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

Welcome to the Super Retail Group's FY 2024 Half Year Results Presentation. Today's presentation will be made by Managing Director and CEO, Anthony Heraghty; and CFO, David Burns. There will be an opportunity to ask a question at the end of the presentation. Today's presentation is for investors only. Members of the press who would like 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 the conference over to Anthony Heraghty to begin the presentation. Please go ahead.

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

Good morning, Anthony.

Will provide you with some more detail in the half year financial results. I'll then talk to the progress we're making in executing our corporate strategy with a focus on marketing personalization and loyalty. Finally, I'll provide you with a trading update for the second half. There, of course, will be an opportunity for you to ask questions at the end of the call. If we go to Slide 3, the executive summary note first half sales increased by 3% to $2 billion. That's a record result. Gross margin increased by 30 basis points to 46.5% as the group maintained its pricing and promotional discipline despite some macro softness and increased discounting activities from some of our competitors. Statutory PBT of $204 million was slightly above the guidance range which was previously announced this January. This translated into a statutory NPAT of $143 million. The Board is determined to pay a fully franked interim dividend of $0.32 per share. The group has entered into the second half with a strong financial position with no drawn-back debt and a positive cash balance. On to Slide 4, and I won't speak to detail, but there's a couple of call-outs I'd like to make. So here we talk about the record first-half sales. We saw sales growth of 3% which was underpinned by new store openings and a 1% increase in same-store sales. Our strong top-line performance reflected growth in transaction volumes across all of our brands. This is an important point, just want to repeat it for references. The group saw a high number of transactions during the period across all our core brands. So, in this more challenging retail environment where our customers have been careful with their spending, we've not lost contact with them. They're still participating in our categories. They're still visiting our stores, engage with our brands, but we are observing that they're putting less in the basket. So for us, lifting the number of units per transaction will be a key near-term tactical focus for us. But what's important, we've got our arms wrapped around our customers and seemingly they're not going anywhere. Over to Slide 5. That shows a 5 year trend for gross margin, cost of doing business and profit before tax. A 30 basis point improvement in gross margin to 46.5% is a pleasing outcome for the group and consistent with our ambition to maintain our gross margins above pre-COVID levels. With over 11 million active club members, we already have the customer, so we don't need to resort to excessive discounting to attract them into the door. Our focus is on targeting our promotions to ensure we are showcasing the right offers to the right customer at the right time. Cost of doing business as a percentage of sales has increased by 90 basis points. As advertised this increase reflects an inflationary pressure on rent, electricity, and wages, which has been partly offset by some of the group's cost-out initiatives, which I'll discuss on the next slide. Inflationary pressure will continue to impact the group's cost base in FY '24 and while we will continue to proactively manage our costs to align them with revenue, we expect CODB as a percentage of sales will increase in the second half. At the bottom line, the group has been able to deliver a PBT margin of 10.2%, which is incredible result. On to Slide 6. For those of you that follow the company, I would hope that this is a familiar slide. It outlines a number of areas across the business. We've identified opportunities for further cost efficiency. To be effective gross margin protection and cost management cannot be done quickly. It requires run-up and we have been judicious about these activities for over 12 months to ensure that we are in the best position to align our costs with our revenue. In terms of gross margin, good news is that inflationary pressure from the supply chain has moderated. We are currently finalizing negotiations on the terms of our enterprise agreement with our team members. Given discussions are ongoing, it would not be appropriate for me to provide you with an update at this point in time. Other than say that the dialogue has been sensible and constructive. Our workforce management system continues to deliver flexibility for our team members and efficiency in our rostering. We will continue to review our store labor operating models to ensure we have the right number of team members at the right time engaged in the right task. In terms of rental exposure, just under 40% of the group's leases have rental clauses which are CPI-linked as distinct from leases with a fixed rate increase or CPI caps. Also, it's worth noting that our weighted average lease expiry is around 3 years, so we have over 200 leases up for renewal every year. We note that landlords have a strong appetite for our brands in their centers, and we are receiving competitive terms on these new leases as they roll through. On to Slide 7, shows that the group -- across the group. We now have 11 million active club members and they represent more than 3/4 of our sales. Club member spend as a percentage of sales has continued to increase across all of our 4 brands. In particular, it's worth highlighting BCF where club members account for 90% of sales. It's an extraordinary outcome. Across the group, our club member NPS score has improved again from 66% to 69%, reflecting improvement again across all 4 brands. In summary, we've grown our active club membership by 15%. Those club members represent a growing percentage of group sales and their shopping experience is improving, which is a positive. These are shoppers that know, love our brands, visit us regularly, and for whom we can communicate directly through our loyalty and club programs. This club member base is a strategic asset for the company. Our brands are able to achieve promotional and marketing efficiencies as we do not need to reacquire the same customer with diluted mass market sales promotions. Over to Slide 8. In terms of store network, we've opened 17 new stores in the first half and we plan to open another 11 in the current year, including another BCF superstore. In addition to these new store openings, we plan to convert an additional Rebel into the rCX format and we will continue the ongoing refurbishment of the Supercheap Auto fleet. Over to Slide 9. Group first half online sales grew by 10% to $260 million. This rebound in online sales largely reflects a return to the long-term trends in online participation. This has obviously followed the volatile shifts in consumer behavior through the COVID period. The group's strong online performance in the first half provides further validation of our omni-retail business strategy. Whether the customer chooses to go into a physical retail outlet or shop online, our goal is to capture that demand both across our store network and our digital channels. Importantly, Click & Collect, which is our most profitable channel, accounts -- accounted for almost half of online sales. As a bricks and clicks retailer, Super Retail Group continues to utilize both our store network and our distribution centers to fulfill online orders. Our new automated distribution center, which is on track for completion in the first half of FY '26, will further enhance our capability to meet this growing consumer expectation for fast and reliable service. Slide 11 and 12 is self-explanatory, so it's probably just to move on to the brands, and let's start with Supercheap Auto on Slides 13 and 14, Supercheap Auto has delivered a resilient first-half performance, confirming the reliability of the auto category throughout the economic cycle. Benjamin Ward and his team has delivered a record half year sales result and a record customer NPS score. Supercheap Auto order has continued to excel in customer acquisition, having added 600,000 club members to their club plus membership program in the last 12 months. A summary of the financial performance of Supercheap Auto is set out in [ Slide 24 ], but I want to make the following call out. Total sales grew by 4% to $760 million. Like-for-like sales grew by 3%, driven by growth in transaction volumes and higher average transaction value. Gross margin increased by 70 basis points. Segment EBIT of $116 million was higher than the prior corresponding period. PBT of $107 million represented a PBT margin of over 14%. Off to Rebel. First half was a more challenging period for Gary Williams and the Rebel team as we started to see some cross the living pressure begin to bite in the second quarter. Nevertheless, it's important to recognize some of the key milestones, which Rebel reached during the period. They relaunched their active loyalty program in October and the response from their customers was overwhelmingly positive. The team also executed the highly successful licensed football campaign around the Women's World Cup, where the Matildas captured the attention of the Australian public and probably a bit of their wallet as well. Rebel opened its flagship rCX store in Emporium in Melbourne and added 5 rCX stores in total, bringing the rCX store count to 20 and we introduced new and expanded brand ranges to the Rebel offering, including Hoka, On, Vans, Skechers, Muscle Nation, Frank Green, BAHE, and Lorna Jane. A summary of the total of the financial performance of Rebel is set out on Slide 16. Like-for-like sales declined by 1% to $673 million as consumer demand softened in the second quarter. Like-for-like sales fell by 3% reflecting lower units per transaction. Underlying gross margin was flat when you exclude the 70 basis point adverse impact of the loyalty program as Rebel maintained promotional discipline despite some increasing discounting from competitors. PBT -- segment PBT declined by 23% to $65 million. PBT margin fell by 260 basis points reflecting higher operating expenses, mainly due to the wage impact, the impact of wages and rent, and the deleveraging of lower sales. Just as we get into Slide 17 and we give you a little bit more detail about the Rebel active loyalty program. I think the overarching message here is the program's went well and it's performing absolutely in line with expectations. The half-one result includes the impact of a $5 million provision for deferred revenue as a result of loyalty credits issued to customers. At our full year result presentation for FY '23 in August, we indicated we expected the provision for loyalty credits would have a full year impact of $8 million in FY '24. I can confirm this position has not changed. I can also confirm that the introduction of the new program has had a 70 basis point adverse impact on Rebel's half-line PBT margin, which again is consistent with our expectations when we launched the program. Turning to Slide 18, it sets out some key metrics, it sort of just gives us a sense of how this program has resonated with our Rebel customers. So since October of last year, we've seen an acceleration in club memberships to 3.9 million. Over half of Rebel's active club members have earned points during that period since October and more than 660,000 have actually redeemed loyalty points in 16 weeks. The ATV or average transaction value for club member redemption transactions is higher than non-members and members who redeem loyalty points are spending more than 10x the amount of their loyalty credit. I think we're pretty pleased with that. While it's early days, we're pleased with the results of the program to date. We remain confident the program is on track to achieve our aim of incentivizing these members to visit us more frequently and increase their average spend. Off to BCF. Paul Bradshaw and the BCF team delivered a record first-half result driven by strong performances in key outdoor categories of fishing, caravan, four-wheel drive. Other highlights. BCF achieved a record NPS result, successfully launched the BCF value range, and grew sales from key strategic brands including YETI, Darche, and Samaki. A summary of the financial performance of BCF is slid out on Slide 20. In particular, I would like to call out the following. Total sales grew by 8% to $484 million. Like-for-like sales increased by 2%, driven by strong growth in transaction volumes. Segment PBT increased by 33% to $41 million and segment PBT margin improved by 160 basis points to 8.5%. Off to Macpac, they achieved a record half result driven by strong growth in travel-related categories including luggage, backpacks, and insulation. The Macpac team delivered sales of over $200 million, which reflected a very strong rebound in sales in the second quarter. Macpac's highlights for the period include opening 4 new stores in Australia, include introducing the new brewer tracking range, and launching the Quest pack range in response to the growing demand for travel customers. A summary of the financial performance of Macpac is set out on Slide 22. Total sales grew by 4% to $105 million. Like-for-like sales increased by 10% in New Zealand, driven by strong growth in gear and accessories. Like-for-like sales declined by 5% in Australia followed that -- follow -- following that very warm and dry winter. Gross margin declined by 200 basis points due to unfavorable exchange rate movements and a mixed shift to lower-margin equipment and accessories. PBT of $8 million was very credible result given the slow start to the period due to that mild winter. Now I'd like to hand over to David Burns to talk in more detail to the financials.

Thank you, Anthony, I'll talk to Slide 23. Group unallocated incorporates costs, corporate costs, and costs not allocated to the brand as they relate to developing capabilities that brands do not yet have access to. Corporate costs have increased slightly year-on-year; development costs for customer, omni, and digital are lower in this period as the weighted activity was targeted towards the loyalty build for Rebel which had a larger proportion attributable to capital expenditure. Since launch in late October. Rebel now bears all loyalty costs directly. Interest revenue in the period was $3.6 million reflecting the higher level of interest rates and a higher cash position compared to the prior year. Slide 24, group balance sheet. Inventory has increased $26 million to $902 million when compared to December 2022. This increase has been driven by an additional 29 stores compared to December '22. Total of 751 stores now on the network. Inventory per store has declined year-on-year, mainly driven by BCF. Reported net inventory has improved this half due to the timing of the month-end payment cycle. Adjusting for this payment cycle, net inventory was $441 million. Consistent with the prior year's corresponding period, despite an increase in inventory driven by improvements in trade partner payment terms. PPE has increased in the period due to the increased investment program in stores. We reported a modest decline. Moving to Slide 25, we've reported a modest decline in normalized EPS. The Directors have determined a $0.32 fully franked interim dividend. Our policy position remains unchanged and we will review our capital expenditure activity at the full year. When assessing capital management, we consider the macroeconomic environment, trading conditions, and the share price. Subject to these conditions as we have previously disclosed, our preference is to pass value back to shareholders through fully franked special dividends. Our credit metrics remain healthy and our average cash position has increased this year. Slide 26, group cash flow. Operating cash flow on an underlying basis delivered 98% cash conversion. This was a good result when considering the increase in tax payments to $20 million in the half. Capital expenditure of $83 million captured circa $19 million of payments carried over from FY '23 due to a number of store openings late in '23 and the larger program of software work on the loyalty capability. The capital expenditure profile includes prepayments for the new distribution center in Victoria. I'm now pleased to hand over to Anthony to take us through our corporate strategy and trading update for H2.

Great. Thanks, David. So Slide 28 provides an overview of the key pillars of our corporate strategy, which we first announced in 2019, but reconfirmed at our most recent Investor Strategy Day in May of 2023. So our focus is remaining 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 29 contains further detail on some of our progress to date in executing this strategy, but given the limited time today, I won't talk to the detail on this slide. However, turning to Slide 30, I do think it's worthwhile reminding you of the progress we've made in the areas of loyalty and personalization. This is about ensuring we're utilizing our first-party data to focus on tailoring our customer communication, matching the right products with right customers and improving our marketing efficiency. With the recent launch of the Rebel Active program, which is one of a number of milestones we've achieved in this space in the past couple of years. Other achievements to-date we've successfully rebranded the Supercheap program, commenced a personalization pilot and -- in Supercheap Auto, and fully scaled up our personalization program in BCF. The results of this investment are shown on the chart on the slide. Over the past 3 years, across the group, sales from active club members have grown from 62% to 76% of total sales. Based on these results, our resolve to continue to invest in this program has strengthened. So what's next? Well, we look forward to the Rebel personalization trial. A relaunch of both the Supercheap Auto and BCF programs are scheduled to take place over the next 12 months. Slide 32 we're making some solid progress on our sustainability agenda, which is focused on supporting our people and managing the impact of our operations and products on the environment. We'll provide more detail on our progress at our full year result in our sustainability report, which we will publish later in the year. In the meantime, we are pleased to be recognized with our recent top quintile performance in the S&P Global corporate sustainability assessment. Our 15,000 team members continue to be highly engaged with the business. Our most recent score -- engagement score of 80 is above the achiever's benchmark for team members. In addition, I'm proud to say that we've invested more than 69,000 hours in learning and development during the first half across key team member and leadership development programs. Turning to the trading update on Slide 34, it shows that as at week 33 the group has delivered a like-for-like performance in line with the previous year. Like-for-like sales momentum slowed towards the end of the first half and that trend continued into the second half as the group is now cycling or cycling over that period 8% like-for-like sales in the prior corresponding period. Demand in the auto category remains resilient, particularly for products that keep customers' cars on the road, including batteries, lubricants, and wipers. Supercheap conducted less promotional activity in January '24 than the prior corresponding period, which has had a positive impact on margin. Rebel is cycling elevated sales in the prior corresponding period, specifically from the New South Wales back-to-school voucher program. Men's and women's apparel sales returned to growth in January, which was pleasing. However, football does remain challenging. BCF's fishing category continues to perform well. Second half trading has been disrupted by wet weather, specifically a couple of cyclones which impacted sales across the East Coast. Macpac has made a positive start to the second half, driven by strength in travel-related categories. The group continues to focus on optimizing margin and driving cost efficiencies in the business. Inflationary pressure on cost of doing business is expected to moderate but will continue to impact wages and rent in the second half. The group expects to invest $140 million of capital expenditure in FY '24 to fund its store development program, construction of the new distribution center, and to enhance its omni, loyalty, and digital capability. Group announced allocated costs in the second half are expected to be approximately $22 million, which would result in a full year segment net profit before tax impact of $37 million. And with that, I'd like to hand back to the operator now and open the call for questions.

[Operator Instructions] The first question today comes from David Errington from Bank of America.

Anthony, I don't know, if I could ask 2 questions, one broad question and one delving deep into Rebel, if I may. I'm just a bit confused, if you like, not confused, just wondering how you're going to execute it, where the theme in this result seems to be that you've been very disciplined in promotional activity. I mean, you've been very disciplined with Rebel as competitors were discounting, and you're very disciplined with BCF, particularly as others have backed away. But then, on the other hand, that you've been -- you're measuring success by increasing your transactions and you want to keep your arm around customers, particularly as you get a tough economic environment. So I'm just wondering, how do you get that balance? By putting your arm around your customers, by showing that you love them, and not discounting as much as say, competitors are. Yet how do you actually do that whilst you want to not lose sales? I'm just intrigued as how you get that balance right now. I know you target your promotions, but jeez, you got to be good to execute that because my experience is when competitors go pro, harder on promotions and you lose sales.

Yes, good question, David. The way we think about this is I think the reason why we called out transaction and visitation is if we just take a broad brush approach and say, what's the role of a promotion? Ultimately, it's to get the customer in the shop. And if we look at our visitation, if we look at our transaction, we're confident we've got visitation. So the need to further discount to drive further visitation is not required. We've achieved that goal. We can see that. I mean, the beauty of having 76% coverage with club, we get a richer detail of some of that information in terms of individual traffic and visitation performance. So the game for us isn't around getting them in the door, we've got them in the door. It's all about what's in the basket. And so it becomes illusory to pull the promotional handle to drive a better basket outcome when they're already in the store. We would observe where the opportunity for us is to start to make. Our regret would be we could have been a little bit more opportunistic around some of the impulse items to just drive up some more units in basket that would provide -- would have provided a better sales outcome. But make no mistake, if we saw visitation come off, if we saw transactions come off, if we saw share diluting because we weren't keeping pace with the competitive offer, we'd make that move. But there's no point driving promo to get customers in the store if we've already achieved that. That's our logic anyway.

No, good call. And if I could go on to Rebel. Look, this one does worry me a little bit. Your 3 key areas, footwear, apparel, and big-ticket items really come off, and they're big. It's probably 70% of your sales, if truth be known. But I want to hone in on footwear because it looks to me that Rebel has a look, I shouldn't say this, but it does look like you've lost your way a little bit in footwear, I don't know why, but my own personal experience is when I go in there when you're on promo, you don't have the stock and then when you've got and you're lacking staff there because the staffing just seemed to be [ unders ], particularly in the key Christmas period. You just seem to lose your way in footwear. Now, is that a fair call with Rebel? Because I would have thought footwear is, no pun-intended, a big foot traffic driver to get the customer in the store in Rebel. And if you can't get that area right, you might lose that foot traffic. Now, I don't know that's a statement, but I'd love it if you could comment on that because that's my observations with what's happened in the first half.

Yes, we would agree. Look, we would agree with a couple of those observations. So a couple of things I'd say about footwear within Rebel. One is that you've seen, and you have to be blind-free, not to see it, a significant increase in the cushioning trend and we have a high dependency on Nike, adidas, and ASICS. And you'll see that we've only just put the HOKA brand on range within Rebel. And so we would say that from an offer perspective, we missed that. And we probably would say our very strong partners in Nike, Adidas, and Essex missed it as well. So I think we've got a bit myopic in terms of the way we thought about that trend and maximizing the opportunity there. So we'd have to own that. So we haven't got that ride. I think there's some issues, especially over that period just after Boxing Day where we felt that our in-stock position was not as strong as we would like. And then terms of the team member levels, that one is probably that could be site-specific because we look at our NPS scores in terms of service, they seem to be holding up, but would acknowledge that macro trend of cushioning. We weren't there, we are there now though. So you'll find HOKA and on will come on strong within the network and we were very pleased to see Essex's new high cushion range has started to be released in the market and improving. So, no, David, I'd be happy to concede there's areas for improvement there. No doubt.

No, that sounds at least you've acknowledged it, and hopefully, we can start looking for improvement in the second half. So, thanks for answering the question, Anthony, I really appreciate it.

The next question comes from Michael Simotas from Jefferies.

First one for me is just sort of delving into the metrics around that get you up to the sales number. I think it's pretty impressive that you had transaction growth across all of the brands. Can you give us a sense of what your ASP did across the brands and it's probably worth breaking it down into mix and underlying price change.

No. Michael, we won't -- I don't think we'll be breaking it down, but with the inflation that's come through over the last couple of years, of course, you would see movements in ASP. I think what reason why we've sort of called out transactions is we probably would be concerned if it was all price-driven sales growth. We can report that is definitely ASP inflation in there, no doubt about that and that's not new news. But to have it partnered with transaction growth I think is a good sign. But we won't be in a position to sort of give you a further breakdown in terms of mix and the like.

Okay. Can you give us a little bit sort of directionally around that rate of change in price? Has it started to slow?

Well, we've seen inflation coming through, starting to slow, but you're still seeing some price inflation there. But just probably redirect the real game for us and the focus ups is to maintain that visitation and transaction growth.

Okay. All right. And then just one on costs. Completely understand why it's inappropriate to talk about the enterprise agreement negotiation at this stage, but can you give us a little bit of color around where your current wage rates are relative to the retail award, I mean, you've generally paid a pretty handsome premium to the retail award. So as your enterprise agreement has rolled off, have you broadly maintained that premium in the lead-up to the negotiation?

Broadly. It's complex because you have to think about base rate versus some of the penalties. And if we get into that, I start -- I mean, we're in the middle of an EA negotiation, sort of start to examine the entrails of our relative rates to agree, may not be overly constructive at this stage. I think we should on paper be in a position to talk to this either in May or certainly at the full year. And as I say, it's a pretty -- we're having very sensible, constructive conversations. I think that's what we're prepared to say about that at the moment. I think that's fair because our team members haven't been presented with the deal yet. So we need to probably be respectful of the process.

The next question comes from Lisa Deng from Goldman Sachs.

I've got 2 questions. The first is on the Rebel GP margin. Understand that there were 70 bps of impact from the loyalty program, but even after that, excluding that, it's flat. I'm surprised that is flat because from some of the key retailers that we're also seeing if anything, the GP has been strong, benefiting from at least global freight. Can we talk a little bit about the key drivers that's contributed that to being flat, first, please?

Lisa, this is David. We source a significant proportion of Rebel's product direct from Australian-based global brands. There's not such an exposure for Rebel to be sourced directly. So some of that freight impact globally has been absorbed when it went up and is obviously being recaptured on the way down by those global brands. And so it's getting less of that value transfer and we build a range each season with the global brands to ensure that we achieve a consistent GP outcome. So that would be my comment there. There is obviously some mix shift that's going on in there as we've seen some of these changes with bulkies and the like. Fitness tech, we've seen some rebound in Garmin has been able to get its chips back into its system and has been able to release new ranges this season, which has also been positive in that sense to offset some of those larger ticket reductions on things like treadmills and the like.

And so, just to follow on is flat, sort of like the right base to be thinking about it, extra loyalty impacts into the second half. Yes.

Yes. We're not chasing, as Anthony's outlined, we're not chasing a desire to grow gross margins. We'd be wanting to maintain them because they are more elevated than they were pre-COVID and we've obviously got that got to be quite sensible in maintaining the right, striving the right balance between promotional activation with customers and the like. But yes, absolutely, we wouldn't want to be seeing them grow at all in the context of the investment we're making with loyalty at the same time.

Yes. And then just the second question is, from the tone, I guess, of the execution strategy into the second half, it seems like we're a little bit, I guess, margin-focused or margin preservation-focused versus trying to chase the top line and we made the decision not to, or I guess, promote less in January for Supercheap like. Can we talk about what key drivers, especially you're observing in the consumer or the retail environment, that's kind of amounting to this margin focus rather than top line focus, or if I understand that correctly at all?

Yes, I would say no. We would be -- we're gross margin dollar-focused as opposed to rate. So I don't think, I'd sort of interpret, I would encourage you not to interpret. Our narrative as being shooting for margin over volume, the change in sort of trading patterns for Supercheap, for instance. We've had a promo in January. And frankly, we just think we're going to get a better result by deploying that promo later in the quarter. So it's just a phasing issue as opposed to a preservation. So we -- the way we sort of think about it is similar to the question earlier in the call from David. We have a focus on share, on traffic, and on margin, and we look to strike a balance between all of them, and whilst we are seeing strong traffic and visitation trends and our relative share performance is sound, there's no need to just give away margin willy-nilly to make ourselves feel better that we're going after volume. So we think we're trying to get the balance. It's about maximizing gross margin dollars is the game we're trying to play.

The next question comes from Peter Marks from Barrenjoey.

Just -- my question is just on the cost outlook and how we should be thinking about that. It looks like cost grew about 8% in the second half. Sounds like it will moderate into the second half -- sorry in the 8% in the first half sounds like that's going to be lower in the second half. I think you've given some good color on rent. Just wondering if you've got much flex in the rest of your cost base in terms of where you are with your store wages or if there's any other investments in that cost line that could be dialed back if you needed to.

Yes. I mean, I think the -- I mean that Slide 6 is really the go-to slide to sort of navigate that question. I think in terms of wages, we have good capability to constantly optimize the relationship between traffic and wages. Not sales and wages, but traffic and wages because if you're not there to serve the customer when they appear in the store, you're going to miss out on revenue. So that means that we're able to be much more astute around ensuring our investment is right-sized. So I think that's always available to us. We've made a good fist of optimizing some of our marketing spend and promotional spend, both in a COD perspective and a gross margin perspective. And we would sort of -- we would observe that with inflation starting to moderate, I think where you would like to think that we're starting to come down the hill in terms of some of this CODB inflation coming through, but we're very vigilant. It is fixed cost business courtesy of rent, but we have demonstrated adaptability in terms of cost control and we continue to be a key focus for us.

The next question comes from Bryan Raymond from JPMorgan.

Just first one is on the loyalty program for Rebel. Obviously some impressive metrics there in terms of take up of the program. I just was interested if you've got any insights on the people that were club members beforehand for the Rebel program without the points and the current structure of those existing members, have you seen a meaningful uplift in spend per person because of the points, I know there's been a lot of promotion around if there's a lot of new members and there's a lot of redemptions. But as a customer myself, it's a great, nice to have for Rebel, but I probably would have spent a lot of that money anyway at Rebel, it just is kind of an additional discount. I'm just interested in if you're seeing any change in spending behavior on the back of this program for those who are already in the program prior to it being launched.

Yes, I think with 16 weeks, Bryan, it's hard. That's the $64,000 question. And it's hard to see it in 16 weeks when you've got an average visitation of say 2, 3 times a year. So what we would want to see, I mean, what we wanted to see early was that strong multiple off-the-point balance, we're going to take -- that's very good. We wanted to see uptake and to get 660,000 people in 12 weeks or 16 weeks burn points, you go, that's excellent. We won't really see a visitation impact until we start to have a longer run and get a bit of a view as to whether that, call it 2, 3 times a year, turns into a 3.2% or 3.4% or 3.5% and that slight increase in visitation is pretty material. The biggest driver for that though, as the points go to expire. Because the points that you've got on your card, Brian, you've got 6 months to spend them and then they disappear. And I guarantee you about month 5 and going into month 6, you'll probably get a few emails from us saying get in and spend your points. That will be where we start to see impact on visitation. And we would have fairly reasonable expectations that, that will take time to build. You've got to build awareness. This is a new program. These things take a while to bed in. So, I would -- that will be a long -- that answer will unwind the medium to long-term, but the early returns are strong. This is an encouraging start.

Fantastic. Okay, I better get back into store. Just my second question. Just around capital management, obviously, there was $0.25 per share in August last year. Nothing in February, you've got a target gearing level out there. I mean, given your fairly low payout ratio and fairly solid earnings profile, I don't expect you'll ever get back into net debt at $0.25 per annum of special dividends. So I'm just trying to understand sort of what I'm missing here. Should we only ever be expecting $0.25 a year? Are you committed to getting back into a more sensible gearing position or maybe 0 net debt or net cash? Like, how should we think about capital management going forward from here?

Good question. And one obviously reasonably expected. So we commit to the guidance that we've got in terms of our gearing. We would recognize that special that was issued at the full year is not going to be enough. Your arithmetic is entirely correct. That's not going to get us there on a flight path back to our guided position. So, I would reasonably expect any kind of capital management that the Board considers would need to be mindful of methodically getting back to that guided range. So that doesn't mean all at once. That will be a step-by-step process, but we would understand that we would need -- you would reasonably need to show that pathway of how we would get back to that guided range. And yes, the mathematics would indicate that the previous special in terms of its quantum would not be enough.

Okay. Is there a reason why you only do it at the full years? Or could you do it at the half years if you do a special dividend at the half as well?

No. Just given coming out of a fairly volatile period, I think the Board determined that this was a decision that in terms of setting the capital structure of the business, it's a decision that's probably best done annually and we think that's fairly reasonable. I wouldn't read no action at this half as any change in approach or a move away from our guided position. We're confirming all of that. It's just a decision we're going to make once every 12 months.

The next question comes from Craig Woolford from MST Marquee.

First question, just on gross margins, obviously a nice increase given the operating backdrop. But can you provide more clarity as to the moving parts as it relates to the impact that currency, freight, factory prices had, trying to identify things that may have impacted your buy price as opposed to the level of discounting activity in market?

Yes. In terms of the cost of goods sold have been impacted certainly for direct offshore purchasing where we've gone and had an exposure to currency, it's been unfavorable because obviously the dollar has underperformed and our hedge book has rolled off compared to what it had been. So yes, that's a net negative offsetting that. We've got positive gains in terms of the performance of ocean shifting. We're actually below our rates that we've contracted for this year or below what they were pre-COVID. So we're delighted to be back at those levels. We've also seen an improvement in purchasing offshore, which is taking time to bleed through. So you haven't got a lot of that gain in this half. But it will continue to carry through because of the nature of our averaging that we have with our cost of goods sold versus purchasing averages. The other benefit we've got is we've got gains in terms of which are in GP, which is our logistics costs onshore. We've had some additional off-site storage that we've been able to get out of. And some of those inefficiencies that we saw during COVID have been reduced, which we've got the benefits of those activities. And so, broadly speaking, we're sort of seeing those gains are offsetting the impact of currency.

Right. So just to be clear, a net neutral impact on, say, your intake margin. Another way to say it. Yes.

Yes.

Okay. That clears that up. And just on store openings as the guidance for the second half. Do you feel that the business is on track with its store openings in the sense of being able to find the right sites around the country?

Yes. We -- when we set out our property strategy, I think sort of 2 years ago, we're -- the team were able to start to get a pipeline of new stores and extensions. And so, we're now looking at really a '25 to '26 pipeline and signing that off as opposed to run around looking for sites at the second half. So we might see. We inevitably see some movement across the reporting period from June to August. Just as things are delayed. But prima facie, the pipeline is strong. As we understand the trading areas of the stores. As ranges start to augment and we see the requirement for larger -- slightly larger formats, specifically in Supercheap. We're quite comfortable that the guided position on stores is robust and executable. It's quite -- the team is executing that quite soundly. All right, operator, I think we might be at time and if -- we might have to call time on questions there. And, of course, we'll be seeing you all in the next couple of days on the shore. So with that said, just thank you all for joining us this morning. As I say, we look forward to seeing some or most of you over the coming days, and I wish you all the best on what I understand is a busy reporting day.

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