JB Hi-Fi Limited (JBH) Earnings Call Transcript & Summary

Good morning, everybody, and thanks for taking the time in a -- at a busy time of the year to join us to discuss JB's 2021 half year results. We'll talk through the presentation and then allow some time at the end for questions. At the open, while there's certainly a very pleasing set of numbers we've delivered today, just as pleasing is the group's continued commitment to health, safety and well-being of the team members and customers throughout COVID-19. Our continued investment in online and supply chain operations, including upgrades to the group's website and expanded delivery and warehouse options. Following the launch of our sustainability plan in FY '20, the group continued its focus on having a positive impact on its people, its community and its environment. And our workplace giving programs raised $1.7 million in the half with JB Hi-Fi's Helping Hands program, winning workplace giving Australia's 2020 Best overall program and best innovation awards. Particularly, I'd like to thank our 13,000 team members have continued to do an incredible job and worked tirelessly throughout this period. As I have said before, our team members are our #1 asset and our most important competitive advantage. Their dedication and deep product knowledge continues to delight our customers every day. Now turning to Slide 4 and the group model. This slide highlights the group model and how it supports our 2 leading retail brands. We have differentiated customer bases, underpinned by the best brands, the biggest range and low prices, which is delivered with exceptional customer service provided by our passionate and knowledgeable staff. We deliver this in-store, online, over the phone and via our commercial team. All of this is enabled through a group support function, which leverages our 5 competitive advantages, which I'll touch on in the next slide. These competitive advantages are scale, low-cost operating model, quality store locations, supplier partnerships and multichannel capability. As we've talked about before, these 5 unique competitive advantages: Scale, we have the #1 position in the market, and we are globally relevant to our suppliers, as you can see from that graph; low-cost operating model, this underpins everything we do and is a key enabler; we have quality and diversified store locations, which has certainly helped during COVID-19; deep supplier partnerships, which, again, has been critical to securing stock as we've been through the last 12 months; multichannel capability, we operate across our brand's integrated, high-quality in-store, online and phone offers that provide customers a choice how they shop with us. Our store network gives us the ability to achieve fast online fulfillment times in Click & Collect. And we're also continuing to see pleasing growth in our commercial businesses. Turning to Slide 6. And I'll talk to this in more detail later, but it's a very pleasing result with record sales and earnings in what's been an extraordinary period. Our continued focus on our customers, investments in our online business and our supply chain have enabled us to seamlessly meet our customers' increased demand, both in-store and online. Just to reiterate that all results disclosed today are statutory results, which reflect the adoption of the new accounting standard AASB 16 accounting for leases. I'll take Slide 7 as read, but it is pleasing to see lots of green and all divisions seeing strong sales and earnings growth for the half. As I turn to Slide 8 and the group financial achievements. Sales were up 23.7% to $4.9 billion, with continued elevated customer demand for consumer electronics and home appliances throughout the period. Particularly pleasing with the exceptional growth in online with sales of 161.7% to just under $700 million representing 13.7% of sales compared to the last half of 6.5% for the comparable half. Excluding Victorian sales, during the period when the stores were temporarily closed, online sales represented 10.3% of total sales. EBIT was up 76% to $483 million, driven by strong operating leverage from elevated sales and disciplined cost management. Net profit after tax and EPS were up 86.2% to $318 million and $0.2765, respectively. The interim dividend per share, up $0.81 or 82% to $0.180 per share. From an operational achievements perspective, as I've mentioned before, health, safety and well-being of our team members, customers and business partners and the wider community remain the group's highest priority. We had exceptionally well planned and executed promotional plans during the half, including Black Friday and Christmas. Our stores, online and supply chain remained at high levels of customer service despite the COVID-related challenges and significantly increased volumes. We continue to invest in online supply chain, including upgrades to websites and expanded delivery and warehouse options. The group did not receive any government wage subsidies and continued to pay team members and landlords throughout the half, including the periods when stores were temporarily closed. Turning to Slide 9. As we highlighted in FY '20, we have given a huge amount of thought to what generating long-term sustainable growth means for us. We have adopted our sustainability policy, outlined our commitment to having a positive impact on our people, our community and our environment. Some of the key half year '21 focus areas and achievements are as follows: we prioritized the safety of our team throughout COVID-19; we rolled out updated equal opportunity and workplace behavior policy and training to all store team members and launched a support office well-being and mental health program with the support from the resilience project, which was really well received. From a community perspective, as I touched on earlier, our workplace giving programs totaled $1.7 million and since exception -- since inception, a massive $26 million. With JB's Helping Hands program, winning workplace giving Australia's best overall innovation awards. We've been joined by our newest charity partner, Earth Squad, that comprises partners, 2040 and Carbon8 and focuses on supporting initiatives have the greatest impact on our environment. And we've continued to work with suppliers to enable our ethical sourcing policy. From an environmental perspective, we've trialed with a partner 100% recyclable and sustainable packaging for selected products to continue to explore environmental initiatives, including solar power generation and e-waste recycling, established an operational waste and recycling within group. Now turning to the divisional performance and starting with JB Australia on Slide 12, then I'll take Slide 11 as read with those numbers. So Slide 12. Turning to our half year sales. For JB Australia, total sales grew 23.3% to $3.36 billion, with comparable sales up 24%. Sales momentum was strong through the half with continued elevated customer demand for consumer electronics and home appliance products. The power of the JB model is highlighted where I would enjoy solid market -- sorry, enjoy above-average growth in new categories as customers see us as a destination for new products, but also serve solid gains in established categories. Hardware and Services sales were up 25.8%, with comparable sales up 27%, driven by Communications, Computers, Visual, Games Hardware and Small Appliance categories. Communications had a very strong result with both outright handsets, connections with our offers continuing to resonate with customers. Product sales drove growth with a particularly strong period with Apple. After a strong half 2 FY '20, Computers had another strong half with customers continuing to seek products for working and learning at home with MacBooks and laptops performing well. Visual had a great half despite some stock challenges. We have seen an increase in sales of larger panels as customers move to 75-inch and above panel sizes, and our FFALCON exclusive brand continues to resonate well with customers. But again, we would have liked to get more stock. Games Hardware performed very well and assisted by new console sales in quarter 2. Small Appliances had a fantastic half with growth in sticklebacks, coffee and kitchen appliances. With a number of competitors closed, it was good to engage with our customers in a relatively new category. And online sales grew 20 -- sorry, and online sales grew $201.9 million versus 18% in the prior half to $515 million or 15% of total sales. Excluding Victorian sales during the period, where stores were temporarily closed, online sales represented 11.3% of total sales. Our ability to scale and maintain a high level of customer service and [online] (sic) [on-time] delivery through the half was really pleasing. And our commercial business continued to record, record sales as we expand our product and service offering. Turning to Slide 13. A key element of our customer promise is the biggest brands at the lowest prices in-store and online, coupled with passion and knowledgeable staff delivering great customer service. Online, we strive to ensure our site simplifies the journey for customers whether they are researching or transacting. We work with our suppliers to build a relevant and agile promotional plan, which, coupled with JB's ability to bring products to life in-store and online, creates our unique customer proposition. It is this that enables us to maintain our price and market leadership. It was pleasing to see gross profit increased to $737.4 million or 22.7%, while gross margin was down 9 basis points, driven by -- to 22%, driven by -- primarily by sales mix as a result of an acceleration in the growth of low-margin technology products. Cost of doing business was 10.1%, down 180 basis points. Cost of doing business grew in absolute terms, 4.6% with disciplined cost control throughout the half. EBITDA grew 43.9%. Depreciation grew 2% as an increase in depreciation on right-of-use assets was offset by a decline in depreciation from fixed assets as we continue to manage our investment in the store network. EBIT was up 57.5% to $329.8 million, with an EBIT margin up to 214 basis points to 9.8%. Turning to JB Hi-Fi's New Zealand performance for the half. And I'll jump to Slide 15. Total sales were up 9.1% to NZD 141.9 million with comparable sales 9.1%. The key growth categories are Visual, Games Hardware, Small Appliances and Computers. Online sales grew 70% to NZD 16.3 million or 11.3% of total sales, up from 7.3% in the prior comparable period. Gross margin was down 23 basis points to 17.1%. Cost of doing business was 12%, down 117 basis points and in absolute terms, declined by 0.7% as store wages remained well controlled. EBITDA was NZD 7.6 million, up 32%, driven by sales growth and cost control. You'll remember, in June FY '20, the group recorded a noncash impairment of the JB Hi-Fi New Zealand right-of-use assets and fixed assets. As a result of this impairment, JB Hi-Fi's New Zealand's EBIT was benefited from a $2.8 million reduction in depreciation expense. As a result, EBIT was $6.9 million. Excluding the benefit of the noncash impairment, EBIT on an underlying basis was NZD 4.1 million, up 173%. And as we look forward to FY '20 and turning to Slide 16, we continue to focus on the safety of our team throughout COVID and continuing to respond and adapt to our customers' changing needs. From a sales perspective, we will continue driving sales across all our channels, in-store, online and commercial. We will always focus on growing top line sales and gross profit dollars. For our store network, we continue and invest in an optimized store network to maximize profitability and continue to trial ultimate store formats to increase market penetration. We will leverage our new e-commerce platform and continue to build on capability, which will enable us to meet changing customer needs through our online offer and continue to integrate the in-store and online customer journey. We'll expand Communications, Connected Tech and Pop Culture product categories and optimize category space allocation to maintain the productivity of our floor space. We'll build on partnerships with major suppliers to extend our capabilities. In New Zealand, we'll continue to execute on our strategy to improve performance. We'll expand and extend our service offerings and continue to enhance and develop the in-store experience. And as always, simplify processes, drive productivity with a focus on improved stock flow into store and back of house operations. Now turning to the Good Guys and Slide 19. Total sales grew 26.4% to $1.45 billion, with comparable sales up 26.4%. Sales momentum was strong through the half with continued elevated customer demand for home appliances and consumer electronics products. The key growth categories were Refrigeration, Portable Appliances, Laundry, Floorcare, Television and Computers. It was particularly strong for home appliances where there was significant growth throughout the half, including the Refrigeration with strong unit sales across Refrigeration and freezers alike, portables, laundry and floor care. With consumer electronics, we saw significant growth, which included Television, with significant unit sales growth across all categories. Computers, again, strong growth across all categories and ranges, and we continue to focus on telco and building out our partnership with Telstra. Online sales were up 86% to $148 million or 10% of total sales, up from 6.9% in the prior period. Excluding Victorian sales during -- when the stores were temporarily closed, online sales represented 7.9% of total sales. Strong sales on the Good Guys' website were partially offset by a decline in third-party marketplace sale. Our ability to scale and maintain a high level of customer service and on-time delivery through the half with significantly increased volume was very pleasing. Turning to Slide 20. Gross profit was $324.6 million, with gross margin up 167 basis points to 22.4%, driven by strong improvements in key categories. Cost to doing business, was 11%, down 195 basis points, and in absolute terms, grew 7.3% as store wages remained well controlled throughout the half. EBITDA growth was 85.4%. Depreciation grew 5.2%, with an increase in depreciation of assets -- on assets and depreciation of fixed assets in line with last year. Strong operating leverage from the elevated sales growth and disciplined cost control drove strong EBIT growth, up 142% to $126.6 million and an EBIT margin up 417 basis points to 8.7%. The Good Guys team continues to leverage its unique offering capability with opportunities for improvement. As we look forward to FY '21. The team continues to prioritize the safety of its team members and customers and it continues to respond and adapt as customer needs change. Sales, as we focus on sales and continue to drive sales from all categories in-store, online, phone and commercial sales. The store network has had considerable upgrade program that focused on adjacencies, supporting growth categories and showcasing the home appliance category. And it's particularly exciting during the COVID period that we've had such an amount of increased customer traffic, which have got to see much of the hard work that's been done within the Good Guys' business, and that is really resonating, and we think that will stand the test of time. So that's a great outcome. From an e-commerce perspective, we continue to leverage multichannel capability to further connect online and in-store experience. From a category evolution, we established leading position in growing home -- connected home appliance market, and we've continued to expand our relationship with Telstra across the group and particularly for the Good Guys. We have strong relationships with suppliers. As you can see from new brands such as Miele in Premium Cooking, SMEG in Portable Appliances and Loewe in Televisions. The -- our investment in home delivery centers has enabled the group to provide customers enhanced delivery experience throughout the elevated sales period. We've rolled out technology to streamline in-store processes, and we've continued to focus on inventory efficiency. The right product, right time and at the right price. And as we've always said, retails about detail, and there's a lot of detail there. I'll now hand over to Nick to talk through the balance sheet and cash flow.

Thanks, Richard. So starting on Slide 23, the balance sheet and starting with inventory. Inventory at December ended flat year-on-year with inventory availability improving gradually throughout the half, but noting we are still seeing variability by category and supplier, particularly in Televisions. Inventory turnover was up 201 basis points to 8.2x, driven by the strong sales growth throughout the half. Payables were up year-on-year due to the increased supply of inventory late in the half, which was needed to continue to make that heightened customer demand and replenish inventory levels. Payment terms with supplies have been maintained with all suppliers paid in line with their terms in full and on time. Receivables were down year-on-year, pleasingly, as we continue to actively manage receivables. On Slide 24, highlights on the cash flow statement. Operating cash flow and operating cash conversion continues to be very strong. CapEx at $28 million remains in line with our expectations as we continue to invest in the store portfolio, our digital propositions and strategic initiatives. On net debt or net cash, we were in a net cash position of $472.8 million at December 31 as a result of the abnormally low level of net working capital. We expect net working capital to revert to historical levels as inventory availability improves and the timing of purchasing returns to normal. This normalization of net working capital will ultimately have a corresponding impact on net debt. The group performance indicators summarized there on the table, all continue to be very strong and in line with our expectations. On Slide 25, capital management. As Richard mentioned earlier, we've today declared an interim dividend of $1.80 per share fully franked, up $0.81 per share or almost 82%, representing 65% of the half NPAT. The Board will continue to regularly review the company's capital structure with a focus on maximizing returns to shareholders and maintaining our balance sheet strength and flexibility. The record date for the interim dividend is the 26th of Feb with payment to be made on the 12th of March. I'll hand back to Richard.

Thanks, Nick, and moving to Slide 27, the sales update and outlook slide. January 21 sales update. Total sales for JB Hi-Fi Australia was 17.3%, with comparable sales growth of 18.6%. For JB New Zealand, sales were up 21.7%, with comparable sales, the same. Total sales growth for the Good Guys was 14.1% with comparable sales the same. We are really pleased with the strong sales momentum that's continuing into January across all our brands. Whilst we are pleased with the start to the second half, in view of the ongoing uncertainty arriving from COVID-19, the group does not currently consider it appropriate to provide sales and earnings guidance. And just reflecting on that, as I reflect on, obviously, a lot of reflection on Victoria and Auckland lockdown. There's no doubt our teams are getting pretty practiced at responding to these lockdowns. An example of this challenge and what really says to me more about how JB operates and what the group is trying to achieve is JB store-to-door initiative. This is where our staff undertake rush deliveries in hired vehicles. It is very aggressive. We enabled this in Victoria. So in the car, we've got the announcement from the Victorian government Friday afternoon. By 7:40 on Friday night, we had store-to-door enabled in the car. And by Saturday morning, we had 40 SUVs on the road. And over the weekend, they made nearly 1,000 deliveries with amazing customer feedback. Now this store-to-door work outside of pandemic. Well, that's a great question. And certainly, as we moved out a lockdowns on stage 2 for Victoria, the volumes did drop. But it's a great customer proposition, but also keeps the teams engaged and it certainly says how we're thinking about the new world of testing and learning. And certainly, as I said before, the customer feedback is amazing. So again, pleasing start to the second half. But certainly, we've -- as always, there's a few, at the most, some changes. So as I close out the presentation, and turn to Slide 29. In closing, both brands work hard to maintain their market leadership. For JB, it's technology and consumer electronics is a staple and front-of-mind purchase for our customers. For the Good Guys, they have market leadership in home appliances and a strong position in CE. The group works hard to maintain a top position as the #1 destination for technology, CE and home appliances in the market. We are focused on maintaining a resilient retail model that rewards our team and customers for their loyalty and reinvest for the future. As we close out this section of the presentation, I just wanted to, again, emphasize those key investment takeaways. And we're very proud of this result. And I'd, again, like to recognize and thank our team members across Australia and New Zealand who have delivered another record result in what remains an uncertain environment. We will continue to focus on what we can control and with the number of opportunities ahead of us, we remain excited about the outlook for the business. So thanks again for your time this morning. We're obviously going to head out on the road virtually, but now maybe some time for questions from the operator.

[Operator Instructions] Your first question comes from Michael Simotas from Jefferies.

First question from me. I was just hoping we could talk a little bit more around the comments on inventory availability. So clearly, it did improve, and we can see that in the numbers, but then you called out some specific categories like Televisions. Is inventory availability weighing on sales at the moment? And I'd be particularly interested in the slowdown in sales in The Good Guys in January relative to the second quarter and whether inventory availability in particular categories was a factor there?

I can give you some very quick answers, yes, yes, yes. So yes, the stock has been a constant challenge for the last 12 months. If you think about the buying teams in Good Guys and JB, stock availability is their #1 focus. And I actually have to say, I'm personally blown away with what the teams achieved with the sales numbers and adjusting time stock arrival. I think I said at the FY '20 results, I never thought we'd be able to achieve sales -- strong sales numbers with this level of inventory. So the guy -- the teams have done an amazing job. That said, coming in, so we did receive -- JB received a fair bit of stock late in the half. Good Guys did certainly struggle on some key areas. Both businesses struggled on TVs, but Good Guys probably had more challenges in that front. Not anything to do with just sort of the way the cookie crumbled. And certainly, we did notice those out of stocks impacting January sales.

And then Michael, the only thing I'll add -- just to add, the difference between JB and Good Guys. And whenever I say, I don't like saying it, but Good Guys also had seasonal in January, which weighed on sales in Good Guys as well.

Yes. Yes, that makes sense. All right. And then the second question I've got is on the very large gross margin uplift from the Good Guys. Can you give us any color on how much of that was mix, I guess, both category and premiumization within categories versus like-for-like gross margin increase on particular products? And how much of that uplift do you think you'll be able to hold on to when the market does eventually, normalize?

Michael, that is just a great question. Okay. So there's no doubt customers' missions were very efficient. And so therefore, that did help gross margin. There's no doubt the Good Guys' team are executing really well and suppliers value that execution. We would like to think that element of it is sustainable. And then there's just the usual moving parts of mix. So certainly, with a strong home appliance mix for the half that is good for gross margin, we obviously have been pushing very hard for the Good Guys on building out their CE offer; ut not replicating the JB one, but a CE offer that makes -- ensures they're relevant for their customers. And obviously, that traditionally will be at lower margin than home appliances. But the strength in home appliances have certainly helped their gross margin, but better buying and continued good execution has all contributed to solid gross margins. Now as to what proportion of that elevated gross margin remains. That's obviously a great question, and time will tell, but we will be working hard to keep as much of it as we can.

Your next question comes from David Errington from Bank of America.

Richard, Nick. Richard, your online sales are performing very, very well. And what I think is really pleasing is that it appears that it's come at absolutely no dilution to margin. How much latency -- if online continues at these elevated levels at around that 10%, how much latency will you be able to continue to follow your existing model, which is you're picking from in-stores, et cetera, compared to when you might have to consider looking at a new model where you might have to look at your warehouse model. And I think you called it out that you might look at doing that. Where do you see that you might have to start putting some added investment in so as to continue to service? It's costing you nothing at the moment. It looks like your margins are the same as in-store and if you could confirm or deny that. But when do you think you might need to look at maybe investing in your warehouse model?

Yes. You can imagine we put a lot of thought into that whole question. So trying to give you as much as I can. I think it actually -- the straightforward issue it comes down to is that as much as I'd like to say, we sell as many items in a basket as a supermarket. Unfortunately, on this occasion, we don't. So it's more like 2, which is not dissimilar to the store network. And so therefore, picking 2 items and packaging them is relatively efficient. So when I think about other business models where if I imagine, when I go to the supermarket and I think how many items are put in a basket, I really sort of feel for [indiscernible] on trying to get online to be efficient, and they're obviously investing in that for us. The flip side is we only have to worry about 1 or 2 items. So it's incredibly efficient. The guys can go out and pick 10 of 1 product, walk out the back, put it in a section and off it goes. So our online model is -- and if you think about warehouse rents, it is really around the edge of -- the rent of a warehouse versus the rent of a store Yes, there were differences. But traditionally, we've been able to achieve our online sales in the in-store network, but I will say, certainly, when I was in the stores post Black Friday, some of the volume going through our stores in Black Friday is certainly incredibly elevated and right up against my comfort levels or Cameron and my comfort levels. And so there's a lot of work being done about thinking about Black Friday next year. Obviously, the challenge we have is those elevated days like Black Friday or Black Friday week, are only single-digit percentages during the year. And so we need to enable a distribution model that works all year-round and doesn't become a cost burden for the business. So micro-fulfillment centers, direct -- a portion that comes direct to store. I think you'll always imagine our rural -- our regional stores will do a lot of their own fulfillment. Our metro stores, there's no reason to be fulfilling out of the CBD because it just takes -- well, they are pretty quiet at the moment, unfortunately. But in a steady state, you really -- they are our hardest stores to get into, imagine Burke Street. Getting stock into that store is hard. We really don't need to be doing online delivery except rush out of that store, where it's found doing online deliveries from Southbank into the Melbourne CBD has worked really well. So we literally have solutions for every city, every state and every store, but there's no doubt we will try and take some of the big volume links out of the stores and understand whether we can do that in quieter stores or using our home delivery centers or do -- your question, which is a good one is, will we eventually see which best 5 has online -- small online delivery centers located in strategic locations. We feel we can achieve all this within our cost base. So anything we're looking at, we go, okay, that's right up against our cost -- comfort level. But that being -- the reason it's up against our comfort level is because then we believe we can do it more efficiently and in fairness, at times, more safely or more efficiently or more productively in a different way of achieving that, then we explore that. And there is a lot of work going into that side of the business.

And I'd just add, when you think about the 10%, I think it is important that you sort of break it down, say, of that 10%, there's a component, which is Click & Collect, and that will obviously always remain in the stores. There's a component which is big and bulky, which is getting fulfilled out of our centralized home distribution centers already. And then the, obviously, the remainder, which goes through the stores, and it's -- that remainder how we continue to maybe use the stores for that fast fulfillment. They have rush options and to Richard's point, if you could take the peaks when there's a new release or a promotion take those peaks out of there, acknowledging though, it's probably not as big a number as you initially imagine when you're picking that whole 10%.

Yes, yes, yes. My second question, Richard, and Nick, is on the Good Guys on Slide 21. The Good Guys has been a fabulous performer, really pleasing. You must be really pleased with the performance of the Good Guys now. You said that retail is detail, and this is not a tongue-in-cheek smart-alecky question, but there's a lot of things there you're focused on still. In terms of latency, is that -- following a bit on from Michael's question, where you had a great uplift in gross margin, but of those key drivers there and you've listed about 6 or 7 of them, in terms of latency in earnings in the next, say, 6, 12, 18 months, what do you think is the most important? What would be the #1, 2 and 3? Now I know you're probably going to say, well, all of them, But if we need to think about what is the #1 area that's going to really surprise us on the upside with the Good Guys' performance, in which areas of those categories do you think it will come from?

I would like to think it comes down to how the business has been repositioned. So if you think about a Good Guys' customer versus potentially a JB customer, obviously, traditionally, a little bit less at the moment in shopping centers because they're a bit quieter. But traditionally, JB's model has been destination stores or half the stores being destination stores and half the stores being in shopping centers where you have access to more traffic flow. Now a great question for JB is what's that traffic due over the next couple of years in shopping centers. Importantly, for the Good Guys, we've never had a Good Guys store. We haven't had to close any Good Guys doors temporarily during this period, aside from government mandated, but where is -- in CBD stores, we have had to make tough decisions in Victoria and -- sorry, in Melbourne and Sydney. So the Good Guys, what you see is a store network that customers are really comfortable shopping at. And because of all the changes we've made, we think this has probably leapfrogged us 2 or 3 years in customer's understanding, what the Good Guys bring to the market. And that's certainly what you're seeing at the moment with those elevated sales. So -- and also, we have obviously simplified the business. We've got -- we have relayed stores back to what you would call is just the basics of retail. And I don't mean that in a condescending way. I mean that in -- there were some initiatives that had previously taking up sort of high-value space. We've got back to the basics of retail. What do customers want when they come to Good Guys? What are they expecting? And what are we going to get them excited about? So we focus on that. And then the team, I think, has just continued to grow over the years since the acquisition, obviously, led by Terry, but as much the area management team, the buying team, the directors in the Good Guys business, we have taken the best parts for JB, but we haven't turned it into JB. We've taken the best of retail and some tools and things that JB has that we could help out with productivity measures, et cetera. But fundamentally, when a customer walks into a Good Guys store, I think they're getting a much better experience, a much clearer experience, a much simpler experience that's focused on the customer rather than maybe what the company was trying to achieve. If you start with what the customer wants, it's a great place to start in retail.

Your next question comes from Aryan Norozi from UBS.

First one for me. I mean, if you look at sort of medium to longer term, has the current environment changed the way you're thinking about your cost base structurally, whether it be in terms of labor, rent, administration on gross margin? I mean -- and what does that mean to you medium to longer-term profit margins moving forward, please?

Well, I wouldn't like you to promise -- promise you these EBIT margins in perpetuity because they're pretty elevated at the moment. So if you sort of try to get back to, and I'm sure you're older. The big question is what are the underlying margins through the cycle. We've always prided ourselves on kind of cutting our cost to fit. And so that means when things are tough, we are pretty focused on our store wages. And when things are good, we feed a few costs into the business, particularly in wages. Obviously, it's been a unique period recently where customer journeys have been so efficient. We haven't probably had to put the level of labor, and sometimes that's been because we haven't had the labor. And other times, that's been just us managing proactively. Obviously, the visibility is not always great at the moment. So from my perspective, we're very comfortable with the cost base. What we want to do is say, we've got this pool of cost in the business, which reminding you, we take pride in the fact that its globally low-cost. And so we don't have that built-in-the-business to start with. So it's not about cutting costs. It's about doing it smarter. It's about being more productive. It's just -- it's a constant focus on review and understanding where opportunities present themselves and then picking a few things that we feel we can win on and chasing those. And once we finish those, we think about the next thing. We're not big on labeling cost initiatives. We're not big on labeling anything. We just find opportunities, get on with them, sort those out. And we're quite happy to get 80% or 90% of the way there and go, yes, that's good, and let's focus on the next opportunity. So I'm not going to give you, numbers aside from the fact that I really feel that we will -- the constant focus on productivity in the business is the case. And that's enduring, from my perspective, even if EBIT margins will come and go depending on operating leverage driven by elevated sales.

Perfect. And then second one for me, how is the Board thinking about capital management, I mean, you've historically sort of mentioned the 65% payout ratio, which is adequate in previous presentations, but it wasn't there this time. Is that something that is potentially going to change moving forward given your gearing position?

Well, the slightly cheeky part of me wanted to regurgitate 0.2 because it says how the Board is thinking about capital management, but I might let Nick talk to that.

Look, and the 65% payout ratio is still there, I think is probably the other thing to say. Look, we -- it sounds boring, we said it, consistently, as a discretionary retailer in an uncertain environment, it is good to have both for balance sheet. And as we enter a challenging period to come from last year, and given the current uncertainty with today, I think we've got almost 90 stores shut across Australia and New Zealand. I think having -- maintaining that flexibility and that balance sheet strength is key. So we'll continue to review it. And will review to making sure we provide accurate returns to shareholders and maximize those returns to shareholders whilst maintaining that balance sheet strength.

Your next question comes from Bryan Raymond from Citi.

My first one is just on how you're thinking about your store network longer term. Can you talk a bit to foot traffic transaction numbers in the physical environment, how they've gone over time and -- well, certainly, over the last 12 months or so? And what sort of levels of online would you need to see before you start thinking about do we need to close some stores? Or can we get more efficient with our store footprint?

Great question, Bryan. And so why don't I get -- cover off the last part, first. I think you'll acknowledge we're not great on setting targets, because every time we set targets, they become a rod for your own back. So whether it's 10% or 20% is just not the way we think about it. So it's -- we want to maintain and grow our market share. We want to delight customers however they shop with us, and we will have some internal targets and some internal focuses. We want to grow store -- sales in-store, and we want to grow them online. And we think if we deliver to customers, we'll be able to achieve both. Rightly, there are bright points in your cost structure where you start thinking about more centralized. The only cautionary note I'd say is it's not hard to make up the math around centralized fulfillment centers. We're at a times, I think, is the qualitative thing is, it's around we have a store network that we really believe in. And most of those stores turn over $20 million. So they are material stores, and they generate good earnings. And we want to make sure that we keep them relevant. And so that's probably why you haven't seen a lot of new stores over the last couple of years, be that The Good Guys or JB because we are thinking about that store footprint of 200 for JB and 100-odd for the Good Guys is really powerful. Yes, there are some stores we're looking at, but we're not rolling them out like the 20s we were a decade ago. So really feel comfortable that the store network is sustainable. Absolutely see opportunity to go faster in online, and there's a big focus around our supply chain and logistics. But as we've always said, it's just continuous improvement rather than sort of dramatic big leaps of either CapEx or sort of big changes in strategy. We will -- I have no doubt, over the next couple of years, find opportunities to do some centralized fulfillment and understand what that opportunity is. But you've seen many over -- and you know we do a lot of work with our overseas peers. So many of our overseas peers are moving back to store-based fulfillment because they found these big DCs are expensive to run. And as I said earlier, when you're only picking 1 or 2 products, the cost to serve -- the cost of us getting out of our warehouse versus -- sorry, the cost to serve on a delivery sort of versus an in-store customer transaction is remarkably similar. The harsh reality is when customers come in store, we sell them more and they buy more. Now I think that's because, fundamentally, an in-store customer is having a more engaged journey. So maybe I say you're coming in, you're thinking about, I want a TV, I want to -- I'm thinking about it being put on the wall. I want to get a surround sound system, et cetera, what's all the cables and brackets, et cetera. And so you end up with a more solution sell. There's another sale where you go, I just need a new watch band for my Fitbit or Apple Watch. I'm just -- JB has got great delivery. It arrives next day. Delivery cost is reasonable. And so I just think its customers have different shopping journeys at different times, and we need to make sure every time they engage with us, we deliver.

Yes. Absolutely. And I guess the second part of this question is around the small format strategy. You sort of started talking about, I think it was just pre-COVID. You rolled out, I think, one, in your head office in Melbourne. How are you thinking about that? Is that just on hold given CBDs and everything else at the moment? Or is that something you're still looking to explore down the track?

Yes, well, I think Nick and I are the only ones in the office today. So there's not a lot of traffic for that store downstairs just at the moment. We did reopen it last Wednesday. So we've opened for 2 days. That was a lot of trouble. So look, the store be at the -- we had -- we thought about around different locations around CBD, transport locations or airport stores. Obviously, it's a bit rough of us to complain, given how well things are going. But if you're in the airport, airline industry at the moment, it's pretty tough. So we've worked really well with the airports that we've worked with and the other partners we have in those spaces to make sure things -- we're able to operate the stores on -- given the reduced traffic. So we're comfortable with that. But as to smaller store formats, we've always -- we always want to test and learn and understand, can we get stores with lower turnover to work on a different -- a slightly different model. So we obviously -- we do not want a scenario where we've got a store with 2 staff. And customers come in and don't get the right service. So we've always believed that we need to set an amount of scale to make it work. South Bank, actually, was going reasonably well, subject to -- it's -- obviously, the lack of traffic in CBD locations at the moment. So certainly, but it's as much of our testing and learning and then identifying where we can just build out the store network because, for example, obviously, smaller stores traditionally suited telco sales, where as you know, you -- obviously, in a small format store, don't do as well with visual. But over the last couple of years, visual has been flying. So we need to -- we don't want to end up in a situation where customers come in don't -- sorry, my main consumer, small-format stores is customers come in and they don't get what they want. Obviously, the way we solve for that is online and saying, okay, well, it's not at this store, but we can deliver it to you. But yes, there's a lot of people in our space that just want to Click & Collect. Or come in store, and we want to make sure that we don't find where they come in and go, actually, it's not here, we'll send it to you because that's where -- our products are very here and now and very impulse driven, and I think there's a lot of gratification from that purchase. And we want to lean into that.

Excellent. And just my final question, actually, a bit of a segue from your previous comment is around the communications category. It's obviously been a real winner for you guys of late. Can you just talk about some of the structural change that happened in that category between your relationship with Telstra evolving the OEMs and how the unbundling has sort of impacted that? Because I think that's been quite a meaningful driver of growth for you guys over the last year or 2. Can you just give us a bit more color around how you're managing that category? And what potential you see ahead there?

Acknowledging 3 questions was probably OTT, but given how important telco is, I'll go with it just probably to keep it in check. Okay, so telco, look, we've got an amazing relationship with Telstra. They're the #1 player in the market. Obviously, JB is an acquisition tool for Telstra to grow its market share and maintain its market share, and we really feel that we have a very strong relationship. I look at the plans over the next few months, and I'm really excited by that. We also obviously have -- traditionally people go into a telco retailer thinking about their contract and then buy a phone. The JB model is us being the largest unit seller of mobile phones in the country and then people often then -- when they're talking to us about that new handset connected to a Telstra plan, which is a great outcome. And that that's a key part of our telco model. So very comfortable with how -- and you're right. Telco has been a winner for us. We're pleased with how the rollout of The Good Guys has gone. So we did wonder how we could continue with the JB strong numbers and with Good Guys, we've just seen, and I know Telstra's pleased with the continued strength across the JB brand and the Good Guys brand, which obviously reinforces in our mind that Good Guys are catering to a different customer. So really pleased where we're going with telco. We obviously have some unique advantages in the sense of just the sheer number of handsets we sell. And that obviously means that the supply -- our supply partners work very hard with us to create value for customers. And we -- as we've always said before, couple that with an agile promotional plan, great in-store execution. We kick a lot of goals in that space.

Your next question comes from Ben Gilbert from Jarden.

Rich and Nick. Just the first one for me, just interested around discounting and what you saw there in the first half and then particularly towards the back end. So it looks like an inflation on the CPR, sort of 4.5-odd percent and just how you're thinking about category deflation looking forward, particularly some of the lower Aussie dollar starts to be cycled through this year as well?

Okay. Maybe I'll cover off the lower Aussie dollar over strong Aussie dollar. So it's always a challenge to see how -- you see the exchange rate playing more out in home appliances traditionally than in consumer electronics. Secondly, suppliers obviously have different hedging policies. So sometimes, that evidences itself in different ways. And some suppliers are not that phased about the Australian U.S. dollar and are more interested in the value of the Korean won. So there's always a lot of moving parts in the exchange rate. There is no doubt at times when the dollar's weaker and that's harder for our suppliers, maybe price deflation slows. And sometimes when the dollar is stronger, it drives price deflation. There's no doubt, Ben, if you didn't sort of flow that into an outlook on gross margins. One, I probably don't love this question at the best of times anyway, so -- but I'll give it a bill. There are so many inputs into gross margin, how we are executing in the market, discounting or the competitive marketplace. The reality is customers have been, as I keep saying, and it's not -- it's just -- it's a fact, customers want to come in store, pick up their products and get out. And that's exactly how customers have continued to think about the world for the last -- it's only grown over the last 12 months. So obviously, on 1 hand, we don't love that because we believe in a model where customers browse and have a longer in-store experience, and we then work with them to deliver a solution sell. The reality is in the market we operate in at the moment, customers are very mission driven. And so therefore, they're not having long conversations with salespeople. Their team's great. I've got that product, I'm in and out. And so we obviously mirror our customers' shopping behaviors because we need to get them in and out as efficiently as possible. And so that does, at times, help your gross margins because the customer engagement might be shorter and more efficient.

That's helpful. And just a second 1 for me. So just interested -- I appreciate all the comments you guys have made on supply chain, but just interested on your vision on CRM and not necessarily talking about an explicit JB Good Guys loyalty system. But to your point around potential risk looking forward the traffic through site centers and how reliable JB's has been. When do you think you need to start actually mining the data you're collecting and understanding the shop behaviors and communicating a little bit more directly and targeted with your customer base? And is that a costly exercise? Or is that something else that can be absorbed in your CBD, I'm assuming that you talk to a supply chain.

Yes, comfortable it can be absorbed in our cost to doing business. We are mining the data. We probably just don't share a lot of what we're doing. Where post the Shopify rollout. There's a bunch of initiatives on the website. We're running multiple vendors, providing us with different intellect into customer journeys and attachments. I feel we've achieved some great results online, but there are -- like everything we do, it's just constant improvement. So comfortable we can achieve it in the cost of doing business. I think there's lots of exciting things. We'll probably update you more when we go to a particular conference in May and talk through some of those things we've seen over the journey of COVID.

Your next question comes from Shaun Cousins from JPMorgan.

Richard and Nick. Maybe just on Online, can you just talk -- did Online drag on EBIT margins in the first half '21? Or was the scale such that you actually enjoyed an EBIT margin neutral outcome from your online sales relative to store sales, please?