Lovisa Holdings Limited (LOV) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Lovisa Holdings Limited FY '20 Full Year Results Conference Call. [Operator Instructions] I must advise you that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Managing Director of Lovisa, Shane Fallscheer. Thank you. Please go ahead.

Thank you, and good morning, everyone, and thanks for taking the time to dial in. On the call today, you have myself, Shane Fallscheer, Managing Director; and Chris Lauder, our CFO. As you're aware, we published our full year results to the ASX this morning, and we'd like to talk you through them. I will now do a page turn through the presentation, and we're happy to take any questions at the end. If we turn to Page 4, I thought we would start with a recap on our business and strategy for those of you that aren't familiar with Lovisa. 10 years ago, we created the Lovisa brand, which is a fast fashion jewelry concept, and the benefits of this concept is we can operate generating high margins while operating in a small store footprint. In May this year, we celebrated our 10th anniversary with 435 stores across 15 markets, delivering significant sales and profit growth over that period with a compound annual growth rate of 30% at the sales line. And we now employ over 3,000 team members around the world. As we stand today, like most businesses, we have some challenges brought upon us because of the pandemic. However, we intend to stay true to what has made Lovisa a great company. We are continuing to develop over 100 new lines of products for our customers every week. We are continuing to invest in our people and structures to support our future growth, and we are pleased with the progress we are making in the digital space. And with continued cost control, we have a strong balance sheet and no debt to take us into the future. So to that end, we have done significant work through the current period of disruption to ensure our business is fit and ready to take on the advantages of opportunities that we're confident will arise. And we will continue to invest in the growth of the business, including new market opportunities as they present themselves, and we remain excited about the future. If we now turn to Page 5, we will talk through some of the details of FY '20. After delivering a solid first half of the financial year, with strong growth in our store network and sales growth of 22.2% in the first half. The impact of temporary store closures due to COVID in the second half, and in particular Q4, meant that our full year EBIT was down 42% to $30.6 million. That is excluding the impact of the new lease accounting standards and impairment expenses. For the sake of clarity, all of the numbers we will talk to today and included in our presentation are after removing the effect of the new accounting standards, so that they are comparable with the prior year numbers, which has not been restated, and also excludes the one-off impact of impairment expenses, primarily from the exit of the Spanish market. We continued our global rollout strategy during FY '20 with 66 new stores opened for the year and a net increase of 45 stores. With the U.S. rollout gaining momentum, we added 29 new stores and we are now trading across 13 states as of today. Our execution and geographic coverage in the digital space improved and has now begun to become an important part of our model. Cash flow from operations was $51.7 million, and cash conversion at 115% despite the impact of COVID. So by a tight cash flow management and inventory control at year-end, we held $20.4 million and no debt. As a result, the Board has confirmed the payment of the $0.15 interim dividend that was deferred back in April this year until end September, with the only change being a reduction in the franking percentage to 50% as a result of lower tax payments made during the year. If we turn to the financial overview on Page 6, as I noted earlier, revenue for the period was up 22.2% with comparable store sales up 2.1% for the first half of the year, and we were happy with where we were tracking. However, unfortunately due to COVID, we were forced to close down our store network to varying degrees around the world through April, May and part of June. As each market was able to reopen, we generally saw sales recover more slowly than we would have liked as our category is impacted by the continued enforcement of social distancing and most major event opportunities unable to occur. This resulted in our comparable store sales for the period since reopening to the end of the financial year trading down 32.5% on the year prior. The new store rollout and increase in CapEx spend prior to the slowdown from COVID resulted in an increased depreciation expense for the year. And combined with the impact of the lower sales through the second half, which resulted in EBIT decreasing 41.6% to $30.6 million. The effective tax rate for the year was negatively impacted by the drop in profitability for the year, particularly in newer markets where we have taken a conservative approach to the recognition of tax losses, in particular, where those losses have increased as a direct result of government tax concessions. The statutory results for the year was also impacted by the recognition of impairment provisions in relation to the exit of the Spanish business as well as provisions against a small number of stores in other markets. Pleasingly, despite the disruption we've experienced throughout the second half of the financial year, we were able to finish the year with a very strong balance sheet position. Turning to Page 7. We have tried to make the impact of COVID on our store network clearer for you. As you can see, almost all of our store network was closed from the end of March, with stores gradually reopening from mid-April through to the end of June. We were able to get our Australian and New Zealand stores back up and running relatively quickly and with less restrictions at that time than some other markets. We were therefore able to achieve better results coming out of the closure period. Unfortunately, more recently, you can see that we've again been impacted by store closures through August across a number of markets. We are also grateful for the support provided by governments around the world in the way of wage subsidies, which helped us retain our team through the lockdown period and made it easier for us to get back up and running as quickly as possibly. If we turn to Page 8, we've spoken to the sales impact from COVID already. And whilst this chart shows our sales declining for the first time since we started the business, we see this impact as temporary, with 60 new company-owned stores opened during FY '20. We've built a strong store base to build as the global economy begins to normalize. It has also given us a strong impetus to drive online and investment made in our digital platform had helped us to offset some of the lost sales from our physical stores. On Page 9, you will see our sales by region. While still down last year, the Australian and New Zealand markets has been our strongest performers in the period since reopening, with a faster recovery than other markets as a result of less restrictions in place until more recently. Those markets were also trading well prior to COVID with strong first half performance. Our Asian markets were the first to face disruption from COVID-19 and have been the slowest to recover. And whilst our European and U.S. stores continue to see disruption to normal sales level, the total sales have increased strongly as a result of new store openings. Turning to Page 10. Gross profit of $187.3 million was down 7% at a 77% gross margin, which was impacted by the lowest U.S. dollar hedge rates for the period, with constant currency margin tracking at 79%. The remaining decrease in margin was the result of more stores reopening post lock down into our June sales period, along with our decision to take higher levels of inventory provisioning required at the end of the financial year based on our normal inventory provisioning policy. If we turn to Page 11, we'll talk to our cost of doing business. As we've said previously, we continue to reinvest into the growth trajectory of our business, which has put pressure on our CODB percentage over recent periods. We have however enable to deliver on some efficiencies in this area, which helped us to keep our CODB in line with last year through the first half. We expect these newer markets to continue to operate at a slightly higher CODB than our more mature markets. However, we remain focused on delivering further efficiencies to manage this. With the impact of the falling sales due to COVID in the second half of our CODB was not able to be reduced efficiently to offset this, which resulted in our CODB for the year increasing 59% compared to 56% in the prior year. Various government wage subsidies and rental abatements, where they have been provided to date by landlords, helped to support our CODB through the closure period and to ensure we were able to keep our team employed. Whilst we have been able to agree some rental assistance to date, in particular working closely with our larger Australian landlords center group in vicinity, among others, we continue to engage in productive discussions with our landlords on both abatement as well as future deals. I'll now hand you over to Chris Lauder, our CFO, to talk through cash flow and the balance sheet.

Thanks, Shane. Turning to Page 12, you've seen that despite the disruption to Q4, cash flow was again strong and cash from operations before interest and tax of $51.7 million, and operating cash conversion of 115% as a result of tight working capital management during the period of COVID-19 impact and net payment deferrals. Inventory was well managed through Q4 despite the disruption to our supply chain and temporary store closures with lower closing stock levels in prior year even when it meant 45 more stores trading in the prior year. Capital expenditure for the period was $25.6 million predominantly through store putouts and refurbishments on existing stores upon lease renewal, with 66 new company-owned stores opened for the year, resulting in a further increase in depreciation expense of $14.1 million. Lower profit levels and the one-off benefit of the deductions related to share options exercised during the year resulted in a $17 million reduction in tax paid for the financial year. This action was taken to protect our cash flow early in the COVID shutdown period, helped to deliver closing cash of $20.4 million and no debt at the end of the period. Turning to the balance sheet on Page 13. The dividend remains strong. Importantly, we were able to refinance our existing debt facilities during the second half of the financial year, with the overall facility limit increasing $50 million, with maturity of the term debt component extended to 3 years. Financial year-end, there was no cash drawings on those facilities, with an available limit of $45 million after taking account of $5 million of bank entry, which we currently have on issue. A continued strong balance sheet position has enabled the Board to confirm the intention to pay the previously deferred $0.15 interim dividend on September 30, 2020 as planned. However, the franking percentage of this dividend will be reduced to 50% and we originally announced 100% tracking as a result of lower tax paid during FY '20. Also, given the ongoing uncertainty in the global marketing present, the Board have elected not to pay a final dividend in relation to FY '20. The Board will continue to assess dividend levels each half year and determine the appropriate level of dividend based on profitability, cash flows and future growth CapEx requirements in the context of the developing economic condition. The Board do not currently have a specific dividend payout ratio, and we'll continue to base dividends on the cash flow needs of the company and the structure of the balance sheet. I'll now hand back to Shane.

Thanks, Chris. If we turn to Page 14, a quick update on store numbers. The key driver of future growth for Lovisa continues to be the international store rollout, with 65% of our store network now trading outside of Australia. We finished the year with 435 stores trading with a net 45 stores opening during the financial year, which comprised of 66 new stores opening and 21 store stores closing as we continually optimize the store network, reminding you that 9 of the store closures related to the exit of Spain. The rollouts in the U.S. and France continued their momentum through the first half. And whilst these slowed as a result of the COVID disruption, we now have 21 stores trading in France at the end of the year and 48 in the U.S. across multiple states. As we have said previously, sourcing quality sites is key, and we will take a measured and diligent approach to moving forward in both our current markets and any new market we may enter. And with the uncertainty introduced as a result of COVID, we need to ensure that we remain true to this focus while still taking advantage of growth opportunities as they arise. Turning to Page 15. I will talk to the progress we've made in recent times in relation to digital. The focus on our digital capability is accelerated leading into lockdown, and we now service all 8 of our major markets with our digital store fronts across the globe, with new sites rolled out in South Africa and the U.S.A. during the second half. As a result, we were able to grow our online sales by 311% for FY '20, with growth of 382% during Q4. And that trend has continued since financial year-end, albeit off a low base. In addition to increasing the geographical coverage of our digital business, we've also been able to deliver a number of other key digital initiatives, including fulfillment from store, live chat and multi-warehouse fulfillment to improve our supply chain capacity. We've also recently appointed a Head of Digital and Marketing to maximize the results in this area, with a further pipeline of digital development in progress at FY '21. Turning to Page 16. I will now talk in more detail in relation to the U.S. market. As I mentioned earlier, we were trading from 48 stores in the U.S. at the end of the financial year across 10 states. Since then, we have been able to get started off store openings following the lockdown and have opened a further 5 stores in the U.S. including our first stores in Louisiana, Missouri and Connecticut, taking us to 53 stores in 13 states in total. Results to date indicate that the Lovisa offer is resonating well with our American customers and operating metrics are in line with our expectations. Whilst operating costs in this market have been higher than some of our other markets so far, in particular, new store build costs, we are happy with the progress in outcomes to date in the U.S. even though the expansion continues to put upward pressure on overall CODB and depreciation. Despite the short-term COVID challenges over the past few months, we continue to see the U.S.A. market as a significant long-term opportunity and continue to invest in the structures to support this. Turning now to Page 17. I'll talk to the European market. At financial year-end, we were trading from 42 stores in the U.K. and 21 in France. Talking to Spain, we were disappointed in the response we received from landlords in relation to rental support, and as a result of that, combined with uncertainty over future return levels in this market, we made the decision to exit and not reopen our 9 stores, exiting the Spanish market. In the U.K., store rollout progress has continued to be slow as a result of the site availability and then COVID taking landlords' focus away from doing new deals. However, we are pleased with the progress we've made with the existing store network in relation to sales and cost management. In relation to France, we continue to be pleased with the performance of the stores we have opened to date and are focused on sourcing appropriate sites to grow this market. We had a leasing manager in place in France to support this growth. And again, we will not sacrifice quality of stores or our operating metrics to deliver on a store number target. As with the U.S., our experience in this market to date has been that operating costs have been higher than our average. However, we continue to see the European market as a strong growth opportunity for us. On Page 18, I will talk to the trading update and outlook for the coming financial year. Trading for the first 8 weeks of FY '21 has seen continued challenging trading conditions as most markets continued to experience economic disruption, with comparable store sales for this period of minus 19%, seeing an improvement from comparable store sales of Q4 of minus 32.5%. We continue to see positive signs across our markets. However, this has been tempered somewhat by recent government-imposed lockdown in a number of locations. With 30 stores currently closed in Metropolitan Melbourne, 19 in California, 2 in New York and 8 stores in New Zealand. We continue to focus on opportunities for expanding our store network, and as I mentioned earlier, have opened 8 new stores since the end of the financial year. Our strategic plans remain in place, and we are ready to continue our store rollout as we continue growth discussions with our landlords globally. We also continue to build our global executive team with the recent addition of a Senior Leasing Executive based in the Northern Hemisphere and a Head of Digital and Marketing. Our balance sheet remains strong with continued net cash position above $20 million and undrawn cash debt facility supporting investment in growth. However, as a result of the current uncertainty in the global economic environment, we are not in a position to provide any further information in relation to the outlook for our business. So in summary, on Page 19, after a strong start to FY '20 with 23% sales growth and strong momentum in our store rollout. Unfortunately, COVID-related closures and impact from our category has a major impact on our sales and profitability in the second half, resulting in EBIT for the year at $30.6 million. We are pleased with the progress we have made in digital, with increasing contribution from online sales, and we were also able to control our CODB well during the year, and in particular, through the Q4 disruption and as a result, have been able to continue to invest in building a platform for future growth. Our international expansion continued prior to COVID lockdown, with a further 66 new stores opened during the year and a total network of 435 stores at year-end. With 65% of our store network now outside of Australia, and the rollout continuing to gain momentum in the U.S.A. and France markets despite the COVID disruption. Our continuing strong balance sheet positions us a lot for the deferred interim dividend of $0.15 per share to be paid on the 30th of September 2020, as planned, and leaves us in a strong position to again move forward with our growth plan. So with that, I want to thank you for your time today, and we're happy to open it up for any questions. Thank you.

[Operator Instructions] The first question comes from Jo Little from Morgans.

Just firstly, on the $20 million net cash position, which is great. And you said that's still intact today. Is there anything different to consider in terms of deferrals or inventory rebuild? I guess that's going to be reliant on sales performance. But just trying to pro forma that a bit, any net [ good ] into the first half of the new financial year?

Yes. Jo, I'll talk to inventory, and I'll turn to Chris for the hard one. The -- so as far as the inventory goes, we basically just ran our inventory straight through. Running into the March period, we obviously reassessed our stock position. The thing that we can get in and out of stock in that sort of 6- to 7-week time frame. We've been fortunate that we could sort of manage inventories through without some of the other challenges. So from an inventory position, we're comfortable with our position now being ramped up of stock to come. And I'll get Chris to answer the other half.

Yes. I just heard that there's a little bit of a catch-up in terms of payment terms with the inventory supplies, but not much, Jo, so that's largely already reflected in that update. As of now, that we still got more than $20 million of cash. We have been paying some rent through the last couple of months. So we have caught up some of that rent to fill already, but there's obviously still a catch-up to do there. So we think about it the dividend to pay, which is about $16 million coming out of that. And then probably a couple of months worth of rent still to pay on top of what we're incurring at the moment. So that's -- a little bit of that's dependent on what we can negotiate in terms of abatement that we haven't done already.

Okay. Great. That's helpful. And just on the store, Shane, obviously, you've opened 8 post [ balance ], I think, 5 in the U.S. despite sales being still have a material deficit, I guess, reflects your long-term focus. But can you just talk about the psychology behind that and maybe a bit more color on where you're at with rental negotiations and the shape of some of those outcomes offshore. Understanding that a lot of that will be confidential, but some kind of color would be great.

Sure. So the way to look at the stores that we've opened since July 1 was really that deals were already in play. So working on -- I mean, we can turnaround stores reasonably quick but we still got a 3- or 4-month lag. So those stores will probably -- deals in the can coming into sort of January, February, March this year, and we really sort of came off-site and came back on site. So that's the sort of stores that we've opened since July 1. As far as landlord negotiations on rent, on rent issue through COVID, it's just an ongoing issue. Some markets have been more cooperative than others but we're confident that we'll find a position that works for us across the world. And as far as new deals moving forward, there has been clearly disruption to our ability to keep doing new deals, being that we're still here and ready to go. But obviously, landlords have been well documented and got other challenges that they're sort of prioritizing. So in simple terms, we're ready to keep moving, but it's probably only been the last 3 or 4 weeks that the landlords have been ready to reengage in new deals moving forward then that everyone has to sort of pause and regroup. So we're confident those discussions are starting again. And we're confident we'll get to a position that we're all happy with on new deals, but it's been slow going over the last 3 or 4 months. So therefore, that's going to see a lag effect on our store openings as you're sort of nearer that down the calendar.

Yes, I got it. And I'm not sure if you're willing to do this, but just any idea of how many stores are in the pipe, if the right deals were actually done from your perspective or from a return perspective?

Yes, not willing to go there. There's a lot of moving parts. As I said, we're just disappointed at the Northern Hemisphere seeing a leasing executive to basically -- because up until now, we've had -- we've got leasing executives in most markets. But really, we've had one Head of Leasing, we've split that in 2. So we've now got a Head of Leasing Southern Hemisphere and a Head of Leasing Northern Hemisphere. And we've got that in place to sort of keep those discussions going, especially with travel being more compromised moving forward in the short to midterm. So -- but there's too many moving parts for me to put a number on it.

No worries. And just lastly for me, I'll jump back in the queue. Just on the gross margin, I understand impact when you do open into a sales period and demand is tough. But just thinking about trajectory in FY '21, hedge rate versus how you're thinking promotionally while demand is impacted? Just any idea there would be great.

From a promotional schedule, obviously, we lost a lot of trade through April, May, which are traditional full price trading months. Then we reopened in June, and we opted to open into sale to make sure that we could clear down any issues that we may have had a build-up on. And now we're back into a normal schedule. And again, the benefits of short lead times with our suppliers is probably beneficial for our business in the current environment. So we're anticipating just rolling into a traditional promotional schedule moving forward.

On currency. I guess it's basically stabilized, consistent with where it closed or what we did for FY '20. So I think the number that we've put out there is about $0.71 on average for FY '20, and that's pretty much where our hedge booking at the moment, with the spot a little bit higher than that. Here the amounts that even hedged out in the second half. At the moment, we're in a pretty good place. So we're not expecting that to be as big an issue for this year as it has been in the past.

Your next question comes from Sam Teeger from Citi.

When you guys say like-for-like sales are down 19% in the trading update. Can you please confirm whether that includes or excludes the stores that are closed? I guess, if it excludes store closures and kind of true like-for-like sales, would be by larger amounts?

Yes. That is a true like-for-like in the like-for-like sales based on stores that are actually trading. So it excludes the stores that's been closed because of government closure orders, if that makes sense. But I simply couldn't tell you what the trading performance business is still that are actually trading.

Okay. Yes. Got you. And then I think you recognized $11.8 million of wage subsidies in FY '20. Based on -- we're quite further with JobKeeper in Australia, but based on all the different kind of wage subsidies around the world at this point in time, how much would you be anticipating to recognize in FY '21? And when do they start tapering off?

Yes. It will be less than that because that was certainly the -- a lot of countries other than Australia with wage subsidy programs that aren't necessarily in place anymore. So it's really just JobKeeper at the moment in Australia and a couple of other countries, so small will be great. Not planning on going through detail of what we expect JobKeeper to be for the year. I mean it's a number that includes the component of top-up where we're having to pay people faster than normal weekly wage, so it would have been misleading, that number.

Yes. Got it. Makes sense. And then just wondering, you guys seem like you've been doing a really good job around face masks, well done for current trends. Just kind of keen to get a sense of right now what proportion of sales face masks represent? And without going to the specifics, is it fair to assume that face masks have lower gross margin?

Similar margin, however, a very small percentage of our business. So we basically brought them in to ensure that we could sort of -- as a recognized brand, supply them to our customers, but a very small percentage of our business. We basically -- [ you may question ] we saw a spike in Melbourne as we went into Phase 4. But most people, depending on where they live, they have to live through wearing masks. What happened very quickly is you end up with 5 different ones on the end of a kitchen bench. So yes, to answer your question, it's a very small business in the end. It's not very meaningful amount of our business. It's a small part of our business.

Your next question comes from Callum Sinclair from Macquarie.

So a few quick ones, maybe if you can just provide, I guess, a bit of color in terms of the trading since reopening globally versus Australia. I [ think ] they're doing better. But I guess, how wide should we expect this difference today at the moment?

Yes. Look, prior to COVID, I think you've always been recently consistent in saying that the span of like-for-like numbers is usually quite a tight bracket. Being that we create all of our own products and distribute it around world, and ultimately, typically product drives our success. So typically, we see those brackets of like-for-like sales be a reasonably tight down between the high outliers and the low outliers, I suppose. In this case, we are getting large variables. We're not really in a position to talk to sort of like-for-like per individual market. But we are seeing a wider scope of like-for-likes really come down to everything from basically infection rates and how each society is dealing with COVID, how each government is enforcing COVID restrictions and so on. Asia has been -- the only thing I would say is that Asia has probably been a lowlier. It will affect the daily. And it's a harder recovery out of Asia that we're seeing, for Malaysian stores. But other than that, I think if you would sort of overlay how each government and how each society deal with COVID. It's probably fair to say that's going to be represented in our numbers.

That helps. And maybe just, I guess, you view that angle being better, does that give you confidence, I guess, that eventually, those other markets will follow suits just in their own time frame according to, I guess, some government restrictions and how people treat going back out again.

Yes. It's a good question. I mean if you overlay, you just take a look at the infection rates around the world. And if you overlay sort of -- I've lost track of the numbers in the last week or 2, but Florida were at 10,000 cases a day and trading through, and then Melbourne got to 400 cases a day and went into full lock down. So it's really just again, that -- the impacts, and that's not a [indiscernible], by the way, that's just the impact of different governments and how that's affecting trade impacts in each market. So we do see blips when you get sort of something happens and there's a new hotspot or whatever you want to call it. And you do see which of sales come off sort of reasonably quickly and then a few good days of lower infection rates around the world. Then if these results come back. And then you've got markets such as WA that have probably, unfortunately, perhaps would sort of avoided a lot of the issues that other states in-countries have got, and then they're trading very strongly. So it really is sort of -- at a macro level, it really follows the sort of level of infections and how the governments are choosing to deliver in each market. [indiscernible] any more details on that, but it really is a bit of a moving piece.

No, no, that helps a lot. I guess people could get that, but it helps if that's what you're actually seeing. Maybe just a follow-up to the gross margin question. Can I just confirm that the inventory provisioning that you've mentioned in the slide deck has actually been included in the results. And so the gross margin for FY '20 in the second half includes that provision being put through?

Yes, that's right.

Are you able to share, I guess, how material that is and what the gross margin -- I mean, you've done it on a constant currency basis, but I imagine there's still double digit basis points impact on that provision as well.

Yes. It's pretty much -- I mean, half of that the reported movement in gross margins from currency. So when you look at constant currency, you can see that. And then the rest of it, a big chunk of that is from provisioning. And then the rest of it is from the opening in the June tail, so probably a bigger part of it is the provisioning component.

Great. That helps. And maybe just one last -- a final one around materiality of online sales. Obviously, it's growing quite fast. But if you could just help casing margins here and some of the initiatives to drive sales in stores, that is to help give delivery costs and actually delivering a sort of, I guess, underlying margins below those costs.

Yes. So obviously, the approach that we've taken with the online business to date has been much a push volume hard at the expense of profit. So that in a lot of respects has limited the growth so far because we want to make it profitable -- make sure it's a profitable business as it grows. And we've been able to maintain that. So what we look for is both the online business to be as profitable as our stores. And obviously, we've got a lot more volume going through there now. So if your question is, do we expect to see a degradation in our overall EBIT margin because of that? Then the answer is no.

Your next question comes from Sam Haddad from Bell Potter.

Just on the ANZ, just want to clarify that all rents have now been agreed on new terms with the COVID environment?

No. We've agreed a number of terms, and we've agreed the majority of sites and current locations in Australia. We've agreed -- made deals that we're comfortable with, but not all...

Well, that's a majority, is that right?

The majority, yes.

Okay. And on those, is that -- can you sort of give color on the structure of those too? Is it more shift as a percentage of sales? Or is it just a reduction in fixed cost? Or...

Yes -- no, we're just not in a position to talk to the deals we've agreed.

Because I'm just finding what -- we've renewed restrictions and the fact that you've closed stores again, are you still paying rent on the stores that you've closed now in Melbourne and Auckland?

Same answer, unfortunately, that we're comfortable with what we've achieved with our landlords, but we're not in a position to talk through details.

Okay. Sure. Just back in the U.S., just wondering, given that negotiations are starting to -- you reengaged in the last few weeks. And given the lag to open up stores from when you start engaging, should we then assume that store openings will -- in terms of the pipeline in the U.S. in the short term, it's fair to assume that there won't be material number of stores in the first half, given engagements that are -- you're willing to starting to reengage with landlords in that respect?

Yes. It's a fair assumption globally, that the first half will be quite -- and that's really off the base. I mean as much as we can do deals very, very quickly, it's just off a base at different markets. Again, it's globally documented, different markets went into lockdown at different periods. But it's fair to say that March, April, May, June, that it was hard to get any sort of proactive activity and probably even into July. Ironically, now in Europe, we're dealing with people going off on holidays and having trouble to get hold of people to get the right deals done. But yes, so that said, it's going to be a slower first half due to the fact that the deals, the lag effect of the closure -- we were open and ready to go through business right through. But unfortunately, hard to get landlord's attention in the middle of this crisis.

Yes. Understood. And just in terms of BD, on prospective new sites. How do you go about that with restrictions between states and flight restrictions? Just, honestly, you want to get a feel for the foot traffic. I know foot traffic is half measured by just the general feel of the store location.

Yes. Look, I mean if we go in the different markets, we've now have a leasing executive based in L.A. to cover the Northern Hemisphere. We've got a senior management team that have been in place for a couple of years now. So the comfortable -- we're comfortable with both desktop analysis and ability for the team on the ground to visit these locations. We're comfortable that, that won't compromise our site selection in the short to midterm.

Okay. And just on the online channel, I was just curious how profitable is that channel and who's handling product fulfillment? And I know you get some over a certain basket, there is some reductions in that, just curious as to the profitability of the online channel?

Yes. So the stance is that [ one is set ]. But the target that, that channel should be as profitable as our stores. So we -- as we said, we have a threshold for delivery. So to make sure that -- recover the cost of fulfillment, given the low average unit for us to go sell. So yes, that's really all to tell about it. So I think it's the same question as before, it's not accretive to our EBIT margin.

Your next question comes from Mark Wade from CLSA.

The question is a little bit of an overlap on what you touched on before, but I'm thinking with the capital restrictions in place, it kind of affected your product development.

From a price perspective, we've got -- I mean, we developed -- our product is basically to develop internally. Obviously, we like to see what's going on around the world for aspiration. Our buyers are traveling, I would like to say less, but at the moment, they're not traveling. But we do have seen designed [ or encoded ] individual in America and the U.K. that basically has pivoted into a role as basically fashion spotter-type scenario where we're getting weekly feedback of what's happening on the high streets around the world. So we're reasonably comfortable, we're not missing -- I mean, of course, it will be better for us to be in and out of China every 4 weeks like we were. And in and out of -- back of the world every 8 or 10 weeks. But we're comfortable that the senior executives in our business that have been in that business for a long period of time and understand what to look for have now sort of moved into some of those roles to keep the feedback flowing into our internal support center.

And just pivoting to this franchisee opportunity, I mean, it's something as an outsider, you think will be marvelous, but I guess internally, it's pretty hard to manage. Wanted to get just your current thoughts around that. Can that be a big opportunity for franchising?

Yes. We -- our simple belief is that we like to control our own destiny wherever possible. So our first priority is to open company-owned markets around the world and have full control of our expansion plans there. The franchise markets that we've operated in or we operate in at the moment are the markets that are either government ownership or restricted from owning our own business. Or complexities, levels of corruption and all the different variables that we'd look at before we open into a market. So we're not proactively pursuing those at the moment. And really, if someone approaches us in a market that we're not currently looking at from a company perspective, and we'll do some work on it and make a decision. It's fair to say at the moment, no one is really in that space looking for new opportunities. I wouldn't imagine there'd be much moving in that space over the next 12 months.

Okay. That's really preferred to company own, so it's about [indiscernible]. Okay. And lastly, just on margins, I mean, it's been an extraordinary year you've been through and your own margins kind of almost halved. I mean is there any reason to think they won't just snap back in time once you really get your sales velocity returning to the business? Or is it something more structural in place that remains going to be harder. I know you touched on this saying the U.S. and the price is all the cost of doing business. But in general, should one think margins are permanently going to have a step down? Or they're due to snap back in time?

And when you say margins, are you talking -- or EBIT I was thinking [indiscernible] but obviously...

Yes. We should take into account both, I think, consequence and -- of the same business?

Oh, okay.

Obviously, the EBIT margin is heavily impacted at the moment by the drop in sales. While we haven't been able to call some of the fixed costs down as fast. So I guess, getting back to the EBIT margins, where we were previously instead of depending on how quickly we can get sales back to where they were pre-COVID. So I think gross margins, generally, we should be able to maintain at least back to levels. We should put in the impact of currency. Remind you that we were at $0.76 hedge rate last year and $0.71 now. Yes. So does that answer your question?

Yes. So that's top line. Anything I should be thinking about in the cost of doing business, which could be a permanent change there?

I mean we've talked a bit over the last 18 months around the newer markets and the higher costs that we've had going with those. So there is still a little bit left falling through as well as more and more stores in those markets. That's -- and obviously, the depreciation side of that was a high CapEx spend. You saw an impact as you've seen in the numbers [indiscernible] we were making some progress on the markets in the first half I'd say in the prior year. So we would expect to sort of get back to that sort of level of sales or more.

Sorry, can I just put a fourth one in? I mean, do you ever see any competitors coming down the [indiscernible]? I mean, given those margins had historically been just solid even at something as an outside of the [indiscernible] really pondering versus opportunities happening off-line? Probably margins that are up there in the top handful, the whole jewelry operators in the world. But one doesn't attract more competition?

Yes, I mean, I think you answered that question. Over the last decade, we've had numerous competitors in our space. Off the top of my head, we've had South Africa, a major competitor that we have built some of their stores. In Australia, we've had colette which is still on the [ trench ] trying to find a buyer. I think [indiscernible] 150 stores or 130 stores. I think to answer your question, our business looks simplistic from that outside looking in, but the complexities to operate our business and all the ingredients that go into run a successful business, probably restricted, except probably it looks easier than any -- in simple terms or any big retail [indiscernible].

The next question comes from Julian Mulcahy from Evans & Partners.

Just a few questions. Firstly, the inventory write-off of $6.8 million in your COGS, you're much higher than previously. Is that mainly just writing off Spanish stock? Or is it there's a line discontinued that you took such aggressively?

That's -- part of that's the Spanish stock. Part of it is just the increase in the number of stores during the year. So obviously, our overall stock level didn't go up. We had an increase in stores from the number in the prior year. And then we took extra provisioning at the end of the year as we came out of a shutdown. So...

I mean with the rent subsidies that you've got $1.8 million. Does that -- do you see any in this half? Or that was just -- that last quarter on the...

Right. So in terms of -- should we expect to continue to get rent probably even for the second half -- into this financial year?

Yes.

Yes. I mean, as said before, we're still talking to our landlords about abatements and trying to negotiate that. So yes, there'll be some there. It's the number we're not talking to.

But basically, you've expensed your rent, if you were paying it less that subsidy. But in terms of the cash outflow, you haven't necessarily paid back completely in the final quarter? The -- is that correct?

From a cash flow perspective. So we've expensed the rent if that's still done with, obviously, reflected that in F '20. We may not pay the net rent by that cost at some cash flow flowing into '21.

Yes. Okay. And so we think the U.S. [indiscernible] landlords and you wouldn't be doing retailers, you'd be out looking to roll out hundreds of stores. Does that just really put you up to sort prior [indiscernible] willing to sign you and offering you baskets of good locations?

It's Shane here. Yes, look, we -- this is how I can answer that question is, we're ready to go, but everything takes longer than everyone would like, especially when we're sort of a young aggressive business that wants to keep moving through. So there's no doubt there's going to be distressed retailers. Probably too early to see any sort of macro opportunity. And being that the American landlord [indiscernible] the only reason we were documented a different performance sort of once a week. I think the short answer is just going to take a bit more time than we would like to get the traction that we think will be there. I don't think there's any question that they'll be on. But trying those opportunities down and getting those deals away, a lot of landlords are still worrying about who's paid rent in the last 3 months and who's capable of paying rent in the future, and so hence the [indiscernible] at the moment. So -- but as I've said earlier, that with our new leasing executives based on the ground there and [indiscernible] the business, different landlords, it's fair to say we sort of -- the audience -- the ability to get an audience and the ability to sort of work through some of those opportunities is starting to get more. And therefore, get some more traction.

Well, there's no bottleneck from the other half in terms of giving [indiscernible] since you've got the opportunities in advance?

Yes.

Okay. And just finally, you mentioned the WA performed the best. So is that even positive like-for-like territory?

Yes. Again, we're not really giving the details. WA is one of the stronger ones. And I really just use that as an example of the markets that have had very little impact from COVID, fortunately, then we're seeing very strong result.

Your next question comes from private investor, [ Greg Hoffman ].

I may have missed it, but have you given a dollar figure for online sales? I know you called out the huge percentage increases. But just without putting those in context, it's hard for us to gauge. Is this the equivalent of one store, 10 stores, what kind of figure we're talking?

Yes. So no, we haven't, and we don't intend to. So we've talked about the percentage increases year-over-year because everybody is -- they're interested in it, but we don't plan to -- to what percentage our business is. At the moment, still a small part of our overall turnover.

Okay. And could you just talk a little bit maybe about Vietnam? You haven't sort of called that out at all. What are you seeing there? Have you learned anything of interest in that market?

No. I mean, look, again, every market has been affected differently through COVID. So there's nothing really different there than we've learned from Malaysia or Singapore, anything like that. Again, some of those Asian markets have had a bigger impact. With Vietnam, by the franchise partner, so we're feeling alone at the moment. Obviously, every business has regrouped through lockdown. And getting them feels off and that's probably the same with our franchise partners.

There are no further questions at this time. I'd now like to hand the conference back to Shane. Please continue.

So thank you for your time this morning, and I look forward to probably talking to most of you again over the next 2 to 3 days. Thanks for your time.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.