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

Thank you. Thanks for joining us this morning to discuss JB Hi-Fi full year results. And as always, thanks for your interest in the business. We'll talk through the presentation and then allow time for questions at the end. I'll now start by turning to Slide 4, titled the group CEO transition. So on Slide 4, as previously announced, Richard Murray is to leave JB Hi-Fi for a new role. I'll be taking over as group CEO. Nick, Nick Wells, the Group CFO, will join the Board as Executive Director. And we made an internal appointment of Biag Capasso taking over for myself as Managing Director of the Good Guys. To replace Biag, we have made an external appointment of Tania Garonzi as our merchandise director of the Good Guys. Tania is a great hire for the business, and she join us from HiSense Australia where she was General Manager for 15 years. Tania's start date is yet to be finalized. All transitions have progressed well, and I'm formally to commence as Group CEO at the end of August. Now on to Slide 6, our group model. I'm sure many of you have seen this slide before, but it's important because it highlights the group model and how it supports our 2 leading brands. Our two brands have both distinctive brand personalities and distinctive core product leadership positions. The group appeals to a wide but brand-differentiated customer base, to which both businesses provide a common value proposition of big brands at low prices, our customer-centric approach which is underpinned by passionate and knowledgeable sales staff delivering exceptional customer service. And we achieved this through a multichannel strategy, be it in store, online or over the phone. This multichannel strategy has been an absolute key to our current and ongoing success. All of this is supported through our combined group functions here at the support office and is underpinned by our 5 competitive or 5 key competitive advantages, which I will touch on, on Slide 7. We've talked about it before. However, our 5 key competitive advantages are scale, low-cost operating model, quality store locations, supply partnerships and multichannel capability. With scale, we have the #1 position in the market and are globally relevant to suppliers. Our low-cost operating model, this is a constant focus and is a key to ensuring we deliver price promise to our customers. Quality and diversified store locations, this ensures we provide ultimate convenience for and maximum reach of our customers. Solid supply partnerships. This assists us in leveraging our scale. And the fifth is our multichannel capability. Our strategy has always been to give customers the ultimate the choice on how they wish to deal with us, whether that's in store, online or over the phone. We continue to invest across all these channels to ensure we provide a smooth and engaging experience regardless of the customers' preferred way to shop. However, key to this multichannel competitive advantage is our store network that provides customers physical access to products, especially those high-involvement products, which are generally not transacted online and of course, access to a knowledgeable sales staff. The store network gives us the ability to achieve fast online fulfillment times, Click & Collect and the security of a physical store presence should after-sales support be needed for both in-store and online purchases. We also have a strong and growing Commercial business to support that sector of the market. Over to Slide 8. We remain focused on generating long-term sustainable growth for the business. Our sustainability policy outlines our commitment to having a positive effect on our people, community and environment. Some of key FY '21 achievements are our people and culture. We prioritized the safety of team members through COVID-19. We rolled out an updated equal opportunity and workplace behavior policy to all team members. And we launched a set of diversity and inclusion initiatives to continue to improve diversity and leadership. For our communities, FY '21 workplace giving donations totaled $3.7 million and $21.8 million since inception, with JB Holding Hands program winning Workplace Giving Australia's 2020 Best Overall Program and Best Innovation Award. We completed our modern slavery statement, which outlines the actions that we are taking to address the risk of modern slavery to our business and supply chain and continue to work with suppliers on embedding our ethical sourcing policies. And with the environment, the group is committed to net zero direct carbon emissions by 2030 and recently installed our first solar power generation at a JB Hi-Fi Chadstone Homemaker Center store. We continue to explore waste reduction, reuse and recycling initiatives led by the group's operational waste and recycling working group. And we're getting continuous improvements in sustainable packaging. Our FY '21 sustainability report can be found on our investor website. Turning to Page 9. We'll talk through these in more detail as we move through the presentation. But again, it's pleasing to see the -- pleasing to see the results in what has been, and I must say, continues to be an extraordinary period. Our continued focus on our customer along with the strength of our multichannel offer, be it in store, online or over the phone, and importantly, the incredible efforts of over 13,000 team members have enabled us to meet the customers' increased demand and achieve these solid results. Over to Page 10. Again I'll take this slide as read and we'll discuss it in greater detail as we move through the presentation. But again, pleasing to see sales and earnings growth across all divisions in FY '21. Over to Page 11, group highlights. The group's financial highlights. Sales, up 12.6% to $8.9 billion. We saw exceptional growth online with sales up 78.1% to $1.1 billion, representing 11.9% of total Sales. EBIT was up 53.8% to $743.2 (sic) [ $743.1 ] million. We had strong operating leverage from elevated sales, gross margin expansion and disciplined cost control. NPAT up 67.4% to $506.1 million. EPS up 67.5% to 440.8 cents per share. Our final dividend per share is up 17.0 cents per share or 18.9% to 107.0 cents per share, bringing in for FY '21 to 287.0 cents per share, up 98.0 cents per share or 51.9%. The group's operational achievements. The health, safety and well-being of our team members, customers and business partners remain the group's highest priority, especially during the period. We continue to respond and adapt to the challenges resulting from COVID-19 with a well-executed promotional program and a high level of customer service maintained across stores, online and supply chain. Key internal appointment of Biag Capasso to Managing Director of the Good Guys. We saw continued investment in online and supply chain operations, including upgrades for the website and expanded delivery and warehousing options. We continue to invest in our sustainability initiatives, including committing to net zero direct carbon emissions by 2030. We also expanded our continued expansion and investment in our group commercial business' products and service operations. Over to Page 13, and I'll turn to the divisional performance, starting with JB Hi-Fi Australia. Again, I'll take this slide as read as we're covering growth in detail as we move through. So over to 14, JB Hi-Fi Australia FY '21 sales. Total sales grew by 12% to $5.96 billion with comparable sales up 13%. Sales momentum was strong through the year with heightened customer demand for consumer electronics and home appliance products. Our home -- our hardware and services sales were up 11 -- sorry, 14.1% with comparables up 15.1%, driven by Communications, Computers, Games Hardware, Visual and Small Appliance categories. Communications sales categories had a very strong result with both outright handset sales and connections with our offering continuing to resonate with customers. Computing had a very strong year with customers continuing to seek products for work and learning at home with MacBook and laptops performing well. Games Hardware performed very well and assisted by new console sales in the second half. Visual had a solid year despite some stock challenges. And we continue to see an increase in sales in larger panels as customers continue to move to 75-inch and above panels. Small Appliances had a solid year with growth in [indiscernible] packs, coffee and kitchen appliances. Software sales were down 14.5% with comparables down 14.2% as a result of the decline in movies and Games Software categories, but offset by growth in music. Software sales were 5.5% of total sales. Online grew 93% to $780 million or 13.1% of total sales. That's excluding Victorian with the lockdown where stores were temporarily closed the first half of '21. Online sales represented 11.1% of total sales. The ongoing investment in this area ensures we're able to meet increasing customer demands. The Commercial business recorded solid sales growth as we continue to grow product and service offerings. On to Page 15 and JB Hi-Fi earning results. FY '21 gross profit increased by 13.4% to $1.33 billion, with gross margin up 27 basis points to 22.2%, driven by a combination of lower discounting and continued buying improvements. Cost of term business was 11.2%, down 91 basis points. Cost of doing business in absolute terms grew 3.6%. As a reminder, sales were up 12% with disciplined cost control throughout the year. Depreciation grew by 1.1% (sic) [ 1.0% } with increase depreciation of right-of-use assets and fixed assets. EBIT was up 33.6% to $523 million with EBIT margin 142 basis points to 8.8%. Over the page to New Zealand. Again, as with Australia I'll take most of this as read. However, just to note the last 2 lines, which show JB Hi-Fi New Zealand underlying EBIT excluding our noncash impairment charges for both FY '20 and 21. We will touch on those as we move through. Over the page to Page 17. FY '21 total sales in New Zealand were up 17.4% to NZD 261.6 million with comparable sales up the same. Hardware and services sales were up 18.3%, again comparables up the same This was driven by Computers, Visual, Communications, Games Hardware and Small Appliance categories. Software sales were up 7.4% with comparable sales again up the same with decline in movie category, offset by growth in music and Game Software. Software sales represented 7.1% of total sales. Online sales grew 35.6% to NZD 27.6 million or 10.6% of total sales. Turn over to Page 18, earnings. FY '21 earnings, the New Zealand gross margins were up 129 basis points to 17.8%. Cost of doing business was 13.1%, down 109 basis points, and in absolute terms grew 8.4%. Again, reminder sales were up 17.4% with store wages remaining well controlled. EBITDA was NZD 12.3 million, up 137.5%, driven by sales growth, margin expansion and cost control. Statutory EBIT from New Zealand was $5.8 million, up $28.1 million from a loss of $22.3 million in FY '21. However, underlying EBIT, excluding the impact of impairments in the current and prior period result in New Zealand having $6 million in earnings, up NZD 7.2 million on FY '20. Looking forward, we've got our focus areas for both JB Australia and New Zealand. With COVID, continue to prioritize the safety of our team members and customers through COVID-19 and continue to adapt and respond to our customers' changing needs. With sales, continue to focus on sales across all channels, be it in store, online, phone or commercial and focus on growing top line and gross margin dollars. With stores, we'll continue investment in and optimization of the store network to maximize profitability. And we'll continue to try alternative store formats to increase market penetration. With e-commerce, we'll continue to leverage our new e-commerce platform and continue to build on this capability. We'll continue to meet changing customer needs through our online offer, including expansion of payment options with buy now pay later, and continue to integrate our in-store and online experiences. Category evolution, continued expansion of Communications, Rideables, Small Appliances and Pop Culture. Optimize category space allocations to maximize productivity of floor space. Supplier partnerships, build on our partnerships with major suppliers to extend our capabilities. With New Zealand specifically, we'll continue to execute on the strategy to improve performance in New Zealand. With services, we'll expand and extend our service offerings, continuing to enhance and develop in-store experience. And with productivity, simplify processes and drive productivity with a focus on improved stock flow into the back -- into store or back of house operations. Over on Page 21, the Good Guys. Again, with JB, I'll take the slide as read and we'll cover it in greater detail as we move through. And so over to Page 22. The Good Guys FY '21 sales, our total sales grew by 13.7% to $2.72 billion with comparable sales up 13.7% or the same. Sales momentum was strong throughout the year with higher customer demand for home appliances and consumer electronic products. We saw growth in Refrigeration with strong unit across Refrigeration and freezer sales alike. Laundry, with solid growth in larger capacity washers and heat pump dryers. Floorcare with significant growth across stick and robot vacuums as we continue to expand our offer across this category. Portable or Small Appliances had strong unit sales growth, seen across coffee machines, cooking and food preparation. Televisions, we saw growth with solid unit sales across all sizes. Online sales were up 48.5% to $258.3 million or 9.5% of total sales if you exclude the Victorian sales during the period when they were temporarily closed. Online sales represented 8.4% of sales. Our online and fulfillment system performed extremely well with the significant sales volume increases. Over to Page 23, the earnings. Gross profit was $608.6 million with gross profit margin up 189 basis points to 22.4%, driven by combined lower discounting, product mix and continued improvements. Cost of doing business was 11.7%, down 100 basis points, and in absolute terms grew 4.7%. Again, sales were up 13.7% as store wages remained well controlled throughout the year. Depreciation grew by 3.3%, with an increase in both depreciation on right-of-use assets and fixed assets. We saw strong operating leverage from the elevated sales growth, gross margin expansion and disciplined cost control for a stong EBIT growth, up 90.2% to $214.7 million and EBIT margin was up 318 basis points to 7.9%. Now turning to the Good Guys. Key focus, as with JB COVID-19. We continue to prioritize the safety of our team members and customers through COVID-19. We continue to adapt and respond to sort of our customers changing needs. With sales, continue our multichannel strategy to drive sales across all channels, be it in-store, online, phone or commercial. With stores, continue the store upgrade program to focus on adjacencies, supporting growth categories and showcasing the home appliances categories. With e-commerce, we want to leverage capabilities to further connect the online and in-store experience. And we continue to meet changing customers' needs for our online offer, including the expansion of payment options with the buy now pay later. Category evolution, continue to establish leading position in the growing connected home appliances market, continued expansion of telco products and services in partnership with Telstra. With supplier relations, we continue to build on our supplier relations and continue to enhance and involve our offer with improving range and the introduction of new brands, especially to increase our relevance in the premium product area. Delivery experience, utilize group supply chain capability to provide customers an enhanced delivery experience. And with productivity, the rollout of technology to streamline in-store processes, focus on inventory efficiencies -- right product, right time and right place. I'll now hand over to Nick to talk through the balance sheet and cash flow.

Thanks, Terry. Starting on Slide 26, the balance sheet and inventory. Inventory finished at $938.8 million, up $199.5 million as inventory availability continued to improve from the low hit by '20 inventory position resulting from COVID-19-related supply shortages we that called out last year. We've included the 5-year inventory growth there, which really highlights that low closing stock position last year and the reversion to closer to normal levels this year. I will call out, we do manage stock to sales. And even with that improvement in availability, inventory supply is still tight, which you can see when you compare the closing inventory balance of $939 million in FY '21 versus the $887 million in FY '19, which is only up 6% when sales across that period are up more than 25%. That's what's driving the increased inventory turnover, which was up 61 basis points to 8.3x from 7.7x in FY '20 and more significantly, up 200 basis points from 6.3x in FY '19. Payables, which would ordinarily grow in line with inventory, were down year-on-year as inventory was purchased earlier to replenish inventories and to ensure we secured stock to support the continued client and customer demand. Receivables were down year-on-year as we continue to actively manage the outstanding receivables. And other current liabilities increased primarily due to income tax payables arising from the elevated profit in the period. Turning to Slide 27, highlights on the cash flow statement. Operating cash flows and operating cash conversion were impacted by the increases to working capital required to replenish those inventory levels from the low FY '20 closing position that remained very strong over 2 years with a combined FY '20 and FY '21 cash conversion well over 100%. CapEx remains in line with our expectations as we continue to invest in our store portfolio, our online offerings and strategic initiatives. FY '20 CapEx again was low as a result of COVID restrictions impacting our ability to complete some projects. FY '21 CapEx has returned to a more normal level. The dividend paid through the year include the final dividend of FY '20 and the FY '21 interim dividend with both increased significantly year-on-year following strong increases in net profit in those periods. The final dividend for the second half of FY '21, which is obviously elevated, is yet to be paid. We have a closing net cash of $263.2 million net. On Slide 28, capital management. We've today declared a final dividend of 107 cents per share fully franked, up 17 cents per share or 18.9% on the FY '20 final dividend, bringing the total dividend for FY '21 to 287 cents per share, up 98 cents per share or 51.9% and representing 65% of NPAT. The Board will continue to regularly review the company's capital structure with a focus on maximizing returns to shareholders and maintaining balance sheet strength and flexibility, which we continue to consider very important in what remains an uncertain period. The record date for the final dividend is the 27th of August with payments to be made on the then 10th of September. I'll hand back to Terry.

Thanks, Nick. We'll move to now to Slide or Page 30 and the outlook. Slide 30, FY '22 year-to-date sales update for the period 1st of July to the 15th of August as we cycle the extremely elevated sales from the previous period. JB Hi-Fi Australia total sales was down 14.6% with comparables down 14.9%, but over 2 years -- but over the 2 years, I should say, total sales were up 19.1% with comps up 19.4%. New Zealand, total and comp sales were up 8.4% and up 14.8% over 2 years. The Good Guys total were down 8.1% with comps down 8.6%. Over 2 years, total sales were up 28.9% and comps up 28.2%. Whilst we have experienced some disruption and variability of sales as a result of the various state-based COVID restrictions, we have continued to see a heightened customer demand and strong sales growth rate over the 2-year period. In view of the ongoing uncertainty arising with COVID-19, we do not currently consider it appropriate to provide FY '22 sales or earnings guidance. We'll now turn to our final slide on 32. So in closing out the presentation, we'll talk about the investment checklist, which I'm sure many of you know, so I won't cover in any great detail. However, a few comments. Both brands work hard to maintain their market leadership. For JB, technology and consumer electronics is at its core and front-of-mind purchase for consumers. For the Good Guys, they have a market leadership position in home appliance categories, but also cater to family consumer electronic needs. As a group, we work hard every day to maintain our position as the #1 destination for technology, consumer electronics and home appliances. Our long-term and ongoing focus on our multichannel capabilities has definitely served us well over this extraordinarily disruptive period for customers. The combined power of our physical locations, the well-integrated online offering, strong sales and a Commercial team ensuring -- all ensure we remain connected and ready to assist shoppers however they wish for and they need to deal with us. We are focused on maintaining a resilient and highly relevant retail model. Also having a business that is a desired place to work for our team members and ensuring we continue to attract high quality staff into the future. We will continue to deliver our commitment to our customers of the big brands at low while continuing to invest for the future and ensuring we do so in a sustainable and ethical way. Thank you, and we'll now go to questions.

Your first question comes from Michael Simotas with Jeffries.

Terry, the first one for me, just on your recent trading in July and August. It seems like a very good outcome that you've effectively maintained your 2-year growth rates in JB Hi-Fi Australia and the Good Guys, notwithstanding the COVID restrictions and closures. Is there any more color you can give us on variability across states and whether the store closures were actually a drag or whether there are offsets looking in other places?

Look, you're right. I mean we're cycling the significant volumes. And just a bit of color around the store closures, at any one -- at any single point in time during that period, we had sort of 30% of our stores closed. And as of today, it's about 55% of our stores closed. Compare that to about 5% this time last year. What you definitely do see though with store closures that it doesn't have an impact on the sales. But I think, I think they're still closed. What it really does demonstrate the strength of the model and how the customers seem to seamlessly switch to our online platform. But when the stores reopen, they flight back. So we are seeing some impact from states such as New South Wales and Victoria. However, what you tend to see, just as a bit of color around that, what you tend to see is those high-involvement purchases, things such as cooking, higher ASP products that tend to -- I'd say get delayed more than you lose. And then when the stores reopen, you tend to pick a lot of those back up again.

Okay. That makes sense. And in New South Wales, a couple of your competitors are still trading, at least to some extent, in-store, Officeworks and Harvey Norman. Do you think that's had much of an impact on you?

Well, generally Officeworks. They always appear on the essentials list, although we sell some of the similar products. Look, Harvey Norman is now closed in New South Wales. They did remain open for a period where we chose not to but we thought it was in the spirit of the right thing to do to close. But no doubt, I mean, you just have to accept that some sales will bleed off into those retailers that are still open. However, as you can see from the results, it's not significant.

Yes, I agree. All right. And then second question from me. Your occupancy expenses, just on the face of the P&L, fell by about $20 million in FY '21. And that implies they were down about 10% in the second half. Can you just talk us through what happened there? Is there something funny with AASB 16 coming through? Or is there another issue?

So there's some occupancy savings [ which lowered the price ] so that's [indiscernible] and then the impairments [ model ] of the New Zealand right-of-use assets and fixed assets last year, some of that is going through in occupancy.

Yes. Okay. And it seems like more of it's come through in the second half than the first half where I would have thought store closures were more of a driver in the first half and that New Zealand issue should have been about even across the halves?

No. The impairment in New Zealand last year is significant, like it's at $20 million, $21 million [ margin ] the second half last year.

Yes. It fell by more in the second half than it did in the first half is what I'm saying. So I would have thought the impact of that would be about the same in the 2 halves of FY '21. We can take it off-line if you like, but I'm just trying to understand the movement.

Yes. Look, there's nothing -- the 2 -- we haven't sought any material rent reductions from landlords. We continued to trade well through the period and pay our landlords in full. It's obviously a little bit strained, that occupancy spend, right now but rent doesn't go through there, it goes through the right-of-use asset depreciation and the interest. So the 2 material on an ongoing basis, the energy consumption and the security cost, and yes, we continue to manage those pretty closely.

Your next question comes from Shaun Cousins with UBS.

Just a question around the inventory rebuild. Can you just talk -- do you think you're still at the risk of losing sales given tight inventory? Or do you remain in this quite positive environment, which is sort of tight supply that supports gross margins but no real loss of sales?

Yes, definitely, we're fairly more comfortable with our stock levels, albeit they're not exactly where we would like them to be. And given that, that stock level is probably elevated around the market, we are seeing discounting return to the market, so we expect that, that would have a slight impact on sales -- sorry, on margin going forward. We have still seen, though, that we definitely, in the early parts here, that we've still stock shortages in some key categories for JB -- that's categories like computing. We've seen some significant stock shortages from Apple, from Microsoft, from HP, which tend to be the premium products. We're seeing shortages come through telco again from Apple and Samsung being very short on stock. And with the -- for both brands in Small Appliances being just a bit tight on stock. Now we're lucky we've got multiple suppliers so some of those sales, we can move across to other suppliers. But in the case of the computers, et cetera, it's a little bit hard when it's a premium product. So it is having -- still having an impact.

Okay. And maybe just a little bit around capital management. I recognize the buyback, I think [ 2011 ] wasn't the best experience and the environment remains uncertain. I'm just -- but I was curious, given you're in a very strong net cash position, elevated franking and fairly sort of modest CapEx outlook, I mean, what are the factors holding back some form of capital management, particularly even just a slight increase in the dividend payout ratio, please?

I think, maybe take a macro view for a start, so Terry called it out when he was talking about trading in the recent period. We've got 55% of our stores are closed today. So I would say we are in a pretty uncertain period. In that uncertain period, having a strong balance sheet is absolutely a priority. And then if you get into just some of the detail around those movements in working capital year-on-year, there's still -- if you look at -- I think it's Slide 27, you'll see there's still a bit of a working capital build to come back in to the business in the next 12 months. A bit tax bill still to pay. I think we do have a pretty material dividend to pay. I think you could calculate that out, it's [ $120 million in the final demand ]. So there's -- that's still a number of significant cash outflows to come out which will obviously eat into that cash balance that we have today. And so we're keen just to preserve the strength of the balance sheet, have that flexibility to give us optionality if we need to and to make the most of any opportunities that arrive over the next 12 months, whether that even is just looking for opportunities to secure ourself, we may do all right. So it's that balance sheet strength and flexibility that we just want to make sure we maintain over the short term. Obviously, we'll continue to monitor it and reassess it every reporting period.

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

Terry, it's relevant to you, coming from the Good Guys, but I never thought I'd see the day where gross margin for the Good Guys would exceed that of JB Australia, which is an astoundingly great result. I'm trying to work out, though, obviously, the sustainability of that gross margin. And I suppose my question is, you've highlighted that it's -- I think you're talking more about what you -- what was the actual phrase for it, I think you said basically improvement in key categories. I'm wondering if you're selling yourself a bit short there. Is it benefiting premiumization of products? Is it scale coming through? I know promotional activities are led by suppliers. But can you give us a little bit more color on what's driving that improved gross margin in the Good Guys? And then obviously working out whether or how sustainable it will be going into the future.

Yes. Look, if you think of the Good Guys and what we were seeing during the year was obviously some strengthening or mix playing a part. So the strength coming from the HA components of the business, which is higher margin, albeit we continue to grow our [indiscernible] offer. It was just that we were seeing a lot of strength in the HA. Definitely, less discounting was going on during that period. Stock was tight, consumers weren't shopping around, they were coming in and it's not just -- and it's not -- that's not just because of discounting on pause, that's just because we don't need to have as many promotions running at that time. One, you just don't have stock to promote. So there's less actual promotion going on in pricing and as I mentioned, that lack of shopping around. I think the benefit going forward is going to be that we'll continue to see mix play a positive impact but that discounting will return, and it is returning. We have no doubt that, it will continue to return. I think one thing that I will say, look, on the on that positive side of mix returning, there is also fact that we've now set this new watermark in the business. And [indiscernible] is just great and is taking that and absolutely striving to maintain that level. So they work hard with suppliers to try and find support and deals to be able to maintain it. They look at their own mix within their categories to maintain it. So it really drives actions and more actions within the buyers. So look, you've got to suspect it's going to be hard to maintain with the discounting but there is some good emphasis there on trying and getting us close to it. One thing we are confident on, it will be at a higher level than we would have anticipated it would have been a few years ago.

So somewhere in between. So you're seeing a little bit of discounting coming back, but you've still got measures going forward, such as premiumization still coming in, also driving working harder with key suppliers. And also scale, you haven't mentioned. We should expect it to remain high, but not at these levels. Is that what you're saying? I'm not trying to put words into your mouth. Is that what you're saying?

We don't give you guidance, David. There's a lot of maybe, but it does yes, to Terry's point, it does feel -- there's some benefit to the environment in there. But absolutely, in Good Guys, I think you see some of the benefits of that improved buying, improved merchandising, improved ranging in there as well.

Yes. Okay. And Nick, while you're there, perfect, question on you. Just taking a bit more understanding on the working capital. There's a lot of moving parts there. But going into '22, did you mention that you've still got a working capital build to go? Or with these payables, I expect that you'd probably get a bit of release into '22. Where are you actually right now with regard to your working capital cycle? So are we expecting a working capital release a little bit in this current year? Or are we expecting still a little bit of a build?

It's still a build into '22. If you look at Slide 27, you'll see there's the cash flow right there. In FY '20, we had a $400 million ratio of working capital. In FY '21, that swung back by $241 million. So it's still a net $160 million release there. I'd say the bulk of it, inventory has got back to a level which we're probably reasonably comfortable with even though our preference would be to have that stock up and closer back to where it was. The payables is the one -- because the stock is turning so quickly, the payables balance is elevated. So at some point, David, that payables balance, so it comes down to a more consistent percentage of inventory as it was back in FY '19.

Your next question comes from Ross Curran with Macquarie.

Congratulations on great results. Two questions this morning. One short term, just kind of goes back to Michael's question at the start. Do you think you might be able to give us some color on the trading space that we're seeing at the moment and how say WA is traveling relative to New South Wales?

Yes. Look, absolutely, it shows you sort of rank them in states with that in numbers. WA will be the strongest. You then hit sort of Queensland, South Australia, and then you start to hit the states that have been more materially impacted by restrictions. So sort of, as Terry called out earlier, I think we are doing a good job of capturing those sales online when the stores are closed, but you do absolutely lose a little bit, and you can see that in the state-by-state breakdown at the moment.

Okay. And then secondly, sort of just a longer-term question. Clearly, COVID changed consumer behavior with less travel spend finding its way into elevated consumer durable spending. Terry, presumably over your tenure as CEO, these COVID restrictions you're dealing with at the moment start to ease and customer behavior normalizes. Do you think it's possible for the business to hold margins if we go back to a sort of pre-COVID $7 billion sort of sales figure?

Well, I think we've pointed out that there is just going to be some challenges holding margin with cycle, to your point, an unusual time. So as we revert back to normal, let's call it normal, maybe COVID normal, whatever it may be, it absolutely becomes more challenging to maintain those margins.

Your next question comes from Grant Saligari with Credit Suisse.

Terry, Nick, could you elaborate on the game plan in New Zealand? You sort of exist there, but it's a market where you really should do a lot better. And you've noted that in the past yourselves. What's the game plan there over the next several years?

To be fair, I haven't got my feet permanently under the desk yet. So to try and give you a game plan, obviously, we remain focused on improving that business and continuing to grow it. And we've seen some reasonable results starting to appear in the sense of growth. So look, I need a bit more time to really get my head around what that future could look like.

I look forward to hearing your answer to that. On the balance sheet, you indicated earlier that there's a number of uses for cash. Are you thinking that the balance sheet could be used beyond that for growth opportunities? How should -- just how should we think about the availability of investment opportunities for JB at the moment, and therefore, how the balance sheet could be used over the next year or 2 beyond COVID?

I think as you know, we're always looking for growth opportunities. And we'll continue to investigate opportunities as they arise, I should say. We point out that probably most people in our sector have had a pretty good period. And that may mean that opportunities might pop up in the short term, but we'll continue to assess and be ready in the event anything does.

I was interested you had called out Officeworks. I mean, is Commercial an area where you could be bigger, small business?

Yes. When you look at -- we've called out Commercial for a number of years, that we'll continue growing that business. We still think there's plenty of opportunity to grow and improve over there, particularly in categories like education.

Thank you. Our next question comes from Ben Gilbert with Jarden.

Just first one for me. Just on the promotional piece. Could you give us any insight into how your level of promotions, how materially it fell last year? Did you say you went from 50% on promotion to 20%? I'm just trying to get a bit of an idea around what sort of deflationary headwind that might mean into fiscal '22 if they come back. And also just trying to get a bit more of what that impact is to gross margin.

Promotionally, we maintained our promotional program out there. It's not so much around the promotional program. It's the price that's in that promotional program. And I appreciate that's what you're trying to understand. But yes, we're continuing to promote and promote heavily. We would -- again, we would find products where we could offer a great value to the consumer. However, the depth of that didn't have to be as great and the starting point didn't have to as great. There were a few periods there where definitely, we were limited in what we could promote, without question. However, that's -- more of them than not, we were able just to maintain our normal promotion

Do you think, Terry, that means because if you look at the CPI numbers and a bit around those issues with that in terms of how they comp and put it together, but it looks like we had inflation across a number of the [ C ] categories last year for the first time in 10-odd years. With promotions coming back, do you think that means we should move to a deflationary situation again through fiscal '22?