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

Thank you for standing by, and welcome to The Warehouse Group Limited FY '23 Annual Results Call. [Operator Instructions] I would now like to hand the conference over to Joan Withers, Chair. Please go ahead.

Tena koutou, and good morning. Welcome to The Warehouse Group's annual results announcement for the year ending 30 July 2023. I'm Joan Withers, Chair of The Warehouse Group. And with me this morning I have our Group CEO, Nick Grayston; and our CFO, Jonathan Oram. I'm going to go through the introductory part of the presentation, including giving detail on our final dividend, and Nick will provide narrative on our strategic reprioritization and the actions that we took in the second half of the financial year to maximize EBIT. He will also cover high-level divisional outcomes and specific actions being deployed to address the significant operating loss we have experienced on Torpedo7 this year. Jonathan will then go through the detailed financials, and I will conclude with our reading of the trading environment that we are facing for the balance of FY '24. I'll start by saying that FY '23 has been a tough year for The Warehouse Group. A challenging trading environment with Kiwi families experiencing rising inflation, increased cost of living and rising interest rates has intersected with the group being midway through a transformation program and a peak year of spending on information systems and digital infrastructure. As a result, we have had to make difficult decisions to navigate through those challenges. On to Slide 4. We are reporting a group sales result of $3.4 billion, up 3.2% on FY '22, including a record sales result for The Warehouse of $1.9 billion, which was up 9.6% on the prior year. We had planned for increases in the cost of doing business, in particular around our East Costs as we continue to invest in replacing legacy systems. Riding through this part of the investment cycle, while facing pressure on our gross profit margin exacerbated our challenges. The pressures on gross profit margin were particularly acute in the first half of the year with higher promotional activity, shipping delays and congestion. In the first half of the financial year, we enjoyed sales growth of 4.8%. This slowed in the second half to 1.4%. The group's response in the second half was a strategic reprioritization, focusing on operational performance, close management of gross margin, active reduction in cost of doing business and rebalancing project spend. While initiatives have been put in place, we have not been able to completely offset ongoing cost increases. But in the second half, we are pleased to have recovered some of the gross profit margin decline experienced in the first half and our cost of doing business has decreased as a percentage of sales compared to the prior year as a result of the actions taken. We are proud of our purpose of helping Kiwis live better every day. Our vision is to make sustainable living easy and affordable for everyone, so to the benefit of our customers, our community, and our planet while providing sustainable long-term returns for our shareholders. Now we go to Slide 5. As I previously noted, our group sales were up 3.2% on FY '22 and notably 10.7% up on pre-COVID FY '19. Both reported and adjusted net profit after tax were down significantly, the latter by 56.2% versus the prior corresponding period. Gross profit dollars were down by 2.4% on FY '22, and our GP margin was also lower than the PCP. However, as Jonathan will detail later, second half gross profit margin percentage improved 160 basis points from the first half. Our net debt at year-end was slightly higher than at year-end FY '22, but the actions that we took in the second half saw our net debt position improved materially from the $83.4 million net debt position at the half year. Now to Slide 6. We continue our strong focus on our ambition to reach 0 emissions in our operations by 2040. A highlight in our path to progress was that just after year-end, we signed a power purchase agreement with Lodestone, a developer and operator of solar farms. 260 of our sites will be powered by solar energy as early as 2026. Other milestones in our road map include having 100% of our light passenger fleet powered by electricity and now having 33% of our private label sales from products with sustainable attributes. To Slide 7, dividend, final dividend for FY '23. The directors have declared a fully imputed final dividend of $0.08 per share. This is in line with our policy of distributing at least 70% of the group's adjusted net profit after tax at the discretion of the Board and subject to trading performance, market conditions and liquidity requirements. As previously noted, net debt has reduced materially from the position at the half year when we did not declare an interim dividend. Our liquidity is now well within the bounds of our target area and we have significantly reduced our planned project expenditure for FY '24. The recall date for the dividend will be the 16th of November, and it will be paid on the 1 December 2023. I'll now hand over to Nick.

Thank you, Joan. Tena koutou and good morning. As Joan has shared with you, while we saw strong sales in The Warehouse and delivered 3.2% sales growth across the group in FY '23, this has been a tough result overall. We plan for an increased cost of doing business that face more-than-expected pressure on our gross margin through promotional activity and cost of goods inflation while continuing to deliver value to our customers. We made the conscious choice to continue investment in core systems to accelerate our transformation program, which has increased the CODB. At our half year update in March, we shared our strategic reprioritization plan to improve financial performance and operational efficiency along with an enhanced customer offer. While it's early days, we have seen some improvement in the second half financial performance. I am encouraged that we are better positioned to weather the economic headwinds that we expect to continue in the year ahead. I'll now share an overview of our action with you now. On Slide 10. We have reprioritized our transformation to concentrate on EBIT delivery and chosen to delay some digital initiatives as well as reducing capital expenditure. We made the difficult decision to restructure our head office team, which will deliver an annualized benefit of $24 million. Our employee expenses have held flat as a percentage of sales despite wage inflation pressures. We have reduced the operating cost of the market from the H1 loss of $16 million to $6 million in H2, and we expect this to reduce further to under $5 million for the full year and FY '24. After peak market cloud promotional spend in the first half, we have eliminated this incremental promotional spend in H2. We have deferred $30 million investment on some digital development projects to focus our attention on core system projects [ instant ]. We were able to reduce store labor costs through productivity improvements. Employee expenses were held flat across the group despite wage inflation pressures. We have closed 1 day operations and integrated the market in Torpedo7 into our agile operating model, and are beginning to realize cost savings, efficiencies and productivity gains. Grocery is one of our fastest-growing categories in The Warehouse. We are focused on building a more profitable category while delivering affordable essentials to Kiwis. We have increased our private label market kitchen range to 64 different products, have seen a significant improvement in our supply chain capability, and are focused on SKU reduction to increase efficiencies in order to deliver the best value products for our customers. Margin management is critical, and this means real-time pricing, reacting to increasing costs and driving efficiencies through the use of bulk stacks in store. Last but not least, we have reduced our inventory significantly from half year with the closing inventory of $493.3 million compared to $562.3 million at FY '22 year-end and $617.8 million at half year. Moving to Slide 11, divisional summary. Although profitability has decreased on last year, our core agile brands, The Warehouse, Warehouse Stationery and Noel Leeming, make up over 94% of our business and sales have remained relatively steady within a challenging macroeconomic environment. Noel Leeming suffered from the slowdown in sales of big ticket items and the shift of disposable income from products to travel and then payment post-COVID and was down 49.3% in operating profit. However, these 3 brands have delivered sales growth of 4.2% and the combined operating profit of $121.9 million, while down on prior year have still delivered operating profit margin 3.8% of sales. Losses in our smaller brands have impacted our group's operating profit significantly and we continue to address that performance with even greater focus. Moving to Torpedo7. Torpedo7 represents 4.8% of the group sales and has been affected by a decline in the bike market, which is also true globally. A wet summer and unfavorable weather had impacted snow and water categories at the time of increased infrastructure spending on their own ERP. This has resulted in an operating loss for the year of $22.2 million. We have provided for an inventory impairment of $4.6 million against Torpedo7 to manage excess and aged stock and have for the recovery plan in place. Addressing this challenge is a major focus for FY '24, and we will provide an update on our progress at the half year. Our ecosystem of iconic brands, an established store footprint and market-leading digital assets are centered around our customer, and we continue to believe in our strategy. Through our transformation work, we are unlocking value for our customers while finding efficiencies and new revenue opportunities for the group. I'm pleased to be able to share that our retail media network, MarketMedia, will be launching 120 in-store digital screens across 60 The Warehouse and Noel Leeming stores to offer advertising opportunities to our suppliers in times of Black Friday and Peak Friday. All stores are planned to be live by mid-2024. This network will allow our brands and suppliers to reach customers while they were shopping. Many suppliers have already placed future bookings, and we're excited by this meaningful step forward in our retail media revenue growth. TheMarket.com has been part of our online ecosystem since 2019 and has developed a marketplace platform on which thousands of customers and brands engage with. This year we have taken the best of the market and embedded it into the core of our group online strategy. Group Marketplace went live on thewarehouse.co.nz in October 2022, integrating some of the best to market products onto The Warehouse website and app. This offers our customers an extended range online, providing over 103,000 third-party products from 71 merchants to our existing online customer base. While our Group Marketplace is still in its infancy, we have seen good updates from customers and suppliers, and have achieved a total group gross merchandise value of $74.3 million in FY '23. We will roll out more choice in FY '24. We have addressed the market's prior year performance by reducing the operating cost of the market. The first half loss of $16 million was reduced to $6 million in the second half as a result of this action, and we expect the FY '24 operating loss in the market to be less than $5 million. MarketClub is proving valuable to our customers. Our 1.3 million members have saved almost $18 million in discounts this year. Through MarketClub donation platform, we have contributed over $1.6 million to community courses around New Zealand since October 2021. Incremental promotional spending impacted our margin in the first half. While this did drive good uptake and a very good CPA, have eliminated MarketClub incremental promotional spending in the second half. Growing first-party data through MarketClub provides us with a competitive advantage, which, for example, enables our retail media opportunity. Moving to The Warehouse grocery offering, we continue to see strong demand. Grocery sales grew 26.1% in FY '23 as Kiwis families chose to shop at The Warehouse more often to find much needed value on the essentials. Grocery contributed 18.7% of The Warehouse's total sales in FY '23. We experienced 91.8% growth in pantry and chilled, 26.6% in household cleaning items, and 23.8% in pet care. This year we trialed fresh fruit and vegetables in 12 Warehouse stores and have received great feedback from our customers. We have expanded our Market Kitchen range to 64 product lines including our famous $5 Market Kitchen 500-gram butter. We continue to take a considered approach to grocery expansion and have a focus on margin and supply chain management. Unfortunately, the recent legislation and code of compliance measures have offered no resolution to the lack of access to wholesale supply at fair prices, but we remain committed to offering affordable groceries to Kiwi families and we'll continue to fight for this. I'll now hand you over to Jonathan Oram, Chief Financial Officer, who will take you through our group financial results.

Thank you, Nick, and good morning, everyone. As Joan and Nick have been talking to the full year result for the group reflects a challenging year with the business gaining the cost of living impact on our customers, the impact of inflation on our cost base while going through a year of peak project spend. So looking at the result, sales growth of 3.2% was underpinned by a very strong first half with growth of 4.8%, followed by a softer second half with growth of 1.4% as the cost of living impacted -- pressures impacted sales growth, particularly in Noel Leeming and in Torpedo7. Gross profit margin declined 190 basis points to 33.4% compared to a prior year that saw a recovery from the first half decline of 200 basis points. Cost of doing business increased in dollar terms, mainly due to significant increases in information systems and digital costs and depreciation associated with the increased project spend but decreased slightly as a percentage of sales to 31.6%. Adjusted NPAT was $37.5 million in FY '23 compared to $85.5 million in FY '22, a decrease of 56.2% and includes interest expense of $9.1 million versus $0.7 million last year. Turning to Slide 19. We see the differences between reported NPAT and adjusted NPAT, in which we exclude unusual items to improve the understanding of the underlying business performance. There are 3 unusual items this year after no unusual items in FY '22. The numbers I quote here are pretax. So firstly, we removed a small realized gain of $0.4 million from the sale of our Royal Oak store property. Secondly, restructuring costs of $10.9 million represents staff redundancy costs and costs in relation to the closure of the One-day business; and thirdly, associate impairment of $3.5 million for the impairment of the group's investment in Zoom Healthcare. On Slide 20, we show the split of the result into the first half and second half. Overall, we have seen a slowing of sales between halves as we [ encountered ] COVID impacted first half in FY '22, and cost of living pressures have increased in the second half. H1 sales growth, as we've talked to, of 4.8%, slowing to 1.4% in H2. A few other points to note on this slide are: first, gross profit also showed signs of recovery through though it fell at a greater rate than sales in both halves, reflecting the decline in gross profit margin. The underlying gross profit margin did improve in H2 with a decline of 180 basis points versus 200 basis points experienced in H1. Second, the cost of doing business increased at a slower rate in H2 versus last year with the benefit of the cost of doing business reduction initiatives that we put in place in the second half. And third, the rate of online sales declined slowed but we continue to see the trend of customers returning the stores. Online sales as a percentage of total sales were 9.3% in H2, down from 12.3% in H1. Slide 21 looks at the half-on-half sales trend by brand. And some observations on this slide. First, The Warehouse saw significant sales growth in H1, up 13.2%, followed by a softer growth of 5.7% in H2, but delivering overall FY '23 sales growth of 9.6%, a record sales number of $1.9 million, reflecting the strength of the brands value proposition. Second, Noel Leeming was impacted by decreased spend on discretionary items over the year with H1 sales decline of 4.5% slowed in H2 with sales down 1.9%. And if you dig a bit deeper, you can see that Q4 sales decline was only 0.4%. So showing some resilience in the categories that Noel Leeming sales. Third, Torpedo7 was most impacted by decline in discretionary spend and demand declines in categories that experienced significant demand uplift during COVID, for example, bikes and fitness, with sales for the brand down 1.1% and 11.1% in H1 and H2, respectively. Slide 2 (sic) [ Slide 22 ], looking at gross profit margin, which has been one of the most significant drivers of the group profitability in recent years. And this year, with its decline is a significant driver of the FY '23 result. The 190 basis point decline at a group level equates to $63.6 million of gross profit on full year sales. Overall trends since 2018 has seen gross profit margin peak in FY '21, then declined back to FY '19 levels. This decline is more than we expected to get back post-COVID-19 highs, and the bulk of this decline has occurred this year and particularly in The Warehouse, which explains close to 80% of the decline. So taking a closer look at The Warehouse on Slide 23. Overall, for the year, we have seen a decline in gross profit margin for The Warehouse of 290 basis points. Most of this decline occurred in the first half, which was down 370 basis points. In the second half we have rectified 2 of the major drivers of the first half margin decline being first incremental Market Club promotional spend, which we have eliminated, and secondly, container detention costs, which have been running at a lower level in H2 last year. However, overall promotional spend, including discounting and also product mix impact, have continued to impact margin in the second half. And when we look at one of the drivers in terms of product mix, looking at overall grocery sales, these have grown 26.1% for the year, and increase the percentage of total Warehouse sales to 18.7% from 16.3% in FY '22. In Slide 24, we take a close look at what has happened in the performance of Torpedo7. After being on a path to breakeven, Torpedo7 experienced significant decline in EBIT over FY '23, losing an additional $20 million of EBIT versus FY '22. Contributing factors can be split between gross profit margin and cost of doing business. In gross profit dollars, we saw $14.7 million of the $20 million decline. In terms of categories, there has been a major dislocation of the bike market. And in snow/water categories, these have been impacted by unseasonal weather. And in the case of water, higher levels of competition. We've also taken extra inventory provisioning in FY '23. In terms of cost of doing business, this explains $5.3 million of a $20 million decline. This has increased as capabilities being built to support the store network growth and increased depreciation of new store fixtures and settings. Slide 25 gives a further breakdown of the group's cost of doing business. Cost of doing business was up $27.9 million or 2.7% from FY '22, mainly due to depreciation and information system costs, which were included in other expenses. Depreciation was up due to significant increases in project spend over the last few years. We have further details on this on the next slide. Employee expense is slightly down. And as a percentage of sales down 60 basis points post restructuring and store productivity initiatives. Lease expense was up 3% as the impact of inflation flows through to our property leases. Slide 26 provides a deeper dive on our information systems and digital costs. In the right-hand chart, you can see the profile of operating costs and the split between what is largely recurring operating costs in green and in blue SaaS project-related costs that can't be capitalized. As these new systems go live, some of the SaaS project expenditure is eliminated, but some of these costs will remain as recurring operating costs in the form of license fees and continuous improvement. For the year, total operating costs have increased $15.7 million. In the left-hand chart, we have capital expenditure and prepayments. This year will be a peak in capitalized information system expenditure we spend up slightly on last year. The largest 2 projects this year have been ERPFI, which is a new finance and inventory system in The Warehouse and Warehouse Station and Noel, and what we call, GOMS, which is the new Group Order Management System. Slide 27, looking at the summary balance sheet. The key points to call out here, first of all, working capital increased marginally over the course of FY '23. But within that, there was a significant reduction in inventory down $69 million to $493.3 million. And as part of this reduction in inventory was a normalization of goods and transit, which decreased from $94.1 million to $65.4 million. This reduction reflected a return to previous shipping transit times and a reduction in port congestion. Offsetting this reduction in inventory was a decrease in trade and other payables, reflecting lower inventory purchasing and a change in product and brand mix. Fixed assets increased by $14.4 million as offsetting the capital expenditure spend was the sale and leaseback of the Royal Oak store property. Net debt increased from $41.2 million to $48.1 million at year-end, but a significant reduction from the $83.4 million at half year, providing liquidity of $421.9 million, well within the group's target liquidity range of $350 million to $450 million. Moving on to cash flow on Slide 28. We have touched on most of the key drivers here already. Operating cash flows increased 103.2% to $214.2 million with a decrease in trading EBITDA, offset by a significant improvement in working capital movement for the year versus last year. Other major movements in cash flow included the sale of Royal Oak and also less dividends paid in FY '23, given though FY '23 interim dividend was paid. The capital expenditure component of project spend was up $7.6 million to $115.1 million. And this meant overall net cash flow resulted in a $6.9 million increase in net debt to $48.1 million. And then finally, looking at project expenditure on Slide 29 and within that capital expenditure. As has been mentioned, project expenditure was significantly up in FY '23 at a $154.4 million versus $140.6 million last year. When we talk about project expenditure, we are looking at the capitalized and expensed elements of projects within the business. Capital expenditure was $113.2 million in FY '23 compared to $107.5 million in FY '22. This level of capital expenditure is the second year in which we have run at more than 2x historical depreciation as the group addresses deferred investment in core systems, store and DC facilities and builds new digital assets. Core systems investment included the delivery of the ERP Finance and Inventory System, Group Order Management System, Warehouse Management System, Master Data Management, and the delivery of our new people and HR system. Store development continued in FY '23, but at a lesser pace than in FY '22. New stores included the new Warkworth retail center, a new Torpedo7 store in Botany, and the relocation of the Torpedo7 Christchurch store to a bigger site. Our SWAS integration program included the development of further 5 stores in FY '23, bringing the total number of SWAS stores to 40. FY '24 total project expenditure is expected to be $80 million, with capital expenditure plus prepayments to be between $60 million to $70 million. I will now hand you back to Joan, who will take you through the outlook of FY '24.

Thank you very much, Jonathan. This is actually Jonathan's last results for the group, and I would like to wish him all the very best in his new role as he departs The Warehouse Group, and thank him on behalf of the entire Board for his exceptional leadership over the past 5 years. So looking ahead, whilst FY '23 has been a challenging year, our initiatives to improve operational performance and reduce our cost of doing business have strengthened our position. We are optimistic we will maintain this momentum into FY '24, and our focus on improving financial performance will continue. This year has started with softer sales than expected, but with gross profits in line with expectations, we remain cautious about the outlook as we approach our busiest time of the year. The business has planned its cost base and inventory purchasing considering this uncertainty. We will continue to adapt to our trading trends to the market conditions as sales fell through to Christmas. As you've heard, Torpedo7 is our most challenged brand, and we will be reporting on the performance against our recovery plan at the half year. We have rationed project expenditure, as you heard from Jonathan, to a cap of $80 million in this current financial year with a focus on delivering major projects that are in flight. So that concludes today's presentation. I'd like to thank you all for joining us and for your interest and support in The Warehouse Group, and we're now going to open the call for questions.

[Operator Instructions] Your first question comes from Kieran Carling from Craig Investment Partners.

Just in terms of -- this is the first one from me. Looking at your cost of doing business, previously, the indication has been that, that will remain broadly flat in FY '24 with some of those cost reductions from FY '23 being offset by wage increases and some further digital spend and increased D&A costs. Can you just provide us with a bit of an update on your thinking there for the year ahead?

Yes. Thanks, Kieran. Look, the objective, I think as we've outlined in terms of operating in an environment where we think sales are going to be relatively flat for FY '24, it's the key cost of doing business also relatively flat, albeit within that, we do see IS costs continuing to -- IS OpEx costs continuing to decline. So currently, I think, putting a number around the $15 million mark against that. And there will be additional depreciation as this CapEx double flows through. So at least $5 million of CapEx. But we have other initiatives which we've got in place to offset that and they're around the things that we've looked at in the past, but we continue to look at our total labor spend of 17.5%. So it's still relatively high versus what we'd like to be. And so things like that will offset it, hopefully, to bring it back down to being, like I said, I'd expect overall relatively flat to '23.

And on Torpedo7, you talked about a performance plan going forward, obviously, a significant decline in FY '23. Can you just run us through some of the detail of what your strategy is for that brand?

Yes. Kieran, it's Nick. So broadly speaking, the recovery plan is broken down into 3 areas: One is margin improvement, the second is cost of doing business reduction, and the third is a product opportunity specifically. If I look at those sequentially, margin is going to be worth about $8.5 million. And that will be a mixture of improving the performance of cycle, though we don't think that the sales are going to bounce back. That's a global phenomenon as we had indicated, people bought a lot of bikes during COVID, which was one of the few forms of exercise they could actually do. And so there's really been a [ clutch ] in the market. That business is discounted. But we do see some opportunities within that. Our own brand mix will continue to increase, that's got a richer margin. And you've seen the performance of some of the sort of own brand at the retailers. We've corrected some of the pricing issues on the water business. We've taken some pricing opportunities and managing our discount. So all of those margin impacts worth about $8.5 million. In addition, looking at reducing our cost of doing business, by integrating the business into agile, we're saying about $1.7 million in terms of the sort of central head office costs. There are some store closures that are possible with about another $1 million. As we bring the business into agile, we started to apply some of the very successful techniques of managing store labor. So we see an opportunity of about $1.3 million in terms of productivity. There's about $0.5 million in terms of cost reduction from logistics and another $1 million from freight and a couple of other bits and pieces. So that $6.5 million benefit from those cost of doing business things. And then a small $2.2 million gross profit opportunity from the addition of some things like brands and camping barbecues, with test and fishing stuff, more electronics, product protections and other possibilities. So there's a lot of detail around it. It remains a very uncertain environment. The business is now, as part of agile, got full focus of the whole team and is a major, major issue. And so we're spending a lot of time on it. We'll continue to review the future of that business.

And I guess just one on where you see The Warehouse's value proposition in the current environment compared to the likes of Kmart. Kmart, you have mentioned in the past as a cheaper option. But obviously, that's where consumers are focusing at the moment. So I just want to know if you think there's some risk of you losing market share to Kmart. And maybe you could touch on the current promotional environment for yourselves and competitors at the moment?

Yes. As I've commented before, they're a retailer who does a good job to be respected. But they only compete with us in about 1/3 of our locations. And so we talked before about not being able to emulate their proposition entirely nor wanting to. As you know, they focus on home, apparel, some toys and a little bit of stationary and some gifting. That would not satisfy the needs of some of the pace in role New Zealand. And so our proposition necessarily is different. We are very focused on their opening price points and have made some quite substantial moves in terms of our pricing with more to come, not necessarily taking everything down or taking everything out but being a bit more nuanced about it. One of the critical things that we have worked very hard on [ expanded ] results is a grocery proposition. As we know, the customer in New Zealand is under a massive amount of pressure. And so we've been working really hard to offer affordable groceries. We started to trial fresh food in veg in 12 of our stores, getting great feedback on that. Grocery is now just under 20%, 18.7% of Warehouse sales. And we've launched some great products like Market Kitchen, buy it at $5, which is a reason to come to us. Pantry and chilled, for example, has grown 91.8% in the year. We still have challenges around fair prices. But to get around some of that pressure we are building our Market Kitchen range to 64 products. And again, we believe and are getting recognition for the fact that we've put a lot more quality into our products and they perform better. And whilst you might be forced to buy it for $5 the last year, most people will buy $1 to $6 last 5 years, and that's a better value. So something we remain very, very focused on a tough environment, but you've got to take your places where you fight.

I might just squeeze one quick one in. Can you run us through your expectations of where you see net debt falling in FY '24 and where you're currently sitting with your interest rate hedging?

So again, to the net debt, look, for the year, I'd expect at the moment, full year, end of FY '24 net debt to be at a similar level to where we are today. That's what we're trying to maintain the -- we're absolutely committed to maintaining the $350 million to $450 million of liquidity. We've also actually since balanced that added another $20 million. So our total facilities are now $490 million. We don't hedge our interest rate risk because we're running at such low debt levels. We don't see that as necessary. We'll end up with a cash balance at half year. So at these levels, it's not worth running a debt hedging -- interest rate hedging strategy.

Your next question comes from Guy Hooper from Jarden.

So just firstly on Torpedo7 and I guess, store counts. I mean, is there much of a profitability range within the existing Torpedo7 stores? And then I guess, how are you thinking about, I guess, that brand in terms of store presence in New Zealand? Is that a store reduction story? Or is it just, I guess, a store location or type of store reduction story?

No. So it's a great question. And almost all of the stores are profitable in their own right. But there are a couple, and I alluded to it in terms of some store closings that we're going to do. One of the reasons that makes us continue to believe in the opportunity to turn around the business part in sort of New Zealand's generic support of outbuilt pursuits is the fact that it would be very hard for someone to come into the country and to be able to obtain a store network like that quickly. And so as we think about the right of use asset, we believe that, that continues to have value. We will not continue to open large numbers of stores until we see the profitability turn. And as I told you, it's under the microscope at the moment. But equally, at this stage, no major closings or relocations.

Just on grocery, I mean, the sales just seems to grocery sales as a percentage of The Warehouse Group, a smaller percentage than what was reported at the interim. Is that a seasonal thing? Or have you made some changes that maybe slowed that growth, whether it's around pricing or categories store?

Yes. So I mean there's always seasonality but around different types of groceries. But we went really hard on some of the pricing. And it's in there that -- that's where a lot of the MarketClub offers were focused, which was an additional [ $14 million ] of incremental promotions in the first half. And so whilst we still have MarketClub pricing, we pulled back the incrementality of that. And so that's improved the margin. And generally speaking, whilst we are very focused on value, we're not going to drive the same level of unprofitable sales. And so we're being a lot more surgical and a lot more careful about how we do that. But we do believe in the future of grocery, it's a great frequency driver. And frankly, it's something that Kiwis really need in this environment.

So the last one for me, just on the current trading. I mean, there was comments about, I guess, slower sales than what there had been the gross profit in line. So it sounds like perhaps margin has been a bit more resilient than what you were expecting. Can you just give us, I guess, a little bit of color about what you're seeing there, either by brand or maybe just in terms of customer purchasing trends?

Yes. And it goes to a lot of the things I just said as well. But in addition, we've seen some commodity prices come back from where they were in FY '23 and some shipping costs reduce. So there's more margin built into the product. As I said, we're being much more careful about how we promote and how we manage our way through so that the inventory reduction means that there's less pressure on us to have to promote to get through inventory. We had to go pretty hard as a result of a sudden drop in sales with our Q2 performance in FY '23. And so we're a lot more measured and considered. In addition to that, if you look back to FY '23, it was a real scramble because of the supply chain complexity to get that product into stores. And so we don't have that this year. And so I don't anticipate quite so hard. So all sorts of issues around margin management. We've developed a capability around price optimization, how much and where we promote. We've been sort of more surgical about sort of prices down and prices up while keeping a focus on great value. So there's really a number of things that have come into that.

Great. And is that -- those, I guess, shipping normalizations and lower commodity costs, presumably, FX has been a bit of a headwind. Are they effectively just offsetting?

Well, a lot of the year has been hedged forward on FX. Do you want to comment on that, Jonathan?

Yes. Look, I would say in the scheme of things, that's been relatively well signaled through the business. We hedge -- currently hedged 75% of forward orders, 12 months forward. It's equivalent of 9 months fully hedged. We've been running at that level. So headwinds, not so much actually in terms of overall movement in hedge rate over the year. The biggest by multiple 4, 5x has been the shipping costs and the reversion.

And then just the last point in terms of the current trading. Is there anything worth calling out around consumer trends, whether that's out of a basket size or certain price points that are doing better than others?

Yes. I mean, FY '23 the traffic has been healthy, and it's been a real case of customers coming back to stores, as you'll have seen our online mix has dropped. One of the most encouraging things for us is if you look at the overall sales drop in Noel Leeming, for example, that reduced to 0.4%, so nearly flat in Q4. And so we're seeing sort of some life come back into the electronics business. And if we take the electronics category overall, we're seeing very strong performance in that category in The Warehouse at the moment. So whilst people might be trading down what they'll spend on TV, they are still buying TVs on Whiteware. And we've had great response to some of the brands that we've added in The Warehouse as well. So overall, our upfronts in that category is up and spreading the load a little bit more between the various different formats.

[Operator Instructions] Your next question comes from Margaret Bei from Forsyth Barr.

First off, I was just wondering if you could give us a quick idea of what your grocery plans are looking like in sort of the near to medium term given the trial has gone well in terms of fresh fruit and veg, is that something you're planning to roll out to all stores?

Yes, we'll be very cautious about that, specifically, the fresh produce. It requires a supply chain. We try to buy locally wherever possible. An exception to that will be bananas, for example, which are not a majorly produced item in New Zealand, but very focused on the spoilage around that business. We are intending to roll out our Market Kitchen business significantly though. And as I said, 64 products so far, we see a potential to get to maybe 200, 250 products. And where possible, we source that direct. For example, rice, we source from the biggest rice sector in the world in India. And there are products like that in dry grocery that you can import. Fresh is a lot harder. As you see, we've had a lot of good uptake. And the other focus in grocery is reducing the cost to serve. So being more efficient, getting it through our supply chain, a lot more cross-docking, much more just-in-time ordering and having improved the ordering process. But also increased use of bulk stacks installed, which reduces the handling costs associated with that will be a continued SKU reduction. We're really focused on driving essentials. It's not our plan to become a full-scale supermarket at least not in our current format, but the customers are clearly telling us that we need to do that. And frankly, pleased to have seen some reaction from the competitors bringing down the price of butter, for example, because of our aggression to give people a fair price.

On the outlook comments, and you mentioned softer sales than expected. I was just wondering if it was possible to sort of put a range on this, whether it was flat versus the prior year, I mean, or whether you're actually seeing some sort of low single-digit decline year-on-year at the brand level or at the group is easier?

So Margaret, we'll be releasing that in Q1 -- Q1 sales release. So it's quite volatile at the moment, and I wouldn't want to give anything that was misleading.

No problem. In that case, in terms of Torpedo7, I was interested to hear your comment that a lot of the stores are mostly profitable and there's only a few that aren't. Does that mean that the operating profit/loss in that division of about $20-something million is mostly attributed to a few stores?

No. No, it's not that. There's a lot around being a central costs, depreciation, cost of putting in ERP. So -- and that's why it's been important to sort of reduce the central cost and bring that in-house and be more efficient around things like marketing spend. There's a higher attribution this year to central costs, which is very much a focus. Do you have anything to add, Jonathan?

Yes. So when we look at store profitability, we're looking at what we call retail brand and all that sort of costs directly attributable to the store. And so there has been an increase and if you want to call them, head office costs as capability has been scaled to support a growing store network, which, as Nick said, we're not planning on growing the store network any further at the moment. And the refresh of the ERP system they use, which is Accredo moving to Microsoft Dynamics is a really big change for the business to the systems. And that's -- that, unfortunately, you replace the legacy system with a new system, there is an increase in cost associated with the ongoing maintenance of that. But it will, we believe that deliver a lot of improvements across the board.

On that same note then, I think at the half year, you talked a bit about combining the head office functions for T7 the market and also The Warehouse brand. How is that going? And do you have sort of any time frames in mind of when that might look complete?

Yes. So thanks for the nudge on that. So we've more than a year now had the central agile brands working together in terms of head office, Warehouse Stationary and Noel Leeming. Back in April, we bought the market into our digital tribe. And so we run it alongside all of our other digital properties. It was the end of August that we bought Torpedo7, so that's much newer. And so we're only sort of 1.5 months going on 2 months into sort of bedding that in, but it is done. What's also significant is at the beginning of this year, we moved our core brands retail operating structure to agile. And so the regional structure, for example, in the central structure all run together across Red, Blue and Noel. And we've seen a lot of synergies and idea sharing around that. And Torpedo7 is now integrated into that, as I say, it sort of very early. So all done, but early stages of betting it in, in terms of Torpedo7, the market's already merged in.

You've given some really good breakdowns of cost saving expectations from the various initiatives you have going on. Was there sort of a number in mind for how much the consolidation of the different head offices and I guess moving to agile might help T7?

Yes. I mean all of the $24 million of the unfortunate elimination of roles that we had to do earlier in the year is around that -- reducing the spend, particularly on digital, but also getting synergies across those businesses. And so that is the annualized benefit, it's $24 million. So that's central.

I guess final question from me is, there have been -- I think I saw some news articles around negotiations with unions being a little contentious and workers at one of your stores going on strike. Can you talk a little bit more about that situation and how it's playing out to the degree that you can?

Yes. Of course, Margaret, and a matter of public record. And our perspective is that our offer is very fair. The last collective agreement for workers who've been with us more than a year, over the last 2 years, it was just under 9%. And you look at that same constituency over 5 years, '18 through to what roughly in '23, and that's a 47% increase. And so you have visibility on the overall performance of the business. We think that's a very fair number. We have a relatively small number of union members, under 20%. We're negotiating good faith, and we hope that it will be more to a conclusion soon. But we obviously have contingency plans, and we've cut off according to how we can afford it.

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

Thank you so much for attending this morning. We really appreciate your interest, and we look forward to updating you at the half year. Thanks very much.

Thanks, everyone.

Thank you.