Super Retail Group Limited (SUL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Super Retail Group FY '22 Half Year Results Presentation. Today's presentation will be hosted by CEO and Managing Director, Mr. Anthony Heraghty; and CFO, Mr. David Burns. [Operator Instructions] Today's presentation is for investors only. Members of the press who would like to access -- who would like access to management should contact Kate Carini, whose contact details appear at the bottom of today's ASX announcements. I would now like to hand the conference over to Mr. Anthony Heraghty to begin the presentation.

Thank you, operator. Welcome, everyone, to Super Retail Group's half year results presentation. In terms of the structure of today's presentation, I'll begin by speaking to some of the financial and operating highlights for the period before talking to the performance of each of the brands. And then I'll ask our Chief Financial Officer, David Burns, who's joining me from Sydney. Good morning, David.

Good morning, Anthony.

And he'll provide you with more detail on the full year financial results. And finally, I'll speak to the progress we're making in executing our corporate strategy and also refreshing our sustainability goals before providing the all-important trading update for the first part of the second half. As always, there will be an opportunity to ask questions at the conclusion of the call. All right. Let's get to it. So we turn to Page 5 in the executive summary, and I'm pleased to report the group has delivered $1.7 billion in sales in the first half. This is in spite of the challenges of COVID, Omicron has significantly disrupted supply chain. Group first half NPAT of $113 million is, as anticipated, down on the prior corresponding period, but is more than 60% higher than the profit the company delivered just 2 years ago. [ Commensurate ], this Board has determined to pay an interim dividend of $0.27 fully franked. A couple of parts. First quarter trading which was significantly disrupted by COVID-19 with lockdowns -- [ a lot of ] lockdowns. We're pleased to see sales rebound in the second quarter. Our decision to [indiscernible] capture strong demand [ in the ] market holiday trading period. We have [ sustained gross margin at 46.7% ]. This result in such circumstance is a testament to [indiscernible] of our team, the Christmas casual, the DC team member all the way to executive leadership team. I can only say thank you. This half, our omni-retail strategy continued to deliver. The group achieved $389 million in sales, that's a 109% increase in Click & Collect, that sustained our demand during the Q1 lockdowns. Put simply, this period has demonstrated that our online business can grow directly without losing the operational leverage of a store network. Consistent with our strategy, half 1 also saw the recent investment in stores' digital and our team's capability to pursue our strategic growth objectives. Operating costs as a percentage of sales have begun to normalize as a result of both [ this ] investment and the unwinding of cost containment measures that were implemented in the first half of FY '21. The group is entering the second half in a strong financial position. We have no bank debt. We have $94 million of cash in hand. Now for completeness, I note that Boxing Day fell in the second half of this year, whereas it fell in the first half of last year. Adjusted for Boxing Day to allow for a more meaningful comparison with the prior corresponding period, first half sales would have increased by $27 million, and PBT would increase by $7 million. We've been quite thoughtful about how we show this comparison throughout the presentation. So I think you'll hear me say Boxing Day adjustments with some frequency. Okay. Let's go to Slide 6. [indiscernible] first, we've been able to achieve a first half sales number approaching the prior year's record sales results. Facing the risk of a disrupted supply chain, the decision for the group to invest in inventory was key to this result, and we're clearly seeing the benefit of that higher stock availability as we can [indiscernible] half. [ On a continued ] basis, we achieved double digits in 2 largest brands, Supercheap Auto and rebel. Lifestyle and fitness categories are continuing [indiscernible] perspective for [indiscernible] categories. BCF on a 2-year basis has grown by more than 40%. This is a testimony not only to the growth in the popularity of key categories like 4-wheel drive and camping, but the group's focus on lifting sales and in BCF through tailored local offerings, the broadening of our footwear and apparel ranges and the introduction of Macpac, our recent product, to offset the seasonality of structure of this business. And finally, whilst Macpac's performance is comparatively modest by comparison, Macpac is a brand that without a doubt has been impacted by store lockdowns and restrictions on travel in the [ cold ] retail markets of New Zealand, New South Wales and Victoria. I think as we say with Macpac, once it opens, it gets going, and we'll talk about that later in the presentation. Slide 7 shows like-for-like sales in each of our key brands split between the first 16 weeks and the last 10 weeks of the first half. Now we wanted to show this split for 2 reasons. Firstly, it provides continuity in disclosure as the last update we provided to the market showed our trading performance in the first 16 weeks. And secondly, it provides pretty reasonable proxy of how our business performed since the reopening of key markets of New South Wales in Victoria follow the lifting of the COVID lockdowns in October. A clear sales rebound occurred in all brands weeks 17 to 26. And whilst the economy reopened during period, Omicron certainly made its presence felt late in that quarter. This was certainly the case for rebel. Major centers and CBD locations experienced quite significant reduction in foot traffic. On Slide 8, which shows gross margin performance over the last 5 years. Group gross margin of 46.7% is 100 bps lower than the prior corresponding period, but 170 basis points above some of recent historical levels. This uplift in gross margin reflects the ongoing benefits of business improvements that have been put in place relating to sourcing, relating to our ability to manage strategic pricing and promotions, as well as obviously [indiscernible]. This result -- this half result is consistent with our previously stated aim reserving a meaningful proportion of the 300 basis point gross margin uplift we generated over the full year of FY '21. it's worth emphasizing though that the prior corresponding period did really benefit from this once-in-a-lifetime combination of extraordinary demand with effectively a flat line of promotional activity. It's not supposed to work that way. [indiscernible] was pleasing considering [indiscernible] the current half impacted by a couple of transient factors relating to COVID, including high cost of external storage and a surge in home delivery as we were dealing with temporary store closures, specifically in Q1. Now we recognize that continued cost inflation is a key concern for investors at this time in the cycle. Our focus is unchanged, though, optimizing the balance between the generation of gross margin dollars and protecting our brand market position is unchanged. On to Slide 9. It's sort of showing the group's cost of business -- doing business expressed as a percentage of sales over the last 5 years. It highlights the point that cycling FY '21 mark was always going to be -- half 1 '21 mark was always going to be challenging. Half 1 '21 saw the business deploy aggressive cost containment measures in response to the pandemic, measures that have sensibly and subsequently been unwound. So in half 1 '22, the group has accelerated its investment in our team's capability. We've accelerated our store network and our strategic programs. This investment is consistent with the strategy I articulated during the July 2020 capital raise, namely that we're aiming to pursue our strategic growth initiatives in line with the key priorities outlined in our corporate strategy. CODB in this first half has been impacted by pandemic-related costs, including higher store wages, high digital marketing costs, and we'd expect to see these costs begin to dissipate as we hopefully exit this pandemic phase. And finally, there's been some modest unwinding of cost fractionalization compared to the first half of last year given the reduction in sales. On to Slide 10. $389 million of online sales at 23% penetration in terms of group sales mix is a seismic change when it's contrasted to F '19. Now we've aggressively invested in this capability, and rightfully so, because COVID has probably and permanently remapped the way that customers engage with online. But what's interesting for us is that despite this almost, one would argue, extreme caution about visiting stores during COVID, 58% of these online sales were Click & Collect, which, thanks to a combination of higher ATV and obviously the low Click & Collect fulfillment cost, is the group's highest contribution channel. If we go to Slide 11, it provides more color on our online performance on a brand-by-brand basis. It's worth noting a 31% penetration for rebel or percentage of sales, and 98% growth for our Supercheap Auto [indiscernible] notable callouts. But on Slide 12, it really shows, as I mentioned before, this extraordinary circumstance presented by the pandemic and extended periods of COVID lockdowns. Despite all of that, 90% of all these transactions involve a customer going to store, whether that was an in-store transaction or an online transaction with a Click & Collect pickup, 90%. The key trend that supports this statistic is the increased uptake of Click & Collect, which grew faster than home delivery and represented 13% of sales. Now Click & Collect is attractive to our customers because it leverages the location of our national network. It gives the customer certainty the product is available and allows the collection almost immediately or not. The chart on the right-hand shows that there's been obviously some surges in home delivery sales during the peak of the pandemic, and we're now reverting to more normal levels as customers start to return to stores. On to Page 13. Look, the big picture here is we grew our active customers. And remember, they are members who have purchased from us in the last 12 months. So they're real. It's grown by more than 20% to 8.7 million active club members. Currently, across the group, these active club members represent more than 69% of total sales. We think this customer stickiness bodes well for the earnings resilience of the group throughout the economic cycle, and that's why we continue to invest in our capability in personalization, customer loyalty and associated data analytics. Slide 14 provides more detail on a brand-by-brand basis about our customer -- our growth in customer numbers, customer satisfaction and club members as a percentage of sales. It's worth calling out, we've made some good progress on the customer acquisition across all brands, but Supercheap Auto is clearly a standout, with active club members increasing by 50% to 2.8 million. Now we made a decision to remove the $5 club membership fee for the Supercheap Auto Club Plus program, and we've been very pleased with the customer response. And probably just as pleasing as our membership growth are our strong NPS scores. All 4 brands improved their NPS despite the logistical challenges and the health and safety requirements associated with COVID-19. Simply from a customer lens, I'd just simply say we've achieved more customers and we've got more satisfied customers, not a bad start. Okay. Slide 15, 16 and 17, summarizes the group financials. But I think what's more important is to discuss -- diving into the brand-by-brand detail on Slide 18, starting with Supercheap Auto. Supercheap Auto delivered a very solid performance in another COVID-disrupted year, reinforcing the reliability of the auto category and just the strength of the Supercheap Auto brand. As I've previously mentioned, Benjamin Ward and his team continue excel in customer acquisition, having added more than 900,000 new card members to their Club Plus membership program in the last 12 months. Total sales declined by 6.9% to $616 million, but this represents an 11.9% growth on half 1 '20. Supercheap Auto delivered a strong rebound in sales in the second quarter with a 4.1% like-for-like growth, with the adjustment for Boxing Day in the final 10 weeks. Like-for-like sales declined by 7.7%, again, adjusting for Boxing Day, that's 6.2%, which represented a 10.1% growth on half 1 FY '20. Gross margin was consistent with PCP as pricing and promotional effectiveness was able to offset higher supply chain costs. Segment normalized PBT of $75.9 million was 39% higher than half 1 or FY '20. Normalized PBT of 12.3% was 240 basis points higher than half 1 FY '20. On to rebel. rebel also delivered solid performance in the half, particularly considered that peak Christmas trading was impacted by a reduction in footfall in CDB (sic) [ CBD ] and large shopping malls. Faced with this challenge, Gary and the team -- and the rebel team have done a great job pivoting to meet online demand, growing online sales by 56% to represent 31% of sales, the penetration number that was unthinkable not that long ago. Total sales declined by 2.9% to $606 million. This represents an 11.6% growth on half 1 FY '20. Like-for-like sales declined by 5.9% or 5.4% adjusted for Boxing Day. This represents 10% growth on half 1 FY '20. rebel delivered a strong rebound into the second quarter, like-for-like sales down just 0.3% adjusted for Boxing Day in the final 10 weeks, cycling a record PCP. Gross margin was lower than our PCP, reflecting higher supply chain costs, some increased promotional activity and a higher sales mix of lower-margin categories. Segment normalized PBT of $68.3 million was 32% higher than half 1 FY '20. Normalized PBT margin of 11.3% was 180 basis points higher than half 1 FY '20. BCF. BCF delivered a strong online sales performance in the first half. Now I've spoken previously about our aims rebase revenue and earnings above the pre-COVID levels and Paul Bradshaw and the whole BCF team are making good progress on delivering this ambition through an expanded store network, range improvements, tailorization and expansion of our footwear and apparel offering to reduce the seasonality impact of this business. Total sales declined by 2.2% to $418.5 million, but this represents a 47.6% growth on half 1 FY '20. Like-for-like sales fell by 3.7%, but with adjustment for Boxing Day, that's 2.4%. This represents a 40.6% growth on half FY '20. BCF delivered a strong rebound in sales in the second quarter with a 7.2% like-for-like sales growth in the last 10 weeks with Boxing Day included, and that was cycling a record prior corresponding period. Gross margin was lower than PCP, reflecting the anticipated normalization of promotion activity, an increased mix of higher value but lower margin national brand products, and of course, higher supply chain costs. CODB has increased compared to the prior corresponding period, as we've discussed on Slide 9 earlier in the presentation, however, were favorable to historical levels as a percentage of sales. Segment PBT of $31.2 million [Audio Gap]

[Audio Gap] Moving to Slide 25, cash flow. Our operating cash flow of $157 million was impacted by 3 key factors. Inventory investment increased. We made a payment to the ATO of $67 million related to last year's record profit. And we also had the impact of the timing of Boxing Day, which we previously mentioned is $27 million. If we -- but to capture that, we would have a $27 million of additional cash in the operating cash flow result. We have increased our investment in stores to drive and we're driving an increase of $63 million of CapEx spend in the period. $34 million higher than previously when our investment was constrained. We have $94 million of cash at bank and we've paid a record dividend. I'd like now to hand over to Anthony to talk to the strategy and trading update. Thank you.

Thank you, David. Okay. So let's go to [ Slide 27 ], it provides an overview of the key pillars of our corporate strategy, which we referred to at our Investor Day [indiscernible]. The strategic focus for the group remains focusing on these 4 core brands, leveraging our closest to customers specifically through our club, connecting our omni retail supply chain, simplifying the business and excelling in omni retail. Now Slide 28 provides some detailed progress to date in executing the strategy, but give us [indiscernible]. But on Slide 29, I did want to highlight the progress we've made in terms of execution of our FY '22 store development plan. In short, the group [ opened 15 ] stores in the first half and has undertaken a number of relocations and refurbishments. Overall, we're well on the way to delivering our network [ of stores ]. Slide 31 and [ 32 ] on sustainability. The group it is more [indiscernible] and integrating sustainability into our decision-making in line with our group [indiscernible]. We previously announced that we currently see [ within our sustainability ] framework and we will look [ our ] position later in the year to update the market when we release our sustainability report later this year. Nevertheless, I'm proud of the progress we've made on our sustainability strategy to date. And on Slide 32, we've got some of these great achievements. We've increased our Dow Jones sustainability score to 62, and received an A rating from MSCI and a leading rating from ACSI for ESG. Our modern slavery report was recognized by Monash University as a top decile result for ASX 300 companies. So we're happy with our accomplishments to date on ECG (sic) [ ESG ], but we recognize there's more to do, and we look forward to updating on our goals and aspirations later in the year. Finally, on Slide 33. Important to talk about our team. Engagement levels remain high. We've recently deployed a new time and attendance capability across the group. Clearly, strides have been made in terms of achievement of improved health and safety scores, but what is most telling is that over 2,500 team members are part of our I Am Here mental health program. I'm very proud of that achievement. Now let's turn to the trading update on Slide 35. So I'm pleased to report it's been a pretty positive start for the group, delivering [ 6% like-for-like ] sales growth. That's a clean comparison with Boxing Day out. Supercheap Auto and BCF in particular delivered strong sales and both brands benefiting for this higher in-stock position in key categories. Now January sales were impacted by reduced footfall in malls and large shopping center, and it particularly impacted rebel. We note recent sales trends have continued to improve as customer caution has shown side of receding. In terms of brand-by-brand callout, Supercheap Auto has executed a successful lubricants campaign. rebel is actually starting to benefit from a catch-up on back-to-school spending. BCF delivered a record sales result in January, driven by continued strength in boating and camping. And Macpac, because it's open, achieved strong sales growth in summer apparel equipment and accessories. And group still expects to spend $125 million in CapEx in FY '22 to fund our store development program, our investment in loyalty, omni and digital capability. Finally, I note that FY '22 will be a 53-week year for the group. That concludes the formal presentation. I would now like to hand back to the operator for questions. Thank you.

[Operator Instructions] The first question comes from Adrian Lemme from Citi.

Just first question, please. Just on what you're thinking about inflation, just what you're seeing from the brand and what you're thinking on private label, given the step-up in supply chain costs. And are you looking to keep price points or sort of -- and sort of work around those? And yes, just thinking how you're [ impacting ] costs, please.

Yes. It's, I think, obviously, a topical point. We are fortunate where we've made some good investments in terms of our capability around strategic and promotional analytics. And what that enables us to do is really understand not only elasticity, but relativities to competitors pretty clearly. What that enables us to do is appropriately manage the gross margin dollar outcome with one eye on our market position. And that's the balancing act that we're trying to achieve. So therefore, you would anticipate that as we start to see increase in COGS, logistics costs, we reasonably expect those costs will indeed be passed on, but passed on in reference to market position and optimized through that analytical capability. So there shouldn't be a sharper sting. The second thing that's worth pointing out is the benefit of the private brand business that we've got is it actually gives us -- as a percentage of sales, COGS is much lower than national brand. It gives you a little bit more latitude to be able to flow cost increases through or do better workaround mitigation. So it's certainly not business as usual, but we're pretty confident we're well set up to manage that fairly effectively.

Excellent. And can I just ask one just additional question, please? Just thinking about capital management, should we think about the trajectory of the normalization of inventory and perhaps the trading outlook is the key swing factors for how you might think about capital management down the track, please?

I think we've always said, Adrian, that the driver of the capital management is the external environment, namely the pandemic and its associated complexity. I think when we start feeling confident that we're nearing or at the end of this period, we'll put out or turn our mind to capital management. What our -- we accept that our gearing is conservative, but that gearing has allowed us the confidence to invest in inventory. And you can see this is the second peak period where that strategy has paid dividends, so we want to be sure of our footing before we turn our mind to that issue.

Your next question is from Lachlan Costello from Jefferies.

Just looking at consensus, it's implying that future group gross margins to remain elevated from pre-COVID levels. Just wondering how sustainable current gross margins are in terms of the outlook in 2H and beyond? Or do you expect these to normalize pre-COVID levels?

Yes. Look, we're obviously not providing guidance on anticipated movement in gross margin. I think what I'd probably direct you to would be if we look at the 5 years, you'll see that gross margins have performed quite robustly based on that 5-year performance. And as we think about 2 things: one, that investment in pricing and promotional capability as well as some of those transient COVID cost in the mix, that gives you some pluses and minuses. It is worth noting, though, that we are -- this external environment continues to throw us unanticipated consequences and ongoing inflation is one of them. It's something we're going to have to manage, and that's why we're not -- will be [ able ] to sort of provide specific guidance accordingly.

Next question is from the line of Keegan Booysen, Jarden Group.

First question from me is just on the phasing of corporate costs. There's a bit more digital costs to come through in the first half, I appreciate has already COVID disrupted a lot of those investment plans. Can you give us some color on just how to think about full year run rate? Should we -- how big a step up in those cost would we expect just given your commentary, please?

We would expect the -- yes, I'll take that. The CODB is, as you can see, is sort of normalized. We had the benefits, particularly in H1 last year, of really heavily constrained cost environment. We weren't investing in projects. We were sort of certainly constraining our expenditures, both in terms of marketing and also just general team. So what you're seeing in this result is moving back to a consistent level to what we've seen over time, and we would expect to try and maintain relative consistency of CODB.

That's good color. And then just secondly, on M&A. Look, you're in a net cash position and your balance sheet is looking very strong. How do you think about M&A opportunities out there that fit within your verticals? Do you see some scope for M&A? Or do you think that the better allocation of your capital would be to reinvest in the existing verticals?

Yes. I think, look, our position on this one is unchanged. We've sort of got a strategy and called that core 4 brands. And we always would think about any activity within the context of that construct. And so we'd have to have -- it would have to make sense on that front. Secondly, we've just gone through a fairly elevated period of performance and trying to bottom out ongoing underlying performance for some of these assets is challenging. So timing may not be awesome. And the second -- and the last thing, we've sort of maintained this position, is we're in the middle of quite a significant digital transformation of the business. It's paying dividends. That focus is paying dividends. And if we were to do something in this space, we would have to make sure that it did not adversely impact our organic transformation agenda, first and foremost.

Next question is from Bryan Raymond from JPMorgan.

My first one is just on online. So you guys seen over the last 2 years, brick-and-mortar sales actually go back within Supercheap and rebel, albeit obviously lockdowns contributing to that, that's not a normal period. But all -- what I'm trying to get is all of your sales have been driven by the online part of those businesses, and you've seen underlying PBT margins up substantially circa 200 basis points across those divisions. Just wanted to sort of get your feeling on how the profitability of online has evolved. Do you see that as a margin-neutral business? Or is it still dilutive? Why don't I pause there and then there will be a follow-up after that.

I think the key -- whenever you think about online for Super Retail Group, you just have to have a look at the Click & Collect penetration because that -- I think that tells a story. Because -- with 10% of those sales being delivery of total sales, you have a very different dynamic to a traditional construct about online with fulfillment through delivery. So if we just called it out sort of in the presentation, Click & Collect on a contribution dollar perspective is our most affected channel. That's because online will always attract or have attracted and continues to this day attract a higher ATV than an in-store purchase. And that combined with 0 -- effectively 0 fulfillment costs for Click & Collect makes it an astonishingly good channel for the business. So there's no sort of loss of operational leverage. You still have customers coming into the store. They still have the possibility and the probability of buying something else while they're there. We've always said that's good business. And the fact that in this period, that outgrew delivery, even with lockdowns, says that customers like Click & Collect. It's good for us. It's good for them. It sort of doesn't unwind operational leverage. So first things first is Click & Collect. Second piece is then when we look to delivery, courtesy of that high ATV and the improvements we've made through our order management system, we still are -- whilst it's albeit lower than a Click & Collect contribution at $1, and I think we sort of published a bit of an insight into this at the Macquarie conference last year, from a dollar perspective, it's there or thereabouts to in-store courtesy of higher ATV less fulfillment costs. So from a total online perspective, you got to start generating some confidence that the combination of a more and more efficient delivery system and a very, very high contribution dollar Click & Collect channel, the ability for the company to keep up with online demand without unwinding operational leverage, we're pretty confident of that. We feel like we're in a good position, a good place.

Okay. Great. Just following on from that, gross margin is obviously still well up on pre-COVID, as some of the other questions focused on. Just wanted to understand, is online a higher gross margin channel? Like do you have a price premium vetted in online? Or do you run different discounts? Is that contributing, that online penetration, to higher gross margins at the moment?

No, all pricing is omni. So all pricing is the same. The only difference between online and in-store is that mix I talked about from an ATV. Now when you get a higher ATV, you may get a lower percentage margin but obviously a high gross margin dollars. So that might be in play. But major differences -- or the structural differences between the channels are customer behavior or [indiscernible] optimizing pricing or promotion now. You get the same deal in or out, which of course, is logical because if you find a deal online, you go on Click & Collect and there's a different deal in store, that's going to be a frustration for a customer.

Yes, absolutely. And then just final one from me, just on the gross margin line, just promotional calendar versus pre-COVID. I think you mentioned BCF it's normalized, and I understand it's a pretty competitive channel for you guys. But just focusing on 2 big brands in Supercheap and rebel, can you talk about the promotional side [ you ] see at the moment and potential for that market to absorb price increases that you're seeing from suppliers in a rational manner?

Yes, I think that's all looking fairly orderly. Certainly in Auto, I think the rebel space is just got a little bit -- only -- it's a little bit more complicated because supply chain is just so lumpy. You've got the Q1 lockdowns, which potentially had some players going long in apparel. And then now we've got Vietnam factory closes, which sort of tightened up on footwear. So that's -- I wouldn't put that down to promotions, I'll just put that down to just a little bit of a [ blip ] in the supply chain and people trying to reasonably optimize their stock position. But generally speaking, so to say, I think the impact of input costs are clear. It's transparent what's coming through. And generally speaking, I think there's this good structure that's holding in the market.

The next question is from Grace Malin from MST Financial.

My first question is what portion of the data and digital costs will be ongoing and what are one-off establishment costs? And on that, what revenue gains do you anticipate from the data and digital investments?

David, do you want to take that one up?

Yes. We've got investment in the period, which we've called out as part of the impact on CODB. We would say that that's ongoing. The full benefit, yes, we're still in the ramp-up phase. We've only just gone live on a trial with BCF for our hyper-personalization. So that's -- yes, we're not going to see the benefits really until FY '23 in terms of top line revenue benefit. Second, there's a lag between investments and return. And so we'll see that investment [ will start ] to increase and we'll see those returns increase. And obviously, in '23, we'll start to see the returns override the benefits probably in the second half of the year.

Great. And my second question is, what is the company's planned inventory cover going forward given the very high levels in December? And will higher inventory cover be retained throughout 2022?

Yes. I'll direct you to a couple of things that's driving inventory balance. Firstly, the balance is increasing because of increased sales, which is not impacting cover. There is some inflation cost obviously coming through as well, which we're passing through, which we discussed earlier. The cover position, we would expect to need to -- we've got an environment of disrupted supply chain and disrupted demand in the last 6 months. As we see a normalization of demand, which I think we started -- we're now in a bit of a more of a normalized environment so long as we don't have another Omicron, we will start to see a normalization of supply, we expect, during calendar '22. And so we would hope to see midway through calendar '23 an ability to get cover levels down. So that said, I think in the context of what we've been through, it will probably be higher than historical levels just because of what we've seen. I think there's a degree of caution.

Next question is from Alexander Mees from Morgans.

Just following up actually on inventory. I just wonder if you can quantify the provision for aged stock that you put through during the period.

Yes. The provisions that we provide for aged stock and release will just be sell it and then obviously provide for it as we see more aging occurring. So it has not been higher this period than normal because those aged stock levels are relatively lower than historical norms. So I would not call out in this period that we've actually had an increase in those provisions. If anything, we've been sort of -- we're seeing -- because of these elevated sales, we're seeing a good freshness in our stock. And so we're not seeing an increase in aging. At this stage, it has been quite good.

That's clear. And then just for clarity. You provided the like-for-likes at the start of the second half adjusted for Boxing Day. I just wondered if they would look different or materially different if you had included Boxing Day?

Clearly, because you've got $27 million of sales that would be in them.

Yes. And Boxing Day -- on Boxing Day, is there anything to call out there in terms of a year-on-year basis?

Look, it was a good result for Supercheap and BCF, slightly below historical. So that was above historical norms, and so a record Boxing Day for Supercheap and BCF. And for rebel, it was just slightly lower because of the -- yes, the Omicron was probably kicking in a bit more and the foot traffic reductions in the major shopping centers. We did actually go early on our Boxing Day promotions for rebel. I think they commenced in that last week. So there was some -- probably some slight benefit. It was only slight.

Although actually, when I think of it, there's just one more if I can. With regard to pricing, I think you referred to taking price in Supercheap, which helped you to keep the gross margin steady. I'm just wondering, did you look to take price effectively in the other brands as well?

Yes, we -- it's a constant process. We've always, as Anthony has outlined earlier, we optimize -- we price [ products ] every day and we optimize our price position market competitively. And so we're constantly taking price adjustments, both up and down. But there's been -- as we start to see cost inflation pass through, as you would imagine, the cost of TEUs, shipping containers into Australia, has been elevated for more than a year. We've been taking those adjustments and passing them through. So it's just a constant process and will be continued. We've already undertaken price changes in January and February.

Next question is from Aryan Norozi from Barrenjoey.

First one from me, just on the gross margins. If I just look at [ competitor ], your first half this year is up about 160 basis points on pre-COVID, so first half 2020. Can you just split out how much of that is a structural improvement in terms of your own optimized pricing and how much of it is industry driven COVID, maybe reduction in industry promotional intensity or any other sort of moving parts? Just trying to work out what's sustainable and what's not, please.

I'm not sure we'll be able to provide that level of analysis. I think -- look, I think that's tricky, broadly because that -- you have seen -- so if we go back to -- you have to go back to last year, we've got a flat line of promotional intensity [indiscernible] come through. The other tricky thing in that analysis that you have got these transitory costs related to COVID with higher supply chain. So the bet you've got to make or the conclusion you've got to draw is that as supply chain normalizes, those demand start to normalize and if some of that offset by promo, so to try and calculate what's meant behind is tricky. I suppose I would just simply point back to our broad ambition that when you get beyond the COVID period, when demand starts to normalize and supply chain starts to normalize, given our investment in pricing, promotion and our investment in club, we're confident to hold gross margins at a higher than pre-pandemic levels. Now we're obviously not going to quantify that, but that's the underlying logic. It's difficult to calculate for the moving parts.

That's fine. And just on that point, like in terms of this half, how much -- I mean did you experience the full impact of elevated rates? And if I just go from the first half '22 to second half '22, is there anything that you're annualizing within that gross margin that we should be aware of that we should penalize or give you the benefit of?

David, anything...

Yes. I mean, certainly, the benefits of -- yes, we traded the first half of last year and we started to see the impacts of shipping halfway through the half. We've seen them for more -- for 15 months now of elevated shipping costs playing through our cost base. So I do -- I would say that -- and we've seen where there's sort of very little promotional activation last year in that first half because it was just literally trying to get hold of inventory. And so we've seen more -- the beginning of the normalization in some of those activities. And so yes, I just -- I think we've got -- we've had the full impact of cost inflation coming through supply chain probably is what I'd call out.

Perfect. And my last question, just around the cost of doing business. I think at the AGM, it wasn't quantified. And my understanding was -- well, back on the envelope, is that there's probably about $10 million to $15 million of extra investment in loyalty and digital capabilities. How much of that was incurred in this half? And I think you flagged $1.3 million in digital and omni, so does that mean that's going to step up in the second half? Just give us an idea on the cost investment [ posing ] in the second half now.

Yes. No, absolutely. That's called out in that $21 million that we've sort of said is our year-on-year increase in investment in both stores and our portfolio. So we would classify the work that we're doing with customer as a portfolio activity. So that lives inside the brand's results. And that ramp-up that's going on there is, I would say, for loyalty is -- has started but it's still got -- it's on a -- it's in a ramp-up phase. And so we'll see a higher proportion of that in H2. But at the same time, we'll see a reduction of some other project activity that we had in H1. So we're not calling out a significant step-up in CODB, but we're saying it's actually going to have a higher weighting of our portfolio activity in H2. So that cost base will build for customer digital, we'll consume it inside the CODB, which we've sort of outlined to you, and it lives inside the brands.

Next question is from Tim Lawson from Macquarie.

Just in regard to the trading update, you called out sort of higher inventory, there were also some issue around supply chain and stuff. Is this, [ firstly ], the range you called out that are being particularly impacted by those issues?

Look, inventory -- yes. Look, in the -- as we get into this half, I think we're -- from a Supercheap, BCF and, broadly speaking, Macpac perspective we're feeling pretty comfortable with our inventory position, as you would hope so, considering the inventory we have available to us. I think rebel is a little bit more of a dynamic situation just because it's more dependent on the global brands. I think it's been called out that, obviously, there's some supply chain disruption specifically within footwear categories and the like. So we'll be managing that. There's no specific call-out, but that would be the way we think about the dynamics of inventory as we sort of cast our mind forward.

And just a question on the relocated stores, it may be too small and has a big impact. But just their trading versus the original side and the costs, et cetera.

Look, in terms of the store program, it's achieving. So we're very pleased with the performance of all those activities. So especially considering 90% of what we sell goes into a store, courtesy of Click & Collect, those refurbishments relocations, they -- we only would do them if there was a return, and we're comfortable with the outcomes we're achieving with the program thus far.

Next question is from Mark Wade from CLSA.

Just to start with, I'm looking at the big jump in club numbers you've had, big increase in the sales that they represent. Net Promoter Scores up, your staff engagement, that's all heading in the right direction. That looked to be a pretty contended bunch. How do you see this playing out or giving you a payback in the form of higher transactions, maybe lower [ staff absences ] and turnover, et cetera, in the next year or 2?

Well, in some respects, it already has. So just on the team members, we've gone through the most disruptive cycle for our team with all sorts of external issues and, again, operationally dealing with this has been, I cannot tell you just how difficult it's been for them. The fact that we've been able to maintain the integrity of the network, broadly speaking, we've been able to keep most stores open most of the time, even the most difficult of circumstances. And so I think we -- the company has handsomely been rewarded for our investment in the team and their welfare, just simply by the fact that, operationally, we've been able to do -- frankly, do so well from a store perspective. Absolutely, once you get beyond that, one of the biggest drivers of NPS is the customer service you receive in the store. So it does become a little bit of a virtuous circle. As It relates to the big club numbers, I think with -- starting to round out on 9 million active club members, you first and foremost have a marketable database that you can work with. But more importantly, for every single one of those individuals, we have their complete transaction history. So we're able to better inform our purchases, better inform our ranging, better inform our promo. David mentioned it before, but we've just started the process in BCF of sending our very first hyperpersonalized e-mails, which actually looks at your individual transaction history and picks the product that's right for you. Now that's not cutting edge, a lot of retailers are starting to do this. But for us, we've started the journey of heightened personalization that's been underpinned by quite a relatively substantial, for us, investment in data analytics and data engineering. So what you'd hope for as we start executing this as well as the replatforming of our loyalty offers that we're underway on, is you would see great stickiness, so increase in ATV or in transactions per year, and you should see an improvement in promotional margin because you've been much more targeted at an individual basis. But that's a long journey. It's a big investment. It's no different, frankly, to the omni investment, which seemed to sort of get to the kind of numbers we're talking about today was a bit of a [ massive amount ] not that long ago. I suspect we'll be talking about customer in the same way in the not-too-distant future.

That's helpful. And lastly, in the past, you've highlighted the long-term positive trends reinforced by the pandemic on the business with the customers focus on health, fitness, outdoor participation, et cetera. Is that still your expectation that those benefits will hold? And perhaps weakening slightly as the world returns to some form of normality, hopefully, in people's lives?

Yes. what the world looks like going forward is the question. I think health and wellbeing only seeks to, I think, improve. And it's arguably more potent than it was prepandemic, especially the relationship between mental health and physical wellbeing. That has become clear. And we see -- I think it'll be fascinating to see key participation in sport numbers as we start to get into a normalized school year. I think that -- parents wanting kids out of the house, active, you can sort of see that be a driver. Certainly, the Australian holiday has changed for the foreseeable future. I mean like the domestic caravan and camping holiday, we're in our second summer now where that's taken place. That starts to become habitual. We're seeing that in terms of BCF's camping performance as people go beyond buying the tent to buying the table and the chairs and the barbecue and all that type of stuff. So still as confident as we always were in terms of those macro trends. And we sort of point to international tourism at a prepandemic level does seem some time away. And certainly, brands like Supercheap and BCF will be a big beneficiary of that. And then finally, Macpac, connecting with the outdoors, getting out and about, as I said, with that domestic trends has been -- tourism window starts to normalize, there's some upside. Good solid upside there. So look, we're a big believer at these categories. They're high involvement, we've got 3 of the market-leading brands in 3 of our categories, the company is well positioned to benefit from that upside.

The next question is from Sophie Carran from Goldman Sachs.

Just maybe one on inventory. I mean how do you think about your inventory position over the half relative to your competitors? And do you think this has given you an advantage in terms of sales over the half? And then just sort of following up from that, looking forward to the second half with that higher inventory position in mind, what's your thinking in that promotional activity as we sort of come into what could be a more normalized sales period?

Okay. Hard to judge. Certainly, on your first part of your question around what -- to provide the company an advantage. Look, broadly, I think that's true. There's been some segments within the brands where we've been much stronger than others and others where we're even. What's interesting, though when you get into this kind of hyper demand period, which we've now experienced over 2 peaks, is that people are prepared to go for second choice, third choice, just simply to get access to product. So whilst you've got to have, it does become a little bit fuzzy into the customer's mind as they're dealing with product shortages and the like. But I'd say, broadly speaking, I think that's true. Secondly, your second part of your question in terms of go forward. Look, I think this is going to be -- it's interesting because you've still got China, which is where the vast majority of our products are sourced either from a componentry perspective of finished goods. Clearly, that economy is in a -- still in a suppression strategy. That means that we could reasonably expect more impact to the supply chain continuity. So that is going to play into this calendar year without a doubt. That plays on our mind in terms of how we think about inventory and appropriate levels of safety stock, as well as the fact that, as mentioned in the previous question, underlying demand still is robust. So we do want to make sure as we approach peak for this calendar year, we're appropriately set up, taking into account probably a still robust demand position and still possibility for supply chain disruption. So could it be similar to the last 2 years, there's an argument that says it could. We watch that carefully. We've got pretty good controls over it, and we'll make a decision to optimize the position for us.

[Operator Instructions]

I think we might [ need the day ] off, right, if there's no more questions.

Yes, sir, we don't have anybody in the queue. As there are no further questions at this time, I'll now hand over to Mr. Heraghty for closing remarks.

Great. Thank you, operator, and thank you all for joining us. For those that we are seeing later this week. Look forward to seeing you, albeit still virtually, we'll get to in person at some point soon, I hope. Again, wishing you a very good morning. Goodbye.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.