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

Ladies and gentlemen, welcome to Super Retail Group's FY '23 Full Year Results Presentation. Today's presentation will be made by Chief Executive Officer and Managing Director, 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 presentation is for investors and research analysts only. Members of the press wishing to speak with management should contact Kate Carini whose contact details appear at the bottom of today's ASX announcement. I'd now like to hand over to Mr. Anthony Heraghty to begin today's call.

Thank you, operator and welcome everyone to Super Retail Group's full year results presentation. In terms of the structure for today's presentation, I'll begin by speaking to some of our financial, operating, and ESG highlights for the period before speaking the performance of each of the brands. Our Chief Financial Officer, David Burns, who's joining me here today. Good morning, David.

Good morning, everyone.

Will provide you with more detail on the full year results. I'll then provide you an update on progress we're making executing our corporate strategy and our approach to capital management. Finally, I'll provide you with a trading update, which everyone is always interested in, for the new financial year. Of course, there'll be an opportunity for you to ask questions at the end of the call. Before we get started, it's important just to cover off some housekeeping, which is set out on Page 2. FY '23 compromised -- comprised, I should say, a 52-week trading period as compared to 53 for FY '22. So we've had 1 less week of trading this year. Unless otherwise indicated, growth numbers in the presentation are comparing a 52-week trading period in '23 with a 53-week trading period performance in FY '22. Adjusted numbers do show an apples with apples 52 versus 52 comparison. And finally, and probably most importantly, all like-for-like numbers in this presentation are also based on a 52 versus 52 comparison for stores, which have been open for more than 12 months. All right. That all said, let's get to it. Over on Slide 5, the group delivered a record sales of $3.8 billion, driven by like-for-like sales growth of 8%. Pleasingly, notwithstanding the return to a more normalized promotional environment, we were able to deliver gross margin of 46.2% above pre-COVID levels. Segment PBT was up 12% to $391 million, and segment PBT margin increased 50 basis points to 10.3%. This translated into a statutory net profit after tax of $263 million and a normalized NPAT of $274 million. The 8.8 difference between the statutory and underlying the recognition of the proceedings filed by the Fair Work Ombudsman in January of 2023 and costs relating to the team member wage remediation. The Board has determined to pay a fully franked final dividend of $0.44 per share and a fully franked special dividend of $0.25 per share, together with an interim dividend of $0.34 per share, which represents aggregate annual dividend to shareholders of $1.03 per share. The group is entering FY '24 in a strong financial position with no drawn bank debt and $192 million of cash on hand. If we go to Slide 6, I won't go into a lot of detail. Group delivered $3.8 billion of sales. This represented a 7% sales growth or adjusting for that pesky extra week, 9% sales growth. All 4 of our core brands delivered record full year sales. Slide 7 provides a more detailed breakdown of like-for-like sales between the first and second half. Following an 11% like-for-like growth in the first half, we delivered a 6% like-for-like sales growth in the second. In comparing our first and second half performance, I'll remind you that the first half sales in the previous year were adversely impacted by COVOD-19. All 4 of our brands have delivered positive like-for-like sales growth in the second half despite a weakening consumer environment. Finally, I note that sales momentum in BCF actually improved in the second half, which shows continued support for the Outdoor category post-pandemic. Slide 8 shows the 5-year group trend to gross margin, cost of doing business, and profit before tax. Group gross margin is normalizing, but we're happy with this result, particularly given the pressures on domestic supply chain during the year. Cost of doing business as a percentage of sales has improved by 60 basis points despite inflationary pressures on rent, electricity, and wages. This reflects the impact of some of the group's cost out initiatives, which I'll discuss on the next slide. Inflationary pressures will continue to impact the group's cost base in FY '24. And while we continue to practically manage our costs to align with revenue, we reasonably expect that percentage of sales for CODB, I should say, sorry, CODB as a percentage of sales will increase next year. The net impact of these gross margins and CODB outcomes has been a 50 basis points improvement in PBT margin for the group. Over to Slide 9. I've previously spoken to a number of projects the group is underway, designed to protect margin and manage our cost base. But in light of the challenging macroenvironment, it's worth reiterating the steps we're taking to maintain profitability and align costs with revenue. In terms of gross margin, the good news is that inflationary pressure from the supply chain has continued to moderate with offshore freight costs back to historic levels and domestic supply chain pressures starting to ease. We've successfully negotiated terms with our ocean freight providers and trade partners to achieve rate reductions, which will benefit COGS over the medium term. In addition, our strategic pricing team is continuing to work with each of our brands to optimize our approach to price setting, clearance, and discounting. As part of our strategic goal to simplify the business, we are achieving meaningful benefits from a more centralized approach to tendering and procurement across the group. The recent National Wage Review decision and the renewal of our EBA in February 2024 will impact our wages built in FY '24. While ongoing investment in our workforce planning systems to optimize store rostering will provide a level of offset, we reasonably expect that wages will increase as a percentage of sales in the FY '24 period. In terms of rental exposure or rental increase exposure, approximately 1/2 of the group's leases are CPI-linked, although a portion of those leases have capped increases. I will note that the group's weighted average lease expiry is around 3 years. That means we have over 200 leases due for renegotiation each year that clearly provides us the flexibility to renegotiate rents based on market conditions and market rates. Slide 10. Group inventory at the end of FY '23 was $11 million lower than 12 months ago. Overall inventory level is at 21% of sales, which is in line with pre-COVID period -- the pre-COVID period. For those of you seeking further detail, the composition of inventory by brand is set out in the segment note. The detail in the segment note shows the value of inventory held in both Supercheap Auto and BCF has decreased compared to FY '22. Rebel's inventory position reflects a normalization compared to 12 months ago, but frankly, trade partner supply constraints and disruption actually constrained the inventory levels at that time. There's a modest increase in Macpac's inventory levels, which is consistent with the expansion of the store network. In short, we're pretty comfortable with the inventory position, noting as we always do, that the products we sell are non- [indiscernible] and nonperishable. Off to Slide 11, shows that we've added over 1 million active club members. And remember, to be an active club member in this number means you have to be a member who has purchased from us in the last 12 months. On top of that growth, we've also seen our NPS score move from 64 to 67. So on simple arithmetic, we've got more customers and they're happier than they were 12 months ago. Currently, across the group, these active members represent 73% of total sales, probably appropriate to call out with BCS striking close to 90% of total sales of club members being quite a significant achievement. So in the context of this softer consumer environment, this is an important figure because these are shoppers that we know that that know our brands and whom we can communicate directly, means we have less resilience on casual shoppers just walking past the shops. Having now reached over 10 million active club members, our goal is pretty simple, want to continue to grow those members, and we're going to focus on increasing the annual average club member spend. On Slide 12. In terms of store network, we've opened 24 new stores in FY '23 and plan to open another 24 in the current year, including another BCF Superstore, which I'll touch on shortly. In addition to these new store openings, we can plan on converting another 4 of our Rebel stores to the rCX format, and will continue the very important ongoing refurbishment of the Supercheap Auto fleet by upgrading them to the next-generation format. If we go to Slide 13, provides a little bit more detail about the rCX performance. And for those that have been following the company for some time, you'd know our first rCX store opened in the middle of the pandemic in Doncaster in 2020. And now we have over -- we have reached 15 rCX flagship stores. Now this format has been designed in partnership with Nike and other key trade partners, and it continues to provide innovative displays, differentiated experiences for customers in the core categories of running gym and fitness, football, basketball, and cubes. So 2 call-outs I want to make on the Slide 13. The first is that the rCX stores as a cohort are making an increased contribution to Rebel's performance. They now represent 18% of Rebel sales in FY '23, and this contribution is obviously going to grow as we expand the rCX fleet. Secondly, the capital we've invested in rCX stores have resulted in a significant increase in our sales base. The analysis on the bottom half of the slide shows the uplift for the 10 rCX stores that have operated for the whole of 2023 compared to those stores in FY '20 prior to that conversion. The investment we've made in these stores have delivered an increase of more than $2,000 per square meter and a 50% increase in total sales when compared to -- from '23 back to FY '20. Similarly, Slide 14 provides with a bit of color about performance of our BCF Townsville Superstore, which we opened in November 2022. The Townsville Superstore grew from 2.5 -- 2,500 square meters to 5,500 square meters and holds just shy of 30,000 SKUs. We're obviously very pleased with how the store is performing, and this has led us to open a second store in Kawana on the Sunshine Coast in June 2023. I'm pretty pleased with how that's going. With the expanded ranges across fishing, boating, spearfishing, power solutions, caravaning and forward drive, our brand partners are embracing the Superstore concept, which gives customers the opportunity to see, but most importantly, touch and learn about how products we sell will enhance their outdoor experience. On Slide 15, omni and digital. So we've had $445 million of online sales in the period. Notably, online as a percentage of sales has declined from 17% to 12%. This is just reflecting the shift from online to in-store as customers revert to pre-COVID shopping behavior. However, importantly, Click & Collect, which represents our most profitable channel, of all the channels, and not just online, accounted for almost half online sales. To Slide 17. We note our 15,000-plus team members continue to be highly engaged with the business. This year, we recorded an engagement scores of 81 and 80, both well above the team's benchmark for team members. We remain committed to the diversity across the organization as we pursue our goal of 40:40:20 represented in our Board, executive, and senior leadership positions by 2025. Over the next 12 months, we also plan to develop our inaugural Reflect Reconciliation Action Plan as we seek to advance the cause of reconciliation and deliver meaningful outcomes for our Aboriginal and Torres Strait on the team members. On to Slide 18, we're making very solid progress on our sustainability agenda, which is focused on supporting our people and limiting the impact of our operations and products on the environment. As a group, we've set out a decarbonization target of 0 Scope 1 and Scope 2 greenhouse gas emissions by 2030, which includes the emission generated by our operations and from our energy use. We've reduced both emission types against our base year by 26% through initiatives, including LED lighting upgrades, installation of solar panels and an energy efficiency program for our stores. We were again included in the S&P Global Sustainability Yearbook in 2023 and achieved a top quartile result. Slides 21 and 22 are self-explanatory, so I'll then move on to the brand slide to start with the Supercheap Auto. Well, Supercheap Auto has delivered another strong performance this year, and I think that's an understatement, reinforcing the reliability of the Auto category and, frankly, the strength of the Supercheap Auto brand. Benjamin Ward and his team have done a super job, excuse the pun, and delivered a record full year sales results, a record number NPS score and a record number of fitments for the in-store service program. It's continued to excel in customer acquisition, having added more than 550,000 active club members to their club plus membership program in the last 12 months. The business has also benefited from the upgrade of further 37 stores to the next-generation format. These stores include a dedicated floor space for growth categories, including tools, 4-wheel drive and a designated service zones for the do-it-for-me fitment services, improved visibility Click & Collect, just better signage and lighting. Earlier this year, Supercheap Auto modernized the brand with a new visual identity and a new slogan, "Whoever you are, whatever you drive-make it SUPER". This rebranding has been extremely effective in helping the Supercheap Auto appeal to a more diverse range of customers. A summary of the financial performance of Supercheap Auto is set out on Slide 24, but I want to make the following callouts. Total sales grew by 8% to $1.45 billion or 10% adjusted for that extra week. Like-for-like sales grew by 10%, driven by growth in transaction volumes and transaction value. Second half like-for-like sales growth of 6%, PBT margin increased by 100 basis points to 14.1%, and PBT increased by 16% to $204 million; very, very well done. On to Rebel, so Gary Williams from the Rebel team delivered a record full year sales result. Performance, both basketball and football, was Rebel's strongest performing category, benefiting from the successful rollout of the home and sports format. Key events, yes, the Women's World Cup and a rebound in participation in Grassroots Sport, which is fabulous news for Rebel. Following the opening of our 4 rCX stores in the period at Erina, Joondalup, Knox and Warringah, Rebel has now a total of 15 rCX stores. It's also worth noting that Rebel's top 3 performing rCX stores are now part of the $20 million a year sales club, which is quite an achievement. In addition, the rCX store rollout -- in addition to these rCX store rollout, Rebel commenced a regional store rollout, by opening stores in likes of Dubbo, Tamworth, Ballina and Nowra. We've been pleased with the performance of these stores and see -- we really see further near-term opportunities for regional store openings. On top of this, Rebel has expanded apparel range to include PE Nation, Lorna Jane and The Upside and launched a redesigned Rebel website. A summary of the financial performance is set out on Slide 26, I want to call out the following. Total sales grew 8% to $1.3 billion or 10% adjusted for the extra 53rd week. Like-for-like sales grew 9%, driven by higher transaction volumes. Second half like-for-like sales growth was 7%. PBT margin fell by 40 basis points to 11.2% and PBT increased by 4% to $146 million. On to BCF. BCF -- well, Paul Bradshaw on the BCF team not only delivered a record sales result that actually improved our like-for-like sales momentum in the second half, which I think puts them into some rarefied air. Among other highlights, BCF successfully launched the new superstore format in Townsville and Kawana, and the Townsville Superstore is on track to join that $20 million a year sales club with some of the rCX formats. BCF achieved a 10% sales growth in fishing category and club member sales increased to 89% of sales. In response to competitive market, BCF is focused on developing a portfolio of private and strategic brands to differentiate itself from competitors and to provide customers with access to exclusive products. BCF partnerships -- partners with leading outdoor specialty brands, including Yeti, Weber, Darche, Dometic and Lowrance and they're providing successful sales from strategic and private brands now representing more than 50% of BCF's total sales. There are positive signs of this strategy's leading to growth in BCF market share. A summary of the financial performance is set out on Slide 29, I want to call out the total sales grew by 1% to $840 million or 3% adjusted for that 53rd week. Like-for-like sales were flat as higher transaction volumes were offset by a modest decline in ATV. Like-for-like sales grew by 3% in the second half. And against this backdrop, segment PBT of $51 million was a very credible result. Macpac. Macpac delivered a record full year results driven by favorable weather conditions in the first half and a continued rebound in tourism and travel activity. I'm pleased to report that Cathy Seaholme in the Macpac team had, for the first time, delivered over $200 million of sales underpinned by 20% growth in annual customer transactions. Macpac opened 6 new stores bringing its network to 89 stores across Australia and New Zealand. On top of that, Macpac product is now stocked in 200 Rebel and BCF locations across Australia, supporting growth and brand awareness. Similarly, the performance of the other brands is set out on Slide 31, but I want to call out the following: Like-for-like sales grew by 22% or 27% adjusted for the 53rd week. Like-for-like sales grew by 24%, 26% Australia and 20% in New Zealand. Second half like-for-like sales grew by 5%, noting the first half like-for-like sales were cycling that COVID impact prior corresponding period. PBT margin increased by 280 basis points to 13.3% and reflected a 140 basis point improvement in gross margin. PBT increased by 54% to almost $29 million. Now I'd like to hand over to David Burns to talk in more detail to the financials.

Thank you, Anthony. Slide 31, Group unallocated. This segment includes our corporate costs and costs that are not allocated to the brand segments due to the cost being related to -- being not related to the underlying trading of the brands in the financial year. Pleasingly, corporate costs have decreased to $22 million, $3 million lower than PCP. The customer loyalty capability build has been undertaken over a number of years, targeting to benefit all brands. We outlined that we will hold the cost to develop the virtualization in [indiscernible] in group unallocated until it is in use by the brands. In the investment in '23 of $18 million was slightly below the $19 million we advised at the start of the year. The customer program has further development for Supercheap Auto and BCF to be completed, and that will be deployed in FY '24, which those costs will approximate $8 million, and those costs will be held in the 2024 year in group unallocated. All the costs associated with the Rebel loyalty program will be borne by Rebel once the capability is in market. We disposed of our Autoguru investment in the year, recognizing the proceeds having written off the business to 0 in FY '22. We received $3.7 million of interest income in the year, benefiting from our strong cash position and the higher risk interest rate environment. Turning to Page 32. Our balance sheet has improved over the year, increasing our cash position, reducing total inventory and improving our net inventory investment despite adding an additional 24 stores to the network. Our inventory position has normalized across all brands with a healthy store in-stock position, low aged inventory profile and good balance across categories. The brands have worked hard through the year to manage inventory cover as customer preferences has normalized post-COVID. Unit inventory volumes are lower, but this has been offset by some inflation in purchase value and mix shift. As Anthony outlined earlier, we've seen an increase in investments in Rebel and Macpac, Rebel as a consequence of the in-store inventory position normalizing, having had some supply issues in the '22 year. Moving to Slide 33, returns and capital ratios. The strong normalized EPS results have allowed the group to pass on a final dividend of $0.44 and a special dividend of $0.22. The total ordinary dividend in the year of $0.78 represent a 64% payout ratio of underlying earnings, which is at the top end of our dividend payout ratio -- payout range. Combined with the special dividend, we have declared $0.13 fully franked this year. Our credit metrics are excellent. We have a net cash position of $192 million and committed undrawn debt facilities of $500 million. Moving to Slide 34, cash flow. The operating cash flow result of the business of $716 million was robust as the business normalized its trading activity post COVID-19. Capital expenditure cash flow of $109 million is higher when recognizing we had $19 million of capital expenditure payments that fell into '24. This is due to the late delivery of a number of store projects, which were in fact completed in the month of June and which was driven through construction delivery delays, both at a landlord level and also at a fit-out level. I'll now hand over to Anthony to take you through the corporate strategy.

Yes. Thanks, David. So if we go to the corporate strategy slides, that provide an overview of the key pillars of our corporate strategy, which we first released in November of '19 and reconfirmed at our most recent Investor Strategy Day in May of this year. The group's strategic focus remains on growing the 4 core brands, leveraging closeness to our customer, connecting our omni-retail supply chain, simplifying the business and excelling in omni-retail. Slide 37 provides further detail on some of our progress to date in executing the strategy, but given the limited time today, I won't talk to the detail of this slide. Over to Slide 38, I can confirm that our program of investment in customer loyalty and personalization is on track and proceeding timetable. We're looking forward to the relaunch of the Rebel loyalty program between now and Christmas, and we'll have more to say on that shortly. Our personalization trial at BCF is continuing with communications being extended to the vast majority of customers, excluding a control group, and the Rebel personalization pilot will commence a calendar next year. Over to Supercheap loyalty. Before talking to the new Rebel loyalty program, I just wanted to make a brief mention of the success we're having with the Supercheap program. It's worth noting, and it's worth pointing out that over the past 4 years, Benjamin Ward and the team have made a number of changes, which has meant we've seen active club members grow by 2 million from 1.7 million at the end of FY '19 to 3.7 million active members. It's quite an achievement. Benjamin and the team have introduced a number of changes to the club program, including the removal of the $5 membership fee, the relaunching of loyalty along the new brand platform and the introduction of exclusive member offers, which have all contributed to growth in club member sales. Most recently, Supercheap has been conducting Spend & Get trials, which has delivered positive outcomes in terms of incremental visits, transaction and increased gross margin dollars and improve member engagement. This bodes well for the continued success of Supercheap, but importantly, it provides some lessons and valuable insights for us as we contemplate the Rebel active launch. Now if we turn to Slide 40, I want to talk to this Rebel program, and I'll hand over to David because we want to manage some disclosures around the financial impact and the accounting treatment of the introduction of this program, David.

Thank you, Anthony. We outlined the launch of the new Rebel loyalty program at our Investors Day in May this year. We noted that we are targeting a new member value proposition with benefits linked in every transaction and an expanded presence in-store and online. The current programs and the synergy program limited value exchange for our customers. And yet we have been able to attract approximately 3.7 million active club members and a swipe rate of 73% of sales attributable to those members. We understand that we only capture approximately half of our customer's wallet. This program is targeted to increase our share of their wallet with an effective value exchange. The program is therefore targeting to grow sales by increased visitation, increased items per basket for increased value of items. The outcomes we are targeting vary by customer segment. To achieve lifting customer sales, we need to provide the appropriate value exchange, points or credit, which will have a dilution impact on gross margin percentage. So sales will increase, gross margin percentage will dilute, but gross margin dollars are expected to generate a net gain. In the first year, we expect the program will break even on an underlying basis. Year 2, the program is expected to deliver a net benefit. In the first year, we will need to recognize the value of unexpired points or credits as deferred revenue. This is a one-off impact for the launch year. We have modeled this and expect it to be approximately $8 million in FY '24. This will be reported in the Rebel segment results for the FY '24 year. This is an exciting change to the Rebel customer base. The Rebel management team have championed the effort to launch the program and get the offer into market. We need to finalize testing, including a pilot in the first half of this year. I'll now hand back to Anthony to take you through our new automated business.

Thank you David, getting close to the end. So the group has signed -- on Slide 41. The group has signed a long-term lease agreement with the Goodman Group for the construction and leasing of a new 62,000 square meter distribution center at Truganina in Victoria. Construction of new the DC will be built to achieve a 5-star green sustainability rating and scheduled to commence in the first half of FY '24, with completion expected by the first half of financial year '26. The future capital costs of the DC to Super Retail Group is expected to be approximately $80 million, with approximately $30 million to be scheduled to be -- sorry, with approximately $30 million scheduled to be incurred in each of the financial year '24 and '25 years. Further, as we transition from 2 of our existing facilities in Victoria, transition and close, the company will incur a one-off OpEx cost of $8 million in FY '25. The new DC will reduce the group's supply chain costs over time, improve the group's home delivery capability and minimize the group's need to use third-party storage facilities. Up to Slide 43, dividends and capital management. I'm pleased to confirm that having considered the group's strong balance sheet position and in addition -- sorry, in terms of -- I'll start that again completely. I'm pleased to confirm that having considered the group's strong balance sheet position, in addition to payment of a financial dividend of $0.44, the Board has declared -- decided to pay shareholders by way of a $0.20 -- $0.25 special dividend. Together with an interim dividend of $0.34 per share, this represents an aggregate annual dividends to shareholders of $1.03 per share. The group is targeting long-term net debt-to-EBITDA position pre-AASB 16 of between 0x and 0.5x in the near term. But given the current uncertain macro environment, a more conservative net debt position seems prudent. Turning to the important trading update on Slide 45. I'm pleased to report that the group has achieved flat like-for-like sales and 2% total sales growth in the first 6 weeks. Supercheap Auto achieved like-for-like sales of 3% and total sales growth of 4%. Rebel, negative 1% for like-for-like sales and total sales growth of 1%. BCF, a negative like-for-like sales of 1% and total sales growth of 6% and Macpac, a negative like-for-like sale of 9% and total sales of negative 8%. Sales growth has continued to moderate as the group cycles strong sales in the prior year, rise interest rate costs and cost leading pressures dampening consumer spending. The group has a sound record of performance through the economic cycle and the customer value proposition and the low average ticket price across its 4 core brands. I mean, we think the group is well positioned for a more value-conscious consumer environment. The group is targeting CapEx in FY '24 of $150 million to fund its store development program, the new distribution center, enhance its customer loyalty program and cyber, omni and digital capability. As a result of inflationary pressures on wages, rent, and electricity costs, the group expects cost of doing business as a percentage of sales to increase in financial year '24. Group and unallocated costs in FY '24 are expected to be $43 million, including $8 million relating to investment in personalization and loyalty programs, and that does not include the Rebel loyalty first year revenue deferral, which David mentioned, which will be captured in the Rebel brand result. Looking ahead to the rest of financial year '24. While the macro looks challenging, Super Retail Group's unique portfolio of retail brands with market-leading positions in growing lifestyle and leisure categories, our large and growing active club membership base, very strong balance sheet means the group is well positioned to develop long-term value for our shareholders. I'd now like to hand back to the operator for questions.

[Operator Instructions] And your first question comes from the line of Adrian Lemme from Citi.

The cash CODB looks like it was down about first 1% in the second half. So for the cost initiatives you outlined earlier, did most of those benefits come through in the second half? And should we see similar improvements in the first half of '24?

Yes. Thanks, Adrian. Certainly, as you saw through the like-for-likes sales performance, we had a moderation that occurred in the second half. But also we saw a strong underlying sales growth in the business. So we would say that there's both the benefits of just cost control and, secondly, some cost leverage that's been achieved on that -- those strong like-for-likes. We've certainly seen, as we've outlined in the presentation, onshore inflation pressures building, but offshore inflation specialty pressures abating. So I think we, in February noted that we're expecting to see improvements on sourcing and they'll flow through GP and also freight, inbound freight into Australia, which again will flow through GP. But we are seeing still a continued elevated inflationary environment onshore. So some of the initiatives obviously have supported that, but I would also point out the -- just the general leverage that we've achieved on sales growth in the half.

And just one follow-up, please. Can you explain the process of the new EBA being formalized? And should we expect wage growth of around 6% in line with the Fair Work decision from February onwards, please?

Yes. I think the best way to think about the EBA is that relative to position to the general award will always more or less stay the same. So you always think of an EBA as a form of hedging. So ultimately, that 5.75% will find its way through into our wage file. It's just the way it will moderate through agreement to agreement. So as [ GRIA ] goes up, you would expect that our EBA will transition over time. So I think that's a relatively fair assumption.

Your next question comes from the line of Shaun Cousins from UBS.

Maybe just a question on corporate costs. Can you just talk a little bit about you've guided in the second half '23 to be $26 million, but it seemed to only come in at $16 million. So can you talk about why that was the case? And then just thinking about the additional $8 million cost for the DC, is that a step-up that is enduring in fiscal '24? Or will that be a one-off sort of $8 million cost in corporate and that should fall away in fiscal '25, please?

Thanks for the question, Shaun. So the corporate cost, when we guided we didn't note the interest income. So that's one of the factors that plays through when we gave you that guide. So the 3.7% is incremental. We have underspent, you're correct. The guide that we've given for the DC is the cost of having duplicate infrastructure in place for the transition year. So we have to have -- effectively we're paying rent and cost on 2 sets of infrastructure, we've got the existing 2 DCs, which will be there, and we've got the new DC, which we'll be paying rent on. And so it's a transition year only whilst we transition from one set of infrastructure being to 2 DC to the next set of infrastructure. And so as we outlined earlier, the businesses should only pay for one set of infrastructure, not duplicate infrastructures that we're holding at group and it's only a 1-year period.

And my second question is just around Rebel. Can you just talk a little bit about particularly sort of trading for the first 6 weeks, just the assistance from the support where in terms of the tremendous success of Matildas, how much that helped? And then maybe the broader trends that you're seeing in Rebel sort of key categories, shopping center traffic, apparel sluggish, just the broader factors playing out in Rebel for this first 6 weeks, please?

Yes. Thanks, Shaun. Look, I think the story for the first 6 weeks, and we see it carbon copy in Macpac and for that matter, BCF apparel, means apparel performance across the board, and we sort of note, it does seem to be a bit of a market trend, especially in the first 2 weeks of July was very poor, double-digit down. Matildas have been fantastic and has provided some moderation to that number. But given what was a very interestingly warm start to the season, apparel did notably stand out as a significant underperformer across the group. The Matildas thing was -- look, it's there, it's good. I think my view would be paled by comparison to the value extra participation of girl getting into soccer and requiring soccer boots in the future will create. We backed women's sport or Rebel backed women sport many years ago, and we're quite excited by what we're seeing in terms of intention to sign up to participative sport, which translates into footy boot sales for us over the medium term.

Your next question comes from the line of Bryan Raymond from JPMorgan.

Just continuing on with Rebel. If you back out the rCX sales on the slide presentation deck and look at the non-rCX store base, it looks pretty flat in FY '23 and FY '22. Obviously, rCX is going really well. But just keen to understand the broader trends across the other 140-odd stores in the network, is rCX cannibalizing some of those stores, do you think? Or is there something else going on where they're not obviously achieving some of that growth that you're seeing in other parts of your business?

Yes. Look, it's a good question. We've got -- you'll see that Rebel's overall store numbers have not really significantly shifted over the last 5 years, and we've been rationalizing the network. So there's certainly examples where we've gone and opened an rCX and with that then consolidate an old Amart at the same time. And so overall, you're eliminating all the costs associated with that distributed infrastructure and getting certainly a lot more efficiency. So just got to be careful of that impact passing through the Rebel numbers and so we're still at only 159 stores at the period end, and yet we've been opening, as we saw a number of regional stores this year because we continue to do some store closures, which we have had over the last number of years. But yes, the general network, we are doing rationalization of stores in the network and there are stores that are being combined and taken the benefit of a larger, more efficient store. An example would be, which we haven't yet completed the process, but in Adelaide, we had 2 stores in Rundle Mall. We're expecting to have one with Rebel with the new Rundle Mall store there. But we've still got a lease tail on the old one. So we're taking those opportunities. That's part of the strategy is to make the stores bigger, a better experience and to eliminate ineffective duplication.

And then just my second question, just around the cost outlook. You've already talked to wages, which I appreciate. You've got -- you mentioned rents, energy would be, I'm sure in the mix as well. Obviously, we see a bit of sales ramping up into -- well, increasing next year, I should say, which shouldn't surprise. I'm just interested in the sort of absolute level of CODB growth we could expect and the fixed cost percentages across the brands? Like obviously, sales are somewhat up in the air in terms of how that might go. We'll have to wait and see, but just interested in how you might be able to manage costs through that journey and if there's an opportunity for you to see some higher variable cost businesses or any other fixed cost reductions you might be able to see across some of those brands in [indiscernible]?

Yes. Look, it's a good question. There's certainly the rationalization of ineffective stores across all the brands is a focus area and that we see that opportunity in BCF and in Rebel, and we're also looking at the performance of the Macpac stores. And so optimization of stores is an opportunity to assert ourselves on that fixed cost, improving sales intensity in the stores. So the refurbishment programs do lift sales intensity. And therefore, you get a dividend certainly there. And as you've seen over the last number of years, have lifted our increase in investment in the customer experience and across all the formats. But there is an underlying inflation that will pass through in rents, but we've got protections in a lot of our leases have got either fixed increases or CPI caps. There are a small number of leases. It's less than 40% of our leases have got open CPI. And so those are certainly things that benefit us. And then finally, as we go through those, the lease renewals of our -- we have probably 120 to 150 lease renewals we're performing every year. We're looking to get outcomes through from our landlords in terms of improved rental outcomes. So all of those things do combine to -- as you can see through the results over time, we've been able to manage that cost escalation. Certainly we've just spoken to the AI earlier in terms of what is the variable cost in stores, but at the same time there's rate increase that's passing through store labor. When you look at the other areas of cost in the business, we are certainly working with our service providers and trade partners about achieving outcomes of improving our procurement with them and getting a net benefit. So we have got a program of work, which Anthony outlined on those, focus areas which we've been working on over the last 12 months.

Your next question comes from the line of Julia de Sterke from Bank of America.

Just a question on your DC investment. Could you just give us a bit more of a road map of the kind of efficiency improvements sort of on cost of doing business that you expect to get from this and the time line on extracting those? Sort of what are the early signs, the early roadmaps that you're looking at to see if this investment is successful in taking costs out of the business?

Yes. No, thanks for the question. Look, we're also not going to be disclosing specific targets. But just to give you a flavor of what we're trying to achieve with the automated DC, we're looking to put totable items into one facility nationally, that will provide both a working capital gain as well as a cost per unit gain coming through at the same time because we'll be instead of having the same inventory replicated nationally through our regional network, we're able to concentrate that. So we think there's a significant gain, working capital and cost per unit. That will, like every DC, go through its natural transitionary period. So you can sort of see with the transition arrangements we've put in place in terms of closing the 2 older facility, we've taken a relatively conservative approach to make sure we manage the natural disruption that takes place when you commission a new DC. But that will be the 2 areas we will be focused on cost per unit and reduction of working capital.

And just my second question around continuing on from -- on cost of doing business. You flagged at the Investor Day, a lot of work that you've done on labor rostering. Is there more to do on that?

Yes, there is. I mean whilst we've got, as David pointed out, a rate increase in terms of the appropriate allocation of labor hours to transaction load and all of movement load in store. The business has actually generated quite a sophisticated capability where we're able to understand at a slight level, not only what transaction volumes are going to take place, but what inventory is moving in and out of the business. And so we can better align our wage model, our wage volume against that. So that's a -- we think there's continued improvement there. It's no terribly different to the way we've worked on gross margin through the pricing and promotional center of excellence using analytical tools to understand that highly variable cost base. We do think there's ongoing optimization in spite of an underlying rate increase, which is, as we indicated earlier, somewhat inevitable and unavoidable.

Your next question comes from the line of Lisa Deng from Goldman Sachs.

Two questions from me. First one is on the Rebel loyalty program or the new loyalty program. I understand that sales are going to be higher and GP margin lower, GP dollar higher. But can you help us think a little bit about the magnitude that we should be looking for? And also the follow-on is the $8 million of deferred revenue. Like how -- what's the actual accounting entry that we should be looking at for that one?

Yes. Thanks, Lisa. Yes, we haven't guided to the magnitude of those changes. Obviously, we've got to launch the program and get it into market. And so that will have an impact this year. But on an annualized basis, it should be driving a sales uplift that's generating a GP outcome, GP dollar outcome higher than the actual dollars that have been consumed by customers. And we've got experience of this certainly in Supercheap where they've got a mechanism program. We've got experience historically where we had other programs such as in other brands that were mechanistic. So we're quite comfortable that, that will be favorable. And this year, it's -- as was outlined, it's going to be [indiscernible] will be breakeven. The accounting entry is that when you have a sale and you've got a point attached to it, you actually have to defer the revenue at the time of the sale. And so it's actually a revenue deferment and you…

Is that liability?

And you put a liability on the balance sheet. And then that liability on the balance sheet sits there until such time as it's consumed. And what we've seen historically, we know the Supercheap that for every $10 of credit, the customer spends $30 when they're consuming it. So we do know that, and we've seen that and they've done other tests, it's not just the best price rewards they've done a Spend & Get program as well. So we do know that we get a net gain when it's consumed. And then secondly, if it's still sitting there because it's got a longer life than, say, for example, Supercheap one has only 28 days because it's got a longer life over financial balance states, you have to then make a determination of what would that future consumption be, you have to consider a breakage assumption, how much of it will be consumed and how much of it will be not consumed, and therefore, that determines what the liability should be. So we don't yet know what the response from the Rebel customer will be. We would like them to consume the credit because we know that then we get either an additional visitation. We get an additional line in the basket or we get an upgrade of the items in the basket because of that credit. And that's all building brand loyalty. And so ideally, they will spend the credits, but we don't yet know. And we don't -- we'll have to see that and understand that through the life of FY '24 and get a better understanding through the life of FY '25. But we'll have to -- our auditors and us will go through a process of determining how to calculate that breakage. And you see that in any point space program, you can see that in quality, you can see that in any other retailer that's got a liability program.

What's the other side to the liability? Sorry, just when we're looking at the liability recording of $8 million, what's the other side to it?

Well, it's revenue deferment. So you're deferring revenue at the time of each sale. And in the first year, you generate that liability. And then the point is brave. They have a life. They don't have -- they're not forever. And as the points break, you write the liability back to profit.

Maybe we'll take it off. I just think like debit liability $8 million and then credit watch, I guess, or credit liability…

Yes, credit liability as well as some liability…

Yes, credit liability $8 million and then debit what?

Debit revenue. It's a revenue…

Okay. So you do recognize revenue. You just don't have that cash. Okay, I got it. Okay. Got it.

You're referring to cash, but you're recognizing liability by deferring it from revenue.

The second question is just on the unallocated costs. I wanted to clarify. So the $8 million on personalization in FY '24, is that a step up on to our current $18 million? Or is it actually falling from $18 million to $8 million next year?

Yes. It's moving from this year's spend with $18 million and next year spend with just $8 million because the largest build costs we've seen in building the Rebel capability and that we need to then transition both BCF and Supercheap onto that platform. And then secondly, transition Supercheap also onto the personalization program -- platform along -- ultimately with Rebel as well.

And the DC doesn't come in -- that DC $8 million doesn't come in until FY '25, I think. So then what's the big step-up in unallocated cost then if we're getting a $10 million reduction in personalization?

That's where we've gone. Obviously, not had the benefits of the $1.8 million Autoguru and $3.7 million of interest income. We've not attempted to put a figure on interest income at this stage given that we'll be undertaking some return of capital through a special dividend.

Your next question comes from the line of Michael Simotas from Jefferies.

First one from me. If we could just follow up again on CODB and in particular, the wage rate and the enterprise agreement, did you take any wage rate increase in July of this year? Or will it effectively be flat until the agreement is renegotiated?

Yes, Michael, yes, we did. So we'll take into this year, a good majority of that 5% increase even though the enterprise agreement frankly doesn't actually -- doesn't compel us to do that. It doesn't require us to do it. But I think just frankly, some common sense here is we'll push through a good WAC of that 5.75% through this year. And then that appropriately sets us up for a very reasonable engagement in the enterprise agreement in February of next year.

And then the second one for me on gross margin. I appreciate there's going to be a bit of noise around the point scheme in loyalty. But how should we think about underlying gross margins from here? It looks like you finished FY '23 a little bit better than what the update in May suggested because your second half gross margin was actually a little bit higher than your first half. Was there some sort of underlying change in gross margins? Have they stabilized? They've obviously come down a long way from the peaks during COVID, but they're still above pre-COVID. So any sort of help you can give us on your thinking on an underlying basis, excluding the noise would be really helpful?

Yes. I sympathize because it is a rich tapestry, gross margin movement. So let's just go through it bit by bit. I don't think there's been a lot of movement in the period. I've been -- you're quite right, we've overachieved. But there's nothing really material to see here. But if we just sort of step through appropriately let's put the deferral revenue aside and the gross margin rate impact that Rebel will experience because you have the loyalty programs, so that's going to be one. We see the -- and we called this out at the last time we met around COGS improvement as we see international deflation flowing through. Now we still see that. We think we've got ourselves in an inventory position where we are buying inventory and we are buying into a weak market, and we are seeing a reduction in COGS accordingly. So that -- we planned for that 8 -- 12, 18 months ago now, and we've got it. So we're happy with ourselves there. If we look at international logistics, we give ourselves a tick on that as well. We've been able to achieve appropriate levels of deflation relative to the COVID period. So we like that. But on the domestic front, it's still a very -- it's a real mixed bag in terms of inflation coming through there, which would provide upward movement or negative impact on gross margin there. So promotions, we, broadly speaking, are flat. So we've never -- we've really not walked back from our position that we could hold the underlying promotional gross margin gain pre-COVID, since COVID and that more or less is holding. So we're not seeing the need to pump inventory -- sorry, pump GP for volume. That's fairly tidy. And then our inventory file is clean. We -- as a percentage of sales, we feel good. There's no need for us to class gross margins to go after that. So look, as you say, there's lots of ups and downs there in terms of the component parts. But at macro, we always saw a big move or a big opportunity at COGS, we're going after it. We know that we've got the implications of loyalty and then inventory is clean and promotion looks okay.

But ex the loyalty impact, do you think you could possibly grow gross margins into '24?

I don't think I'll be doing -- yes, I don't think I'll be making any predictive commentary based on that mix bag. There's a lot of -- there's a few -- as I say I emphasized, there's a lot of moving parts. I think that would be well into the guidance universe by sort of putting a marker on it.

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

Can I start with the rCX uplift? I mean, it's really impressive some of the figures you've provided today, so thank you for that. And is it reasonable to think you can kind of extrapolate that 50% growth across the whole network in time, even though you won't be converting all the stores, I imagine? But then again, these are the better stores you've done already. So what is it kind of do to long term for the Rebels group sales?

I don't think you would extrapolate to the whole network. I think this is -- many are very capital-intense projects. And if we -- if we zero in, you've got very high-traffic, high-volume stores that you're making an improvement and quite a material improvement. So whilst the uplift in [indiscernible] is amazing and it is, there is an appropriate uplift in capital that we put into those stores. So I'd sort of say that would be an unlikely outcome. It is, however, worth calling out that we've taken a cut down, and I pretty just referenced Bryan's question earlier in the call, we've taken a cut down of worlds of football worlds of kids through the network, which has also provided an underlying like-for-like growth across the network. So where are we making the investment for us, yes, we'd expect to get this uplift where we're making a more modest upgrade. We are still seeing an uplift. And of course, we've got the capital and the program to go after that. So I would say from a Rebel total business perspective, the combination of improvement in rCX the cut-down versions going after driver category, throw in loyalty, et cetera, et cetera. I mean there's a fair bit of [indiscernible] shop there in terms of sales velocity, all things being equal.

And lastly, on the -- turning to the Auto business, what would be the notional opportunity you're seeing in fitments, I think you've called out $769,000, I think it was fitments in the year at $10 each or so, some are more, some of less, if maybe are you talking less than $10 million, so that's pretty small for in that scheme. But then again, how big can it get in terms of being introduced sales or products you may not get otherwise. So what's it been limited by? Is it awareness of the customers? Is it the sites? Is it staff capability? And how big is it going to get?

Look, we think that there is a lot to be going with fitment. We don't frankly charge a lot for it, Mark. It's -- the benefit we get is the gross margin from the item that we're fitting. There is a constraint in terms of -- there's an acute safety issue that we always deal with the fitment when you've got team members working on customers' cars, you need to be very mindful of that. So we're -- that is a limiting factor. But we've slowly grown our fitment business over time. The one thing I would always back is the executional engine of Supercheap Auto. We think this is a big opportunity. You just need to go after it methodically and conservatively just because you are dealing with an underlying risk there, which we are very, very mindful of. But the customer [Technical Difficulty] in terms of customer sentiment is quite material. It's a way of turning a customer into a fan.

And that doesn't explain that -- you said about safety, that doesn't explain why you're seeing those team safety measures deteriorate in the year, is nothing to do with this, it's just they're underlying on manual handling stuff, I imagine?

Yes, but more talking to the underlying -- all talking to the underlying risk that we're trying to mention. The priority for this business is team safety. And if we push too hard in accelerating fitments, we put that at risk, and we're frankly not going to do that.

All right. Well done yes, really robust results. Congratulation.

I think we've got -- operator, we got one more question given time.

Your next question comes from the line of Craig Woolford from MST Marquee.

Can I just ask a question, obviously a lot of moving parts on gross margin. How would you describe the discounting activity across the market? And are you seeing some of the, what I would describe as excess supply amongst the supplier base in footwear and Outdoor. Is that having an impact on discounting activity across the market?

So within Outdoor, we have seen excess have an impact in terms of the directly sourced product as opposed to supply-generated product. So third-party inventory, not too bad, some of the direct source programs within the market have been -- we've seen some pretty aggressive discounting in the period. I would note, Craig, that that's moderated. So I want to say that cautiously, that has moderated. We always have sort of seen in the footwear space within Rebel, especially in the lifestyle space, a fair bit of aggressive discounting to clear stock. As you know, we like to think ourselves as cool, but we don't really sell the supercool stuff. So that's not so much of an issue. And we saw with some of the global brands, a little bit of excess inventory in the period, but that more or less has been managed as we would expect and as we've experienced for those global brands over the medium and long term. So nothing material that I would call out. If anything, I think the challenge of managing costs is playing on the market's mind in terms of gross margin optimization as it relates to price.

So the other question, just on -- probably just direct this on Supercheap Auto because it would be hard to answer across all the brands. What is the cadence now in terms of average transaction value versus transaction numbers for that business, maybe the June half and just reflecting on the resilience that it shown in July as well?

Yes, the transaction, both are very strong, very strong. They're good. So Supercheap, I mean, we've always said -- and we've said it because we just have to look at history that Supercheap run both sides of the cycle. So when times are good and everyone buys a new car, they got by car wash and car care and times of tough car maintenance side, and that's exactly what we've seen. So there's not many indicators within the Supercheap performance that we would point to that would suggest that we're seeing a collapse. I think it's far, far, far from that. So Supercheap both price and volume is very solid.

So it's overall 3%, but both are contributing to that 3% like-for-like.

You bet. Yes. All right. Well, I think we are at a close. Thank you for joining us this morning. Always a delight to do Q&A. I think we've got a fairly big dance card over the next couple of days. So we look forward to seeing quite a lot of you in the coming days and into next week. Wish you a very, very good morning.

Thank you all for joining us. This now concludes today's conference call. Enjoy the rest of your day, and you may now disconnect.