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Edited Transcript of ADH.AX earnings conference call or presentation 26-Aug-19 1:00am GMT

Full Year 2019 Adairs Ltd Earnings Call

Victoria Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Adairs Ltd earnings conference call or presentation Monday, August 26, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ashley John Gardner

Adairs Limited - CFO

* Mark Ronan

Adairs Limited - MD, CEO & Executive Director

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Conference Call Participants

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* Aaron Yeoh

Goldman Sachs Group Inc., Research Division - Equity Analyst

* John Hynd

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst

* Jordan Rogers

UBS Investment Bank, Research Division - Director and Small Caps Research Analyst

* Josephine Little

Morgans Financial Limited, Research Division - Senior Analyst

* Mark Wade

CLSA Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by and welcome to the Adairs' Results Call for the 2019 Financial Year. (Operator Instructions)

I would now like to hand the conference over to Mr. Mark Ronan, Managing Director and CEO of Adairs. Please go ahead, Mr. Ronan.

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [2]

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Thank you. Good morning, and welcome to the Adairs 2019 Financial Year Results Call. With me this morning is our new CFO, Ash Gardner; and our new Head of Investor Relations, Jamie Adamson.

And starting the 2019 financial year result, where Adairs achieved a very good sales result with top line sales growth of plus 9.7%, driven by like-for-like sales of 7.2%. The like-for-like result was off the back of another great year in online, up 42%, and a solid store like-for-like sales result of plus 1.5%. We were very pleased with the sales result and the execution on product throughout the year. Our gross margin result was in line with our guidance, coming in at 59.2% pre-AASB 15 adjustments. Throughout the year, the gross margin rate was impacted by higher distribution cost and the weaker Australian dollar.

Excitingly, New Zealand was profitable over the year, giving us additional confidence to open new stores and continue to develop the brand and the business in New Zealand. The overall impact of the reduced gross margin rate and an increase in our cost of doing business, in particular around the supply chain, saw us deliver an EBIT result of $43.4 million, which was down 2.4% on the prior year. Given this result, the Board declared a fully franked final dividend of $0.08 per share, taking the full year dividend to $0.145, which is up 7.4% on the prior year.

I will now walk through some of the key areas in more detail. If we move to Slide 3 in the sales result, total sales were up $30 million over the year with stores driving $13 million in sales growth. The store sales growth came through like-for-like sales of 1.5% driven by the performance of our expansion categories, in particular, home décor and Adairs Kids with ongoing growth from our core categories of bed linen, bedding and bathroom.

Further supporting our sales growth was the opening of 5 new stores and the upsizing of 5 stores. We expect all these new and upsized stores will meet our sales expectations over the coming year. Our disciplined approach to reviewing our store portfolio saw us close 7 stores during the year. It should however be noted that these closures focused heavily on the smaller stores within the portfolio, including the 3 Myer concession stores and 2 Kids stores that were merged into larger Adairs stores within the same center. These stores finished the year with less total store numbers but with a larger average store size and growth in our total level area or GLA of approximately 4.5%. We'll continue to review our store quarter portfolio with a view to increasing the profitability through optimizing the existing portfolio via upsizing, closures, relocations and complementing this with new additional stores.

Our online sales grew strongly as we continue to enhance our customers' omnichannel experience. Online sales were up 42% largely driven by increasing traffic to our site. This increased traffic has come by growing social media engagement, continual improvement in our search engine optimization and marketing, and improving the integration of our Linen Lovers program with the online channel. This increasing traffic combined with improved conversion allows us to build our number of new customers online, providing us with ongoing growth opportunities as we look to increase Adairs' share of our customers' purchases across our expanding category ranges.

Despite the higher variable nature of cost associated with the online business, we saw strong contribution growth from the online channel over the year, even with there being less operating leverage available.

The sales growth across stores and online is being driven by both new customers shopping at Adairs and existing customers buying across more categories. On Slide 5, you can see the impact our product strategy is having on driving the growth of the business and, importantly, the combination of our expansion categories growing as a percentage of the total business combined with ongoing growth of our core categories. This strategy provides our customers with more reasons to shop at Adairs; and at the same time diversifies the Adairs business.

Over the year, we have seen significant growth in our kids range across bed linen and bedding combined with kids decorator and furniture items, and this growth has come from both our store network, in particular the Homemaker stores, and via online. Further, we have seen good success across categories such as wall art, storage and other home decor added category. In these categories and across the majority of our expansion categories, we remain relatively small players in generally fragmented markets providing us with scope to continue to grow our market share. The focus on developing a wider, more comprehensive range allows us to furnish more of our customers' homes. This enables us to both attract the new customer to Adairs and importantly allows us to capture a greater share of our existing customer's spend on their home. We see our product expansion strategy as being a strong contributor to continuing to drive our sales growth over the coming years.

If we move to Slide 6 and the gross margin rate. I would like to take a minute to highlight the impact AASB 15 has had on the classification of cost within the statutory profit and loss this year. The changes have resulted in postage costs related to our online sales now being recorded as a cost of goods sold and, as such, reducing our gross margin. We consider it more appropriate to treat these costs as an expense as we always have and, as such, have completed our analysis for the financial year for both gross margin and our cost of doing business based on online postage cost being an operating expense to the business.

With this in mind, we saw gross margin decline 110 basis points over the year. This decline in gross margin rate can be explained by 3 key drivers: The impact of the declining Australian dollar. As a business, we tested a number of price increases and started discussions with suppliers around cost prices, however, we did not move fast enough to mitigate the impact of the falling Australian dollar over the year. Whilst this will remain a headwind in FY '20, we have now obtained a number of cost price reductions and have implemented a broader price increase strategy based on the learnings from FY '19, which have seen us start to improve our underlying gross margin rate to combat this decline.

Further impacting the gross margin rate was the impact of increased distribution cost. Distribution cost increased during the year due to the growth of the business in areas outside of Victoria and New South Wales. Ongoing growth in the sales of our bulkier products and the impact of some costs associated with the activation of the additional DC capacity to support the growth of the business. The underlying margin made up the balance of the decrease against the prior year with this impacted by us driving the business harder towards the end of the year as we saw sales decline, combined with some challenges in selected product categories that resulted in further markdown activities to ensure we finish the year with clean inventory.

In relation to our cost of doing business on Slide 7, our operating cost increased by 11%; however, we were able to maintain costs as a percentage of sales across the key areas of salaries and occupancy expenses. Ultimately, our other expenses grew as a percentage of sales, reflecting increased cost to support the online sales growth, including online postage and additional DC operating cost, as we ended up with inefficient processes, brought about by running multiple distribution centers in Melbourne to cater for the growth of the business, including setup cost across labor, freight and establishment of the facilities.

The FY '19 year saw Adairs gross sales in line with our expectations and maintain a relatively stable underlying trading margin but was impacted by the speed at which we reacted to the weaker Australian dollar and our costs that was significantly impacted by supply chain not having the capacity to manage our continued growth.

Importantly, both of these challenges can be managed by the business and we are already actioning plans that better manage both the overall supply chain costs and improve our underlying trading gross margin to reflect the current Australian dollar.

So I now move to our strong balance sheet position, as highlighted on Slide 8. The closing cash position of $16.7 million saw our net debt reduced to $8.2 million with our net debt-to-EBITDA ratio falling to 0.16x. Our inventory position increased $9.2 million, with $5.9 million of this coming from stock in transit as a result of system improvements providing greater visibility of stock at overseas ports and in transit to Australia. Further increases came from the revaluation of stock based on the lower Australian dollar and a small increase in actual stock held to support the sales growth across online and our upsized stores.

The increase in other liabilities reflects the impact of AASB 15, which sees the deferred revenue relating to the Linen Lovers membership reflected as unearned income. Ultimately, the balance sheet is strong and provides us with a great platform for growth.

Throughout the year, we continue to invest capital for growth by opening stores, upsizing stores and through ongoing expenditure on technology as highlighted in Slide 9. The CapEx requirements for the year were less than anticipated largely due to the contributions received from landlords to support our larger more inspiring store strategy.

The cash flow of the business remained strong as highlighted on Slide 10, although we did see an increase in working capital requirements in particular around inventory and changes in the timing of tax payments, reducing the level of cash flow from operations. As I mentioned previously, we reduced our net debt to $8.2 million and have declared a fully franked final dividend of $0.08 per share to be paid on the 25th of September.

On Slide 11, we've highlighted our FY '19 year and how we've delivered on the underlying strategies in the business. Our product, product, product strategy which sees us focusing on delivering differentiated product and growing our expansion categories, delivered the like-for-like sales growth of 7.2%. The team delivered a year of on-trend well-curated products that inspired our customers and delivered a strong sales result.

Our focus on more inspiring larger stores saw us open 5 stores, upsize 5 stores and refurbish another 6 stores. Whilst we did not increase our overall total number of stores, we increased the average size of our store and executed well on merging 2 kids stores into a large store within the same center. International expansion in New Zealand had a good year. The sales results improved throughout the year with stores and online growing strongly, particularly across the last quarter. This improving result in New Zealand provides us with confidence that we can build a successful business in New Zealand, and we will look to open additional stores in FY '20. We continue to grow our team through enhancing our management capability in particular, in key areas such as finance, supply chain and digital. Further, we increased our investment in our team's learning and development across the year that will reward us in the future through leaders in our business being developed from within.

We have continued to build upon our omnichannel capabilities with online sales increasing 42% and now representing 17% of our total sales. Further, we grew our Linen Lovers loyalty members by 17%, with these members now representing 75% of total sales. Our omnichannel capabilities are being constrained by our supply chain. This has seen us add an additional strategy focused on creating an agile and efficient supply chain to support growth in both online and store. We know there is significant value to be created by optimizing our supply chain's capacity, productivity and efficiency over the coming year. This will be supported by the consolidation of multiple DCs into a single DC facility in FY '22.

On Slide 12, we have highlighted the creation of the 6 strategic plan around the improvements required to deliver an agile and efficient supply chain. The FY '19 year was a challenging year in supply chain as we exceeded the capacity in our primary DC and took too long to develop an operating rhythm for supply chain across the multiple facilities. This resulted in the business incurring not only one-off costs associated with establishing the additional facility but ongoing increased operating costs. Whilst we expected to be in a position to provide a more detailed plan of how we expect to create an agile and efficient supply chain and the costs associated with this, we are currently in negotiations with a number of parties around finalizing detailed plans to support a restructure of our supply chain anchored by a single new facility that will be operational by FY '22. This restructure will provide us with the platform to support the ongoing growth of the business, both through stores and will assist the achievement of our medium-term online sales target of $100 million.

As we conclude these negotiations, we will provide shareholders and the broader market with more detail. However, given the length of time of the project we'll take and the operating costs incurred in FY '19, we are making changes in the interim.

We will see an improvement in our supply chain over FY '20 and FY '21 by our investments in the management team and their execution of initiatives that will improve our capabilities and productivity within our existing facility. These initiatives will see us both lower our costs and improve our customer experience over the coming years.

If I move to the outlook for FY '20. We remain confident in our ongoing like-for-like sales growth numbers and expect to open 4 to 6 stores and upsize a further 3 to 5 stores over the year. We have seen our first 7 weeks of trade in FY '20 deliver like-for-like sales growth of plus 4.8%, with online growing at 26.9%. Due to the changes in accounting standards, we no longer believe that we can provide gross margin guidance. We acknowledge the currency headwinds that we will face in FY '20. However, we believe that we are better placed based on the learnings of FY '19 to manage these headwinds and have already implemented widespread price increases and negotiated reduced costs early in the year. This has seen the business improve underlying trading gross margins over the last 7 weeks.

Given the introduction of AASB 16 in the coming year, we have provided EBIT guidance pre-any impact of this standard. In appendix 5 we have highlighted the likely directional impact on our statutory accounts, although we note that the standard should not have any economic impact on the business as it will not change our cash flows, debt covenants or net assets.

With this in mind, we expect to deliver modest EBIT growth in the coming year reflecting our sales expectations, the additional investment in our team to drive our growth initiative and better management of our supply chain costs and our underlying gross margin rate. Whilst the FY '19 year didn't deliver the bottom line result we were looking for, we executed well on our underlying growth strategies and believe the business is well placed to continue to grow.

I'd like to thank the Adairs team for all their work and support over the year, and we look forward to delivering on our underlying strategic plan.

And with that, I'd like to open the line up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from Aaron Yeoh with Goldman Sachs.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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A couple of questions for me this morning. Just the first one, with regard to the improvement in the like-for-like sales growth for the first 7 weeks in the year, is there anything you could call out as to what has driven these improvements? And I guess, just your comment around expecting revenue growth to be strong over the course of the year. I guess what gives you the confidence that we should expect this, particularly given what we saw in June?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [3]

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Yes. Good question. What we're seeing is the -- we sort of bounced back as quickly as we saw it disappear. And ultimately, we've delivered a good set of numbers over the first 7 weeks driven by the new ranges coming into store. The ongoing growth of some of those expansion categories and the additional ranges we're adding into those. So we think there's continued growth around those expansion categories and increasing our inventory investment and width of those categories to drive increased sales together with some refinements we've made to our underlying core categories that are delivering good numbers over the first 7 weeks. So now the hard part of this game is that you're only as good as the last little trading period. And we've seen these results and what -- the good news for us is we're not seeing them being particularly driven by one thing in particular. It's a combination of those core elements that we have been looking to put in place that has really driven it.

And the new season ranges in particular have driven a lot of that. Now does that mean it continues over the year? That's -- we wait and see what the customers' reaction is as we continue to deliver product. But as we sit here today, we feel good about what's going on. We've moved prices, driving a better margin in the business and driving that like-for-like sales number that we continue to see that we think we should be able to execute on that. And if you think even to the full year results the last year, we delivered plus 7 in the first half and plus 7 in the second half. We had a rough patch there in June that knocked us around a bit and made us think about some things. But ultimately, the underlying strategy in the business continues to deliver a good like-for-like number, and we don't see that dissipating unless we see something macroeconomic that is in there today impacting us.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [4]

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Okay. Great. And then just second question on gross margin. I'm a bit confused as to, I guess, what your comment on gross margin tell us to be -- us around sort of what we should be expecting for gross margin next year relative to this year. Are you saying that gross margin should be -- I mean should we expect to be lower than this year or around the sort of same level? And I guess just with regards to the commentary on pricing. Have you seen any of your competitors make price changes to combat the FX headwind as well?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [5]

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I think we're seeing -- so if we start with -- I'll start with competitors. We're definitely seeing competitors start to move prices, and we're hearing it both through wholesale and retail components of that. So I think all -- we all know that we are on the same boat. We're all exposed to the USD and the Australian dollar. So therefore, we expect to see that come through the market. We've decided that with the learnings we took out of the second half of FY '19, we pushed some price increases through. We tested, we trialed. And what we have identified is a plan to bring that through more fully in FY '20. And so far, we've seen that resonate with the customer or not impact the customer. So therefore, whilst I'm seeing it come through other competitor set, I'm more interested in how ours is working with the customers.

And we're seeing some good results of that in terms of increasing underlying gross margin delivered week-on-week as we've moved those price increases through. Back to gross margin. Well, I think what we've done in gross margin there and the reason why we haven't given a lot of guidance is it really does start to play into a number of points into the -- the statutory gross margin is going to be impacted by the impact of online postage and how big online is as a percentage of the overarching business. Now we have our underlying expectations on what that looks like, but we're just adding in additional factors. At this stage, we sort of think that we can continue to trade the business in or around the same gross margins as we've experienced in the past so that underlying trading gross margin, including FX, and that's really our aim for the year. But -- and that flows through into those EBIT numbers that we've obviously put out with the results or with the guidance there.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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Okay. Great. And then last question. Just with regards to the near-term initiatives on the sort of CODB line. Can you sort of give us some more specific details around that?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [7]

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Well, a lot of it will be in supply chain and what we can see in supply chain is currently, we have a complicated element within there particularly around our online orders. So for those that have seen my facilities and come out and visited us in the past, the moment we consolidate all of our online orders through one distribution center and we will look to -- that will be amended and we will be distributing from multiple distribution facilities that will take out some costs associated with handling that stock. We also have done a lot of work on improving a number of elements within the supply chain, upstream and out of China working with some freight forwarders to how we improve our freight rates, working on how we might be able to reduce cost coming through into the Australian market in terms of that cost of delivering product into Australia and then working with our local providers on how we provide a more efficient and more cost-effective delivery into stores. So we have a lot of work going on in supply chain all at the same time in order to not only look at the underlying cost of that but how we can improve the productivity and efficiency within that supply chain piece. And ultimately, that's where a lot of our focus is on the CODB line. We still think there's opportunities within rent, occupancy expenses is definitely something that as all retail businesses are doing at the moment. We think there's good opportunity for us to continue to focus on how we drive additional savings out of occupancy lines. So -- and ultimately, I think the other piece for us, our earnings in the business, we'll continue to focus on that CODB and increase the focus on the CODB over the next couple of years across all areas of the business, so -- and won't be one individual silver bullet, it will be the combination of all of those sorts of mini projects that will do it, but there's some big ones particularly in supply chain that we think can deliver real value, and we should be able to execute early in FY '20.

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Operator [8]

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Your next question comes from Jordan Rogers with UBS Investment Bank.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [9]

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Mark, just first question around the online margins. I know you've talked in the past about it being sort of where you think it's right at the top in terms of the pecking order in terms of incremental margins. Now given the extra supply chain costs, I know some of them are sort of one-off, just interested in your thoughts, how do you think now it compares relative to your group EBIT margins of 12.6%?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [10]

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Yes. I mean it's really hard to think of it at a group EBIT margin line, Jordan, on the basis that yes, how do you allocate the cost of the product team who are creating the product to stores and online. So the best focus we put on it is how does it contribute at a -- let's call it, a channel line or a store contribution line is where we see it. And it continues to see that around the same as Homemaker's. And we call that out at circa 30% or thereabouts of sales, delivering that through to a store contribution or a store profit line so to speak. We don't call it profit because it sometimes doesn't fall down to EBIT and quite neatly as we think about the consolidated cost because ultimately, those supply chain increases across a lot of areas have impacted both online and stores and we need to be efficient across both of those and come back to thinking about our supply chain in an omnichannel mentality rather than thinking about it specifically for online versus stores.

So I mean, we definitely saw over the year that if I think about it from a store contribution level, did online increase its contribution as a percentage of our overall EBIT? Yes, it did. So that -- driving that sales through there is driving additional profit into the business. The supply chain costs are more broadly than that, they're supporting both. So if you allocated a portion of them, it probably would still come in as a net contributor to the overall result. And what we're seeing is we need to work harder at driving operating leverage out of our store portfolio when you think about the cost increases that run through there in terms of occupancy and wages and making sure that we create that really efficient store portfolio to support or to work together with the online business to build this business going forward. So it's a hard question when you think about it at EBIT margin level. But I still see it as a solid contributor to the business and we think there is net incremental profit being driven by our online sales growth. And what we need to do is work harder at getting a more efficient back end to support both stores and online in that theme.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [11]

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Great. And then if I just go to your medium term online target, what, in your mind -- you've rattled off a bunch of things you're doing and what worked for you in FY '19 in lifting that traffic so significantly and [given that you're right,] what do you think are the sort of biggest factors in getting it from just under 60 million to the over 100 million (inaudible) [yes?]

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [12]

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Well, ultimately, i think it comes down to the combination of those 2 again, which will be more traffic and improved conversion and, preferably, if you add in a third, we'd increased the ATV, which would make the orders more profitable as well. And we think that comes about largely through thinking about our product within our expansion strategy so when we think about our stores, obviously, the challenge within them -- within the stores is they are the size they are. Despite our upsizing strategy, we're not going to be able to increase every store size. So working hard at developing additional product that stores can sell via our home delivery option and our online then gets access to more [width of product] is definitely helping drive -- we think that drives both conversion and, in additional categories, it will drive traffic. So the combination as always of our strategies of expanding our category ranges and offering together were driving more traffic to the sites and the larger more inspiring stores.

Those 3 things combined are all aimed at building out that online piece. But we think there's still significant room to grow traffic. We know that room to grow conversion and we know there's enhancements to ATV. So things like better product recommendations, linking that through to e-mails, so product recommendations within e-mails. So we've got a whole bunch of pieces of the puzzle where we are not doing today what I would think best practice omnichannel retailers are doing, which gives us great upside and means we're not sitting out here with bleeding edge opportunities. We're actually well and truly sitting -- someone said perhaps even slowly following others and building the business. We'd like to think we can move towards fast followers.

But again, that supply chain piece is probably holding us back a bit on really trying to crank the handle on traffic and driving it if we can, make sure it comes out the other end with a great customer experience because we know that will -- that's what a lot of people talk about in the online space is that delivery experience must be good and must be able to keep up with the front end. Otherwise, we're going to create damage to the overarching online business. So getting those 2 things and those ducks in a row over the next little while I think gives us great opportunity to push that towards $100 million. And ultimately, in here I can tell you that the list of things we want to do, the biggest challenge is what don't we do to get us towards $100 million, not what are the ideas that get us towards $100 million.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [13]

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Yes. Sure. And do you think click-and-collect will be material?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [14]

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Do I think click-and-collect will be material? No. It will be -- it will form a part of the solution but I think it will only form a part.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [15]

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Yes. Okay. Just to follow up on the trend of like-for-likes post balance date. The 4.8, is that majority price? You said it won't spread price increases post balance date, would that be more than the 2.4 there?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [16]

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Yes. Price will make up a fair chunk of it. It's price and still transaction volume but price is definitely -- I don't think it would be more -- it's not more than 2.4 but it is a portion of it. And we're seeing that definitely drive that through. And there's more to go, Jordan. We're sort of -- we're still very much a test and learn business. So we've implemented a bunch of price increases and they'll be -- given the success of those, we've got more confidence again to push through some other categories and selecting when we do it and how we do it over the course of the first half. But over the first half, there is significant price increases to be pushed through. But I would think in terms of your percentage, it's probably more like 1 to 1.5 than 2.4.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [17]

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Yes. Okay. And on that. With your hedge rate, where did your effective rate end up for FY '19? Just comparing, 51% hedged at $0.715. Where do you end up [indiscernible.]

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [18]

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[That's a good question.] We came in at about $0.73 over the year if you take the full year.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [19]

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Yes. Okay. And I appreciate you haven't finalized the new DC so you can't talk to the details yet. But is that going to take a little bit longer than I think previously you've thought, which it's going to take at least another sort of 18-plus months rather than sort of 12 from today? Is that just because you haven't finalized negotiations or is it a more complex build (inaudible) or...

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [20]

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I think what we've wanted to do is depending on the final solution selected and want to be careful about what I say given we're in the middle of negotiations. But I expect that by FY '22, it is fully operational and delivering. And so just depending on the solution and the final components of that, I don't think it impacts FY '20 at all but when it comes online in FY '21 and how long it takes to get up to speed is probably the couple of points that we're working through at the moment and -- but I don't expect it -- next 18 months, I don't expect it to be impacting. That was probably always, once we got further into the detail, our expectation but that's probably being an evolving piece of the learnings that we've undertaken over the last 6 months in getting to this point where we're now in these final negotiations.

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Jordan Rogers, UBS Investment Bank, Research Division - Director and Small Caps Research Analyst [21]

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Yes. Okay. And last one for me. Just have you noticed anything competitive-wise that's changed at the Myer store closures or floor closures rather? Had it impacted anything else sort of competitive landscape-wise?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [22]

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Not significantly. I think there's still a lot of driving of sales. So we're seeing a lot of discounting in the market and heavier -- maybe not heavier but more prolonged discounting rather than actually depth of discount. So we're in that quite competitive environment and I think what we're trying to do is make sure that we're focused on curating the range and giving the reason to shop as opposed to driving it all on price, so -- and giving up any of those price increases that we pushed through. So we're not seeing significant changes in the competitor set at this stage.

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Operator [23]

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(Operator Instructions) Your next question comes from Jo Little with Morgans.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [24]

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Sorry. Just a bit further on those prices, sorry to harp on them harder. So would it be fair to say you'd probably want to put them up by, I don't know, in the range of 3% to 5% this year or don't want to put any exact figure on it?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [25]

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Well, I think that's a reasonable range for us to go on. Of course, it's a little bit distorted given how much of our product is sold on promotion. So it's all about how we move the promotional price and whether that's -- and it varies by category so that's where it becomes a little bit tricky for me to say 3% to 5% price increase across the board. But it is fair to say that what we're actually aiming to do is lift our average selling price of products. So we look at it more at that level and how we move that number, which is a combination of increase the full price in some instances, reduce the depth of discount in other instances, combination of both.

And in some instances, we've actually gone the other way. We have reduced best price and then reduced depth of discount and started to move towards how do we sell more at the full price rather than necessarily having to sell at all at promo whenever we found our promo price was too far away from our full price number. So that's why it's a little bit tricky to sit here and say it's 3% to 5% across-the-board. But that's definitely the aim of the underlying businesses, how we move our average selling price when we start to look at it by numbers in that sort of range. Probably towards the bottom end though. We're probably more looking at 3 across the entire business because there's categories that are harder to move than others. But that's where we're really targeting that at the moment.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [26]

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Yes. Great. That's helpful. So if you think about some of the wholesalers out there, you've got (inaudible). There'd be much more pain at that point in the channel. Can you give us an indication of what the wholesale price moves have been for some of these retailers?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [27]

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We don't necessarily get access to it but I have heard through the rumor mill that it could be as high as 10, in some instances, some selected products rather than across the board. As I said, I don't necessarily get that information handed to me visibly but there are definitely price increases being pushed through by wholesalers.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [28]

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Yes. Great. Just be interested to know, how your like-for-like sales performance has gone, started this year in the back end of FY '19 between when you're in a sale and out of sale. Just trying to understand if that's really moving the dial for your customer at the moment or not.

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [29]

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Yes. That's a good question. And what we are seeing is we're actually performing better out of sales than in sale, which is both a great result to the business in terms of it shows the strength of the product. And I think it comes back a bit to potentially that sales fatigue, how long we run some of those promotions for and how we get the balance of the right promotion lens and the right depth of discount and when we're on sale versus not on sale. And as most of you are well aware of the business, we are -- generally permanently have promotions running within the business, sort of driving the business. But what we're finding is out of sale is definitely delivering better numbers. And that is really good for us and a real positive in terms of the product that we're putting out there in front of the customer, that they're happy with what we are curating for them and then they're buying into that look and feel. So that gives us good confidence that over at least the next little while, while we're in more of that inspirational mode, we don't see why it should change. But it also means we've got to think about our sale periods, which ultimately drives big dollars and didn't deliver as well as we would've liked in the back half of last year. So that's something for us to challenge our marketing calendar and what we want to do to drive the numbers.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [30]

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Okay. Just lastly, sorry, just whatever the cost will come out to be for the new DC, ultimately, I guess? Just from a CapEx perspective, will that still be reasonably evenly split, do you think, FY '20, '21, probably more towards '21 at this stage? But just trying to think from a capital management perspective, will -- if it's split more evenly, we can see the dividend payout perhaps be a little bit higher than previously thought, certainly lower than this year?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [31]

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Yes. I think what you'll find is there'll be minimal spend in FY '20, and bulk of that spend will be '21, depending on where that -- what the final solution is and where those numbers come out. So we don't see that being a real big investment although we still are just negotiating on some of those key terms in particular around some of it. So I say that but I think more will be '21 than '20 will be where we sit today.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [32]

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Awesome. Sorry, just slip one more in, sorry. By the time we get to the new DC being fully operational, we'll probably be a bit closer to your store target. What's the view for growth above and beyond online given I know it's a couple of years out? But I guess any more indications around New Zealand, other territories upside to the store rollout, et cetera, please?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [33]

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Yes. Well, I think we still see good opportunity over the relatively short term if you think 3 years in rolling out the stores. And I think, Jo, what we're now in a position is, we've solved the supply chain challenge or at least put the supply chain plan in place for us to start to think about what are the next opportunities within that in terms of with the international expansion, what are the growth opportunities within the business. So as we sit today, I'm probably not comfortable commenting too much on what they look like. But I think what you will get over the next 12 months is more commentary from us in relation to that as we solve the supply chain issue and are able to bed that down. But within that, we are also thinking about how does that supply chain help us and particularly some of the work we've done upstream on what that might look like if we did think about other markets and the like, how do we make sure that we've got a supply chain that we're building that doesn't hamper our ability to continue to drive the overall growth from the business because what we've seen over -- probably the best part of the last 3 to 4 years even is we're often trying to keep up in supply chain. So this supply chain strategy that we're putting in place now is not aimed at solving today's problem. It's aimed at providing us a platform to not only support the growth within Australia but where that -- where else that growth might come from.

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Operator [34]

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Your next question comes from Mark Wade with CLSA.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [35]

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A question around just the general health of the consumer, how you're seeing that? And then more specifically to Adairs, some of the customers' perception scores and how those played out over the last [weigh lot]?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [36]

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Yes. I mean I haven't walked away from my commentary on the consumer for quite some time, and I continue to think customers have money. They are happy to spend it if you put the right product in front of them at the right price. So whilst I'm not quite sure what went 100% wrong in the back half of last year in those few weeks of really poor trading compared to what we've seen for such a long period of time and whether the consumer stepped out. We've probably done a bit more work since then and found that perhaps there was some underlying product that wasn't quite as good as we wanted it to be. I don't think it had a massive impact because we were selling it 3 or 4 weeks before then. But definitely there were some results through that overarching 6 or 7 week period that didn't quite hit the mark that we would have thought we could have delivered on. But I think the consumer still is relatively okay in most markets in Australia. I think they're happy to spend. And as I said, our focus must be on providing them the product and giving them the reason to shop with Adairs over that time. So I don't think the consumer is going out backwards or anything like that. I think we feel pretty good about that. And sorry, what was the second part of that question, Mark?

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Mark Wade, CLSA Limited, Research Division - Research Analyst [37]

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I think just around the customer perception arc. I know you do your own surveys and you get a bit of a sense or a pulse -- take the pulse of your own, what the consumer thinks of the brand and just how that perception has moved.

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [38]

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Yes. Well, I think what we're seeing is, generally, we're still being rewarded for our service that we're providing in-store, and we really see that as a key differentiator between us and others in the market and making sure that we continue to build and develop upon that. So we continue to hear good feedback on that. I think overall, we continue to be seen as a bit more contemporary and more fashion forward, which is being a big driver of our success over that time. And I think the final part of that is we haven't quite gotten there to how we get more of the customer's home. We still are anchored in bedroom and bathroom and some of those areas. But we think with additional work, the good part about that is because we haven't quite transitioned customers to thinking that broadly about us, particularly if your store is just a regular shopping center store that perhaps doesn't have the category width that you'll see in our Homemaker store, we see there being opportunity for us to continue to drive the growth of the business by expanding those categories and getting more customers to buy into the fact that Adairs is a place to shop for those.

So I think generally, and probably if we call it out the challenge part of that is -- comes back to our supply chain, and our abilities to live up to customers through the online channel has definitely impacted our I guess our customers' feedback on us over the last 6 to 12 months. And that's something that we think we can -- with the work we're doing now, we should be able to resolve at least to get it to a point where we're comfortable. The standard has gotten back to a more expected standard. It's not exceptional but it will be. It should meet more customers' expectations. So hopefully, that covers it.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [39]

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Yes. That's helpful. And perhaps for Ashley, I mean if it's possible for him to just share his thoughts on the business, what attracted him to the role and what he sees as kind of the immediate and then the longer-term opportunities for Adairs.

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Ashley John Gardner, Adairs Limited - CFO [40]

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I'll defer answering the last part until I get a little bit more time in the [seat].

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Mark Wade, CLSA Limited, Research Division - Research Analyst [41]

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(inaudible) a week or 2?

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Ashley John Gardner, Adairs Limited - CFO [42]

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Certainly, as an outsider, I'm probably not even as informed as you are this year, having been here for less than 2 weeks. But I think a great business that resonates well with its customers. Mark touched on the service. I mean that's an asset that is a key differentiator of the business and I think it has great potential. So I'm excited to be here and looking forward to what the next few years has in store. But yes, I think there's great potential and great place to be.

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Operator [43]

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Your next question comes from [Peter Cooper], private investor.

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Unidentified Participant, [44]

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Just a couple of quick questions. Firstly, over the last 12 months, was there a lack of visibility on the DC capacity issues?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [45]

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No. I wouldn't say there was a lack of visibility on them. There was a combination of lack of management of them which did see us invest in additional team and leadership in that space over the last 12 months. So I think going back 18 months ago, there was a lack of visibility. We identified that. And obviously, the challenge in supply chain comes back to length of time to get a facility set it up, put it in shape, and make sure that we could do that with a view to not altering our view on what a longer-term strategy might look like. So and in that, I'd say ultimately, we needed to find some additional DC capacity for a period of somewhere between 18 months and 3 years, which not too many people leasing DCs are overly happy to provide that sort of term, so it was a bit more challenging to find the space. So I think over the year, adding the DC capacity, it definitely started with a -- potentially a bit of a lack of visibility on it and some poor planning. But we've now I think resolved that internally and put us in a space where we've got much better planning around it as opposed to visibility -- I think the visibility was there but what people were necessarily doing with all the information didn't necessarily gel to the overarching strategy.

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Unidentified Participant, [46]

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Yes. Okay. Just one other question. And just in terms of your product lines, with such a strong sales price, are there any product lines rather than whole [campaigns] but are there any product lines that you're looking to discontinue?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [47]

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No. Well, I wouldn't -- it depends how you define it. There will be lines within the business we will always discontinue I think as the business is constantly changing. If we think about bed linen, we talk about the fact that within our bed linen wall, if you go into the store in 12 or 13 weeks' time, you'll see significantly different bed linen than you see today. And it may not be significantly different. The trends and themes might be there but the bed linen won't be the same. And that's in view of giving customers different options and different choices and the view of constantly trying to reinvigorate the store. So there'll be lines within that. And even within core lines, we see things come and go over time, and we tend to work them through -- products have a life cycle of -- they start, they're new, they're exciting then we move them into a more core ongoing piece of the business. And then as they start to weigh in with customers and we start to bring them back out and out of the business over -- depending on the price, it could be a 6-month life cycle, it could be a 2-year life cycle depending on where it fits in the overarching business.

So but is there individual categories within the business that we start to think that we wouldn't be in going forward? Not at this stage. We've definitely tweaked some things. I think tabletop is a good example of a category where we exploded the category for a while there and found that actually we had a real niche and we needed to bring that back to the niche and what we were good at. And something like lighting falls into that same sort of category as well where we exploded it for a while to see how big we could make it and found where our niche is and made sure now, well actually, let's focus on the niche because we're not a lighting business and what we need to make sure of is we know what our customers want and what they come to us for and how we provide that for them rather than trying to be all things to all people in all categories. So there's nothing specific that I'd call out to say we're not going to be in going forward. I think what you're seeing from us is a ebbing and flowing and rebalancing the percentage of the overarching business dedicated to each of the categories within it today.

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Unidentified Participant, [48]

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Just a quick follow-up question. What can we expect for certain in social media campaign over the next months?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [49]

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I think you'll see a lot of collaboration. I think that customers are definitely responding to it. So -- and when I talk about collaboration, collaboration with artists, collaboration with different designers, collaboration with different brands. I think those sorts of elements will not only fall out as part of our product strategy but that will then naturally link back into our social media strategy and being able to work collaboratively with some of those sorts of influencers and other brands to help drive the visibility of Adairs and get more people looking at it is a great opportunity and one that the team are definitely working on today.

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Operator [50]

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There are no further questions at this time. I'll now hand back to Mr. Ronan for any closing remarks. Sorry, I do apologize. We have one more question from John Hynd with Wilsons.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [51]

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I just wanted to focus on the outlook statement, if possible, and maybe just some of the changes that we're seeing, if you help illustrate some of the changes we're seeing come from the business. The previous guidance statements you've given us throughout FY '19, you were doing -- you were guiding to similar EBIT with substantially less sales. If the sales line is now -- for '20 is now well ahead of the consensus range that I look at but EBIT hasn't moved too much, I'm wondering I guess why you're more confident on the sales and can you just maybe break down what's changed between the EBIT from previous to now?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [52]

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Well, I think the -- we're confident on sales because I think we have largely delivered that over a number of years now. So we tend to be very -- or better -- not very good, but we're better at actually identifying our sales and where we think that's going to come from and how we're going to deliver that. And I think what you're seeing in the numbers we have provided highlights that. I think within the EBIT, what we're acknowledging is there's a number of underlying challenges the business needs to work its way through this year, be that the falling Australian dollar, be that our continual supply chain improvement strategies that we're working on. Occupancy cost will rise as they always do with a lot of the leases incurring plus 4s and the like year-on-year. And the same with wages in-store and the general increase to the underlying rate of pay. So -- and with the business heavily focused on service, our assets increases in rates of pay, what we need to do is become more efficient and not take away service because that's what's the key differentiator of our business.

So how do we get good at managing those. So I think what you're seeing from us, John, is that we know there's a number of challenges within the business. We think we can continue to grow the top line and we think we should continue to grow the top line whilst we have the customers engage with us. The worst thing I think we could do is try and scale that back and then try and work the rest of it in the background. What we're better to do is continue to grow that top line and understand more and more, which gives us great opportunity for growth going forward. And in the meantime, we're seeing through the EBIT number that we've put out there that we know we've got to manage a bunch of these challenges that the business faces today. And we'll get some more right and others less right. But overall, we think we can grow the underlying EBIT of the business modestly in FY '20. So the structural change of the business comes back to structural change in the way the business operates as opposed to structural changes in the macro environment comes down to ultimately the combination of supply chain, Aussie dollar and how we work all of that through the business rather than a specific point within that. But if you sit here and you take from this call what are the guys heavily focused on as a business? We're heavily focused on the gross margin and the underlying trading margin once we factor in what we're seeing in the Australian dollar.

And we're heavily focused on making sure we have a better year and a much more efficient and productive year in our supply chain. The changes we made last year are now all done and now what we should be doing is operating those facilities and trying to improve our efficiency within those facilities rather than spending time setting them up and getting some things wrong and then changing them up and getting it to where it is today. That work's being done. But we just don't know -- you never know quite the success of each of those elements. What I do know is I think we can deliver and that's why we see that underlying EBIT number come out more like it's a lesser percentage of sales than it has been in the past. And that's something that we think as we start to improve the supply chain over the coming years, we hope to improve that number and push it back towards where it was, once upon a time. But that's sort of the change that I see in where we are today. Does that answer your question?

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [53]

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Yes. And my follow-up question as well.

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Operator [54]

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Thank you. I'll now hand back to Mr. Ronan for any closing remarks.

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [55]

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Thank you. I'd like to thank all of you for your attendance this morning and, no doubt, we'll see many of you over the coming weeks. And I'd again like to take the chance to thank the Adairs team and our loyal customers for their ongoing support. We look forward to a good FY '20. Thank you.