The Warehouse Group Limited ($WHS)

Thank you for standing by, and welcome to The Warehouse Group Limited Fiscal Year 2026 Interim Results. [Operator Instructions] I would now like to hand the conference over to Mr. John Journee, Group Chief Executive Officer. Please go ahead.

[Foreign Language] and good morning, everyone. Welcome to the Warehouse Group's FY '26 interim results presentation. Thank you for joining us today. I'm John Journee. It's a privilege to be speaking with you as the first time as Chair of The Warehouse Group. Joining me today are Mark Stirton, our Group Chief Executive Officer; and Stefan Knight, our Group Chief Financial Officer. I will start with an update of our first half and then hand to Mark to step through the group's performance and progress. Stef will then take you through the financial detail, and Mark will return at the end of the talk to talk about the second half of the year. As always, there will be an opportunity to ask questions at the end of the presentation. From the Board's perspective, the group is on the right path, and we are seeing execution and proof. This progress has been delivered in an extremely challenging retail environment with volatile macroeconomic conditions. In these circumstances, the group delivered a solid result for the first half, holding sales, reducing costs and improving profitability. Sales were $1.6 billion, up 0.3% on the prior year half. Gross profit was $520.5 million, down slightly on the prior period with a gross margin of 32.3%. Operating profit improved to $26.9 million, up 37.7% on FY '25, H1, reflecting tighter cost control. Most of our new management team were in place by the start of quarter 1. They have delivered a leaner operating model and have made progress reestablishing the retail fundamentals, which Mark will cover shortly. I want to acknowledge the hard work of our team members across the business, delivering progress during significant change. There is more work to do to restore sustainable returns and realize the potential of our brands. Looking ahead at the tight economic conditions, and now with increased uncertainty from the international conflict in the Middle East, our turnaround will take time. Given the half year result and the level of economic uncertainty, the Board has made the decision not to declare an interim dividend. I know this will be disappointing for our shareholders. I want to assure you that the Board and management are aligned and taking action to rebuild shareholder value quickly and return the group to paying dividends. I sincerely thank our shareholders for their patience and ongoing support. I will now hand over to Mark.

Thank you, John, and good morning, everyone. I'm Mark Stirton, the group Chief Executive Officer. As John has outlined, we are making progress, but it is happening in a tough environment. I will step through what we are seeing in the market, what the group achieved in the first half and the work underway to strengthen the business. I want to spend a moment looking back at the macro conditions during the first half of the financial year. By January, we began to see some early signs of improving consumer confidence. For the first time in 4 years, more people felt it was a good time to buy a major household item and 55% of consumers describe their financial position is comfortable. These were the first indicators that retail spending might start to increase in 2026. That said, retail spending in January decreased 1.1% due to the severe weather events that disrupted parts of the country. At the same time, inflation has remained high, sitting at just over 3%. That pressure was being felt most sharply through everyday essentials, particularly food and Petrol. Unemployment had reached a 10-year high in December and GDP growth remains muted. While confidence was improving, many households were still cautious, focused on repaying debt, saving where they could and prioritizing basic needs over discretionary spending. Like all businesses, we are focusing on our ability to respond quickly as conditions change, and I will talk to the current climate at the end of the presentation. Despite a volatile environment, we delivered a solid result in the first half with disciplined cost control starting to flow through to improve profitability. One of the more positive aspects of the first half was the trading performance across all brands and stores. Warehouse Stationery delivered a standout result with sales margin and operating profit all up on the prior period. As our smallest brand, it has been the fastest to begin turning around. Our focus now is on applying those same learnings at scale in the Warehouse as we continue the broader turnaround. Noel Leeming delivered a strong result in an intensely competitive market. Operating profit for the half exceeded the full year results in FY '25, which is a meaningful step forward. At the Warehouse, customers are responding well to the changes we have made in our stores and across our ranges. Foot traffic and conversion were both up again, supported by new ranges, better pricing and ongoing visual merchandising improvements. As newer ranges landed in the second quarter, we relied less on discounting and delivered higher levels of full price sales. The Warehouse held its #1 position in the market for toys and health and beauty continue to grow, an increasingly important category for us. Across all 3 brands, trading was strong during the main summer retail events, including Black Friday, Christmas and back-to-school. Underpinning all of this is a new leaner operating model and a culture of cost control. This will allow us to deliver better value for customers over the long term and improve profitability. None of these highlights would be possible without our people. And I want to acknowledge our 10,000-plus team members across the country. Their work and commitments are making a real difference as we reset the business. We are making good headway on our retail fundamentals. This is the practical work that supports margin improvements at the Warehouse and the broader turnaround across how we plan, buy, move product and sell and in store. In merchandise planning and buying a new strategy and governance model is now in place. This is improving decisions and giving us better control over ranges, margin and inventory. We brought in key talent and broadened our supply base, and we're starting to see better planning discipline and alignment between product pricing and customer demand. Turning to supply chain. We now have clear leadership in place at the executive level. We've changed our shipping supplier, improving visibility, control and cost and a broader review is underway to further improve our cost to serve over time. We have improved delivery windows and helped remove some complexity from how our containers move. And finally, so today, I'm excited to announce that we'll be opening The Warehouse and Noel Leeming in Mangawhai. This will be the first new The Warehouse store since Wanaka in 2023. Our store network is our key strength. More than 85% of New Zealanders live within 20 minutes drive for one of our stores, and our stores are central to how we will serve communities and deliver value. Alongside this, we are continuing to invest in store experience, including visual merchandising upgrades and planning is underway for a new flagship store format. We are invigorating our brand to drive reappraisal and preference and actively testing our paid media to find the best value and performance while expanding our own retail media strategy. This work is about fixing the core. It takes time, but it strengthens execution and will support better performance at The Warehouse over the long term. Even in a challenging period for the business, we have stayed true to our heritage and the communities we serve. Through The Warehouse Red Bag, we raised close to $700,000 to support local communities through our stores and families and needs through our charity partners. I want to recognize the team at The Warehouse Papamoa who use their Red Bag funds to deliver food, water and sunblock directly to first responders at the cordon during the Mount Maunganui landslides. Over Christmas, our annual Be the Joy campaign raised more than $250,000 and collected thousands of gifts for families in need, thanks to the generosity of our customers. We were delighted to welcome Santa to 19 of our stores, giving families opportunity to create special memories. To support our busiest trading period, we employed an additional 1,000 team members in local communities across the country. We continue to look after our environment with Scope 1 and 2 emissions down 80% on last year. We're proud that 183 of our sites are now powered by Loadstone's Energy solar farms. But we diverted 79% of our operational waste from landfills and increase the amount of post-consumer waste being diverted. 69% of our private label sales now use sustainable packaging, continuing a steady improvement year-on-year. Doing good remains an important part of who we are as a business as we look ahead. I will now hand over to Stef to take you through our financial performance in more detail.

Thanks, Mark, and good morning, everyone. I'll start with our overall group performance before expanding on each area of the income statement. As mentioned, sales for the half were $1.6 billion, up 0.3% on the prior period. Due to the 53-week financial year we had last year, this half falls a week later compared to FY '25 H1. Throughout the result, we'll refer to like-for-like sales which compares 26 weeks ending 1 February 2026 with the 26 weeks ending the second of February 2025, as opposed to the reported prior half year ending 1 week earlier on the 26th of January 2025. At a group level, like-for-like same-store sales increased 0.5%, driven by unit growth, but offset by lower average selling prices. Group gross profit margin was compressed by 20 basis points across the half with lower sales in high-margin categories in the Warehouse and partially offset by strong growth in Warehouse Stationery, our highest margin brand. Our half was a story of 2 quarters. In Q1, gross profit margin was down 80 basis points due to category mix and clearance. This recovered in Q2 with gross profit margin up 30 basis points with higher levels of full price sales. Our cost reset program has gained traction with cost of doing business down 1.7% and down 70 basis points as a percentage of sales, and I'll go through the main drivers shortly. Our cost savings supported strong growth in operating profit, up 38% to $27 million compared to $20 million last half year. So looking at the 2 quarters of the half, Q1 delivered sales growth of 0.9% and an 80 basis point decline in gross profit margin, with lower sales growth in high-margin categories and higher clearance activity of winter stock in the Warehouse. Q2 improved with flat sales and gross profit margin up 30 basis points. Warehouse Stationery delivered exceptionally strong sales growth and higher margins. And Noel Leeming margins grew with sales in Computers, Whiteware and Services. These improvements were partially offset by softer sales in high-margin categories in The Warehouse like home and in apparel. So on to The Warehouse. Sales increased 0.5% with major trading events like Black Friday, Christmas and Boxing Day performing well. We note that January sales were impacted by the severe weather events across the country. Like-for-like same-store sales increased 1.2% of store traffic and conversion up. Total units sold increased 1.7%, while average sales prices decreased 1.9%. Sales growth in FMCG continues and led by our growing health and beauty category with sales up 3.7%. The Warehouse also held its #1 position in the market for toys. Gross profit margin was disappointing in the half, decreasing 110 basis points, but this was quite different between the quarters. Margin in Q1 was impacted by higher clearance and higher freight costs. Margin in Q2 improved with higher full price sales. The Warehouse brand costs were kept well below the rate of inflation, but still increased 1.6% driven by increased DC costs and store labor. However, group overheads remain too high and continue to suppress operating profit, which decreased to $9.1 million, down from $12.5 million in the prior period. Unfortunately, our central Wellington store closed in May 2025, and we look forward to growing our footprint again with Mangawhai. As Mark said, growing margin in The Warehouse, our largest brand contributing almost 60% of group sales is key to improving our overall financial performance, and we're making progress. Foot traffic is up with more than 1.5 million New Zealanders through our doors every week. A huge endorsement of our brand. We're seeing progress in the key categories we need to win. In home units were up 4.2%, a pleasing result in an increasingly competitive environment, and Apparel delivered good ASP growth and less clearance. Inventory management improved with stock on hand down 10%, better stock turn and lower aged inventory. And we've improved margin in FMCG by increasing Health & Beauty sales and optimizing the grocery offering. However, we still have work to do to turn this brand around to deliver meaningful financial performance. Mark covered a number of changes currently underway, and we note our most critical success factors: improving the home and apparel offering with new merchant processes and sourcing changes to improve execution and reduce clearance. Also improving our supply chain to reduce cost and boost efficiency and also to reinvigorate our brands to increase customer reappraisal. On to Warehouse Stationery. The standout performer with sales up 5.7% and strong growth across all categories. Sales growth was impacted by the inclusion of the last week of January, which is the biggest week of back-to-school trade whereas that week occurred in the second half of FY '25. Like-for-like same-store sales increased 1.8% with increased foot traffic and conversion. New ranges, good stock control, price resets and lower clearance has led to gross profit growing faster than sales, delivering excellent gross profit margin growth of 170 basis points back to FY '23 levels. Warehouse Stationery opened a new store on Tory Street in Wellington and moved the Sylvia Park store inside The Warehouse Sylvia Park to create a store within a store. In Noel Leeming, sales declined 1.2%. This decline reflects a strong comparative period with elevated Flybuys redemption sales as the program closed. Lower store sales were offset by very strong online sales, up 14%. We had strong category sales growth in cellular, computers and whiteware. Noel Leeming's focus on strengthening profitability delivered 90 basis point growth in gross profit margin. Combined with brand and overhead cost control, Noel Leeming achieved an operating profit of $13 million, up 52% and higher than FY '25 full year, a really great outcome in a highly competitive market. In November 2025, we announced our cost reset program and our aim to reduce cost of doing business to less than 31% of sales. We're pleased to have made significant progress with cost of doing business decreasing 1.7% to 30.6% of sales. It is important to note that due to the seasonality of sales in H1, cost of doing business as a percentage of sales is always lower in H1 and is expected to normalize in the second half. Looking at the top graph by category, employee expenses increased slightly including increases in store and DC labor, and this was offset with a 10% reduction in store support office labor. Depreciation decreased 10% through controlled capital spend. Other income and expenses decreased 5.7%, primarily from savings in IT running costs and SaaS spend and lower store costs. We've also increased revenue from our Retail Media business, MarketMedia. Brand costs increased 1.3%, albeit lower than inflation. Within this, distribution costs increased 5.5%. The changes to our supply chain, I mentioned earlier are expected to reduce these distribution costs going forward. We continue to reduce our store support office costs down 8% in this half, following our 8% reduction in FY '25. And the full effect of the cost reset program, including the recent SSO restructure and TCS arrangements is not expected to be fully realized until FY '27. So brand profit, which is all the brand profits after brand CODB and before SSO costs and depreciation decreased 3.3% compared to FY '25 H1. This was caused by the small decrease in gross profit and the marginal increase in brand cost of doing business. However, overall group operating profit was up 38% to $27 million, driven by the disciplined cost control and lower depreciation I just outlined. Net debt improved slightly from FY '25 full year of $96 million to $93 million as at FY '26 half year. Net debt was impacted by the balance date timing, which includes large monthly pay runs in the half that were not in the prior half. Normalizing for this timing FY '26 H1 would have been in a net cash position of $45 million compared to $19 million in the prior half. Throughout the period, average daily bank borrowings decreased $52 million compared to the prior period, which combined with the reduction in interest rates resulted in a 63% lower interest cost. Notwithstanding the reduction in operating cash flows due to the timing of the half year end, well-managed capital expenditure delivered positive free cash flow of $3.1 million. We've reduced our bank facilities in the half year after elevated facilities were put in place during COVID, which are no longer required. Available liquidity was $207 million, comprising of $300 million available bank facilities and $93 million net debt. All debt covenant criteria were met over the half. Moving on to inventory. Inventory decreased $26 million or 4.7% compared to this time last year. Group inventory on hand was down 8%, offset by higher levels of goods in transit which were up 19%. We continue to improve stock performance with weighted average stock turn of 4.7x, demonstrating our focus on stock turns and sell-through rates and aged inventory of 16%. The clearing of higher aged inventory on hand at FY '25 year-end did impact FY '26 H1 margins, particularly in the first quarter. We have good stock health with 76% of Group inventory on hand and continuity product. There's still work to do over the next 12 months to deal with aged inventory as we aim to balance pressure on margins. Looking at our project spend. The level of project expenditure has remained low and finished at $9 million for the half compared to a spend of $9 million in H1 last year and $50 million in H1 of FY '24. We have reduced spend on IT systems and digital projects and have increased spend on store development and store improvements to improve our customer experience. Looking forward, project expenditure is expected to be modest, and we will prioritize store development. And with that, I'll hand you back to Mark who will share our view of the year ahead.

Thanks, Stef. Before we move to questions, I want to briefly look ahead to the second half. In the first 6 weeks of H2, sales were down 0.2% compared to the same period last year, reflecting a competitive and uncertain environment. Our focus for the rest of FY '26 is clear. We are prioritizing what is in our control and continuing to work to turn around our performance. This includes driving margin recovery in the Warehouse, further reductions in overhead costs, tighter inventory management to unlock working capital and disciplined capital expenditure. Along with store growth, new product ranges and enhancing the customer experience. That said, we are entering the second half cautiously considering the geopolitical environment and broader economic conditions. The international conflict has created further uncertainty for New Zealanders. Rising fuel prices and potential disruption along with congestion across key shipping routes are expected to push freight costs higher in the period ahead. While the full impact on supply chain and consumers remains uncertain, we are closely monitoring conditions with planning underway. We're working with all our external stakeholders to seek to mitigate and manage these pressures as the situation evolves. In this environment, the mission doesn't change at the Warehouse. We continue to strive to deliver value for Kiwis every day. In closing, I want to thank our customers and our shareholders as we stay focused on fixing the core of the business and improving performance over time. We will provide an FY '26 Q3 trading update on the 15th of May 2026 and report our F '26 annual results on the 24th of September 2026. Thank you very much.

[Operator Instructions] And your first question will come from Kieran Carling with Craigs Investment Partners.

I might just start with a couple of questions on your outlook commentary. So are you able to provide any color on how sales have tracked over the past couple of weeks particularly against the backdrop of higher fuel prices just relative to what you saw through the first 6 weeks of the second half?

Thanks, Kieran. I'll get Stef to pick that one up.

Kieran, thanks for your question. So you saw on the announcement that sales for the first 6 weeks were down 0.2%. There's nothing in the last 2 weeks that are substantially different in that trend between the rest of that period. So I think you can kind of say that it's a pretty flat performance over the full 6 weeks.

Okay. And I appreciate there's still a fair amount of uncertainty around the duration of the conflict. But can you just help us understand what exposure you have when it comes to increased freight costs? And I guess to the extent that those pressures continue. Are you looking to offset them through price increases? Or are we likely to see some margin impact in the near term?

So I can pick that one up again. Look, I think there's no question that it is an incredibly uncertain time. The short answer is it's really just too early to say. So we think that there's 3 potential areas where we will likely see impacts. Clearly, international freight and shipping costs are going to come under pressure. So we know that there will be some increases there. Then obviously, you've got domestic transport costs. There will be some pressure there, too. And then I guess the last year, we would expect to see impact will be around demand. And that's also -- it's a very difficult one to predict at this stage. Clearly, customers will be feeling the impact around increased cost of living. But that said, businesses like The Warehouse, we're incredibly well placed to meet the demand of customers and the needs of the customers in a tighter environment and value brands such as ours typically have done better in environments like this. So while there is definitely some headwinds, there's the potential for some offsets as well. We're keeping a really close brief. We're doing a lot of scenario planning as to how that may impact us. But in terms of being able to give you specifics, it's really just too early to say at this stage.

But is it fair to say that you're not putting up your prices in the near term on that basis?

Once again, it's just too early to say. We've got a really strong watch and brief, but it's too early to call that at this point.

Okay. Maybe just a question on Noel Leeming. We've seen the sales run rate continue to decline there. And I guess I compare that to the likes of JB Hi-Fi who's been printing some fairly good numbers. They saw like-for-like sales up 20% in the latest quarter and Noel Leeming turned negative. So can you just help us understand why there's such a large difference there? I appreciate the brands aren't entirely like-for-like. But do you think you're losing market share in Noel Leeming? And if so, why?

Thanks, Kieran. I'll ask Mark to pick that one.

Kieran, yes, I think it's JB Hi-Fi is a great competitor to us. I think what the game that we played, we played a margin game versus a sales game. And they've have a 17% gross margin profile in New Zealand versus ours. And we chose to play a slightly different game. So I mean you would have seen the bottom line performance obviously reflects that. There are certain categories that we decided to pull back on, which are low-margin categories that as a result. And I think some of that did give up some market share in the short term, but we felt that, that was something that we were willing to do. We still are a formidable competitor, and our presence in the market is very, very strong. Like you say, we obviously have a Whiteware component and various other components that they don't have. And as those sort of units start to come back, we're starting to see real benefits in that business. The key thing in there, Kieran, is that also we've got -- we mentioned some of the flybuys and your base is your base, so we don't want to make excuses, but it was a big component for us. We were one of the largest flybuy components and that really did help us last year. But we also got commercial sales, which we had some really big commercial sales in the base last year, which impacted some of our growth.

And then maybe I'll just squeeze one last question around your OpEx. So good to see some cost out in the first half. But can you give us a steer on what you're expecting in the second half there just in terms of year-on-year run rates?

Thanks, Kieran. I'll come back to Stef for that.

Yes. Thanks, Kieran. So you obviously saw that our cost of doing business dropped below that 31% target, which we have been aspiring to. Clearly, that's helped by the fact that we have the peak period trading in this in the first half. And so it's great progress. You've seen things like support office costs down 8% last half. It's down another 8% again this half. But also, we are acknowledging that in the second half, that run rate will normalize a little bit off the fact that sales will be lower in the second half than they are in the first.

But on a like-for-like basis with the second half of FY '25?

We'd still would expect them to be lower than the second half of '25, but just not at the same rate as the first half of '26 if that make sense.

The next question will come from Guy Hooper with Jarden.

I just ask maybe a couple of questions around the different disclosures with which are helpful. First of all, the aged inventory clearance. I mean that looks like a reasonable drop in aged inventory. Can you just give us a bit of a steer, I guess, how that clearance went and the impact of it? And then I guess the ambitions in the space to take it lower?

Thanks, Guy. Yes, the call, unfortunately, is a little distorted, but I think we've got the gist of it. I'll get Mark to pick that up, but he may need to clarify with you that he's got the gist of your question.

Guy, so if I just replay it back to you, basically, we obviously came out with higher aged inventory at the end of last year impacted H1 results, particularly in the first quarter. It looks like the aged inventories come down. Is there more work to do? Would that be a good summary?

Yes, yes. And just maybe a bit of the impact itself. So was that contained in the first quarter?

Yes. It was primarily in the first quarter in the red. Obviously, Blue and -- Blue had less of an impact and that dealt with, but there was still also much bigger than what we would hope. Despite the very strong overall performance. I mean the first second half -- first quarter, second quarter performance was quite dramatically different in Blue and in Noel, with both businesses jumping at gross margins quite considerably. In the red, we struggled in Q1 in particular because of that aged inventory, particularly in apparel, with winter merchandise and some home winter merchandise. And -- so -- but obviously, whenever you've got aged inventory or stuff that you're carrying, it does put pressure on your supply chain because you've got only so many slots in a DC and all of those type of knock-on effects. So we obviously have to get through that and want to release working capital and two, to obviously release just pressure within our supply chain. So there is still more work to do, like Stef picked up, but we're trying to do it responsibly. There is good stock in there, but we just -- it's not stock that's always the wanted stock that the customers want, but if there's enough. So we have to just systematically get through it. There will be some sort of flow-on effect into probably H2, but we don't know the extent of it. We're obviously be doing it responsibly.

Just building on Mark's comments here, I think there's a bit of a ratchet there. Some of the earlier stuff was still dealing with legacy stock and which was much worse than the sort of general cycle of age. So as we move forward in the product mix entering the business is better and more planned. Then obviously, the aged profile and need to deal with that is improving. And that is probably what we're seeing in the underlying numbers is we're still an aged product to deal with, but it's getting off a better and better base.

Yes. The fresh products, as that gets -- like John said, that sort of seasaw comes in with your fresh products got a much stronger appeal than just your margins will be straight through because it will dilute your markdown.

Okay. And again, the home apparel gross margin chart, helpful to see that that's lifting. Can we just give us a bit of color about how you're thinking the sales of this margin balance of that? Because, I mean, that's obviously come with a little bit of a trade-off in terms of lower unit sales?

Yes, slightly lower unit sales, mainly because, obviously, the predominant markdowns were actually in apparel. So that's why we had a bit of a softer apparel result because obviously, if you're not selling at full price, you do take a slight decreased deflation on like-on-like period. But what I am seeing in the second quarter and actually just going into every month, the apparel business gets stronger and stronger. In January, it had some of its strongest gross margin I've seen in the business and the history that I've looked at so far. So we are getting stronger in that business, and I think it's just going to get -- and as you know, we've got a new leadership in place, which is making some great changes. We've put a Chief of Planning in place, which is making great strides to reduce our inventory while still maintaining gross margin. So I think that's the key message in Red is that we've been able to sort of hold gross margin in some key categories without -- with also containing inventory. So often, what happens is you can gain gross margin but lose the battle on inventory, and we seem to be planning -- getting the balance right, we'll be able to pull down inventory, release working capital be able to deploy it back into fresh product. We know that's going to win in the future seasons. But while still trying to be responsible with margin. I think that's the game -- the balance we're having to strike.

And then just maybe one last one for me. The average daily bank borrowing is down $32 million, again that's pretty helpful color. Can you give us a sense of what sort of core debt is or what that average daily bank borrowing is?

Thanks, Guy. I'll get Stef to pick on it.

Guy, our borrowings typically range. I mean, you see about $300 million worth of facilities. At the half, they were at $90 million. The average range is probably somewhere between that $50 million and $100 million or something like that kind of mark. It would be a pretty good gauge for you to think of as an average. So it's quite a material reduction. That's the key point. Off the back of better inventory management, managing our capital investments more tightly, we're seeing material improvements there. So something we're really pleased with.

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

Congrats for the results, Maybe just a quick first question on red. You guys sort of talked about some of the work you're doing on margin there. But maybe just the way you see this business going forward in terms of category mix, FMCG or something you talked about a lot and now that's turning into more of a health and beauty plus some other FMCG categories to get the margins up. Home and apparel, you're doing a good job on margins there, but maybe just where do you guys see this business going in terms of category mix?

Thanks, Paul. Mark, I think you pick that one?

Yes, Paul, I think we're going to -- like we discussed with you guys before, I think we're going to go with the market presentation, which will obviously make all of this hopefully a lot clearer from a go-forward strategy. But like you say, we've got a home and apparel pillar categories for us in terms of the overall contribution to the business. So we have to get those right. Health and Beauty when we've done the analysis on our FMCG, which is what we call grocery, which is your traditional food and then there's nonfood, which is broken up into pet cleaning, baby and health and beauty and wellness. Their health, beauty and wellness and pets, for instance, for us and baby has really done super well. So -- and it's an area we really believe that we can create a real meaningful business, which when you're growing a business, you're testing and learning and we're trying to garnish the learnings there. And then on the food side, we've really had a good uptake on our food offering, but we've probably gone a bit wide on SKUs. So we're just trying to rationalize the SKUs and making sure that we're curating that offer that it's really the offer the customers want and would want to shop us for. So that's really where we're getting to, and that's helping us sort of also manage the margin mix that's in that larger FMCG bucket.

Yes, cool. And then I think it was kind of encouraging to see you guys announced the two store openings in Mangawhai. Maybe if you guys just want to talk to what you looked at in terms of that catchment? And what numbers you had to see to feel confident enough to press go? And I guess you can add on the store in Wellington as well for Blue?

Yes. I mean I think what -- you go through a feasibility process. So we -- I mean, some of it is just intuitive. You can just look at the level of development. If you pop a pin on Google map, you're going to see how much land has been excavated there. You see that Bunnings and New World are there already. They are -- the reports are that they're both doing extremely well. The New World are looking for more and more space. They're quite huge with all the golf courses up there, there's a big catchment of people that are coming into the area. And there's just generally an urban semigration up north that we felt that the area was a huge growth catchment. What we do, do is we use credit card data to help us determine the level of spend in and around the area and on discretionary because the credit cards are great or card spend, not take credit card. Card spend is a great indicator of what people are spending on and will spend on in the future, and the data came back very, very strong. And then obviously, you look at where your closest proximity stores would be? And is there -- how much cannibalization is there relative to where you think your closest stores? And when we did all of that, we looked at the overall returns, and we think it's a really good site, not only -- I mean, obviously, it's still in development, and so a lot of it will grow into, but that's the Warehouse's DNA. We were in early communities throughout our history, and that doesn't change.

Yes. Just building on that from Mark because basically that is a key point. We've actually got strong understandings of how to support smaller communities and then move into growing catchments and service them early with those needs. So that data obviously informs when we see the next opportunity coming up or the next need base coming up. And maybe the Wellington.

The Wellington. You're referring to the Stationery store, Paul?

Yes, yes.

Yes. I mean it's for the same reasons. We -- Tory Street and Wellington, I mean, Wellington CBD area is fantastic. We're actually looking for a new Red store. I think last year, you would have noted that we had to vacate that Tory Street site. We didn't want to vacate. It was just a landlord, we couldn't come to agreement with the landlord. So we're actively hunting to get into a site in Wellington because it's a key area for us. So the Wellington store in CBD is just part of the general expansion of the Blue business. I think we our stationery business, I believe we've spoken about before through that previous strategy. The brand of Blue unfortunately, probably got lost in the mix. I'm particularly excited on that brand. It's got incredible gross margins, great contribution to the bottom line. I think that's really -- we've got a real right to play there. And we've got great strength. So I actually think you're going to hopefully see a lot more from that brand and Tory Street is just one example of that, and it's performing well and to feasibility.

Cool. And then maybe just last one for me. On costs, you guys have done good job through the first half, and that's going to run rate better into '27 as you say. You guys working pretty hard on margin. And so I guess, big picture, do you think your target of 33% or 34% gross margin, 31% cost to doing business, 3% op margin. Do you think that's one achievable in the like near to medium term? And then do you think you're being ambitious enough there as well?

I believe in the businesses. I think the underlying leverage of the business should suggest that that's true. When I look at -- that's why we're spending so much time on the retail, that sort of drawing out these retail fundamentals because there's so much value track there, Paul. So for me, not even growing the top line, the value is trapped in the operating model, and that's my observation. Obviously, our cost of doing business, it has to evolve, and we're doing some strides on that, and you would have seen some of those changes we're trying to do. And making sure we execute in the areas that we feel like the lowest cost to serve and trying to be really special in the places that make you different and where your strengths need to be. So that's where we're trying to invest in those areas. So -- in my personal view, each brand has a real value trap that can be unlocked. And so that's the glide path to that 33 or 34, 31 and then 3 on the bottom is definitely still in scope for me and the management team and the Board. But it's that -- you have this Middle East conflict and that like changes your -- it does definitely then go, wow, okay, we've got a whole bunch of potential costs coming my way, how do I have to navigate that. So it's your best guess, but if -- based on the potential of the business, it should easily get there in time. So yes, that's my view.

There are no further questions at this time. I would like to hand the call back over to John for closing remarks. Please go ahead.

Thanks, everyone, for your time today, and I'd just like to thank Mark and the relatively new leadership team for the dedication they've shown to the business and the progress they're making and steadily moving us forward, improving both our brands and our financial performance. So thanks, everyone, and thank you for your time.

The call has now concluded. Thank you for your participation. You may now disconnect.