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

Thank you. Great. Thank you for joining us. And as always, thanks for the interest in the business. As normal, we will talk through the presentation, then allow time for questions. I'll now turn directly to Slide 4, the group model. And most of you'll be familiar with this slide, so just a few key call-outs. You know our 2 brands, JB Hi-Fi, The Good Guys, along with their different category leadership positions. Our channels to market, we have a diverse mix, including stores, online, commercial phone and live chat, all to ensure we can cater for the different customer shopping needs. Our target customer base for JB is generally younger, looking for the must-have latest tech. For The Good Guys, this target customer, while being homemaking families, is generally those looking to replace broken appliances. The [indiscernible] brand has shown to be very much less discretionary in nature. Our value proposition is even more relevant in today's environment. This proposition of great value and low prices has been earned over many years by our consistent and always-on promotional activity. The model is then underpinned by 4 key competitive advantages, which I'll detail in the coming slide. So over to Page 5 -- Slide 5. Again, you'll be familiar with our competitive advantages that's worth reinforcing. So with our scale, #1 in the Australian consumer electronics and home appliances market, a large, engaged and diversified customer base across the 2 brands provides suppliers with the ability to execute promotions and new product launches at scale. Younger customer base drives ongoing brand importance to suppliers to maximize the sales of new technology and innovation. Our high volume website traffic provides significant opportunities to engage with shoppers and provides additional sales opportunity. Our low cost, we have a constant focus on productivity and minimizing unnecessary expenditure. Highly productive floor space with higher sales per square meter and efficiency of the model allows us to respond to market price activity and remain focused on market share and compete effectively with traditional competitors and new market entrants. To multichannel, our multichannel capability focused on providing the customer with an integrated and frictional shopping experience regardless of their chosen sales channel. Customers can choose how they wish to shop with us, giving them the ultimate choice. Fast fulfillment, via in-store shopping, click and collect or delivery from our store network, including our on-demand delivery via Uber or a home delivery center. Confidence when buying the security of knowing after-sales support for any channel. And a national commercial business supporting corporate, government and education customers. Final competitive advantage there, people and our unique culture. Knowledgeable and passionate team members have put customers first and provide exceptional customer service. Dynamic and flexible environment allows us to pivot the business quickly and adapt to any changing market conditions, and highly engaged teams who have a connection with the business and a diverse and inclusive workforce. Over the page to Slide 6. We remain focused on generating long-term sustainable growth for the business and having a positive impact on our people, community and environment, and have today released our FY '23 sustainability report. Some of our FY '23 achievements are, with people: continued to improve the gender mix, gender diversity across the group with an increase in the number of women in leadership positions; expanded our Speak Up program by delivering interactive workshops to stores and support office people leaders to build a greater understanding of their roles in creating a safe, respectful and inclusive culture; and ongoing focus on safety, including mental health and wellbeing training programs. For our communities, FY '23 workplace giving donations totaling $3.9 million and $35.9 million since inception. The Good Guys, their Doing Good program received the best innovation award. And the JB Hi-Fi Helping Hands program, partnership with Sleepbus received the Silver award for the most innovative charity employer partnership. We engaged with an additional 107 suppliers regarding the impact of modern slavery on our supply chain. For our environment, a 9.6% decrease in Scopes 1 and 2 -- Scope 1 and 2 emissions, supported by the installation of solar panel generation, in 9 stores in FY '23, bringing the total number of stores to 24 as the group works towards net-zero direct carbon emissions by 2030. But a 12% decrease in plastic bag usage, with plastic bags to be phased out nationally and replaced with 100% recycled paper bags. Improved our recycling infrastructure across the store networks, including dedicated cardboard, paper, soft plastic recycling bins and expanded polystyrene recycling and introduced a customer trade-in offer to ensure old devices following refurbishment are given a second life. Now turning to Slide 7. We'll talk through this in more detail as we move through the presentation, but it's -- but we are pleased to report record sales and earnings per share growth for FY '23. In this challenging retail environment, we remain top of mind for shoppers and grew our market share by continuing to drive our value offering, leveraging the strength of our multichannel offer and maintaining our high levels of customer service. Turning to Slide 8 with the individual brand performance. Again, I'll take this as read, as we'll cover in greater detail as we move through the presentation. Now turning to the divisional performance, and starting with JB Hi-Fi Australia on Slide 10. I'll also take this summary slide as read, as we'll be covering in greater detail over -- in the coming slides. So turn to Slide 11. For JB Hi-Fi sales results. Total sales increased 5.6% to $6.55 billion, with comparable sales up 4.8%. As compared to pre-COVID FY '19, total sales were up 38.5%. Hardware and Services sales were up 5.8%, with comparables up 4.9%. The key growth categories were Communications, which was another very strong year, largely driven by the strong Apple iPhone 13 launch in the first half, with growth in both units and ASP. Audio, with growth across headphones and sound bars. Our airport stores are an important part, important to Audio growth, and the increase in passenger numbers across our airports assisted this category. Accessories had a solid year with growth across all major product groups. Games Hardware, we had strong growth, with good availability of next-gen consoles driving the results. And Services category, which was very pleasing, with a strong result in areas such as installation and telco services. It is a great category, and a good opportunity for us and one that will continue to grow into FY '24 and beyond. Software sales were up 2.4%, with comparables up 1.9%, driven by the growth in Game Software and Music category, which was partially offset by a decline in the Movies category. Software represented 4.5% of total sales. Online sales declined by 20.9% to $940 million or 14.4% of total sales as shoppers returned to stores. However, as compared to pre-COVID FY '19, online sales were up just over 264%. On to Slide 12 and the JB Hi-Fi earnings result. Gross profit increased by 6.7% to $1.48 billion, with gross profit margin up 23 basis points to 22.6%, driven by positive sales mix. Cost of doing business was 12.1%, up 68 basis points. However, cost of doing business percentage remains below pre-COVID FY '19. Depreciation increased by 1.8%, with an increase in depreciation in right-of-use assets, partially offset by a decline in depreciation on fixed assets. EBIT was up 1.3% to $551.9 million, with EBIT margin down 36 basis points to 8.4%. As compared to pre-COVID FY '19, EBIT remained strong. And now on to New Zealand on Slide 14. Again, as Australia, I'll take the summary slide as read, as that will be detailed in -- greater detail as we move through. On to Slide 15. JB Hi-Fi New Zealand FY '23 sales. Total sales increased by 11.3% to 200 at -- NZD 292.1 million, with comparable sales up the same. As compared to pre-COVID FY '19, total sales were up 23.6%. Hardware and Services sales were up 11%. The key growth categories were Communication, Audio, Games Hardware, Fitness and Accessories. Software sales were up 14.5%, and software representing 7.6% of total sales. Online sales declined by 25.7% to NZD 32.1 million or 11% of total sales. As compared to pre-COVID FY '19, online sales were up 141.9%. Turning to Slide 16, earnings [indiscernible] New Zealand. Gross profit increased by 2.4% to NZD 46.7 million, with gross margin down 140 basis points to 16%, driven by price competitiveness in key categories and a negative sales mix. Cost of doing business was 14.2%, up 142 basis points, but remained below pre-COVID FY '19. EBITDA was NZD 5.3 million, down 56.3%. EBIT was down 49.9% to NZD 4.4 million, with EBIT margin down 185 basis points to 1.5%. Underlying EBIT, excluding the impact of impairments in the current and prior year, was down NZD 6.9 million and down on pre-COVID FY '19 EBIT. Now turning to The Good Guys on Slide 18. Again, I'll take the slide as read, as we'll cover in greater detail as we move through. So over to Slide 19. For The Good Guys, total sales increased 0.8% to $2.81 billion, with comparable sales up the same. As compared to pre-COVID FY '19, total sales were up 31%. The key growth categories were: Refrigeration, with strong growth across both bottom-out, side-by-side and French door models; Laundry, with solid growth in large-capacity washers and heat pump dryers; Floorcare, with growth across stick vacs, robot and barrel vacuum cleaners; Personal Care, with strong growth in hair styling led by the premium brands; and Audio, with an increase in headphones, speakers and home theater systems. Online sales declined by 14.1% to just over $341 million or 12.1% of total sales. As compared to pre-COVID FY '19, online sales were up 160.5%. Over to Slide 20 with earnings. Gross profit was $658.4 million, with gross profit margin up 11 basis points to 23.4%, driven by a positive sales mix. Cost of doing business was 12.8%, up 104 basis points. Cost of doing business remained below pre-COVID FY '19, driven by continued disciplined cost control. Depreciation grew by 5%, with an increase in both depreciation on right-of-use assets and depreciation on fixed assets. EBIT was down 11.8% to $213 million, with EBIT margin down 108 basis points to 7.6%, however, remaining strong against pre-COVID FY '19 levels. I'll now hand over to Nick to talk through the balance sheet and cash flow.

Thanks, Terry. So starting on Slide 22, the balance sheet and inventory. As we have always done, we continue to manage inventory tightly and in line with sales. Inventory was $1.04 billion, down 8% or $94 million year-on-year. As compared to FY '19, inventory was up 17% versus sales growth of almost 36% over the same period. The result of inventory turnover was down 5 basis points to 6.8x, but up 58 basis points on FY '19. Payables moved largely in line with the movement in inventory, so they were down 8% or $61 million year-on-year. And as a result, as you can see in the bottom of that table, overall net working capital was largely consistent year-on-year. Turning to Slide 23 and highlights on the cash flow statement. Operating cash flows and operating cash conversion continues to be very strong. CapEx was circa $72 million, up 24.8% or $14 million year-on-year with investment in our store portfolio, online and strategic initiatives. And we closed with net cash of $127.5 million. On Slide 24, capital management. And today, we declared a final dividend of $1.15 per share fully franked, which is down $0.38 per share or 24.8% on the final dividend last year. As compared to FY '19, the final dividend is up $0.64 per share or 125.5%. The total dividend for FY '23 was $3.12 per share, down $0.04 per share or 1.3% on last year and representing 65% of NPAT. Again, as compared to FY '19, the total dividend was up $1.70 per share or almost 120%. The record date for the final dividend is the 25th of August, with payment to be made on the eighth of September. We do continue to maintain a strong balance sheet with closing net cash of $127.5 million at 30 June. The Board will continue to regularly review the Group's capital structure, with a focus on maximizing returns to shareholders and maintaining our balance sheet strength and flexibility. I'll hand back to Terry.

Thanks, Nick. Moving to Slide 26, the FY '24 trading update. July sales update for the period 1st of July to the 31st of July 2023. Total sales for JB Australia was negative 1.8%, with comparable sales growth of negative 2.9%. As compared to pre-COVID FY '19, total sales growth was 38.7%. Our total sales growth for JB New Zealand was up 10% with comparable growth the same. As compared to pre-COVID FY '19 total sale -- sales growth was 27.9%. Our total sales growth for The Good Guys was negative 12%, with comparables being the same. As compared to pre-COVID FY '19, total sales growth was 22%. July sales are in line with the Group's expectations cycling the elevated period from last year. While total sales continue to be well above pre-COVID July FY '19, we are seeing increased variability in the category performance. We'll now move on to a few slides just on the group focus area -- focus areas, starting on Slide 28. So firstly, our retail execution. Our retail execution continues to be vital, especially in these tougher trading environments. We need to ensure we continue to deliver our value or low-price proposition and capture those shoppers who may be trading down and seeking better value. We will focus on growing our market share by attracting new customers to the brand. To do this, we need to stay focused on the first one, delivering value to our customers. That's a constant focus for us. We need to -- we will continue to leverage our low price and discount heritage, which we are trusted for; utilize our scale and supplier relationships to continue to create best-in-market offers and promotions to ensure we can appeal to those customers looking for best value in low price; use our breadth of range, brands and price points to give customers a choice to trade up or down; leverage our unique, entertaining in-store experience with our knowledgeable team members who can educate and engage shoppers; and finally staying focused on constantly proving a great value to shoppers using our significant reach by our in-store, online, social media, press, or TV to constantly reinforce the value we can give to shoppers. The second part of the retail execution is to leverage the efficiency of the model. Retailers are facing cost pressures, and we have a culture of managing our costs tightly. We will look to continue to maximize our low-cost culture, with a focus on minimizing unnecessary expenditure while balancing the longer-term needs of the business. We'll leverage our scale and productivity to manage costs. Wage productivity will always be a focus. But again, we'll balance this with a longer-term needs to maintain our trusted service levels. Benefit from our diverse product categories, brands and store locations, with well-managed stock position with high stock turn and low weeks' cover. We constantly manage stock in line with sales and promotions to maintain efficiency of our stock in hand. Our flexible business model with the ability to respond quickly to changes in the consumer -- the customer environment. We have a track record of being able to flex when necessary, and this will be important over the coming financial year. Over the page to multichannel. On 29, expanding our reach and attract more shoppers to the brand. Again, as shoppers hunt for value, we need to ensure we are easy and convenient to access. We'll focus on in-store experience and engagement, with constant category and store layout evolution. Remaining relevant to shoppers by encouraging visitation to explore will drive future purchasing opportunities. We had 5 new JB Hi-Fi stores -- as JB Hi-Fi Australia stores opened in FY '23, with additional new store opportunities in Australia and New Zealand in FY '24. Our significant web traffic can be further leveraged to drive additional sales opportunity. We'll focus on improving customer conversion and online spend. Always evolving, we are always evolving our delivery options to provide a greater choice and convenience for shoppers. We launched the national launch of JB Hi-Fi Perks membership program for JB Hi-Fi Australia, with around 820,000 engaged customers joining the program since its launch in November 2022. The Good Guys continue to utilize the Gold Service Extras membership program, currently has -- which currently have 1.2 million active members and expand our reach and convenience to our customers. We'll continue to implement -- will implement, I should say, personalized promotional campaigns using our substantial customer membership data. We have added the addition of online chat, The Good Guys online Price Beat and utilized the JB TV and The Good Guys Facebook pages. Over the page, our third focus opportunity, which is New Zealand, will continue to grow and expand the business. We've refreshed our store network to deliver an improved in-store customer shopping experience and engagement. 7 existing store relays completed in FY '23, and the relocation of stores at Queen Street and Hamilton in early FY '24. Increased focus on the retail execution is delivering strong market share gains. Actively identifying potential new store opportunity to expand our reach. We're targeting 3 to 5 new stores per year over the next 3 years. We are also involving our multichannel offer the re-platforming of JB Hi-Fi New Zealand website to Shopify, I should say, in FY '24 and developing commercial sales channel. We've invested in key hires to strengthen the local capabilities and support the growth and continue to focus on learning and development for our team members. Over the page to 31, commercial. We've spoken about this in the past, but we continue to evolve the brand to align with our key market segments. JB Hi-Fi Business, JB Hi-Fi Education and The Good Guys Commercial. Targeting growth in small- to medium-sized business sectors, we offer a national proposition in a fragmented market. We're leveraging the Group's retail proposition of best brands, big range and low prices, as well as the Group's store network, supply chain and marketing capabilities. And augmenting by -- augmenting it by access to extended business ranges, value-added services and expert teams to support business and education providers. We'll continue to invest in our sales team, continued investment in e-commerce program, integrating legacy platforms and enabling self-service transactions. Expansion of our product range -- integration product range, integration with supply catalogs, improved stock availability and fast quotations. And fast online fulfillment, order tracking and integration with store click and collect. And finally, over to fifth focus area, continued investment in Group supply chain, ensuring we continue to deliver better customer offers and experiences. We are highly focused on customer delivery solutions. The continued growth of JB Hi-Fi Australia's on-demand delivery service in partnership with Uber, with an average delivery time of under 60 minutes, with the launch of Uber in The Good Guys in FY '24. Also launched improved delivery options for The Good Guys customers, focusing on increased certainty, transparency and choice. Newcastle home delivery center opened, and Brisbane is relocated to a larger facility in the second half of FY '23. Perth to relocate to a larger facility in FY '24, and continue to review the supply chain network to ensure it remains fit-for-purpose, evolves with our multichannel strategy and continues to improve the customer experience. In closing out the presentation, I'll just turn to Slide 34 and our investment checklist. I'm sure everyone knows this by now, so I won't cover in detail. However, I guess there's always just a few comments that are especially relevant here in the current retail environment. We have unique and relevant brands that have a trusted proposition of great value pricing, which means we remain very relevant to our existing customers and can also appeal to those who may be new to the brand and looking for great value with today's tougher retail environment. Our flexible business model, not only do we have the history of category growth and development, but also demonstrated the business' ability to adapt to changing market conditions. With our diverse category for JB, that is, many, many of them are highly desirable and less discretionary as they're so important in our target customers' lives. Our The Good Guys home appliance business is skewed largely towards replace the customer. But the value offers will also appeal to those looking to trade down in today's market. With our scale, we'll continue to leverage to deliver the best-in-class promotions. And the final one to call out is the experienced management team, who have been through these tougher retail environments before and understand how to manage through this while continuing to think longer term to ensure we emerge as a much stronger business. Thanks again for your interest, and we can now go to questions.

[Operator Instructions] Your first question comes from Tom Kierath with Barrenjoey.

Just a question on the cost growth. I think in the second half was kind of 8% to 9%. Firstly, is there anything unusual in those numbers? And then secondly, how are you kind of thinking about that into '24? Obviously, there's a few pressures out there on costs across the retail space.

Yes. So cost growth, as you were -- as you're aware, the largest cost in our business is wages. And our staff on the general retail awards. So you've got those award increases washing through -- through FY '23. And obviously, they will come through, effective from 1 July in FY '24 as well. So that's an element of the cost growth. You've also got a -- particularly Good Guys, some increased energy costs coming through in the second half. Good Guys stores are pretty big stores to [indiscernible]. So that's an element of it. And then a little bit tricky to see these days, the way rent is accounted for, but you do have rental agreements, sort of circa 50% across the Group of stores -- the Group stores do have sort of CPI-linked rental agreements, those I think are coming through. I don't think it's unusual, Tom. I think it's all the things we expected, but we do acknowledge a lot of those costs are elevated at the moment. And that is obviously something we need to manage closely going forward.

Yes. Thanks, Nick. And just on The Good Guys, I think from memory, you said that -- you thought that gross margins would set over kind of 100, 150 bps higher than pre-COVID, just on the structural changes you put through, like does that still hold? And you're kind of about 300 bps now on pre-COVID. Just getting a sense of -- trying to get a sense of, yes, what structural changes might have happened since you made that statement?

No. Look, we still feel that's going to be the case, especially in the environment where what we're discounting is returning to the market. And that's consistent with what we've been saying over the last 3 years, we anticipated we settled back down sort of between that '19 and the '23 mark. So yes, look, we remain -- we still believe that's where we'll settle.

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

Terry, Nick, can you go into a bit of detail with regard to -- you say, Terry, on this current retail environment, but your sales numbers still look very tidy. Is that volumes holding up? Or are you starting to see pricing -- in other words, volumes holding up, but pricing is coming off? Or you -- isn't -- is the pricing not coming off as quickly as what we might be thinking? Can you go into a bit of detail as to what's happening across both JB and The Good Guys, particularly with what's happening with volumes and what's happening with pricing? Because it looks to me like particularly JB Australia, sales are still very strong.

Yes. Look, it's a little bit different between what we saw last year in July, but only slightly. If we just address how that may look for -- for the FY '23 sort of figure there, JB was up in volume and flat on the ASP. The Good Guys, slightly down on volume, but up on ASP. So a little bit different. And being up on the ASP was a bit of mix. I think more importantly, with July, it's obviously -- it's a little bit harder. But JB was down slightly on volume but up on ASP. And again, that's mainly due to the -- ASP being up is mainly due to sales mix. It's going to be things like stronger gaming consoles during that period, for example, where The Good Guys was down on their volume and slightly up on their ASP, again, more due to sales mix. And that is the mix -- higher mix of the home appliances categories relative to the [indiscernible] categories.

So nothing untoward here. I mean things are holding up pretty well by the sound of it so far. I mean, so far, so good, consumers are still out there spending. Is that -- that's still relevant?

Well, yes, I mean, you can see by the -- I mean, The Good Guys was down. I mean, and we are still up on an FY '19 basis strongly. And we are cycling at such an unusual period last year. So yes, look, it was within our expectations as combined, we would have thought The Good Guys was down a little bit more than we had hoped, but that was really a function of some weather-related events. But we were also cycling that had a -- had an impact on the sales. So yes, look, I come back to the fact that we're -- we're a value retailer. We're a discount retailer, and that's -- that will be resonating much more strongly in today's market with customers if they're considering buying, then we're definitely going to be on the shopping list.

Okay. And following up the second question I've got, Terry and Nick, is the second half -- I mean, the gross margin in JB's bouncing around like a PingPong ball, I think the first half was up 108 basis points. The second half was down 70 basis points. Can you just -- I mean, it just seems to me that's just -- we haven't had much clean air, I suppose, with COVID. Is it the best way to look at the gross margin on an annual basis rather than a half-on-half? Because there's some people in the market thinking, oh, the second half momentum is weak. Is that not the right way to look at it? Or is it just a look at the full year gross margin as opposed to the movements in the half?

Yes. I think it is, David. Like we always said, the thing in JB that impacts -- the biggest impact on gross margin is the sales mix. And so it does bounce around a bit, depending on the mix in the half. I think if you look at that absolute numbers, look, I appreciate it's down in the second half, but we were cycling a fee gross margin the year before. So I think it's still 23.3% in the second half. And I think we said pretty consistently, we think JB, that's where gross margin typically runs around that low 22%. So I think yes, it does bounce around a bit by half based on sales mix, but I think if you look for consistency around that 22%. We've always had, we've always thought about it.

The next question comes from Michael Simotas with Jefferies.

Can I follow up a little bit on gross margin and maybe we can talk about JB Hi-Fi Australia and The Good Guys separately. Is the underlying trend on a category-by-category basis pretty consistent? Or was there a little bit of decline starting to come through? There's been a lot of promotion out there, but obviously, it's hard for us to tell how much you guys are funding versus how much suppliers are funding. So any sort of color on that would be very helpful.

From our perspective, category is all pretty consistent. I keep coming back to -- I know it sounds like it's saying a lot, but it is. Mix is the biggest impact on gross margin. It is very promotional at the moment, but it is still largely supplier-funded. I think we're doing a good job of working with suppliers on executing those promotions. And we would say the stock availability challenges that we had over the last few years have definitely normalized. And suppliers have stock that they are looking to move and they'll be working with those suppliers to create offers to move it. So acknowledged, it's promotional. Aren't seeing significant variability in categories, but mix definitely still impacting.

Okay. And is that the case for the The Good Guys as well?

Yes, yes.

Okay. All right. And then a somewhat related question around market share. And it's good to -- it's hard to get a good read on industry trends, but -- it looks like you guys have taken share, especially in JB Hi-Fi Australia, acknowledging that the category mix is different. Are you seeing any response out there from competitors to try to stem that market share loss?

Well, yes, look, we definitely -- the stock is returning to normal, getting a bit tougher out there. Then we are seeing individual retailers ramp up that promotional activity. But to Nick's point, a lot of that is supplier-funded. However, there is a little bit of -- they aren't going out on their own to -- to fund promotions. But it's not really -- it's a market we're used to competing in anyway. And this is really sort of getting back to what it was pre-COVID, in that respect.

Your next question comes from Ben Gilbert with Jarden.

Just -- could you just help us how to think about just the delta of the cost increase sort of all else equal for next year? And how much flex do you have to things like adjust staff here at store level back? If sales were to be weak, and since you guys has done such a great job around talk to them that relates. But all else equal, you sort of see that we are at what, sort of circa 5%, then you probe a little bit of work around to adjust that to sales?

Yes, it can be transformed more than that, like if you were to award wage increase ,that's from 1 July. That's 5.75%. And you've got another 0.25% of super. That's a payroll tax and work over increases in Victoria. So there is cost growth there. We do have -- deliberately, we do have flexibility in our -- in the way we roster. So we do try and maintain a level of sort of flex in the rostering. But as Terry called out -- and we can go there and we've demonstrated previously, we can manage that to sales. But in the current environment, we want to make sure that when people come into the store, they get a good experience and they get serviced. And so we just need to be very mindful of making sure we don't cut too hard into hours that would ultimately, longer term, damage the business. So we're managing it closely. I think we've got a good track record of doing it. But no doubt, there is some pretty material increases coming through in full FY '24.

Simplistic, and I mean obviously, we sort of look out on to [indiscernible] guidance, but the second half '23, your costs were up 9.2% and your sales are down about sort of 0.5%. So is that a 10% difference between the cost versus the sales? Your cost obviously stepping up more into '24. Should we be thinking about -- thinking on that sort of delta, or should we make up some assumptions that costs are up 6%, you might be able to take 1 off, and then does it make around revenue?

I'll leave you to come up with that one, then.

I thought that might be your response. There may be -- just the second one for me is just around staff productivity. And you sort of talked to the fact it is helpful that you still you're saying still facing kind of promotions. What's happening to staff productivity at the moment? Because obviously, it looks like people coming to the stores more broadly, cost retail, the conversion rates are down to shatter them more to bargain, et cetera. How are you seeing sort of store conversions? And then also, are you having to offer out discounts in stores, people have it a little bit harder if you're staffing, just seen that that's kind of the gross margin?

Yes. When it comes to conversion -- conversion, we don't measure any great detail in JB in the sense of door counters, et cetera. We do a select number of stores to do that. The Good Guys, we do it across. The Good Guys has maintained its conversion rate. That's the one we can confidently speak about. JB, very similar. So it's not -- we're not seeing any conversion challenges, as far as that is concerned. And that second part about customers coming in. There is a -- discounting on the floor has definitely increased. I mean, that's what we are seeing. We've always called that out as stock got back to the hope for -- back into all the channels, then we would start to see that, and that's what we are seeing now. So discounting has increased on an on-floor basis. And again, that's an environment we're used to. It's getting back to sort of how we may have thought about it in FY '19, just being competitive on the floor.

Your next question comes from Lisa Deng with Goldman Sachs.

I've got 2 questions. The first one is around inventory. So we mentioned that the suppliers are looking to get rid of inventory. We're working to -- with them to get through it. But our inventory days still look pretty lean. I think on average, we're looking at 53 days for the year. How are we thinking about that going forward? And what does it mean, I guess, in terms of when we restock potentially, on the gross profit margin?

Look, from our perspective, it's not changed to how we manage inventory. We're still managing it to -- when I called it out in the presentation, I called it out as sort of backward. So -- but we're still managing it to forward sales, forward weeks' cover. So we'll continue to do that. And we want to make sure we have the flexibility that it varies opportunities to buy stock that we have the capacity to do it. So from our side, no difference to how we've always done, Lisa. And we're very comfortable with our positioning today.

Okay. So comfortable at current levels. And the second question relates to the lease asset, like the right-of-use asset, it seems that we've had a large addition this year. And just wondering why and how does it impact potentially the occupancy cost going forward as well?

And on the lease asset, it is just timing of when we're signing leases. We are just renewing. It's just -- obviously, there are few new stores in there, about 5 new stores in JB. But it's renewal of -- of leases, it is adding to that. It shouldn't -- it is -- obviously, the -- what I called out earlier, the CPI increases will impact the depreciation and the interest. But the actual additions themselves, I suppose it does bring forward a little bit of the expense, but it shouldn't be that material.

Okay. So a large part of that increase year-on-year is more like the number of leases that were renewed versus rate of increase. Is that right?

Yes. Yes, that's right. A lot of renewals in that.

And a lot of renewals. Okay. Got it.

The next question comes from James Wang with Citi.

So my question is around The Good Guys. So just trying to understand the profile for that trading update. Could you provide some comment on the exit sales run rate for that July period? And whether that's weaker than the 12% reported? And how is the inventory of The Good Guys positioned in terms of the category as sales weaken?

I assume -- weaken sales -- I'm sorry, we looked at just 1 month ago. So run rate through a month, it's...

It seems you are referring to the written sale versus the diluted sale. Is that correct? Is that a...

I guess if you put the 12% reported in that July period. Like if we say, okay, well, looking through -- the through period, is that towards the end of the period, is that weaker than the average or -- that you reported?

No. Look, it was reasonably consistent, how long during the month. No, there was nothing there that sort of said it was necessarily deteriorating during that time. It was more in line week-to-week with what was going on with things like the weather events versus last year. It's a reality of it, with the very -- with -- so a lot of wet weather in Queensland, New South Wales and Vic last year. So it had more to do with the timing of that coming through. And as far as the stock, the stocks -- the stocks continues to be well managed in that business. There is no -- we're not concerned about the stock levels in there. And again, because we have that ability to flex quickly, if we have a little bit of extra, we just slow down the ordering during this month to make sure that we rectify that.

I'll just go at it. I know it's a negative trial on the 1 year. I think it is important to anchor back to that FY '19 number. And you see 22% up on FY '19. It's pretty consistent of what we had in Q3. So from our side, we haven't seen a significant change.

Your next question comes from Shaun Cousins with UBS.

Maybe just a question just further on July. You've spoken in the results regarding the second half or the full year '23 on category performance. Can you just maybe call out some of the categories that are doing better for JB Australia that don't seem to be helping The Good Guys where they may have a lesser representation there. And then also maybe some of the categories that are contributing to some of the sluggishness on The Good Guys there, just -- I guess this question is particularly with reference to your comment on the volatility and tell me the variability in category performance, please.

Yes, with JB, there it continues to be those products that we've referenced in the past of that feeling like a little bit less discretionary, and mobile phone continued to be to be solid in JB during that timeline. Relative to The Good Guys, Computers was better than The Good Guys. I think you can -- could anticipate that. So it was really that tech. And there was some -- still some continuation of some gaming came into The Good -- JB results, sorry. So that was really the driver there. If you go to the weakness in The Good Guys, just to come back to some of the things that I've called out. If you think of the HI categories, the real weakness came out of Laundry, which was -- was driven by the wet weather last year, cycling the wet weather last year on a 1-year basis. And seasonal, which is a heating sale was down. And then overall, it can fix -- CE was down more than obviously, JB was. It's not necessarily top of mind on the -- for consumers with the CE categories.

Great. And I mean, just 2 very quick questions. You highlighted market share gains. Did you achieve that across JB Australia, JB New Zealand and The Good Guys, across all 3 brands, divisions, please?

We're -- we're thinking of the brands independently there. Nothing -- yes, no. New Zealand, it had its market share gains. I mean, that's -- you can see that from just the sales results with -- so far, with sale reported in New Zealand. So we're definitely seeing some good results there. JB continued to perform extremely well. And The Good Guys, with the HI category, performed well.

Got you. And then finally, just around CapEx. Nick, can you -- your CapEx is up some just under 25% for fiscal '23. Store rollout is sort of ramping up in New Zealand. But can you maybe sort of provide some indication of where we should think of that CapEx going forward? Should it be flattish? Or should it actually step up a wee bit again in fiscal '24, please?

Yes. It will step up again in '24. So to your point, we've got -- we've got new stores coming in New Zealand. So we did not open any new stores in '23. So we've got then calling out 5 stores to open in '24 in New Zealand. We've still got new stores to open in Australia as well. So we sort of expect to open a similar number of stores in Australia in FY '24 as we did in FY '23. So yes, an extra step up, I suppose, largely driven by New Zealand into '24, Shaun.

Your next question comes from Bryan Raymond with JPMorgan.

Just my first one is actually following on from Shaun's around the CapEx, particularly around the store network. What sort of longer-term opportunities do you see in terms of store network? You've had very little in Good Guys, and you're starting to ramp up in New Zealand and now Australia is accelerating a bit. With online having stabilized in that low-teen range for most of the businesses, how do you think about investment in bricks and mortar from here? Is that something that you see more of a medium-term runway? Or is that more just like an FY '24 view? How much should we extrapolate that beyond '24 in terms of thinking about the network expansion?

I think you'll see that just -- what we've done over the last few years, probably just be fairly consistent. When I think of JB Australia, we're in just about all the major shopping locations. There is a little bit of regional growth there that we think there is an opportunity to do. As we continue to see suburbs expand out, that will open up a few opportunities. So it's not -- it hasn't changed our thinking now that online has stabilized, because we always believed that the store network was vital regardless of the online. So that's JB. JB New Zealand, we've got a lot of growth opportunity there, and you've heard of that 3 to 5 a year mark that you'll see over at least the next 3 years. And then with The Good Guys, we do see some growth opportunities, but that's more Northern Beaches, Sydney. We went through those landmark. So it's all going to come down to finding the right property for that business. That -- so it's not going to -- you're not going to see a real substantial -- we haven't done many. So it's hard to say a substantial ramp-up. But you won't see a great deal of stores being rolled out with The Good Guys.

Okay. That's helpful. And then just on the -- on the loyalty side, seeing some good growth there and then the numbers for Perks and Gold Service. Like can you help us understand sort of how meaningful that is as a percentage of sales basis or like what's that able to do for you in terms of customer insights, maybe ranging ways you can utilize that in terms of suppliers, extracting some terms out of them? Like what's the sort of the end game around loyalty and how is it helping you?

Yes. I think if you go to the endgame, the endgame is if we wanted to be a true omnichannel retailer, it's understanding our customers' transactions regardless online or in-store. And then being able to utilize that data into the future to mine that data, so to speak, to be able to then work with suppliers to have some really highly personalized and targeted offers to go to those customers. So not only will they potentially get deals above and beyond while they might get early access to Black Friday promotions, they'll be able to get that. But they'll get these really highly targeted promotions into the future.

Right. And are you happy to share sort of whether it's a material part of your sales mix at the moment? In terms of a -- that little...

No, I mean the -- we have a large engaged database of something like about 9-odd million customers, who asked to receive e-mails from us. So that is a very engaged database. So we use that constantly to promote and just keep updated with what's new, what's hot at both brands. So that's a meaningful part of sales. This next layer, which is the Concierge and all the Gold Service Extras, I should say, and Perks is all about getting -- starting to mine deep into that customer's purchasing. And purchasing habits, what they purchase so that we can work with suppliers to be a lot more targeted in the promotional activities that are really relevant to that individual in that program.

The next question comes from Alexander Mees with Morgans.

Just a couple from me. Just with regard to online sales, I think you talked about a stabilization of online sales post that normalization following lockdown. I'm just wondering if we should expect positive growth in online sales as a percentage of overall revenue in FY '24?

Look, you would I think FY '24, you might find that it's probably a little bit more stable. But no doubt, over time, online will continue to grow as a proportion of overall sales. I've struggle to see it being a real significant part of sales. And the reason I say that is because consumers in Australia are so well versed on the fact that you go into a store and you can negotiate a deal. And that access to that in-store environment is very easy for consumers as well. So consumers still will want to go in-store to negotiate a deal. So I think you'll see FY '24, it probably just remains stable, might grow a little bit. And then just slowly grow over the coming years. But I struggle to see it really as changing meaningfully over the next 3 or 4 years, 3 to 5 years.

That's helpful. And just secondly, just wondering what's changed in New Zealand to give you the confidence to increase the pace of the same store roll out the way that you've indicated?

Simply, the -- we've got now the management's talent over there, talent and passion to be able to do this.

Great. And then just finally, if I can, just with regard to the cost of the business percentage to sales, I think you refer in the divisions to -- to that ratio being below FY '19. But the charts show it on a statutory basis. So obviously, pre-AASB16. I was just wondering, the clarity, if the cost to do business to sales is below 19 on a like-for-like basis?

Yes, we got to publish that number, so we didn't put it in. But yes, it's still on a like-for-like basis in each of the brands, it's still below FY '19.

Your next question comes from Craig Woolford with MST Marquee.

Just the first question, you've obviously flagged the challenge you're dealing with wage cost and then you alluded to the rental cost impact. So did I hear it correctly, you've got 50% of your leases are tied to CPI? And if so, is that partially offset when you do rental renewals, that you're getting some negative leasing spread? Or should we be thinking about that coming through to that extent, given the CPI-linked leases?

Yes. So on the CPI, you're right. It's about 50% in JB Australia. It's actually a bit more in The Good Guys. More of that is CPI-linked. And yes, that's absolutely how we think about it, is if those CPI increases get ahead of what we think is the market rate, then yes, absolutely, we'll be looking to -- looking for a [indiscernible] renewal. And the beauty is we do have a pretty short lease term or weighted average lease expiry so that we can face into those challenges when we get there.

Got it. And then just with regards to the performance in market share. Do you used to feel in this -- particularly the January to June period just gone, do you feel the company's market share gains can be retained? Or is there some factors where you, JB going forward and The Good Guys have managed inventory better than competitors in the period, just gone that may reverse in some future period?

No, I don't think there's anything that we did differently during the period other than we just constantly -- it's just -- we just -- we had a -- we're now in full value. And I think that something that we've done all during COVID. We were constantly out there advertising promotions, deals and just staying top of mind for people on the fact that they can get a great deal at either JB or the good guys. And when the markets start to tighten up, I'm pretty confident. We saw customers flow to us, but we're trading down a little bit.

Right. So you don't -- because there has been some supplier perspective that would suggest that you had a better in-stock position of the fresh shipment in new inventory. You're obviously able to engage because you weren't dealing with an excess inventory position?

Yes, I think that -- yes, I think -- when you think about that, it was probably over the Computer category would have been the main one that flowed through.

Your next question comes from Ross Curran with Macquarie.

Just a quick question around your outlook on wages, particularly into Christmas. Does the market expect in the consumer to continue to slow into the end of the year. And I'm just wondering how much flex do you have around hours worked, trading hours around the stores? Casual workforce in to Christmas, I might help to manage some of that wage bill over the next six months?

Coming into that peak trading period, we obviously ramp up our casuals, significantly. So I guess we'll do that based on what the sales volumes we think are looking like. So I guess, that's the time that we can have a little bit more flex with the business. Casuals represent about 30-odd percent of our headcount. So that's something, I guess, that gives you a bit of an indication of the quantum there. However, I'll still bring it back to the fact that we've just got to make sure we maintain customer service. So we will roster to ensure that we're maintaining that customer service. That's going to be our absolute key. But we do have some flakes. I would also think though that coming into that period of Black Friday and Boxing Day, we're pretty optimistic around that period, based on the fact that consumers are really hunting for value and seem to be waiting for promotional periods. Some of the things we've seen with some of our promotions that really resonate well. So it's going to be an interesting time going forward to see just how that Black Friday and Boxing Day play out.

And then just finally, just in relation to New Zealand and the write-down that you took in FY '20 around that business. As you reinvest in the business as you relocate stores, should we expect those rent costs to come back on the P&L?

Yes. And look we're trying to be pretty transparent with that. That's why we do present that underlying EBIT on that slide, to show you what it would be the rent costs were on that P&L. I think, we still got 2 more unanswered question, why don't we take those 2 questions and wrap up.

Your next question comes from Phil Kimber with E&P Capital.

Just -- I'll just give it to 1 question, and sorry to hop 1 [ about it ]. It's on the cost line. So you do provide at the group level an expense breakdown and there's sales and marketing in every half for the last few years, it's sort of growing 9% or 10%. Similar in the second half this year, it was nearly 11%. But obviously, the sales were a lot weaker. So I just wanted to understand that flex issue a little bit better. Are you managing -- I mean, 1 in that period where it's pretty volatile, it's hard to -- hard to know which way things are going. Did you sort of take a conservative view and keep the service levels up? And then as a second question, when you say you've managed to sales, are you mainly managing to volume? So therefore, we need to think about, if we do move into, say, more price deflation, we shouldn't assume that label will flex down as much because you're actually managing to volume, not nominal sales?

No. We manage to dollars. And it's probably not the most technically correct way, but we do manage to dollars.

Sorry. And then the first bit, was there a reason why the sales and marketing line, which is largely employees -- it grew nearly 11% in the second half, and yet sales were down. Was that a case of just holding back because the environment was volatile? Or is it just harder to flex that labor cost down to sales? I guess that's a bit of -- I was trying to explore, because it's quite a big difference between sales going backwards and sales and marketing costs going up 11% in the second half?

Yes. I must have been -- if one of us have it, I've only got that sort of growing 9% in the second half and so 12% in the first half, 9% in the second half. So I had to check out. But look, it's very high. That line is predominantly light luggage, most of our marketing is supplier-funded. That line is predominantly wages. We are, as Terry said, just managing it as a percent to sales. And again, when I look at that, it's messy, obviously, first half, second half. So we just keep anchoring back to looking at that compared to FY '19. And as a percent of sales, their wages are still running well, where they were in FY '19 even in that second half.

The last question comes from Mark Wade with CLSA.

What would it take, if anything, to get sales back to pre-COVID levels? And with that in mind, around the -- just the sheer volume of the installed base being so much bigger. Are you starting to see any benefit from that?

Is that what level of decline we need to see? Is that just...

No, I just meant more like what kind of general kind of market conditions would give rise to seeing sales back at pre-COVID levels? Is that theoretically possible? Or is it just -- we're just so far above them and we've just moved on in the world, partly because of some of the work-from-home trends and how much more installed base you've got in the consumer's households?

Yes. Look, I think it's definitely a hard one. I mean if I maybe just -- when I think about something -- a business like The Good Guys, it's just such a better business than it was back in FY '19 as well. I mean it's just got a far better mix of premium, premium products, both products and supplies and our brands in the store. It's a much more efficient model in there. So it is just a much better business than it was back then. So I'd like to think that if it ever was to get back to '19, it's outperforming the rest of the market, getting back to '19, that makes sense. Look, I just think the categories that JB got and how important they are to your point, where they're working from home. Our phone sales are significantly up over that period, too, and that means a bigger install base, which means a much more larger opportunity to see a replacement of those customers. And those customers understand we've got it. They have trust in us. So I think there's a lot of positives that come out over the last few years that should mean, structurally, there is some benefit there to us.

Yes. I think you guys have run the business pretty well and you will be there to capture. So all the best.

There are no further questions at this time. I'll now hand it back for closing remarks.

I just want to say thank you again to everyone for their time today on the call, and we look forward to speaking with -- I'm sure many of you over the coming days. Thank you.