The Warehouse Group Limited (WHS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to The Warehouse Group Limited FY '21 Interim Results. [Operator Instructions] I'd now like to hand the conference over to your Chair, Ms. Joan Withers. Thank you. Please go ahead.

Hello, everyone, and good morning. Welcome to The Warehouse Group 2021 Interim Results. My name is Joan Withers, and I'm Chair of the Board of The Warehouse Group. And with me on the call today, I have our Warehouse Group Chief Executive Officer, Nick Grayston; and our Chief Financial Officer, Jonathan Oram.

Good morning.

Good morning.

Now I'm going to just start by providing some of the highlights of the half year that we're reviewing. And so to Slide 4, the first 6 months of the 2021 financial year has seen a very pleasing record first half result. And that, of course, included part of calendar 2020, a year which saw just so much disruption. And the highlights for the half year are shown on that Slide 4. Group sales were up 7.4% to $1.8 billion. Gross profit increased 15.8% to $655.4 million, and adjusted net profit after tax increased 140.2% to $111 million. This exceptional financial performance, combined with robust inventory and balance sheet management has led to a strong cash position. We've moved from a net debt position of $68.6 million this time last year to a positive cash position of $183.6 million at the end of January 2021. Our investment and commitments to e-commerce solutions for our customer has resulted in an increase in online sales of 50.3% across the group, meaning online sales are now 11.9% of our total sales. And despite lockdown periods, we experienced strong demand and in-store demand with more than 2.2 million average customer store visits per week. Our Click & Collect offering continues to go from strength to strength, now offering The Warehouse customers same-day collection and Noel Leeming customers 1-hour collection, and this has seen our Click & Collect fulfillment increase 106.3% across the group on that same 6-month period last year. Now to Slide 5, just a bit more detail on our performance in operations. So following a year of interrupted and uncertain trading conditions in 2020 and despite Auckland entering another Level 3 lockdown for 2 weeks in August 2020, the 6 months ending 31st of January 2021 has delivered a record result and a strong platform for the FY '21 financial year. And as I mentioned a moment ago, The Warehouse Group total retail sales were $1.8 billion for the half, up 7.4% on the prior period, with online sales continuing its growth trend from last year, increasing 50.3% and now, as I said, comprising 11.9% of all group sales. The group delivered a reported net profit after tax of $55 million. Debt was up 88.5% on the prior period and adjusted net profit after tax of $111 million, up 140.2%. Increased customer demand in the half year, along with the continued execution of everyday low price in The Warehouse and less discounting across our other brands, continue -- contributed to significant margin increase. Operating profit was $153 million in FY '21 H1 that was up 125.4% on the prior period, and operating profit margin increased from 4% to 8.5%. Overall, we grew slightly ahead of the market, and that's based on market share of total retail spend. And we did that by focusing on delivering what customers need, when they need it, while maintaining careful focus on not driving unprofitable sales. Due to strong operational performance, sustained sales momentum and strong financial position, the group was able to repay the wage subsidy of $67.6 million that we received in March 2020 that we paid to our 11,000 employees. Customer demand continues to be strong and stock levels and supply remain well controlled. However, we do see isolated issues with suppliers' ability to fulfill inventory requirements and we will continue to monitor that closely. Now to Slide 6, dividend and the review of our dividend policy. Now the Board took an appropriately cautious approach to cash preservation in FY '20 due to COVID-19 and the resultant operational uncertainty which drove us to the difficult decision to cancel the FY '20 interim dividend, and we declared no FY '20 final dividend. However, following stronger-than-expected trading performance in November last year and December, the Board declared a special dividend of $0.05 per share in February 2021. The directors have recently undertaken a review of the group dividend policy, including a review of our policy compared to market practice and to other listed retailers. And we took into account current and forecast group operational cash flow, forecast capital expenditure and liquidity requirements. As a result, the directors have now approved a new dividend policy in March 2021. And that new policy is to distribute at least 70% of the group's full year adjusted net profit, of course, at the discretion of the Board and subject to trading performance, market conditions and liquidity requirements. That dividend policy will provide the group flexibility to maintain a stable capital structure and allows us to provide capital expenditure to invest for future growth and progressive and sustainable dividends. The payment of special dividends is included within this policy where an additional dividend may be paid outside the interim and final dividends. The group maintains a healthy balance of imputation credits. In accordance with this new policy, the Board has declared a fully imputed interim dividend for the 2021 financial year of $0.13 per ordinary share to be paid on the 22nd of April 2021 to all shareholders on the group's share register at the close of business on the 7th of April 2021. Now Nick is going to give a group update. So I'll hand over to Nick, and he will talk about our strategy and provide some group performance highlights of the half year.

Thank you, Joan. And good morning, ladies and gentlemen. Slide 8 demonstrates our purpose, vision and strategic priorities and how they play into our values. The past 3 to 4 years has seen the transformation of The Warehouse Group from a company with multiple independent brands working in silos with duplicative support functions to a centralized, agile, efficient, high-performing, customer-focused retail group, working together to help Kiwis live better everyday. This is our purpose and throughout our transformation. This has not changed. But rather, our transformation and shift to agile has enabled us to change fundamentally so we may deliver on this purpose. Our vision to build New Zealand's most sustainable, convenient and customer-first company has now become embedded throughout the organization. How we deliver on this vision will continue to evolve as we adapt to meet the changing needs and wants of our customers. This year, we have developed this vision to focus on 3 primary areas. Firstly, to provide a customer-first offering powered by data. We are investing in our core systems and infrastructure to capture, manage and utilize data better to manage our inventory to monitor both internal and customer-focused initiatives across the group and to enable us to identify customer shopping behavior to allow us to adapt quickly to solve our customers' problems. Second, to provide a frictionless on-demand shopping experience. This is providing customers what they want, how they want it and when they need it, in the smoothest, easiest and hassle-free way, be it in-store or shopping online, either with delivery or with Click & Collect. Using the principle of continuous improvement, we continuously make changes to our operations and improvements to our stores, websites and delivery options in order to meet these ever-changing customer needs. Last but not least, by delivering an ethical and sustainable performance. This means achieving our vision by offering ethically sourced sustainable products to our customers, doing the right thing for our people and delivering sustainable performance and returns to our shareholders. Our strategic priorities underpin our ambition to fulfill this vision. These are outlined here, but I'll go into these in more detail on the next slide. Lastly, our values underpin our way of working, our culture and how we strive to go about delivering on our strategic objectives to put the customer first in everything we do, to walk the talk and make things happen. And to do good by being 1 team, standing up for our people, our planet and our communities. Slide 9 demonstrates further detail on how we are starting to deliver on our vision to build New Zealand's most sustainable, convenient and customer-first company. We are building a customer ecosystem. This is at the heart of what we do. Our ecosystem is centered around our customer. I'll go into this in more detail shortly. But essentially, it's designed to serve our customers' needs and wants through our people, our platforms and our data. By utilizing our data-powered platforms, we can engage with new and existing customers to give them seamless and frictionless shopping experience. We have invested in our customer-facing e-commerce solutions, ongoing store optimization and supplier relationships to improve inventory management. We have achieved a number of milestones in this half. We re-platformed and relaunched a new website for The Warehouse; we continued to develop TheMarket.com, providing 2.5 million individual products for our customers; and with improved inventory management, we have reduced in-store SKUs by 11% in Red, but with an enhanced range of choice through our online offer. We are building the experience of the future. We know customer shopping habits are changing and that we must change and adapt with them. We continue to focus on our store optimization to ensure that we have the right stores in the right places with the best layout and are appropriately staffed to meet customers' needs and shopping behaviors. Our focus on e-commerce solutions is designed to meet trends towards digitally powered shopping journeys, driving on demand shopping, whenever and wherever our customers want. This half year, we have developed personalization across our store websites and e-commerce platforms. We have established same-day Click & Collect at The Warehouse, increasing fulfillment by 116%, and scaled 1 hour Click & Collect at Noel Leeming, increasing fulfillment by 93%. With Warehouse Stationery, we continued store optimization through the implementation of our store within a store program, which is proven to be hugely successful, and we rolled out a further 6 SWAS stores this half year, bringing the total to 23. The third pillar of our strategic priorities is to invest in our infrastructure to excel in retail fundamentals. We seek to deliver the best retail performance metrics, build a strong corporate and brand reputation, and build a company with long-term financial security and improving returns for our shareholders. We have seen benefits accruing from this across the company in H1. We decreased stock on hand by 14% to $497.7 million at half year-end and reduced aged inventory as a percentage of finished goods from 8.7% as at January 2020 to 5.4% as at January 2021. In 2020, we held our #8 spot in the 2020 Colmar Brunton Top 20 Corporate Reputation Index for the fourth year in a row, despite the numerous challenges the year brought. And at the half year, we're in a very strong financial position with cash on hand of $183.6 million which combined with available facilities, increases our liquidity to $513.6 million with no debt drawn down currently. Moving to Slide 10 and our ecosystem. This demonstrates our customer centricity, putting customers at the center of everything we do and finding new ways beyond our own network to satisfy their needs and wants, all powered by data and driven by personalization. Today, I'll highlight just a couple of successes we have seen in this half. Our approach to fulfillment demonstrates how we deliver to customers however they want to shop for goods. We established same-day Click & Collect at The Warehouse and 1 day Click & Collect at Noel Leeming. Noel Leeming consultation revenue increased 375%, with Noel Leeming tech service solutions revenue increasing 28%. We increased our use of artificial intelligence, chatbots and digital humans to drive improved personalization and better to solve customer problems while increasing team member engagement and effectiveness. Our digital human, Nola, has become one of our most productive employees. We increased customer payment options by launching Purple Visa interest-free at The Warehouse and Warehouse Stationery. Online shopping is increasing exponentially, and we're dedicated to providing customers with a seamless, frictionless online shopping experience. Our online sales in total increased 50.3%, now up to 11.9% of total group sales. As I previously highlighted, we continue to develop TheMarket.com, now featuring over 4,400 brands and over 2.5 million active SKUs, but also increasing customer sessions and repeat purchases. And lastly, we launched a free e-waste recycling program in 16 Noel Leeming stores, making it easier for our customers to live sustainably. Moving to Slide 11 and highlighting some of our key performance metrics for each of our brands. Total group sales increased 7.4% for the half year. And as you can see, this is driven in no small part by exceptional sales growth in both Noel Leeming and Torpedo7. The Warehouse saw pleasing sales growth of 3% and delivered exceptional operating margin growth from 6.4% in the first half of FY '20 to 12.7% this half year. We continue to focus on our everyday low price strategy, combined with increased sales from higher-margin categories and gain further benefit from buying better and exploiting our sourcing capabilities. Online sales continued to increase significantly over the last year as New Zealanders shop online both in and out of lockdown periods. Red's online sales grew 75% on top of the 50% achieved in the FY '20 financial year, while Click & Collect fulfillment grew an outstanding 116%. Our new same-day collection offer along with improved logistics and inventory management, provided exceptional service delivery for our Click & Collect shopping option, which our customers told us, they appreciated greatly. Warehouse Stationery sales grew 2.1% delivered outstanding operating margin growth from 7% in FY '20 first half to 12.6% this half year. This is driven by less discounting in the half year, combined with the benefits of our increasing SWAS model, for which we rolled out 6 more integrations this half. At $17.2 million operating profit, this was another record first half for the brand. Online sales trajectory continued in H1 with 31% online sales growth following 25% growth in FY '20. Warehouse Stationery saw our largest Click & Collect fulfillment growth, increasing 230% as people continue to work and study more from home. Noel Leeming sales were up 15.7% in the half, contributing significantly to the group-wide sales increase. Noel Leeming also delivered 140 basis point increase in operating margin to 5.6%. customers demonstrated the need for more tech products to enable them to work and learn from home and helped online sales to increase 85%. This was driven by our class-leading Click & Collect offering, which now offers 1 hour collection. This improved offering increased Click & Collect fulfillment by 93% compared to the FY '20 half year and following growth of 130% in the previous year. Moving to Torpedo7. With a net new -- with a net 2 new Torpedo7 store openings in the 2020 financial year, along with targeted media, in-store campaigns and booming domestic tourism, Torpedo7 sales increased a huge 29% on previous year, including same-store sales growth of 24%. I'm especially pleased to report the turnaround in Torpedo7 from an operating loss of 6.4% in the first half of last year to an incredible positive operating profit of 6.2% this half year. Our turnaround strategy for Torpedo7 is delivering results, thanks to improved product margins, reduced discounting and efficiencies gained across the supply chain. The Torpedo7 online offering also improved with online sales up 66% and Click & Collect fulfillment up 120%. New store opportunities have been identified, and this has commenced with the opening of Torpedo7 Napier store last week. I want to take this opportunity to thank Simon West and the team for driving this impressive turnaround. Slide 12 provides some of the key metrics we monitor for the performance of TheMarket.com. It's now been 18 months since the launch of TheMarket.com website, and its online presence is going from strength to strength. We're exponentially improving metrics. TheMarket.com offers a significant range in audience growth, supported by increasing purchase frequency and has grown merchant orders by 493% in FY '21 H1. We now offer 4,400 local and international brands and 2.5 million individual products from more than 600 merchants. We recorded 9.2 million online traffic sessions in the 6 months ending January 2021, this is up from 7.8 million sessions in the first year and have 207,000 active subscribers. We now have 140,000 active customers and the number of orders per customer has increased 25% in the first 6 months compared to prior year. I'll now hand over to Jonathan, who will talk you through the financials for the half year in more detail.

Thanks, Nick. So as Joan and Nick have been talking to, the first half result for the group has been a record. Looking at the group financial performance, some highlights to call out are sales growth of 7.4% or $125 million versus 2.6% last year. This was particularly driven by exceptional growth in Noel Leeming and Torpedo7. Gross profit has increased at more than double its rate, underpinned by group gross profit margin of 36.2%, which is 260 basis points up on last year. We began to see signs of this margin growth last year where margin was up 110 basis points in our FY '20 first half result. Cost of doing business as a percentage of sales decreased by 190 basis points with good control of variable costs, including store labor and fulfillment costs versus the comparable period. This delivered an operational profit of $153 million at a margin of 8.5%. Adjusted net profit, as has been said a few times now, was up 140.2% to $111 million. So turning to Slide 15. What Slide 15 shows is week-on-week sales trends in the business since the beginning of the half year. What you can clearly see is, firstly, the Aukland lockdown in August, followed by a sharp recovery. And the timing difference, secondly, of Christmas relative to Black Friday, where we had 1 more week of trading this year versus last year. And also a Christmas falling on a Friday versus a Wednesday in 2020 -- 2019/2020 financial year. Overall sales growth of 7.4% comprised relatively modest growth from Warehouse and Warehouse Stationery with 3% and 2.1%, respectively. However, the standout growth came from Noel Leeming and Torpedo7 at 15.7% and 25%, respectively. What has also been surprising is that the Q2 outperformance of Q1 in terms of sales growth. This is not a trend we had observed in recent years. And shows the robustness of spending at least that we've seen in the first half of our financial year. Looking at Slide 16. What it clearly shows, we have an improvement in gross margin, profit margin which started with our H1 result in FY '20. This has been the most significant driver in the improvement of financial performance with gross profit increasing by $89 million. The Warehouse, Warehouse Stationery and Torpedo7 all experienced significant improvement in the gross profit margin this half. There have been a number of transformation initiatives that have contributed to this improvement in margin. The most significant of these being in The Warehouse and the introduction of everyday low pricing 3.5 years ago, which led the platform for further initiatives to improve margin and greater control of inventory management and promotional activity, which we've seen across other brands. Turning to Slide 17. Slide 17 gives some further detail on our cost of doing business, which can also be found in our financial results. A couple of items I want to call out. First of all, employee expenses are down 110 basis points to 15.9% of sales. Approximately 67% of employee expenses related to stores, fulfillment centers and distribution centers, which have all been managed well throughout a period of elevated sales. In particular, store labor has declined 1.5% compared to the prior half year period driven by the efficiency gains from the labor operating model changes we had in our Warehouse stores. Combined depreciation and lease costs have declined slightly, with a reduction of 4 stores as part of the group's store footprint optimization and ongoing SWAS program. Other costs are down 30 basis points, which is a mix of fixed and variable costs, including technology, credit card commission and non labor store costs and advertising and promotional spend. Looking at Slide 18. To better show the underlying performance of the group, we adjust our reported earnings for unusual items. This is the number that we base our dividend policy calculation on. There are 2 major items to note here in terms of NPAT -- on the adjusted net profit after tax. First of all, the restructuring costs, the group has continued its transition to an agile way of working. The restructuring costs incurred in the current half relate to fees paid to our consulting partners and some additional redundancy costs connected with the group's restructure announced at the end of last year. The second item to point out is the repayment of wage subsidy in December 2020. The group made the voluntary decision to repay the $67.6 million in relation to the government COVID-19 wage subsidy. After adjusting for these 2 items and other minor items, reported profit improves from $55 million to an adjusted net profit after tax of $111 million for the half. Slide 19, turning to our balance sheet. There are a few line items I'll call out here. Firstly, inventory, which is significantly lower at the end of the half year. Following strong customer demand through Christmas holiday period, better inventory management and the impacts of COVID-19, which have included supply chain challenges in port congestion, it should be noted that last year also, Chinese New Year was earlier, which brought forward some of our purchasing activity in The Warehouse. Secondly, higher trade and other payables are due to higher New Zealand trade creditors and higher payroll accruals impact by the timing of the balance date occurring a week later in the payment cycle compared to last year. And finally, gearing. This time last year, we announced a reduction in gearing from 24.5% to 12.6% on a non-IFRS 16 gearing measure. This trend has continued. And we've ended with a very strong cash position of $184 million, which when combined with the undrawn facilities of $330 million, gives us liquidity of $514 million. Slide 20. Slide 20 gives a bit more color on inventory with the 5-year history of our inventory levels at half year and also some turn -- inventory turn ratios by brand. What this demonstrates is that despite significant drops in the likes of TWL, the impact -- the implied turn ratios are not unsustainable. We think there is more to go, in particular, in The Warehouse, Warehouse Stationery and Torpedo7 brands. Turning now to Slide 21, in terms of cash flow. A couple of items to note here. The very strong EBITDA with an increase of $83.4 to $247 million for the half did not translate into a significant increase in operating cash flow compared to last year. And this was due to the repayment of the wage subsidy of $67.6 million, plus increase in tax paid and reduction in working capital offsetting most of this benefit. The other major difference when looking at net cash flow is the fact that we paid a dividend in relation to the FY '19 final year. And there was no dividend, which impacted FY '20 cash flow and no dividend in the FY '20 half. This resulted in a net improvement in our cash position from year-end of $15.5 million to get us $184 million of cash. Slide 22, looking at CapEx spend. Some further details on our CapEx spend for the half. We are pleased here to see a 33% increase in our spend versus FY '20, with year-to-date spend of $40 million. The group's major investments in the half were in customer-focused digital initiatives, including our group e-commerce platform and continued development in TheMarket. The investment in our core systems is also a major component, including ERP finance and inventory systems, Warehouse Management Systems and deploying cloud-based master data management. The third biggest category in our CapEx spend is store renewals and include the new stores in Ormiston and the rollout of 5 store within a store integrations in the first half. The group did provide guidance of capital expenditure to be in the range of $100 million to $120 million in FY '21. While we do expect CapEx to pick up in the second half, our revised FY '21 CapEx number, our guidance is between $80 million to $100 million. So now turning to Slide 24. Slide 24 gives a snapshot of our overall divisional performance. The graph on the right-hand side clearly shows the significance of the performance improvement in The Warehouse with operating profit up $62.8 million, accounting for 75% of the improvement in group operating profit. However, all the brands with the exception of TheMarket, which is only in its second year of operation, exceeded a 50% increase in their operating profit. So turning to Slide 25. On Slides 25 to 28, we cover the financial performance of each of the established trading brands. I will touch on key highlights of each, which haven't already been called out by Joan or Nick. So first of all, looking at The Warehouse on Slide 25. The standout in performance here is the gross profit margin, which was up 340 basis points in combination with CODB being down 6.1% in terms of dollars, due to good variable cost control, including the successful implementation of our new labor operating model. This resulted in our operating profit improving 105% to $122.6 million and an operating margin of 12.7%, which is over -- or nearly over double the operating margin from last year. Since H1 last year, there have been a net reduction of 2 stores with Birkenhead, Johnsonville and Dunedin stores closing and the Lunn Ave store opening. Turning to Page 26, in terms of Warehouse Stationery. The financial performance for Warehouse Stationery is a similar story, but with much greater contribution of the gross profit margin to its financial performance. Sales were up 2.1% on the prior period. And despite total transactions declining compared to FY '20, both average basket and conversion was strong. Gross profit margin was up 500 basis points due to a range of inventory management initiatives, including the benefit of stronger disciplines around promotional and clearance activity. This in combination with holding CODB flat in terms of dollars delivered an operational profit improvement of 84.4% to $17.2 million. We had 6 further SWAS integrations we implemented, bringing the total number of SWAS to 24 with 1 new SWAS store opening in Lunn Ave. Turning now to Slide 27. Noel Leeming delivered another excellent result, with the largest dollar increase in sales of all the brands up $80.4 million or 15.7% compared to last year. Top performing categories with double-digit sales growth from prior period included communications, computers, whitewear, televisions and small appliances. Gross profit margin was relatively steady at 22.7%, with some increase in CODB reflecting the stronger variable component in store labor relative to other brands, and delivered an overall operating profit of $33.1 million, up 54.3%. In addition to the 4 store closures and 2 store openings in the second half of FY '20, Noel Leeming Tokoroa was closed in September 2020. And finally, Slide 28, looking at Torpedo7. It should be noted that this is the first year that we are presenting Torpedo7 stand-alone excluding 1-day, which in last year's sales numbers would have accounted for $24 million of sales. This has been a turnaround half for Torpedo7, achieving the strongest sales growth of all brands at 29% and delivering $84.9 million of sales in total. Torpedo7 has benefited from strong trends in outdoor activity and fitness, at the same time as lifting its media and in-store marketing campaigns. Gross profit margin is up nearly 950 basis points to 37.8%, which is approaching where we would expect the margin to be for a brand operating in this category. And in combination with good control and CODB down 310 basis points as a percentage of sales, delivered an operational profit, up 223.5% to $5.2 million. I'll now hand back to Joan to comment on our outlook.

Thank you very much, Jonathan. So I'm going to look at the outlook and the dividend. So for the first 4 weeks of the second half, we experienced group sales growth of 2.3% on the same period in financial year '20. This is inclusive of the most recent Auckland Level 3 lockdown. However, for the 3 weeks into March 2021, we do cycle a comparative period in March 2020, which saw increased COVID-19 uncertainty and unseasonal increased demand and sales as New Zealanders face the impending lockdowns. As a result, sales for the first 7 weeks of the second half are relatively flat year-on-year. Compared to the first 7 weeks of the second half of FY '19, which is a more comparable period being unaffected by COVID-19, sales in FY '21 are up 9.7%. While the group has traded well through recent Auckland Level 3 lockdowns, there does remain significant uncertainty as the COVID-19 environment evolves including: the sustainability of heightened consumer retail spends; constraints on global supply chains as consumers and other parts of the world experienced relaxed COVID-19 lockdown restrictions; and retailers building stock levels ahead of retail demand. So due to that continued uncertainty in the trading environment, the Board does not consider it appropriate at this time to provide guidance for the full year FY '21 result. The Board will continue to reassess this position as we get closer to the year-end. And as I said earlier in the presentation, the Board are pleased to declare a fully imputed interim dividend for FY '21 of $0.13 per share payable on the 22nd of April 2021 and based on a record date of the 7th of April 2021. So I'm going to thank you for your time this morning. But I also want to take the opportunity to thank Nick and the entire Warehouse Group team for delivering what has been an outstanding result for this half. And I know that we've had some fair wins in terms of consumer sentiment and spending, but as you'll see from the detail of the result, a lot of the work that's been put in in the last 3.5 years is now really to pay dividends to the company and its operational performance. So thank you, and I'll now open the mic for questions.

[Operator Instructions] Our first question comes from Lilly Zhuang at Jarden.

Can you hear me, sorry.

Yes, really well.

Okay. Perfect. So my first question is about the gross margins. Obviously, you've seen significant uplift across most of the segments like Red and Blue Sheds and Torpedo7. To what extent do you think this level can be sustained? Do you think this is a sustainable level going forward? And did the recent NZ dollar strength against the USD contribute to a bit of that in the current period?

I'll ask Nick to answer that.

Okay. So I'll take the first question, for sure. Thanks, Lily. Yes, that's one of the things that's been most encouraging for us. We've been saying for a number of years now that we would no longer chase unprofitable sales. And so we've built a mechanism, both in terms of the intake margin and the selling margin that enables us to be able to have much better control. So if you think about, first off, the fact that we built a better sourcing business and so do a lot of the business direct, we have built that out. We have 200-plus people in Shanghai. We have an India office and a Bangladesh office, Bangladesh being significant for apparel now, our biggest apparel manufacturer in the world. And so we're getting a benefit on that end. We've continued our ethical sourcing policy. But in addition to that, we firstly moved to EDLP a few years ago in Red. And so all of the up and down in pricing that often confuse customers, and they told us it was very confusing, they could never be sure what the price was and whether it was correct, we've seen benefit from being able to give our customers every day value. So the price is the price, the price. In addition to that, even though we are still in the process of modernizing our -- and in some cases, 30-year-old systems, we've built mechanisms, especially using data science where we've been able to do a lot of work around price optimization and sell-through. And so being able to buy product better, negotiate better through our use of our negotiation factory tool, be able to price it appropriately to optimize profit using data science, being able to plan the sell-through better despite the systems inhibitions and being able to sell through and, therefore, generate less clearance, run on less inventory, are the reasons why we've improved gross margin -- gross profit at double the rate of sales. And so whilst we understand that there is a buoyancy around the market at the moment, we believe that it's more as a result of all of the efforts that we've put into all of those areas that make it sustainable.

And just on FX. We keep cover around that 65% to 70% mark in terms of 12 months forward. And the delivery rate has been more around that 66% mark. So given we're continuously updating our cover, we haven't seen the benefit of some of the spikes in the U.S. -- NZ to U.S. dollar rate that we've seen in recent times, yes. So but going forward, we'd expect some of that to factor in, but it will all be averaged out by our overall buying over the period.

Right. And then the next question, I recall back in December and January, you had mentioned shipping delays on some winter products. So is that no longer an issue?

Well, it's still an issue. It's fairly isolated. There's -- it's a volatile situation between what I talked about then, which was the circulation of containers around the world, which is still inhibited by COVID all around the world. And I read today that the Suez Canal is likely to be blocked for a couple of days, which isn't going to help. And then in addition to that, the -- a lot of our merchandise comes through ports of Auckland, and we're all aware of the issues there. So what I would say is that we've planned for it. We're managing it actively. We look for substitutional products. We brought forward things where appropriate. There are isolated areas. Winter is the latest one. We got through back-to-school fine. We got through Christmas fine. But it's not going to be material in our view.

Great. And then on Torpedo7, now that it's in an operating profit position, what's your -- like how should I think about it in terms of the profitability going forward, maybe a pullback or sustainable?

Yes. So I mean, the reason why we haven't given guidance in totality is because the current situation is extremely volatile. So in a half where we've just announced 7.4% sales gain, you will have seen on Friday GDP figure is down 1%. So there's a real bifurcation of everything going on. It's clear to us that there is some benefit and Torpedo7, I think, has been one of those beneficiaries of the discretionary income, something around $12 billion that typically key we spend abroad, being retained in the country. And if you think about the $16 billion to $17 billion tourist spend when they come in, it's far more likely that people will buy goods such as bicycles or ski gear to -- because they're stuck in the country and they're using our country for oddball pursuits, as opposed to tourists coming in who are much more likely to spend on hospitality and experience. So there's no question that there's a benefit. It's hard to model because we don't even know when the -- if and when a bubble is going to happen with Australia, let alone the rest of the world. But what I'd point you to is that -- is the fact that we've gotten leverage and the benefits from Torpedo7 were anticipated pre-COVID. I think we've gotten some incremental on top of that. But it's come from starting to get to more scale, improving how we buy and the profitability margins. We've done quite a lot on the cost base like improved logistics, for example. A lot of those benefits still to come through. And we're not sort of finished with accruing those benefits. So I think you'll see some easing of demand at some point in the future. But the structural benefits will remain. So we see it as a profitable business that will be accretive going forward. But hard to say in the immediate future, how much so. We do still see opportunities for opening stores. In fact, last week, as I mentioned, we opened Napier. We're looking for other opportunities. There's quite a few places where we see a lot of potential, and that will only help.

And you're not aiming for a specific number of store rollouts by year-end?

No. We'll take opportunities where they make sense.

Our next question comes from Chris Byrne at Craigs Investment Partners.

Wow, what a massive result, congratulations. I just quickly -- I know you've sort of given a sort of mixed outlook versus what's the prior comparable period, but it looks like sales are still trending reasonably well. Can you sort of give us an outline on what your margin trends have been like in the last couple of months and what those are still looking like? Because I know you mentioned you've gone through the restructuring power process late last year. Are you still cycling good margin improvement over the last 2 months or so?

Yes. We're still seeing good improvements. There's -- obviously, on a tactical basis, from week-to-week, month-to-month, there's a number of things going on. We've had further Auckland lockdowns in the last couple of months. Who knows where that will go. We've got a shift in Easter, which is a week later. But we've continued to manage our clearance. And as we mentioned, aged inventory reducing from, I think, 8.5% to 5.7% means that we've got less of a drag on our business in terms of clearance. So that will feed through in terms of future benefits as well. Interestingly, as well, this week, we're starting to cycle up against panic buying going into lockdown. And you may remember last year, we missed Easter effectively and had to give away a whole bunch of Easter eggs. We're hoping we won't have that sort of disruption, and we'll be able to continue to harvest margin. But yes, as I said, margins, we believe, to be continually sustainable. And we believe also that we'll continue to get cost leverage that was a large part of -- if you think about margin -- gross profit benefit in addition to cost leverage, we see both of those things continuing.

Great. I don't have any problem with giving away Easter eggs. It's great.

We try to make some money out of selling them.

And also sorry -- and just also, I was sorry, I was a bit late to the call so when you're going over the dividend policy. I just wanted to clarify the special dividend will be as paid. And with this $0.05, should we assume that's over and above the 70% payout ratio?

We've aggregated the $0.05 per share special dividend within that policy framework at this stage, Chris.

Okay. Okay. So that -- so effectively, the $0.13 plus the $0.05 and then whatever you forecast that should add up to sort of 70% level?

Yes. Yes, yes.

Thank you. We have no further questions, so I'll hand back for any closing comments.

Well, thank you very much, everyone, for your attendance this morning. It has been great to be able to present this result to you. As I said in my introductory comments, a huge thank you from the Board to the entire team and to our shareholders for their fortitude, and it's nice to see that the market is acknowledging the progress that we're making. And also, of course, to our customers. So we look forward to updating you as we go forward closer to the end of the financial year. Thank you.