arrived again, which is towards the back end of January, we started to really pick up again. So, I think it shows our customer is looking forward to the new product. They continue to shop with us at a really healthy margin and they're excited by the launches. To answer your second question, look, the way Easter falls, we don't look at that as in our favor or any more or worse than last year. It's definitely a different timing. It all falls in the second half. Easter is a lower event to us than Mother's Day. Mother's Day is our second biggest event of the year. And I feel really strongly sitting here today that not only is the product all on time, but I think we'll be able to really excite our customer with what's to come with, again, similar to Christmas, new product innovation, really on-trend product and I think we're very price competitive on Mother's Day.

Okay. Maybe one for Gordon. Just on the CODB. I appreciate you have provided a bit of a bridge for us. But just sort of thinking about the other line that sort of bucketed there, maybe a bit of detail there or to what extent the sort of pop-up stores might have sort of played into some of the sort of CODB growth?

Yes, it's a good question. Thanks. I think the first thing to note in that line is the additional investment we've put into marketing, which accounts for about 1.1% out of that 2.9% reported. And I think the way to think about that is we've mentioned a few times in the speech, we're focused on ROI. We're looking to invest in areas where we can see return. So as an example, we've invested $1 million in marketing and we've achieved an additional $10 million in sales in the period. So, I think it's all around ROI and productivity. I think the other lines, of course, there's the mandatory increases, but there's also just sort of static increases across the board with inflation that's unavoidable. And then I think lastly, in terms of the top-ups, it doesn't have a substantial cost base. We had 10 pop-ups through, I think it was 7 weeks in the period. So, it's minimal impact in terms of total CODB.

I will -- sorry, just one other quick one. Just on GP. Now that's a 65-odd percent marker. To what extent do we think that is an appropriate number to think about more into the medium term and/or just sort of layer in how the new products may give or take away from that, including how you think about FX pressure, please?

Yes, I can probably answer from a product point of view and Gordon can comment on FX. From a product point of view, we continue to realize supply efficiencies. So, we feel strongly that from an FOB and an intake margin, we're well positioned in the next 6 to 12 months. From an FX point of view and a trade environment point of view, I think trade remains competitive. I think who knows with the cost of living and what the customer sentiment is in the next 6 months, but trade is definitely competitive as it's ever been. From an FX point of view, I'll let Gordon comment.

So I think, yes, just around the FX, of course, we've got a hedging policy that we apply consistently unless the Board approves otherwise. I think we can't shy away from the fact that since the November '24 U.S. elections, the USD exchange has become extremely volatile, but we continue to apply the policy in order to mitigate our risk. I mean it's worked pretty well for us over the last 6 months. I think also importantly to note is we do now have local production, which will continue to increase over time. And of course, that's a fully hedged operation.

I guess more of a statement of fact, but historically, GM has been a touch weaker in the second half. We're always measuring second half versus second half, if that's a fair way to still do it.

Yes. I think, I mean, on the trading and outlook page, I think we did note that trading margin is expected to be in line in the second half and that's sort of our position.

Your next question comes from Anthony White, who is a Private Investor.

Congratulations to you and the team on this result. It's been solid. Just noting the strength of Bath & Body and your ability to produce new products quickly and also your closest competitor who works in the wholesale space being an $80 million company. There is a lot of arrows that point towards an open opportunity in this wholesale market, including the fact it's possibly a negative CapEx venture. What is your thinking with this over, say, the next 2 years?

Thanks, Anthony. I think definitely a solid start to FY '25. We're proud of the achievements. To answer that question, look, I think that we've got a number of options and we've put that in the presentation as well. I think as we continue to really focus on our internal business and I think we're -- we've absolutely started to hit the ground running and we're on track with our strategic initiatives, but we've got a way to go and we're now really actively focused on our core product rejuvenation strategy, which is in the next 6 to 12 months away. Once we feel we've got a really solid base of product, we feel there's plenty of opportunities, whether that be wholesale, whether it be international, whether it be other things that we can do. But we do see Bath & Body, and we're very encouraged by that, where we can take it in the next 6 to 12 months. But over the next 6 to 12 months, in particular, we continue to test and learn with various subcategories of Bath & Body. So, because it's really infancy stage for us, we really need to learn what's really commercialized enough to be a really big vehicle and volume driver in our business. But again, encouraging signs and we'll continue in the next 6 months to bring out new products within that category. Once that settles and we've got a really solid baseline that we can predict sales and it's consistent, I think that opens up ventures into other things that are not organic to Dusk.

Thank you. [Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Yakubson for closing remarks.

Thank you for all your time this morning and going support of Dusk. But I'd also like to take this opportunity to acknowledge and thank our teams, both in our support office and stores for their hard work and commitment. It's an exciting time at Dusk and we are proud of what we've achieved over the past 12 months. We'll continue to reinvigorate the Dusk brand with innovative on-trend and affordable product solutions. This is combined with a great omni customer experience as we continue to grow the Dusk as the leading destination for home fragrance for both personal and gifting solutions. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.