KMD Brands Limited (KMD) Earnings Call Transcript & Summary

Good day, and welcome to the KMD Brands Limited 2023 Half Year Results Release Conference Call. Today's conference is being recorded. [Operator Instructions]. At this time, I'd like to hand over the call to Michael Daly. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining today's presentation of KMD Brands Financial results for the first half of 2023 financial year. My name is Michael Daly. I'm the CEO of the group. I'm joined on the call by Chris Kinraid, our Chief Financial Officer. We will be talking through the presentation live on the NZX and ASX this morning. Unless otherwise specified, all financial numbers are in New Zealand dollars. Today's presentation will begin with the half year highlights, and we will then discuss the group's financials and brand results before concluding with the trading update and outlook for the second half of FY '23. I will begin with the financial highlights and achievements of the first half of FY '23. Turning to Slide 4. We are delighted of the results KMD Brands achieved in the first half of FY '23, with record first half sales decreasing 34.5% to $547.9 million. This can be attributed to continued growth in Rip Curl, a strong recovery for Kathmandu and record first half sales for Oboz. Our full year gross margin increased by 100 basis points to 58.7%, reflecting improved Kathmandu performance, assisted by favorable currency, more than offsetting continued elevated international freight costs and raw material cost pressures. Q1 sales recovered strongly, cycling Australasian COVID lockdowns last year, in which more than 11,000 retail trading days were lost. We delivered strong Q2 sales growth on top of last year's post-COVID lockdown rebound, aided by the return of international travel and tourism. This contributed to the group's underlying earnings before interest, tax, depreciation and amortization increasing significantly from $10.2 million last year to $45.3 million this year. We reported an underlying NPAT of $16.5 million for the half, which reflects a substantial turnaround from first half of FY '22 underlying net loss of $5.1 million. These results have enabled us to declare an interim dividend of $0.03 per share. Moving to Slide 5. During the half, we continue to deliver on the 4 pillars of our group strategy. At a group level, we remain focused on building global brands. During the half, we saw sales growth across all brands and at all regions. Rip Curl saw retail store expansion with net 9 new stores and USA sales increased by 8%. Kathmandu's first deliveries were delivered to select wholesale partners in Europe and Canada, and we saw Oboz achieve record first half sales as well as expanded product range into adjacent categories. In the digital space, we have successfully launched Rip Curl loyalty scheme Club Rip Curl, which has attracted over 120,000 members in the first 5 months. For the first time, Rip Curl customers are connected to the group's loyalty ecosystem, enabling a single view of the customer and customized communication. We have also aligned Rip Curl retail store pricing with pricing on its online store. Kathmandu now has French, German and Canadian websites. And Oboz online sales demonstrated significant growth opportunity, growing by more than 500% of last year's supply-impacted base. KMD Brands continues to leverage operational excellence with our EBITDA margin increasing to 11.3% of sales on a rolling 12-month basis. We are continuing to grow scale across brands to maximize the efficiency of our overhead spend. And our portfolio approach to lease negotiations achieved a 2% reduction -- a net 2% reduction across leases renewed in the first half. We have made excellent progress in ESG with KMD Brands and all 3 of our individual brands now certified B Corporation, becoming one of the first multinational companies based in Australia and New Zealand to have all of its brands individually certified. This is a testament to our commitment to setting ourselves high standard and social environment impact, accountability and transparency. The group has been recognized for ESG leadership, winning the Deloitte New Zealand Top 200 Sustainable Business Leadership award. We have submitted science-based targets to SBTi, with 2030 emission reduction goals aligned to the Paris Climate Agreement with assessment underway. Our Rip Curl Reconciliation Action Plan has been formally approved by Reconciliation Australia, and we're delighted to have joined a network with more than 1,100 corporate, government and not-for-profit organizations that have made a commitment to reconciliation with Aboriginal and Torres Strait Islander peoples. It's been a very productive first half of FY '23, and we are proud of the achievements made under each of our strategic pillars. Moving to Slide 6. You can see how we are progressing towards our short- and medium-term goals. We are striving to achieve the short-term goals on the left side of the slide in the next 1, 2 years and the medium-term goals within the next 3 to 5 years. Underlying EBITDA margin as a percentage of sales grew to 11.3% in the rolling 12 months to January 2023, with ongoing work to grow sales and control and leverage expenses as we progress towards our EBITDA margin target of 15%. Looking at working capital as a percentage of sales, the January 2023 balance equates to 21.8% of sales over the last 12 months. And we aim to reduce this to 18% in the short term as we normalize our inventory levels following the impact of COVID supply disruptions. With Oboz still recovering from supply challenges in the first half of the 2022 calendar year, we still saw over USD 50 million in sale in the rolling 12 months to January '23. We are on track to achieve our medium-term target of USD 100 million of sales, considering opportunities to further grow the North America wholesale customer base, online growth opportunities, plans to expand the brand outside of North America and further product range expansion. In terms of regional growth opportunities, North America is a key market for Rip Curl. Rip Curl is the top 3 brand in other key ranges, and there's a real opportunity to grow the brand's top 3 status in the North American market. In the rolling 12 months of January '23, North America sales were up NZD 146.4 million. And we aim to hit a target of approximately NZD 200 million sales in the medium term. In terms of Kathmandu, we have the medium-term goals of both reinforcing market leadership in our own Australasian market as well as executing on international growth opportunity for the brand. Kathmandu currently has 155 stores in Australasia, and this number has not changed significantly over recent years as we have navigated the impact of COVID on consumer shopping preferences. We see an opportunity to ramp up our retail store presence by 40 to 50 stores in the medium term, focusing on suburban and regional shopping center opportunities in Australia. Kathmandu has begun the journey of growing internationally, with the recent launch of new websites in France, Germany and Canada, and the first wholesale deliveries to select European and Canadian wholesale partners. We look at this as a testing phase with these wholesale partners to learn consumer products and channel preferences in each market. As Kathmandu expands into North America, Europe and beyond, our sales target for Kathmandu International remains NZD 100 million. Moving to Slide 7. I'm very proud that KMD Brands and all of its brands have achieved B Corp certification. In 2019, Kathmandu made history as one of the first significant apparel brands in Australia and New Zealand to become B Corp certified. In 2023, Rip Curl and Oboz have 2 certifications as well as the Rip Curl factory wetsuit factory OnSmooth in Thailand. The Kathmandu brand achieved recertification with major improvements that were commended by B Lab. Kathmandu brand is one of the first multinational companies based in Australia and New Zealand to be certified in its entirety, and one of only 45 listed businesses globally out of more than 6,000 B Corps. This globally recognized certification demonstrates commitment to leading in ESG and is a significant achievement for a company our size, complexity and scale. We continually push ourselves across our group of brands to be better, and being B Corp-certified is recognition of our commitment to balancing profit with our impact on people and planet. This is a great achievement for our business and our people. I'll now hand over to Chris to cover the financial slides.

Thanks, Michael. Moving on to Slide 9. We will now go through the group profit and loss for the first half of FY '23. Just a reminder, our statutory results include the adoption of IFRS 16. For comparability, the impact of this and other -- and the notional amortization of Rip Curl and Oboz customer relationships have been excluded from our underlying results. We achieved record sales in the first half, with group sales increasing 34.5% to $547.9 million. First quarter sales recovered strongly, cycling Australasian COVID lockdown last year with more than 11,000 retail trading days lost. We then delivered strong second quarter sales growth on top of last year's post-COVID lockdown rebound, supported by the return of international travel and tourism. Statutory EBITDA was $90.8 million, up substantially on last year. And on an underlying basis, excluding IFRS 16, EBITDA was $45.3 million. Although the group continued to experience elevated international freight costs and raw material pressures, gross margin increased by 100 basis points to 58.7%, which reflected improved Kathmandu performance. Operating expenses returned to historical levels post COVID. First half FY '23 operating expenses are 50.4% of sales, demonstrating operating leverage year-on-year with strong sales post-COVID lockdown -- sales recovery post-COVID lockdown last year. Moving to Slide 10. The group achieved a record sales result in the first half, strong diversified sales growth across our brands, channels and regions. Kathmandu sales grew by 51.2% after a strong recovery. Rip Curl grew by 18.8% and Oboz grew by 124.3%, recovering after the supply chain challenges last year. We saw strong sales growth across direct-to-consumer, wholesale and licensing channels, and retail sales -- store sales grew by 46.2% as customers returned to in-store shopping, moderating online sales, which decreased by 2.2%. Wholesale sales grew by 27.1%, assisted by Oboz sales growth following last year's supply constraints. By region, Australasian sales grew by 33.6% despite some COVID lockdowns last year. North America sales grew by 52.8% over travel recovery, and Hawaiian stores capitalized on return of international travel. And European sales grew by 6.9%. We'll now take a closer look at online sales on the next slide, Slide 11. On Slide 11, we are seeing consumers returning to shopping in stores. Our omni-channel offering provides customers the choice of in-store and online shopping. While online sales moderated in the first half of the year, growth of online sales still remains significantly above pre-COVID level, growing at a compound annual growth rate of 17.14 since the first half of FY '19. Kathmandu online sales have normalized at $26 million, comprising 13.6% of direct consumer sales. Rip Curl's $17.8 million in online sales comprised of 9.6% of direct to consumer sales. Oboz online remains a significant growth opportunity, increasing to $2.8 million of last year's supply-impacted base. Now on to Slide 12. We continue to maintain operating expenditure investment for leveraging sales growth. Post-COVID travel lockdown sales recovery, sales grew by 34.5% while operating expenses grew by 20.3%, excluding one-off COVID assistance received last year. As a result, operating expenditure as a percent of sales reduced from 56.4% to 50.4% in the first half. On the dollar increase in operating expenses, nearing 80% related to variable costs of operating stores following last year's COVID lockdown closures. We upheld our brand and marketing investment, and we expect to further deliver leverage as sales growth continues. FY '23 full year operating expenses are expected to be around 48% of sales, and there are ongoing initiatives to further reduce annualized operating costs by up to 2% of sales for FY '24. Moving to our balance sheet on Slide 13. We have a strong balance sheet position, which leaves us well placed to invest in organic brand growth and to strategically invest in inventory where required. The high inventory balance of $318.8 million reflects investment in Oboz inventory in the second half forward orders, as well as strategic investments in wetsuit raw material for perennial sales to mitigate international supply challenges. Rip Curl inventory balance is expected to reduce in the second half as purchase orders placed during the first half align to improved supply chain time lines. Kathmandu's inventory is well-positioned, and includes what's realized in July 2022. In terms of aging, clearance stock levels were below July '22. And inventory obsolescence provisions represent 1.4% of gross inventory on hand, 50 basis points below July '22. Rip Curl inventory balance to reduce to between $270 million and $280 million by July '23, depending on currency translation and by the timing of goods in transit. As at January 2023, [ net debt at $84.9 million ] with significant funding headroom over $200 million. Moving to Slide 14. Operating cash outflow was impacted by inventory build. We're expecting an unwind of inventory to underpin traditionally strong operating cash flow generation in the second half of the year. The directors declared an interim dividend of NZD 0.03 per share, fully franked for Australian shareholders and not imputed for New Zealand shareholders. The record date will be the 15th of June 2023. The payment date will be 30th of June 2023. Turning to Slide 15 on our rolling 12-month period. This is the second half of FY '22 combined with the first half of FY '23. We are pleased to report that the group sales were well over about $1 billion. For first time since Rip Curl was acquired, the group has experienced a full 12 months of trade without significant interruption from the COVID pandemic. We announced that after acquisition, the expectation of a global $1 billion outdoor company. In terms of sales of the rolling 12 months, Rip Curl made up 52% of sales, Kathmandu made up 40%, and Oboz made up 8%. The underlying EBITDA for rolling 12 months was $127.1 million. I will now walk through the segment results across all brands. And moving to Slide 17 for Rip Curl. Rip Curl segment results were strengthened by the growth across all channels. Total sales up 18.8% to $306.4 million. Direct-to-consumer sales growth were especially strong in Australasia after the COVID lockdown last year, with Hawaii also performing well off the back of the return of international travel and tourism. The direct-to-consumer channel, including owned retail stores and online, generated same-store sales growth of 13.9%. While online traffic reduced year-on-year, aside from the COVID lockdown versus last year, online sales continued to be well above pre-COVID levels. Wholesale sales dropped 2.2% at constant exchange rates, maintaining the strong growth delivered during COVID, despite softening wetsuit demand from record highs, and strategic destocking from retailers. EBITDA was up 11.4% to $37.6 million, despite the impact of gross margin mix, freight and higher distribution costs. Now turning to Kathmandu's results on Slide 18. Kathmandu's performance in the first half of FY '23 was attributed to a strong post-COVID sales rebound and recovery. We saw total sales increased 51.2% to $194 million, driven by a rebound in Australia, 59% up after last year's lockdown, and a return of domestic and international tourism in New Zealand during Q2. International sales were $1.4 million, which includes the first deliveries to select new wholesale customers in Europe and Canada. Online sales remain significantly above pre-COVID levels, and have grown over compound growth rate of 12.8% in the first half of FY '19. We saw total same-store sales growth, including online, of 48.8%. Gross margins increased by 580 basis points, driven by -- with currency benefits and the deliberate and careful moderation of the historic high-low pricing model. Turning to Slide 19. Oboz has recovered from the significant supply challenges that impacted last year's results. The Oboz brand continues to diversify its simple product offerings in the Gen Z market, with first half sales increasing by 124.3% to $46.5 million. Online sales grew strongly, but associated with high gross margins, increasing the mix of direct-to-consumer sales. And this channel remains a significant growth opportunity for the brand. Gross margin decreased 50 basis points due to elevated international freight costs over the last 12 months. Operating expenses include investment in brand and product teams, which we expect to be leveraged as sales growth continues. During the half, North American wholesale operating margins remained below historic levels, with the full extent of increased wholesale selling prices to be realized in the second half. We now see international freight costs trending towards historical levels. I'll now hand it back to Michael to talk through the outlook.

Yes. Thanks, Chris. Moving to Slide 21, we remain clear on our medium-term strategic priorities. We will continue to build global brands with the ongoing goal for our comparable sales for each brand, while executing new growth initiatives. We'll focus on improving Rip Curl's North American market share and operating margins. We aim to reinforce Kathmandu's market leadership in the Australasian market, opening 40 to 50 new stores over the next few years, while also executing the international sales growth opportunity through wholesale and direct-to-consumer channels. There are a lot of opportunities to deliver sustained growth in both wholesale and direct-to-consumer channels both within North America and globally. With the successful launch of our Club Rip Curl loyalty program in Australasia, we are planning rollout in the U.S. and Europe over the next 2 years. The immediate goal is to launch Club Rip Curl online in the U.S.A., followed by full omnichannel launch in North America. Planning is well underway for the relaunch of Kathmandu's loyalty program with an exciting new value proposition. We also plan to implement personalization at scale across Kathmandu and Rip Curl. At Oboz, we'll be launching our B2B platform, utilizing the group's technology. We will focus on leveraging operational excellence at a group level with ongoing inventory management driving towards a working capital target of 18% of sales. We will also continue to leverage the operating cost base to help deliver the group's underlying EBITDA margin target of 15% of sales. The ongoing consolidation of procurement and supply chain operations are important priorities for achievement of operating margin target. Lastly, we'll continue to lead in ESG, with the aim of rolling out circular business models across brands. We are currently launching the KATHMANREDU apparel repair and recommerce pilot in select Victorian stores in Australia, and we'll continue the global expansion of Rip Curl TerraCycle wetsuit take-back in the cycling program. We are progressing well towards approval from SBTi of our science-based targets and the development of our emission reduction road map. Turning to our trading update and outlook for the second half of FY '23 on Slide 22. Positive first half sales momentum have continued through February, with strong diversified sales growth across brands, channels and regions. In terms of the trading update, group total sales increased by 31.9% year-on-year in the month of February '23. We saw Rip Curl's sales drive by 13.3%, cycling FY '22 growth. We can see Kathmandu's sales momentum continues into the second half of FY '23 with year-on-year total sales increasing by 20.8% in the month of February. Oboz sales rebounded from last year's supply challenges. Please note that February is not a significant trading month nor necessarily an indicative of results for the remainder of the year. Our positive second half FY '23 outlook is supported by several factors, including the positive direct-to-consumer sales trends continuing through February. The group is also well positioned to continue benefit on the return of international travel and tourism. We've seen holiday destinations such as Hawaii, Queensland and New Zealand as well as Australian airport stores achieving sales growth year-on-year and tracking above pre-COVID levels. As we potentially enter a period of challenging global market conditions, the group is well diversified. Product ranges across all 3 brands appeal to a diverse range of consumer interests, ages and demographics. We acknowledge that the consumer outlook remains uncertain, with high global inflation and rising interest rates expected to impact consumer demand. On the wholesale side, we are seeing retailers around the world strategically destocking and increased promotional activity from competitors. The second half is traditionally the strongest cash-generating period for the group, and we remain well capitalized to continue to invest in the long-term international expansion of our global brands footprint. This now concludes the formal part of today's presentation. I want to thank all of you for taking time to join us on this call. I would now like to open the call for questions. Over to the operator.

[Operator Instructions] At this time, we will go to our first question, Marni Lysaght of Macquarie.

I just would like some -- just more color around, I guess, the gross margin expansion in Kathmandu. I know you've called out FX being a benefit in the first half and moderation of the high-low discounting model, which will be the second half where you've started to deliberately moderate that, that started to kick off second half '22 like -- because I understand your clearance mix in the first quarter of FY '22. And just trying to kind of triangulate I guess, cycling lockdowns and how much of the expansion is FX versus moderation of prices.

Yes. Look, obviously, our group margin is up a full point of course. Obviously, that's a blend of all of our margins of each of our brands. In terms of the Kathmandu brand, as you say quite correctly, some of the margin uptick we're seeing in Kathmandu is a function of both some currency -- positive currency as well as ongoing inventory management. Obviously, the mix of the inventory with that and the level of growth as well as our continued high-low moderation. So -- but from our point of view, there's not one particular thing that is helping that margin for Kathmandu, to be honest, they all play a key role. . And I guess most importantly -- we certainly face some increased FX headwind obviously where the dollar is at today. But at the same time, our clearance levels of Kathmandu are really well positioned. We've been quite aggressive through the last 6 months in just making sure that we take any tough calls on the impact that we have and see that in Kathmandu industry numbers, which are down year-on-year. We're really comfortable where we're at, and [indiscernible] confidence on the margins going forward for the Kathmandu brand.

And just a follow-up on that. Just to kind of refresh our memory how we should be thinking about, I guess, FX to pass given current hedging and FX into next year. And also, I hope to shove another question into one, but just you are going to comp this winter at Kathmandu having a phenomenal gross margin in the back into second half '22. Just the way to be thinking about that, given you have lowered the stock levels and the potential macro outlook.

Yes, that's for this is really good. We're seeing in the market today that, yes -- I mean if you want to sell some volume at discount, you can, but we're certainly not seeing the strong need for us to discount our brands. Our brands are wanted by the consumer. And we can certainly display margin discipline, and as I said I think before, Marni, that we've had the kitchen sink thrown at us in terms of margin over the last 6, 12, 18 months, and you wouldn't even know it because our margin continues to go up, and that's a function of the strong management of our inventory being aggressive where we need to be and being careful, we will take our risks. So yes, from our point of view, yes, we definitely faced some headwinds with the FX. But important to note that in today's group, we have a diversified group. So while we will face some headwinds with a stronger U.S. dollar relative to the New Zealand and the Australian dollar, we also have 20% of our sales over in North America. So it gives us an obvious natural hedge because obviously the translation profits -- translation of those profits will be stronger as well. So from that point of view, it does give somewhat of a natural hedge, not full natural hedge. But again, I guess, supports our confidence in our margins not only historically, which has continued to trend up, but in the future.

Just like you've given us before kind of indication of what the hedge rate is versus prior periods. So kind of what does the hedge rate look for this half and early first half '24 versus prior periods?

Yes, we do. Marni, it's Chris here. We do -- Marni, we do hedge 12 months reasonably well [indiscernible]. And I think we can manage that recently. So the average rate differential from an activity to the, let's say, Hong Kong dollar, for example, versus the U.S. So it's not a significant movement overall. That's something we can definitely manage through product range where it's hedged by 12 months.

So just to clarify, you can manage that through price. Is that what you just said? Just...

Price and product. Just price and product.

And we will hear next from Bianca Fledderus with UBS.

First question for me is just on your North American Rip Curl growth. So obviously, growing your market share there continues to be one of your key priorities, as you mentioned. Could you share what you estimate your current market share is in that region for the Rip Curl brand and what you estimate it would grow to when you reach that $200 million in sales that you mentioned?

Yes. I think, yes, referring to what's in the pack as well as what we have expressed previously, our perception of where we sit in the market is that anywhere between the #5 or #6 brand in that market. We'll probably talk more to our position in the market relative to our total of the market because that's obviously a bit of a hypothetical. So yes, we see ourselves with #5 as we expand in that market, particularly in terms of our wholesale positioning. We feel strongly that if we were to be successful in continuing to take market share and move into a top 1, 2 or 3 brand that we're looking at a circa USD 100 million opportunity. That's what we've been pursuing, and that remains our ongoing process.

Okay. And I guess just following up that. Could you give some indication around what sort of CapEx spend we can expect given -- correct me if I'm wrong, but I believe it's a lot of D2C store growth for that region for the Rip Curl brand?

Yes. I think we're relatively comfortable where our capital expenditure sits, to be honest. At per annum basis, we'd probably run at $30 million to $35 million CapEx per year. We feel pretty comfortable with that. I say that because we've had some big chunky IT spend with rollout of new POS systems and loyalty programs, particularly in the Australasian market, which is a bigger market. As they slow, we'll save some CapEx there and redirect that to some of the ongoing growth in terms of D2C, whether it be online or in-store. So we don't see change from our history in terms of our capital spend at this point in time.

Okay. Great. And then just on your underlying EBITDA margin targets. There's obviously a good improvement in underlying EBITDA margins compared to first half '22. But at 8%, that is still quite a big jump to your 15% full year targets. So I guess the second half margins, of course, are usually higher. But are you still expecting to reach a 15% margin for FY '24? Or are you expecting that to be more realistically FY '25?

Look, we've been trying hard to get there as quickly as we can. I wouldn't obviously want to be giving out a specific forecast, but we remain committed to achieving our 15% target. We certainly -- the Kathmandu and the Oboz brands both have much better second half based on the seasonality of their products, Kathmandu on the back of Australasian rebound and Oboz on the back of Northern Hemisphere spring/summer. So we obviously see that EBITDA margin improve significantly for the group in the second half. Yes, look, we'll be pushing as pretty hard as we can to achieve that 15% target as quickly as we can, maybe a stretch for FY '14 -- or sorry, not FY '14 -- FY'24, but we'll be giving it every intent to try to achieve it.

And so we'll go next to Andrew Steele with Jarden. If you're on mute, we're not able to hear you. Well, at this time, then we will move to our next question from Mark Wade with CLSA.

Just trying to get a sense of the -- this opportunity for Kathmandu internationally, the $100 million target that's been out there for about a year or so. How do you get there from the $1-or-so million you're doing today? Is it just about getting that brand awareness and recognition globally? Is it trying to get a bigger range, more customers? What's the secret sauce on how to realize that target in a reasonable time line?

Yes. Look, the 2 key points there. While that time has been out there for a while, you've got to remember, we only started our first deliveries in August '22. So we've only just started delivering. So really, the clock has really just started running for us this first half. So it's our first half with first deliveries. We're also very consciously and strategically in a test or a soft launch phase. We're only dealing with select accounts. So we're talking 20, 25 accounts that we're working with in Europe and Canada. They are very small numbers to start with. But if you look at what that likely number is going to be on an annual basis, and you're talking 20 to 25 accounts, the average sale per account is actually pretty healthy. I'd say that because we're dealing with 25 accounts, but if we were to ramp up interaction with all the possible accounts we could have in the Northern Hemisphere, we're talking thousands or more than a thousand -- a couple of thousand accounts we could be dealing with. So we're really happy with where we're at. We strategically wanted to start with a soft launch just to make sure as an organization, we're really clear on what the consumer wants and expects from a brand like us in those markets of Europe and Canada and also to understand what our wholesale partners expect from us. So in terms of us realizing the opportunity to take it from a couple of millions to tens of millions to hundreds of millions, really the main focus is expanding that distribution. So taking that from the 20 to 25 accounts to 100 to 200 to 300. Really, that comes down to the timing at which we think is appropriate. We want to do international expansion on our own time line. From our point of view, we don't want to take too many risks. But we could go after 500 accounts tomorrow. But if we push product down to the market and it doesn't sell, we will have some very angry wholesale partners. So we want to keep it quite organic to start with and really just make sure that when we decide to expand that distribution and make a more concerted push into one or more geographies that we're ready for it. And when we are ready for it, we won't be just talking wholesale. We'll really ramp up our e-commerce as well as potentially looking at a couple of stores. I think as we've said previously, probably later this year, we'll be in a position to sit down and go, okay, where do we think the real opportunity is? The likelihood that we will push aggressively into all northern hemisphere market is low. I think it's most likely we'll continue on soft launch in some markets and really try to pursue it more aggressively in one or a couple of particular geographical market. And when we do that and go more aggressively, that's going to take a little bit more risk, and that will involve some more marketing spend that will involve a couple of stores. And that will involve tightening up our e-commerce assortment and our distribution or fulfillment strategies to those consumers. Look, I think we're realistically another 6 months away from that. We'll continue to soft-launch it. Once we've got a full year of data and a full year of trading results, we'll be in a much better position to decide where we really want to take that more aggressive approach geographically.

That's helpful context. And on the -- and closer to home on those store opening plans in the Kathmandu brand. What's the thinking on how to get to that 200? Do you need to acquire some of the existing competitors? Or is it just about rolling out stores in the existing geographies there? I mean it looks like you have an open date [ in the next month ] on a net basis anyway.

Yes. If you look at our assortment of stores on the Kathmandu side, we think we've got a good segmentation of stores across larger format, destination, small stores, small format, high street or airport stores, through to your mega malls, destination malls throughout suburban -- out of suburban regional malls. So we think we've got a good segmentation of stores that gives us the flexibility to expand our network. If you look at our penetration in New Zealand, what we've got circa 45 to 50 stores across New Zealand, population of 4.5 million. We got just over 100 stores in a population of 25 million in Australia. We do think we underrepresent in the Australian market, and there are a number of out of suburban, in the city as well as regional locations where we're not represented, and we think there's an opportunity for us. And certainly, there are plenty of other examples of retailers in this market and they have a lot more stores in Australia than just 100 stores.

We'll go back to Andrew Steele with Jarden at this time.

Okay. The first one for me is just on the outlook for the wholesale market. You've noted retailers destocking and sort of -- somewhat sort of inconsistent activity. So when you look forward to the second half, could you provide some color as to your expectations for how wholesale performs year-on-year for Rip Curl and Oboz?

Yes. So I mean what you've seen in our half year results is we're certainly seeing the -- our wholesale performance moderate relative to our direct-to-consumer performance. We're seeing where we're interacting with the consumer directly. We're seeing continued strong performance, all brands, all markets, all regions. There has been a bit of a change in that mix as consumers get back into the store and the e-commerce softened up a little bit. But overall, our direct-to-consumer channels, all brands, all regions, performing very strongly. On the wholesale side, we're certainly seeing that soften up. So we're still seeing some growth. Obviously, Oboz is seeing great growth, but that's on the back of supply chain issues of last year. But we're seeing that most growth moderate. We're seeing that growth moderate because basically all there retailers out there are either spooked by or making news about potential recession, or they just have too much stock and are strategically destocking to make sure they're not taking so much risk. So what we're seeing consistently across the market is retail holding up on taking deliveries, willing to take the risk that if they need more stock, they can chase it. So not willing to put the same commitment down. So we're seeing that across each of our brands, across both the surf market and the outdoor market. We think -- what does that mean? We think for the next 6 or 12 months that -- it will take 6 -- probably 6 to 9 months for that cycle to finish, where everyone destocks, and then they'll be aggressively chasing stock again. So from what we see, we still think there's growth opportunity. We're still posting growth. That growth is just moderating, but at some point in time in that 6- to 9-month period, if the consumer continues to show strong demand across outdoor and surf, which has no signs of that stopping as yet, we certainly know that the retailers are going to be chasing stock. So -- from our point of view, yes, it has moderated a little bit, that wholesale demand. But we're still in a growth position, and we've got the stock to meet the consumers' needs on a direct-to-consumer. So -- yes, so I think it's going to be probably moderate the demand for 6 to 9 months, but certainly there's going to be a lot of retailers chasing stock. So we think our outlook for wholesale moderates more single-digit growth for the next 6 to 9 months, and at some point in time, assuming the consumer demand remains strong, we should see another bounce beyond that destocking cycle.

That's great. It's very helpful. Just in terms of gross margin, and just to clarify because, unfortunately, my line cut out during Marni's questions. Do you expect growth -- when you are saying you expect gross margin to improve in the second half and into '24, you see ongoing gross margin improvement trends? And then just to be clear, I assume that's driven largely by price and mix, given the FX outlook?

Yes. Look, with the group as diversified across channels and geographies and brands as us, gross margin is a fairly safe harbor conversation, to be honest. But that said, an overall group point of view, obviously, we're up in the margin in the first half. We expect in the second half, we'll remain relatively flat. We might see some improvements on the prior year, but we're not expecting any dramatic changes, to be honest. We think in terms of medium term on margin. As I said before, we've had the kitchen sink thrown in the last couple of years on margin. Our margin only improved. There are clear pockets in our organization where our margin is not where we expect it to be, and that's because the full impact of price [ raises ] have not yet cycled through. We expect to see that cycle through in the second half, which would give some underpinned -- some margin strength to offset any other headwinds we may face, whether that be consumer sentiment, whether that be other competitors' activities. So we remain relatively happy with where our margins are at. And if anything, in the short to medium term, we'd be hopeful of continued increments in our margin towards our goal of the 15% EBITDA underlying.

Great. And then just on the 2 percentage points of OpEx improvement that you're talking to for FY '24, could you sort of just talk about some of parts of business? I mean is there any specific cost-out? And if so, could you quantify that? And then what about the -- could you be a little bit more specific as to the measure that you are taking to achieve this margin improvement? Or is it simply just operating leverage coming through?

Yes. It's just operating costs and our operating leverage specifically. There's not one particular area. We -- our focus has been so much in the last 12 months just actually having our stores open again and overcoming our supply chain disruptions. And the harsh reality is when you're focusing on those type of things, it does mean that you can't necessarily focus on a whole bunch of other things. So from our point of view, we know there's continued work to do to moderate our expenses and particularly in the inflationary environment. So we are continuing to focus on that. There's not one particular pocket, to be honest. Now as we mentioned in the pack, we've seen some good results of portfolio negotiations across our lease exposures. It will remain a fairly aggressive lift in everything from distribution, labor to freight costs in terms -- domestically. So we're seeing that come to moderate. We've certainly seen our international freight costs moderate significantly over the last 6 months that they start to return to more historical levels. Obviously, we're continuing to work on our in-store labor costs to make sure that we might continue to moderate that as well as just looking at our overall head office costs. And even our marketing costs, we've been quite [indiscernible]. We were quite aggressive on lifting the spend of our marketing spend, particularly coming out of COVID, and we held that flat in this first half of the year. But certainly, as we get into second half in FY '24, we'll see that marketing spend continue to moderate down as well. So -- but no particular money pocket. That's really across the board in our broader drive to bring the brands together. We're still completing integrations with our brands in the back end, and completing that integration...

Okay. And just one -- last one for me. And reflecting your -- would you say that year-on-year improvement in debt is achievable by year-end?

Yes. We expect to out-deliver that [ a little bit ], Andrew. Yes.

I'm sorry. You said expect, would that be some improvement or sort of broadly flat?

Well, maybe, we won't go into that, Andrew. As I said we expect to [ deliver ].

And we will go next to Kieran Carling with Craigs Investment Partners.

Just thinking back to the last full year result, there was some commentary around M&A opportunities. And I think at the time, you were sort of indicating that a buyback might look like a better option with where the share price is currently. Just wondering if you can shed any light on whether you expect to see that any time in the near future or whether that's an option.

Probably no change from our commentary of 6 months ago, to be honest. Where we are today, our main focus is living the -- delivering on opportunity that our brands have in local and international markets. Obviously, we've got some work to do to continue to moderate that inventory down and achieve a broader 15% EBITDA, 18% working capital. I think once we get there, we'll be in a positive net cash position, which should be 6, 9 months away. And once we're there, we'll assess those options whether they be M&A and/or further dividend enhancement or capital management. But yes, at this point in time, to be honest, our main focus is just not executing on the business and continuing to grow the business. So that's our main focus, and we've certainly got all those other things in mind, but not our most immediate priority.

And just thinking about the strong sales that you've seen through the first half and in February, particularly for that Kathmandu brand. Just wondering what the mix has been between sort of the core product range and maybe some of the new summer gear that you've been selling. And would you expect any of the bad weather that we've had through the start of the year, particularly in New Zealand, has pulled forward any of those rainwear and insulation sales from the second half?

Yes. I think it's -- yes. Look, what we're seeing, we never like to point to weather, of course, but it's been very wet in the North Island, New Zealand. So our rainwear sales are being pulled forward in that part of the market that has been particularly hot on the eastern -- hot and dry on the eastern seaboard of Australia with [ 19.8-degree ] weather in Sydney the whole of last week. To be honest, our rainwear sales completely disappeared in that market. So look, it's a bit of across the diversification of not only Kathmandu brand, but the group. It's hard to point to any one particular thing. But yes, in terms -- specifically in terms of summer mix versus the core range, I would say both remain relatively popular. The core range continues to be strong. We're seeing a lot of the basic insulation, even right through summer, sell really well, that people go on holidays over to U.S.A. or Europe. But at same time, we certainly think good growth in things like T-shirts and shirt thing and shorts as we continue to try and build out our spring-summer offerings. So look, we're pretty happy with how things are progressing, and that's going to be an ongoing focus for the Kathmandu brand to become a 365-day destination for consumers.

And then just last one for me. Just if you're able to comment on any mix shift that's taken place between your normal stores and outlets and any change in margins across those 2 distribution methods.

No real change in margin across those two. If anything, you know, not rotation margin, to be honest, across -- as we've said, our margin is up across the group. So what we're seeing is slight margin mix across each of those channels and across all of our brands. In terms of what we're seeing -- there's no doubt. I think as we alluded to 6 months ago, we are starting to see or have seen our outlets performing really strongly in all markets. We think that's two reasons. There's no doubt there are some consumers that are hurting with higher interest rates and inflationary pressures. And in my experience, when that happens, you will see a positive impact on our outlet performance, and we're certainly seeing that through not only at the back end of last financial year, but through this first half. So our outlets performed really well across both brands, both Kathmandu and Rip Curl in all markets. But at the same time, our outlook 12 months ago was so significantly understocked, particularly on the Rip Curl side. We're basically -- on the back of a great sell-through, we really had no stock. So to be honest with you, with our strong outlet performance, particularly on the Rip Curl side, it is much about having depth of inventory as it is what the consumer might be up to. But look, overall, definitely, I'd say outlets performing slightly stronger than our primary flagship stores at the moment. But not that noticeable, to be honest.

And at this time, with no other questions in the queue, I will turn the call back to Michael Daly for any additional or closing comments.

Thank you, all. Thank you, everyone, for joining, and that's all from me.

And so this concludes today's call. Thank you for your participation. You may now disconnect. Goodbye.