Lovisa Holdings Limited (LOV) Earnings Call Transcript & Summary

Hello, and welcome to the Lovisa Holdings Limited Fiscal Year '24 Half Year Results Briefing. [Operator Instructions] I would now like to turn the call over to Victor Herrero, CEO. You may begin.

Good morning, everyone, and thank you for taking the time to dial in. On the call today, we have our CFO, Chris Lauder; and myself, Victor Herrero, CEO. As you are aware, this morning, we published our half-year results to the ASX, and we would like to talk you through them. I will now do a page turn throughout the highlights of the presentation, and we are happy to take any questions at the end. If we turn to Page 4, I will talk through some of the details of the half year. I'm pleased today to present another solid result for the first half of financial year '24, which is again evidence of strength in the team, the product, and the potential of the business. Despite a more challenging trading environment, particularly in the earlier part of the half, we were still able to deliver strong sales growth of 18.2%, including comparable store sales down 4.4% on last year. The store rollout continues through the half. And even though it was at a lower pace than last year, we still managed to open 74 new stores in the period, taking the store network to 854 stores at half year-end. Recently, we were able to open a further 3 new markets during the first half, including the significant growth opportunity markets of Mainland China and Vietnam. Gross margin was strong and total cost of doing business was stable while making significant investments into growing the business. As a result, we delivered an EBIT of $81.6 million, up 16.3%, and an impact of $53.5 million, up 12%, which has allowed the Board to announce an interim dividend of $0.50 to be paid in April. If we turn to Page 6, you can see the sales performance for the period that shows the benefit of a store network expansion, which allows us to deliver 18.2% sales growth despite negative comp store sales. Looking to our regions, more markets saw more challenging trading conditions in the first quarter with improving trends on Q2. However, with the exception of ANZ, the growth in the store network was able to offset this to deliver growth in total sales across the regions. Growth was particularly strong in the European and Americas market with those regions providing the majority of new store growth. I will now hand over to Chris Lauder, our CFO, to talk through our financials.

Thanks, Victor. Good morning all. If we turn to Page 7. Gross profit was $301 million at an 80.7% gross margin up on last year by 40 basis points with from tight management of pricing and promotion and strong focus on optimizing gross margins and building on the 200 basis point improvement we saw in the first half of FY '23. We continue to focus on the efficiency of our inventory position and are very pleased that we've been able to close the half year in a good state. Turning to Page 8, we talked about profit. As you can see, we began to be able to deliver growth in both EBIT and NPAT despite the impact of negative comps and inflationary pressures on the cost base of the business. This outcome was assisted by the reduction in the CEO LTI expense from $15 million in the first half last year to $6 million in the current period. NPAT for the half year also includes higher interest expense on our debt with increased borrowings on the balance sheet throughout the half and higher interest rates having an impact. We've made a deliberate effort to continue to reinvest in the rollout of new stores in existing markets as well as the opening of new markets and structures to manage the growing scale of the business, and we'll continue to do so to ensure we're able to continue to deliver operational excellence for our customers. Turning to Page 9. You will see that the cash generated by the business has again been strong with cash from operations before interest and tax of $150 million for the half year, a sloping tight management of our working capital. Capital expenditure for the period was $14.3 million, predominantly for new store fit-outs, which represents a decrease on the prior period as the store rollout in the half was lower than that delivered in FY '23 with 68 new company-owned stores built for the half versus 101 built for the same period last year. Cash interest payments were significantly higher than the prior half year, primarily due to the larger store network, resulting in an increase in lease payments classified as interest but also from the deliberate strategy to introduce additional debt into the capital structure of the business combined with higher interest rates resulting in higher interest payments on that debt. Turning to Page 10. You will see that the balance sheet remains strong with a clean inventory position and significant liquidity available to fund growth with net cash at the end of the half of $15 million and total cash debt facilities of $120 million. Focus on distributing surplus cash to shareholders and the introduction of debt into the capital structure combined to result in the increase in gross debt you can see on the balance sheet versus December 2022. The solid profit result for the period and continued strong cash flow and balance sheet position has allowed the Board to announce an interim dividend of $0.50 per share franked at 30%. As we've said previously, the Board will continue to assess dividend levels each period end and determine the appropriate level of dividend based on profitability, cash flows, and future growth CapEx requirements in the context of prevailing economic conditions. 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 Victor.

Thanks, Chris. If we turn to Page 11, a quick update on store numbers. The key driver of future growth for Lovisa continues to be in our global store rollout. We finished the period with 854 stores training in over 40 markets with 74 new stores opened for the period. Although the pace of rollout was slower than prior year, we remain focused on continuing to grow the store network global. Recently, we were able to deliver our first new stores in a strategically important Asian market of Mainland China and Vietnam, both of which provide us with significant growth opportunities in the region. You can see photos of these stores on Page 12. We were also able to open a number of new franchise stores in the half to continue our growth in the South American market with new franchise markets open in Ecuador during the period. On Page 13, you can see a recap of the business strategy, which sets out the key of our success to date and our focus for the future. Our strategy is unchanged. We continue to be focused on the continued global expansion of our physical and digital store network. And as you have already heard, we have made strong progress in delivering on this strategy during the current half year and have laid solid foundations for continued growth in the future. We have continued our focus on delivering an omnichannel experience to our customers and have improved our e-commerce execution at the same time as expanding our customer reach by adding present on a number of new online marketplaces during the period, adding the iconic in Australia to our existing presence on platforms such as Zalando. On Page 14, I will talk to the trading update for the second half to date. Trading for the first 7 weeks of the second half saw comparable store sales for this period up 0.3% and total sales up 19.6% on last year as the improved trend from Q2 has continued. Since the end of the first half, we have opened 9 new stores together with 3 closures, taking the store network to 860. Recently, we have also recently opened our first store in Ireland at Henry Street in Dublin, adding another new market to our growth potential. We continue to focus on opportunities for expanding both our physical and digital store network. And our balance sheet remains strong with available cash and debt facilities supporting continued investment in growth. To summarize the half year on Slide 15. Our sales performance was solid for the half with strong sales growth from network expansion, offset by negative comp sales for the half. Our global expansion delivered 74 new stores opened in the period, finishing the half with a total network of 854 stores. Gross margins were again outstanding at 8.7%, an improvement of 40 basis points on prior year, which was achieved along with a clean inventory position and growing on the 200 basis point improvement we delivered in prior year. This combined to deliver good profit growth with EBIT of $81.6 million, up 16.3% on prior year, an impact of $53.5 million, up 12% with our strong cash flow and balance sheet position, allowing the Board to announce an interim dividend of $0.50 per share to be paid in April. I want to thank the entire global Lovisa team for the outstanding work they are doing to deliver these results. And with that, I want to thank you for your time today, and we are happy to take any questions.

[Operator Instructions] Your first question comes from the line of Shaun Cousins with UBS.

Maybe just, Victor, just on the 6 net stores opened to date, 9 openings, any reason in the slowdown in store growth, specifically, is it landlords that are becoming more difficult? Or is Lovisa seeking better rentals or other impediments to growth? I'm conscious that you quite -- the company is quite consistent in not providing guidance on store network outlook, which is fine, but just keen to get a better understanding of what's produced a slower rate of net new store openings so far this calendar year.

Hello. Thank you for your question. At the end of the day, it depends on how, for example, several weeks you cannot draw conclusions by how many stores we opened exactly on the last 7 weeks. And I think that it's better to think a little bit about how many stores we opened during the first 6 months, which is 74 and from their working, it's a period very short is a short period of time in order to draw a conclusion on how many stores we are going to open because we open in 7 weeks only 9 stores.

All right. But I mean, is there anything about rents or anything on landlords or anything that's sort of impacting this?

Well, as you hear us over the last years, I think we've been very consistent. We open stores whenever we believe they are profitable and that we believe has potential. And over the last 7 weeks, we found 9 stores, so we opened 9 stores that they are doing this. But there is not a significant reason that we are seeing in the marketplace why we are not opening neither less stores nor more stores.

Those sort of considerations are always a factor no matter how many stores are opening. So there'll always be arguments of landlords about rents and the like. But as we always say, the rollout of new stores is not a straight line. So don't draw too many conclusions just on the first 7 weeks.

That's fine. And my second question is just -- and maybe this is more for you, Chris. Maybe just gross margins. Just you commented there about the ongoing management of pricing structures. Can you just discuss price rises or how promotional management has occurred? And then just any sort of benefit given that the strength of that gross margin result, any benefit in changing sort of COGS be lower sourcing costs out of Asia or reductions in the cost of air freight, please, just in terms of trying to get a better understanding of what's driven the gross margin and the resilience of that strength, please?

Yes, as we said, I mean, the management of price has been a key factor in that, and as it has been for the last year or so. It's prudently more a built-in part of what we're doing at the moment, just given the inflationary environment. So backing think with 2022, we did a big shift in prices and that gave us a bit of a step-up at that point in time. But now it's more just ongoing. So as we're bringing new ranges in, we're constantly tweaking the prices. And then if there's -- we think there's work to be done in a particular market, then we'll put an increase through, but it's sort of not across the board or at once or anything like that. So it's kind of just built in to make sure that we're keeping pace with inflation. So that's definitely an important part of it. The input cost side of it, there's probably not too much to talk about there. It hasn't really -- that hasn't been the driver rather than we see a bit of improvement in freight costs in there through just better negotiation of some logistics contracts and that sort of thing and just general price decreases overall in the freight side of things.

Your next question comes from the line of Tom Camilleri with Wilsons Advisory.

Could you please talk to us a little bit more about the improving sales trend you noted in that second quarter? I guess, is that specifically to certain markets? And is it consumer-driven? Or is it to do with, I guess, the pricing changes and promotional activity that you're implementing in stores?

We have seen -- thank you for your question. We have seen an improvement on Q2 on the trends, and we are seeing the same trend over the last 7 weeks. We are pleased on that, and it's all over the place. It's not really one particular region, and we are quite satisfied with these positive comps over the last -- the first 7 weeks of the year.

So if I'm interpreting that right, it's a broad-based improvement that you saw in the second quarter across countries.

Yes. Is not one country specifically. I think it's all over in the 40 markets where we are presenting.

Okay. Great. And then just a second follow-up. How are you thinking about, I guess, now that you've been in China for a couple of months, how are you thinking about the velocity of that rollout there? And I guess, can you comment on, I guess, if the performance of that Chinese store is meeting expectations?

As we mentioned on AGM, we are starting to understand the market from a Lovisa point of view and trying to interact with the customer. We believe that the market has a lot of potential. But so far, for the time being, we are cautious. We open 1 store and let's see how is the performance of the store and then we will see the potential of the market. The good news is that we already opened China, and I think so far, so good, and the market, as you know, has a lot of [indiscernible].

Your next question comes from the line of Edward Woodgate with Jarden.

So just wanted to check, just whether OpEx obviously has been a bit of a tough thing for on to navigate right now. Have there been any reduction in number of hours worked per store location? Is that something you've been implementing to manage your [indiscernible]

I mean, generally, we obviously try to manage rosters as well as we can to deliver the right level of service for the sales level that the stores are currently delivering. So we obviously manage that on an ongoing basis where the sales are going up or down or whatever. But I mean, generally, we have to that level of detail on these sort of calls. But I think there's a point where customer service will suffer if we cut any further or take any of that sort of action. And our focus is on making sure we deliver for the customer. And that means that sometimes when you get inflation in store wages that, that can through a higher cost of doing business, which it has in the first half with some negative comps. So I mean, it's basically what we think the customer needs, not just the financial decision.

One thing that I want to tell you that is operating in more than 15 languages is something which can be a challenge, but I think we overcome that challenge because I think in 40 markets, we speak more than 15 languages. And I think that's an important thing to say that the complexity that we are adding by operating in so many languages. I think we overcome that complexity, and I think so far so good. We continue training the people in order to have great Lovisa store managers and people in the store. So at the same time, so far so good, and I think we are quite satisfied with the outcome of working in more than 20 -- more than 40 countries or markets.

Okay. Great. And then the like-for-like trading update is a very incredible result given the comp and the consumer headwinds. So I guess just in relation to the price increase that you were just talking about -- just following from a question there. But could you just provide some color as to the timing of the price rises would just be useful to understand that for performing comps. And then also with the JP, how sustainable do you think that is? And can you just remind us what the -- what airfreight is a percentage of your COGS?

Yes. I think the point I was trying to make before Edward was that the price as embedded in the business now so that not just the one lumpy hit necessarily that you see all of a sudden and it's only for the last 2 weeks of the quarter or half or whatever. So we're not going to sit here and break it all out for you in terms of market-by-market where we did price adjustments and what the impact of it was. Yes, there's probably not much more to add on that other than it did give us a benefit. In terms of the gross margin sustainability, yes, I guess, there's nothing in the outcome for the first half where we go, yes, that's got some one-off thing or some issue where it's not -- we don't expect it to be sustainable. So there's probably nothing to call out there. And we generally don't sort of break out the different components of our product costs in terms of freight. So just, I guess, it gave us a benefit in gross margin, but most of it was from the price.

Sure. And then just a couple of questions just to finish. We hear you're on Iconic now. Can you just talk about the unit economics and margin impact that is per I guess, per unit of sale? And then also with -- as it looks like there was a bit of weakness there if you look at it on Asian sales per average store. Was that consumer-driven -- is it tough just there was a tough comp the timing of new stores? How do you think about that?

First of all, thank you about the iconic. We don't disclose much -- well, we don't disclose anything on the split between retail sales and e-commerce sales. But having said that, I think we already disclosed that we open several marketplaces. We are happy with the performance of those marketplaces, and we will continue opening relevant marketplaces across the world. This time, we opened in Australia Iconic, which is great, and let's see how we perform over there, and we'll continue with this rollout of marketplaces over the next few years.

Yes. Asia sales per average store in the half looked like they were down quite significantly. If I've got my numbers right in the rush of the morning. So what was the driver of that thing?

Yes. I think you got to be careful with taking averages does depend on when during the period the stores opened in which markets. So we opened a few in Malaysia at a lower turnover than Sateri Singapore. But generally, that does have an impact. But yes, I mean, that market has been soft for a little while. Same impact of the rest of the business in terms of negative comps in the period. So you'll see the average come there.

It's an interesting question. But I think at the end now with 40 markets, sometimes some markets were performing better one time and now the other markets are performing better. But at the same time, I think that we have not to analyze market by market because different circumstances when they end up the COVID period, for example, as well, can affect that performance, so there are plenty of things that can affect one specific market. And in Asia, as you may know, we have Malaysia, Singapore on comps, and we opened Hong Kong, Taiwan, and now Vietnam and China.

Our next question comes from the line of Sam Teeger with Citi.

I just want to ask a question on the balance sheet. You're back now in a net cash position. Under what scenario do you expect to use most of the $120 million in available bank facilities? And if you're not planning on using it, are you thinking about reducing it to save fees and potentially get a lower rate?

No. I mean just you got to remember that the cash position or the net cash position at December, that's as good as it gets for the year, right, because that's the end of the busiest trading period that we have in the whole the year. And the half year fell on the 31st of December, a couple of days later, we paid a hell of a lot of cash out for rent and payroll and the like. So it's obviously comparable to the prior year and a great outcome. But we do -- it does fluctuate during the month. So it's not like that's a simple flat number throughout the whole period. We just announced a $0.50 per share dividend. So that will obviously put us back in the debt position, not in that cash position. And obviously, we'll continue to look at that in terms of how much facility we need and how much dividend we pay versus how much CapEx we're spending. But we're happy with the size of the facility at the moment. If we get to the point where we think that it's more than what we need, then obviously, we look at it and say the fees on the facility. But at the moment, we're comfortable.

All right. And just in terms of costs that were better than we expected. How should we think about CODB sales in the second half versus the first half? Is the pace of investment into new markets and support structures likely to change much in the second half?

I mean we're not going to give any guidance on it, Sam.

But Just directionally, not…

Well, every time you ask this question, so I'll give you the same answer. We always focused on continuous investment into the business to support growth. It doesn't stop. And that doesn't really change. We have a negative comp in the first half, and we still continue to do that to make sure that we can execute on the new markets that we're opening in the store rollout. So the existing levels that you've seen are probably a good way of looking at it. I guess we've just returned to positive comps. So if you're looking at CODBs as a percent of sales, the tater gets easier if we can continue to be on positive comps. So yes, it's probably what I can give you.

Your next question comes from the line of Julian Mulcahy with E&P.

Just a couple for me. Firstly, with the still rollout, there's quite a marked slowdown in the U.S. Is there any particular reason for that? Is it part of the haggling process? Or are you just finding better returns in other markets?

Julian, Victor here. Thank you for your question. In the U.S., we have, at this moment, 206 stores in plenty of states -- and I think there is not a slowdown. It's obviously a slowdown in the number of stores, but at the same time, what is as we mentioned always, whenever we find the right deal, we do the right deal. This time, we found less deals than before, but this doesn't mean that we are slowing down the number of stores opened in the U.S. U.S. right now is the largest market for us in a number of stores and which is great news, followed by the Australian market. So at the end of the day, you can see the dimension of our global footprint.

But is that sort of in the past or getting the right deal is that starting to ease up now?

Yes, it's getting the right deals. Whenever we get the right deals, we'll open more stores. Until we get the right deals, we don't open stores.

And with the China store, you said you're kind of testing and just seeing how the market operates. What are you kind of looking for and when you're sort of going to the next lot of stores?

Well, at the end of the day, we have to stay prudent trying to understand the potential of the market, the interaction with the customer. And as you know, as well, customers in China are really into social media, creating Busan social media, creating also some noise on e-commerce platforms, so it's kind of a market where we have to build up, and that will show the real potential of the market for Lovisa.

With your LTI, is that -- that's foregone or is there scope to sort of catch up in the second half?

So when you say foregone, what will you mean, Julian? I mean it's an LTI that vest based on the performance for the full financial year. So that will determine what the outcome is. So the number that's in the P&L is an estimate of what we think that's going to be and has been for the last 3 years. So remember that this tranche at the test this year is part of that was expensed in FY '22, part of it in FY '23 and the rest of it this year, and a little bit into FY '25. So yes, I'm not quite sure I understand that.

Based on the original terms, there was another sort of $22 million that could be used this financial year. So do we sort of 6 and then 16 in the sort of second half being or?

No. So like just said, the way that it's the P&L. First was, there's a big drop this year in the total LTI expense. That was $15 million for the first half last year and at $60 million this year is last year, we had a year's worth of the LTI invested in F '23, and we had 1/3 of the F24 of out hitting last year. This year, all the only amounts that are hitting it related to F'24, so that amount has been expensed over 3 financial years, if you remember. So we were always expecting that number to come down this year just purely for that reason. So there's no other real change there in expectations from what we've been booking previously. So it's a mathematical calculation.

Right. So it's clear so another 6 in the second half assuming in [indiscernible]

That's right.

Your next question comes from the line of Mark Wade with CLSA.

Just starting off with, can you tell us about the adaptations that have gone into selecting the new markets like Ecuador in China? I'm specifically interested in some of the similarities or differences in the product range, the price points that you might use in those different markets.

It's more or less the same in every market. We open, we allocate the right product with the ranges that we develop everywhere. So I think there is no much difference between markets, maybe some of the -- maybe some of the things that some of the ranges are allocated in a different density, but a part of that, more or less, is all the same across every single market.

Okay. And just lastly on the -- how important is the role of those Chinese marketplaces like Taobao and JD, Tmall, like you kind of touched on it before, I mean, I guess it's a really online savvy customer. But on the other hand, this kind of fashion does tend to be more of a spontaneous purchase. So how do you find that balance?

Well, at the end of the day, we are learning about the market for Lovisa, as I mentioned before. And clearly, it's an important thing to have. It's an important understanding for the knowledge of the Lovisa brand inside China to be part of the marketplace footprint that they have out there, a part of the physical presence in shopping malls. So it's kind of a balance in a way. So this is what we are planning to do.

Your next question comes from the line of Wei-Weng Chen with RBC Capital Markets.

I just wanted to throw back to the questions about the LTI. Just wondering how much has been expensed in FY '22 and '23 for FY '24?

Off the top of my head, I can't remember, sorry, but you can go back to the other annual report for '23 and have a look at the remuneration report. It should be in there, you should be able to find that pretty easily.

I mean what we're booking this year is still in line with that.

Okay. And then if I think about the reduced LTI payments this half, it looks like our pre-LTI EBIT only grew 3%. Is that correct? Or is that the wrong way to look at it because of the expensing employees?

Yes, whatever the math comes out to, it's pretty simple to take the 2 numbers out and whatever that works out.

So I guess, how much should investors kind of read into that $6 million LTI payment versus $15 million last year and so far as, I guess, what it means to likely EBIT outcomes for the year?

I'm not sure you probably have to ask them. I don't think I'm understanding your question.

Well, I'm just saying LTIs are directly -- I guess, tied to hit performance like pre-LTI EBIT. You guys did $6 million in this first half. I guess there's some expensing in prior halves. But I guess you guys have a first half should LTIs kind of also skew to that first half?

No. I think Julian just said the answer before that expect that, that cost would be the same first half, second half. It's basically just we look outward in the first half, half in the second half.

Your next question comes from the line of Johan Faul with Morningstar.

I had another one on the GP line. What I was wondering if the gross profit margins, are they different across regions now for expanding in Asia, should we expect GP margins to be roughly the same? Or is there a mix shift there? I guess that also ties into Mark's question on pricing across regions.

Yes. I mean, they can be slightly different between regions, but not massively. I mean that does depend, particularly for new markets where we decide to go in, in terms of price points. So we may decide to go into a brand-new market a little bit cheaper than a more mature market or vice versa depending on what we think. So the relativity can be slightly different, but nothing material, things like shrinkage rates and that sort of stuff can vary a little bit depending on what's going on in a particular market. But yes, generally, it's not enough to swing the margin substantially if the mix between markets changes.

Great. And then I guess you also speak about store profitability and to take action if the required levels of return on investment aren't met. Have you ever spoken about where that fits that required level of return?

Generally, not.

So there's a percentage out there. Yes, maybe a related question on what's -- on the CapEx number and thinking about CapEx going forward. What's roughly the average feed-out cost where it varies quite a bit across regions, but what's an average currently that we could work with?

I mean it does vary between markets. You must probably divide the net CapEx spend for the period by how many stores we opened and it will get pretty close on average. Obviously, the SKU in the Americas is higher. So the U.S. is the expensive market to build stores in which can be sometimes double what it is to build a store in somewhere like South Africa or Australia or whatever. But yes, I mean, historically, in the more mature markets like Australia, it's about $1500 per store, Aldi. And then some of the cheaper markets like South Africa and Malaysia, are a bit less than that, and Americas a lot more than that.

Your next question comes from the line of Chamithri Ratnapala with Bell Potter Securities.

Just 2 questions from me. Firstly, would you see the Island market opened? Just in terms of the opportunity for the European region, I mean anything you can sort of point to in terms of the opportunity that you see then?

Well, the European region has been a very good -- well, a bunch of markets is where we have the most market, and Ireland is the last one, and we opened in [indiscernible] in Dublin, which is kind of a good pedestrian street, and we are happy of being already in the Irish market. But at the same time, we have a lot of potential in -- I think we have almost 15 markets in the European region, which I think is great news because I think our product is very redesignated a lot to the European customer. And well, as you saw, the growth in that particular region is significant, and we will continue rolling out the stores over there and continue as well with our online offering in our own platforms and as well in several relevant marketplaces, such as Zalando.

Perfect. And then secondly, just on the rental expense more for Chris, I suppose, it's come in slightly higher than we expected. Just kind to understand, has the trend in base rent we you said changed much? Or are there any particular markets that it's a bit more difficult than others?

Yes. Are you talking about the line in the P&L property?

Yes, Chris yes. Yes.

I'm assuming everybody noticed is we're no longer providing any breakdown between pre and post-AASB 16 numbers. We've moved on. Hopefully, everybody else has. So we're only talking to the statutory numbers now, which means that, that line for property expenses will be a little bit volatile because it depends on -- a little bit on the timing of where we are in terms of lease renewals and things like that. Because all that's on that line now is any stores that might be in holdover percentage rent payments over and above base rates and just general outgoings for -- under its lease as opposed to the base rent, which is captured in the depreciation line and the interest line now because of the way the accounting state works. So that increase is largely just a factor of that, and you kind of need to look at the combination of the property expense line, the depreciation of the right-of-use assets and the interest expense, and the lease liability to try and get a view of what's actually happening there. I guess the answer to the question is really -- it depends on the site. So we're getting good renewals with some leases that we've renewed during the half where we've got good reductions in some locations and others, we've had to pay more because they are the premium locations and you don't really get those reductions on those ones. So it's the same message has been for a while. We're not certainly not seeing big increases in rents that you've probably implied from looking at that line on the P&L.

Congratulations on again on the result.

Your next question comes from the line of Aryan Norozi with Barrenjoey.

Correct me if I'm wrong, but I think you've got a maximum level of LTIs left to expand to that $130 million, giving you overprovision in prior years. Given that you're going to do about $12 million this year, you've done in the first half and the fixed life in the second half. Am I correct in saying that you're basically provisioning for about $155 million of EBIT for this year? I mean -- and it's obviously nothing that's not public. It's what you're assuming. Is that right?

I'm not going to give you exactly what we're assuming in that calculation. So I guess there is actually a component that falls into FY '25 as well because the LTO does invest until the end of August, we have to expense all up until that point that yes, obviously, we've made an assumption around what we think the outcome is, and you can do your own math based on all the stuff that we've got out there to work out what that is. We're not going to tell you exactly what that number is.

That's it. But based on the calculation of $13 million left to be expensed. Is that roughly right based on the disclosures all over the pace, but is that right?

Yes. I mean, I actually can't remember what the number is off the top of my head.

That's fine. And just in terms of -- I mean, one of the pushbacks or concerns investors have in the businesses, you're opening into newer markets, which have lower sales per store, for example, Poland or other Eastern European countries. The unit economics or maybe the EBIT per sort of profit contribution of those stores, are they similar to the group average? In other words, your sales contribution might be lower, but actual margins are higher, that sort of offsets that sales. Can you just give us a bit of color around that, please?

Yes. That's a good question. I mean, and it does depend on which market you're talking about. But that's -- what we want to see is it is a market that does have lower average sales per store, the cost structure of that market is also lower so the EBIT outcomes are similar or better. So we've probably talked a lot over the years about the beauty of places like South Africa and Malaysia, where the cost structure is really low, and they've performed quite strongly. So we end up with some more profitable markets than the average, even though the average sales per store might be lower. So yes, it does depend, and we don't break it all out in my new details, but your hypothesis is probably right in terms of where we aimed.

And then have you been surprised about the lack of negative sort of volume impact from price increases? Because I mean, to your point, a few years ago, there was a bit of a reluctance to raise price because of the elasticity and you've done it once last 2 years ago and you've done it again now. Have you seen any negative volume response? And are you confident that this sort of is a new setting in the business, i.e., moving price in line with what cost inflation too?

Regarding the price increases, it is opportunistic whenever we believe that this kind of higher inflation or higher cost on doing our products we decided that in one particular market, maybe we have to increase prices. And right now, we are adding flexibility because we are in 40 markets. So sometimes, we decided to increase prices in one particular market with one particular microeconomic conditions. I think what is adding its flexibility to our business model because we can increase prices in 40 markets whenever its need. But at the same time, we have to be very cautious because we still have an affordable jewelry company. And this is something which is very important to take into consideration whenever you increase prices in any market.

And just a clarification on the gross margin. I mean, historically, second half has always been about sort of 0.7, 0.8 percentage points lower than the first half. Is that a similar relationship that holds every year? Or is that volatility in the past?

It doesn't always hold that way. They can be impacted one of our -- can't top of my head what it would be this time around that was making any difference. But as I said earlier, there's nothing in the margin improvement that we saw in the first half that we various -- you could use the same sort of assumptions to land on where you think it in.

Great. And sorry, I missed the first part of the bad line in the first part. But did you say that the first take what you did in the first half in terms of gross store openings and that's a pretty good run rate for the second half, '24?

I'm not sure if we said it, but I think we would like to be able to achieve that sort of level.

Our next question comes from the line of [ Rupesh Kara, ] Private Investor.

I just got a quick question in terms of how long the company's exceptional growth is going to continue. So at the moment, you've got about 850 stores. What's the kind of a target that you're trying to get in, in terms of what your market share is and who your best most important competitor is, just liking to see how long to keep this growth before keeping -- treating you as a mature company. Any kind of guidance on that?

No, I mean -- yes, I think we don't give guidance on where we think the end is because our mindset, we expect to continue to be able to grow and keep driving the business forward. So it's not something that we put a number on.

The important thing, I think, to answer your question is that we are becoming a truly global company with a lot of opportunities everywhere. Every time we open a new market, you have an additional white space in the market. [indiscernible] there's 850-plus stores. I think we continue opening stores. We opened 74 stores during the first semester, and we will continue opening stores because I believe that there is plenty of white space everywhere.

Okay. And the results for special return on equity are amazing, close to 100%. That's ahead of, but obviously, it's not going to continue our way in forever. So that's what I was trying to determine when we that slower growth is supposed to slow or expected so. Anyway, you have great results. Thank you.

Your next question is a follow-up from Edward Woodgate with Jarden.

Just wanted to talk about Victor's LTI. It seems like there's some confusion there. I think the buyer side seems unrounded okay, but it just seems like the low LTI expense this year is just because your accrued expenses in the previous year is still -- the performance is still going well from a cash perspective. sorry, from, I guess, hitting the targets this year. But I guess it might be worth getting some color from you what happens into calendar year '25. So FY '25, have you -- I'm sorry if you've already asked and answered this, but are you guys any closer to firming up comp for FY '25?

Yes. So no, there's nothing in place as yet. We said previously that will -- the discussion between Victor and the Board, obviously, in the next little while. And whatever that ends up being will obviously impact FY '25 and going forward. So yes, the current one obviously runs out end of this year, and that's why the expense is lower this financial year.

Yes, sure. But I guess just to, I guess, make sure the consensus stays appropriately conservative or, I guess, maybe considering where that reflects what's going on. I guess next year, probably be reasonably for us to assume some sort of run rate based on the previous LTI package, and so there will be a bit of a step-up in OpEx next year. But then I guess offsetting that is you're cycling easier comps and you have more stores and more operational average. But is that fair that we should be assuming to let in the absence of any operation a step back up in some of the [indiscernible]

Yes. I'm with you. Yes, obviously, we can't answer that question because there's nothing agreed, and we don't know what that will look like. But yes, you have to make some sort of assumptions. So we got to decide what you think it might be and the fact that in your numbers for next year. That's by the time we get to the full-year results, we've got a better idea. But yes, I think you're on the right track that you'll need to assume something.

Yes, sure. Okay. Well, I guess the result and the discipline in the store rollout put paid to some of the concerns around the market hard, at least on the bar side that you guys would roll out excessive numbers of stores. So just to hit LTIs, it seems like the economics are strong enough to do that anyway. I'm not sure I sure you can leverage whatever comps you put in place next year, but I'll leave that to the smart I'll leave you to…

Your next question comes from the line of [ Peter Taleo, ] private investor.

Just a couple of short questions. On the South American market, why do we go with the franchise strategy compared to basically the rest of the world where we're going to company-owned stores? And on average, my second question on average, when you open a new store, how long does it take you forward basically pays for itself.

Regarding the franchising markets, we are in South America, but also we are in North Africa and the Middle East. No, it's not only there. And the reason why we are doing franchisees is because sometimes some of the operators in those regions on those particular markets are top-notch, and we believe that we can partner with them in order to reach our product offering and our brand into consumers in those regions. Sorry, what was the second part of the question?

Second question was when you open a new store, how long on average how long does it take to pay for itself?

Yes. And the answer is it depends on the store. Some stores are amazing and pay for themselves within a year because they all generally cost the same amount in a particular market to build. Others will take longer. So there's no sort of simple answer to that one. But yes, it can be a year, it can be a couple of years.

There are no further questions at this time. I will turn the call to Victor for closing remarks.

Okay. I want to thank you for your time today, and we will talk to you on the full-year results in August. Thank you.

This concludes today's conference call. We thank you for joining. You may now disconnect.