Pepco Group N.V. (PCO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the half 1 interim results. Just to let you know, I have my anchors here who -- this is his last reporting with us. So I'd like to formally thank Matt for everything you've done for the business and wish him luck in his new venture. And as I said, thank him for everything he has done for the business and me personally as well as CEO and formally welcome Galloway, who will support me on this presentation today. So quickly go through the highlights. So another strong financial performance despite challenging macroeconomic conditions, up from revenue of 22% or 22.8% increase to EUR 2.8 billion. And half 1 EBITDA of plus 10.8% to EUR 377 million, and that is on a constant currency basis. The store network expansion program, which is very important to us, is on track to open up a minimum of 500 net new stores this financial year. And we continue to accelerate and focus on leveraging the scale from all formats to unlock the full potential of the group as well as OpCos, and I'll talk about some of those as we go through the presentation. And finally, we're confident on meeting our full year '23 EBITDA guidance of mid 10s growth despite a softening sales environment through us driving sales as well as strong cost of doing business plans. I now hand over to Neil to take you through the financial review.

Thank you, Trevor. First of all, very pleased to join the group for its results announcement. I have been on board a couple of months around the business, have to say very positive experience from colleagues and stakeholders around the business. So I'm just going to run through the financial highlights for the first half. I pick on Slide 5. Trevor mentioned group revenue up 22.8% on a constant currency basis to EUR 2.8 billion, largely driven by the growth in Pepco revenues were up 36%. And revenue were all driven by 2 components: Like-for-like growth, up 11% on the first half plus the continued store expansion within the business. Our gross profits were up 20%, but we had a slight margin erosion of 90 basis points down to 40.1%, which is an expected low point [indiscernible] in the buying cycle of Pepco, sort of 12-month calendar of buying cycle and the earlier cost headwinds from containers and commodities, which have come down, we will see benefits from those having improved in the second half. So we'll see a recovery visible in the second half on our gross margin. The underlying EBITDA is up 11% to EUR 377 million, again, supported by growth in the business in terms of the store expansion. A couple of small nonunderlying items in terms of the SaaS costs in relation to our ERP rollout program, and restructuring costs related to the combination of Pepco and Dealz in Spain. Pretax profits down 10%, impacted by a drag from the growth investment, largely increased depreciation and supply chain costs related to supporting that growth and some inflationary headwinds certainly around labor and transport cost utilities, et cetera. And we also had a slightly higher interest charges, interest rates have gone up in the period. We turn to Slide 6, just to give a bit more color on the sales performance. You can see like-for-like up 11%, 15.8% of Pepco in half. That slowing down quarter 2 over quarter 1 and 4.9% like-for-like performance again we had actually increasing performance, up 5.7% in Q2. So we've seen stronger performance from Panama, which is benefiting from stronger consumer demand for FMCG as a category compared with general merchandise and clothing. There's a similar picture in total sales performance Q1 and Q2 of Pepco's driving group revenue. And that's really to do with a combination of the store expansion and the benefits we're seeing from refits coming through the business. Turn to Page 7, the segment's performance -- just to give a little bit of color. Revenue about EUR 467 million on a reported basis of just under 20% in absolute terms year-on-year, again, largely driven by Pepco. and the underlying EBITDA in absolute terms up EUR 30 million. The 2 real factors impacting performance that was the lower gross margin and the cost of growth and inflation coming through. Turning to Slide 8, give a little bit more context around the trend in gross margin. A few facts just to remember. One, firstly, Pepco to bind cycle longer than Panama, we've got a 12-month forward calendar in terms of buying range. So there's a delayed benefit from cost tailwinds of lower container cost and commodities. And you can see that from the chart on the slide, which is showing container spot rate movements, commodity movements and FX rates. Historic gross margin for Pepco, which is really the growth driver for the group margin around about 47%. So there's significant recovery. So there is significant recovery opportunity in gross margin relative to where we are at this point. and that will pick up in the second half, which is visible given the purchase is already made in the business. Poundland gross margin improving, but has been relatively consistent over several years of around about 37% gross margin. Although there is opportunity in that with a more aligned range and buying that's going on across the group. The key driver for the group of roll-out is the Pepco margin. Look at Slide 9, so the category mix across the group. It's fairly balanced FMCG went about 26%, clothing 34% and general merchandise, 39%, not surprised at the largest category giving general merchandises running across both and a non-Pepco performa. At clothing, we've seen an increase in share driven by the increase in the Pepco roll out, But currently, FMCG is winning consumers as they focus on food and nondiscretionary spend over general merchandise including, although those are up from a sales perspective. And we had strong pandemic performance in Q1 and Q2. We turn to Slide 10 and cost of doing business. That has improved steadily since 2020. You can see it was about over a 250 basis point improvement in cost of doing business over the last 3 years. Although that has gone up in the first half of EUR 134 million, we've given back about 40 basis points year-on-year due to inflationary pressures, plenty driven by labor, transport and utility costs in the business. However, there's more opportunities to go for as the performance and customer for increasing the line. And we've seen some examples of that in Spain where we brought together the Pepco and Dealz range and saw a significant benefit in cost from the combination of those two businesses. Moving on to cash flow, Slide 11. Just to put in context, if we look -- and this is sort of showing the impact of gross margin on the business, if we looked on an IAS17 basis, the cash EBITDA is fairly flat -- it's really held back by a gross margin down 90 basis points. If we had the gross margin flat year-on-year, we would have seen a 16% improvement in cash EBITDA. So that just shows the key driver is that gross margin improving. The other holdbacks have been growth from store expansion and the inflationary costs, which I've mentioned. On a positive note, the net cash from operations is up significantly year-over-year going to better improved stock management and a supply chain program we put in place during the year. Our CapEx, not surprising up 30%, EUR 148 million, reflecting a combination of refix across the business and store growth as part of our 5-year strategic plan, resulting in a slightly lower cash position at period end and net debt marginally higher EUR 383 million is still relatively unleveraged at 0.9x EBITDA. And lastly, just to cover key movements in the balance sheet on Slide 12. The main points really relate to property plant equipment, i.e. assets, leases and stock, all of which are driven by store growth across the business. Noting that the stock position is at the half year is similar to what it was at the year-end as opposed to the half year last year. We've seen material working capital improvements really related to growth of business and better supplier payment terms. And although just one final on an increase in the drug disposition really related to the increased stock purchases and FX movements during the year. and that is a quick summary of the financial performance. With that, I'll hand it back to Trevor to talk about the strategic.

Thanks a lot, Neil. So let me now continue with a strategic update where are we. So just as a quick reminder, everything we do and everything we focus on is how do we get bigger across the business, how do we get better across the business and how do we get simpler and cheaper as well. So starting with Bigger, our crucial program of new stores. We're absolutely on track to open a minimum of 500 net new stores this year. We've opened up 166 stores in half 1. The Pepco openings in Western Europe out number Center Europe for the first time, and we've opened up our first stores in both Greece and Portugal this year, which are both trading very strongly. Moving on to our Better pillar. Well, let's start with the Pepco Plus. So just as a quick reminder, in Spain, we trialed a concept where we put a full Pepco, both GM and Clothing as well as FMCG under the banner of Pepco and they're trading really, really strongly. You can see on the right-hand column of Page 16. Half 1, the like-for-like impact of FMCG is 29.9% and in standards, it's still a very strong 8.2. So as we said previously, our Pepco plus format is the chosen format for our Western Europe expansion. What does that actually mean is in Western Europe, we'll have Pepco stores, as you know them, but we'll also have Pepco Plus stores. That's what we call them internally. We'll have Pepco Plus stores with FMCG across Western Europe as well. And just one quick fact. In terms of Spain and Portugal, the pipeline is 80% of the stores will have FMCG and 20% will be standard Pepco. So Pepco Plus is our chosen format to roll out across Western Europe. What else about better? Well, the important program of Pepco new look continues. The refurbishment program started off in January 2023. We're targeting, just as a reminder, we're targeting to refit all of our old branded stores across Central and Eastern Europe, 2,500 stores over the next 2.5 years. We've converted already 191 of the stores in half 1, and that's across Poland, Slovakia, Czech, and those conversions are set to accelerate in half 2. And the results remain encouraging with the like-for-like converted stores up 10% over the control group. And this is a really important reminder, this is important in terms of refitting the stores and having a financial benefit, but it's equally as important that we protect our Central Europe and our Central European business, EG, the Heartland of Pepco from all of the new competitors that are coming in. So it's important that Pepco is at its best in Central and Eastern Europe. And just the final one that is part of the New look program, we are actually making the stores simpler and cheaper by introducing self-scan tills because the shop floors are bigger, we're able to achieve a 95% one touch replenishment EG when the cases come in, 95% of them go straight on the shop floor and 5% go into the warehouse. And we're also changing our software on the checkout to an Oracle software, which moves our current transaction time from 19 seconds to 7 seconds, which is very pleasing for both the colleagues as well as their customers. So as part of this new look program, it's better for the customers and also for our colleagues and shareholders. Moving on to the next pillar, cheaper, where we continue to drive cost efficiencies, it's even more important because of the inflationary environment. So we'll double down on our efforts on cost efficiency to combat the inflationary pressures. The 2 end-to-end programs that we started one in Pepco 2.5 years ago, continues. As I've previously said, we're 2.5 years into a 5-year program and we started our interim program in Poundland this year, beginning of this year. Both of those are showing good improvements in terms of cost of doing business, and that was set to continue over the months and years going forward. We've also incorporated our Pepco group sourcing into the Pepco business to optimize and align the buying cycles -- and that, again, over time will prove benefits from both the way the cost of doing business and also the economies of scale about buying. We've also introduced some near-shoring facilities for PGS that opened up in Europe to increase our sourcing flexibility. And whilst the stores are becoming more efficient and more effective through the end-to-end supply chain, so this is -- some of it driven by our processes and some of it driven by some of our technology. So we're putting in WMS blueprint across all of our Pepco distribution centers. So they all will operate in the same way. There are some other things that we're doing across improving our margin. So on the right-hand column of Page 18, just a reminder, in Poundland in autumn winter of this year, we will cease the brand of Pep & Co clothing, and we will move to one Pepco Clothing. So that means by autumn/winter this year, there would just be one clothing offer across the whole group and that will be Pepco. And just a reminder of what we said previously, in spring and summer '24, we will cease the Pep & Co GM offer in Poundland and cease the Poundland GM offer and move to one Pepco GM offer across the whole group, including Poundland, all of which brings margin benefits cost of doing business benefits and also simplifies all the infrastructure benefits. So that's on our cheaper program. In terms of simpler, well, we continue -- there's lots of work with lots of opportunities and lots of work to simplify both our customer offer and also simplify work for our colleagues, both in the DCs, the offices as well as the stores. So let me give you a few examples. In Spain, we -- as you know, we used to have 2 businesses. We used to have Dealz business in Spain and the Pepco business. We've now trialed and tested and rolling out 1 business, 1 entity, which is the Pepco business, which creates a far simpler operating model because it's 1 brand, 1 range and 1 team where previously, it was 2 brands, 2 ranges and 2 teams. So lots of benefits in terms of simplicity and economies of scale. A second program that we're doing to be simpler. A good example is our rollout of the new scalable Oracle ERP platform across the group with Poundland going live this summer. And there's benefits to gross margin through optimised markdown management as just one example. And we continue, as we invest in our new stores and refits, especially across Pepco to introduce self-scan tills, as I've mentioned, and the implementation of Oracle Xstore retail point sale, which drives higher levels of customer satisfaction, but also significantly simplifies work for our colleagues. So that's the end of an update on the 4 pillars. And what I'd like to do now is just take a few moments to update you where are we on our strategic reviews. So when I started as a CEO, I said that we wanted to take a strategic review of all of our OpCos, looking at how do we maximize the OpCos, but also maximize the group. So let me give you a quick update. As we've said -- as Neil said and I've said, we've completed all of the work we wanted to do in Spain. We've done a strategic review, and we've put our Dealz business and Pepco business as one. So that's now completed. We did a strategic review of the Pepco group sourcing. And what we concluded is to actually make that part of the Pepco business because we're one GM, one clothing. So the PGS is now a part of the Pepco business in Poland -- the head office in Poland. So that has been completed. And we're currently in Ireland, we've tested 5 stores. We've got 2 more stores, we're going to open, where we've turned the Dealz into Pepco Pluses and we're just completing the test and evaluation. So the next time we speak, we can give you an update of what we intend to do with our Irish business in terms of Pepco. So let me move on to the strategic review of our business in Poland -- our Dealz business in Poland. So what we adopted is we knew -- what we knew today, how would we organized for success. What we've concluded is that because we are -- we've got many Pepco's in Central Europe, it's very difficult to turn the Pepco stores into Pepco pluses because the chances are when the rent come -- or when the lease comes up, being able to extend into a store on the left or the right to make it bigger is going to be -- it's going to take decades before we could actually end up with a scalable Pepco plus format across Central Europe. We've done the strategic review of Dealz brand in Poland, and it's very positive for customers. It's very positive for the shareholders. So our decision is we want to continue to develop and roll out our Dealz business, but not just in Poland, but across the whole of Century Europe. So in terms of the growth in Western Europe, we'll end up with a Pepco and Pepco Plus format. And in Central and Eastern Europe, we'll end up with a Pepco format as well as Dealz format across Central and Eastern Europe. But our strategic review didn't end there. What we are going to do is we're going to adopt that the infrastructure of the Dealz business in Central and Eastern Europe will be run by Pepco as one entity. So the IT will be led and managed by Pepco. For Dealz, the finance will be led and managed by Pepco. The HR will be led and managed by Pepco as well as the supply chain and distribution. So effectively, we will have 1 entity and 2 brands, Pepco as well as Dealz. But again, the strategic view didn't finish there. We did a lot of work understanding how customers saw our Dealz brand. We have big plans to roll out the brand across Central and Eastern Europe. So we really wanted to understand how the customer sees the brand. So we've now got all of the data. And what we've done is we've changed a couple of things going forward. We've been testing and trialing a new look and feel, which has gone down very well with the customers. And we've also tested a new layout -- a far simpler layout for consumers to navigate well so. Interestingly, the layout is incredibly similar to our Pepco plus, so FMCG at the front and GM at the back. So as I said, we're going to remodulate the brand all the stores since March have been operating with the new layout, which is simpler for customers. And all of the stores opened since March had the new revitalized brand. And next year, we will look at going back to the existing , I think it's 177 deal stores and look at doing a small refit, so we end up very quickly with one look and feel across the deal's brand across Poland going forward. And our plan is to look at rolling out the Dealz business into another country, which we'll update you on next time we speak. So we'll be going cross border that would be sometime next year. Importantly, we intend to optimize the supply chain. If you think about Pepco, operates 3,500, 3,000 stores plus when we organize the transport going forward, we can organize the transport for Dealz. So there's going to be many economy of scale benefits as well as simplicity benefits as we bring the infrastructure from Dealz, Central Europe into the Pepco. And by the end of this financial year, we're going to have 300 deal stores in total by the end of 2023. The other things that we're doing in Dealz is, as you know, our plan is to have one GM range, one clothing range. Clearly, we could not put the GM range that Pepco sells in the Dealz because it would compete against 1,300 stores in Poland. So what we intend to do, we understand that customers like to shop in Dealz for the brand, the brands from FMCG. What they're also looking for is branded GM. So we're going to introduce a range of branded GM into our Dealz stores, and that will be supported and supplemented by some GM range of essentials, all of which will be created and brought using the Pepco infrastructure. So we'll get all of the economies of scale as well as the infrastructure as well as the absolute skills of our buying department as we approach, as we plan by and move the GM products or Dealz going forward. The final thing about the Dealz, it's a small point, but an important point as we intend to roll out the Dealz across Central and Eastern Europe, all of the things like fixtures and fit-ins, social rooms, everything that goes into a store will all be purchased as part of what we purchase in Pepco. So for example, the social room will be exactly the same social room is in Pepco and that, of course, helps to significantly improve the economies of scale as we roll out both the Pepco format as well as the Dealz format. So that's our strategic review, and I've look forward to showing you the new format at some stage when we meet. So going on to the outlook. So for us, after many years, 3 years of disruption, we believe that we now can see for the first time a much, much clearer outlook since COVID-19. It's very clear where we are on the commodities and that's all good news. It's very clear where we are on the containers, and that's all good news. FX is becoming less volatile. It was previously some headwinds and it looks like it's going to become some tailwinds for us. And March inflation is still remains high. It's going in the right direction, and we're getting used to managing in an inflationary environment. So the outlook, as I said, is becoming much more clearer. And I think we've navigated over the last 3 years very well through the disruption. There are a couple of things that we still got to navigate as every other retail business has to is that the customer behavior is changing, has changed as well as the trends. So we're still -- that's still to play out, I believe, across all of the markets. And I take confidence that we've been able to manage. The management team has been able to manage lots of disruption. So the last thing still to play out, which is the customer response to inflation. I'm pretty confident that we can manage that over the next months pretty well and pretty strongly. So as I said, there's been lots of disruption. And in fairness, that's meant a fair amount of opaqueness on things like margin, et cetera, not just in Pepco but across many, many businesses. And as I said, we are now far more clearer on what it looks like post COVID-19. We have set ourselves or we set ourselves the target through the order disruption and continue to set ourselves a target that we want to make sure that through all the disruption, we increase our market share in all the markets, which we've done. We wanted to make sure that this disruption does not disrupt what we believe is a very strong strategy of getting bigger, better, simpler and cheaper, which I believe we've done. And of course, importantly, we wanted to make sure that we delivered our EBITDA targets throughout the disruption, which is what we've done. Ultimately, we want to come out of all this disruption, which I think we're beginning to come out of it. We wanted to make sure that we're bigger as a business and better as a business for both customers and shareholders. And I believe that's what we have done and we've set it out. Because we can now see that the outlook is becoming clearer, we want to hold a mini Capital Markets Day probably in Warsaw late September, early October. I think it will be an important session. We can show you the new look stores for Pepco and we can also show you the New look stores for Dealz. But more importantly, I think we're at a stage where we can take you through the modeling that you should be using for margin going forward or cost of doing business going forward as well as cash and I know that's important for you guys as there's been so much disruption as well as so many changes in what Pepco Group is doing. Well also because of the modeling on margin and cost of doing business, it will be an appropriate time to take you through the modeling for our new look program in Pepco, which is pretty substantial at 2,500 stores. Also what this new Dealz modeling should be as well as focusing on what is the 1 GM1 close in a Poundland, what's the model look like for that. And then finally, we'll give you a look on what you should be modeling for Western Europe, in particular, Italy and Spain. So I'll come to the end of my session. So what would I led the key takeaways for you to take away. First of all, we will open a minimum of 500 new stores. There's no doubt about that. We will deliver our EBITDA guidance because we are driving sales as well as managing our cost of doing business, particularly strongly. Whilst the customer behavior and inflation is still to roll out -- still to run the pathway in terms of the customer, we have maintained price leadership and that is why, as Neil mentioned, we've seen a margin drop. That's because we have been a discounter through the disruption. You cannot be a discounter when it suits you. You have to be a discounter in the good times and bad times So we've maintained price leadership, which has meant that our market share has been growing. And the final key takeaway, we have remained -- we continue to remain absolutely focused on our strategy and our strategic reviews, bigger, more stores, better, better stores through the refits and simpler through our entering programs in both Pepco and Poundland. And cheaper, you'll start to see all of the benefits of our end-to-end work sharing us getting cheaper as well as all the margin and sourcing work that we've been doing to make sure that our margin more than recovers going forward. And then finally, I look forward to hopefully see all of you, if not most of you, in the Capital Markets Day, which you'll hear more about either at the end of September or October this year. Thank you very much.

[Operator Instructions] And our first question today comes from Matthew Clemens of Barclays.

Matt Clemens from Barclays. You've given us reassurance that gross margin will improve in the second half than full year '24. But how do you see OpEx moving? So that Pepco [ down ] saw 150 bps increase as a percentage of sales and cost of business in the first half. What's driving that? And will that be different in the second half?

Thank you Yes. I mean I think just a context. As I said, look, we've obviously seen significant improvements in OpEx over the last 3 years. We've seen about 150 basis point improvement over the last 3 years. We've done significant work around the company to create efficiencies. Trevor has alluded to some of those. And yes, you're right, we have seen about a 40 basis point sort of negative movement, we give back in that in the last -- in this period. And really, that's really been driven by sort of inflation coming through that's impacting the business, really driven by sort of higher transport cost, labor cost, utility costs. But we have been mitigating that with some of the actions Trevor talked about in terms of store efficiency. I think the outlook for that is -- it's going to continue to be -- while inflation continues to run, we're going to have to continually work at the cost of doing business as we have been doing to continue to mitigate those increases. But -- the absolute cost will continue to go up as we continue to grow the business. And I think we will just continue to manage that as best as possible. But we've got -- there are certainly new areas of opportunity, and Trevor alluded to them in some of the Dealz plans where we can see significant opportunities for further mitigating the cost of business than tomorrow than how we have been operating the business to this point.

Matt, just a couple of bills to what Neil said. So we've in the last couple of years, we've made really good headway on the cost of doing business primarily in Pepco through the interim program. But I just want to sort of remind everyone, we're only 2.5 years into a 5-year pretty significant plan. I mean the opportunities we've got to improve our cost of business are pretty -- pretty opportunities for us. So we've had a little bit of a blip because we weren't expecting the wage increases to go 15%. That's -- so we've had to double down on our customer doing business. I think the good news for the Pepco and Pepco Group is whether it's through the end-to-end supply chain, both chain analysis we're doing in Pepco or in Poundland. There's plenty of opportunities for us to go for. So -- and we'll continue those through to the rest of this year. and into next year. So I believe that we'll -- that those programs will be bigger than the inflation increases that we technically had to take a bit of ahead on.

And we take our next question now, which comes from Simon Bowler of Numis.

I wonder if I can touch on a couple of areas, if that's okay. First one is just kind of follow-up on the OpEx piece. The references in the statement to some of the OpEx increase in Pepco being kind of lapping of one-off benefits in last year and high levels of stock impacting costs. And I was wondering if it was possible to kind of quantify or add a bit more color on those two aspects in particular.

Maybe I'll ask Mat to pick up that from last year, given I wasn't to give the context around that, if that's okay.

I think the point with, I think, last year piece is we were dealing with many different one-offs last year, particularly around the runoff COVID still and in addition to energy spiking last year has come off. And as -- I don't think at this stage, we're going to be quantified precisely what that is because there are so many moving parts to the last year, there were some specifics. I think what has come up this year has clearly been a higher progression of underlying inflation across all of our cost lines. And Trevor already mentioned, labor inflation, which is installed on DCs, alongside energy still being higher, albeit not as high as we saw it sort of coming into Christmas. And [ fuel GNFR ] so in placing. So whilst there were some one-offs last year, I think what we're now facing is a far more broad-based set of increases across all of the sort of operating lines below the gross margin.

Yes. It's kind of just two things, reiterate a couple of things. So clearly, the inflationary has impact, whether as Mat says, wages in the stores or wages in the DC transport, et cetera. But I'll say again that when I look at the end-to-end opportunities we've got in both Poundland and Pepco, over a sort of major amount of time, they far outweigh the inflation that we're taking as a short-term debt. And I would like to think by the time we meet, hopefully, we meet in September, October, when we go through the modeling, you'll also take comfort that our programs going forward are bigger than the inflationary impacts that we're typically taking. Also, some of those impacts are set to look like the sector sort of come off, whether it's the transport costs, they've already started to come down. So I think, again, there's a bit more certainty in the inflation, not right set to continue to rise and actually starting to reverse itself.

Okay. And then the second one will be part linked into the previous one. Just can you talk a little bit about inventory, kind of I guess this time 6, 9 months ago ever. You spoke quite a bit about deliberate investment in it. Have you been able to kind of maintain full price sell-through? And for us quite a bit of capital tied up in inventory. And just to reference, is that kind of part of the reason in the higher OpEx and the higher levels of stock you're carrying in the business? And do you plan to continue with that strategy of higher inventory levels?

Let me start and then maybe Neil add to it. So Obviously, we're saying that we want to open up a minimum of 550 stores. We've opened up 166. So we've got quite a big program in the last 2 quarters. So we need to stock to open those stores. It's quite a bit of stuff goes into each and any one of those stores. In terms of -- we're pretty committed to make sure that there's always what we call a sweet spot, which is October 1, we need to be in good shape by October 1 on our stock if were to have a successful Christmas. So the whole -- certainly in the Pepco business, the whole business is focused on making sure that the sweet spot of the right amount of stock, so we can take in the new stock for Christmas. We've got to hit that sweet spot. So they're currently in relatively good shape to get there. In terms of are we maintaining -- are we reducing prices because we've got stock -- absolutely not. We -- all of the stock is good stock. We cleared out all of the Easter stock. We've cleared out all of the sort of stuff that we needed to. However, I would say that we are making sure that we are driving south. Clearly, I would say that across the business, this discretionary, people want to buy food and fuel first and then GM and Clothing things like that second. So as the market toughens up in terms of trading, then we are making sure that where we need to, we'll promote the business as and where we need to, but that's driving sales for our customers because of what they need to come to the stores and trade. That's not -- it's not -- we're not driving any markdowns because of the stock we've got. We are just making sure that we maintain price leadership, whether it's price or promotions because that's what we've done for the last 3 years, and we're not going to stop doing that, but it's nothing that anyone should be concerned about.

The only couple of build that make on top of that, Trevor, is if you look at year-on-year, yes, stock is up, but against the full year, it's pretty flat. And against that factor, we opened up -- we obviously opened a significant number of new stores in the interim. So we've got more stores to feed stock into. And I think the last point I'd make is on average, a lot of the newer stores are larger in size, so there's more space to cover through. I think from a stock management perspective, we're in a better position than we have been.

Okay. Great. And then final one for myself, if it's okay. It's just beyond kind of the core kind of Pepco rolled out and you've got kind of Dealz into CEE now and kind of Pepco Plus into Western Europe. Can you just talk about the kind of relative returns on capital you see from each of those programs and do they have similar hurdle rates that you apply to both of them?

Yes. I think we have similar target hurdle rates across the business irrespective whether it's Central Eastern Europe or Western Europe. The hurdle rates were running are similar across the business.

We do not invest in anything that gives us less than 30% IRR. That is all. I mean we would not move from that 30% IRR.

[Operator Instructions] Next, we have Elena [ Janover ] of JPMorgan.

A couple of questions from me, please. I'm sorry to come back to the OpEx point. But -- it would be great to try and quantify some of the increases that you saw in whichever form that is convenient for you. But if we break down the increase of OpEx to sales, let's say, like-for-like for your stores and pressure from new stores cost to new stores. Can you give us a rough idea of what that was on a year-on-year basis?

I think not off the top of our heads. I think it would be wrong to do that for the live on this call. I think we can look into that and come back definitely on that.

Yes, that would be very helpful. And then conceptually, a related question, there will be a certain point in time when basically your fixed operating costs in your new countries are at an optimal level. And so all the incremental -- all the store additions and incremental sales are going to be beneficial for your operating leverage. How far do you think are we from that point when you actually start seeing like positive dynamics in your OpEx to sales in the Western European business?

Yes. Elena, I understand and appreciate the desire for more. As I said previously, we, for the first time, can start to see the really clear direction on things like commodities, containers, FX. We've done a lot on cost of doing business. And we understand that everyone wants to understand what is the model for the Pepco group going forward because it's -- whether it's new logo,it's the new store openings in Western Europe or the new Dealz on 1 GM and that's exactly why we're inviting everyone to come along to the session in the end of September, October, where we will go through all of the modeling that everyone needs to sort of model the business going forward. And the only reason we'll do it in September and October is because I've been running the Pepco and the group for the last coming up to 4 years, it's the first time that we can really see certainty going forward. The good news is the certainty is good news. So we're looking forward to meeting you all to go through some of those detailed questions you're asking around the model. And so what we want to do that in September or October, if that's okay.

Okay. That's fair. Then maybe a few other questions less related to modeling. So -- in terms of Dealz, it's an interesting decision to continue rolling that out in CEE. Maybe you can remind us what is the competitive edge of that format versus the discounters that are quite strong in the region, particularly Biedronka in Poland. And what is the pricing strategy versus discounters?

Yes. So everything we do is price leadership. So what we're doing in the Dealz is price leadership on the FMCG and price leadership in terms of what we do on the GM. What is unique about Dealz is actually you can buy brands, you can't buy anywhere else. So I'll be honest with you when I was running Pepco many phone calls from the polish retailers, said if really a chance we could wholesale some of those FMCG land. So when you go into a Dealz store, probably 30% of the products need to just check it, but I think around 30% of those products are unique to Dealz only. You can't buy them when they were used in Poland. So you've got lots of U.K. brands are sold in the Dealz that you can't buy in the other retailers in Poland. So that's what -- so what's unique is it's all about brands, and that's why we want to go with an element -- a strong element of branded GM. It is -- that's -- so what's unique is it's a brand, extended brands, you can't get anywhere else and price leadership.

Sorry to clarify, but are these brands, the U.K. brands, are they more attractive price wise versus what the Polish retailers are selling?

Yes. So we always maintain price leadership. One of the things that people don't quite understand is in the U.K. because of Tescos, sales risk, as the Morrisons because they are -- probably the U.K. was the first country where the big 4 had such a prominent own label business for the brands to get in there, they actually had to be very aggressive on their -- what they were offering to those retailers because in some of these retailers, 70%, 80% of what they sold was own label. So Europe brands, you have to work very, very hard to get into the second biggest consumer market. And that still persists today. So it's still very opportunistic for Poundland to wholesale to our businesses and the price that we get it, we're able to offer price leadership on these branded goods.

Okay. That's clear. And two more for me, please. So like-for-like in refurbished stores, I believe you said in the presentation and press release that like-for-like is 10% above the control group. So it used to be like 10% to 17% before when you just started the refurbishment campaign. Can you remind us what's the overall expectation? And why is this a downward trend?

So Elena, I think we all -- I hope we were very clear when we initially started talking about this any trial that you do at a small scale in a business like ours will always be higher. And when we describe the results, which as you say sort of high teens. That was not all what we were planning going forward. So I hope we were always clear about that. I think we're right now broadly where I would expect it to be it is sort of meaningfully had. And the reasons for that, as Trevor described is this is better for customers in terms of the environment that the store is in a better for colleagues, it's a more efficient box to operate. So this is an overall better retail proposition. So I think it still remains in line with where we expected it to be, albeit as you say, slightly lower than when we trialed what was at the time between 17 and 40 stores inevitably when you're trialing small into just more scale and you will get better results. Certainly, that's what I've seen pretty consistently throughout my career in retail.

Yes. I think the 10% versus control group is well within what we need to achieve to achieve our IRR of 30% because there's many of the benefits that we put into the store as we do it, whether it's the cost to do business and other benefits. The second thing is we're rolling out the brand across Poland, Czech, Slovakia, and all of the countries. At the moment, the countries we've done, we've just done city by city. We have done no marketing. The real power of what we're doing is once it's been done, and we've got 1 clear brand identity in these stores. And we've decided that we don't want to promote anything about the brand until the brand is primarily 80% of the stores in Poland are the new brand. Otherwise, we confuse customers and also, just a reminder, even if we didn't achieve a good like a good financial return. This would be one project that I would have to do even if we didn't achieve 30% like-for-like. But by the way, we are, I would have to do it to protect the heartland of Pepco in Central and Eastern Europe because being in Poland and Central Europe is a good place for retailers to be. So you're seeing lots of new entrants, whether it's action or [indiscernible] or the continued rollout from [indiscernible]. So we need to be at our best in our Central Europe business if we want to protect what was -- what's taken us 20 years to build. So we would do it for 2 reasons. One, I would do it just to protect if we had to. However, what we found is, as we've done them, we've got some good financial returns and 10% like-for-like is before we do any advertising. So we're still pretty pleased and confident this is the right thing to do for our consumers and shareholders.

Yes, I agree on that. So 10% is what you're planning going forward in energy world.

I'm not sure how to answer that part. Well, the most important thing is we need to achieve the like-for-like to achieve our -- what we set out is we would like to do this at 30% overall and 10% gives us a good figure to achieve the IRR. So 10% will be a good number, yes.

Okay. And the final one I had was...

I have I think it would really help when we show you the modeling of come September, October, I think it's much better to show the modeling rather than focus on just one number it's better to see all of the numbers that equal a strong IRR. So I think September, October, many market is the reason why we want to do it.

And again, I hope you don't look at this as a modeling question, but just remind us, please, conceptually, Pepco versus Pepco Plus sales densities and margins, how different are they not numerically, but one is higher or lower?

Yes. So I think from a density perspective, it is a tough hire and the reason that is clearly FMCG sales density is higher. And obviously, but connected to that, clearly, what is almost more important is the fact that in absolute terms, the sales are kind of they not only keep track or slightly better. That is quite important for the business. We scale up on the side of the store. The densities are a touch high, that is very important. And it is driven by not only FMCG, which is high density in its own right, but it's clearly a fly we're also driving customers into shopping the GM Clothing. From a margin perspective, on a percentage basis, yes, there will be some drag because of the introduction of FMCG. But again, the absolute margin, both in kind of gross margin and EBITDA cash margin is higher. To limit this dynamic as we sort of described before about we are building stores that deliver absolutely higher profit, and therefore, give us an opportunity to better kind of deliver sort of operating leverage and EBITDA level for the country. So I think, again, yes, the concept -- these are slightly different stores, and it delivers a slightly different answer in terms of how we'll be operating the business because bigger top line revenue, greater opportunity for operational leverage. To deliver EBITDA returns in countries that are similar to the returns today. So I think I think we need to sort of consider this not just at that 1 unit basis, but also the kind of business that we'll be running in these territories in the future as well.

[Operator Instructions] We now take a follow-up from Simon Bowler of Numis.

Sorry, just a couple on the gross margin piece, if possible. Firstly, and this may be ambitious, but are you able or kind of willing to kind of quantify expectations for the sort of pace of recovery that you've indicated from, would Pepco, for example, be expected to get back to a flat or positive gross margin for the full year, perhaps maybe a way of thinking about that. And then secondly, I guess with that kind of gross margin recovery coming through and you kind of pointed some of the reduction or deflation in kind of input costs. What gives you the confidence that [indiscernible] peers are seeing similar tailwinds come through themselves. Those peers won't pass those tailwinds on to consumers, making it harder for you to recover gross margin and maintain price leadership.

I mean I think Sam I think in terms of gross mark, we're not going to give you an exact rate number for the gross margin for the year. So I think you're comment on ambitious is correct. But the second half will be better and the group gross margin driven you're right, it's driven off Pepco is performing well, and we've seen an improvement on that. So I think as Trevor said, also, we know the gross margin is coming through because we bought already the product already in the business. We have visibility on that. And again, you've seen the historical levels at which Pepco gross margin was running and I think we're not going to call timing on that, but we can see the opportunity for gross margin recovery in Pepco. And we can see that coming through in the second half versus where it has been in the last year.

You've got a couple of more builds from me. So yes, of course, our competitors will have some of those tailwinds and they could invest in the customer -- and we will always maintain price leadership. And through the last 3 years, we have maintained price leadership and in many cases, we've made the price leadership gap even bigger. So maybe some of our competitors will invest in price, but we'll still maintain price leadership. That's one point. The second point is one of the things that we've done is religiously focused on our strategy of getting bigger and better through entire last 3 years. We're a significantly bigger business than we were pre-COVID. And all of the economies of scale are benefits that maybe some of our competitors will not have the idea was that we want to get bigger, which is so important to us. We've got lots to go for. We're getting bigger and that gives us opportunities to really get the economies of scale. I think I've talked about we now have a rate card for clothing. We have now got a rate card for GM. We know as we grow what we should expect from our suppliers. But we've also got 6 power projects of improving our margin, and I've spoken about this many times. But for example, we have our own business that goes around all the manufacturers and make sure that manufacturers are efficient and effective as possible. We take half the gains. They take half the gains. They pay half the cost, and we pay half of the cost. So we've got 6 programs that are improving the margin. So not only do we get bigger and get the economies of scale, but we get better in what we do in the brand. So in the end, we will always maintain price leadership. We have advanced price leadership through the last 2.5 years, and we can see all the benefits of what we've been doing in terms of making sure that our whole by program is better. So we've got all of those advantages. Of course, if the world becomes very competitive, we will always maintain price leadership. That's absolutely crucial part of our DNA, but the good news is we can clearly see that at the moment, we are notwithstanding what we have to do for the customer to maintain price leadership, we can see that all of the work will end up with margin recovering plus.

Okay. Great. And then kind of just one final kind of clarification. In terms of your kind of comments of gross margin recovering in the second half, is that sequentially recovering versus the kind of the first half gross margin in Pepco of 41.2% or is that recovering year-on-year versus the second half Pepco gross margin of 42.6?

I think it's improving sequentially, I think, from where we are. And I think what -- I think Yes. I mean I think I'm not going to say nothing more than that at this point. I think where we -- yes, well, I think that -- I think you're taking it. We are going to see an improvement sequentially, I think, is the key point. So I think giving much more than that right now. I think we are trying to manage this end to end. As we always have done, as Mat and Trevor described, looking at all these elements one by one, I don't think we're going to be giving kind of more specifics in that right now. I think what we take to is where we think we'll land on our profit growth for the year and the fact that we'll see sequential improvements in these areas., but we need some more time in terms of the flexibility to manage the business to that end result at the moment. So I don't think we'll be giving any more than sequential improvement right now.

And now I'd like to hand the call back over for any additional or closing remarks.

Okay. Thank you very much, everybody, for joining us on the call. I appreciate there's still lots of hunger in terms of future dynamics, and that's why we will very shortly be inviting you to a mini Capital Markets Day where -- because we can see certainty, we think that's good news. Because we can see certainty, we're being right now to the mini Capital Markets Day where we continue through the modeling of our margins, our cost of doing business and our cash as well as the modeling around all of the changes that we're doing in Pepco to maximize the OpCos, but also maximize the group as well. So I look forward to seeing you, hopefully in September and October. Thank you very much.