The Warehouse Group Limited (UXN.SG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to The Warehouse Group Limited FY '25 Annual Results. [Operator Instructions] I would now like to hand the conference over to Dame Joan Withers, Chair of The Warehouse Group. Please go ahead.

[Foreign Language] and good morning, everyone. Welcome to The Warehouse Group's full year results presentation. First, to Slide 3, the chairs update. Thank you all for joining us today. I'm Joan Withers. I'm Chair of the Board. And on the call with me today are Mark Stirton, our Group Chief Executive Officer; and Stefan Knight, our Group Chief Financial Officer. During the presentation today, I'll begin with the chairs update. Then I'll hand over to Mark to give an overview of the group's performance, the work that is underway to restore profitability, and he'll also talk to our outlook. Stefan will then share a more in-depth summary of our financial results. And as always, there will be an opportunity to ask questions at the end of the presentation. To Slide 4, the year in review. FY '25 has been another challenging year for the company, shaped by extremely tough economic conditions and a sharp decline in consumer confidence. With unemployment rising and households tightening their budgets, discretionary spending has slowed significantly. Retail competition has also become increasingly intense. Despite these headwinds, group sales held steady. Reported sales were up 1.6%, reaching $3.1 billion. It is important to note that FY '25 included an additional trading week, so on a like-for-like basis, sales were flat, which reflects resilience in a difficult market. The real pressure came through in our margin performance gross profit margin declined, particularly in the Warehouse, driven by a highly promotional environment and changes in category mix. While we made progress on cost control, there was not enough to offset the margin decline. Operating profit came in at $1.3 million, and we have reported a net loss of $2.8 million. Given this financial performance, the Board has elected not to declare a dividend for FY '25. That is deeply disappointing, and I want to acknowledge the impact on our shareholders. We continue to take decisive action to restore profitability so we can once again deliver value back to our shareholders. During FY '25, under John Journee's leadership as interim Group Chief Executive Officer, we made the important changes that were foreshadowed last year. We have reshaped the organization and returned to a brand-led model with better execution across core retail capabilities. These necessary changes are already making a difference, particularly in the Warehouse. Customers are responding well to our refreshed ranges and to sharper pricing, and we saw a stronger sales performance in the second half. Cost management has also improved across the organization and CapEx and project expenditure have reduced significantly. Mark Stirton stepped into the role of Group Chief Executive Officer on the first of August this year, following 16 months in the group CFO role. The Board is confident in his ability to take the business forward and Mark brings commercial strength, strategic clarity, a sharp focus on execution and highly relevant retail experience with the Mr Price Group in South Africa. So while meaningful progress has been made, there is still much more work to do. But our direction is clear. The leadership is strong and the initial signs of progress are encouraging. I'll now hand over to Mark.

Thank you, Joan, and good morning, everyone. I'm Mark Stirton, Group Chief Executive Officer. It is a privilege to speak to you today in my first results presentation as CEO. I want to begin by thanking Dame Jones and our incoming Chair, John Journee for their steadfast support as I've stepped into the role. I'm grateful for their leadership as we continue to navigate this important phase of the group. FY '25 has been a reset year for our business, a year of discipline, simplification and laying the groundwork for sustainable growth. We have made tough decisions, simplified our structure and focused on execution. While our financial performance is not yet where it needs to be, we have built momentum and are moving with speed into FY '26. As Joan spoke to, the New Zealand economic environment remains extremely challenging and this backdrop has had a direct and significant impact on our margins. GDP fell 1.1% over the year to June, and GDP per capita dropped similarly. Unemployment is rising now at 5.2% nationally and in Auckland, our biggest market, it has reached 6.1%, the highest in 8 years. Inflation is sitting at 2.7%, right at the top of the Reserve Bank's target band. Interest rates have come down by 225 basis points since last September, but the relief has not yet been enough to offset the pressure felt by households. Cost of living increases have been sharp. Local authority rates are up more than 12%. Electricity is up over 8% and housing costs remain elevated. These are not small shifts. They are having a material impact on how customers spend. Consumer confidence fell to 92 in August, the lowest level in 10 months. That is not just a number, it reflects how people are feeling. And when confidence is low, discretionary spend is the first thing to go. Retail competition has intensified and the fight for share is tougher than ever and led to a highly promotional environment. FY '25 was a reset year for the group. We reshaped our operating model, returned to retail ways of working. We reset pricing, improved product and introduce tighter controls on cost and capital. These changes were necessary to position the business for long-term recovery and growth. Despite the economic headwinds I outlined earlier, our sales held steady -- that result is significant. It reflects strong customer response to the changes we've made across our brands. I want to acknowledge the team in a year like this, holding ground is no small feat. Traffic conversion improved and unit sales growth was strong across all three brands. We saw encouraging sales momentum in the second half, particularly in the Warehouse and Noel Leeming. Profitability, however, was impacted. Gross margin declined by 140 basis points, which materially affected the group's bottom line. In the warehouse, price resets, combined with a shift in category mix towards lower-margin products placed pressure on margins. In the second half, category mix improved. Unit growth for the year lifted across the group by 4.6%, supported by sharper pricing and more relevant on-trend products. Key categories such as home, apparel, toys and beauty performed well, and we launched several new brands as part of our range refresh. Cost control remains a clear focus and grew slower than sales. Our cost of doing business decreased 40 basis points to 32.2% of sales despite inflationary pressure experienced on rent, utilities and employee costs. Costs within our control, like head office costs were down 7.8% and depreciation down 7.4% compared to the prior year. We exercised discipline in capital management. Projects were rationalized, elevated IT spend tapered off and capital expenditure reduced to $12.4 million, down from $39 million in FY '24. Our brand-led strategy is gaining traction. We delivered more targeted and engaging marketing, improved store experiences, launched new ranges and introduce new layouts such as the Beauty Zone. We now have a new leadership team in place, aligned on our goals, focused on execution and committed to rebuilding profitability and unlocking the full potential of our brands. Even in the year is challenging as FY '25 we remain committed to looking after our people, our communities and our environment. It's fundamental to who we are as The Warehouse Group and part of our DNA. We maintained 100% gender pay equity and our employee Net Promoter Score rose to 36, up from 18.2 last year. That's a strong signal that our teams feel more engaged as we work to build a high-performance culture. Together with our customers, we raised $2.4 million for New Zealand charities. That impact matters, especially in a year when many households and communities were doing it tough. We also made strong progress on our environmental commitment. 66% of private label sales now use sustainable packaging. Our Scope 1 and 2 emissions are down 45% compared to FY '23. More than 150 stores and sites are now powered by Lodestone Energy solar farms, and we've diverted 79% of operational waste from landfill. These are meaningful steps that reflect our long-term commitment to sustainability and our belief that doing good is not separate from doing good business. As we look ahead, one thing is clear. The potential of our brands is enormous and this slide reflects the scale of opportunity we have in front of us. Our private label portfolio remains a core strength with 27 well-established brands that deliver quality and value and when repositioned, will be a key source of growth for our future. H&H, our apparel brand is a staple in millions of Kiwis' wardrobes. And in FY '25, we sold over 37 million Living and Co Home products, a clear sign of the trust customers place in our brands. Veon, our private label TV brand is now the second largest TV brand in New Zealand, showing we can lead in categories beyond everyday essentials. This year, we introduced Poppi, a fresh, affordable beauty brand designed for younger customers. Its early success reflects our ability to spot trends and respond quickly and at scale. The Warehouse has made significant gains in consumer brand preference, which is a difficult dial to shift. In FY '25, we reclaimed the #1 spot in consumer preference for toys with toy sales up 8% for the year. We also shifted consumer preference across several key categories. Home was up 5%, apparel was up 2%, pet care was up 5% and party and suppliers up 6% and sports and outdoors up 5%. These shifts reflect the impact of our products, pricing, marketing and visual merchandising improvements. Our reach remains a strategic advantage. Over 85% of TVs live within a 20-minute drive of one of our stores. And 1 in 3 New Zealanders visit our stores each week. I'm delighted to share that this morning, we are opening the doors on a new Warehouse stationery store in Central Wellington on Tory Street with a refreshed look and layout. These strengths give us confidence they show that our strategy is gaining traction and reinforce the opportunity ahead as we continue to unlock the full potential of our brands. Since stepping into the CEO role in August, I've focused on setting the playing field. In my first two months, I've aligned the organization around clear goals and performance expectations and set the direction for the group. Our group purpose is to build exceptional retail brands that customers love, our teams take pride in and deliver sustainable shareholder returns. Our group ambition is to get back to being a highly desired retail stock to own. Our strategy will be anchored in restoring profitability and positioning the business for sustainable growth. Our group values, "Think Customer, "Do Good" and "Own It" continue to guide our culture and decision-making. Our strategy will revolve around strengthening and growing our three New Zealand retail brands, enabling each to lead in this market while leveraging shared services, platforms and capital efficiencies. Later in FY '26, we will share a longer-term strategy for the group and individual brands. To improve execution across the organization, we've made several key appointments to the executive team. We struck a strong balance. We've promoted exceptional internal talent, brought in fresh capability and retained experienced leaders to ensure continuity. Stefan Knight joined as Group Chief Financial Officer in August, bringing deep expertise in finance and performance. He's sharpening our focus on cost control, margin improvement and operational discipline. Shayne Tong also joined in August as Group Chief Digital and Transformation Officer. He will lead our digital transformation and systems modernization. We've also promoted two outstanding internal leaders. Carrie Fairley is now acting Chief Merchandise Officer for the Warehouse and the Warehouse Stationery and Silv Roest has been appointed Group Chief Legal and Corporate Affairs Officer. This team is aligned, focused and ready to drive the next phase of our strategy. I will now hand over to Stefan to take you through our financial performance.

Thank you, Mark and Joan, and good morning, everyone. My name is Stefan Knight, and I'm the CFO. For those on the call, I haven't met, I joined the Warehouse Group in August this year, and I spent my first few weeks getting around the business visiting some of our stores, the distribution centers and meeting the team. Joan and Mark have laid out where we are, and it's no secret that we are facing economic headwinds that are challenging our business. But having seen what I have since starting, I'm encouraged by the changes we are already putting in place and the enthusiasm of the team. We are absolutely focusing on the right things what we can change and control and to turn around the profitability of the group. Before we get into the numbers, I would just remind you of the anomaly in this year's reporting period. So FY '25 was a 53-week financial year ending Sunday, the third of August 2025 compared to 52 weeks in FY '24. Where appropriate, we've competed FY '25 revenue on a 52-week same-store sales basis with FY '24 so this removes the final 53rd week of FY '25. It excludes online and Noel Leeming commercial and the impact of opening and closing of stores in each period. All the other financial commentary is unadjusted and compares 53 weeks in FY '25 with 52 weeks in FY '24. So you can refer to Appendix Slide 27 for a sales summary by brand and we've -- in that slide, we've laid out the 53 weeks reported, the 52 weeks like-for-like and also a 52-week same-store sales basis. So on to Slide 13. As mentioned, top line reported sales increased 1.6%, and this was flat on a 52-week same-store basis. So really pleasing to be able to hold sales in such a tough economic environment. This was underpinned by a movement of two halves. Sales declined 1.6% in the first half but delivered a turnaround in H2 with sales growth of 1.6% on a like-for-like 26-week basis, removing the 53rd week of the year. Within the warehouse, our everyday low price reset earlier in the financial year and the hard work our buying teams have done to deliver on trend products have contributed to group units sold up 4.6%, which was then offset by group average sales price decline of 4.4%. Tough retail conditions were felt throughout the period in a low economic growth environment and have resulted in gross profit margin declining 140 basis points in the year. Although the declines in margin were less in H2 than what we've seen in H1. Overall, group gross profit margin decline was further impacted by the relative strength of Noel Leeming sales contribution. To offset these margin impacts, we are focused on controlling what we can. While cost of doing business was up 0.2%. This is largely due to the 53rd week, with cost of doing business growth slower than sales growth and reducing 40 basis points as a percentage of sales. So looking at group gross margin in more detail as this has been the biggest impact on profitability this year. As Mark has alluded to, the competitive retail environment, combined with the cost of living crisis has continued to put pressure on retail pricing and margins in the year. Group gross profit margins decreased due to four key contributors: A strategic price reset of everyday low prices, particularly in the warehouse; secondly, lower inventory sell-through resulting in increased clearance activity; third, growth in sales from lower margin categories; and finally, sales growth in Noel Leeming contributing to a higher percentage of group gross margin. FY '25 H2 did see a reduction in the decline in margin from improved inflow margin in category mix. FY '26 will target further margin improvement as the strategic reset of everyday low prices move through the buying cycle with an increased focus on home and apparel in the Warehouse. So on to cost of doing business on Slide 15. We've seen in the last year that controlling operating costs would be a huge focus for us, and we are pleased to say that we've made some progress this year. While cost of doing business increased 0.2% in the year, this is largely attributable to the 53rd week. Cost of doing business was held below sales growth, resulting in a 40 basis point improvement as a percentage of sales. Employee expenses increased 2.8%, primarily due to the extra week and higher wage rates. But while we saw the increase in employee expenses at a brand level across stores and distribution centers, head office employee expenses decreased by 6.8%. Depreciation and amortization decreased 7.4% as large capital projects, which have been capitalized roll off. Lease expenses increased 2.7% but held relatively flat on a 52-week basis, below inflation and a testament to our property team managing our store and property assets. Across the group, brand-specific costs increased, namely in store labor, buy now and pay later commissions and DC operating costs. But the hard work we have done improving our retail operating model, improving efficiencies and reorganizing our ways of working has decreased overall head office costs by 7.8%. And now moving on to the brands and starting with the Warehouse on Slide 16. Sales increased 1.4% on a reported year basis and increased 1.2% on a 52-week same-store sales basis compared to FY '24. As seen across all brands, we've seen an improvement in sales in the second half. So while sales declined 2.2% in the first half, sales recovered in the second half with growth of 2% based on 26 weeks. Foot traffic conversion increased 2.5% and the number of units sold increased across most categories, including home and apparel. While average selling price increased in FMCG, this decrease in home and apparel resulting in average selling price down 4.5% across the brand and contributing to overall lower basket value and lower gross profit margin. Gross profit margin decreased 180 basis points, and I'll go through this in more detail on the next slide. So while we drove savings in some cost of doing business areas, including head heat office costs, this was not enough to offset the significant decline in gross profit margin, resulting in an operating profit decline from profit of $17.7 million in FY '24 to an operating loss of $12.2 million in FY '25. This is a disappointing result, and we are acutely focused on driving improvement in both gross profit margin and the cost of doing business to return to profitability here. The group reluctantly closed two Warehouse stores during the year, Pakuranga and Tory Street, exiting these locations due to lease reviews and external factors outside our control. Looking at the warehouse gross profit margin movement in more detail on Slide 17. This is where the decline in the Warehouse and the group operating profit came from. As mentioned, we invested in an everyday low price reset in the Warehouse earlier in the financial year. When you do this after you've already bought the product 6 to 12 months ago, that has an immediate impact on your margins, and that is what we've seen this year. But this is now moving through the buying cycle and that reset pricing impact will reduce. The pricing reset does mean we have seen less promotional activity compared to last year but the highly competitive retail market, combined with some slow-moving inventory sell-through, particularly in winter apparel, increased the clearance activity required. Pricing, clearance and promotional activity had a combined negative impact of 1.3% on gross margin. We've talked about category mix and the fact that consumer spending was weighted towards everyday categories like FMCG and less towards discretionary spending like home and apparel, and that had a negative impact of 0.8%. Rebates from suppliers did increase in the year, improving margin, thanks to increased unit sales in FMCG and toy categories. And lastly, increased freight and container detention costs eroded margin by a further 0.3%. So now moving to Warehouse Stationery on Slide 18. Sales were down 2.5% on a reported year basis and down 3.2% on a 52-week same-store sales basis compared to FY '24. While sales declined 6.8% in the first half, the second half showed an improving trend with a 1.6% decline compared to FY '24 H2 based on 26 weeks. Print and create categories continue to grow and at strong margins, achieving another record sales year but were offset by a decline in higher value office furniture in computers. We know New Zealand businesses are finding it tough and business components are still not overly positive. Our BizRewards channel sales underperformed as these SME customers manage their costs. But we continue to have a powerful base in this area of 12,000 active customers. Warehouse Stationery gross profit margin decreased 110 basis points due to the reduction in everyday low prices throughout this brand also and higher sales and lower margin categories. While cost of doing business held flat, the decline in margin and increase in cost of doing business as a percentage of sales contributed to the decline in operating profit from $12.9 million to $8.2 million. During the year, we moved the Warehouse Stationery stand-alone store in Sylvia Park to within the Warehouse store next door, and both these stores continue to perform well. So moving to Slide 19 in Noel Leeming. Noel Leeming has recovered its sales momentum after the decline in FY '24 with sales growth of 3.3% on a reported 53-week-year and sales growth of 1.4% on a 52-week comparable period. Noel Leeming and Commercial experienced significant growth in the year, up 40% on prior year. 52-week same-store sales, excluding Noel Leeming and commercial, which are not transacted in store, declined 1.6% compared to FY '24. Sales were resilient with sales growth of 0.8% in the first half, improving further to sales growth of 2% in the second half. Sales increased in gaming, small appliances and computers, but decreased in big ticket items such as TVs as customers continue to be purposeful with discretionary spending. Gross profit margin held relatively steady decreasing 20 basis points as a result of the competitive market and higher sales and lower margin categories. So our sales were relatively strong. The small decline in margin and an increase in brand cost of doing business impacted operating profit decreasing to $11.7 million. So on to the balance sheet and looking at movement in net debt and working capital. Inventory increased slightly on prior year but was split between inventory on hand, which was down 4.3% in goods and transit, which was up 59%. Group weighted average stock turn held steady at 4.6x while aged inventory did increase to 23.1%, but this is primarily a continuity product. The graph on the left shows the movement in net debt from $50.7 million last year to $96.1 million at this financial year-end. Operating cash flow of $72.3 million comprises of trailing EBITDA of $197 million, the movement in working capital of $81 million and bank and lease interest paid of $44 million. The biggest impact here was working capital. And as you can see in the table, the biggest impact within that was the movement in trade payables. Trade payables decreased $84.5 million due to the month-end supplier payment in the 53rd week of the FY '25 financial year. Due to the timing of year-end and significant cash outflow in the 53rd week, net debt would have been approximately $13 million at year-end had it been at the same time as FY '24. As a result of the reduction in operating cash flow and timing of the payments I've just described, cash conversion ratio was minus 50.5% and free cash flow was minus $45.2 million. Adjusting for the timing of net cash outflows in that 53rd week, cash conversion ratio would have been approximately 80% and free cash flow would have been approximately $38 million. So moving to Slide 21 in capital expenditure. Capital expenditure has been managed tightly this year following five years of elevated capital and project expenditure, particularly in IT and replacing legacy core systems, we're pleased to see this come to an end. Total project expenditure was $21 million in FY '25, significantly below FY '24 spend of $73.4 million and below the FY '25 spend we indicated at the half year. A number of nonessential information system projects have been deferred while store development projects have come in below budget. Within project expenditure, capital expenditure comprised $12.4 million compared to $39 million in FY '24. Our future investments will focus on improving merchandise buying and planning capabilities to lift margins and strengthen inventory management, implementing new automation in our distribution center to improve our efficiencies and enhancing our store customer experiences. And lastly, touching on earnings and dividends on Slide 22. It is clear that earnings and shareholder returns in the form of dividends and not where we want or need them to be. We have faced significant economic headwinds this year but have also invested in price and categories to set ourselves up for success in the future. We are committed to significantly improving financial performance and profitability in order to return to paying sustainable dividends. And with that, I'll hand back to Mark. Thank you.

Looking ahead, we believe the retail environment will remain challenging. Low consumer confidence and ongoing cost of living pressures continue to impact household spending, and we expect these conditions to persist through the remainder of 2025. Trading for the first 7 weeks of FY '26 show sales and growth profit at similar levels to last year. Foot traffic is slightly down, but conversion is up across the group which reflects the strength of our offer and the improvements we're making in stores. With our new leadership team now in place and direction set, our recovery in FY '26 is about disciplined delivery. We are targeting margin recovery, cost reduction and working capital unlocks. Margin recovery will depend on scaled improvements in higher-margin categories, particularly in the warehouse. Cost management remains a priority with work underway to reduce our cost of doing business to below 31% of sales. Capital investment will be directed to the most impactful projects and we are actively pursuing selected space growth opportunities. As I mentioned earlier, later in FY '26, we will share further detail on our refreshed strategy for the group and our brands. Before I close and hand back to Dame Joan, I want to thank our team for their resilience and commitment and our customers for their continued support and our shareholders for their trust and patience. We have the right foundations in place, and we are now accelerating our progress. Thank you.

So before we move to questions, I want to take a moment to acknowledge that this is my final annual results presentation as Chair of the Warehouse Group. Although I'll formally step down after the Annual Shareholders Meeting in November. This is the last time I will lead a full year result for the organization. Over the past 9 years, I've had the privilege of leading this iconic New Zealand business through times of strong positive momentum and through some of the most difficult challenges we have faced. The past few years have been especially tough. I know the impact on our shareholders has been profound, and I want to acknowledge that directly. It has weighed heavily on the Board and on me personally. Despite these challenges, I remain proud of the resilience of this company. We are not yet where we want to be, but we are making progress. We have clearer focus, stronger leadership and a renewed determination to deliver for our customers and our shareholders. I am delighted that John Journee will succeed me as Chair. His appointment brings continuity and confidence as the group moves into its next phase of growth. To our shareholders, our customers, our team members and my fellow directors, thank you. Your support, your belief and your commitment have meant a great deal to me. It has been an honor to serve as Chair, and I look forward to supporting a smooth transition over the coming months. Thank you. Now we'll move to questions.

[Operator Instructions] And your first question today will come from Guy Hooper with Jarden.

I know It's just -- buying -- particularly planning had been a challenge in recent years. And I know I should've called it out as a focus for improvement for next year. Just with aged inventory up and inventory levels flat generally year-over-year. What can we expect to see in terms of clearance levels still required through the first half of next year? And then just more generally, the direction of working capital?

I'll hand that over to Mark, but I think most of our aged inventory is in the continuity space, but we've definitely been discussing that, Guy.

It's a great question. As we've discussed many times, the planning discipline is a key focus of mine, and it is part of the working capital unlock that we've spoken about before. And we've got a new leader in there that is doing good work so far and he's already starting to make a difference. So I think that is encouraging. We also made some changes in our buying team. You would have seen our leadership change there. I'm really positive about that change and what's going to happen through the combination of that buying and planning role and the strong buying and planning leadership. So working capital unlock, we are definitely not at the stock levels we should be. On the aged element, the continuity -- like Joan mentioned that over six months sort of inventory is mostly continuity product. What we mean by that is it's on replan, which means it's the same product would be bought over many times. And so all you need to do there is actually just cut your forward order book so that you don't buy more. So it's not sort of things that go off if you want to put that in inverted commerce. So that's -- we're managing that actively as we're obviously managing the sales line because as the sales line is still in these type sort of conditions, we have to manage our forward order book. I hope that answers your question.

Yes, it certainly does. And maybe just follow-up or some additional color. I mean where should that aged inventory number be then? I mean 20% suggests there's quite a lot of extra. I mean, if you just look at the inventory number, that's close to, I guess, $100 million of maybe excess inventory. I mean, does that give us a sense of what the working capital unlock could look like?

I definitely think so. Guy, I think you have a business like ours with that level of over six months inventory is not where I would want to run the business, and it's definitely a key focus area of mine. A good business should be a very little past six months, and we shouldn't have very much over six months. So that's a key focus for that unlock, you're 100% right. And that would take us out of debt.

Yes. No, that's some use some color. Joan, the consumer preference shifts that you've called out all look fairly positive and are in categories you've called out as focus previously. Can you give us a bit of a sense of maybe where those consumer preferences or consumer perceptions of the brand have kind of gone over the last couple of years and maybe where they're coming from year-on-year?

I think what happened, the apparel and home wear categories for us essential to our contribution for the business. And those two categories really got a little bit boring and predictable and stale. And what happened there is that we took a lot of color out. We took a lot of -- let's call it trend, we're never going to be a high-fashion business, but we definitely need to have a level of trend in our business. And said I felt our customers were seeing too much of the same thing over and over again. And so what we've done is we've injected new options into the assortments which has now started to show a lot more life and customers are starting to see those new trends, new colors coming through, some in apparel, they call it silhouettes, which is really the shape of the garments are changing. So we're getting a lot more trend there. I think what is really exciting is how -- and it's actually taken us all by surprise, and it's going to be a big area of focus for us in the future is really our health and beauty section of our business. It's really a space that we deserve to play in, and we haven't really done justice to the opportunity, and that's a key focus of mine into the coming months is really how we're putting that, the team actually in the midst of -- I've just been overseas on a big buying trip. So we're putting a really comprehensive range across which I'm quite excited about. I think it's -- we will have a great offer and we're going to change our in-store experience on that. As you know, Guy, that's a huge category. I think out of all core retail at the moment. I think Health and Beauty is growing at about 12%. So when you think about the rest of core retail is growing at very pedestrian level. So that is a huge unlock for us, and we're really barely participating. But the growth that we are seeing and the ranges like Poppi, we spoke about, [ Days ], which is another brand that we've just launched from one of our suppliers. It's going really, really strongly. And so we're starting to get a lot more of that the younger customer coming in, and that's really for us a key unlock that we can get the younger customer in through the doors looking at our beauty, then we can start to introduce them to our power ranges and stuff. And as those refresh, we're hoping there's a multiplier effect across. I think at home, we haven't done justice to. We've actually got a really good product, but we're not displaying it well enough. Our visual merchandising standards need to improve. And that's really the storytelling in our stores. Our customers are telling us our stores. We like you, but you're a bit boring and you're a bit functional. And so that's the big job to do for us. It's not -- I'm not suggesting we're going to have huge CapEx projects. But actually, there's a lot of treatments you can just do into your store that's more decorative than it is necessarily big capital projects. And that's really, I think, once we get that more excitement back into our stores, I believe that our customers -- we've got the fit. We've got -- and once people start talking about us in a positive way because of the changes we want to make. I'm really hopeful that, that will come through strongly.

That's good to hear. In terms of the allocation of categories across the first space, particularly within red. I mean you're calling out a few areas that you're increasing or targeting improvements in one area that has been growing in recent years as FMCG. Can you give us a little bit of an update about how you're thinking about that category in that store?

Yes, FMCG is part of, obviously, our biggest store mix, because we are a multi-category business. We obviously have to make sure we're managing space for every category. It has done really, really well for us. But FMCG for us is not just grocery. It's -- we actually got pet, We include pets in there, we include baby. Both of those have done really, really well. And you would have seen, as I called out, the net preference uplift, you had seen that both those preferences have increased a lot. And within that FMCG, we sort of loosely -- we're calling at grocery. And as these other categories have emerged, they're actually starting to really perform well. And again, health and beauty is included in that grocery category. So I think we will -- we alluded to in next year, we'll come out with a proper strategy on each of the brands. And we are, at the moment, looking at a merchandise strategy, which will basically shape up each job to do for every category. And once I've got that, I can give you a better answer.

Your next question today will come from Kieran Carling with Craigs Investment Partners.

First question from me is good to see sales stabilizing over the second half. But if we look at your cost of doing business finished the year broadly flat after being down in the first half. You've sort of called out cost reduction as a priority. But beyond that $40 million relating to the simplified tech stack over the next five years, are there any other levers that you can be pulling? And can you give us a bit of a steer on how cost of doing business is expected to track in FY '26?

Yes, I'll take that, and then I'll hand over to Stefan if he wants to add some more color. You're right, we did -- we've done a good job on our sale at our SSO level, which is what we call our support center level. We said this was down 7.8%, which is no mean feat. We've really looked at roles, we've looked at the way we spend money across the group really started to rationalize a lot of excess parts of the business, which are discretionary in nature. Stef's got a program on at the moment, which is we're really going to start to delayer the business even further at a cost layer basis, just really looking at what's actually driving some of these costs in a deeper way. And the relationship with TCS is really to help us deliver that what they're going to bring to the party is a lot more capability that actually help us unlock a lot of the opportunities that are deeper in the business. So we're going through an exercise with them that will address not only the systems, the process and the people, elements of all of our whole ecosystem, which will then give us a greater sort of insight as to how we can extract cost out of the business, Kieran. But at a brand level, we -- there is some constraints around our leases because obviously, those are contractual mostly in nature, whilst we've obviously negotiated hard and as Stef alluded to, the fact that we've done well in that regard. And this year, our employment costs at a store level, obviously, bargaining related. And so we've got some contractual commitments there that we're trying to -- we obviously got to manage within. But all other costs at the store-related level, we look at extremely hard. And if we gave you that color, you would see that there is quite good reductions in that regard. So we're looking at it across the board. And as we said, we're trying to target below that 31 level in the medium term. So at this stage, I can't give you more than that. So Stef, I don't know if you want to add anything more?

Yes. Thanks, Mark. Kieran, really, when we're thinking about the cost reduction, I guess there's two areas that we're -- looking at the brand costs, as Mark mentioned, a lot of that is harder to implement things like wage levels are impacted by click to bargain agreements and leases are longer term. So our focus is very much in the SSO space. If you look at the reductions that have been made over the last year, it's quite significant in years like employee costs, they're down 6.8%. Licensing is already down a level and also things like the exit of the market has been a driver. So when we look ahead, we'll be continuing to look for further opportunities in those space. The other thing I would point out is it's not just in the cost of doing business. Clearly, the other place where margin improvement would come from is active in around our gross margin improvement. And there's some pretty significant programs we're look at in the cost of goods sold, so very much around sourcing strategies, which Mark has already talked a bit to around which we are buying, particularly ongoing stock flow management, and ultimately, that should deliver lower clearance levels. So a combination of those factors are all the things that we are acutely rapidly focused on.

I guess just regarding your comment around getting to below 31% of sales in the medium term. if I could recall correctly, at the half year result, you were talking about that goal in the near term. Is that more just a function of the sales trajectory of the group not being as strong as you're expecting? Or have you sort of missed on some of the cost out that you were predicting?

No, I think it is a bit of the top line, Kieran. I mean, when you're in at the tough top line, like you said, I think it's we did well to keep the top line positive, which in this environment is tough. But yes, it is obviously infinitely harder if you've got inflationary pressures on all your costs and your sales aren't holding abreast of that. You do have a negative influence on your -- on that ratio. But we're not standing back and thinking that that's the only thing in our control. If you actually just look and you step back, irrespective, the business is making 32.2% margin and it's 32-point something on cost, and that's just not an acceptable shape even if you just do a standstill evaluation. So we're looking very hard at the cost layer irrespective. But like Stef said, it can all come from cost. We should be earning much better GP margins, and that is a function of each of the brands is looking -- steering hard into that. And that's a combination like what Stef said. When you have [indiscernible], I think I alluded to it, when you've got stock that's sitting in age buckets like we have. And there's inefficiencies all around your business. There's an efficiency through your DC, there's inefficiencies through your supply chain. There's working capital cost of holding stuff all of that, as we improve our planning and buying part of our business, which is really about our stock flow. And all of the consequential costs that relate to that will also start to drop out the business. And I'm really positive that, that is actually a large portion of also what's holding up these costs of doing business.

No, that's very helpful. And then I guess just talking about that aged inventory, and I guess to elaborate on Guy's point. I mean aged inventory is up. You had a bit of a price reset in red, and that's all played into some of that gross margin reduction through '25. But can you just talk us through your expectations for gross margin in '26 and how much of that inventory sell down is still to come?

I think, Guy, in this year, we -- what we did is we provided for a large chunk of that aged inventory. I think if -- when you look at our financial results, you would have seen that we've improved what we've added more to our provisions. And that's a function of, obviously, the risk that potentially is already in that. So if you think about it, some of that's already baked into the provisioning that we've already got. But you shouldn't have to mark down continuity-based product. If it's a white sheet, it's a white sheet all day long. So we don't believe there's huge clearance that's anticipated into the assortment. The only thing that I would caution is that when you're in a tight environment and you need what they call open to buy in planning, when your stock, all your money sitting in the wrong stock, it all comes down to how quickly you can sell that stock in order to give yourself money to buy new stock. And that sometimes is the catalyst to induce a markdown that we might need. I don't think at this point, we will need it. Obviously, you can never have a crystal ball into the future, and you don't know how the key trading period, this golden quarter or trade. But that's a key -- that will be a key influence in terms of whether we have extra clearance or not. But we're not anticipating high level of clearance. Our budget doesn't foresee that. But we are trading in tough conditions than we anticipated. So there's a function that is coming through in the -- as Stef alluded to, in the first 7 weeks, it is really tough when we're still having to get through inventory, particularly the winter inventory from last year, which is now the winter inventory is pretty much done.

What do you think of a base case then would sort of be looking at flat gross profit margins? Or are you able to sort of give any indication of that?

We haven't given guidance. So I don't want to -- yes, I can't say anything at this point, yes.

Okay, sure. And then maybe just the final one. In your outlook statement, you've talked about profitability recovery being dependent on scale improvement and higher margin categories. Can you just elaborate a bit on that? And talk about what steps you need to take to make that happen?

Yes. I think what's -- when I alluded to, I think in the Red business, what were the [ red sheds ] what we have alluded to is that our home and apparel categories are nearly 50% of our turnover. So when those are not performing at the levels we anticipate the way we expect them to perform at. They have a disproportionate influence on our margins. So what we're doing is the key gold work, which we've been speaking of for a while now, but because of the buying cycles and how long it takes to actually get new products in, remember that you buy seasons ahead of time in the manufacturing, that takes a while to get through the system. So we still will be experiencing some of that now. And I'm hoping by winter next year, we will really be in our strides in the place we really want to be. But we've -- this summer, we're going to trade probably trade on similar sort of levels with really managing our stock and our clearance levels. So that's a key part of the unlock of the GP, you mentioned a little bit earlier in those categories. But we're doing a lot of work on our sourcing. There's also a lot in the type of products we are offering, and we're going to get into much better sort of assortments on home and apparel products, which have better margin. So hopefully, there's a mix element that comes through on both of those scores.

Can I just add a point to -- Also, I'd just add on Noel Leeming, if you look at the composition of the sales this year, it's been quite heavily skewed towards some of those the smaller items, which really reflects the pressure that our customers are under given the economic environment, so much more small appliances. Obviously, the higher margin areas for us are things like TV and White wear and with forecast interest rate drops, it will be really interesting to see how that plays through into the economy. So that's something we're keeping a really active eye on because that will be a key part of what we need to see to help drive that turnaround.

And the same actually story, Stef is on the blue business. A big portion of the blue sales this year that got affected was our furniture sales. We know we are a big office furniture business in the country, and that office furniture has been really an -- albeit that we actually hold market share, we actually gain market share on furniture, but it was in a declining market. So as that sort of comes back online and small businesses feel more confident, they'll update their offices and with the destination for that. So all of these are mix issues that we're fighting against, which hopefully, as economy improves, those will all be in our favor.

Your next question today will come from Paul Koraua with Forsyth Barr.

Sorry, I'm going to dig in on the margins again, if that's all right. And it really comes down to red, if you look at that Slide 17 that you guys provided on the gross margin waterfall between '24 and '25 and you look at the EDLP reset, that feels like that's a structural shift in group margins. The category mix, yes, you guys are doing some stuff to work on apparel and home, but that takes, as you say, a few years to wash through. So it does feel like the margin story for '26 is still going to remain under some pressure? And I guess the clearance is anything that constrained? Is that sort of a fair synopsis of what's happening?

Yes, I think that's fair. The clearance part is probably more than 50% or just over 50% of the 1.3%. So -- and then the sort of the price resets was probably the other 50%. So the price resets you can get back through better buying and that sometimes can take half a season. But like you say, you obviously trade for a full year. So some of that is taking a little bit longer to extract because you've got to find different supply bases, you got to do those sort of things, but that's all opportunity for the future. And then the clearance is a function of your planning and buying better and tiering at the rates that you anticipated. So that's within your gift if you buy better and you buy the right quantities. So the mix issue like you said as you get the home and apparel stronger, remember the dollar version, the dollar contribution of those two categories to GP is significant. So you have to sell a lot less T-shirts than you have to sell grocery, for instance, at much lower margins. So if you get right and you get your offering right, it can swing for you really nicely. So yes, I hope that answers your question.

Yes. That sort of does, and it sort of leads to my next question, right? So if we're thinking about -- you guys made a loss in red this year and gross margins have come down and it feels like there's structurally going to be lower going forward. And you guys have lost a little bit of leverage on the cost base, so your cost of doing business as a percentage of sales in red is up at 36%. Like what is the path to profitability here? Are we -- do we have to wait for sales to come back to regain leverage on that cost base? Because as you sort of alluded to, you can't really take cost out at the brand level. Or is this -- because I sort of struggle to see how this makes any sort of operating profit over the near term anyway.

Yes. I mean it has to be a sales story. You can't save yourself to prosperity, but we've obviously got costs within our base that we've got to -- we can still extract -- because remember, some of it's contractual, not just lease contractual, but there's other contractual elements that you obviously are stuck into, which will obviously move. But the GP story is critical to this business and the turnaround of this business. And I think that's what I alluded to in my outlook is the GP -- you hit the nail on the head, it's contingent on us nailing these home and apparel categories and categories like beauty, for instance, is significantly different margins to our FMCG part. So while our FMCG part or the broader FMCG part of which food is quite a high contributor. While that continues to grow and outstrip the growth of those other categories, it has a disproportionate influence on the business. So my job is to make sure that we're scaling that or we will appropriately putting that in its right cadence and growing the other categories.

Yes. And then maybe how are you guys thinking about the home category in red and where you want to position that business in light of IKEA opening later this year?

Yes. I think we've been on Home wares for quite a while, and I feel that the more I will ground our stores, the more I'm more confident that our offer is a great offer. And IKEA is particularly strong in furniture. It is part of our offer. It's not the main part of our offer. And so I think whilst we also recognized last year, IKEA has been coming for some time now. And we've been doing some work on our ranges to try and combat their influence, but they're a great business. They're in one location, and they do have distribution points around the country. But I think maybe our advantage at the moment is that we've got the 86 stores that sell furniture and sold those same products. So for us, they're a great competitor and they help us get better. So we're just seeing it as that.

There are no further questions at this time. I'll now hand back to Joan for closing remarks.

So thank you all very much for joining this morning's call. And I'm sure, like me, you'll be watching the group's progress through this upcoming peak season that we're about to enter into. And I guess we're all hoping for exactly the same thing that the economic situation in New Zealand improve some rapidly and gives us the sort of 2026 that we all need it to be. But thank you very much for your ongoing attention. Thank you.

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