Temple & Webster Group Ltd (TPW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Temple & Webster Group Ltd. 2023 Half Year Results Investor Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Mark Coulter, Chief Executive Officer. Please go ahead.

Thank you, Mel, and good morning, everyone. It gives me great pleasure to be presenting Temple & Webster's first half results for the financial year '23. To begin, I'd like to acknowledge the traditional owners and custodians of country throughout Australia. We acknowledge the Gadigal and Wangal Peoples as well as other First Nation countries we operate across. We pay our respect to elders past, present and to all Aboriginal Torres Strait Islander peoples. Temple & Webster has made significant progress across the first half. This was always going to be one of the toughest periods for year-on-year comparison, as we alluded, due to the timing of lockdown in FY '22. We delivered revenue of $207 million, which is down 12% year-on-year for the half. Importantly, we saw our revenue year-on-year comparisons improve over the half, with Q2 down 6% versus pcp and the month of December finishing up on the previous year. Now while we continue to take advantage of the industry shift from off-line to online, we are also committed to delivering profitable growth. We delivered an EBITDA result of $7.3 million with a 3.5% margin, which is within our guidance. This result importantly includes our investment in our new home improvement site, The Build. We have strong cash balance and remain debt free, which gives us excellent flexibility to fund our ongoing organic growth but also to pursue inorganic opportunities as some operators in our sector come under pressure. Longer term, we see a huge opportunity with uplift from online penetration in the coming years due to substantial structural tailwinds behind us. We're Australia's leading online pure-play retailer in the category, and we are profitable with attractive customer and unit economics and have a long growth runway. As you can see on Page 3, our results were even better in the second quarter. Since the end of the previous financial year, we have been focusing on accelerating cost base initiatives and margin improvement programs. We believe this focus will ensure we win in a trading environment and position us then in a stronger, more profitable business. These programs included reducing our headcount through natural attrition, improving margins through strategic pricing and better sourcing, and focusing our marketing spend on our more proven ROI channels. We are also taking a longer-term view of the opportunity in home improvement and, as such, slowed our investment in The Build. These programs led to an improved second quarter EBITDA result of $5.2 million versus $4.6 million in the prior corresponding period. This was despite revenue being down year-on-year, which highlights the flexibility of our business model. When stripping out the investment in The Build, our core EBITDA result actually improved to $6.5 million for the quarter, representing a 6.1% EBITDA margin, up from a 4% margin in the previous corresponding period. Looking ahead, we are confident in returning to double-digit growth. While active customer numbers reflect the lapping of COVID impact comparison, repeat customers now make up the majority of orders, which goes to the quality of cohorts we've acquired over the last few years. We've also seen a 7% increase in revenue per customer, the 10th consecutive quarter of growth in this metric. Pleasingly, both of our longer-term growth plays, Trade and Commercial, and Home Improvement, were up 17% and 12%, respectively, in the half. Our customer proposition around affordable beauty is well suited to any further changes in the macro environment, and our business model allows us to pivot to less discretionary items, such as bedroom furniture and focus on our value ranges, both of which have been outperforming. Pages 5 and 6 reiterate the longer-term investment case of TPW. The B2C furniture and homewares market is a big one, over $18 billion, and e-commerce penetration is significantly lagging other markets such as the U.S. and U.K. The structural shift from off-line to online is being driven by demographic trends independent of macroeconomic factors. Millennials are overtaking baby boomers as the largest population segment, and these are the first digital natives to enter their core furniture and homewares buying years. Internally, we are already seeing the millennial cohort as one of our fastest-growing segments. Given the consistency of our strategy, I'll skip to some of the highlights of the half. As you can see on Page 8, one of these highlights was receiving the Canstar Blue award for the furniture retailer with the most satisfied customers in 2022 based on the independent customer survey data. We were the only retailer to receive 5 stars across all customer satisfaction drivers, which included 5 stars for overall customer satisfaction, value for money, customer service, checkout experience, product availability and website experience. I always say, starting an e-commerce company is easy. It's the scaling bit, which is hard. And it's great to see that even as we've rapidly become a much larger business, we've been able to keep the vast majority of our customers very happy. While buzzwords such as AI or artificial intelligence and machine learning are no doubt going to be popular this reporting season due to the global phenomenon of ChatGPT, we have been actively exploring the space for many years now. We've already rolled out multiple data projects to help us improve conversion rate and lower our cost of doing business. Some of our work in the space includes using AI-powered algorithms to better sort and display our products and drive cross-sell and upsell. We've been testing an AI-powered chatbot within our customer service team for quite a while now with good success, and we're also using machine learning models in our demand forecasting to drive better inventory accuracy. Our major play in the space actually kicks off almost 3 years ago when we invested in an Israeli start-up, which is building an AI-powered interior design engine. We're the exclusive partner for this technology in Australia, and there are a wide range of innovative use cases for this technology. We believe, like many other industries, AI has the power to disrupt the interiors industry, and we want to be at the forefront of this trend. Pleasingly, our marketing metrics, including customer acquisition costs and our return on investment, are holding even as demand softened over the half. We saw some CPC inflation. However, this was offset by further gains in our revenue per active customer. Our Trade and Commercial division performed well despite the tougher operating environment, with revenue up 17% year-on-year. B2B now represents around 9% of our total business with considerable potential to grow as we target new customers in specific sectors while focusing on margin improvement. We've been capitalizing on the boost in tourist numbers with the launch of furniture packages and commercial product offerings into the accommodation market. We also launched a design and project team to focus on some of these large-scale projects. We are excited by the opportunity to gain market share in a multibillion-dollar market, which is B2B, which has attractive fundamentals. Our home improvement offering across T&W, Temple & Webster, and The Build has grown 12% year-on-year and represents 6% of the group for -- representing an attractive growth horizon and complementary revenue stream with significant penetration upside. Given home improvement is a longer-term opportunity, the multiyear horizon, which we've always said, we've decided to phase our investment over a longer period. This involves slowing hiring and redeploying our marketing budget on to the home improvement section on Temple & Webster. While our initial [ revenue ] targets of this new venture have been lowered, we have reduced the initial level of investment required to $6 million versus the $10 million previously disclosed. We feel this is a more prudent course of action given the volatility of general trading and the fact, as I said, the opportunity is a longer-term play. Note, we still remain very bullish about the home improvement opportunity, which is a natural complement to our furniture and homewares market and significantly increases our total addressable market. I'll now hand over to Mark Tayler to take you through the numbers in more detail.

Thank you, Mark, and good morning all. I'm going to start on Page 15 of the deck, which highlights the group's results for the first half, which were in line with expectations and within our stated 3% to 5% EBITDA target range. As foreshadowed, revenue for the half was down 12%, as Mark mentioned, as we cycle prior year periods impacted by lockdowns. As a result, we focused on improving unit economics, margins and cost base metrics while leveraging the investments we've made over the last 2 years in our people and our platforms. A few of these are listed on Slide 15, such as focusing on proven ROI marketing channels and just moderating the pace of our longer-term investments. This led to improved contribution margin levels of over 15% and a reduction in fixed cost growth, which helped deliver an EBITDA result, which was within our margin -- target margin range. In terms of some housekeeping metrics to assist in modeling out TPW, I'll call out the following. In respect of FY '23, group depreciation and amortization is expected to land between $5 million to $5.5 million, CapEx between $3 million to $3.5 million, which is a little bit higher than historical levels, but this is due to the final payment of our new head office fit-out, which is now being completed. An effective tax rate of closer to 30% for '23 is also advisable. Page 16 focuses on Q2 performance. Pleasingly, our unit economics improved compared to the prior year despite year-on-year revenue headwinds, leading to an EBITDA result of 6.1% if you exclude The Build investment. Our strong position with suppliers are helping with negotiating better margin outcomes, while optimizing marketing channels helped achieve strong contribution margin results. Elevated supplier inventory levels are also providing an opportunity to help clear some of this stock, and we continue to see signs of pricing deflation, which should support margins for the remainder of this calendar year. And it was also pleasing to see the positive trajectory throughout the half with revenue in the second quarter down just 6% for Q2 on Q2 FY '22 versus being down 18% for the first quarter year-on-year. This improved further towards the end of the half with December revenue being up on the prior year. Page 17 shows that our longer-term margin aspirations have not changed and that we are targeting these through margin expansion initiatives and phasing investments in growth. In particular, we know that as we scale, we should continue to see benefits with suppliers and benefits of increases in private label sales. We will also see other benefits such as a reduction in our marketing spend as a percentage of revenue, particularly as more of our orders come from repeat customers. As we know, it is a lot cheaper to reengage your repeat customer than to acquire a new customer. Our fixed cost base will be a key area of operating leverage in the coming years. We know Temple & Webster can drive much larger revenue with existing resources, and we can also leverage the significant investments we've made into the business over the recent years. Finally, Page 18 highlights the cash flow generative nature of the business. We have a strong balance sheet with cash levels over $100 million, primarily driven from cash from operations and the benefits of the group's negative working capital model. These cash levels are strong and ready and able to be deployed. Our capital-light business model does ensure that balance sheet risks are minimized. There's still the majority of our business drop ship, which carries no inventory risk. During Q2, we completed the fit-out and moved into our new headquarters here in St Peters, which was a real highlight. This site consolidates multiple offices, studio spaces and warehouses and means our entire Sydney team is on one single building. We've negotiated a long lease on the site with options to expand our footprint and tenure as we grow. So look, the takeaway for me from these results is we are managing what is in our control, and we are being prudent in our financial management. We have an adaptable business model with attractive unit economics and -- for an e-commerce company that is, that continues to generate good cash that can sustain our growth ambitions whilst maintaining a strong capital structure. This puts us in a very strong position to continue generating profitable growth irrespective of the market conditions. Thank you. I'll now hand you back to Mark.

I'll now turn to our strategy and outlook. Pages 20 and 21 should have the longer-term [ case ] for TPW. As high highlighted previously, the furniture and homewares market is stable and has shown resilience even through periods of macroeconomic headwinds. Importantly, even if the overall market is challenged, we still have the tailwinds of the structural shift from off-line to online. This rate of adoption may actually increase as customers turn to the better value online channel, as we've seen in the past. We're also expecting market share gains as we exert our market leadership position and reap scale benefits. We continue to diversify revenue mix by expanding activities into B2B, furniture and homewares and the home improvement market, and this increases our total addressable market to more than $30 billion. I often hear online retail companies will never be profitable. I feel like that is a little like saying all off-line retail companies will be. Of course, the answer is much more nuanced. It depends on the vertical company's in, their assortment, the customer proposition, their margin profile, the cost of doing business, the level of competition, et cetera. Over a decade ago when my fellow co-founder and I first scoped Temple & Webster, along with the general other category, we did look at the fundamentals of furniture markets. While having higher average order value and better margins in many other categories is an obvious benefit, some of the other benefits are a bit more hidden. For example, over 3/4 of what Temple & Webster sells is either white labeled or sold under a private label. This allows for more of the catalog to be differentiated, exclusive to us and remains as big opportunities in high-margin initiatives such as private label. The logistics around bulky goods is hard, both moving goods around and into the country, and airfreight is prohibitively expensive for bulky deliveries. This reduces the level of competition and the reason that Australia has some of the highest margin furniture retailers in the world. We believe these dynamics, along with others, will ensure the long-term sustainability and profitability of Temple & Webster. Given the consistency of our strategy, I'm going to go straight to the trading update on Page 24 to give more time for questions. Sales for the first 5 weeks were down this half, were down 7%, noting that the prior comparison period was significantly impacted from strong e-commerce demand during the Omicron outbreak. We note that December 2022 sales were up slightly versus December 2021, the trading period that was not impacted by Omicron. We remain committed to our profitable growth strategy, and we'll continue to focus on margin optimization and cost management to ensure we end the year within our 3% to 5% EBITDA margin range. We believe our business model, customer metrics, brand and new growth horizons position us well to navigate any trading conditions and return to a high-growth business. Furthermore, we have over $100 million of cash to expand our road map sales initiatives, pursue inorganic opportunities to support sustainable growth. Longer term, the e-commerce in Australian furniture and homewares category remains highly underpenetrated, and we have a much larger addressable market to go in after -- with our new target verticals. In closing, I'd like to say a huge thank you to the Temple & Webster team for their dedication and commitment to delivering beautiful solutions to our customers. We will now take any questions you may have. Thanks, Mark.

[Operator Instructions] Your first question comes from Sophie Carran with Goldman Sachs.

Just the first one around inorganic growth, can you talk a little bit about what sort of opportunities you're looking for whether it's a technology advantage or to grow the customer base? And then just as a sort of follow-up, just given the amount of cash you have on the balance sheet, if you don't find something to acquire, are you also considering other capital management opportunities such as a buyback or anything else?

Yes. Sophie, it's Mark T. here. I think maybe MT and MC, we'll call out, just so you know who's talking. But look -- yes, look, we are definitely in a strong position when it comes to our balance sheet position, our capital position and have been in that -- we've been in a positive position now for a little while. I think if you go back to the COVID period, this was clearly a difficult period for us to be deploying some of that cash as the primary focus was actually to maintain growth and ensure we have a consistent and strong customer experience. I think now we're -- definitely, it's more of a mindset and head space, and we have capacity now to be looking at this with more depth and more focus. So look, I think to answer your question, well, there's a few questions in there, but we're certainly taking M&A more seriously. We have resources on the ground now, and we have the cash to deploy. So I think for us, we aren't in the business of wasting shareholder funds, and I think hopefully, everyone knows that by now. So we will be very considered in our approach, and we're not going to buy something just for the sake of buying something irrespective if it's perceived as being very, very cheap out there. But I think the areas that we've spoken to before, which are areas like trade and commercial B2B, where there's some attractive unit economics in that space and there's no real household brand names and would be quite accretive, adds capability to our business that we don't currently have, I think, makes a lot of sense. You've seen our appetite from a technology perspective with the investment in Renovai. And I think if there's further technologies out there that can replicate or do similar things in terms of being -- or producing disruptive technology, I think that's quite interesting to us. And I think also from a third growth horizon, the home improvement area as well is quite attractive as well. So being able to deploy some cash there to accelerate growth prospects in some of these secondhand growth horizons, I think makes a lot of sense. But I think the overarching sentiment is we would prefer to put that cash to work as opposed to other capital management strategies, but we would obviously look at those if there was nowhere to put that cash or to deploy that cash in accretive acquisitions. But certainly, that is our preference.

Great. And just one more for me just around the revenue environment. Have you noticed any sort of shift in trend outside of the Omicron impact as you think from December to January? And then are you still comfortable in returning the business to double-digit growth through the half? And then how do you balance that revenue growth with the pullback in marketing spend?

I think, definitely, we can see customers' flight to value. So I've always said furniture and even the homewares is better. The business is less discretionary than people think. I know we're in a discretionary category as labeled there in retail. However, if you think about your own decisions, you don't you impulse buy a dining table sort of. It's usually a need that is generated for that item. The other thing is things break. So a large percentage of what we sell are people replacing single items or sheets that have worn out or towels. That kind of demand keeps going. But within our data, you can you see the flight to value. So our furniture categories are doing well in categories like bedroom furniture, mattresses. Even sofas are doing well. Our sofas actually outperforming some of the categories. However, within those categories, people are looking for value, and that's kind of where we feel confident that we have the ability to weather macroeconomic headwind because we have -- we can spin up our range to be more value-driven quite quickly. We already have the drop shippers there, which is 70% of our business. We can push the value ranges, promote the one -- promote the price points, which makes most sense. We've already started importing entry-level ranges. They land at Q4. So we're definitely expecting to be a more value-based retailer over the next 12 months, but that is the beauty of the Temple & Webster brand and business model that we can change our assortment and price proposition quite quickly.

Great. And sorry, just around revenue growth, balancing that with the marketing spend pullback.

So I think the answer to that question is that my view on our -- where we are in the market is that the actual structural -- the structural tailwind's behind us. The shift to online is going to do most of the heavy lifting to be honest. And you've seen that in the past, where even downturn from a macro point of view, we've gone through housing market downturns and fall. We've gone through economic downturns, and it -- we're still seeing strong growth in the category and strong growth in TPW. Now that is a result of, as I said before, millennials are still growing up and they're still having life stage and they're still moving out, et cetera, and they're turning to the channel of choice, which is online. And we're doing better because we're exerting our market leadership proposition. I can't see -- I mean, obviously, we're lapping COVID, and there was a period of acceleration of the online adoption curve, and that's kind of sorting itself out. However, that adoption is going to keep going. We look ahead and we look at our growth in repeats and growth in revenue per active customer. We looked at how trading was at the end of the year when it was impacted by Omicron. And we're still pretty confident that we will return to growth just by doing what we're doing. Obviously, I said we're focusing on selling more value range to take advantage of the ability to do that. However, we are quite confident that our business model will return to growth without us having to do -- without us having to dial marketing more than it already is. Now what we're saying is that, in this current environment, we think it's more prudent to make sure that we really match fit. Our pricing is right. Our cost of doing business is right. We're looking for cost savings where we can so that no matter what happens, we're going to stay profitable, and we can still show the operating leverage in the business model. I don't think it's a trade-off. I think we can do both. I think we can manage our margins, manage our cost base and still return to growth and have our cake and eat it too.

Your next question comes from Rachael Harwood with Macquarie.

Just first one, just a follow-up from the last one. I mean I know you did reiterate your expectation to return to double-digit revenue growth. Just confirming the timing around this. Are you still expecting it to be in the financial year?

I mean, look, we're deliberately -- I mean, obviously, there's a lot of uncertainty there. I am looking at the year. I'll tell you that the -- the FY '22 comparisons, which just kind of gives you indication of what we're expecting, Q1, very tough because of lockdown versus FY '23 versus FY '22. It got easier as lockdowns came out, work started looking more normal, and you can see that our trade in Q2 December actually finished up. Q3 was always going to be the tougher because at this time last year, the country was dealing with literally tens and tens of thousands of new COVID cases a day. The foot traffic was subdued in stores. All the off-line retailers are complaining about their sales down. Clearly, there would have been a bump to online sales during this period. That abates relatively quickly, and so Q4 is actually a relatively clean period. So internally, we're definitely hoping it looks more like Q4, but we've taken the pressure [ ourselves ] to put a firm line in the sand out there. Whether it's Q4 or the beginning of FY '24, it's definitely going to happen, but that's an indication of the timing we're thinking.

Understood. And just, I mean, for other retailers, January is key month for trading. How big is January for Temple & Webster just in terms of sales relative to other months?

We have -- I mean it's -- definitely, it's a good month in terms of furniture sales. We follow though the various peaks throughout the year. So we have a June peak, which is the end of financial year sale; the November peak, which is Cyber Monday and Black Friday period. January is a good month at the start of the year. It's a good month. It's not -- definitely not our biggest month. So...

Yes. Understood. And then just looking at customer acquisition costs, it looks like flat on FY '22. But just looking at your percentage of marketing spend on new customers, appears lower. Can you just maybe explain the rationale for this? And are you expecting to focus on existing customers for marketing spend versus kind of new customer acquisition?

I think there's some -- I mean the goal of the longer-term goal for Temple & Webster is new customer acquisition. We're still -- it's a very -- it's a nascent market. People are still coming into the sector. They may have experienced our category with something like buying towels or sheets as well but yet to buy a piece of furniture. That movement is still playing out. So new customer acquisition is definitely the longer-term game. While demand softened a bit, we did see the increased competition in some of the main channels. And so we always -- we basically run our performance marketing channels to an ROI. So we scale back our marketing to -- in parallel with the softening of demand. We are constantly looking at -- to make sure we're optimizing this channel. This is a blended average, obviously, so each channel, we look at to make sure that there is ROI. I think the more obvious calls, which we've taken, is to go, okay, well, we've got all these customers acquired. Let's make sure they repeat. Let's make sure that they're spending more money with us. And so definitely, reengagement and driving repeats has been part of our strategy. Having said that, we have put on a new head of brand marketing. We are going to be trialing some new customer -- new channels for customer acquisition over the next 6 months, but we're going to do it in a very measured fashion. We are -- we will take a single market, deploy some of our marketing budgets, measure, track the results, see what the cost of sale is, over what period. Does it stack up? If it stacks up, then clearly increase the budget. But definitely, our goal is to make Temple & Webster a household name. Yes, 63% of the country has heard of Temple & Webster when prompted. But when you don't prompt them and you say what brand would you go to, it's still the household names, which the off-line retailers, which customers revert to or front of mind. We want to be that front-of-mind Wine brand, and we want to make sure that when you're thinking of furniture, homewares, you think of Temple & Webster. And now the online retailers around the world have already got there in their respective categories. So how you do that, it's definitely not just through performance marketing, which is very much customers are looking for things. It is making sure you always have an always-on budget managed through other channels outside in digital ones. Obviously, we need to grow into that budget. So we're not going to -- we are prudent financial managers. We are not going to start $50 million brand campaign. That is not the goal at all. It is to grow every year. We will find channels that work, ROI stacks up, and we will spend a little bit more each year. And then over the coming years, that budget will get more and more sizable. And as an always-on presence, it will become more meaningful. But -- so yes, I think it's a bit of both. I think yes, we're focusing on repeats right now, but we do have definitely one eye on the future, and the growth model is definitely based on getting more new customers in the door.

Understood. And if I could just squeeze one more in quickly, can you just comment maybe on your customer acquisition for The Build? And are you seeing any cross-selling with Temple & Webster's existing customer base?

Yes. Interestingly, a lot of the customers are all a bit -- about a majority of customers into The Build and home improvement in general are new customers to the group. So it does -- and it's -- the thesis is playing out. They're a bit more male. There are different buying needs. There are different demographics in that audience. Also, interesting, which is one of the reasons why we're kind of redeploying some of our marketing budget to home improvement on Temple & Webster, as we've improved our range and as we've improved our service model within home improvement and The Build, because we have deployed the same range and the same service level in the home -- in Temple & Webster, we're also seeing the home improvement do well in Temple & Webster. So the Temple & Webster home improvement customer is growing. And some of them -- definitely, a chunk of them are repeat customers. So they have been customers of Temple & Webster, trust the Temple & Webster brand and therefore, are Okay buying home improvement objects or home improvement products on Temple & Webster. In terms of kind of more broader cross-sell, we're using our [ E&R ] channel, et cetera. But really, it's trying to -- again, the home improvement is a new customer acquisition strategy, so we're mostly focusing on trying to get the new customers in the group who are looking for home improvement.

Your next question comes from Aryan Norozi with Barrenjoey.

Just first one for me, please, is there a reason why the trading update was cut off in the 5th of Feb. I think usually, it's a few days up until the day of the result. Just anything happened between 5th to now or pretty similar, please?

I mean it's really -- I mean the timing of promos is quite the promotional calendar. So that period gives a cleaner read because the calendar -- the promo calendar was a bit up from year-to-year. So it's a more like-for-like comparison that 5 weeks to the -- we're comping similar promo.

That's perfect. And then just on the gross margin, so it's up 70 basis points year-on-year, about 45.5%, 45%, 46%. How do we unpack that growth? Like how much of it is temporary because of better supply funding because they're obviously trying to clear excess stock and will unwind in 12 months' time? And how much of it do you expect to hold on, please?

Yes, Ary. MT here. Look, I think it is a little bit hard to unpack to be fair. There's a few things that are kind of going on as there always is within gross margin and delivered margin. But I think the majority of things that we're seeing that are sort of making up that -- the composition should be permanent. Like one of the larger ones is actually a lot of the work that we're doing on the shipping recovery for instance. So you'll see the revenue per active customer and the margin benefits of us improving our shipping recovery, which there's a lot of work that's kind of gone into that. There was a lot of wastage, and there was a lot of [ recovery ] historically with our shipping. We're being a lot more tactical. We're being a lot smarter, to be fair, on how we're charging customers for shipping. So it's increasing the shipping recovery without -- whilst minimizing any sort of conversion issues. But there's a few things going on. You've got that. You've got -- obviously, you've got some inflationary pressures that have gone into the -- in the pricing over the past sort of couple of years that have kind of flown through into pricing, which would have an impact on the revenue per active customer and the gross margin. We are seeing some mix changes in our composition, if you like. We're certainly seeing a shift towards less discretionary items, i.e. furniture as opposed to homewares, which is probably more discretionary. So that does improve the AOV, and it does improve the margin profile because we certainly skew a lot more private label. And furniture, it's just generally a higher-margin category. But on the flip side, we are seeing some signs of customers despec-ing a bit as well. So Mark sort of pointed to this, and it certainly -- this is exactly how it played out back in '18, '19 when we saw the housing market come off 15%, 20% off the back of quite substantial growth, had impact on the furniture and homewares industry, which essentially meant it flatlined during the '19 year. But we still grew very, very strongly throughout that period, but what we saw was a bit of a flight towards value. And as an online retailer, retail -- online retail is a lead value channel, and our pricing points relative to off-liners is very strong. It's very competitive. And it's -- to be fair, it is better pricing. So we're certainly seeing that sort of flight to online, but we're seeing that flight to value as well, which means that average selling price does come down a little bit as well. So there's a -- there's quite a sort of -- there's quite a lot of things kind of going in into the composition of that. Some would be more temporary than others, but a lot of the things that we are doing will be more permanent in nature as well.

The only thing to add to that is that actually one of the bright spots in the horizon is that we're seeing shipping rates return to pre-COVID levels, and that was at every retailer in the world we spoke about was quite an impact during COVID. And the other thing which we're kind of benefiting from is that the U.S. is moving demand away from China, which means the Chinese factories are definitely looking for business. So we're expecting our COGS and line of COGS to come down over the half year as that washes through. So there is a bright spot in terms of margin benefit.

Perfect. And just last one on the costs. So your employees are down 9% through the half through natural attrition. So a few parts to this question. Should we expect your wage dollar cost to be down half-on-half as well? And given that and the fact that your gross margins are pretty strong and it seems like a lot of it's permanent, would that make you rethink that 3% to 5% margin? Shouldn't that be higher given those benefits now please?

Look, we've said 3% to 5%, and there's quite a range between those 2 points. I think we do need to see how things do play out. But those -- the deflationary impacts that we've spoken about, a lot of that won't actually play out in this financial year because you're going to see those container cost reduction, you're going to see those factory reductions come through in orders that are being placed now or being placed 1 or 2 months ago, and there's a 3- to 6-month lead time in those orders. Then you need to sell those orders as well. So you're not going to see immediate impacts of those come through, but there's still -- there's certainly a number of initiatives that we're running internally on top of those things that should be driving margin higher than where we are at the moment. But there's always natural sort of inflationary pressures that come through in wages in terms of wage increases from the prior year as well that will come through in the second half. So we're not -- we're certainly not saying what area within the 3% to 5% we think we'll be in at the moment. I think we need to see how the next sort of few months play out. I think as we get closer to the next trading update, that'll give us a bit more of an indication as where we kind of sit between that sort of 3% to 5%.

And the wage costs, will that be down half-on-half? Or is that pretty -- the first half is a pretty good run rate for the full year?

I think the first half is probably a pretty good gauge. But like I said, there's more than likely there will be some of those wage increases that are coming through in the first half. They would naturally come through in the second half as they've always done. I think for us, there's other levers that we can pull as well if we needed to [ pull ] certain levers in the fixed cost base. But we'll pull those levers if we have to only if we're seeing trading conditions, not where we think they'll be. But there's certainly no plans at this stage to be doing that.

And the other point to note is we view and we deliberately split out in our -- the P&L that we present, our customer service costs as a variable cost. So the number of agents we need to handle our pre- and post-sale inquiries, we want to scale up and down as demand shifts. So we treat it a variable and we manage it as a variable expense. And so that 9% of headcount reduction, a chunk of that was in our customer care line, so you actually see it in the customer service line as opposed to the sort of wages line. Now most retailers would -- most businesses would lump it all into wages. We deliberately split it out. We manage the business to make sure it's a variable cost. So you'll see some of the wage decrease in the customer service line as opposed to wages line.

I think that's right. Yes, that's right, Mark. And I think that's an important point, which is that is a variable cost, which that will flex. I suppose my comment was more related to the fixed costs. And I think going back to your original question, I think, to be fair, with some of the natural attrition that's come through, the first half is probably a pretty good proxy for where the full year should end up.

Your next question comes from Wilson Wong with Jarden.

Just a question just around over the past 1.5 months, like how have average order values and conversion rates been tracking?

So fairly in line with historicals. We're still seeing an improvement in AOV. So AOV is still up, and that's driven by -- as I said, by furniture but in line with how it's tracking in the half. Conversion rate is -- I mean I don't think we've released the point, but I mean there's nothing kind of too dissimilar in terms of our conversion rate. Definitely, we're seeing those -- the customers that are looking to buy will convert. So I mean, partly, it's a function also as traffic goes down, conversion rate kind of holds as well because you get a more qualified audience, but nothing out of the ordinary.

Sure. Have you seen much impact so far from the slowing housing market, particularly in that trading update period?

I mean it's so hard to disentangle kind of macro from everything else that's going on, where it's a very noisy period, where if we didn't have the lapping impact of lockdowns and Omicron outbreaks, et cetera, we'd have probably a cleaner read. I don't -- I think it's a bit hard to untangle. The only thing -- as I said, the only thing we can see in what -- in our sales is people are definitely looking for more value, and now that's probably macro related. As interest rates go up and how the market cools, people are definitely feeling they're poorer. So that is -- that, we can see in the data. But as I said, we do have the ability to becoming more value-based retail quite quickly.

Okay. So that's -- my last question is just around just breaking down that 7% decline. How much of an offset was inflation for that period?

As in prices, pricing -- you're talking pricing? How much is price improvement?

Pricing. Pricing, yes.