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

[Operator Instructions] Good morning, ladies and gentlemen. Welcome to Super Retail Group's FY '23 Half Year Results Presentation. Today's presentation will be hosted by Managing Director and CEO, Mr. Anthony Heraghty; and Chief Financial Officer, Mr. David Burns. There will be an opportunity to ask questions at the end of the call. Today's call is for investors only. Members of the press 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 today's presentation.

Thank you, operator, and good morning, everyone. Joining me today is David Burns, our Chief Financial Officer. Good morning, David.

Good morning, everyone.

All right, in terms of structure for today's presentation, I'll begin by speaking to some of our financial and operating highlights for the period before talking to the performance of each of the brands, and then David will provide you with more detail on our financial results. I'll speak to the progress we're making in terms of executing our corporate strategy, describe some highlights around our ESG and team; and finally, provide you outline of our app dividends and capital management. Of course, I'll provide you an update on our second half trading as well. There will, as always, an opportunity to ask questions at the end of the call. Right. We're a good start. On the executive summary and given that we are effectively pre-released the half yearly result in our January trading update, I'll move through this pretty quickly. The group delivered record sales of $1.96 billion in the first half, driven by a very strong Black Friday and peak Christmas trading period. Group like-for-like sales growth in the first half was 11%. Now pleasingly, notwithstanding the return to a more normal promotional environment, we were able to deliver gross margin of 46.2%, well above the precut levels. Segment net profit before tax of $280 million at the top of the previously announced guidance range. This translated into an NPAT of $154 million and a statutory NPAT of $144 million. The difference between the statutory and underlying NPAT primarily reflects an $8.8 million increase the group has made in our provision to recognize amounts potentially payable as a consequence of the proceedings filed by the Fair Work Ombudsman in January of this year. The borders resulted by a full franked dividend -- interim dividend asset sale of $0.34 per share. Total ordinary dividends in FY '23 are currently expected to be more weighted to the interim dividend than in FY '22. This is consistent with our pre-COVID practice and reflects the strength of the half 1 trading outcome. The group is entering into the second half with a strong financial position with no overran bank debt and $24 million of cash on hand. If we go to Slide 5, I won't speak to the details, but make a couple of observations. In the first half, the group has delivered 15% sales growth and 11% like-for-like sales growth at just to make sure that Boxing Day appears in both periods or 4 of our core brands delivered record first half sales. Having returned to a normal consumer environment where customers are comfortable shopping in stores, the differentiated mentor store formats and the positioning of our brands in category killers is pleasing. Slide 6 shows a 5-year group trends for gross margin, cost of doing business and profit before tax. Gross margin has held above pre-COVID levels, which is broadly consistent with our ambition to maintain half of the gross margin uplift we achieved during October period. Cost of doing business as a percentage of sales in the first half was below pre-COVID levels. And given the potential for a slowdown in consumer demand, we recognize the importance of managing our cost base to match our top line. I'll talk shortly to some of the measures we're taking to ensure that occurs. The outcome we improved gross margin and ongoing cost management has seen the improvement in PBT margins for the group, which again remain well above the pre-COVID levels. We turn to inventory on Slide 7. You see the chart left in side shows group inventory at the end of December '22 was $33 million lower than 12 months ago. In terms of composition of this movement, I'll note that volumes have to down to the tune of $156 million. However, this reduction in total inventory volume has been partially offset by inflation in COGS and a shift in mix to higher-value products. For those who see detail on the composition of inventory by brand for December '22 and December 21, it set out the -- set out in segment notes in the appendices, but there's a couple of details, which I'd point out. The value of the inventory in both Supercheap Auto and BCF has decreased. However, the value of inventory holding level has increased. This reflects the normalization of rebel's inventory position compared to 12 months ago where to partner supply chain disruption really constrained inventory levels. rebel's inventory number also reflects the early delivery of new season stock from the global brands in December, which has contributed to a positive sales outcome during peak and into January. A modest increase in net packs inventory level is consistent with the expansion of a growing business and a growing store network. Overall, inventory is 44% of sales, which is broadly in line with historical levels. We're comfortable with our inventory position, noting that the vast majority of the products we sell are nonfashionable and nonperishable. We continue to manage our inventory in an orderly fashion with a view to optimizing our gross margin. We expect our inventory levels to normalize in the second half as we adjust forward orders to reflect our current levels and expected demand. However, ad that we see inventory as a percentage of sales sort of in the most bodies with a sustainable position for the group. Over to Slide 8. We're optimistic about the group's ability to perform through the economic cycle. However, we continue to maintain our hope and best and plan for the worst cost. The group has a number of projects underway to design to protect margin and to manage our cost base. In terms of gross margin, encouraging news is that inflationary pressure from supply chain has continued to moderate with freight costs retracing towards historic levels. We have initiatives in place to capitalize on the deflation in the supply chain. We've initiated cost reduction programs in FY '22 to capture these savings, actively renegotiated terms with our ocean freight providers to achieve rate reductions and with our trade partners to ensure the benefits of this normalization are reflected in our go-forward calls. We've been at the front book the car to ensure we capture these savings. In addition, our strategic pricing team is working hand-in-hand with each of our brands to review our press pricing clearing and discounting. Added by our data insights into the amount of $9.7 million active Quad numbers, we're improving our understanding which products are key value items, traffic drivers, cross-sellers, profit generators and reflecting that in our pricing architecture. As part of our strategic goal to simplify the business, we continue to identify new opportunities to drive sourcing benefits from a more centralized approach to tendering and procurement across the group. And whilst we can reasonably expect some wage inflation over the next couple of years, our investment in our workforce planning systems to optimize our store working and develop new ways of working should partly offset this inflation by improving our operating efficiency. In terms of rental expense, approximately half of the group's leases are CPI-linked, although a portion of those leases have capped increases. I would note that the group's weighted average lease expiry is less than 3 years. So as a rule of thumb, we have roughly 200 leases due for renegotiation each year that provides us with flexibility to renegotiate based on market conditions and market rates. Finally, within that $125 million capital envelope we set for ourselves this year, we remain focused on the disciplined allocation of capital to projects meeting our internal rate of return. That's the plan. Hope for the best and plan for the worst. On to customer insights on Slide 9. It shows that in the last 12 months, we've grown our active -- our active club members, and remember, to be an active club member of our program and have purchased from us in the last 12 months, to have grown up by 11% to 9.7 million active club members which is pleasing. It also means that we'll likely be revising our internal ambition of achieving 10 million active club members by 2025. Our Club numbers NPS score has also improved from 64% to 66%. So not only we have more customers, we have more customers that are happier customers in the formula. Currently, across the group deductive customers represent 72% of our total sales that are a significant asset. 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 capabilities in customer loyalty and data analytics. On the store network highlights on Slide 10. We've got a strong pipeline of store openings in FY '23 across each of the brands. In addition to these new store openings, we've upgraded 2 level stores to the rCX format in the first half with another 2 to follow into the second half. And in October, we expanded our BCF Townsville store, one of the more significant BCF stores to a new super store format, which is comprised of 5,000 square meters and over 25,000 SKUs. While it's early days, we are very pleased by the response of our customers and our trade partners to this format, and we'll look to open a second trial store in Queensland in the second half of this year. Over to Slide 11. The RCS format over 2,000 square meters for rebel showcases a comprehensive range of sporting goods and apparel from key global brands, focusing on core categories, including running, football, basketball and kids. These stores are exceeding our expectations. The offer with differentiated customer experience with physical spend claims, including half our basketball indoor football pitches and sports gaming consoles, which are particularly popular after 3:00 on a school day. Since opening first rCX store in Doncaster in 2020, rebel has added a further 12 rCX stores to the network. These stores feature a range of "home of" parts where customers can access latest cool products from their favorite sports, specifically basketball and football. Slide 11 shows a step change which rebel has delivered in that basketball and football category over the last 4 years. During that period, you'll note the basketball category, which represents 8% of rebel's total sales have grown by 126%. And sales in the football category, which represents 9% of rebel's total sales have grown by 6%. We present sales were achieving the performance of these stores in these high-growth categories. And as a key sponsor of the Matildas, we very much look forward to the hosting of the Women's World Cup, which will be in Australia later this year. On Slide 12, digital and omni. [indiscernible] sales [ were ] $236 million, 12% of group sales. Click & Collect [ compromised ] just under half of the group's online sales. And as expected, following a significant uplift in online sales during the [indiscernible] COVID period, customers are normalizing and returning to stores. In the first half, 94% of all transaction online or off-line were actually completed in store. Whilst we expect that, over time, online sales, especially delivery sales, will resume in an upward trajectory, these numbers give us confidence that our national network and our customer-focused team members continue to represent a valuable asset to the group and our omni strategy. Slide 14 and 15 summarize the group financial results. They speak for themselves and we propose to move on to brand-by-brand details starting with super cheap water. So specifically an excellent first half result, reinforcing the reliability of the auto category and the continued strength of the Supercheap brand. It was a triple pound for Supercheap water in the first half, record sales, record NPS results and a record number of fitness for the in-store service program where customers can get their gold, light and gloves installed on the car. Supercheap Auto has continued to excel in customer acquisition, having added more than 650,000 active club members to their program in the last 12 months. In March 2022, Supercheap Auto modernized the brand of the new visual identity in sloping, wherever you are, whatever you drive, make it Super, employ you to check out our latest campaign, which launched today, which is a continuing continuation of this program. As part of this launch, pentamer the team have been busy making their vans Super everywhere through improvements of our website, which has attracted over 20 million visits and store upgrades with 22 refurbishments completed this half. A summary of the financial performance for Supercheap Auto in the first half is set out on Slide 17, but I'd like to particularly call out the following. We saw total sales growth by 18%. Like-for-like sales grew by 15%, driven by both higher transaction volumes and higher average action value. PBT margin increased by 250 basis points to 14.8%. PBT increased by 42% to $108 million, very sound results sales. On to rebel. rebel delivered a strong first half performance, peak sales benefits from growth of course traffic from higher and higher inventory levels in seasonal categories, which were well stopped compared to the prior corresponding period. Cary Williams and the rebel team delivered a record first half sales and a record December sales results from business. Among other first half highlights, rebel relaunched its website in October, added 2 rCX stores in Warringah and Erina, bringing the total rCX store count to 13. The rebel rCX at High Point in Melbourne achieved a $20 million record sales result in its first 12 months of opening. A summary of the financial performance is set out in '19, but to call out outperforming highlights with sales growing by 11%. Like-for-like sales also grew 11% of the back of double-digit growth in transaction volumes. PBT margin increased by 100 bps to 12.3% and PBT increased by 23% to $84 million. BCF, strong top line results in the first half. I've spoken previously about our aim to rebase BCF revenue and earnings to above pre-COVID levels. And BCF is making good progress on this through store expansion, range improvement, expansion of our [ power ] offering to reduce the seasonality in the business. Paul Bradshaw and the BCF team delivered record first half sales, including a record Boxing Day result. Among other highlights, BCF grew their club member sales to 88% of total sales. They've successfully launched superstore format in Townsville and expanded sales from strategic and private brands to now representing 49% of total sales. It's a highly competitive category. And we're very pleased that we continue to grow our strategic relationships with marquee brands like Weber; Dometic; Engel; YETI; and more recently, [ Nebo co ]. The summary of the financial performance [ is set out on 21 ] that call out that total sales grew by 7%. Like-for-like sales declined by 2% even though transaction volumes increased. This reflected a lower ATV achieved due to aggressive discounting from a pretty hot competitive environment. Against this backdrop, segment PBT of $31 million is a very incredible result. On to Macpac, [ a bit of a very solid ] first half result. [ Conditions ] helped drive strong growth in both insulation and wet weather, and sales in key travel categories benefited from tourism growth. Cathy Seaholme and the Macpac team delivered again a record sales for the first half of over $100 million, which is a high watermark; and a record half profit of $16 million. This was a high-quality result driven by a 50% increase in transaction volumes and 35% growth in active club members. A summary of performance is on 23, noting sales grew by 55%. Like-for-like sales grew by 69% in Australia and 32% in New Zealand. PBT margin increased to 15.7% and reflected a 500 basis point improvement in gross margin. PBT increased by $16 million compared to a prior period loss. That's the summary of the brands. I might hand over to Dave, who can talk through the financials.

Thank you, Anthony. On Slide 24, we present the group, unallocated segment, which includes corporate costs; and costs not allocated to segments relating to the development of our loyalty, digital and omni capabilities. In August, we advised that we will be [ holding ] costs to develop our [ loyalty capital ] in this segment, with a full year estimated cost of $19 million for '23. So looking at the performance. Corporate costs have increased [ $2 million ]. The customer and loyalty investments for the half was $10 million. Of note, our investment in Autoguru was sold in December, which finalizes the exiting of all noncore businesses. The investment in Autoguru was written down to 0 last year and taken through group, unallocated. This disposal in the half was a small gain of $1.8 million. Group balance sheet on Slide 25 is -- presents the key balance sheet focus areas of inventory, working capital, PPE and net cash. Inventory is reduced by $33 million compared to December last year. As noted by Anthony earlier, we have reduced the volume of inventory in the business, while we have had an increase in the value of inventory due to inflation and mix shift towards higher-value inventory, consistent with brand strategies. Compared to December last year, the business has reduced inventory units by 4 weeks of cover. By brand, we have seen Supercheap reduce inventory, compared to December last year, by $44 million. BCF has reduced inventory by $20 million, noting in December last year the business was impacted by late deliveries. rebel inventory is increased by $20 million, which is pleasing given the poor inventory position the business has had to deal with over the last 2 years. As Anthony outlined earlier, global brands supply chains are now fully recovered, with a $10 million early delivery captured in these results. We can see the benefits of this stronger inventory position in the very robust like-for-like sales performance that rebel has delivered in the last 6 weeks of trading, which you will see in the trading update. Macpac's inventory has increased by $4 million to support the very robust sales performance. Net inventory investments increased compared to December last year, recognizing that our financial year close has moved out a week due to the 53-week financial close in FY '22. December this year captured an additional payment cycle, which is driving an increase of the -- driving the increase or the $80 million difference compared to December last year. Of note, net cash of $212 million reflects our strong trading performance. Slide 26, returns, capital ratios and FX, highlights our strong balance sheet and trading performance. I would like to note the group dividend policy is to pay annual ordinary dividends of between 55% and 65% of underlying net profit after tax. We determined the payout ratio on a full year basis. We do not apply the payout ratio specifically to the interim dividend, but to the full year combined interim and final dividends. Our approach to the interim dividend has historically been to target a lower interim dividend than the final dividend, and we have announced a $0.34 fully framed interim dividend. In the period, we have refinanced our core debt facilities, which now total over 50 -- sorry, $500 million with between 3 and 5 years of tenure. Slide 27. Group cash flow highlights our performance. The operating cash flow for the period was strong at $439 million, noting strong cash conversion of approximately 108%. Capital expenditure this year has a stronger weighting to the second half due to the profile of our systems development and the store development program. There are a number of new stores targeted opened from February onwards. I'll now hand back to Anthony to take us through the corporate strategy.

Thanks, David. And on to Slide 29. And that just provides a bit of an overview of the pillars [ to keep over our ] corporate strategy which we released at our Investor Day in November 2019. It's unchanged. It's a core focus on the core 4 brands, leveraging our closeness to customers, connecting our omni retail supply chain, simplifying the business and excelling in omni retail. Slide 39 (sic) [ 30 ] contains some detail on our progress. Given a little bit of time, we'll talk through the details, but it will be there for your review. Over, though, to Slide 31, I just wanted to reiterate our commitment to our customer loyalty program in our investment, which is proceeding to timetable. Importantly, we recently completed a spending get trial for Supercheap to test the program in New Zealand, which yielded very positive results, quite cures. We are in the process of completing our go-to-market plans for the new rebel royalty program and be launching that in the second half of this calendar year. This is expected to be followed by BCF and Supercheap in the calendar 2024. Our personalization trial continues with now BCF communicating over 50% of its cod members using that tool. On to Slide 33. ESG sustainability and team will continue to be committed to implement a more sustainable practices and integrating sustainability in our vicinity and into our decision-making as part of and in line with our group values. Proud of progress we've made on our sustainability strategy to date. And on Slide 33, we've highlighted some of our achievements, including a AA rating from MSCI; Dow Jones sustainability index score which placed us in the 97th percentile across 493 retail peers; and a "comprehensive" rating from the Australian council to the superannuation investors. Amongst our other ESG achievements, the group has maintained our WGEA certification as an employer of choice for gender equity (sic) [ equality ]. And Macpac has certified as a carbonreduce business with Toitu. In terms of team highlights. Our engagement score of 80 is above the Achievers benchmark for comparable companies, which is quite the achievement considering the environment our team have been operating in over the last couple of years. We have over 3,000 team members as part of our I Am Here wellness program. And our team members have completed over 70,000 hours of training across leadership and development programs, and I say it's one of the drivers of a continued improvement in our NPS score. Slide 35, dividends and capital management. In light of our strong net cash position, I thought it would be appropriate to touch on how we're thinking about the groups balance sheet. In summary, given the uncertain macroeconomic environment, the group intends to maintain a conservative debt position. We target a long-term net debt-to-EBITDA position pre-AASB16 of between 0 and 0.5x and given the group's strength of the group's balance sheet really provides the capacity to support organic growth and flexibility, including future capital management initiatives such as special dividends or on-market buybacks. Group trading update on Slide 37. Well, I'm pleased to report that the group has delivered a 10% like-for-like sales growth in the first 32 weeks. Strong year-to-date sales momentum has extended into January with positive like-for-like sales in each of the core 4 brands. Supercheap Auto performed well in auto maintenance and do-it-yourself categories, including car care, lubricants and tools. rebel executed a successful back-to-school promotional program. BCF has continued to see strength in fishing, supported by the introduction of new brands and regional ranges. Macpac launched an expanded summer range, and it's outperforming in the travel-related categories. Everyone is getting back on planes. And in the second half, the group is targeting the opening of 18 new stores, plus 2 rebel rCX store upgrades, which will bring the total rebel rCX store count to 15. We'll also continue to progress our BCF personalization trial and complete our go-to-market plan for rebel's new loyalty program which is expected to launch later this year. Low unemployment and the Knot savings seem to be supporting customer demand. However, interest rates are expected to dampen that demand later in the second half. We're not immune to that either. Nevertheless, we remain optimistic that the business will perform well throughout this economic cycle. Noting that, for example, Supercheap Auto has an average transaction value of $40 and an average dwell time of 4 minutes. So it is able to run both sides. So we'll be supported by that and also our customer base of 9.7 active cod members, the strength of our brands, their ongoing network expansion, the rollout of our new store formats and our leading market position and that has continued to be attractive and growing categories. Thank you. I'd now like to hand back to the operator for questions.

[Operator Instructions] Your first question comes from Michael Simotas with Jefferies.

Can I start with the trading update? I mean I'm still thinking about sales relative to Pre-COVID to remove the base effect. And it looks like momentum actually accelerated in the early weeks of the second half of '23. You made the comment that you expect demand to dampen as a result of monetary policy. Is there anything you're seeing in the sales mix that shows easy sign of any change in consumer behavior yet? Or is this just the expectation to go forward? And also, is it worth a comment on the weather as well given the goes to vote?

Yes. Thank you and just processing all of that. I think we -- I'll make a couple of observations around sales momentum. On the face of it, there's no change. We are seeing some mix change out of wants to meet and you sort of called that out for Supercheap Auto. I think the results for this period is the results, meaning it's very hard for us -- I'd be very unenthusiastic about trying to extrapolate a continued strength given what's happening in the macroeconomic environment. We're pleased with what we've achieved. It's very dangerous to start working through the entrails of a couple of weeks of trading to sort of extrapolate from. It is solid. We are seeing some mix shift, but we don't see any reason why we would be any more immune from the macroeconomic environment than another retailer. We are in good categories. We're able to play at the lower ATV side of the cycle across all the brands. But as I say, we do have a posture of hope for the best, but we have planned and continue to plan for the worst.

Okay. I think that's sensible. The second question for me is on inventory. As usual, you've given us some good color on inventory. Is the timing of boxing day shift in halves have a material impact on your inventory balance with the sell-through of boxing day inventory in the first half of this year versus second half of last year? Can you give us some sense of where your inventory position would have been, if not at that time?

Yes. Clearly, we outlined last year what Boxing Day contributed, which was a sales impact of $27 million. So the inventory impact is circa $10 million. We would note, though, that obviously, we had inventory arrived late last year because of the supply chain. So we bought inventory that didn't get in for peak. BCF was a key was really impacted by that by over $25 million. And we're underway on the other side of it in rebel. And we can see this year, we're delighted to have the global brands delivering on time. And in fact, they delivered $10 million of inventory early, which means we can plan to sell through the season in the season rather than having to sell it through late in the season. And I think you all experienced that the football boots last year. So yes, there was a boxing day on downside the balance date. It's $10 million. It's not a major exact.

Yes. Okay. And that $10 million, that's just relating to boxed sales presumably there's a little bit from the couple of days after boxing day that are pretty big as well. Yes, there is. But that's also -- you've got the days that we're -- it's a 26-week period on a 26-week period. So we have to hold inventory for January peak. So we actually sales are strong in January as well, because we have quite a lot of people.

Our next session comes from Craig Woolford with MST Marquee.

I just wanted to understand, you've made some comments, including on the inventory of that unit, but I'm just trying to understand across each division, the contribution that price is having versus transaction volume growth and a bit like Michael's question before, trying to get an understanding of the underlying trend. So early in that first half, there would have been strong transaction volume growth because of the lockdowns in the prior year, whereas later in the half, it might have been a better read. So I don't know whether it's something you can easily pinpoint. But just to get an understanding of how much price inflation and average transaction growth is contributing to like-for-like sales.

Yes, there's a question. The first quarter of the half -- the first quarter of the year, the first quarter that we experienced in this half benefited from comping the lockdown periods, particularly in Victoria and New South Wales and New Zealand. And so we saw from really late October onwards where we're comping the opening period. And obviously, that was quite a strong rebound. Overall, we've seen a really sound increase across the businesses in average transaction value. And that we have benefited from that increase in the price of items but also the fact that we're in a different promotional cycle. We would say that BCF is probably the exception to that where BCF average transaction values have fallen. And in fact, transactions have been a little bit more robust there. So it's a -- across the 3 brands, excluding BCF, it's been predominantly through price.

Okay. And then you mentioned some renegotiations suppliers and see freight rates coming down. There's just quite a few moving parts for us to comprehend around currency, what your hedge rate might be on your own purchases, see freight and then general factory cost reductions. What do you see on that score as a contribution to cost of goods or gross margin outcomes over the next 6 months?

Yes. I think you care not to quantify it, but just maybe give some color. If you take the retracing of the shipping costs and some of your logistics costs. We are working hard to get that into pre-COVID shape. We're also noting that we're seeing availability at factories very strong. So we're able to access supply easily and are able to negotiate accordingly. So we started this process in June, August -- June, July, August last year. We are quite pleased that we'll see the COVID inflation that we experienced with the broader supply chain start to normalize the pre-COVID period. That's a big prize for us and will give us some shelter from what we take in the CODB line. So we're absolutely getting domestic inflation coming through, whether that's local logistics or wages, but we're working hard to use. This is a bit of the coms benefit as an offset to that inflation. And that's been pretty key to our strategy as we start thinking about go-forward '24, '25.

And just on currency, is there anything...

Yes, no, we've obviously got currency playing through. It's been a pretty challenging calendar '23 -- sorry, '22. And this '23 period, we've been -- we have a hedge book that we execute. We benefited. That was certainly supportive of -- in last year because we'd sort of taken some strong mid-70 positions into '22. And we've gone and put hedging on most recently in 70, low 70. So the hedge book is there just to manage things, but it's -- currently it's passed through. And it does play through into the gross margin line item. It will do that over time because of averaging. And certainly that's been a factor that's driven our COGS inflation and driven some of our price that we've been able to take in market.

Your next question comes from Shaun Cousins with UBS.

Maybe just a question regarding the trading start second half '23, particularly the stronger performance in rebel. Can you maybe sort of talk a bit about the benefit you might have got from back-to-school vouchers, recognize that's just the New South Wales issue and you're a national business. But then also just the Omicron sort of tough -- sorry, undemanding comp that you had there and where back-to-school seems sort of occurred now in January where on the con last year that back-to-school might have been lighter, but also February, please?

So if you just -- we go back to '23. I think the biggest differential for rebel was inventory. So we called out last year that we -- if we could have more, we'd take it. And I think, this year, it's demonstrated that having it was an advantage, so I think that's the tick. I think, in terms of the vouchers, well, I mean, vouchers are still [ large, right to ] New South Wales being where -- it's difficult to just get a precise read on a if we think it's coming through in ASP, as opposed to transactions. So mom and dad are always going to buy [ the sneakers for said ] children. Are they -- looks like they might be buying a slightly more expensive pair than the atelier. So the transaction is always going to happen. Are we seeing a benefit in ASP, perhaps we are too early to quantify, but I don't think that's a game changer. And you're right, rebels, you almost got a normalization in some of that school-based activity. Remember, we had the foot bids sort of -- I mean, there was lockdowns in some of the schools this time last year in and out. We're clear of that now. We got a good inventory position. And I think it -- that does augur well in terms of that participation flowing through into those articles, for boots and those top of opens for rebel. So inventory, clean demand, ASP bump from the vouchers in New South Wales perhaps, that feels like that's a story.

And then maybe a question for David, just conscious around where the supply trends at and capital management, I think the 0 to 0.5 net debt to EBITDA, pre-AASB capital management framework has been provided for a little while now, but the first gate you had to get through was clearing a disruptive supply chain. Is the supply chain still disrupted? Or are we getting to a stage where it's not in that manner such that we could then anticipate given the strong balance sheet, capital management, consistent with the framework that you've previously outlined?

Yes. So the supply chain has improved substantially. We are still seeing a very challenging operating environment going for inbound going into New Zealand. So it's still substantially delayed getting 3 years in there. Once -- we then look at the actual landed supply chain. There's still -- it's been a very challenging half, whether it's pallet shortages, driver shortages, huge amounts of disruptions from flooding across where we had significant inflation in costs related to flooding for across the per most recently, farmer Queensland. So it is still a challenging operating environment. But as I called out earlier, we start -- we are now seeing deliveries on time, but we are still -- there are still some national brand partners that are still not fully recovered. We've been quite deliberate, I think, in our disclosures today that Anthony took us through in terms of our thinking around capital management to outline our views around our balance sheet strength and how we are thinking about that. And I think it's been quite clear that, that environment is improving, and we've tried to be sort of present that thinking on that slide that you've taken us through.

Your next question comes from Bryan Raymond with JPMorgan.

Great trading update and great result. Just on the promotional activity. Obviously, gross margins came back a little bit, and you've given great color across the brands and Tagawa on board. Just thinking about marrying that up with the trading update, which is very strong. Just interested if there's been any change in promotional activity by either yourself or your competitors that might have contributed to that delta we've seen in underlying run rates of growth?

Not in at the beginning of the second half. It's not a -- I wouldn't declare a shift of gears. I think if you go around the grounds, auto categories slowly spinning up. So it's sort of -- I would observe, Bryan, that we were kind of at the new normal. -- tensile discounting take place. That doesn't feel like it's accelerating just that's what it is. That feels reasonable. In terms of the venture Macpac space, again, I think there's a bit of activity there in the clearance space, but nothing untoward and again, starting to -- we saw an acceleration but it's starting to normalize. So again, that to take a bit of a new normal. BTS in the leisure space has been terrible, and it continues to be terrible. So could it get worse unlikely. So I think are we there yet? I don't think we have left. It's always been bad. And rebel is actually outside of clearance fairly orderly. So from fractional activity, we sort of -- we think we're at a place of equilibrium in the market. I don't anticipate it's going to get better, but at this stage, don't anticipate it's going to get materially worse.

Right. Okay. That's really helpful. And then just my second question is on rCX and rebel. By the end of this year, you'll have roughly 10% of the network by store count under the rCX banner, which is, I'd assume a fair bit more of that sales. I'd be interested if you could give us a feel for what sort of sales penetration or I guess sales fall under that format. But just trying to understand the economics of those refurbishments. How meaningful are they in the sales and earnings improvement you've seen in rebel? And if there's any store economics you can share that it would be helpful for us to be able to build out potentially some uplift from that in the future?

I think we've disclosed a couple of uplifts in previous presentations, you might say we just did that for rCX. I think we got the benefit -- actual expenses to 2 ways. So there's the store economics upgrade of the store itself. And we've started from the top trader to the -- start up on the top and worked our way down. And you've always say it's the top 25 doors that we're shooting for and you got a high point sort of hitting an MAT at $20 million, that gives you a kind of a sense of what that top door and rebel does, which was the time where a $20 million was a dream. So that's -- I mean that's a big deal. So there's store economics. The bigger benefit that has much more transformative effect is the access to range inventory because the name of the gaming, especially with the global athletic brands, because you've got to be a door that's worthy of them ranging and what the rCX proves as proved to us and also approved to our partners is where a top global retailer that can accept their best ranges, which would usually attract a higher ASP, better sell-through. So if you don't look like the first grade football they'll give you a third-grade product. And so we're able to take that rCX range and start to push it across the network, which gives us a much more title impact. So that strategy is quite coning because you get the store economics, but you have to get a title movement across the network. And from a competitive perspective, we start to become a key partner in this part of the world for some of these global brands, which gives us the beginning of a sustainable advantage.

That's helpful. Just on that uplift you're seeing? Is it basically more foot traffic? Or is it bigger basket size for people sort of trade up because they're inspired by the experience? Like how should we just think about the customer experience in those stores?

It's both. It's both. So they are a destination. So we see good traffic generation. You see what we're seeing is better basket performance, but more with greater breadth and depth. So what I mean by that is if you look at something like personal fitness, we're actually able to create a range and an experience there that's creating multiple purchases around a category that rebel sort of trying to push in and grow. So it's been -- it really has gone -- it's gone particularly well because it's become a destination. I mean we're just applying the basic rules of good retail here. And we're getting the advantage of that across the whole store, notwithstanding the kids playing basketball up school, which we still love but that's a traffic driver of itself.

Your next question comes from Adrian Lemme with Citi.

Just a question following on actually from the rCX question. Are there really any elements of that, that could be applied to the other businesses? I know you obviously got the trial the BCF super format. Just interested if there's any learnings from that, that can be applied to other businesses, please?

I think -- so look, in short, it does. So if you look at the BCF Counsel store, which as we go along, we'll you try to give you a bit more color of some of the things we're doing there. It does have the same characteristics actually, where you're creating an experience which attracts brands that you otherwise wouldn't have access to. So if we look at the ranges that we've got in that Counsel store, traditionally, BCF 4, 5 years ago would never ever be confident enough to range it or a trade partner give it to us because you're creating the experience. So in that respect, using that retail experience to leverage exclusivity and high-volume, highly attractive product, absolutely, that's the case. In Supercheap, it's been an issue we've probably played a slightly different game there as opposed to going bigger and brash where we've looked at the Supercheap refurbishment is the team have been obviously able to focus the store presentation in its same format and really leverage the economics of that store. So in terms of the way we position tools, the way we position car care, car maintenance, we've been able to get a little bit more of an incremental outcome as opposed to a step out performance that we saw with rCX and that we are seeing with this counsel store for BCF. So being a different strokes for different boats. Is there a Supercheap store in the next, we probably will look at it, but it doesn't have the same kind of driver of these credentialing products that rebel and BCF seem to enjoy. I think the other point I'd make is, as I sort of said, I think it's Bryan, that the real benefit is taking the small parts of the superstore experience and then blowing them out to the network. So how sort of basketball, how or which you'll find in your local rebel store today, all things being equal. So we -- if it's a good idea of believe me, we'll steal it and throw everything at it.

That's very helpful. It seems like there's more opportunity there. And just one more question, if I could, please. The CapEx prior to the current investment program was something in the order, I think, is about $100 million. Obviously, the business is much larger now. Once this current program is we expect CapEx to sort of return closer to that $100 million level or other thoughts about further investment programs post the current one, please?

No. I think there's -- first is what one -- the core tenet of the [ core 4 ] strategy is investing in your biggest assets, finding opportunities that provide an incremental return for relatively low risk. Like opening a store in Townsville is not going to kill us. It's sort of trying to set up a new retail brand. And then tinker with them and then roll them out. [ Someone can say ] reload, re-improve; and you get the return. [indiscernible] return on capital numbers are strong as a result of that. So I'll be of the belief that the $125 million is kind of there or thereabouts, but can't see at deleveraging our investment in these core 4 assets because you've got to stay with it. The minute that you take your foot off the accelerator, you've got a customer that can potentially go elsewhere, et cetera, et cetera. So the other thing that's obviously worth also pointing out is we've sort of spoken for a while. We've got 2 sheds in Melbourne that need to become one. In the next couple of years, that's probably going to have a bit of a bump to that CapEx number. We'll have more to fair about that in the full year, but I can't see that number sort of finding its way out.

Your next question comes from James Leigh with Goldman Sachs.

Just a quick one on me around loyalty and what loyalty will we be providing loyalty members? And I think you previously now you didn't have to provide much value in the royalty space. Is that still the same? Or has that picked up a bit?

So that's the -- it's a good question because that's the work as we prepare for the rebel launch that we're doing now. So traditionally, outside of Supercheap Auto, we haven't provided what we call a structural loyalty program where you give something to get from a customer. And one has to be very cautious about executing a program like that because, if you don't get the uplift, you'll obviously just get gross margin dilution. We're very alive to that risk. And to manage that risk, we've been conducting a series of trials, where we've been offering customers incentives to see what that does to their basket size or their visitation and recency and frequency. And that was a trial that we sort of referred to in New Zealand for the spend and get, and we were very pleased about the returns of that. And all of that sort of builds into the way we will think about the -- in first instance, the [ restructuring ] program for rebel; and ultimately, other improvements that we may take to BCF and Supercheap Auto and Macpac in due course. So short answer is you're right: Don't give much now. Will we give something in the future? Yes, we will. Will we test it to know what we get in return? Absolutely. And we [ won't tell until we're sure about putting on that ].

Your next question comes from Ben Gilbert with Jarden.

Just interested in the decision making at the Board level when you decided not to do capital management for this period. And I suppose in terms of my thinking is if you were -- if you're thinking around you're doing it on market buybacks, you probably would have done it to give yourself the option. Does it mean that you probably -- if you were going to do something you need towards more of the capital return to utilize in the franking credits?

Yes, I don't think I'll be sub answering that directly, but Ben, I think the way we're thinking about this is we're wanting to get through the supply chain issues. I think we're there. I think we're past that gate. Question for us now is we have -- we absolutely have excess capital needs to be returned to shareholders, is a question for us of how we do it and when?

Did it feed into the -- your mind of Atlantic. I think obviously, the business is also pretty humbling now. You've got good momentum coming through with the brand initiatives around loyalties as you talk to things like there's plans in place around the DC consolidation. Do you feel you're in a position of -- I think you sort of you talked before sort of a license to go out and look at M&A in terms of some attractive bolt-ons which might be complementary. Or is that something you're still thinking of a few years down the track?

Yes. We're not there yet. So I've always said this about M&A, we gained good returns from the program now. We're not done. We're 2/3 of the way through the transformation. And with the F '19 program that we talk about every half hasn't changed, and we've taken at all, and we're making progress. My concern is that if we to coming in too early, we'll actually stop that growth and potentially put ourselves over a strategic disadvantage. Business gets distracted, we sort of lose our bottle. So the strategy now is still core for and the capital management approach is consistent with that strategy. In due course, we'll consider our strategic options there are for that and then may be part of that in the go forward. But that's not now. Now is completing the job that we set out, get the terms that we said we would, which we're on track to do. We've got excess capital now. We've got to hand that back and we'll just say, it's a matter of when not if.

And just final one for me. Appreciate the coldest inventory helpful. Just if you could give a comment on sort of cleanliness. I know you talked to provision in the release that Quentin terms of aged stock because obviously, typically, you sell the better quality stuff out for. You pre- rebel seems like it's fine, but you're pretty comfortable with the quality in terms of age stock and at-risk stripe across the brands?

Yes, we are. I mean look. There are always -- when -- [ you direct to ] COVID. And we ingested all this inventory to sort of protect our position, which in hindsight still was the right move. Now we're putting off the dismount from that. And you'll always have [ some odd ones that are ] longer than you would like, but none of them are material. And all of them are well managed and management assessors are strongly aligned to ensure that they are not held. So there's nothing in that. I mean we've -- Dave and I'll turn the place of or looking for it. We're comfortable that whatever is there is manageable, which is a lot. And we've said that the inventory is not perishable. We don't have a balance sheet issue, obviously, so we can afford to be patient in CNO gross margin that we have been pretty managed pretty measured in the way we've sort of called it thought. We're pleased with where we're at.

Your next question comes from Mark Wade with CLSA.

Firstly, on the trade opportunity in auto, how attractive is that with maintenance?

Mark, look, it's a significant category, and it's an adjacency that is a bit like a siren that calls us and also of a siren that can create some issues because of the nature of the inventory holding in order to be competitive. So I think one of the strong parts of that sort of be auto, it is a B2C play out that absolutely now that customer gets the value proposition right. And the focus of that team has put on understand the customer, building out ranges. I mean for those that have been on the sites for a long time, Superiors always performed well, but we are seeing a step up in performance. And I think it's because of that focus. That said, we do think there's opportunities for us to play in the trade space. We are looking at some of our go-to-market and channel optimization, especially on mine. But in terms of aggressively stepping into it, I would be concerned about impact on focus on the B2C stuff. And we would have to think about a business model which works to our advantage from a spare parts perspective. So yes, we're looking at it. We're certainly going to make some investments to assert ourselves on, but focus is enabled the game, and that's what's given us the return, and that's working will continue to do.

Excellent. And just on the -- a couple of years ago, you had this JV BOSS was it in the auto stores there was like a premium for that. It's kind of interesting how that format didn't work, but the rCX and rebel is really going well. So just remind me the -- that deal with Bosch, where that fell short of expectations.

Yes. The deal with Bosch was really trying to step into the service mechanics space where we would be providing a service with Bosch where you'd actually serve the customers care holds -- what -- I mean that's probably -- I mean it was a good learning because it's a different mode. When you're hiring mechanics, dealing with a different EA, safety, from a property perspective, where you open a mechanic shop is very different to where you'd open the Supercheap Auto store. So you are actually getting a employ different business model. And what we -- the determination we made is, while that again, the market is big, seems attractive, it's well serviced. It's going through obviously quite a step change because of EVs. And we contain to the view, I think, a retrospective with view by investing our money in the B2C business, the core business, we get a better return. And I think history would probably judge that to be the right judgment.

Yes, very helpful. And lastly, if I can sneak one in the Sally announced resignation at the AGM last year, but it was a bit like a 2-year caveat. Wondering if there's -- if that's been considered to bring that forward?

No, I think Sally announced that term concludes at this AGM, the next AGM. And I think that announcement or her intention to stand. I think that might be -- operator, I think we might have time for one more or indeed time.

Your last question comes from April Lowis with Barrenjoey.

Just on -- I'm just wondering how we should think about FY '24 and beyond corporate EBITDA and EBIT cost. And also, we saw that there has been a $6 million D&A charge in the corporate and unallocated line. Can you talk about what that is?

Yes. So I think we've put the CODB outlook into the slides -- sorry, the historical performance is in there. We've been quite specific about corporate unallocated incurring costs associated with the development of the loyalty. And we've not gone and we've guided that there's been a -- there will be a $19 million full year cost associated with that development in this year. There will likely be some additional costs in net. We haven't guided to that at this stage. In terms of the $5.8 billion, that was related to that program in terms of we've identified a decision to change our approach to carrying one of those assets. And so that's in the group lead line for the half.

Can I sneak in one more question? Is that okay?

I think we're at time, I'm afraid. But I appreciate your question.

That is all the time we have for questions today. I'll now hand back to Mr. Heraghty for closing remarks.

Great. Thank you, operator. Thank you to ask questions. And if you missed that, I apologize, we've run over the people waving at me frantically. Thank you for joining the call. As always, I look forward to seeing some of you or most of you over the next couple of days, and we'll see how it all unfolds for another interesting calendar year in the Australian consumer segment. So thank you all for dialing in.

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