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

Thank you for standing by. Welcome to The Warehouse Group Limited FY '24 Interim Results Call. [Operator Instructions] I would now like to hand the call over to Chair, Joan Withers. Please go ahead.

Tena koutou, and good morning. Welcome to The Warehouse Group 2024 Half Year Results. I'm Joan Withers, Chair of the Board. And on the call with me today are Nick Grayston, our Group Chief Executive Officer; and our Acting Chief Financial Officer, Chief Financial Officer, Celia Mearns. Also with us on the call today is our new incoming Chief Financial Officer Mark Stirton, who will officially start with the group on the first of April. Before we do move on, I'd like to take this opportunity sincerely thank Celia for stepping into the role of acting CFO so adeptly and what has been a busy and very technically challenging 6-month period. Thank you, Celia. Your contribution has been immense. We'll go to Slide 4. The first half of our 2024 financial year has been difficult and the results that we're releasing today are challenging. This is a moment for all of us in leadership positions at The Warehouse Group to acknowledge that some of the choices that we've made have not been delivered as we had hoped. While we laid out the scale of the challenges Torpedo7 was facing when we spoke at our last FY '23 results and then further at the Annual Shareholders Meeting. Our results today crystallize the impact that the financial performance of Torpedo7 and the accounting impact of the resultant impairment has had on the overall group performance. The group announced on the 22nd of February 2024 that we had signed an agreement to sell the Torpedo7 business assets to Tahua Partners Limited. We have recognized a one-off noncash pretax impairment impact of $60.1 million in the half year income statement. And that has resulted in the overall group reported net loss after tax of $23.7 million. The Torpedo7 decision and other initiatives being taken are needed to reset our business and set us up for a much leaner, sharper focus group into the future. And Nick is going to speak shortly about our intentions in relation to the market. Our core brands are the underlying strength of the group, and we have a laser focus on their performance. And at this point, I'd like to note that set of financial statements is complex, and Celia is going to provide some more detail on the T7 impacts when she speaks shortly. The group reported continuing sales of $1.6 billion for the 26 weeks ending the 28th of January 2024, and that was down 4.9% compared to strong sales of $1.7 billion in the first half of FY '23. The Warehouse sales were $965.6 million, down 4.7%, Warehouse Stationery sales were $117.9 million down 5% and non-lending sales were $544.4 million, down 2.2%. Sales have been challenged by the current economic environment with the impacts of inflation, higher interest rates and increased living costs on customers' household budgets impacting discretionary spending and therefore our brands. This is especially noticeable following the top line strength in FY '23 first half. Our reprioritization and refocus is already showing progress. The leadership team is highly engaged on margin improvement and tight cost control. Our network has delivered 160 basis points improvement in group gross profit margin in the half year under review. Our continuing adjusted net profit after tax delivered a result of $30.7 million, which was up 18.9% on FY '23 H1 and that is a result of cost of doing business management and the reduction initiatives that we have put in place. Now to Slide 5, the FY '24 H1 financial highlights. The last few years have seen a mixture of peaks and troughs in group sales as COVID-19 and cost of living disrupt the retail trading environment. As previously mentioned, continuing group sales were $1.6 billion, and while this was down 4.9% against the near record first half in FY '23, it was flat against the first half of FY '22. And I've already touched on the 160 basis points improvement and gross profit margin. Continuing adjusted net profit after tax at $30.7 million was up 18.9% compared to the comparative net profit after tax in the first half of FY '23. Our net debt reduced significantly following the elevated levels of FY '22 and FY '23 during which time we reached peak spending on the transformation program and investment in essential systems and infrastructure upgrades. Net debt was $18.7 million at the FY '24 half year, and that compares to $83.4 million at this time last year. Liquidity was $471.3 million at the half year. Now to the dividend. The Board is pleased to declare an FY '24 interim dividend of $0.05 per share. The Board and management are acutely aware of the impact the group's recent performance has had on our shareholders. We are clear on the actions needed to deliver sustainable growth and shareholder value enhancement. We remain confident in the underlying strength of our business and in our ability to navigate through these challenges. The record date for the dividend will be the 8th of April 2024, and it will be paid on the 23rd of April 2024. Now to Slide 7 and some very good news. The Warehouse Group is pleased to announce today the appointment of Tony Carter as an independent director to the company's Board, and that will be effective from the 1st of May 2024. Tony, who will be known to many of you, is an outstanding appointment who brings wide range in retail, commercial and governance experience to complement the capability already in place around The Warehouse Group board table. Tony has previously served as Managing Director of supermarket operator foodstuffs and managing stores and where he played a critical role in both of those entities strategic development and expansion. Tony's previous directorships have included roles at Fisher & Paykel Healthcare and Air New Zealand, Fletcher Building, ANZ Bank New Zealand and Vector New Zealand. Tony Carter currently chairs the Board of My Food Bag, Datacom Group and The Interiors Group, and he is the Director of Ravensdown. We're also today announcing Julia Raue's resignation effective from the 31st of May 2024. Julia's leadership, particularly as Chair of the Health, Safety and Wellbeing Committee and her roles on the Audit and Risk Committee in the Environmental and Social Sustainability Committee have been instrumental in steering the group towards a better and more sustainable future. Julia informed us earlier of her intention to resign during 2024 and that has allowed us ample time to prepare for a seamless transition. And on behalf of the entire Board and The Warehouse Group, we thank Julia for her dedication, and we wish her the very best in her next chapter. And with that, I'm now going to pass you over to Nick and Celia to run through the group's strategy and the half year financial results in more detail.

Thank you, Joan, and good morning all. As Joan said earlier, this result is a sobering outcome for the group. The sale of Torpedo7 has had severe impact on the group's financial performance this half. But while we've incurred significant write-downs it allows us to redirect our focus towards our core brands as we simplify our business. We're already seeing some green shoots from our decisions to simplify. Our sales were down 4.9%. Much of this reduction was driven by a decline in online sales as we chose to focus on profitable performance. If we remove the impact of store changes year-on-year, and exclude online, sales were down 1.4% compared to last year's H1. Net profit and gross margin are both up and gross profit is largely unchanged despite the reduction in sales. Our 3 core brands delivered $30.7 million adjusted NPAT, up 18.9% on PCP. This underscores that disposing of Torpedo7 was the right thing to do. Our strategy to simplify and prioritize is working, I look forward to sharing more about that today. This time last year, we set out 7 strategic priorities to deliver improved financial performance and operational efficiency. As you can see from this slide, we've done a lot to advance those priorities. Here are some highlights on that progress. We've reduced cost to serve through decreased freight costs and cost recovery decisions. Gross profit margin is up 160 basis points across the group and up 250 basis points in the warehouse. We bought labor costs down and decreased CODB by 1.5% and in dollar terms despite upward pressure on labor rates in an inflationary environment. We are bringing down project expenditure to where we need it to be and are on track to deliver total project spend around $80 million for the FY '24 full year. We have sold Torpedo7, which I'll talk about more in a moment. We're also announcing today that as a further part of our strategic reset, we intend to close or sell TheMarket.com by the end of the financial year. We've been unable to achieve the organic growth required to sustain the platform profitably. It's now time to draw a line under TheMarket.com as a separate entity and shift our market-based focus and learnings into growing group marketplace on The Warehouse site and app, where we're now seeing much improved profitability. We're working through options and we'll update TheMarket in due course. Other highlights include an increasing number of Kiwi families are choosing to shop with us as they search for affordable groceries. Grocery sales were up 11.7%, and grocery now makes up more than 20% of The Warehouse sales. We offer more than 9,000 grocery SKUs at great prices, including our own private label market kitchen range and have expanded fresh fruit and vegetables to 22% the warehouse stores. Our 2 biggest programs, MyNoelLeeming and MarketClub continued to offer more than 1.9 million member value and special offers. We said that we would stop driving unprofitable sales. This is especially true of online, where we saw reduced marketing spend, less promotional intensity and greater freight recovery. Overall, our gross profit margin rate improved by 160 basis points and GM dollars were only down 0.4% despite the 4.9% reduction in sales. Slide 10, Torpedo7 sale. As you are aware, we've entered into an agreement for the sale of Torpedo7 assets to Tahua Partners, which is expected to be completed by the end of this month. Frankly, it's a bittersweet moment losing one of the group's family brands. But when faced with the choice of persevering closing on an asset sale, this was without doubt the best solution. The sale was the quickest, cleanest way to exit the business. It also meant the majority of Torpedo7 members were employed with the new owners and Torpedo7 remains in New Zealand ownership to serve Kiwis who want to get outdoors.While we've taken a financial hit to our half year results, the sale of Torpedo7 was the right one because it helps us to simplify our business, focus on our core brands and ultimately improve the group's financial performance. Celia will take you through the financials of the sale and how this is accounted for shortly. Slide 12, strategic direction. We've been through a big strategic reset. This is centered around simplified, prioritized and executed speed. Simplifying the group means we will do fewer things better. These calls are needed to reset our business and set us up to be a much leaner, sharper focus group in the future. Our core brands of The Warehouse, Warehouse Stationery and Noel Leeming are the bedrock of the group, and they now have undivided attention. We have sold the underperforming Torpedo7 and as I have just mentioned, we are taking action with TheMarket.com. A simpler business makes it easier to prioritize. For our customers, we're delivering better products in key categories. We're energizing our position as a value retailer and bringing back excitement into our shopping experience. Finally, we're executing at speed. Thanks to our agile structure, we've been able to reorganize ourselves quickly to address the opportunities and challenges in front of us. We put more focus on the red business trading by creating a go-to-market trial. Joan mentioned the addition of Tony Carter of the Board in May 2024, which we're looking forward to, and I'm pleased to share we're investing in world-class talent in other key areas of our business with new additions to our apparel tribe with 2 key hires from J.Crew and Kmart. And we've recently hired 2 strong additions to lead both our logistics and property chapters. Slide 12 of The Warehouse. And now on to some of those core brand highlights, starting with the heart of the group, The Warehouse. Sales this half were down 4.7% on what was the brand's record sale result of over $1 billion this time last year. Same-store sales, removing the impact of store changes year-on-year and excluding online, were down 2% compared to prior half year. What is pleasing is the growth in gross profit margin, up 250 basis points to 38.8% this half helped by online contribution and through customer pricing changes, decreased freight and container detention charges along with reduced shipping costs. As mentioned, grocery is a growing segment for The Warehouse where providing affordable essentials is extremely relevant in the current cost of living crisis. This growth was offset, however, by underperformance in some categories, namely home, toys and apparel where we've made deliberate choices to improve the quality and value of our essential ranges. This coincided with a tougher trading environment where customers had to prioritize price over quality and sustainability. These categories had a tough half and to drive sales, we increased promotional activity to generate top line sales and ensure that we manage inventory sell-through. We are resetting our product strategy in these critical areas to regain price leadership and add more exciting new products to our great value basics. We have maintained 88 stores, the same as this time last year, but with the closure of Belfast store and opening of the new Wanaka store. The closure of Wellington Tory Street due to a fire was a drag on sales. We've started to remerchandise and are working to get the store fully reopened in April. Online sales have pretty much returned to pre-COVID levels at 5.5% of sales. Choices we made here improved online EBITDA. Click & Collect is now the preferred choice of online fulfillment with more than half of online orders collected in-store. On to Warehouse Stationery. Sales were similarly down 5% compared to prior last year. With a similar trend to Red with same-store sales only down 1.4% removing the impact of store changes and online. Gross profit margin also improved in Warehouse Stationery but to a lesser extent, up 70 basis points to 46.6%. Our print and copy centers continue to do extremely well, and we continue to see growth in sales in this category as well as smart home, particularly in this half. Growth in these were offset by a decline in print hardware and consumables as well as stationery products, particularly back-to-school as customers pared down their school lists to stock up on the absolute essentials. We have 66 stationery stores, including 41 stores within the store. We closed our stand-alone Johnsonville and Belfast stores and opened our new Wanaka store. Online sales were 8% with Click & Collect fulfill also increasing to 22.5% of online sales. Onto the last of our core brands, Noel Leeming, which actually fed best in terms of sales. While half year sales were down 2.2% compared to FY '23 H1, we saw a small recovery in the second quarter with a growth of 0.1% in Q2. Same-store sales were also pretty flat with a small decline of 0.2% compared to last year, again, excluding closed stores and online. Key standout categories included communications, gaming and tech accessories. We closed our Dunedin George Street and Belfast stores but opened our new Noel store in Wanaka. Noel's online sales were 11.1% of total sales, marginally down from 12% in FY '23 H1. Customers are loving our one hour Click & Collect service with orders increasing to 66.6%. While sustainability might not be as front of mind for customers as price in the current environment, we've continued to make important progress around sustainability and remain committed to helping our customers live more sustainably. Improving the sustainability of our products and packaging is one of our biggest contributions to making sustainable living easy and affordable for everyone. 35% of private label sales are now from products with sustainable attributes. 13, The Warehouse stores have had their EV charging stations upgraded to 25-kilowatt DC chargers. We help customers divert 136.6 tonnes of post-consumer waste from landfill, up 37% year-on-year again. We signed a landmark agreement with Lodestone Energy to power all our stores and sites with solar by 2026. We diverted more than 80% of our own operational waste from landfill, up nearly 9 points on prior year. We've raised more than $1 million for our charity partners and community groups around New Zealand, and we've maintained our gender diversity with 50% of senior leaders and 50% of the Board currently being female. I'll conclude by acknowledging that while some of the decisions we made in our strategic reset are painful, they are what we need to do to simplify our business and get costs under control. Our core brands, The Warehouse, Warehouse Stationery and Noel Leeming have our undivided attention. We are focusing on improving our product ranges, and there are some fantastic products landing in our new winter range with more to come. I'm proud of our talented team for delivering real value to Kiwis every day. And with that, thank you very much for your time. I'll hand you over to Celia who will take you through the financials.

Thank you, Nick, and good morning, everyone. Before I start, I just want to reiterate that the financial performance is disclosed on a continued operations basis, excluding Torpedo7 and unless otherwise stated, also excludes the impact of IFRS 16. Sales were down 4.9% compared to prior year, but we did see a slight softening of this decline in the second quarter, with sales down 5.8% in Q1 and 4.3% in Q2. The Warehouse recorded its highest ever sales result last half year and in the current economic climate, that was going to be a difficult yet to follow. I will focus on cost of doing business, though, which was down in dollar terms but increased slightly on lower sales to 31.7% of sales. While employee expenses decreased as a percentage of sales, depreciation increased as a result of elevated investment in recent years. Lease expenses also increased predominantly due to rent reviews in IT and SaaS costs increased as our investment in systems continues and more systems come online. Operating profit improved 14.9% and 40 basis points early due to a significant reduction in the loss in TheMarket.com along with improved gross profit margin and decreased CODB. Adjusted NPAT from continuing operations was $30.7 million in FY '24 H1, up 18.9% compared to FY '23 H1. When accounting for the net operating loss after tax of $55.5 million in Torpedo7 even, including the one-off noncash pretax $60.1 million impairment, this did result in a reported net loss for the total growth of $23.7 million. Moving to Slide 18, adjusted EBIT and NPAT, as you can see, stripping out the noise of T7 in the impairment, operating profit from continuing operations and input are relatively clean with just some restructuring costs in the prior half. EBIT before IFRS 16 adjustments increased 14.9% to $43 million with reported EBIT after IFRS adjustments increasing 22.6% to $62.8 million. Adjusted NPAT increased 18.9% to $30.7 million. And obviously, the reported impact for the whole group includes the operating loss for Torpedo7 in the half and the asset impairment totaling $55.5 million. On to Slide 19 and the financial impact of Torpedo7 and the sale thereof. We entered into the asset sale and purchase agreement with Tahua Partners on the 22nd of February, with the business being accounted for as held for sale at the half year end. The relevant assets of the business were impaired at balance date, including plant and equipment and inventory. The total impairment value was $60.1 million noncash pretax. When combined with the operating loss of $8.6 million interest expense and net of tax, the net loss from discontinuing operations was $55.5 million. The sale is continuing as planned and completion is expected on the 31st of March. In H2 of the financial year, there will be a wash up of final sales adjustments operating performance in February and March in staff redundancies and IFRS lease adjustments. On Slide 20, quarterly sales. Slide 20 provides details of how sales have moved between brand from Q1 and Q2. While Q1 sales were down 5.8% for the group against record sales in FY '23, Q2 performed better, down 4.3%. Our largest brands, The Warehouse and Noel Leeming both improved in the second quarter and particularly Noel Leeming, which saw soft growth. When removing new stores and store closures in the period, same-store sales for the physical stores declined 2% for The Warehouse, 1.4% Warehouse Stationery and Noel Leeming remained relatively flat at 0.2%. Moving to Slide 21, gross profit margin. The Warehouse and Warehouse Stationery saw year-on-year growth in gross profit margin. The Warehouse up 250 basis points, and Warehouse Stationery up 70 basis points, leading to overall group gross profit margin of 34.3%, an increase of 160 basis points while increased promotional activity took place to drive top line sales, costs were decrease with reduced shipping related costs, improved productivity and supply chain and decreased online freight expenses. On to Slide 22 in cost of doing business. As mentioned, this has decreased 1.5% in dollar terms. Employee expenses decreased $19 million or 6.7% and decreased as a percentage of sales despite increased minimum wages. But other costs did see some increases. Depreciation and amortization has increased by $5.3 million, driven by significant investment in recent years and lease expenses increased by $1.2 million due mainly to rent reviews. Increased IT running costs and SaaS spend is included in employee expenses and in other expenses. The total IT and SaaS including employee expenses for the half year increased by $9.8 million with the ERPFI project due to go-live in April this year. Moving to Slide 23 in the balance sheet summary. The balance sheet for FY '24 half year includes a reclassification of Torpedo7 assets to held for sale, however, the prior year includes Torpedo7. Balances are generally lower in HY '24, therefore, partly from that reclassification. Inventory for continuing businesses, excluding Torpedo7, is reduced by $61 million this half versus last year. Included in working capital is the net value of Torpedo7 held for sale assets and liabilities of $4.1 million. This was made up of $25.7 million worth of assets, including plant and equipment, receivables, inventory, cash on hand and right-of-use assets offset by $29.8 million of lease and gift card liabilities. Our FX hedging has moved favorably with our hedging in place versus the declining U.S. dollar over the period, and net debt has decreased from $83.4 million in FY '23 H1 to $18.7 million at FY '24 H1. This is largely due to improved trading terms and careful working capital management. Next, Slide 24 and cash flow. A few points to highlight which have contributed to a 26.4% increase in operating cash flow to $137.5 million. Trading EBITDA increased as a result of the reasons already explained and without the impact of the increased depreciation. Higher taxes were paid in the prior year, while the positive movement in working capital contributed to increased operating cash flow. Capital expenditure cash spend was significantly lower at $28.7 million in FY '24 H1 as the group purposefully reduced investment as necessary information systems projects and developments came to an end. Dividend payments were lower in FY '24 H1 based on the FY '23 final dividend of $0.08 per share compared to the FY '22 final dividend of $0.10 per share paid in FY '23 H1. The above key movements resulted in net positive cash inflow of $29.4 million, enabling us to bring debt down to $18.7 million, not quite where we want it to be, but we're heading in the right direction. And finally, project expenditure. As mentioned at the FY '23 year-end, we have kept project expenditure for the FY '24 year at $80 million. Core system spend is still the bulk of our capital and total project spend at $22.5 million this half year, including the likes of ERPFI, GOMS and Human Capital Management. Capital expenditure on these projects decreased from $11.5 million in the last half year to $4.7 million in FY '24 H1. Store development has also slowed compared to last year with new stores for The Warehouse, Warehouse Stationery and Noel Leeming in Wanaka. Investment in stores has decreased from $17.2 million in FY '23 H1 to $5.9 million in FY '24 H1. I would like to sincerely thank the leadership team and Board for their support over the last 5 months. And on that note, I will now hand you back to Nick.

Okay. Thank you, Celia. And looking ahead now, we expect tough retail market conditions to continue. We believe that the macroeconomic climate will remain difficult and it's challenging to predict how cautious consumer spending will impact sales across all of our brands. Our second half is now underway, and we've seen much tougher trade in February, with sales decline in the low teens. In March, we've seen some improvement with our sales decline returning to be much more in line with the level of decline experienced in our first half. Given the unpredictability we're seeing and that we expect the retail environment to remain challenging with subdued customer spending, we won't be providing a full year outlook but we will share a Q3 trading update in May 2024. Our focus remains on strengthening our core brands, delivering better products at great value and managing our costs. We're very focused on improving our product ranges, there are some fantastic products landing in our new winter range with more to come. Now I'm going to hand back to Joan.

Thank you very much, Nick and Celia. So to conclude my comments today, I'd again acknowledge that the Board and management are acutely aware of the impact of the group's recent performance on shareholders. And we are very clear on the continuing action that's needed to deliver both sustainable growth and value. The execution of those imperatives is underway. And with that, we'll move to Q&A.

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

First question from me is just around your outlook commentary and the volatile sales trends that you have seen through February and March. Can you provide any color around what drove the significant decline in Feb and perhaps just touch on what change in consumer trends you've seen in recent months?

Yes, for sure. Thanks, Kieran. Certainly, sort of January and February, our view is that TheMarket was significantly restricted. We have seen that from a number of commentators. We think that part of it was customers stretched for Christmas in a tough environment, but credit card bills, et cetera, et cetera, became due, and that stretched into February. If you look at some of TheMarket data, for example, in February, Data mine had apparel down in total 6.4%. But home furniture and appliances down 9% so there's no question that customers are already doing it tough. As the weather has gotten cold, we've seen that cause some change as we get into March. We've seen a good reaction to some of our new season product. But -- as you've seen from a number of defaults, mortgage rates remaining high and Thank God they didn't go up anymore. It's going to remain tough in our opinion, and very hard to call.

Great. And at the Q1 sales update that you provided in mid-November last year, you commented that The Warehouse core market share had declined, how do you think you're losing market share to? And I guess a follow-on to that is, how are you thinking about the emergence of companies like Temu and where your value proposition sits relative to those online retailers, particularly for younger consumers?

Yes, I'll take that again. And so market share has remained under pressure. As I said, whilst we were down 4.9% when you back out the choices that we made about how we trade the online business and you take out the sort of the changes in our store base down 1.4% in stores that were like-for-like. So not quite such a die picture, but of course, sort of market share looks at the whole picture. Specifically within that, in the past, we've been writing some sales in particularly online, heavily promotional, not at particularly good margins with a lot of severe overheads. And we made a conscious choice to correct a lot of those until we get some of the new systems in, which will enable us to grow that again. So specifically, we pulled back a lot of spend in the marketing in particularly in the market. So marketing spend came out, but it wasn't just in the market that we did that. If you look at the $48 million year-on-year loss in The Warehouse, $18 million of that was specifically from online. And that was an improvement that we saw year-on-year of around $7 million in profitability. So sort of we think it's the right decision again, TheMarket dropped in sales that the loss was reduced quite dramatically. Once we've got our group ERPFI system in, which will be in April in the last stages of that, that enables us to firstly have real-time inventory. So we'll be able to have a much more accurate picture of what we have available in stores, and therefore, more confidence to push customers to it. Plus it will enable us to put our Group Order Management System in, which takes out cost of fulfillment, but it also gives more clarity to customers. So how we're thinking about online is very much as part of our omnichannel home. There's a lot of research goes on online, especially in our apps, and that drives customers to stores. So knowing having more clarity about what's available. It's going to be really helpful on that. And sort of if you think specifically about Temu, there is our perspective is that they are growing here clearly and very rapidly, very different from us. They have very different standards around their supply chains and labor and our ethical sourcing for us is a differentiator. We've worked very hard to improve our product quality and manufacturing standards. And we don't intend to walk them back to match Temu. So really, our focus is on differentiating ourselves as a key retailer who have a good store footprint and making sure that we focus on our value proposition, and we have that product available very quickly and clearly and offering great value.

Great. And final one from me. We've seen the group cost of doing business hold relatively steady in the first half look at reduction in labor costs. Are you able to give us a steer on how you expect this to track into the second half and comment on whether there are any other levers that you can pull to take cost out of the business from here?

Yes. And CODB in the first half was down $8 million, sort of 1.5% and a big chunk of that side of employee expense, which is a lot of the action that we took this time last year, which did benefit us it started to benefit us in Q4 last year. So we won't have that same opportunity plus last year, we started to pull back spend in TheMarket. And so we've already taken a lot of those benefits in H2 last year. So the opportunity will not be as great, and there are challenges. That said, we are looking again at how we can reduce costs. We started to see real benefits in terms of things like in our DC from some of the systems investments we made in our warehouse management system. We've seen benefits in terms of labor scheduling, and we've seen great efficiency in labor. But there are sort of inflationary pressures on things like our collective agreement, which impacted our store labor, but we were sort of significantly below our budget through greater efficiency and some of them will continue, but the opportunity is not as great as it was in H1.

So all of that considered where do you think it will sort of fall relative to the first half of the year or the second half of last year?

We're still working through that and looking at everything that we can squeeze out there.

Your next question comes from Guy Hooper with Jarden.

Maybe just to pick up a little bit on the, I guess, your competitive position. I mean, obviously, what you called out Homeware is an area that hasn't been doing well. And I guess while some of the warehouse sales when you make those adjustments, I think was down about 1.4%. But acknowledging that grocery is doing particularly well. So when we look at those other core categories, I assume that there's still quite a bit of weakness there. I mean how are you thinking about your competitive position at the moment? And then maybe talk to some of the changes you're making around the buying process.

Yes, I'm happy to do that, and good morning, Guy. As you quite rightly pointed out, we have done well on grocery, and we've seen a strong 12% increase in our total grocery category. Within that, the pantry category is up 31% and much more profitable more than 80% in terms of gross margin. So we see that as being additive and an important traffic driver. That said, we're taking a long hard look. We've done a lot of customer research and looked specifically at some of the issues in our apparel and home businesses. We made a choice through COVID where we decided to take a lot of the risk out of the -- what was a very unpredictable pattern of being open. And put a lot more weight behind basics and took a lot of seasonal and fashion inventory out. We think we're suffering from that now. In addition, from choice and from a sustainability point of view, One of the things that we've long had feedback from customers about was around product quality. And so we purposely built more quality into our goods, and we've been recognized for that to see product quality up 12% over the last 5 years, products that work, ratings up similarly. So that's good. However, going into a recessionary environment, customers would just so constrained whilst they might have wanted to buy better quality products or pay a little bit more for a bit of sustainability. That really collapsed. And so we've taken a lot of swift action to correct that. We've been through a whole customer research where we're reconstituting our core customer value proposition. We're starting to build entry price points, which are taking to deliver now and getting a good reaction that have full margin built in at better pricing. And we're starting to put more interest and more inspiration into a lot of our products. That, for example, is one of the reasons why we've updated the power leadership, bringing someone from J.Crew and someone from Kmart. So lots of work to be done there. But equally, the core of our business, and again, this comes out of the customer research has remained strong with a lot of our core customers. But really need to win back critical shoppers like young moms and tweens and so forth. And that's why we're putting the right products in to do that and starting to get some good reactions in the early stages of rollout, much more to come.

Okay. And when you think about, I guess, your broad category offerings, are you still pretty comfortable with all the sort of categories that you're in? And like, is there a room to be a bit more focused on some of these things?

Yes. And some things will get more focused. The balance will change. We're just kicking off a space management program, where we're looking at space productivity. And so we think that there are some categories that are under footage within their footprint and we'll give them more exposure, more debts or buy the pricing hierarchy and the product construction within that will be important. So that, again, is sort of something that will happen over time. But yes, we're always evolving that, and we think there's some good opportunities. A lot of -- broadly speaking, we're in 88 stores throughout New Zealand. And in some more rural locations, for example, we're relied upon as being the source of -- we have to solve the -- a bunch of customer problems. And couldn't just go out with, say, home and apparel offer, though it will be tempting to do so some exposure in terms of better margin categories because we're relied on for all sorts of needs and create value across a broader range of assortments.

Yes. I mean one last thing, I guess someone wants the line. I mean you called out foot traffic to Warehouse Stationery in the [indiscernible] I mean what's foot traffic done in the [indiscernible] like do you see grocery in those stores where you have that more fulsome offer, do you see grocery actually driving a reasonable increase in foot traffic?

Yes. Foot traffic has been down, broadly speaking, less than total sales. And so that hasn't been the bigger problem. What we found is that a lot of those trips have been much more purposeful people have come in with a lot of very specific missions in mind. And so looking at things like conversion and what people are available to spend in terms of having transaction value where the challenges have come, but we're pleased that we have grocery because that has helped the traffic hold up significantly.

Yes. Okay. And one last question for me. Just, I guess, along the lines of the Torpedo7 in the market. There are also a handful of other smaller bolt-on businesses that you've been acquired or invested in over time. Can you just remind us sort of where -- some of those set, for example, some of the online -- different online offerings, are they also being closer alongside the market and then can you just give us...

Yes, I think you're thinking of businesses like 1-day that we closed before the year-end. That was a sort of discount online business that came bundled with Torpedo7 which we closed Shotgun Supplements a few years ago. We rolled #1 fitness into the Torpedo7 offer. So we had a discount business called Red Rack, those are all gone already. So TheMarket itself, whilst it's disappointing not to make it work. we have seen some benefits from doing it and now have a group marketplace. So within the Red website, we have third-party sellers. Those would not sell to us before we prove that we could be responsible with them -- with Themarket. And that business -- and part of the problem with Themarket was that we were trying to move traffic off Themarket -- of the Red website to the second best traffic website in New Zealand onto Themarket website and weren't be able to persuade customers to move. So by putting those to a third-party product merchandise on the Red website, we're seeing good uptake. We're in the early days of that yet but that's proven to be much more profitable because we're not having to drive traffic. But all of those sort of rats and mice are already effectively closed.

Your next question comes from Paul Koraua with Forsyth Barr.

Maybe just a quick few for me and just back on the grocery trend. So grocery has been going pretty well, but if you sort of stripped it out of Red Sheds performance we have sort of sales and Red Sheds expressly down 8%. And if you roll forward into trading through February, and we assume groceries stayed pretty solid. It seems like that business might be struggling a bit, is that concerning? Or have you guys done addressing that in any way?

The grocery business struggling, Paul? Or we have a bit...

The Red Sheds it's grocery.

Everyone's -- we believe in TheMarket struggled in February. And grocery was not as planned as it had been previously. Obviously, it's more than meat purchase and so it's more resilient. So we're very happy we have grocery. But as I said before, we have struggled in the -- in both the apparel and footwear business and the home businesses. Toys has been a little tough as discretionary as well. We've seen mixed results in things like tech and appliances. That, again, has driven very promotionally. We've seen good results when we promoted. But yes, February all in all, was very challenging. And we don't think we're on our own there, but you're right, grocery has helped us to keep the business up a little.

And if you think about long term, grocery now 20% of Red Sheds sales, is there a view on where that should end up?

Yes. We don't see it as being significantly more of a percentage of the mix. Where we need to concentrate, as I said before, is that we need to look at rebuilding the apparel and home businesses. Grocery, we've made it a lot more profitable. As I said, more than 80% improvement in gross margin. We're also reducing the cost to serve, better distribution out of our DCs, a lot more shelf led packaging, for example, a lot of bulk stacks. Those take a lot less handling when they arrive in stores. We've the improvement in the distribution methodology means they can come straight into the stores in many cases and go straight out. So a lot more efficiency to make that grocery business more profitable. The increased mix of private label is helping that margin dramatically as we roll out our market kitchen and shops ranges, for example. And so that's the focus on grocery. But I don't see it being more than sort of to [indiscernible] 1/4 of the whole business. And we think it's adequately footage. And so the concentration is really on those other parts, which are intrinsically more profitable. The other thing to point out about February, and this is true of the whole market is, but we were cycling against a lot of demand created by the adverse effect of both Cyclone Gabrielle and the floods in Auckland last year, which drove a lot of replacement business, insurance business, wind payments. So it is a bit of an artificially comparable number. But that's why I think we're starting to see it pick up a bit.

Cool. And then maybe just one more on the comments you guys made around having a leaner and sharper focused business. You talked a little bit about the cost out of employee expenses not being there for the second half. Sort of maybe longer term, is there an opportunity to reduce total store footprint increased stores within a store in a way to reduce those rent expenses?

Yes, there'll always be churn in store footprint, but we don't see a sort of material closure of stores and virtually every store in the chain is actually profitable in the continuing businesses. But we will be looking at how we drive credit efficiency. I think there's more opportunity for further store or business with the Blue Sheds that has worked well and enables us to be open longer than they would be as stand-alone stores, and they experience more traffic. So that will continue.

Your next question comes from Rohan Koreman-Smit with Forsyth Barr.

Just one question for me. I guess, recently, you've kind of swung back to refocusing on the core businesses that you've had for a while after kind of a series of adventures outside of those lanes. I'm just wondering, and maybe this is something for you as well, Joan. Strategically, is this where we stand now, do you see the warehouse, I guess, having shareholder permission to do anything other than the core businesses? How do you think about the strategic growth of the group going forward or strategic shape of the group going forward?

Yes. I think that's a great question, Rohan. And I think one of the things that gives us the Board enormous confidence is the fact that this is an organization as a company that's been able to weather all of the economic cycles way back since 1982. So this is a particularly difficult time and we talk about volatility. We've had that in spades, and we've had aberrations such as COVID. At the moment, our focus is very much on simplifying, prioritizing and driving execution of the core business as we now see it. I think those adventures, as you call them, as Nick has pointed out, we did have some learnings. And certainly, the example of TheMarket that he described I think we would ever have been able to get third-party tenders on to our Red platform. So from the Board's perspective, we've got to regain the confidence of shareholders that shareholders and shareholder value that has been long suffering. I think we've continued to serve our customers very well. We've continued to look after our team members incredibly well, but we've got to get this business back where it needs to be. You never say never to any opportunities. Even if they don't work out as you intended them to, there are almost always learnings. So we're not alone in that regard in terms of failing relatively fast on some of these adventures. But that's certainly the focus for us at the moment, we're committed to making sure that we, as a Board, support the team as much as we can in driving that focus on execution.

I'm just on that comment around you could never pass up an opportunity. Do you think The Warehouse Group is on the right to investigate those opportunities? I noticed you called out $490 million of liquidity, which makes me a bit nervous given historical [indiscernible] acquisitions?

I think we've learned in terms of acquisitions a little bit. And none of us in this room today, in fact, virtually all of the boards weren't present when Torpedo7 was bought as an example. TheMarket, when we set it up, as we said, the whole online scenario and what we were potentially looking at in terms of online competition was very different from what it is at the moment, albeit we've got the [indiscernible]. I think there'd be a hell of a lot of rigor that would go into any analysis, as you would expect in terms of evaluating an opportunity. We probably have different criteria. I joined the Board in the financial services business still existed here. Clearly, that was something that we needed to shut down very quickly. And again, it was a situation you can always look back in hindsight and say would you have bought that if you knew then what you know now. Don't be nervous about the liquidity. We watch that very, very carefully. So we're never going to be anything other than prudent with our balance sheet. But to answer your question, a lot of rigor would go into any future acquisition.

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

Okay. Well, thank you, everyone, very much for your attendance this morning and your highly intelligent questions. It is almost Easter, and so we're very much looking forward to one of our major trading events in the year. We're also looking forward to this current coal weather continuing. But in the meantime, I wish you all a very happy Easter break. So thank you.

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