Wesfarmers Limited (WES) Earnings Call Transcript & Summary

Well, good morning, everybody. I think we're coming up pretty close to time. I've just, yes, got the nod, so we're good to go. Wonderful. Well, welcome, everybody. Thank you very much for taking the time. For those of you that are in the room today that have come and joined us, we're very much looking forward to spending some time with you today. And for those of you listening online, welcome to you as well. I hope you enjoy the presentation as we run through it. To open up, I'm going to ask Isaac to come to the stage here and perform an acknowledgment to country for us. Isaac, over to you.

Hello. Testing. There we go. I can hear myself. Off we go. My name is Isaac. I'm the Aboriginal Affairs Adviser for the Kmart Group. It's nice to see you all this morning. In aboriginal culture, it's customary to be either invited in or welcomed into a space or an event, especially having such a significant event like this is today. All right. Gunai, Gunditjmara and Yorta Yorta on my father's side and Wurundjeri on my mother's side. Does anyone know where any of those are? No, a few shakes, a couple of nods. Gunai is down Gippsland way. Anyone familiar with Gippsland area? A couple, yes. Gunditjmara is down in Portland, and then Yorta Yorta, which is up in Shepparton. And then on my mother side, she's of Wurundjeri, so New South Wales. It's been a long time for our family to be working in this space, and I'm just very fortunate to be able to work in this environment with the corporate affairs team and really showcase our commitment as the group to working in the aboriginal space. Just over 100 years ago, back in 19 -- just under 100 years ago, back in 1929, my great, great grandfather, Shadrach Livingstone James, I know, strong name, he wrote a letter to Australian businesses and government saying that they haven't yet taken them out of the experimental stage. And he's writing this back almost 100 years ago. And he writes a vision for our people, writes a vision for our country, which says, "I have a vision that we will come together as one, that we will open up our hands to work together. We'll lift up our heads and look and see the future, see the vision, just like Bunjil, the eagle, the creator. Open up our hearts to see, hear and listen to those around us, to come together again and share this wonderful land and be prosperous together." 1929, almost 100 years ago. Fast forward to now, I'm very fortunate to be able to take on his message, take on his vision and see that come true for us here at Kmart but also our family so that it doesn't take another 100 years for us to come together and work together to open up our minds, open up our hearts and lift up our heads to see -- I'll say you're all looking at me now, and we're starting to see great change. Now does anyone know what this is? Yes. Probably you've all seen it before. One guy knocked it over earlier. That's all right. It still works. It's made out of wood. It's called a didgeridoo or traditionally yidaki. Can everyone say yidaki? Everyone, come on, 1, 2, 3. Yidaki, deadly. So deadly means great, awesome. Now this was made by my great uncle. We made it together. When I say great uncle, he's only 54. There's big age gaps. But this has been passed down from him to his son and then across to me. And I'll play a little bit for you this morning just really, again, to bring that same messaging, that vision that my great, great grandfather spoke out onto us. And this will also play into the acknowledgment of this land, which is the Wurundjeri people of the Kulin Nation and my acknowledgment as an aboriginal man on behalf of everyone here today that we pay our respects to their Elders, past, present and emerging. [Presentation]

Thank you. Thank you, Isaac. A wonderful acknowledgment to country. I'm sure you all enjoyed that as much as I did. We'll now get into the little more formal part of the agenda where we take you through the Kmart story. I will be joined by Aleks Spaseska today, who's going to help me out with some of the presentation as we run through it. Aleks is our CFO. And then we'll have about 45 minutes of presentation, so sit comfortably. And then we'll have about another 45 of questions, so lots of opportunity to get into any topics that you'd like to get into. So if we turn to Slide 2. Kmart Group includes Kmart, Target and Catch with the focus of today's presentation being on the strategic positioning and future plans for Kmart. So it's very much a Kmart day. We won't be going into trading updates, of course, because we'll do that at the end of each half. It's much more about the strategic direction of where we're going. The period of time since COVID appeared has been an extraordinary one, and in Kmart Group, we have consistently focused on 3 things. The first one is being there for our customers. The second is to keep our customers and our team members safe. And the third one is to keep focused on the long term. And we have used this period of time to accelerate our strategic agenda and proactively invest in the future. The broader restructure of Target is an excellent example of an accelerated strategy we expect to deliver strong growth for Kmart and a much more sustainable position for Target. Later in the presentation, Aleks will talk through the Target conversions to Kmart and the benefits to the Kmart business. I thought I'd very briefly touch on Target, and I'm very happy with the progress that Richard and the team are making to create a simpler and more focused business with a clear differentiation from Kmart. All aspects of the restructure of Target are on track, and at the Kmart Strategy Briefing Day later this year, we'll provide more information on Target and also spend some time on the strategic progress being made at Catch. The way we run the group is to ensure we have clearly accountable operational leadership teams for each business. We collaborate on shared initiatives where it makes sense for each business, and in a small number of areas, we make group decisions. Property is an excellent example of this, where Aleks and I take accountability for those decisions, and this ensures we make the right commercial decisions for the group. Other areas are also called out on the bottom of this slide. The main takeout here is that there are dedicated teams at Target, led by Richard Pearson; and Catch, led by Pete Sauerborn, who are 100% focused on the successful operation of their businesses. Turning now to Slide 3. I have a strong and very experienced leadership team who I am very privileged to work with. Aleks, who's our CFO, joined us in 2008 with great experience in Wesfarmers, both in the corporate divisions as well as in Target in the past. And I know some of you will know Aleks from her Investor Relations days. John Gualtieri joined Kmart in 2008 from Myer and was appointed to Kmart Retail Director in 2019 and is tasked with the day-to-day operation of the Australian and New Zealand retail business. John will also be introducing and helping us through the store tour for those of you that are in the room today when we get to the store later on around lunchtime. Arjun Puri is based in Delhi in India and has been with Kmart now for 10 years. Arjun leads the Asia teams and is responsible for driving the sourcing strategy for Kmart and managing operations in Asia, including the group's GCC in Bangalore. Prior to Kmart, Arjun has a rich sourcing background, including working with Li & Fung. Tristram Gray joined Kmart in February 2018 and is the Chief People and Capability Officer for Kmart Group. Prior to joining Kmart, Tristram held senior roles at Ericsson as well as Coles Supermarkets and Officeworks prior to that. Brad Blyth has recently joined Kmart Group as Chief Information Officer with over 20 years of technology leadership experience. Prior to joining, Brad was Chief Technology Officer of Flybuys and also ran digital technology at Commonwealth Bank prior to that. Brad brings extensive digital and data experience and technology transformation to our team, which will be very helpful as we work through the next stages of our business development. Finally, Tracie is the General Manager of Corporate Affairs and Sustainability for Kmart Group. Tracie and I have worked together for many years now, going back to Coles Myer days, which seems like quite a time, and has been with Kmart now for well over a decade. Needless to say that this is the tip of the iceberg in terms of the talent we have in our organization with a mix of leaders who have extensive knowledge of the DNA of Kmart and new executives who bring new skills and capabilities, which are critical to enable our future plans. Turning now to Slide 4. Kmart is categorized as a department store, and globally, department stores are in a challenging position. I believe this is the wrong way to think about this business. Whilst Kmart is a multi-category retailer, the comparison with department stores stops there in my view as the fundamentals of this business are very different. Over the course of the presentation, we are focusing on 5 topics listed on the slide here, and we'll call out where we see we have sustainable competitive advantage and why we see these as solid foundations for future growth. As retail evolves and data and technology become critical elements of a successful retail model, we will call out how we see these capabilities coming to life in Kmart and how they will enhance our lowest-price positioning by improving our customer offer whilst further reducing operating costs. And finally, as one of the biggest volume retailers, we have a big role to play in reducing the impact we have on our planet. Turning now to Slide 5. Many of you will have seen this strategy slide before, and this has not changed. Our purpose of making everyday living brighter manifests itself in 2 ways for our customers. The first is a rational response to the lowest price. People really appreciate low prices as most Australians are on a tight budget and low prices really help. The second is a more emotional response from making products which were previously out of reach for many people but are now affordable at Kmart. Our customers love this. It's no compromise. A key element of our model is bringing on-trend products to market at the same time as specialty players but at a fraction of the price. Our strategy of better products at even lower prices enables this, and we have lots of opportunity to further improve our products and reduce our prices. Our second strategy of a great place to shop that is simple to run always plays to a great store and a great online experience whilst keeping it simple and low cost to operate. Our business model is anchored on volume and economies of scale, focusing on families, lowest price and everyday items. And of course, our values are very important to us as we strive to have a really great place to work for our team. And when we deliver all of this, the results follow, and we continue to aspire to 10, 1, 6. I emphasize aspire. Not a forecast, of course, but it's a real ambition for our team. So as a reminder, it's $10 billion of sales, $1 billion of EBIT and 6 stock turns. These numbers give our team a clear goal to go after and keep us grounded as we make progress towards that goal. Turning now to Slide 7. Our first topic is the -- yes, if we can just click over one more slide. Thank you. Our first topic is the competitive advantage we have from economies of scale. We are easily the largest Australian player in our segment. In FY '20, our revenue was in excess of $6 billion, and this number will grow significantly as we convert the Target stores to Kmart stores. Each week, we have close to 10 million visitors across stores and online, and we import close to 100,000 containers per annum. With 83% of Australians living within 10 kilometers of one of our stores, we have a size advantage. Turning to Slide 8. The core economic model is very simple but not easy to replicate due to the scale advantage and the product development and sourcing capabilities Kmart has developed. 80% own brand, which is direct source for our own team, enables us to acquire products at a very low cost. This enables low prices, and consistently, we pass those on as cost savings to our customers. Lower prices stimulate more demand, and as volume grows, volumes enable further sourcing benefits and repeat. We've been doing this now for 10 years, and the level of sophistication and our ability to design, create and source products has grown as our volume has grown. Turning now to Slide 9. The next 2 slides provide 2 basic examples of how low prices drive volume increases and lower costs. The bubble wand, which is our first example, used to be $1 and is now $0.50. Volume has increased by 166%, and unit cost has dropped by 33%. If we go across to Slide 10. The towel in this example has gone from $8 to $5.75. Units have increased 460%, and units are down -- and so unit costs are down 17%. A critical enabler here is we focus our buying teams on margin dollar growth, not margin percent, and that enables us to really focus on the dollars that we generate versus focusing purely on percentages. Turning now to Slide 11. Kmart has the largest direct sourcing business by volume and value of any Southern Hemisphere retailer and is Australia's single largest importer of containerized freight. We have a business and a sourcing model that can find any product in the world and bring it to Australia cheaper than anyone else in the region can. Scale is central to Kmart's success, and our scale capabilities are driven by our best-in-class on-the-ground sourcing team, strong partnerships with our diverse supplier base across Asia and production of our own brand products, which doesn't just help lower costs but ensures we have control over the design, using materials in a sustainable way and support merchandising the products in-store in a cohesive way. Turning now to Slide 12, where Arjun Puri, our Director of KAS Group Asia; and Anne-Marie will talk to and demonstrate some of the examples of Kmart's best-in-class sourcing capabilities.

Our market-leading scale is underpinned by internal design, product development and sourcing. Kmart is a product development company in an unprecedented number of categories. What is even more amazing is that Kmart leads most of these categories, highlighting the connection with the customer and the ability to deliver quality products at unbeatable prices. And we are growing quickly with the increase in size and scale helping drive lower cost for customers, which in turn drives greater demand and scale. So how do we do it?

The complexity of getting 1 billion items designed, sourced and shipped around Australia and New Zealand every year is a really quite mind-boggling task. But if a customer walks into a well-stocked store and the process of choosing a product they love is effortless and satisfying, then we've really done our job. They don't need to know that their one simple shopping experience has been enabled by our team of 72 designers and 600 sourcing and supply people across Australasia. It all starts with design, enabled through our Kmart critical path, which has been really key to our brand transformation. At the beginning of each new season, we establish the starting point for the critical path. We call this the global trend steer, or GTS. This is a process where we look at the macroeconomic climate and consumer trends, then set the color, high-level print and fabric and material direction for the season. This is a really important process as it allows us to understand changing consumer requirements, tastes and fashions and then allows us to design and build ranges for them that suit. We share this information across the companies that all teams are aligned. And the buying and sourcing teams can start to plan fabrics and other materials. On top of these seasonal influences, we have a brand DNA document that defines our core brand pillars and key customer types. Through this methodology, our design teams in Melbourne, Hong Kong and Delhi have a framework to work with, clearly connecting brand with a seasonal customer vision. At the same time as maintaining this clear brand vision, we have a continued focus on making our stores more customer-friendly and to also provide a simpler shopping experience. This is very much enabled through having cohesive styling across both general merchandise and apparel. We also continue to maintain a sharp focus on our sustainability strategy by making fabric and material decisions in line with business priorities, but really, design is only the very first step. We then pass the challenge on to our sourcing teams, whose job is to bring our vision to life and get it into the stores.

So the sheer size and scale of the Kmart sourcing business is quite complex because of the volumes which we purchase. Just based on our volumes, we would figure in the top 20 retailers of the world. And definitely, when you consider Australia and New Zealand, our home markets, we are the largest. We are also one of the largest retailers sourcing in the Southern Hemisphere. So Kmart operates to what we call the multi-country sourcing model, which is what is necessary to make sure that we are able to deliver the best mix of quality and price to our customers. And this really requires us to work with volume-based suppliers across all the different sourcing regions. We typically like to work with suppliers, which run large-volume operations. We also make sure that we ourselves are running a very lean and efficient sourcing operation. The direct sourcing arm of Kmart Group involves working with over 1,000 factories across Asia. We are highly committed to ensuring that all the factories and suppliers we work with are fully compliant with our ethical sourcing norms as well as our technical audit requirements, which means that we work to the highest standards as far as the industry is concerned. We are a global company in the way we operate. We benchmark ourselves against some of the best of the best in the world. The contemporary way in which we run our sourcing business actually makes us stand apart from both our Australian peers and our global peers. It's one which we take real pride in being a part of not only for the ongoing success of Kmart but also because of the valuable role it plays in the success of one of the greatest retail businesses across Australia and New Zealand.

Wonderful. So I guess a couple of takeouts from that video. First of all, the wide range of categories we direct source is pretty unique globally. It's quite common to focus on either apparel or general merchandise, but if you think of the widths and the range of the offer that we have, it's quite unique. This gives Kmart the ability to source any category we wish to expand into, which is a great source of future potential. And we have a scale and a product development advantage, which I'm sure has come through. If we now turn to Slide 14. We've shown a similar slide to this in the past, and we consider our Australian addressable market to be the $86 billion in annual spending across these 3 categories or product groupings that we have on this slide. These groupings broadly align with our 3 worlds of clothing, kids and home. Within our categories, we are in the strong position of typically being the market leader, targeting the #1 or #2 slot, but often with only single-digit market share. So we are the biggest with lots of room to grow. And driving growth really comes down to continuing to invest in price and improving our existing range, winning share within the existing categories; and secondly, by leveraging our product development capabilities to expand our range, entering into new categories and expanding the addressable market in those categories where we already operate by delivering product innovation that grows the market. Our offer is dynamic, and we are constantly growing, reducing, adding or removing categories, which means we are not constrained to historical categories. And as the market moves, so do we. Turning now to Slide 15. Although Kmart is the lowest-priced player, we have a very broad appeal. Over 90% of Australian shoppers shop with us at least once each year. All income levels shop with us. Our stores are successful in low-income and high-income suburbs, but our opportunity is frequency. The right-hand side of this slide shows how frequently our most enthusiastic customers shop with us. Many of our customers, of course, shop with us and only shop a subset of our store and our ranges. And even our best customers do not know all of the items we have to offer. We have run guided walks with some of our customers and taken them to parts of the store which they did not often go to, and they were amazed by the products that we have. Our opportunity is to connect our customers with the products they did not know we have, and data and personalization will be able to make this happen. Equally, as a product company, there are times when customers are looking for a product but not necessarily thinking of Kmart. As an example, we are seeing that Kmart products being sold on Catch are a different customer journey from visiting the Kmart store or kmart.com.au, and hence, they are incremental sales. Turning now to Slide 16. Product development capabilities, supported by our scale and sourcing model, give us the unique advantages as we look to grow our range and our share. We have scale at a company level and a winning scale at a category level. If we decide to enter a category, we can go from nothing to being one of the biggest very quickly. This differentiates us from both department stores and category specialists, we believe. To put this in context, we have 3 categories on this slide that demonstrate this advantage in practice. First, we entered into the fitness and active categories over the last 5 years, investing the benefits of scale into lower prices and driving product innovation. The result is a range of products without the premium cost of a brand, making Kmart a leading seller of fitness gear and activewear within Australia. What we have done in wooden toys shows the power of the model to follow a customer trend and make great quality, more sustainable products accessible at everyday prices. We have created a market here selling more than 5 million wooden toys in the last 12 months, taking a product that used to be limited to toy specialist retailers to significant scale and sharing the benefits with our customers. Similarly, we are the leading seller of knitwear in Australia, demonstrating our ability to source merino wool, a premium product, at the scale and efficiency that has seen us deliver great value clothing in categories that just would not have been possible 10 years ago. Turning now to Slide 17. For those of you joining the store tour after this presentation, we will highlight the features of the Kmart stores, which create flexibility and sales density. For those of you online, we have included a link to a virtual walk-through of the store, where you can get a sense of the flexibility of the layout, but of course, better still, feel free to visit, and of course, pick up something whilst you're there. First, the fleet of Kmart stores has been refurbished over the last 7 years so that we now have one consistent fleet. This enables consistent application of new layouts and operational processes to enable ongoing upgrades to the store. You can think of it as like being a software upgrade. These stores will continuously evolve as our business evolves without the need for major periodic refurbishments. To enable this, the stores are flexible, one floor with no marked aisles; fixturing, which is mobile and works for apparel and general merchandise; and lighting, which can move and adjust. The categories effectively compete for space with high-returning categories gaining space and low-returning categories either being reduced or exited. Finally, the store design, the products and the packaging is all designed to coordinate and fit together to create a very cohesive and enjoyable customer experience. Turning to Slide 18. While stores are at the center of what we do at Kmart, online has an increasingly important role to play as we grow the business. We are committed to making it a seamless experience to shop in-store or online or both. We are introducing Click and Collect for Kmart, Target and Catch products and also plan to introduce returns via our stores for all 3 businesses. We pick from stores, and whilst the online business is profitable, there is significant opportunity to improve our picking efficiency and reduce the number of split shipments. COVID rapidly accelerated online, and that growth has identified where we need to improve. Online is also proven to be a terrific channel for Kmart to be able to test new categories or products as online exclusives without the need to sell them in all of our stores. This is opening the door to faster reads on demand with significantly reduced risk should the products not resonate with customers. While stores will account for the majority of total sales, we expect online to continue to grow faster than the stores and become a bigger part of Kmart over time. Ultimately, we will be very happy for customers to shop via either channel. Turning now to Slide 19. At this point, I'd like to welcome Aleks to talk to us about some of the points. Aleks?

Thanks, Ian, and good morning, everyone. I'd like to take some time to share our thoughts on why we see our store network as an incredibly valuable asset and how we will leverage this asset as a key enabler of our strategic priorities to drive sustainable, long-term growth. As Ian said, our stores are at the center of everything that we do. Turning to Slide 20. Store network growth has been an important driver of Kmart's success over the last 10 years. Today, around 83% of Australians live within 10 kilometers of one of our stores, providing high levels of convenience and brand awareness. Our store network is irreplaceable and valuable. Kmart stores are highly productive with market-leading sales densities and a standardized and efficient operating model. Our network is resilient. Our stores perform well across all types of locations, from freestanding sites to super-regional shopping centers. And we have maintained a high degree of flexibility to optimize our network over time through an ongoing reduction in the weighted average lease tenure, which today stands at just over 5 years for Kmart Group. And more recently, we're also driving greater flexibility through our lease structures, where we are introducing greater variable components, which has the benefit of not only reducing our fixed cost base but also ensuring that our tenancy costs remain appropriate for store sales over time, that is that our tenancy costs can go both up and down. Our valuable store network will be a key enabler of our future growth in a number of ways: by supporting online fulfillment; by enabling technologies, which will continue to improve the customer experience while reducing costs, and for those of you joining us at our Southland store later today, you will see one example of this; and finally, by providing a rich source of customer insights, which Ian will cover in a bit more detail later in the presentation. Turning to Slide 21. By the end of this calendar year, we will have 271 Kmart stores across Australia and New Zealand, up from 187 in 2011. While the net number of stores has increased by 84 over this period, we will also have closed 18 stores, reflecting the ongoing optimization of our network towards more productive and higher-quality sites. The Target store conversions have enabled us to accelerate planned future network growth and have materially addressed Kmart's network gaps. Our opportunity, therefore, is to continue to improve the productivity and sales density of our existing store network. Our investment has also taken the form of refurbishments, and over 95% of Kmart stores are now in the current Plan C format, which offers a flexible store design to accommodate changing customer preferences and ongoing range innovation. This year, we also launched the new K Hub format, And this, I think, has been a really great reflection of the flexibility of the Kmart model and the rapid pace of innovation that is possible within our business. From launching the first K Hub in July, we now have over 50 stores largely in regional communities, which previously did not have easy access to a Kmart store. In addition to the rapid pace of the rollout, the program was executed with a relatively low capital requirement. And we are most proud of the 1,200 new jobs that Kmart is creating across regional communities in Australia. While the K Hub program has delivered a number of benefits, including the ability to test and refine the Kmart format in a small footprint, the real economic driver of the conversion program is the large stores. And I'll cover these in more detail now. Turning to Slide 22. When we undertook the strategic review of Target last year, we had a very clear objective: to accelerate the overall growth of Kmart Group while addressing the unsustainable financial performance of Target. The store conversion program is the key to delivering on this objective. Through detailed market assessments, we identified 30 to 40 Target stores, which we believed would deliver higher returns from a conversion to Kmart. These were stores that were aligned with Kmart's network strategy and represented key market gaps. In the case of the K Hubs, we selected Target country stores that were over 1,000 square meters in size and located in catchments where we did not have a Kmart store. From here, the business case was relatively simple. Upon conversion, these stores were expected to deliver a significant increase in sales density and unlock further scale economies in Kmart, ultimately driving strong incremental earnings growth. From a Target perspective, the simplification of the store network has been a key enabler of significant cost reduction, and this is something that you will hear more about at the Wesfarmers Strategy Briefing Day later this year. If we turn to Slide 23. You can see here the sales density opportunity unlocked by the conversion program. Kmart sales density was 85% higher than Target for the 12 months ending December 2020. And while it's still very early days, the overall results of the conversion program are currently tracking ahead of our expectations. Specifically, we've seen strong uplifts in transactions, sales and profit. The customer response has been positive, and we have had good partnership from our landlords to support these outcomes. While some of these benefits will flow through to Kmart in this financial year, the large store conversions are weighted towards the latter part of the second half. And therefore, we will see the full year impact in FY '22, including the corresponding reduction in Target sales base. Turning to Slide 24. With the growing importance of online, which was accelerated by COVID-19, there are often questions about the value of physical store networks in the future. At Kmart, we see the 2 channels as complementary, and in fact, our store network is a key enabler for building a fast and cost-effective online operating model. Almost all of our online orders are fulfilled from stores, and this serves a number of important advantages. Firstly, by leveraging our existing store assets and team members, the profitability of servicing online demand can be significantly improved. Secondly, our large and geographically dispersed store network supports faster delivery to customers, particularly for click and collect. Click and collect accounts for around 1/3 of our online sales, and our ambition is to create a market-leading click-and-collect experience, combining speed and personalization across the Kmart, Target and Catch brands. COVID-19 accelerated our investment in online, and we moved quickly to respond to customer demand by enabling contactless click-and-collect options and converting our stores to dark stores during periods of mandated closure to customers. Our opportunity now is to optimize these processes to deliver a faster and more economic online fulfillment model while continuing to improve on the customer experience. And we see a significant opportunity here. Our extensive and productive store network will be key to unlocking these opportunities. I'll now hand back to Ian.

Wonderful. Thank you. Thank you, Aleks. We're on Slide 26 now. As we've mentioned in recent years, the business has really accelerated its investment into digital technologies and data analytics. The Kmart model works because it's simple, and standardization of stores and processes has unlocked efficiency and productivity savings. However, whilst this has served us well for many years, it comes with some trade-offs on flexibility and personalization. Our investment into digital technologies allows us to optimize the existing model while also delivering a level of personalization to our customers that have previously not been possible. Equally, technology enables us to tailor processes to the circumstances of a store in a way that standardization cannot. Over time, we see more technology-assisted processes providing our store team members with better information, enabling them to serve our customers more effectively. We are focusing on 4 areas where the investment is expected to have a material impact: improving our online offer, increasing the flexibility of our supply chain, creating a digital store of the future and personalizing the customer experience. Turning now to Slide 27. The business' online offer has expanded significantly over the last 12 months. As we think about supporting continued online growth in the business, there are some key initiatives that are already underway. A new online platform is being implemented, which will provide a more stable and scalable online environment and avoid the issues we have had with the website in previous peak periods of demand. Inventory visibility is improving to give us more real-time view of stock locations to make sure the order allocation to stores is correct, and as a result, we reduce split shipments and customers are not disappointed by out-of-stocks. We are delivering range expansion through online exclusives such as furniture, where we can bring big and bulky and space-intensive products into the range without impacting store operations. The online platform is already underway and will be progressively implemented during this financial year and next. Turning now to Slide 28. We experienced significant imbalances between supply and demand at the start of COVID, which were well-publicized. Since then, we have increased the depth of inventory we carry in core lines but maintained the low-cost, high-volume flow model, which has served Kmart well for many years. With the advent of new technology and data science, we see a significant opportunity to increase the flexibility in our supply chain and further reduce costs. Last year, we embarked on a digitally enabled design-to-shelf project with 3 core areas. The first is increased flexibility. The second is faster product development. And the third is demand sensing. This project is currently prototyping new approaches with encouraging results with the benefits expected to be progressively realized over the next 3 to 4 years. Turning now to Slide 29. While our Plan C format works very well for us, we see significant opportunities to improve store operations using technology. The most immediate initiative in this area is our investment in RFID technology to provide real-time inventory tracking, a feature from which we would derive significant benefit. We have a short video coming up to showcase TORY and RFID technology in action. This technology was one of the benefits of the research and development project run out of Seattle. It has now been tuned to Kmart stores and is about to be rolled out across the fleet over the next 15 months. The result is a quantum improvement in inventory accuracy for apparel from 60% accuracy at SKU level today to 95%, and the 95% is by location within the store. It is a real inventory system as opposed to a derived book inventory system. This is the first of our digital store improvements, which will always be focused on improved customer experience and lower operating costs. Let's have a look at the video. Each store will get one robot, which docks at the back of the store. TORY can navigate the store when customers are there, and we did this in Seattle. However, we do see operating TORY when the store is quiet is our preferred approach. Overnight, TORY self-navigates around the store and triangulates the exact location of each RFID chip in X, Y and Z dimensions. Unlike barcodes, RFID is specific to an item, and each chip is unique. This gives us the ability to know on which fixture an item is and even know where it's in a place it should not be. Sometimes products are picked up in one place and put down in another. Equally, some products will be in the back of house or near the change rooms. With this technology, we can find them each day. Our initial focus is on apparel and soft home as we see these areas will have the greatest benefit, but over time, more categories will be added where we believe we can get adequately strong results. With this data, we have many use cases available to us with the initial ones being improved recovery of the store, which then leads to better on-show availability for our customers; improved replenishment due to improved data quality; faster online picking by being able to find the products more quickly; and better customer service to help customers locate the products which they're looking for. Turning now to Slide 31. We believe that we can continue to make shopping easier for our customers by helping them discover new products, experiences and content and make them feel special by anticipating their needs. In delivering this more personalized customer offer, we will leverage many -- many touch points we already have with our customers and invest in our capabilities to deliver greater customer insights. We have built our customer data asset combining in-store and online data, and we are now embarking on our first personalization projects. I see this as a big opportunity for us but, like any new skill, will take time for us to master. The good news is that we have data, and Flybuys is a great help here in identifying customers in-store. And as we implement our new technology platforms, this will enable real-time personalization for customers over time. As a very basic example, today, if you live in Hobart or Darwin, customers are greeted by exactly the same homepage despite their very different locations. The ability to surface products, which are most relevant to our customers, will be a significant lever in improving frequency of visits over time. Turning now to section 5, and we will start a short video outlining our sustainability principles.

Hi, everyone. I'm Tracie Walker, General Manager of Corporate Affairs and Sustainability for Kmart Group. At Kmart, as one of the world's leading retailers, we know we have a responsibility to care for and respect our people and planet and everything we touch. We take this responsibility very seriously. It gives us an opportunity to use our relationships and scale to make a difference. The size and reach of our business means we can lead the way and set the standard regarding sustainable development. Our sustainable development program, Better Together, has 2 pillars: people and planet, which between them encompass the important sustainability goals we are tackling.

For planet, we're working towards keeping this in circulation instead of in landfill. Hi. I'm Chris Foley, Head of Energy and Environment for Kmart Group. We're reducing the need for raw material inputs, preventing waste and reducing energy use by making products and materials more efficiently and reusing them. Kmart's long-term vision is that our products generate 0 plastic waste. It sounds really bold, but we think we can do it, thanks to our in-house design and sourcing capabilities. In a few months, we will have phased out 10 priority own brands' single-use plastic products that, when combined with our own brands' single-use plastic shopping bags, will remove 500 million pieces of plastic from the environment each year. We are replacing problematic plastics like PVC and expanded polystyrene and multi-laminates in our products and our packaging to improve their recyclability while reducing contamination in Australia's recycling systems. And to really help drive the circular economy, we are starting to focus on increasing our use of recycled materials and plant-based alternatives to plastic. This focus on waste in the environment also includes our stores and distribution centers, where our waste diversion systems achieved an 80% recycling rate last year. We're aiming for net 0 by 2030 moving forward.

It's not just plastics either. Hi. My name is Rick Lambell, and I'm Head of Sustainable Development for Kmart Group. We've already delivered on our commitment to source 100% of our own brand clothing, bedding and towels as Better Cotton, organic or recycled cotton. And we're working on other materials such as polyester, cellulose and wood. In the past year, we've introduced our first activewear ranges using recycled textile fibers and our first toys using FSC-certified wood.

We have a huge store footprint and gigantic supply chain, so we have a responsibility to minimize our impact on the climate. By 2030, we will reduce greenhouse gas emissions from our stores, distribution centers and offices to 0. But more than 95% of our carbon emissions come from our supply chain. So we've signed the United Nation's Fashion Industry Charter for Climate Action and are working with our global peers and industry partners to achieve a common goal of reducing the fashion industry scope 1, 2 and 3 emissions by 30% by 2030.

At Kmart, we're passionate about human rights, fostering an inclusive culture and helping communities thrive. Everyone who works with us in our supply chain must be treated with respect and rewarded for the work that they do. So we're proud to be a part of Action Collaboration Transformation, or ACT, working to achieve a living wage for everyone involved in the garment and textile industry. Sourcing products ethically is also important to us and our customers. We work with suppliers who share and follow our high standards wherever they operate. Our Ethical Sourcing Code sets expectations for our suppliers, and we're continuously improving how we operate and further developing relationships to ensure better working conditions in the countries and communities where we source. Naturally, we set people targets as well. We were the first to disclose all the factories that produce our own brand apparel and general merchandise. And by July next year, we will have mapped and published all of the processing facilities used by our suppliers to produce our own brand clothing, towel and bedding ranges. By 2023, we'll improve our purchasing practices with our apparel suppliers by implementing the ACT Global Purchasing Standard. And by 2025, Kmart will be supporting 100,000 women overseas with health, education and professional skills training.

Hi. I'm Kate Thiedeman, Head of Community for Kmart Group. Kmart must be a great place to work for everyone, regardless of their cultural background, gender, gender identity, disability, thought, experience or sexual orientation. This means we are working towards being truly inclusive, and part of expressing that is our work with Aboriginal and Torres Strait Islander peoples and communities in creating employment opportunities and celebrating culture. It is important to us that we connect with our communities and positively impact young people and their families. Our customers support this focus by contributing, with us, to a variety of organizations that make the well-being of young people their priority. And of course, there's our iconic Kmart Wishing Tree Appeal that is vital to so many facing hardship. We generally want to make the world a better place, and we are so proud to be able to use our growing scale and network to make a real and lasting difference. Through lots of hard work and dedication by our teams in Australia and globally, we've ranked 14th in the world in a corporate human rights benchmark, achieved a perfect score in the Baptist World Aid fashion report and global measures such as the Fashion Transparency Index rate us as leaders in Australia. There's lots more to come in this space as major programs roll out over the coming months and years. At Kmart, we're working towards a more sustainable future, and we look forward to continuing to make a difference and continuing to lead by example.

Great. We're now on Slide 34. So why is sustainability important for Kmart? Well, first the obvious. We are the lowest-priced player with the highest volume in the market. We sell a lot of products, and every product sold needs to be sourced from the earth, made somewhere, transported and, at the end of the life, disposed of. This equation is no different from any other retailer, and the sustainability challenge is one that is faced by all. However, where we do differ is in the opportunity we have to do sustainability at scale, making it more effective and more affordable. Our volume, in combination with our product development and sourcing capabilities, gives us a unique ability to make a significant progress on our sustainability agenda whilst retaining our lowest-cost model at our lowest price points. We also see that if we can make this work, we can help lead the way for retail in Australia, and this is why we are working with the leading players globally to build and deliver our program. Our full list of commitments right across people and planet pillars of our program are available publicly on our website, and we are excited by both the momentum that we've created in this space and the opportunity that lies ahead. And finally, on to Slide 36. Over the last decade, Kmart has consistently innovated to make lowest price cool. We always aspire to provide customers with no compromises for the lowest price, and in doing so, we go from cheap to incredible value. Our future is to stay true to who we are and what we do and to continue to deliver better products at even lower prices and create great places to shop that are simple to run. So what's going to be different? First, a move from standardized to personalized; second, from one process for every store to technology-enabled processes tailored to each store's circumstances. Online will grow in its importance. Data will become an increasingly important asset, and our scale advantage will continue to grow. And our ambition is that we connect even more strongly with our customers and make everyday living brighter for them. Thank you for listening to the presentation. We've got quite a lot of material in that piece of time. I'm sure you've got quite a few questions. We have now -- we'll just get ourselves set up, and then we'll get straight into the Q&A. So thank you.

[Operator Instructions]

Ambitious aspiration. Why are you being so timid and keeping it at level? I'm just curious in that -- or had there always been a plan to get to this level of stores, and that was the basis upon which that aspiration was set.

Yes. No, it's a good question. I hope you can hear me okay. The -- yes, the 10-1-6 was created when we were $5 billion in sales. And it was as simple as we wanted to double the business. Our business has always responded really well to having some financial goals. So prior to that, you may remember, we had 10-10-20 was the set of numbers that we had historically. And so the -- yes, the 10-1-6 was really about doubling. We wanted to maintain our profitability ratio. So that's the 10% EBIT, which is the one that comes out. And the stock turns was critically important because for us to be able to deliver that sales growth, we needed to be able to move that inventory through the system fast enough that we could effectively create the capacity within the stores to deliver those sales. So what I'd say is that we're making progress towards that goal. It's still a substantial ambition. Clearly, I'm very pleased, though, that from $5 billion, we're moving closer towards the $10 billion. I think on the day that we get close to $10 billion, the $10 billion will move into a bigger number. And I think the potential of this business is substantially greater than $10 billion over time. But the consistency in a business like Kmart is really helpful. And so having that strategy page that we went through, that's been there for about 3 years now without changing. That means we've got every chance of getting our 30,000 team members really aligned. And so I'd much rather keep consistency for a longer period of time wherever I can so that we can really embed the messages through the organization.

It's Ben Gilbert from Jarden. Just interested, obviously you talked a lot about supply chain and data in there. Just how that's feeding out your thinking around CapEx and OpEx looking forward. And specifically, where do you see you are in that investment phase? And do you think you're going to need to go down this sort of phase of having more centralized distribution, rapid deployment centers? And would you share services with someone like [indiscernible] and part of the group?

You'll get that one?

Sure. Ben, so I guess in terms of CapEx, if you think about where we are in the cycle, this year, clearly, we're doing a very large number of store conversions, and therefore, you'd expect that to translate to an elevated level of CapEx this year. I think going forward, you'd expect our CapEx profile to revert back to more what we've seen in line with historical levels. However, the differentiating factor there is the composition of the CapEx going forward will be quite different to what it was historically. So historically, as I outlined, we had quite a number of new stores coming on each year, and we also had quite a large refurbishment program, which accounted for a majority of our capital expenditure. Going forward, as we've accelerated that network growth into this year and the majority of our stores are now refurbished, we would expect to see the composition of our CapEx move towards more supply chain, data and information technology investment. So it's a change in composition rather than an increase from historical levels. I think the other thing worth noting as well is a number of the investments that Ian outlined into new capabilities and into technology are really OpEx-type investments rather than your traditional big, lumpy CapEx-type projects that you might have seen historically.

So just to follow up there. Should we be expecting some news around having some more centralized distribution, even some of those sort of rapid deployment centers, as you start seeing that online penetration number shift? Like I think Michael at Bunnings talked to 5% as a threshold and curbside Click & Collect makes sense with more centralized distribution.

Yes. Look, I think from our perspective, to the extent that we can continue to utilize our store network for online fulfillment, we will continue to do so. At some point, I think that reaches capacity. We're not there yet. As I outlined today, I think we still see quite significant opportunities to optimize the existing processes within store to increase the amount of online fulfillment capacity that we have. I think going forward, there will come a point in time when we need to look to how we complement that through other methods to both improve speed to customer as well as continue to drive the economics at scale. But stores are our focus today.

I think some of the things which make picking from store quite a viable model for Kmart is we run the same range in every store. And whilst we talk about personalization, that's much more about how do we serve these products to customers. It's not about changing the core model. So we're very focused on making sure the products are available in every single store, which then means, of course, we can pick them from every store. And the stores are so close to our customers. That gives us the ability to be very quick to get to the end position for our customers on the way through, whether that's Click & Collect or home delivery. So we do see the stores being really at the center of this model. Now what we will look at is central fulfillment probably in the future, but I see it being a minor percentage of the total, and I see the core being in the stores. Now as we continue to grow, of course, and we get -- and we find more pressure points with the volume, then of course, we'll assess that along the way. But at the moment, we're coping well with the growth, and we think we -- the in-store-pick model is going to be the right one for us in the near term.

Really enjoyed the presentation, really good. And Kmart looks like you're really going well again. But look, I know it's a Kmart day, but can you spend a couple of minutes -- you gave a bit of an outlook saying Target, you're on track. The conversions are going well. You don't want to talk too much. I know it's early days. But can you give us a little bit of confidence that the investment has -- that's been made, it's been pretty sizable into Target with respect to the restructuring, the write-downs, et cetera. Can you give us a bit of comfort that all this good work with -- that you're doing in Kmart is not going to get offset going forward with an unforeseen setback in Target? If you could just give us a little bit of that, that would be really appreciated.

Yes. No, for sure. So yes, as I called out right at the start, we've actually made incredible progress. And you consider the period of time we've been through with the restrictions of COVID, the inability to travel between states, the fact we've basically got through all of those conversions is incredible. And I think on the Kmart side, the Kmart team has a real capability in refurbishing stores. And fortunately, we have teams in every state that know how to do that, which is one of the great enablers. On the Target side of the equation, the team did a really good job of actually selling through products and closing those stores really efficiently. And in many cases, we traded well after closure, and then we traded really well 2 weeks later when we've reopened. And so we've had a really strong performance, I think, through that transition from one business to the next. So therefore, the transition's been successful, I'd say. When you look at the core Target business and where is that placed now, well, it's going to be substantially smaller in terms of the number of stores and simpler, which has always been the key. You can't reduce the size of the above-store costs unless you change some fundamentals, and that's what we went after. So we've gone now to the one format. We have got tighter and more focused on what we're doing within that business, and we're on track to have the new cost base in place by the end of this financial year. I think when you look at the product offer and how is that performing, we've now had 2 years of pretty consistent strategy for the buying teams. And there is a lead time in these businesses of consistency because of the amount of times you get to go through seasons and to make improvements year after year. And now we're starting to see the benefit of that 2 years of consistency. And I think there's reasons to be optimistic that, that consistency will continue to improve as we continue on that core strategy and that's really around making sure we're incredible value but it's about quality and it's about style. And what we really want to make sure is that this isn't an overlapping offer with Kmart to both try to play at the lowest-price position. I mean Kmart's position is super clear, as I think everyone would recognize. And where we struggled over time was that the Target position has moved around. We've now been consistent for 2 years, and I see it staying there, and we're seeing strong -- resonating strongly with customers. But equally, we'd say we still got quite a long way to go to really get that business to where we would like to. I'd say we're optimistic about the future for that business and the work that's been done so far, but we've got work to do.

So you get the uplift -- the leverage points. You get the uplift in the sales from the conversion from Target to Kmart, which Aleks highlighted really well on her slide.

Yes.

You get the reduced costs in the Target stores, and you get the increased leverage from the improved sales for Kmart as well. And that's ultimately the maths, is that the way I look at it?

That's the maths. And of course, when you close some Target stores, we do our best to retain as many of those customers via our online or conversion into Kmarts or conversion into other Target stores as well.

And a lower-risk Target model as well?

Bingo. And Target will be about 20% of the combined total. So when you look at it from a risk level, it's a reduced risk.

Michael Simotas from Jefferies. How are you thinking about the store network for the Kmart brand from here? You've obviously added a lot of stores to the network very quickly post the Target conversions. Is there still room in the market for more Kmart stores going forward as you do move towards those targets? And maybe related to that, if you could give us a little bit more color on what the Target conversions look like so far. I know it's very early days, and clearly, COVID and stock availability has muddied waters a little bit. But anything you could give us there would be very helpful.

Do you want to?

I'll start. Michael, from a network perspective, I think as I mentioned, the conversion program has really allowed us to address the material network gaps that were there within Kmart's network plan and have accelerated that activity, as you've said. So going forward, I think you'd necessarily expect to see a much lower level of network growth than what we have historically. It will be a continued exercise of optimizing towards higher-quality sites as those opportunities arise. To the extent that there are some growth corridor and infill opportunities that come up, we'll continue to look at those. And then within New Zealand, we still see some opportunities to continue to expand our network within New Zealand. But I think within Australia, as I said, the material opportunities have been largely addressed, and therefore, the opportunity for us, which is really the strategies that Ian outlined today, is continuing to drive that sales density within the existing store network as the key driver of growth going forward. And we still see quite a material opportunity to do that, both by lifting the existing in-store sales density through improvements in the customer experience and then also continuing to drive online as another channel to market amongst other channels to market for the product development capabilities that we've outlined today.

And the Target conversions?

Look, it's really early days, Michael. I guess most of the stores have traded for far less than 20 weeks today, so it's very early. And as you noted, due to COVID, there's a lot of variability across the network. But consistently across the board, as I outlined, we've seen really strong increases in transactions. We've seen that the customers that were shopping the Target store previously are spending significantly more post the conversion. And we're starting to attract customers from a much broader catchment than what the stores were doing previously. If you look across the board, we've got a variety of sites all the way from regional centers to highly densely populated metro locations in Sydney and Melbourne. I think what that means is as you see some of the COVID impacts play through that, the maturation of the sales profile will probably differ across those different store types. So some of the more metro stores in Victoria and in Sydney, which relied on more tourism or university-type students or CBD locations, will probably take longer to mature than some of the more regional or out-of-suburban locations. But having said all of that, across the board, we've consistently seen transaction and sales increases that are well above what we're expecting when we formulated the business case. I think what's worth noting is if you compare the Kmart and Target businesses, the average selling price within Target is materially above that of Kmart. Therefore, for us to be reporting significant uplifts in sales, the volume uplifts that we're seeing are really quite extraordinary, and that's coming through, as I said, attracting a much broader catchment of customers to those stores as well as increasing the expenditure of the customers that were shopping the Target store prior to the conversion.

Maybe if I can just add just to finish off. That was a great summary, Aleks, so thank you. If you stand back and look at the 2 businesses in total, we're pretty happy when we look at the 2 in combination from the sales that we're generating where we've gone through the conversion. So that gives us some comfort. It is early days for some of the bigger traders. So we've got stores like Doncaster and Bondi have only been opened just over a week, and so of course, there's very early reads on those. And the biggest stores of them, as called out, are in this quarter or just into the start of the next financial year. And of course, they're going to have quite a material impact on the final numbers. But nothing is coming out of this so far that there's been a surprise on the downside. So we've generally seen it as very positive.

It's Bryan Raymond for Citi. If I could do mine in reverse and do a follow-up on Mike's question and then ask mine. So on those conversions, I know, again, it's early days, but in terms of cannibalization of nearby stores, I can understand that Target store changed to a Kmart would have a great uplift. But what are you seeing in surrounding stores within, say, 10-, 15-kilometer radius? Are you seeing sales drop in those locations as they transfer across?

Go for it.

What I -- so the answer is it depends. I guess what I would say is we've got, and over many years of rolling out new stores, we've become quite sophisticated with the way that we use customer data to anticipate and estimate cannibalization impacts and factor that into the economics of opening a new store and, in this case, into the economics of a conversion. So we went through very detailed market assessments in selecting the 30 to 40 Kmart stores. As I mentioned, they represented key market gaps. Therefore, for a large number of those, the cannibalization impacts were less. For others, Bondi is a great example where we have an existing Kmart store in Bondi pretty close by and where we've just converted the Target store there. So the cannibalization will really vary across the network. But I think the important point is that it was anticipated and it was forecast and taken into account in the incremental conversion economics. And we remain confident that, net of cannibalization impacts, we'll get a good payback and a good return on the capital that we've invested to fund the conversions.

Yes. If I could just add to that. It's a good summary again. The -- we very much take a financial lens to every one of these conversions. Everyone has to stand up on its own right, and that was the way that we assessed it on the way through. And it was really an assessment around could it generate more value as a Kmart than a Target. That was the assessment we went through. And then when you look at the network, over time, we will close some stores, and we will continue to open some. But there -- so there will be a net small increase, probably very small. And what we are always very focused on is sales productivity of the stores and profitable returns from stores. So we would rather -- if we've got 3 stores in a catchment, and we have done this already, so Northcote would have been an example of this, where we had -- we actually had 4 stores in a pretty close catchment. We decided to close one. Now that will mean we'll lose a few sales in that catchment because it won't be 100% transfer. But of course, you've got less fixed cost because you've closed one store down. And of course, with the migration of traffic into those other stores, we end up generating a better economic return. And you'll see us very much be focused on the return and the quality of the fleet that we have as we continue to manage our property from here.

And then just my other question is container costs at the moment. We've heard a lot about shipping freight rates stepping up a lot. And you guys are probably more exposed than most, given your volume and direct sourcing. How do you see that evolving? How is that playing through price and margin for you guys? Is that a headwind? Or is that something you're able to pass on or offset somehow?

Yes. Maybe I can start, and Aleks, you can fix up whatever I say. Yes, it is a challenge. I think it's a bigger challenge for others than it is for us. So we are the biggest importer of containers into Australia. And we have strategic relationships with our shipping partners and their long-term relationships with guaranteed rates, which means that the core volumes that we bring in are covered through those rates. However, we've seen a significant increase because obviously there's been a lot of growth in the market. There's also been a shift towards general merchandise, which is bigger cube. So the net result is we need more capacity than we previously have contracted for. So we do have to go to the spot market for that incremental capacity. And that is obviously -- we still get pretty good rates on that relative to others in the market, but it's still substantially higher than the pre-agreed rates that we had with our strategic partners on the way through. How big is it? How manageable is it? I'd say it's part of the cost of managing our cost of goods sold. And it's in the realms where, no, we wouldn't pass that on to customers on the way through. And I don't think pushing prices up to customers even at the moment would be an acceptable thing for them on the way through. I think it's just part of the cost that we have to manage within cost of goods sold, and it's just one of the variables that we have to factor in as we balance raw material movements, foreign exchange movements and the international freight. I'd say one of the real advantages with this model is we see all of those numbers directly. So we can understand exactly how much the international freight is, exactly what's going on with the cotton price, exactly what's going on with the FX. And of course, if we were buying branded products, we wouldn't have that same transparency. So it does give us a lot of ability to manage that more proactively, I think. I've got a nod from the CFO, so thank you.

Grant Saligari, Credit Suisse. Interesting presentation. Ian, I'm hoping that you'll expand a little on carbon costs. And specifically be interested in how you think about the cost of carbon emissions in your global sourcing model. And specifically, how would you actually respond if there was an explicit price on carbon? And the ability of the business to get to a net-zero emissions position within some foreseeable future.

Yes. I think we've called out within the sustainability piece. I might need to come back to you with some more of the specifics on this one outside of this. And we can follow up as necessary. But within the elements we control within Australia and New Zealand, our ambition is to get to net zero. And we're already making progress against that as we look to different ways to manage the emissions we have within this market. As we called out within the video, the bigger emissions, of course, is in the product and the manufacture of the product at source. And that we're targeting a 30% reduction from where we are today, which is in conjunction with a whole bunch of other international retailers who are grappling with this topic. So I think when you look at it, I'd say the pathway within Australia is a simpler one that we can envisage a solution to. I think the pathway internationally with our supply base is a more complex one, particularly as we're not in 100% control of those factories. We are always a subset of the total of any one of those locations. That's why we need to work with others to try and figure out how do we create the right environment for those emissions to reduce.

Can you just remind us, what was the actual time line for emissions reduction?

2030. Zero by 2030. But happy to go into a bit more detail offline, if that's helpful.

Richard Barwick from CLSA. I've got some questions around the actual -- the store portfolio. Obviously, you're talking about sales density as the driver going forward, more so than stores. If you're thinking about sales density now, how much variation is there across the fleet? How much variation is there across the fleet again in terms of actual -- the size of the stores? So I guess where I'm going to with that is when a store reaches capacity, what's the answer? Do you build a bigger store? Or are you putting in more stores of the same size?

That's a good question. Let's just focus on the big stores. So I'll park the K Hubs because the main game is the big stores, of course, and online. They're the 2 big drivers of the organization. There is quite a variety within our store portfolio in terms of the sales per square meter. When you look at the size, there's a lot of consistency. So the average size of a selling area is about 5,000 square meters; and the vast majority of stores, plus or minus 500 square meters on that. So we have a lot of consistency. And that's one of the things that enabled us to come up with a consistent layout, which enables that standardization that we talked to on the way through. Our biggest stores would do at least double the smaller stores in terms of sales density. In fact, more than double in some cases. And what we found is that the threshold, we're constantly finding ways to push that threshold up, and it's a relatively small number of stores that are of that altitude, if I can use that analogy. So we've probably got like 5 or 6 stores that are the real super traders, and then the rest of the stores are trading well below that. So the vast majority of stores have lots of capacity to grow with our existing model without need for additional investment. So we've proven that out. And where we're generally focusing on is those really high traders, is how we continue to move up their capacity. So I don't see us opening 2 stores next to each other just because we get one to being too big, if I take it to an extreme. So I think we have capacity to grow there.

So therefore, if we're thinking about the growth, it's about lifting the sales density in those other stores. And it sounds like you -- the -- trying to get incremental growth out of the big stores is a much smaller part of that.

I think it's part -- I think I suppose, like most businesses, if you have a big store, growing it by 5% is a lot of dollars, growing a small one by 5% is a lot less. So I don't think we'd ever say we don't want to grow the big stores. We just have to work harder on improving the operating model. But of course, we improve the operating model for those big ones, it translates through all the stores on the way through.

And online, in terms of how it fits across -- again, across the portfolio?

Yes. It's going to continue to grow. And every...

Online, if you're picking from a store, so what's the sort of the online penetration from a weak store through to the top end of the range?

Yes. The way -- I think that's really just a choice operationally as to where do we choose to pick the products from. And the way we currently do that is we have sort of central stores which do high volumes of picking. And then we do other stores which do lower volumes. And then we have stores which try to do Click & Collect. So if you imagine that sort of 3-tier system. So of course, our ability to pick more products means we just put more big stores into the system so that we can continue to expand our capacity. So that percentage is really just determined by us and where we decide to pick the products from. And one of the things that John and the team are investing a lot of time on is how do we improve those processes. So what we're seeing is a really fast growth through COVID, as you would expect, through online, and we've called out some of the numbers in the various presentations. We've chosen to go and grab those sales, and we haven't always efficiently been able to service those. So we're now investing in both technology and people and processes to refine how we pick, how we connect with our couriers and then obviously how we get it to customers so that we can really improve that efficiency and productivity. And we're already finding that we can be very quick in picking and packing products, and we're continually expanding what we believe the capacity is for a store to be able to pick. I don't think we're anywhere near the threshold of that yet because I think we're still quite young in our journey of really perfecting those processes.

It's Ross Curran from Macquarie. Just a couple of questions. Firstly, can you just talk us through the stock outages last year? What went wrong with the supply chain? And what have you fixed in the supply chain that it doesn't happen again?

Yes. Absolutely. So it's -- if I go back 12 months ago, there -- when COVID hit, we looked around the world at the time, and we saw lots of retailers were choking inventory, slowing inventory down in anticipation of store closures. We did exactly the same. Now in New Zealand, that played out well for us because the closures there in that market meant that, that slowdown of inventory meant we kept inventory in balance. In the case of Australia, we went through a slowdown for about a month and then a rapid acceleration, which we hadn't planned for. So that was a big imbalance between our demand expectation and obviously the -- and supply that we created. And from that point on, we then started to chase in the inventory. In the back of that, the sales were so strong, the inventory was landing and selling through. So it took us longer than we initially anticipated to get back into a full in-stock position, albeit the sales generation was strong because of that. That literally was just coming in and going out so quickly. As we went through the next few months, we did start to improve our inventory, and we have consistently managed to do so. The next issue which came was the international freight, which is availability of ships, availability of containers and port delays that impacted everybody within the market. So that hit towards the end of that -- to that process. What have we done to manage that? Well, I think it's 2 things. The first one is we put additional inventory into the system. So we now carry more weeks inventory in core lines than we did a year ago. And that's just a buffer, and we'll run that through -- whilst COVID's running, we'll continue to run with that buffer. The second piece we're doing is some of these more strategic initiatives where we're leveraging data and technology to help figure out how do we do a better job of sensing demand, how do we do a better job of reducing the lead time of product development so that we don't have to commit quite so far out and then how do we do a better job of flexibility so that we have a shorter lead time from production through to store, and we have more flexibility on how we distribute our products through the network.

Just to clarify a point you made earlier. So the 60% stock accuracy, is -- did I -- so on any given day, you only know where 60% of your stock is. Is that what that is?

That was an apparel number, not a general merchandise number. So within our stores, the methodologies we have for general merchandise work quite well. So we have planograms for general merchandise, which is an allocated space. We know how many are on the shelf. We have methodologies for checking how much inventory we have available. We have replenishment processes that are running. And all of those things enable us to have a much stronger availability and accuracy on our general merchandise product. Clothing doesn't work in the same way. So clothing gets put onto the racks, and then of course, it sells through. And really what we rely on is the skills of the team members to be able to figure out what's been sold through and go out the back and find the right item and bring it on to display. So we see this RFID technology, in particular, being a great help in apparel. The second thing is apparel is -- it's -- if you've got a team member and you've got one black T-shirt and another black T-shirt, albeit they're 2 different fabrications, they feel pretty similar, whereas if you're comparing one kettle to another kettle, it's a lot easier to figure out. So the nature of the apparel product really helps with RFID as well.

And then can I just ask on your New Zealand network? So did I read that chart right? You're down to 1 store in the North Island of New Zealand? Is that...

Simon, is that...

It's right in the presentation. It is presented wrong. It's 19.

Okay. So I don't know where they've gone. Johannes?

Johannes here from Morningstar. You mentioned that you'll be investing in data, especially in digital customization going forward. And with the growth that you're experiencing, speed is, I assume, the essence for this as well. How do you feel about your loyalty program with flybuys? Is there a case to be made for your own loyalty program going forward? Or is flybuys moving quickly enough and giving you all the tools you need to address that customization of your marketing?

Yes. It's a live question for us as we work our way through. I mean flybuys is a really good program for us because it gives us good quality data on a decent percentage of our customers who shop with us in-store. And of course, in-store identification is a different game to online customer identification. So we see it as a valuable asset within our portfolio of data acquisition for customers in-store. It's not complete, and so we will continue to look at what are the alternate ways that we can supplement the flybuys data so that we can get a better penetration of customer identification that comes through our stores. But what we have currently is already a lot of data that will enable us to do a lot of things for quite a few of our customers already. So at the moment, I don't feel like it's the constraint, but in 2 or 3 years' time, I think we're going to want to have other methodologies that give us a greater penetration for customer identification in-store.

And I'll ask a question from Andrew McLennan at Goldman Sachs. He says, "You note the breadth of sourcing by location, but can you please give the weight of this as a percentage of COGS sourced from each location or the top 3 locations? Would be good to get an understanding of the relative importance of sourcing regions."

Yes. Thank you. I don't think we go through and give specifics out by region in totality. What I can say is we run a diversified sourcing model. What do we mean by that? We try and source from different countries for the same products wherever we possibly can. And so we've got offices throughout Bangladesh, throughout India. We've got another in Jakarta, and we've now just opened up in Vietnam, of course, in addition to China. When you look at that, some categories are very well-diversified, of course. So if you think about T-shirts, it's quite easy to find different factories that sell -- that make T-shirts at very competitive prices across those locations. And so we've diversified those types of products. There's other products which are more China-centric, not surprisingly, particularly in the general merchandise space, and we're more heavily represented there. And if you look to the mix, China is an important part of our sourcing mix, not surprisingly, with Bangladesh sitting in second place on the way through, India growing fast and Vietnam growing fast as well. So what I think you'll see us doing is continue to expand out that diversification over time. And I think we're all grappling with this, whether you're a brand or whether you're a direct-source retailer, it's how do you look for alternate supply, sources of supply for some of the key product categories.

It's Ben again from Jarden. Just final for me. Just all the businesses or within the 3 within the group sound like they're going on pretty well in line with or ahead of expectations. Your brand trust over the last 12 months, you're the only one since things have gone up through the roof. How do you think about leveraging the strength of the brand that you've got in market at the moment, generating a lot of cash? Do you sit there and say, "Okay. We can start stretching into other things like insurance, other areas."? Do you think about M&A? You just got a great -- a really strong lens of the customer. It feels like this is the opportunity to really consolidate on that. And how are you thinking about that looking forward now?

Yes. It's a good question. I think what we always want to do, particularly for Kmart, is be very on-brand. We do see this as a -- we do see it as a strong brand and as an asset in its own right. And one of the things we're thinking about is how do we capitalize on the traffic that we generate. So I don't see us necessarily branching into categories which are not that adjacent. So insurance is not something that's on our radar or financial services. But if I look at things which customers touch and use every day, what are the opportunities for us to connect especially via online, and I think there's opportunity. So we've partnered with a company called Canva who do personalized products that's embedded into kmart.com.au and that started off really positively. So that's been running for about...

Three months.

Yes, 3 months now. So I think that's a really good example of an offer that complements the products that we sell within kmart.com.au. It's a logical adjacency. It's on-brand for us. And effectively, we're capitalizing on the traffic coming through kmart.com.au and effectively monetizing that. So I think we'll look for those adjacencies as we continue.

Do you see a material number of SKUs going online now? Are you separating 2 similar sort of concept online? Or is that more going to be catch this demand?

We're not going to become a marketplace. That's for sure. So I -- yes, Kmart's a very special brand. We're lowest price. And the curated offer is key to what we do. I think we could run the risk of -- if we try to get too cute, we'll end up adding too many things on there and confuse the customer journey. So many of our customers go to kmart.com.au before they go to store, so we don't want to confuse that. So I think keeping kmart.com.au very pure to the Kmart brand and logically bringing in adjacencies where they're of significant value and they really make sense and don't confuse the customer journey, they're the things that'll get a tick. Anything that starts to get in the way or making this complicated for customers won't get up. Okay. I think we've got time for 2 more. So it looks like we've got 2 more left. So perfect.

Shaun Cousins, JPMorgan. Just a question regarding your extra costs that you took out of Target. Can you just quantify -- I guess, Target was a complex business, you've taken costs out. Could you maybe give us a range of what that was? And as you introduce K Hub, how do you avoid replicating the complexity that you had in Target, where you have Target country stores that are now K Hub stores? Why are you going to avoid or maybe how do you avoid having a different overhead or different cost base such that you can remain that sort of high-margin business, please?

No. No, very good.

Thank you, Shaun. No, we haven't quantified, I guess, the cost that we've taken out of Target, and I don't think we're about to. But needless to say, there's been a pretty fundamental restructure of the business towards, as Ian said, a much smaller and simplified operating model. So the cost reduction has been in a number of areas. One has been in a reduction in the size of the store support office. And that has been enabled by the network reduction as well, including moving towards more standardized store formats. And the second component to that has been clearly the reduction in store-associated costs as we've converted and closed quite a number of stores as well. I think it's not an easy kind of equation, Shaun, in terms of giving you a number because if you think about the different moving components, the way we pick the conversion stores was to say what are the stores that will be really great Kmart stores and generate higher returns as a Kmart than as a Target. So within that mix, it means that some of the more profitable Target stores have actually converted to Kmart because we think they'll be even more profitable as a Kmart store. And at the same time, we've closed some not very productive and unprofitable sites along the way as well. So there's quite a few moving parts within the Target P&L. And really, that's why we've gone away from reporting, I guess, separate Kmart and Target earnings as well because it's really -- we're looking to optimize across the 2 businesses rather than the profitability of Target as a stand-alone business, if that makes sense.

Yes. And on the K Hub side the equation, we've -- I think it's a point we worry about a lot. So we've got the learning side of how to run these small-format stores from Seattle, an anchor that we ran in the U.S. And what we're doing is we're running a very standardized approach to those stores, and the team that's working on it have a very clear brief. It cannot complicate the main game. So these stores have a really important role to play in the regional communities in which they operate. When you look at them as an economic driver of Kmart, they're a relatively small proportion. So we've got to make sure we keep really focused and don't get distracted.

So would they be higher- or lower-margin stores than what you've got currently in terms of your large Kmarts? And then K Hubs, they're obviously going to be lower-dollar EBIT because they're just smaller. Are they going to be higher or lower percentage margin?

So they generate a good return. They're just more relatively small sales base compared to the large-format stores.

To the value -- to the business models?

Yes, correct. That's the right way to think about it. And we'll take the same approach with the K Hubs over time. The high-performing ones, we want to retain; and the low-performing ones, we'll want to move on from.

It's Bryan from Citi again. Just on online. I'm surprised no one else has asked about online profitability yet, seems to be the -- given where it's sitting in terms of penetration. I've always thought that DDS, it's always a challenge, given low ASP and so on, trying to fractionalize those delivery costs. Can you take us through how you think about online profitability in terms of the incrementality of a sale, the basket size, how you charge for delivery? I'd like -- even at a high level, it would be interesting to see your thought process on it, given you're picking from store, I assume you're allocating store costs to it as well. So be interested in your...

Yes. No, it's a very good question. How do you allocate costs accurately in that environment is -- I think probably every retailer who does it grapples with that question. We cut it in many ways. We try and be quite tough on online with the way that we allocate costs, and when we do, we still generate a profitable outcome as we look through that. What are the enablers of that? We do charge for delivery. So we have a free delivery over a threshold. And so that means we get a basket size that's high enough that we can get the efficiencies from the pick and the delivery that we can make the maths work. I mean clearly, if we were just fulfilling one $6-item with a 35% margin, that's pretty tough. But you start bundling them together, then we can get the efficiencies of the pick, which fragments the pick cost and obviously fragments the delivery cost on the way through. So I think inevitably, it's going to be a basket size game where if we can maintain the basket size, then we've got quite an economic model. We then start applying what we're good at, which is we are good operationally. That's sort of one of the capabilities. And we are a machine, and what we're going to do is build that machine for online picking from store, which is today has been really by the really great endeavors of a lot of all the wonderful team members, supported by some technology. We see that being a substantial change as we go forward to get that productivity way up. And as -- of course, as we do that, it will take less pressure off how big the basket size is for us to generate an adequate return.

Can you help me understand what sort of size basket you generate online and then how that compares to in-store?

It's about -- it's a bit of a double.

Double, yes.

Bit of a double. Wonderful. Well, thank you, everybody, for the questions. I think we're going to wrap up this session here. So for those of you online, thank you for joining. I think we're going to leave you now. And then for everybody else, we'll -- I think we're going to be heading off to Southland. Thank you.