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

Welcome to Super Retail Group's FY '22 Full Year Results Presentation. Today's call will be hosted by CEO and Managing Director, Mr. Anthony Heraghty; and CFO, Mr. David Burns. [Operator Instructions] This presentation is for investors and analysts only, media seeking access to management should contact Kate Carini, whose contact details appear at the bottom of today's ASX announcement. I would now like to hand over to Mr. Anthony Heraghty to begin the presentation. Please go ahead.

Thank you, and good morning, everyone, and welcome to Super Retail Group's full year results presentation. Joining me this morning is our Chief Financial Officer, David Burns. Morning, David.

Good morning.

All right. In terms of the structure for today's presentation, I'll begin by speaking to some of our financial and operating highlights for the period. I'll also discuss our brand performance before asking David to provide more detail on the full year financial results. I'll then take an opportunity to overview the progress we've made against our corporate strategy, before talking to our new sustainability framework and targets as well as some of our ESG achievements this year. Finally, as always, I'll provide you with a trading update for the first 6 weeks of FY '23. Of course, be an opportunity for you to ask questions at the end of the call. But firstly, some housekeeping. F '22 comprised a 53-week trading period as compared to a 52-week trading period on for FY '21. We've set this out for you on Slide 2, the impact of that 53rd week on key line items in the P&L. Unless otherwise indicated, growth numbers in the presentation are comparing a 53-trading week performance to a -- with a 52-week trading week -- sorry, a 52-week trading week performance. All of the like-for-like numbers, however, in the presentation are based on a 52 versus 52. And importantly, we've made no adjustments for store closures. Finally, it's important to note that because of this extra week, it included an additional payment cycle for store rental, certain trade partners and also payroll. The impact on group cash flow was an additional outflow of $49.4 million. Right. That said, let's cover off the highlights of the results. The group has delivered a record sales result and a record online sales result. Indeed, it was our online sales performance and the group's strategic decision to invest in inventory in response to a pretty significantly disruptive global supply chain that really underpins our first half performance. As these lockdowns subsided, the group delivered a strong second half result. Like-for-like sales in that second half increased by 5% with like-for-like performances -- or positive like-for-like performances recorded across all 4 brands. Growing contribution from our successful new store format and a record June winter sales result for Macpac topped off a solid revenue performance for the full year. Pleasingly, the group achieved gross margin of 46.8% by optimizing our promotions and pricing to offset higher supply chain costs. At the bottom line, the group delivered a net profit after tax of $241.2 million. As a result of the group's strong performance, the Board has declared a final, fully franked dividend of $0.43 per share, bringing our total dividends for the year to $0.70. Entering FY '23, group has a conservative balance sheet with positive net cash balance. Moving on to particulars of the results and turning to Slide 7. In cost contrast, lockdown impacted half 1, the group achieved half 2 like-for-like of 5% with, as I said, all brands in growth. Half 2 saw pandemic fears eased and customers began returning stores. Rebel's more muted half 2 growth reflected inventory constraints, most of which have been remedied in Q4. On a full year basis, the group has delivered another record year revenue with sales up 2.8% to $3.55 billion or 1% when adjusted for that 53rd week. On the gross margin on Slide 8, we were pleased with gross margin performance of the business in FY '22, a successful execution of pricing promotions and improved sourcing offset higher supply chain costs. As a result, group gross margin of 46.8%, remains well above pre-COVID levels. As expected, the level of promotional activity is beginning to normalize, particularly in BCF. However, the group level promotional sales as a percentage of total sales remain remained below FY '20 levels. Turning to Slide 9. Cost of doing business this year has normalized to 35.7% of sales, which is slightly below pre-COVID levels. Importantly, higher CODB in FY '22 reflects a deliberate decision to increase our investment in our business. These investments are in line with our strategic priorities and are designed to sustain performance in a post-COVID environment. These investment include the opening of 21 new stores and the refurbishment of over 40 as part of our store rollout and refurbishment program; the execution of our portfolio projects, notably, workforce planning, warehouse management system, endless-aisle and gift card programs. It is also an ongoing investment in the group's personalization and loyalty capability, designed to leverage the first-party data from our 9.2 million active club members. Looking forward, inflationary pressure on rent and wages will represent CODB headwinds in FY '23, offset in part from the unwinding of costs incurred during this year and, in fact, prior years associated with COVID and COVID lockdowns. In addition, in FY '23, we're investing a further $12 million in loyalty -- in customer and loyalty capability. This investment will help redesign our loyalty programs and build our customer analytics that allow our business to make increasingly personalized offers to our customers, utilizing analytically driven data and insights. On Slide 10. The businesses continue to attract and retain new customers, with more than 1 million new members added to our loyalty program in FY '22. This takes our loyalty program membership to a record 9.2 million active club members. Remember, to be active, you have to have purchased in the last 12 months, and these club members contributed 70% of total group sales. We have more customers than ever, and I'm pleased to report they're increasingly satisfied with our brand, product and service because our Net Promoter Score increased to 64.6, with all brands recording and improved performance. Simply put more customers, happier customers, not a bad result. Over to Slide 11, it sort of sets out how we are thinking about our investment in loyalty and personalization. And with the 9.2 million active club members, they are an asset to our business, as is the first-party data that is generated as a consequence. Our investment in loyalty and personalization seeks to better leverage this asset. This program of work is well underway and its fruits can already be seen in the acceleration of club growth in the last 12 months, especially within Supercheap Auto. Looking forward, the group will launch new loyalty programs for Rebel, Supercheap Auto and BCF, which will enable the business to focus growing annual customer value by incentivizing visitation and transaction value. Concurrently, the group will continue to invest in our advanced analytics capability, our use purchase cases, its personalized one-to-one promotions. The algorithm is built and the testament phase is well underway. In short, encouraging 9.2 million customers to visit that one more time or purchase that one more item generates a material benefit, and this is the key goal of the program. On Slide 12. As I highlighted earlier, FY '22 has been a big year investment in our store network, one of our biggest. And it's not just brand new stores, notwithstanding the fact that we opened 21 new stores within the year, it's also about refurbishing the network and upgrading our fleet with new and exciting formats. In Supercheap Auto, we converted over 30 stores to the next-generation format, and this helped deliver solid uplift for our like-for-like sales, particularly in the tools category. In Rebel, we now have 11 rCX stores opened, including our pictured flagship Rundle Mall store in Adelaide. These are large-format stores showcasing comprehensive range across key global brands, focusing on core categories of running, gym and fitness, football, basketball games. They provide a differentiated customer experience through physical experiences like half-court basketballs, indoor football pitches and sporting gaming consoles. This unique format is attracting co-investment from leading global sports brands and giving us access to exclusive products. We've continued to roll out our specialized in-store World Of formats in must-win categories of basketball, football, running, kids and training, more broadly across the Rebel network. In BCF, our smallest format regional stores with tailored ranging, are performing well above expectations. And in Macpac, sales and brand awareness have been boosted by the opening of additional 10 new stores and the range of Macpac product in over 200 Rebel and BCF stores. Looking forward, our network expansion plan for FY '23 includes up to 30 new store openings, including our BCF Superstore in Townsville. We also expect to add an additional 5 Rebel rTX stores within the next year. On to Slide 13. Group digital sales grew by 44% to over $600 million. This record sales results show that our omni retail execution is continuing to improve, and we are capturing an expanded digital market share. Since FY '19, online sales have increased by a factor of 3x and they have increased portion of overall sales from 7% to 17%. Click & Collect, which leverages the strength of our store network, continues to outgrow and outpace home delivery. In FY '22, Click & Collect represented 55% of total online sales and 9% of total sales. The importance of our national store footprint is underscored by the fact that despite the pandemic, in FY '22, over 90% of our sales were transacted in-store, whether it be through in-store sales or deep Click & Collect. And finally, the investment we've made in our order management system is continuing to reap benefits in terms of reduced numbers of split deliveries, adding to the profitability of our home delivery sales. Okay. On to the brand results. Supercheap Auto. Supercheap Auto delivered record sales result in another COVID-disrupted year, reinforcing the reliability of the auto category and simply the strength of the Supercheap business. Benjamin Ward and his team continue to excel in customer acquisition, having added more than 1 million new members to their club membership program in the last 12 months. Total sales increased by 2.4% to $1.34 billion, or just 0.5% adjusting for that 53rd week. Online sales grew by 64% to $175 million and represented 13% of total sales. Like-for-like sales for the year fell 0.1% but rebounded strongly in the second half. The second half -- Half 2 like-for-like sales growing by 7.7% driven by strong performance in lubricants, auto maintenance and tools. Gross margin declined by 60 basis points versus the prior corresponding period as higher trading margins were offset by higher supply chain costs and normalization of promotions. Segment PBT fell to $176 million. But pleasingly, second half PBT of $100 million was almost 12% higher than in the prior corresponding period. Rebel. Rebel delivered another very strong sales performance in FY '22 despite inventory talent challenges and a peak Christmas trading period, which was impacted by a reduction in footfall in CBD and large shopping malls, courtesy of COVID. Faced with this challenge, Gary Williams and his team did a great job in proving to meet online demand with Rebel lifting online sales by almost 40% to $268 million or 22% of total sales. Like-for-like sales were down 2.8% for the year, but rebounded in the second half as foot traffic recovered and footwear and apparel stocks were replenished at the end of the fourth quarter. Gross margin was 80 basis points lower than PCP as higher trading margins were offset by supply chain costs and increased promotional activity and inventory supply challenges. Segment normalized PBT fell by 15% to $141 million. But pleasingly, second half segment normalized PBT of $73 million was almost 5% higher than the previous period. If we look to Slide 21 we see that Rebel's relationship with the world's leading sporting brand is key to our position -- to maintaining our position as a preeminent sports retailer in Australia. This slide includes testimonials from some of our brand patent partners, which speak to the strength of those relationships. While global brands have expressed an intention to expect to expand their direct-to-customer offering, we actually see this as an opportunity for Rebel. As the global brands are going to be more selective about who they partner with, Nike, Adi and Under Armour, all co-investors in our rCX format, and I'm sure you -- I'm not sure you can get a more positive endorsement than that. Slide 22, BCF. BCF did a very strong top line result, another record year of sales. Paul Bradshaw and his team are continuing to build this business through store network expansion, range improvement and tailored ranging. Total sales increased 4% to $830 million, or 2.7% adjusting for that 53rd week, driven by like-for-like sales growth and contribution from new stores. Online sales grew by 36% to $117 million and represents 14% of total sales. Like-for-like sales for the year grew 1.1% following a strong second half performance. Half 2 like-for-like sales increased by 6.7%, driven by strong trading over summer and Easter holiday period, particularly in boating and camping. The decline in BCF gross margin reflects the anticipated increase in promotional activity, sales mix skew and higher supply chain costs. PBT of $60 million was 38% lower than prior year, over second half PBT of $28 million was only 14% below the prior year. Over to Slide 23, BCF is continuing to strengthen its portfolio of private label and strategic brands, which now represent 45% of sales. Given the highly competitive category, which BCF operates in, we are pleased with the progress we are making, growing our relationship with marquee brands like YETI, Under Armour and Weber, whose products are simply unavailable in other outdoor big box competitors. On to Macpac, Page 24. After a challenging first half, which was impacted by COVID, Cathy Seaholme and the team, the Macpac team, delivered an outstanding second half performance driven by record June winter sales period in Australia. Total sales increased by 15% to $177 million or 11% adjusting for that 53rd week. Online sales grew by 35% to $41 million and represented 23% of total sales. Like-for-like sales grew by 4.4% overall and 8.5% in the second half. This strong performance was driven by Australian stores, where like-for-like sales increased by 12.4% off the strong demand in rainwear and inflation due to cold and very wet weather. Our performance in New Zealand was subdued, owing to the impact of COVID and reduced tourism and travel. Pleasingly, wholesale sales of Macpac product to Rebel and BCF increased by 95% following the expansion of this offer to now over 200 stores for Rebel and BCF stores. Now for avoidance of doubt, Macpac's reported like-for-like sales numbers exclude these wholesale sales. For Macpac, gross margin was lower than prior corresponding period due to higher freight costs as a result of significant uplift in home delivery sales in the first half. Second half gross margin was higher than the prior corresponding period. Adjusting for the 53rd week in FY '22, which occurred in the peak winter promotion period, we note that segment normalized PBT was only 1.9% below PCP despite a $1.5 million loss incurred in the third COVID-19 impacted half. Normalized PBT was 130 bps lower than the prior year. However, second half PBT margin was 250 basis points higher than the prior corresponding period. On to Slide 25, Macpac continued to scale its business, build brand awareness, both through network optimization expansion and expanding the offering in Rebel and BCF. We have 48 stores in Australia and been looking to expand our Australian footprint through the opening of up to 9 stores in FY '23. I'd now like to hand over to David Burns to talk in more detail to the financials. David? .

Thank you, Anthony. On Page 26, we highlight the key balance sheet areas of focus. Inventory investment has been a key component of our ability to grow sales by 21% since June 2019. While inventory has increased on the pre-COVID levels that now represents 22.5% of sales, an increase of just 1.8% compared to June 2019, a pre-COVID reference here. The increase primarily relates to increased safety stock of an additional 4 weeks of cover measured by units, offset the supply chain risk. Recognizing that our inventory is nonperishable and where we have seasonal exposure, such as Rebel, we have a very clean stockpile. Inventory has been reduced by $109 million since we last reported to you in December '21. In the last 6 months, we have demonstrated we can lower inventory levels without compromising gross profit delivery. Net inventory investment has increased and has impacted operating cash flow in the period. This has been driven by 3 factors. First, the second of July close has picked up an additional payment cycle. This will normalize over time and is not permanent. Second, the additional week of trading has impacted net inventory twofold: a reduced payables balance of $70 million associated with the additional payment cycle, offset by $30 million of inventory that has run through cost of goods in the 53rd week. Therefore, a net impact on net inventory of $40 million. Finally, net inventory was impacted as we reduced total inventory investment, which we have done in the second half. Our purchase frequency slowed and we have had less benefit from trade premium terms. This again will normalize. In summary, there's been no reduction to our trade payable terms. There's been an impact on net inventory investment as follows. We have increased total inventory to accommodate stronger sales position. We will align this investment as we adjust to the sales outlook. We have increased units covered by 4 weeks to accommodate supply chain challenges. We will adjust the cover once the supply chains normalize. Thirdly, the 2nd of July balance date is a snapshot and it will normalize over time. And finally, we will gain more leverage from our trading terms as inventory purchase in patents normalized. The group remains in a net cash positive position despite the late close. Slide 27, Group unallocated. The Group unallocated segment includes the corporate costs, which were consistent year-on-year and other costs not included in the 4 core brands. Operating costs to develop the loyalty and personalization capability has been captured and brand allocated. As noted earlier, these are expected to increase by $12 million in FY '23. We broke down our investment in order during the period. This is a noncore investment, which delivered a valuation gain in the FY '18 accounts. Slide 28, returns and capital ratios. As highlighted on this slide, the group's balance sheet is strong. Access to liquidity is significant and we expect once conditions normalize, the group can sustain a level of bank debt of up to 0.5x EBITDA measured on a pre-AASB 16 basis. Return on capital is excellent, above 20%. Slide 29, cash flow. Operating cash flow this year was impacted by the financial close of second July, including an additional payment cycle which we outlined the full impact on the slide. Tax payments attributable to last financial year and funding the increased investment in net inventory, which we have outlined earlier. As noted, our tremulous term leverage will recover over time. Capital expenditure of $125 million is consistent with previous advice. I will now hand back to Anthony to take us through strategy and FY '23 trading update.

Yes. Thank you, David. And on to Slide 31 and 32. And they really provide an overview of the key pillars of our corporate strategy, which we first released at our Investor Day November 2019, seemingly an eon ago courtesy of COVID. The group's strategic growth has continued to remain on growing our 4 core brands, leveraging closest to our customer, connecting our omni retail supply chain, simplifying the business and excelling in omni retail. Slide 32 contains further detail on our progress to date in executing the strategy, just given the little time today, I won't talk to the detail on this slide. We'll have a turn to Slide 34 and talk about our updated sustainability framework. So today, we released our latest sustainability report setting out a new framework and targets. This framework has 5 focus areas: team, community, responsible sourcing, circular economy and climate. These focus areas have 12 goals linked to measurable targets that are all set out on Slide 34. The given time constraints, I cannot speak to all of this detail now, but in terms of some of the key targets we set, I'd like to call out the following. We've reset our carbon emissions target with a new goal of zero emissions to Scope 1 and 2 by 2030. We've set a 40-40-20 target for Board and executive -- Board, executive and senior leadership positions. We are targeting 100% of private brand packaging to be reusable or recycable. We are developing a disability action plan, and we're also committed to developing a Reconciliation Action plan, I would strongly encourage you to refer to our sustainability report, which was released this morning for further details. Turning to Slide 35. I'm incredibly proud of the progress we've made in '22 against some of our key sustainability and team performance measures. These highlights include a 16.9% reduction in greenhouse gas emissions, Scope 1 and 2 from the FY '17 base year. We've recycled over 1 million liters of oil through Supercheap Auto. In Macpac, we've had over 1 million bags refused since our Refuse a Bag program began in 2018. In terms of team highlights, we have over 45% female representation at the executive leadership level, over 2,500 team members participate in our I am Here mental health program, and we continue to have a very high team member engagement score of 82 and 80 in our October and June team member surveys. On to Slide 38, before we turn to our specific trading update. I want to remind you of the group's track record of performing through different parts of the economic cycle. In the prior to FY '22, Supercheap Auto has delivered 15 consecutive years of like-for-like growth. 40% of Supercheap Auto sales are in nondiscretionary products like lubricants, car batteries, wipers and car parts, which our customers need to keep cars on the road. Growth in the Australian car park and the aging of that car park, particularly given the current shortages of new car are a positive trend for Supercheap Auto. The recent resilient performance of Supercheap Auto New Zealand business in an economy that's impacted by not only the COVID disruption, but depressed tourism, rise interest rates, also speaks to the defensive nature of the Supercheap business. Similarly, following the acquisition by the group in November 2011, we will have delivered 10 consecutive years of like-for-like growth. Looking ahead, we will continue to benefit from long-term trends. This increased focus on personal health more being resumption of grassroots sports and the return of crowd to professional support and indeed, flexible working arrangements and increased letter of time, which basically reasons selling more track data for people at home. Finally, I'd also point out that across our core 4 brands, the group has low exposure to big ticket items. Over 90% of the items we sell across the group cost less than $100. So arguably, that should help support the business in more challenging economic times. Over Page 39 and the trading update. Look, we've made a positive start to FY '23, 17% like-for-like growth in the first 6 weeks. The composition of that like-for-like growth by brand is set out on the table on page -- on Slide 39. Given the group is cycling lockdowns in the prior corresponding periods, we will point out that investors are cautioned against extrapolating this growth. Like-for-like growth against the comparable non-prepandemic period, and we have to go back to calendar '19 is 29%. Low unemployment and high levels of household savings are currently in strong consumer demand and foot traffic in shopping centers continue to build. Shipping unavailability, poor handling times are improving, although the risk of supply chain disruption remains. Transport and logistic costs have started to moderate but remain well above historical pre-pandemic levels. Business improvements and the unwinding of these pandemic-related costs are expected to partly offset the impact of higher rent and wages on cost of doing business. The group is targeting CapEx in FY '23 of $125 million to fund its store development program and its investment in omni and digital capability, including personalization and loyalty. Group unallocated costs in FY '23 are expected to include corporate costs of $25 million and $19 million of expensed costs relating to the investment to build personalization and loyalty capability. And whilst current trading remains strong, we expect that rising interest rates, higher cost of living will start to impact consumer spending, especially in the second half, and that elevated levels of demand, which arose across the pandemic period, we'll of course,we would expect them to subside. So to prepare for a more challenging macroeconomic conditions, we're going to take cost control actions, focusing on normalizing our supply chain costs, store cost normalization, maximizing our cost of goods sold efficiency and implementing a variable cost plan to align costs with revenue. The group's conservative balance sheet, customer value proposition, a large and growing active customer base and the resilience of its key auto and sports businesses means we are well positioned to manage inflationary pressures and a more challenging retail environment. I would now like to hand back to the operator for Q&A.

[Operator Instructions] Your first question comes from Adrian Lemme Citi. We will go to the next question from Michael Simotas from Jefferies.

Well done on a great year. I just want to touch on the comment in the outlook statement around your expectation for consumer spending to slow from the second half? I mean, obviously, it's difficult to predict these things given that the time we're in. But how is that feeding into your inventory planning? And if demand moderates a little bit earlier than what you expect or perhaps the moderation is a bit sharper than what you expect, to what extent can you move quickly to adjust your inventory position?

Michael, thanks for the question. I think if you look at the way our demand patent flows across the year, clearly, that Christmas summer peak trading period is key. And like any Christmas or summer trading period, you have to plan your inventory well ahead. So it would not be unusual for us to set our inventory position March, April of every calendar year in that anticipation of peak. And that's no different this year with the exception that with heightened safety stocks, we've called out that 4 weeks of cover in the system. So that's sitting there. We've built our inventory plan noting that we've got higher inventories. Our purchases coming into this Christmas peak will be lower than last year. And so it will give us the opportunity to begin to normalize that safety stock over the year -- over the full financial year. But in terms of an exposure to that Christmas trading period, we would have an exposure similar to any other year where we plan inventory in April, we anticipate a trading pattern. We decrement that inventory of that trading pattern, and you get what you get. I'd make a couple of observations. One is that in terms of our Christmas planning or summer planning for this year, we're anticipating a similar level of demand, not a growth on the prior corresponding period but similar. We're also extraordinarily cautious around how we think about that safety stock. We've invested in key core lines that have got strong rates of sale. And I would also point out where we've got the most significant amount of safety stock is in Supercheap Auto, which is our most consistent performer.

Okay. That's very helpful. And then the second question I've got, which is related to that. Do you have much visibility either through your own observations or conversations with your suppliers, either exclusive products or national brands about how your competitors in each category are positioned from an inventory perspective? Do you get the sense that there's some discipline like what you're applying? Or do you think there's some risk that the industry as a whole might get caught with too much inventory even if you manage it fairly well yourself?

Look, there's always that possibility. I mean, I think what you'll find is there will be hotspots where people have gone long in the inventory, but the crossover of those hotspots are relatively low. So for instance, we you've got strong levels of crossover in the outdoor category would be outdoor apparel BCF versus other big box retailers. BCF has relatively low penetration in that area. So we're probably not overly concerned about competitors having incredibly long -- not gone long in inventory, which would potentially force price collapse as they try to clear it. We're not seeing any evidence of that. There's pockets of it, but as I say, at relatively low levels of crossover, and we don't think it's material.

Your next question comes from Marni Lysaght from Macquarie Capital.

Just 2 quick ones from me. Just focusing on Supercheap Auto. You called out gross margin declining 60 bps with higher trading margins offsetting normalization of promos and higher supply chain costs. I mean rewind back to FY '21, and you called out some serious gross margin expansion in this brand. How do we think about, I guess, potential moderation in margin, gross margin for this particular brand, given its positive exposure to economic downturns and the aging of cars and the car park? Do we expect that there'll be ongoing moderation? Or do you think that maybe best case you can hold higher trading margins over the next 12 to 24 months?

Yes. Thank you Marni, and thank you for the question. I think if you trace back that gross margin performance in the prior period you mentioned, mostly, that was driven by heightened demand courtesy of COVID and effectively the turning off of the promotional activity. So over that period, there was almost 0 promotions, we were pulling catalogs because demand was quite frankly, winning the risk a outstripping supply, and we were running high out of stocks. And that just meant that you were seeing a super inflated gross margin position over that period. So as we -- and we always have called out that, that high watermark of gross margin would reduce and we had an ambition. I think it was a 300 basis point movement off the base at group level. We have an ambition and continue to have an ambition to keep half of that and working diligently through our pricing and promotional, analytical team to achieve that goal. But we reasonably believe that, that Supercheap Auto gross margin would dilute back to a normal normalized level, but north of where it left in FY '19, mainly because of that zero promotional activity at the peak of that COVID period '21-ish.

Yes. Okay. That's clear. And then just another one for me. On like-for-like, so 5% in the second half. I just recall when we look at the previous disclosures over the course of FY '22, just around the impact of Boxing Day. So can you perhaps kind of point us in the right direction of how we think about what the skew to the like-for-like sales performance was in the second half?

Yes, certainly, we've obviously called that out and shown that in quite a bit of detail in the half. And so the information is there. We chose, with the 53rd week, not to try and complicate the second half analysis by adjusting for Boxing Day. The information is clearly outlined. It is one day, so we think we're going to be careful of just sort of what that 1-day impact is. But certainly, it's there for you to look at and when you do those comparisons against the December information we circulated.

And sorry, just one more for me before I jump back in the queue. You're calling out, I guess, the inventory declining $110 million over the half that's still being elevated. Can you walk us through maybe how that inventory moved over the first half in terms of the unwind from the peak in December and the buildup that you've seen over the half?

Yes. Obviously, we have a couple of businesses that are a bit seasonal. And so we do tend to have a higher inventory build that we have to take into account as we run into the summer period, particularly in BCF and also Rebel. And so there is an elevated position that we tend to have to build an inventory. It's very much a sales and operations planning exercise to be able to just manage that flow through our distribution centers. And so we would traditionally see a slightly more elevated position in December, and then we feel thrilled as we go through past Easter, particularly for BCF. So that process of sell-down was quite active in the half. It's $110 million, as you can see. And obviously, you can see if you look at it at a brand-by-brand level, that's been achieved. We would say that it's important to look at the percentage of sales. I mean we've got an increased inventory in the alignment with cut demand. And when we raised capital back in June 2020, we said we were going to invest organically in the business. We saw this demand quite clearly coming through. It's been very strong. It's been really consistent. And I think it's important that as a percentage of sales, we're actually quite in line with history. We've got a small elevated position as a consequence of supply chain risk, noting that China still has a compression -- a COVID compression strategy.

Your next question comes from Bryan Raymond from JPMorgan.

I appreciate inventory story that you talked about a lot. But just wanted to get a feel for the overall GP margin outlook. Given your commentary around the slowing backdrop plus where you add on inventory, I appreciate that you've got a bit of flexibility into the back half of the calendar year. But relative to that 45% pre-COVID level, do you expect to be able to hold on to a fair bit of the uplift that you've been able to generate up until now? You talked about maximizing COGS efficiency going forward as part of your strategy still slowing consumers. So I just wanted to dig into that a bit further around, what -- for us really what is going to be sticky and hanging around versus what is transitory and ultimately should unwind?

Yes. Bryan, going to be careful about sort of getting into guidance to, which I obviously want to avoid. I think take the commentary of the ambition of sort of keeping half at group level is still, that's an internal ambition that we still are keen on. I think probably a bit of color. So within -- as we saw that high -- quite aggressive demand and bullwhip going through the supply chain, we've eaten a lot of costs. I mean just if you think about TU inflation and the like, I suppose what -- if we would start seeing a moderation in demand, it would be logical to see a moderation in the associated supply chain costs that increased with the heightened demand. And so what we're calling out is, as things start to normalize, in such what they do, there should be cost within COGS and costs within logistics and warehousing that we should get access to because we've had to -- there is associated costs there are costs associated with holding the safety stock, in terms of external storage. There's costs associated with trying to move stuff around the middle of the mass global shop shipping, we think there's an opportunity to access that cost pool and pull that down as we see a normalization of demand. So 2 stories. One, still have the ambition of trying to keep half of that gross margin going, that 300 basis points. Pricing, et cetera, et cetera. The other tool available to us is to go after this hyperinflation of supply chain costs that happened over cost.

Yes. Look, I'll also add, Bryan, retailers have always had promotional patterns, which I think -- well, which are definitely at times ineffective. And the pressure that we had historically has delivered like-for-like comps and the brand merchants have that pressure on them. And so the opportunity to claim the promotional calendar and have opportunity to reset it at higher-quality promotions, actually is certainly a factor that I think you'll see across most retailers, in fact, unless they had probably they've been on the long side of COVID. So I would also say there's been an opportunity to cleanse the promotional calendar that's factoring to the gross margin capture.

Right. Right. And just a follow-up on that is the aged inventory balance of circa 2% feels low, I just don't recall that number being disclosed pre-COVID. But can you give us a feel for where that would have set in 2018, 2019, roughly?

Yes. Look, it's a historical norm. I wouldn't say that it's -- we don't -- you're right, we've tried to give you more color to give you more comfort, but that is the -- what I would describe as a sort of pre-COVID norm. The level of aging in Rebel is very good. We've had real challenges getting access to stocking level. And in fact, through the period. We've had fragmented deliveries of outsets of tops, bottoms and shoes. So it's been quite a challenging trading period, and you can still see the results we've achieved. And -- but that has certainly normalized a lot in quarter 4.

Okay. Great. And then just on my second question around this investment in personalization and loyalty. So you've got a $19 million run rate in '23, which is a full year basis. How should we think about that investment going forward? Is it one-off? Or should it just be in the base? Or will it continue to grow? Just why you think about that beyond '23, if I could.

Yes. So I think working for that price, we've tried to capture in the group unallocated, the establishment costs. So that's not sort of hidden in the segment results. As we go from build to run, both costs or those residual costs will then find our way into the segment result as will the benefit that those costs generate. So what we want to see is as we -- and that's why we sort of given the time line in terms of execution. Now as we go out to '24, we start to get to the end of the build, both costs are to find a way in the segment results. The benefits start to come on stream and away you go. That's probably the best way to think about it.

Yes. And just to add to that, you can see there in the group unallocated last year, we had -- we captured some IFRIC-related costs. And so we are having OpEx a lot more of our investment in things due to the accounting changes. And so this means that where you would traditionally be able to sort of build something and then run it when you're getting the benefits -- you are getting an alignment of sort of expense and benefits. It's -- unfortunately, there's a lot more expensing upfront as you're building. And we're just trying to ensure that you could see it and that it's not impeding the delivery of the results for the brand until we actually gain the benefits of the technology.

Right. Right. And just -- I mean you mentioned the return on that investment as well. Is that in terms of how that comes about, is that less traditional advertising you'd be doing? Are you going to be doing more of this? Or is the incremental sales is the main driver here, as very few people there.

Yes. So it's an incremental sales, it's enhanced gross margin by not having to do as much broadcast promotions and an appropriate shift of marketing expenditure from above the line more to direct. So if you again -- I mean, we've got 70% everything we sell is the people that we know. The need to reacquire them by advertising to say, please be a member should be the mix. And the game then becomes not acquiring a customer, but growing their annual value, and that's just by come one more time, buy one more thing. And just the law of large numbers would suggest if you achieve that at scale, you got yourself a ball game.

Your next question comes from Shaun Cousins from UBS.

Just conscious of trading to start first half '23, and we've sort of got mixed to your stacks given what we were cycling there. BCF and Rebel were down, Supercheap Auto and Macpac were up. Can you just talk a little bit about where you're seeing the consumer, particularly if there has been any impact that you've seen so far on traffic spending, promotional participation due to cost of living, particularly, I guess, fuel prices have been an issue in the past? Or is it fair to suggest that the low unemployment and savings that you've called out are actually the dominant factor that is impacting the consumer that shopping across your brands, please?

Look, it's pretty solid, the consumers there. We're not seeing material softness. And I think if we compare and contrast to New Zealand, especially Macpac, we're seeing solid performance coming out of Supercheap because it runs strongly in the cycle, but we've called out quite subdued performance in New Zealand. We're not experiencing that kind of fragile customer sentiment that's existing in New Zealand and Australia. And where we can see a relatively clean read in terms of like-for-like, we're still seeing green numbers against a pretty racy base. So it's not -- I don't think we're seeing a growth on growth, we're seeing a growth in a hole. And I think the savings, strong levels of employment are certainly holding up in our category. Then remembering, you've still got quite a domestic tourism bubble that we're experiencing as well, which drives BCF and Supercheap.

Okay. Understood. And then maybe just from a cost perspective, just some questions regarding -- you've got out wages and sort of rents. Maybe just -- you've highlighted wage growth of 3%. Can you just talk a little bit about why you're not impacted by the award rates there and then discuss some of the efficiencies around rostering hat you're looking to do? And then how on the rent side, the exposure there, particularly with those that are CPI-linked across Rebel and Macpac and how you seek to manage rent increases coming through, particularly those CPI-exposed divisions or brands, please?

Yes. So look, I think on wages, ultimately, we will be exposed to a higher rate of wage growth than 3%. We're in an enterprise agreement, it's got a year to run. So we'll go through that process, and I'm sure that will be what it would be. So we would expect to be exposed to that over time. That's probably fairly reasonable. Where we get some confidence, though, Shaun, is we've implemented a workforce planning system, which off the back of some of the challenges we've had with payments in the past. And one of the great benefits of that is we see a greater alignment. So we built an algorithm that actually lines traffic and sales to labor, and we can better match that. And so we've taken out some of the manual sort of further to some hand down of information which comes from floor manager, what's the roster for the store, I don't know it's what the previous guy did. Now there's an algorithm being based roster that's generated for every single store. That means that we're not running into paying the kind of penalties and over time that you do when you do things manually, because obviously, it's a complex environment. That gives us the ability to offset some of those gross movements in wage inflation by simply rostering the right team member in the right store at the right time, at the appropriate rate. And we think there's a -- we're quite -- theres quite a potent tool for us in terms of managing one of our most significant -- our most significant variable costs. In terms of rent or pass it to David.

Yes, look, rents are exposed to CPI. A number of them are either fixed, so they're not or they're capped, CPI -- then a cap. And so the open exposure to CPI is certainly less than half. We would say that there's also when you consider it. There's also a substantial proportion of the lease portfolio that rolls each year. There's more than 100 leases we did last year. So you get an opportunity to reset and take advantage of conditions in the market. And so yes, there's a mechanical component. It's only -- it's less half of the book and then -- the lease book and then there's at least, yes, I think we've got 700 stores. There's a good 1/8 -- 1/7 or 1/6 of it that you're actually in market, having conversation for land [ownership].