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

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

Tena koutou, and good morning. Welcome to The Warehouse Group's 2024 full year results. I'm Joan Withers, I'm Chair of the Board. And on the call with me today are John Journee, our interim Group Chief Executive Officer; and Mark Stirton, our Group Chief Financial Officer. During the presentation today, I'll give my review as Chair of the Board and then hand over to John for his update. Mark will share a more in-depth summary of our financial results. We will also take a few moments to share our forward-looking plan and some of the changes underway across our business. And as always, there will be opportunity to ask questions at the end. Now to Slide 4, our year-end review and without a doubt our 2024 financial year has been one of the most changing in our 42-year history. At a macroeconomic level, New Zealand's deteriorating economic conditions have significantly impacted the retail sector in the past year with New Zealand's lightening the belts and consumer spending falling dramatically. However, it's clear that our trading performance and operational execution have exacerbated the challenges of a difficult environment, and this is evident from the decline in market share that we have experienced in some key categories. I want to acknowledge from the outset that the poor financial performance we've reported this year is not acceptable. Both the Board and the executive team are acutely aware of the disappointment shareholders and our teams will be experiencing due to this result, and there is a big job ahead of us to get the company back on track. We are already on that journey. Earlier this year became apparent to the Board that we needed to make significant changes to address the issues we were confronted with. We faced the fact that we were not able to fulfill the ambitions that we had for our group ecosystem strategy. As you're aware, we've sold or closed underperforming parts of the business, including Torpedo7 and TheMarket.com. And the loss incurred on the sale of Torpedo7 has resulted in the first annual loss for the warehouse group in our history. We have simplified the lead team under John Journee as Interim Group CEO and restructured the business around our 3 core brands, The Warehouse, Warehouse Stationery and Noel Leeming. Our dedicated teams on each brand have an absolute focus on better products at better prices with the best customer service experience. Our cost of doing business and capital expenditure have also been too high and these are under the spotlight to ensure disciplined spend and capital allocation. Turning now to dividends. In March, the Board declared an FY '24 interim dividend of $0.05 per share. That interim dividend that was paid in April represents a 92% payout ratio on the full year adjusted EBIT, which is above the group's dividend policy of 70% of the group's full year adjusted net profit. As a result of the group's financial performance, resulting in a net operating loss in the second half of this financial year and in line with the group's dividend policy, the Board has made the decision not to declare a final dividend. We remain confident and the underlying strength of our business and our ability to navigate these challenges to return to paying dividends when our profitability improves. There were some other events during the last financial year that I do want to comment on. The first is that we've made some changes to the Board this year. We have welcomed Tony Carter, who brings wide range in retail, commercial and governance experience to complement the capability already in place around the board table. And I'd like to thank our outgoing director, Julia Raue, for her leadership during his 7.5-year tenure on the Board, particularly as Chair of our Health, Safety and Wellbeing Board Committee. I'm taking up the role of Interim Group Chief Executive Officer, John Journee moved to become an Executive Director rather than a nonexecutive director. And I think JJ sincerely for taking up the reins at a time we really need his skills and experience to get the company back on track. Second measure I'd like to cover is the nonbinding indicative offer that we received earlier this year from private equity firm at Amentum Capital to acquire the company's shift at a price range of $1.50 to $1.70 per share. Under the rules of a scheme of arrangement, critical shareholder backing beyond that of our majority shareholder would be required in order for a takeover to proceed. The proposal did not have that support so it did not move forward. So despite the challenging year we've had, we still have huge fight determination and belief that we can turn our performance around. With our team of 10,000, we are committed to simplifying our business, reducing our cost of doing business and sharpening the focus on our core brands to turn that performance around. I want to thank all our shareholders, our customers, our team members and my fellow directors for their continued support as we navigate these challenges, rebuild our brands and continue towards helping Kiwis look better every day. I'll now hand over to John to run through the full year financial results and the plans to turn around performance in more detail. John?

Thank you, Joan, and good morning all. I am John Journee, Interim CEO. I want to start by recognizing how incredibly tough this year has been for our shareholders and teams. As Joan said earlier, at FY '24 financial performance disappointing in a long way from where we need to be. Our group ecosystem was too ambitious, we persevered with growing the nascent parts of our ecosystem and consequently were held on Torpedo7 and TheMarket.com for too long. That made our business overly complex. It distracted us from strengthening the customer value propositions of our respective brands in response to rapidly changing market conditions and consumer behaviors. The ecosystem strategy also required investment into digital platforms, which, coupled with the significant multiyear investment in the modernization of our core systems has meant our results are materially impacted by the incremental costs of these investments without yet seeing the benefit that will come from them. It has also become apparent that the agile operating model produced to grow the group ecosystem, was not ideally suited to serve the specific needs of our retail brands as they responded to the competitive demands of their respective markets and customer segments. We've made mistakes and we own that. We acknowledge where we went wrong and we'll be working hard to fix it. I will talk to our financials in more detail shortly, but I also wanted to give you an overview of our year-end review, which is Slide 6. Before I start, it's worth noting that all financials with the exception of reported net profit after tax, have been reported on a continuing operations basis, exclude Torpedo7 after it was sold in March FY '24. Sales were down 6.2%, with total group sales at $3 billion. Our sales declined 4.9% in the first half of FY '24 and deteriorated further in the second half, declining 7.6%. This was led by a decline in The Warehouse sales. Group gross profit was down 6.2%, with margin being flat year-on-year at 33.6%. Cost of doing business was down 1.3% in dollar terms, but higher as a percentage of sales, resulting in a 28.9% operating profit, down 65.3%. The group reported net loss after tax of $54.2 million, including the impact of Torpedo7 compared to a net profit after tax of $29.8 million in the last financial year. This loss was significantly impacted by the loss on disposal of Torpedo7 and the wind up of TheMarket.com in the year but it is no less than an incredibly disappointing result. Slide 7. On to our brand performance, which shows sales and operating profit were down across all 3 core brands. Warehouse FY '24 sales were $1.8 billion, down 5.3% year-on-year, and operating profit was $17.7 million. Warehouse gross profit margin held up, increasing 10 basis points on the prior year. Store traffic and same-store sales decreased at a slower rate than headline sales at 2.3 and 2.9, respectively. Warehouse is an iconic New Zealand retailer, known for a bargain, and we should have been the go-to choice for Kiwis getting a rising cost of demand. However, our category strategy was off the mark. Our execution was poor and our customer offer was inconsistent. We had successes with our grocery, audiovisual, home technology and outdoor leisure categories, but this was offset by declines in the sales of home and apparel. We are particularly challenging second half. Our winter product range didn't resonate sufficiently with customers, and we needed to heavily discount as a result. This, along with increased promotional activity, cost of gross margin gains we achieved in the first half guided in the second half, ultimately delivering a modest gain and margin growth of 10 basis points year-on-year. With our stationery sales were down 6.7% to $231.9 million, and operating profit was $12.9 million. Print and copy centers continue to perform well in the period. Our BizRewards customer base is a valuable asset in engaging with our business customers, but we need to leverage this more. Finally, Noel Leeming sales were $1 billion, down 5.3% and operating profit was $17.3 million. Performance was challenged by tough trading conditions driven by reduced discretionary spend on high ticket items and an increasingly competitive market. Margin, however, only declined 20 basis points, indicating tight trading disciplines in a competitive market. Combined with a small uptick in the cost of doing business as a vicinity of sales, Operating profit declined 36.6% to $17.3 million. Services and Tech Solutions showed year-on-year growth and continues to be a differentiator for Noel. In October of 2023, we opened a brand-new warehouse, Warehouse Stationery and Noel Leeming stores in Wanaka. We are proud to employ around 30 locals and be better able to serve this growing community. It's pleasing to see that our in-store customer Net Promoter Score has improved across the 3 brands, indicating that our store teams continue to offer great customer service. Just before I pass to Mark, I want to acknowledge that we released our inaugural climate-related disclosure report today alongside our 2024 annual report. We're clearly focused on our financial performance today, but sustainability remains very important to us. We have continued to make solid progress with improvements across our key sustainability measures, which you can read about in more detail in the appendix of the investor presentation and in our annual report. The amount of work has gone into this. As it's our first report, we will continue to improve it but with very proud progress we've made so far. Now I'll hand over to our new CFO, Mark Stirton, to take you through our financial results in more detail. But before I do so, I want to acknowledge the valuable support that Mark has provided me and the leadership team and the positive impact he has had since joining in April. Over to you, Mark.

Thank you, John, and Joan. Good morning, everyone. My name is Mark Stirton, CFO for the Warehouse Group. I've been 5 months in the seats, and I've spent this time active diving into the details that have contributed to our F '24 performance. And more importantly, how we turn around our fortunes in FY '25 and beyond. Our performance is not where it could or should be. However, what encourages me is that this group has all the levers at its disposal to produce strong operating margins and improve capital returns to our shareholders. The New Zealand economy continues to be challenging, so our recovery will need to be self-generated. More than ever, we need to be surprising and delighting our customers with amazing product at bargain prices operating a leaner cost base with stricter capital allocation in the year ahead. Group financial performance. Continuing group revenue for the year was $3 billion, down 6.2% on the prior period. Revenue, excluding Torpedo7 and TheMarket.com was down 5.3%. The year was a tale of 2 halves for both the revenue and gross profit with strict cost control exercise throughout the period. As reported at our interim results, revenue was down 4.9% in the first half. Performance deteriorated further in the second half, declining 7.6% on the comparable period, escalating cost of living pressures dampened consumer spending. However, important product lines across the 3 brands did not resonate sufficiency with customers, resulting in lost market share. Despite the pressure on the top line, we managed to hold group gross margin year-on-year at 33.6%. Cost of doing business decreased 1.3% on the prior year. but not at the pace of the sales decline. Therefore, cost of doing business increased as a percentage of sales by 160 basis points. I'll go into a bit more detail on the breakdown of gross margin, cost of doing business, operating profit shortly. Adjusted net profit after tax on continuing operations, which excludes Torpedo7, declined $38.5 million to $18.9 million on the prior period which I'll take you through the bridge of what areas contributed to this decline. Group reported net loss after tax was $54.2 million, with the loss primarily driven by the $60.5 million loss on disposal of Torpedo7, with the change in tax treatment on building depreciation, having an adverse impact of $8 million and unusual items, including restructuring asset write-offs of $8.9 million. Earnings and EPS. As John mentioned, the Board has declared no final dividend. Reported and adjusted earnings per share were in line with profitability figures I've just explained and no noticeable weighted average share changes took place. Shared contribution, with a simplified group structure, The Warehouse makes up the lion's share of the group, now contributing 59% of group sales and 61% of group operating profit. Retail selling prices remained robust, declining only 50 basis points year-on-year. However, the group's units declined 4.7%. This resulted in basket sizes declining 1.3%, mainly brought about by product mix and lower full price sales. Our simplified group will make it easier to double down on core retail fundamentals and focus on improving key retail metrics needed to execute the turnaround. Our online channel has softened to 7.2% of group sales but it is an important demand driver as customers browse online and come into our 218 stores. We have the customer base and the geographic reach to get us there. Our job is to be more disciplined in execution and transform processes within our retail value chain to improve our competitiveness. Geographical strength, our geographical reach throughout New Zealand remains unrivaled. We have more reach, particularly in non-urban areas than many retailers with 218 stores throughout New Zealand. The breadth of our store network, our extensive footprint and our ability to reach nearly 1/3 of Kiwis every week, fuels our conviction that we can correct our course and turn the business around. Market share. The group market share of core retail declined 20 basis points. Excluding grocery, it declined 50 basis points on the prior year, mainly due to the underperformance in apparel and home categories. If Apparel and Home had maintained flattish on prior year, the group would have gained market share. Hence, these categories are critical to our turnaround in FY '25. Gross margin. Gross margin held year-on-year at 33.6%. The first half saw the group achieve a strong gross margin lift, gaining 160 basis points. The Warehouse gross profit margin leading up 250 basis points on last year. While some promotional and markdown activity occurred in H1, category mix was much more favorable. We had strong inflow margins and lower supply chain costs. Moving into the second half. Across the brands, promotional and markdown activity increased significantly as consumer demand softened further and competitive activity increased we promoted and discounted to keep up and clear stock. Category mix moved towards lower-margin products across all our brands, aggravated by our winter assortment in The Warehouse that did not resonate with customers. This resulted in gross profit margins declining 180 basis points in the second half, eroding the gains achieved in the first half. In particular, the warehouse gross profit margin decreased 260 basis points in the second half. For the full year, gross profit declined 6.2% in line with sales, resulting in gross profit margin remaining flat year-on-year. Cost of doing business. Cost of doing business decreased 1.3% on the prior period through ongoing efforts to reduce our cost to serve. Employee expenses declined 4.4%, supported by a reduction in headcount and cost of incentives versus the prior year while still increasing our wage rates, particularly of our store and distribution center teams. Tight labor our management in stores added this result. Due to the group's investment into new systems and platforms, technology running costs increased 18% on the prior year. Depreciation increased 6.5% from increased levels of capital expenditure in recent years. These expenses increased 2.6%, whilst below inflation, landlord negations are becoming tougher as they experience rather costs that they seek to pass on. As communicated, the change in accounting standards have been previously capitalized -- on our expense in FY '24, $18.6 million, which would have previously been capitalized has been now been expensed. Bringing cost of doing business back down is a huge focus of ours in FY '25 with the aim to bring this back to historical and sustainable levels of around 31% of sales as a medium-term target. Operating profit. Adjusted operating profit, which excludes Torpedo7, restructure and asset write-offs decreased 65.3% to $28.9 million in FY '24. Most of this decline was in the warehouse, which accounts for 61% of group operated profit and nearly all of the decrease was incurred in the second half with the warehouse operating loss of $21.1 million H2, this significant impact. The closure of the market to come and the reduction in unallocated support office costs was a positive year-on-year move of $19.6 million. The warehouse. The warehouse, our biggest brand, had a particularly poor result. I've already touched on the movements in sales and gross profit and operating profit, so I'll focus on retail drivers we look at what went wrong and what we need to fix. Same-store sales decreased 2.9%, slower than overall sales as marginal store locations were closed on rental renewals. Same-store cost of doing business and moving gross margins will be a key focus of ours in FY '25 through a detailed store profitability assessment. Store foot traffic declined 2.3% on last year, with basket value decreasing 1.1% with mix playing a big part. But what is encouraging is that those customers coming in through our doors bought as conversion was up 0.5%. We didn't have the right mix of product, particularly in the second half, with customers shopping more in low-margin categories like grocery and less than high-margin categories of homeware and apparel. Our teams are focused on bringing more trend in units into our stores upcoming ranges, and we are absolutely focused on winning back our customers and market share in these must-win categories. Given the nature of retail buying cycles and current lead times, it will take time for our improvements in our offer to flow in that scale across our 4 range. However, our teams already started the work and we are very encouraged by the positive customer reaction as these new ranges land in store. Our online channel has stabilized at around 5% of sales. Our online visits were up on last year, and we know our digital channels are key to driving customer traffic and go -- Click & Collect performance grew and remained strong at 54% of online orders. Warehouse Stationary. Warehouse Stationary saw a 6.7% decline in sales in FY '24. While the print and copy centers continue to grow and post another record year of sales, it could not -- offset other key contributing category declines, including print consumables, study equipment and office furniture. Operating profit decreased 44%, a mix of the decline of gross profit margin of 150 basis points year-on-year and insufficient cost reduction to offset sales and margin declines. Key areas of focus going forward for stationary will include winning back market share in back-to-school, our SME business and being the one-stop shop for customers print and create resources. Noel Leeming. Noel Leeming saw demand soften and customers switched to low price point items as discretionary income tightened, causing the replacement cycles for the post-COVID demand spike to be further delayed. Sales decreased 5.3% on last year, but pleasingly grown profit margins held up fairly well, decreasing 20 basis points year-on-year, driven by a favorable change in mix to higher-margin categories. Combined with a small uptick in cost of doing business as a percentage of sales, operating profit unfortunately declined 36.6%. Foot traffic into store was disappointing, down 8.5% as customers' disposable income for high-ticket items reduced, a pleasing increase in foot traffic conversion, however, it was up 5.7%, offset by a lower basket value of 1.3%. And resulted in same-store sales decline of 4.5%. Online sales held up okay, driven by our 1-hour Click & Collect offering with 67.2% of our online sales fulfilled through Click & Collect in store. Balance sheet. Rebuilding the balance sheet and improving key ratios is a focus of mine, and I hope to report progress on this in future presentations. Working capital and capital allocation management will see stricter focus. Inventory declined 4.3% on the prior year, including Torpedo7. Excluding Torpedo7, inventory increased 10.8%. However, aged inventory is under control and well provided for. Aged stock on hand improved to 20.7%, less than the 23.4% of last year. Trade payables closed higher, but a pure timing impact with this year's payments being made in the days following 28th of July. Covenants were all new out the period and at year-end. With interest cover at 4.4x and gearing ratio at 11% at year-end. Covenant Compliance has been front of mind recently, and we're pleased to confirm we have agreed a short-term change in covenant test to an interest cover on a pre-IFRS 16 EBITDA basis. Net debt increased from $48.1 million to $50.7 million with headroom available of $419.3 million. Cash flow. Our operating cash flows declined 13.2% from $214.2 million in FY '23 to $185.9 million in FY '24. This includes continuing and discontinued operations, with the decline in EBITDA offset by favorable movements in working capital and tax. Our cash conversion ratio has improved nicely this year to 85%, while free cash flow increased from $99.2 million in FY '23 to $146.5 million in FY '24. With our free cash flow yield increasing from 15.9% to 29.7%. Capital projects. Prudent capital allocation is necessary as we build our recovery story. Total project expenditure was $73.4 million in FY '24 compared to the $154.4 million in FY '23 and well below our GAAP guidance of $80 million. Total capital expenditure in FY '24 was $39 million, a significant decrease from the $113.2 million in FY '23. In the last 5 years, the group has made significant investments into its information systems. This was necessary to modernize its retail platforms. During this time, we spent $139 million on the replacement of legacy core systems. Fortunately, these big investments happen only every decade or so. These formations are painful, requiring large financial and human capital commitments, but these are largely complete and will set us up for our future. We will now be slowing down to embed, to stabilize and to extract the benefits from these systems in FY '25. We have reduced our annual project spend to $32 million to $39 million for FY '25. We have a lot of work ahead of us, but we are up for it. I'll now hand back to John to talk you through our next steps.

Thank you, Mark. Our financial results serve as a stark reminder to the challenges we face as a business and of our poor operational execution in the face of those challenges. I will now talk you through some of the work that is underway to turn our performance around. We're now on Slide 25. Since stepping into this rock, it's clear to me that our group system strategy was too ambitious and spread us too thin. The distraction of delivering ecosystem strategy, agile and the multiyear modernization of our core systems meant we dropped the ball in core retail capabilities. We're changing all that. We have reset the group strategy divest unprofitable businesses and moving away from the ecosystem to focus on trading our core retail brands, Warehouse, The Warehouse Stationery and Noel Leeming. The shift to a brand-led strategy is centered on strengthening each brand's specific customer value proposition to enable them to more effectively compete in each of their markets. To support those to a retail brand-led strategy, we have restructured our senior leadership and changed our operating model from agile to a fit-for-purpose -- operating model. An overview of the structure is on the following slide. The changes to the executive leadership team were made ensure there is clear accountability for the performance of each of our brands across merchandising, supply chain, store operations and marketing. We have reestablished a dedicated warehouse stationary leadership and retail team within the warehouse operation to enable us to improve the execution of our offer, particularly to the SME and education sectors. A dedicated Noel Leeming leadership and retail team will enable them to strengthen the -- market leadership position more effectively and assertively in a highly competitive and fast-moving market. Our group support functions are now solely focused on supporting our retail brands to deliver greater value to our customers and to drive profitable growth. Slide 27. I have been clear, my key role as interim CEO is to get the company back on track and to set the groundwork for return to profitable growth. Given its importance to the group results, our primary focus in the short term as turning around the warehouse's performance and strengthening its deli proposition. The key drivers of our turnaround plan are: strengthening our everyday low price position across and improved range of products for TV families. We've reset our category strategy to include more trend and newness, particularly in our higher-margin categories of home and apparel. While building on the success of our grocery offer, including fast-growing market kitchen range, we're also optimizing our EDLP pricing strategy supported by improved cost of goods. Our 86 Red Sheds are at the heart of many communities across New Zealand and remain critical to delivering our value proposition. We're resetting store layouts and key locations to improve our customer experience and highlight the improved product offer. E-commerce and Click & Collect remain important shopping options for our customers, and we have recently increased our network of store-based fulfillment hubs to service this demand more efficiently. We are fortunate to have significant endowments of scale and brand values that support a strong platform to drive performance improvement. Several million website and store visits every week, high level awareness in consideration and significant data assets provide opportunity to apply the improvements we will deliver, especially in relation to new product and improved deli. In addition to the work we're doing to get the warehouse back on track, we have programs of work underway to improve the performance of our other 2 retail brands. Having dedicated leadership and retail teams for both Warehouse Stationery and Noel Leeming, enables them to fine-tune their respective customer value propositions to compete more effectively. Operating in highly competitive markets with well-informed value-seeking consumers, it's critical that our teams are able to respond quickly and decisively to changing conditions in their respective markets. We have made significant reductions in both our operating expenses and project spend going into FY '25. And the pressure on reducing our cost of doing business will continue to be a critical part of us being an everyday low-cost retailer. The multiyear investments we have made to modernize our core systems across the group, progressively come on stream over the last year, and we'll be increasingly used to leverage our significant network, inventory, data and people assets to support decision-making and improve our operational effectiveness and efficiency. The point challenges of rising cost of living and increasing pressure on our planet's resources, mean it's never been more important than we strive to make the products we sell affordable and sustainable. This will continue to be our ambition across all our brands. Finally, we have a super power in our large store footprint and a nationwide team of 10,000 who know New Zealand incredibly well because we're an integral part of our communities. You will see us be more relevant owning our Kiwis heritage more as we better connect with our customers and communities. As you can see, we're already well underway with strengthening the retail fundamentals and a shift back to trading our core brands. our strategy reset may sound simple, but it is the simplicity and focus that will enable us to better execute the craft and science of retail to deliver great value to our customers, build shareholder value and plan our market leadership. Now on Slide 29. And as we look ahead, the retail environment in New Zealand remains tough as recent GDP figures show. And we expect that consumer demand and market conditions will continue to be challenging and unpredictable in the near term. We're under no illusions of the challenges ahead of us, thus, we've been able to regain market share in our core retail segment in the first 6 weeks of FY '25. Our sales have still been soft, and our gross profit remains under pressure as we clear the last of our winter stock and continue to reset our product offer in a competitive market. I'm very conscious of words are not what our shareholders and customers or team members want at this time. They want action and improved performance. With our focus only back on trading our retail brands and delivering the bargains our customers expect and those from us, the team and I look forward to showing meaningful progress in the year ahead. The group will share on FY '25 Q1 trading update on the eighth of November 2024. Thank you for your time, and I'll hand back to Joan.

Thank you very much, John. So I'll finish today by just taking a moment to acknowledge John properly for stepping in as Interim CEO during what has been an incredibly challenging year. And having someone with his deep retail experience both with the warehouse and with Noel Leeming has been invaluable. You can hear his commitment and passion for turning around the group. And as you can see, he's wasted no time getting to work. So thank you, John. So to conclude, despite our challenges, we have 3 iconic brands. We have The Warehouse, we have Stationary and Noel Leeming, each playing a crucial role in our business. These brands have stood the test of time, and we remain deeply committed to their success. We know there's work to be done, and we're fully focused on fixing it and returning value to our shareholders. And with that, we'll now move into Q&A.

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

First question is just on the Red Sheds. Saw that, that sales run rate has improved from negative 8.1% in Q3 to negative 3.7% in Q4. Can you just talk us through what drove that improvement? Is that just a function of cycling an easier comp period?

John, can you talk to that?

Yes, there is some past period issues in there, but it also particular retail cycles between Q3 and Q4 is probably explaining the change of product mixes through that time.

Okay. I guess just as a follow-on question to that. If we think about your strategy with grocery, lifted from 18.7% of the Red Sheds mix to around 25% this year. And on my calculations, if you -- your Red Sheds sales were down over 12.5%. Are you intending to grow the grocery mix further from here? Can you just comment a bit on that strategy and what your plans are?

Sure. Our intent is not to grow the mix. The focus is actually growing the other parts of the business to bring the mix in line or to keep the mix in line. You're right, the customers are seeing value in our fast-moving consumables range where they barely -- all beauty or at pantry range, and that's working really well. That's bringing frequency, which is great. But this is are on our apparel and home offer, and that's where we're working to improve and that the mix will come back and get more in balance. So those going forward, big departments outside of grocery will come back in balance so that as grocery grows, our overall mix gets back into an appropriate balance. So to your point on -- our intention is not to go grocery ahead of the balance of the mix.

Okay. And you commented that your winter product range didn't resonate with customers. Can you just elaborate on that point and touch on what went wrong there and what your plans are to improve that offering going forward?

Yes. Probably winter was the tail end of probably over focus on continuity product and getting sort of an essentials range. What our customers were telling us that, well, that was great, and they were responding to that, they say wanted newness and freshness in the range, and we didn't have enough of that in our winter range. So we are correcting it. We've already taken that feedback, but it wasn't showing up in our winter range. So hence, we didn't have enough excitement in the range, enough trend in newness. So the balance of our apparel sales was off.

Okay. And then just last question from me. Obviously, you provided some commentary around early FY '25 trading sales soft and gross margin under pressure. But can you give us any more of a steer on how sales have been tracking over the last 8 weeks compared to Q4 just by brand? And just any sort of read on what your expectations are for the first half relative to last year?

JJ, do you want to take that or...

Yes, I probably can't give any more guidance on how the half will turn out, but the last 2 weeks versus the -- so versus feeling somewhat fairly similar. And so we're seeing market share come back. That is driven, as you pointed out by our FMCG products and the frequency, but it's also now starting to show up in some of the newer products as they land. Now they're not coming in a scale yet, but as they come in through summer in Christmas, we're expecting that balance to pick up. But the headline traffic numbers picking up, and our market share is coming back.

But I guess, overall, if we're thinking about operating for the first half, just broadly speaking, would your expectations be that it's down on the first half of last year for those core divisions?

We're not giving any further guidance than what we've already put on the announcement.

The next question comes from Paul Koraua.

Just a few from me. If I just start with the cost target of less than 31% of sales. Now that's coming down a bit. And if you just sort of do back of the envelope, and assume sales flat, just net $50 million cost out. Is that sort of aligned with what you guys are thinking? Or are you baking in a little bit of sales growth in the end as well?

Mark, I'll pass that to you.

Paul, you can see in historic level, it's been around 31%, we've actually got down to almost down to 29%, not in one of those in our best year. But yes, so I mean you've done the math, that's what it would be. Obviously, I can't give you guidance on the sales number, but we obviously -- we would be seeing positive sales growth. So there there's a calibration that would come off a sales number. But there are elements within our business that there is cost out that we think we can get into. We obviously went from an ecosystem strategy and to more brand-focused strategy. And with that, there will be a cost that are associated to that previous strategy that we will wind out the business. And yes, so it's a big focus of ours, to make sure that we're leaner and being more value minded in the way we go about cost.

Yes. So if I just sort of pick up from there, so you got $15 million of net cost out, give or take, and you say that you're going to lose a little bit with the engine strategy, but you have sort of take costs that have come online that are probably not going to change that much. So it's really going to have to come through some of those other cost lines. Do you have any color on where you think going to be able to strip that cost out?

Yes, I can't comment too deeply ball on that because I think some of the areas are sensitive within the business and things. So I think we -- but needless to say is that there are definitely areas that particularly in how we set up ourselves around lasting costs for certain systems based on certain strategies. Those things can candescently come back where our online is right now with some of the licensing costs around some of those applications, there's opportunity within those. And so we're working hard on those areas to pull those sort of variable costs back. But we're always looking hard at productivity within stores and square meters and service costs within stores, obviously, within the business model envelope. And a large portion of why we make savings last year was just being a lot more planned in terms of our labor hours in stores, which is a big bucket of cost for us. So yes, those are going to be big areas. And there are rental pressures because, obviously, the cost of doing business for REIT for our land or is this increasing with rates and well documented. So we're obviously fighting a bit of an upper battle there, but we are getting some good rent relief on a relative basis to inflation. So we'll continue to lean into that. But yes, so those are sort of the big areas. If you look at our income statement that we'll have to target.

Yes, that makes sense. And then maybe just moving on to gross margin. That first half, second half split was a little bit concerning and you spoke a little bit to the amount of discounting needed that continued on aged inventory sort of at 20% is down on last year, but can you give us a feel of if that's elevated because what you guys would like it to be? Or what history says is and how much longer gross margin pressure continues for through the start of '25?

Yes. Sure. It is transitionary, Paul. As we move from our product offer that wasn't quite right and move into new products. There's a transition cost. So some of that we have to calibrate the clearance of that older range as we bring in the new. So some of that was a little elevated, but transitionary. So you'll see us move back to a much better steady rate position once we've completed that transition.

Perfect. Cool. And then maybe just on that transition, you spoke to -- it takes some time. How long do you think it will take to get to a position where you're happy with the sort of stock that you have in red?

Yes. It will vary depending on the retail cycle or the procurement cycle for the product, so some are quite long. So literally from season to season. And sometimes, you need double round on that to totally nail the range transition. So some of the seasonal product will take a couple of those around, but predominantly, most of the benefit that will come from the first round of changes, and that's what we're seeing. Some of the shorter-range local product is repositioning faster. And improvements in our -- is a big focus also. So that's coming through based on our purchasing cycle. So both the time -- tax to get the product done and the time it takes to clear the existing product will dictate when the margin mix comes through. But pretty much, we expect that to be a continuing calibration throughout the financial year. So each of those different cycles will come in and hit the shop floor and at our results at different stages, but progressively building on each other over the year.

Maybe just a final one for me. Is there any update on how the switch for new CEO is going that you can provide there?

I'll take that one, Paul. At the moment, we are focused on just refining exactly what the physician description and business specification should be. I'm not encouraging every single executive agency in New Zealand to get in touch with me as they did in the first few weeks. So I would reinforce the fact that I've got -- balancing around JJ's league at the moment, hoping that we can keep them for as long as it takes to sort of get the stage of the change strategy thought about. We won't be making an appointment before the end of this calendar year. But obviously, it's something that we are very focused on at the moment, but we're incredibly lucky to have JJ here seeing us through a very challenging time.

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

Okay. Well, thank you very much, everyone, for your attendance this morning. It has been obviously a very sobering result for us to deliver. We're living in fairly tired times in terms of the environment that we're operating in. But I think what you've heard from the team as an absolute commitment to change the strategy so that we do maximize the opportunities that are out there. And of course, we are starting to see some green shoots in terms of the economy. So we look forward to that translating particularly in the lead up to Christmas. But you will get a further update. We are to release our Q1 sales on Friday, the eighth of November. So JJ and Mark will be updating you at that point. So thank you again for your attendance.