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Edited Transcript of ADH.AX earnings conference call or presentation 21-Feb-20 10:59am GMT

Half Year 2020 Adairs Ltd Earnings Call

Victoria Mar 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Adairs Ltd earnings conference call or presentation Friday, February 21, 2020 at 10:59:00am 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

* Aryan Norozi

UBS Investment Bank, Research Division - Associate Analyst

* John Hynd

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities 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 Interim Results Call for the 2020 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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Good morning, everyone, and welcome to the Adairs' First Half 20 Results Call. With me this morning is Ash Gardner, our CFO; and Jamie Adamson, our Head of Investor Relations.

The first half of financial year '20 has seen Adairs deliver a record sales and profit results. Our omnichannel strategy has seen us grow sales across both our physical and digital stores, with stores delivering 2.4% like-for-like growth, whilst our online store grew 31.6%.

Our gross profit result was a real highlight, with our gross margin up 20 basis points to 61.1% despite a FX headwind of approximately 160 basis points. The team have worked hard on a variety of initiatives across the business to deliver this result, and it shows that we are capable of managing our margin despite the declining Australian dollar.

Our cost of doing business increase reflects an investment in team within our support office to drive the growth whilst achieving efficiency gains across our stores and, importantly, our supply chain. This has resulted in underlying EBIT growth of 4.2% to $23.2 million, allowing us to declare an increased fully franked dividend of $0.07 per share.

I will now hand over to Ash to cover the key highlights of the results before I provide some more information on the strategies that will continue to drive the ongoing growth of the business.

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Ashley John Gardner, Adairs Limited - CFO [3]

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Thanks, Mark, and good morning, everyone. As Mark said, we are very pleased with the results that we're reporting today. The strong sales growth, combined with our focus on margin and cost control, has allowed us to deliver improved contributions from both our stores and our online channel.

Our focus on gross margin improved our margin relative to last year by 20 basis points despite the weaker dollar. We've been implementing a coordinated strategy to manage the impact of the weaker dollar whilst also building a stronger sales base that is less dependent on sales and promotional events.

In addition to the reduced markdowns, we have also negotiated lower costs on key merchandise programs and reviewed our price points during the season to improve our initial margins.

We are fully hedged for the balance of financial year '20 and have ongoing programs in place to manage the impact of the weak Aussie dollar into FY '21.

We remain focused on cost control. During the half, we reduced our total cost of sale by 40 basis points, and we saw improved productivity from our DCs, albeit off a high cost base that was too high last year.

We have invested in our customer support team in key areas, including marketing, online, supply chain and IT as well as in the executive leadership team. These investments and the capabilities that come with them will enable the business to continue to deliver on its growth strategy over the coming years.

Our balance sheet remains strong. The acquisition of Mocka in December has had little impact on earnings in the half, but has reshaped our balance sheet with the upfront consideration funded through debt and new shares. We refinanced our debt facilities as part of this transaction and extended their expiry through to March 2023. We remain comfortable within the covenants, and we expect our forecast gearing over the next 3 years to remain around 1x.

I won't talk to the impact of AASB 16 and the Mocka acquisition in detail, but, of course, I'm happy to take questions later if the information provided in the deck isn't sufficient.

Cash flow for the period was strong and, as Mark said, that's allowed us to increase the dividend to $0.07 per share for the half.

I'll hand back to Mark.

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [4]

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Thanks, Ash. As we've covered in the highlights, it has been a good first half all based on us continuing to deliver on our underlying strategies.

On Slide 8, we have the underlying strategies that supported the business. And I won't talk to them all; however, I would emphasize a few.

Our Product, Product, Product strategy has continued to deliver results for Adairs. Over the half, we delivered growth from both our expansion categories. And importantly, our core categories also performed well.

We also acquired the rights to the Mark Tuckey brand. We're excited by the opportunity this acquisition brings to our product strategy, in particular around building a premium sub-brand within Adairs and adding significant furniture expertise via Mark's ongoing involvement with the business.

As we had considered a variety of strategies to mitigate the decline in the Australian dollar, we have maintained and always look to improve the quality and specifications of our product across a variety of categories to ensure that, as always, we remain focused on providing great product for our customers.

Our more inspiring larger stores and our best-in-class omni retail capability strategies have seen us deliver ongoing sales growth. This has come through new and upsized stores, like-for-like growth from our physical store network and continuing strong online sales growth. We are always thinking about and improving how we best utilize the combination of physical stores and online to deliver a more inspiring customer experience and drive ongoing sales and profit growth.

Importantly, the half has seen us invest more in our team with significant experience and capability added to the Adairs' leadership team. Whilst this has come with some one-off costs during the half and a step-up in our support office costs of doing business, this investment brings with it considerable benefits across finance, supply chain, digital and, most importantly, strategy execution. These changes have enabled the business to move ahead with key projects that will help deliver ongoing profit growth for the business. One of these was the acquisition of Mocka in November.

The addition of Mocka, a vertically integrated, profitable, pure-play online home and living products designer and retailer, operating across Australia and New Zealand, provides Adairs with another growth channel. As we noted at the time of making the acquisition, Mocka is an excellent strategic fit with Adairs in that we operate with a very similar mentality, focused on delivering differentiated product at a good price for our customers.

Adairs and Mocka are complementary businesses in that Mocka is a business that has a real focus on hard home or furniture with an element of soft furnishings, whilst Adairs is a soft furnishings business with an element of hard home.

I want to reiterate that we will continue to run both businesses independently, thus making the integration of Mocka into Adairs relatively seamless.

Importantly, during our initial few months working together, we have identified the key areas where Adairs can add value in supporting and derisking the Mocka growth strategy and are working together on planning and executing the next steps around these strategies. We are excited by what Mocka brings to Adairs Group, and we look forward to giving the market more insights into these strategies and the broader Mocka business later in the year.

Another of these key projects is around our supply chain. And excitingly, we can announce today that we have entered into a heads of agreement with DHL as our 3PL partner for our new national distribution center. This project has been ongoing for the better part of 18 months and considerable work has gone into analyzing the available options, working with potential partners and, in the end, coming to an agreement with DHL.

DHL are a global leader in the design, implementation and operation of flexible warehousing and distribution solutions. We believe that by this partnership, we will be able to deliver a local supply chain that supports our strategy of allowing customers to shop how they want, where they want and when they want. Partnering with DHL will also see us reduce the risk associated with this project based on their expertise, significantly reduce our CapEx requirements and will see us achieve annual savings against our existing model of approximately $3.5 million per annum.

We expect that the consolidated national distribution center will be fully operational by July 2021, providing benefits and enabling opportunities across our supply chain at a materially reduced operating cost.

Overall, the first half has seen us build upon and deliver elements within our existing strategic pillars whilst executing on the day-to-day across the half particularly well. This has delivered a good result and sets us up well for the coming year.

If I move to the outlook where we have maintained our guidance for the full year. Over the first 7 weeks of the second half, we have focused significantly on delivering like-for-like GM dollars within Adairs. This has seen us reduce both our depth of discounting and time on full sale over these 7 weeks with like-for-like sales of plus 2.3%, but more importantly, like-for-like gross margin dollars of 8.5%.

Over the half, we will continue to manage the Adairs business with a view to generating ongoing like-for-like GM dollar growth whilst growing our market share. Over the same period, Mocka generated 16% sales growth, which was in line with our expectations given prior year promotional activity. Like Adairs, we expect the Mocka business to deliver ongoing sales and gross margin dollar growth across the half as we continue to execute the underlying strategies of the business.

Obviously, coronavirus is impacting the supply of product in global supply chains across a range of industries. We are regularly receiving updates from our suppliers on the impact of coronavirus on their workforce and their ability to manufacture our products.

In most cases, our major suppliers have recommenced production, which is likely to result in some delays across a lot of our orders. In some smaller categories, the impact is still being determined and is changing regularly. At this stage, we believe we will be able to manage the potential impact of coronavirus. However, given the constant changing nature of the situation, we are closely monitoring this impact to give us the best ability to mitigate any potential impact ongoing delays might cause on our overall results.

To finish, I would like to thank the Adairs and Mocka teams for their hard work and dedication across the half. The result is a good reward for their efforts, and we look forward to working together to deliver ongoing growth across both brands.

I'll now hand over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from John Hynd from Wilsons Advisory and Stockbroking.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [2]

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If we can maybe start on the strategy of less discounting and the impact it's had on like-for-like sales to date, was that expected? And should it change the way we think about the profile of the business going forward? And how does it impact the online strategy as well, please?

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

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Well, it was expected. I think we knew what we've been trying to do is think about the depth of discounting and, in particular, how often we are on full sale and how many days of the -- we are actually on full sale. So if you think about first half, we're very happy with the results we obviously generated there in the first 7 weeks. That result is significantly impacted by taking almost a full week out of sale versus the same time last year, which was a deliberate decision. And we think over the course of the year or the half, we'll get that back.

So you're seeing quite a short period of time, and we did it deliberately and with a real view that we think the less time we can spend on full sale, we can improve our overall margin result and improve the profitability of the business with that in mind.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [4]

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And how did your customers react over that period as well?

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

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Well, ultimately, we saw -- when you take out a week of sale, you're going to cop a like-for-like sales decline over that week. But what we've seen is the bounce-back has been harder, stronger post and that's why we're seeing that like-for-like GM dollar growth really come through. So net-net, our aim is, obviously, always to grow market share, but we want to do it really profitably and not do it by giving away margin to get there.

So it's always a balancing act. We don't shy away from the fact we're a high/low business. So we have to manage the ups and downs of that. But I think more and more, we have to back ourselves in when we have got great product customers want, keep delivering that and then make sure we're getting the right price for it. So we have seen a decline in transactions, but an increase in the basket size is what's actually driving that like-for-like growth.

So we're still getting a transaction growth in that plus 2.5. I don't want that to be misconstrued. What we're trying to do is continue to drive basket size and price of item as well as driving that transaction piece, but we're quite happy to have flat transactions if we are growing the other 2.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [6]

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Great. Got it. And just on the DC update. Can you give us a little bit more color on capacity? And what does the CapEx profile look like now as well, please?

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Ashley John Gardner, Adairs Limited - CFO [7]

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So in terms of capacity, the DC is going to be designed with us taking on what we need initially and then the DC will be big enough for us to then grow into it without having to relocate over the next 10 years. So we'll meet our requirements for the next 10 years.

In terms of CapEx, because we're outsourcing it, most of the CapEx will fall to the DHL and, obviously, come back to us for operating cost. But we're expecting our CapEx cost to be around $2 million, most of that related to the integration of our systems with DHL. And then obviously, there will also be some one-off costs associated with the transition to them, so -- the ramp-up and the restructuring of our workforce around the outsourced arrangement, and we think that will be circa $3.5 million, which Mark mentioned in his talk.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [8]

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Okay. And just last one for me around Mocka. Four weeks of trading and, I think, it's about $2.4 million of revenue. I'm assuming, given the nature of the product, December is not really the strongest, I guess, trading month for you. Can you maybe just give us a little bit more color on how things are going? What December means for the business normally? And perhaps some more color on when the better trading periods are?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [9]

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Yes. You're right. I mean like most online businesses, if you think about taking 4 weeks in December, you've got 2 weeks that are realistically trade periods and then 2 weeks that are big quiet as shipping cut-offs and the like impact that back end. Then you have post-Christmas, which is reasonably strong for trying to get goods out of DCs. Effectively, there was 1 day of operational post-Christmas this year that you could be moving stock around and, obviously, getting the revenue that goes with those orders. So December is not the main month for Mocka. That figure there doesn't reflect -- obviously, multiplied by 12, you're not going to get the full year results.

So realistically, January is a good period for Mocka and then what we'll see is that will continue to grow over the half. And what we aim to be as a business that looks at trying to be fairly consistent and see consistent growth month-on-month rather than being a business that's got lots of big peaks and troughs in it and moves about based on promotion, given it's more a full price or a small discount style of product mix that we're going with.

So if you think about December in isolation, you've also got a bunch -- some one-off costs and the like associated with that EBIT result, which has impacted that in relation to the transaction. And then going forward, I think you'll see it start to meet the profile that we outlined as we announced the acquisition in November/December last year.

So we're very comfortable with the way it's trading at the moment. It's right on plan for where we think it's going to go for the half. Obviously, they've got the same issues around coronavirus, and we're working -- and they're working with their suppliers just like the Adairs product team are working with our suppliers. So the 2 businesses are keeping in contact with all of that sort of stuff and working on how we can help each other if something comes about.

But overall, we think early days, as I've said in there, we're really excited about the opportunity. We certainly haven't found anything in the first 3 months of working together that we've got any concerns with, and we look forward to, as I said, providing a little more color as we start to build out those strategies and make sure they're well articulated and documented for the market to understand going forward.

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Operator [10]

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Your next question comes from Aryan Norozi from UBS Investment Bank.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [11]

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In the absence of coronavirus, it seems to me that you would have exceeded your guidance? Is that the message you guys are trying to put out in the release?

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

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Well, we think the first half was pretty good. Yes, it's long, long way to go in the half, so I'm not sure we would have been out here with an increase in the guidance. But we are feeling confident that the underlying business is in good shape. We've obviously started work. I mean we -- in signing a heads of agreement, there's a lot of work now to be done to actually execute on that supply chain piece. There's still lots of work to do with Mocka, but we are feeling like the strategies and the execution over the first half was particularly good, and we didn't see anything stopping us from achieving those results in the second half. And coronavirus has probably just meant that we're a little more cautious of how that could impact particularly supply chain as we move through.

I mean we really won't know until we hit Q4 is probably realistic. With Chinese New Year, a lot of stock gets moved beforehand. So all of that product's come in. We're really happy with the way that's performing to date. There's obviously -- but there is still a long way to go. We've dropped 2 installs into our season or 2 lots of new product, and we still have a lot to go. So we probably wouldn't have been out here upgrading, I don't think, but there's no doubt that coronavirus has put a little bit of a cloud on just making sure that we're really carefully managing and monitoring that over the half.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [13]

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And second for me, can you guys, please, quantify the increase in support office cost and just give a bit more color around what that was for?

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Ashley John Gardner, Adairs Limited - CFO [14]

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So on Slide 5, you can see that our support office cost as a percentage of sales increased by 160 basis points. There are some one-off things in there, both in last year and this year, that relates to some of the changes we've made to key roles in the business. And then we've got the ongoing costs associated with some new roles that have been introduced or enhanced. We have invested in supply chain capability and that's one of the things that's allowed us to bring the project to this point quite quickly since that team's been or that -- a couple of individuals have been on board.

So it's predominantly in people and in areas where we've either added roles to enable us to grow or deliver on our strategy or enhanced our capability with upgrading existing roles to deliver on the strategy. And it's in the areas that are going to drive growth, so in digital, in online, in IT and, obviously, we talked about supply chain and strategy. Yes. So I think -- yes, it's -- some of that won't be there forever. And the step change we don't expect to -- for that to be seen each year. There's certainly nothing like that, but there is a point at which we needed to invest in order to create the ability to deliver some of these things. And it's an investment today for a return tomorrow.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [15]

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So you said there's some one-off costs in that line item this year and last year. Can you quantify that, please? And has that -- has the one-off costs become larger this year versus the same time last year?

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Ashley John Gardner, Adairs Limited - CFO [16]

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There's some costs associated with changes that are in the base that we -- or in this year that won't recur but quantifying them wouldn't really be appropriate if you understand the types of costs we're talking about.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [17]

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Perfect. And can you guys talk about the magnitude of rent reduction you're getting on renewed leases? And also maybe how many stores you have actually on holdover, please?

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Ashley John Gardner, Adairs Limited - CFO [18]

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And so we've always got a handful of stores on holdover. And I don't think it's any higher than normal. We are making progress with the landlords, and you can see in our numbers that our op cost has come down, and the team is doing a great job both in renegotiating existing leases and making sure that they meet our criteria for enduring profitability as well as the upsizing strategy, which is delivering lower op cost per meter and improved profitability. So we -- store-by-store, it's always -- it's a never-ending war, but it's important, and we're making pretty good progress.

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [19]

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I think that's the point. There's no generic number that we call out across all stores we're getting a 10% rent reduction. That's just not the way it works. Homemakers continue to be good performance within the business, and they're much harder to take out some of those rent reductions in. And as we've talked before, it's A-grade shopping centers where you want to be in there and the landlords are investing the money. But we have seen that reduction in 60 basis points in the occupancy cost overall, which is a good result for the business and it helps drive that operating leverage that we saw out of the store network.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [20]

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And just final one for me just on the trading update. Can you -- of 2.3%. Can you please split out the rate of growth between online and in-store?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [21]

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Yes. I think -- well, primarily, stores are relatively flat over that period, with online driving the bulk of that growth. So stores are up, but not up by a lot, talking 0.2%, 0.3%.

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Ashley John Gardner, Adairs Limited - CFO [22]

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In top line sales, obviously...

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [23]

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In top line sales. Yes. Much better result in GP dollars and online is continuing to drive the bulk of that, but it has also traded at a slower like-for-like growth in that period once you pull out a week of sale. Online, in particular, they love the sale, but we're very comfortable winding that back, particularly given the variable cost nature of that business. If we wind back sales at a lower margin whilst still growing sales at a higher margin, we end up with a much more profitable online business.

So we haven't seen a lot of growth out of those stores. But as I said in my update, a lot of that really came out of me taking a week of sale out. Before that -- now we're ticking along quite nicely, but we take a week of sale out and that's always going to hurt the top line like-for-like sales growth number.

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Operator [24]

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Your next question comes from Aaron Yeoh from Goldman Sachs.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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Congrats on a pretty pleasing results from my perspective. Just a couple of questions for me this morning. Just with regards to Mocka, I think you commented that like-for-like sales growth at the moment is tracking around 16%. I'm just wondering over, I guess, the equivalent of what would be the first half of this fiscal year for that business, do you know what sales growth it did over that period?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [26]

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It's not in front of me, Aaron, but it was stronger than that. And as we've said that, realistically, January was impacted by prior year promotional activity that we collectively all knew we were never going to aim to repeat in this year. So we'd expect that over the half, you'd see that number grow. From 16% in the first 7 weeks, we'd expect that growth number to increase or accelerate over the half going forward.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [27]

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Okay. Great. And then just on your like-for-like gross profit growth, I mean, just doing the rough numbers, it looks like your overall gross margin at the moment might be tracking a little bit higher than the first half. Is that a fair assumption?

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Ashley John Gardner, Adairs Limited - CFO [28]

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Yes, because we've taken out that week of sale activity which comes with a high markup. And obviously, we're continuing to get the benefit of the ongoing work we've done on price and sourcing and so on. So that continues. That's not a one-off.

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

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Yes. And I think that's the key, right? So a lot of that -- a lot of those changes we made over the first half, which really helped Q2 as opposed to Q1. So they've got a lot of runway still to go, and we don't actually need to make more changes. We just need those changes need to annualize through price increases, cost reductions from suppliers. Depth of discounting we've got to continue to manage half-on-half, but some of those fundamental changes that we've made will see us grow gross margin over the second half at the full currency quite comfortably. And we think, obviously, with the currency hedging we've got in place, we're in a good position to manage that over the second half.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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Right. So I guess, your previous gross margin guidance used to be within the sort of 59% to 61% range. Given the initiatives you've put in place and notwithstanding the sort of currency impacts, which are clearly hedged in the second half, do you think that range sort of gets pushed upwards, at least in the near to medium term?

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Ashley John Gardner, Adairs Limited - CFO [31]

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No. I think you've also got to allow for the fact that we're going to provide consolidated accounts, and the Mocka business doesn't trade in that -- at that sort of gross margin rate. And you'll see that we've removed gross margin guidance, which has been a deliberate piece for us because of the changes in all the accounting standards. It's actually made it incredibly difficult to work out what a gross margin rate is in terms of a statutory number that we present to the market.

Internally, we think we can continue to tick along at those sorts of numbers that we once were out there. So we don't think yet at Adairs. Obviously, the blended rate will start to come down with Mocka not running at that sort of high 50s, low 60s margin. It's more like a high -- low 50s margin, but a high 40s margin. That's where that business will come in at. So that will also impact, obviously, the overall result.

But at Adairs, we're comfortable that, its range remains really where we operate in. And as we continue to tick along, we're getting more and more comfortable and confident that we're at the higher end of that range.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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Okay. Great. And then just on the new DC, you've called out $3.5 million of annualized cost savings from FY '22 onwards. Can you just provide a bit more detail where those cost savings within your sort of cost lines will be coming from? And I was just interested, are there any sort of scaling benefits with your arrangement with DHL such that if you were to take more room, you would get sort of more than that $3.5 million cost saving?

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Ashley John Gardner, Adairs Limited - CFO [33]

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Well, theoretically not, but as we take more, we'll pay for it. But I think where we're going to see the benefit is going to come through operational productivity gains. So we currently operate out of multiple DCs. We'll consolidate into one. Obviously, that comes with significant benefits associated with overhead reductions in management and so on. The single facility with DHL's expertise will allow us to put in enhanced mechanization and automation technologies, which will improve the flow of products, obviously, at a lower cost with less labor involved and improve the speed at which we can move product through.

So we expect to see the benefits coming through consolidation and new technologies, which aren't even sort of the leading edge. They're proven technologies around materials handling. And the last part would be designing those processes to integrate or facilitate an online and a store process in one so we get the full benefits of speed for both sets of customers.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [34]

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Okay. Great. And then sorry, one last question for me. Just could you provide some color on how the New Zealand business is going? And just with regards to the store openings in the next half, does that include in New Zealand?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [35]

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Yes. I mean, New Zealand has performed particularly well over the first half. We've got good sales growth. We've seen good margin growth. We know there's more room to go. We're really quite comfortable with how that business is tracking along today. The next step for us is, obviously, to open some more stores. We've got a few deals in the pipeline. I'm not sure they get done this half, but if not this half, probably early next half. So in that -- [it's the] case for couple of stores is probably one of those that may be in New Zealand, but it may also kick into the second half. So it won't have a big impact on this half regardless because it currently would be planned towards the back end.

But yes, the New Zealand business overall, we're starting to see the fruits of the work of improving the supply chain, better stock management in New Zealand. Team have continued to be more engaged with the Adairs’ business and understand the selling techniques and the like that we have there. So we're really quite comfortable with where that's at, and we think there's good upside over not too distant future. However, it will never be a big business. So we continue to see good growth, but there won't be any more than 10 to 12 stores over the next couple of years. So we're not sitting here suggesting there's a significant massive uptick in EBIT driven by the New Zealand business expansion.

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Operator [36]

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Your next question comes from Mark Wade from CLSA.

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

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Firstly, on the like-for-like sales, it's shown a really good uplift, I think, during the half. Just trying to unpack that a little bit, I'm just thinking could you talk to some of the initiatives that might have attributed to the improvement in the customer offer during the period? And lastly, where do some of the opportunities to improve that still remain?

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

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Yes. Well, I think keeping our focus on products and thinking about what product we wanted to, in particular, mix, we paid a lot of attention to where we wanted to sell, what we wanted to sell and how we would construct that offer and construct that range. So those 2 things, which are quite hard to articulate when you're thinking about spreadsheets and the like. But the guys did a great job on delivering a range that really resonated with the customer over Q2, in particular.

And we knew it was coming. We picked the trends. The trends were there. We delivered to those trends. Those trends continue into the business going forward. We're not seeing significant changes in some of those key trends, which have been probably aimed at color without real pattern. So there's been a significant change in the consumer over that period that they like color, but they're not all that interested in high pattern as part of that color mix.

So that, combined with thinking about how we drive a higher average item price, has definitely helped drive those like-for-like growths over that back half. And as a business, we continue to see how we can improve season-on-season, year-on-year and take those lessons and apply them. So we knew we had a good opportunity in Q2 if we executed well on product. We saw great work in the Kids range in particular and across the Kids linen. We saw some terrific results from some licensed product and some collaborations. So for instance, the Frozen piece and collaborating on that with Disney in line with the release of the movie delivered some great sales across our Kids range. We also saw the guys in the Kids area do a lot of great work on gifting around that key Christmas period, and they've got some terrific results out of those sorts of products.

The guys in bed linen delivered a terrific season. We knew we had good opportunity in there. And again, they really had a high focus on fashion colors. So for those who are interested, it was things like mustards as well as clay and terracotta style colors that actually we thought would deliver great results, indeed, across the season.

So those continue. I think the trends -- we always get nervous with the trends, and we're really seeing a big change in trend. This half, we don't see a big change in trend. Color remains the key element of it and -- together with texture. And then also continuing our thoughts around our expansion categories and what other opportunities are within those, we see good growth coming out of a number of those expansion categories over this half, whilst the Kids team probably have a bigger challenge in making sure they continue to deliver growth against some really good numbers from prior half. But so far so good.

So I think we've got good opportunity. And as far as risk goes in terms of changing trends and seasons, we feel like we're pretty much on track this half, and we don't have a significant shift that we're having to manage over that time.

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

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It sounds like all that product rather than doing around the staff training. You alluded to something in New Zealand around engagement and how they source. Okay. Fair enough.

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [40]

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Yes. It's largely product, but you'll find that when we get product right, the team are more engaged. And when doing -- there's interesting things coming through all the time. There's a real focus on how we coordinate that product across a range of categories. And then our training comes back to that team around, right, well, remember, these cushions go with this bed linen, how do we build a basket versus just sell the bed linen.

So a lot of that training has gone back to -- yes, it's really Retail 101 on the basics, but making sure that as you've always got changing team members out there in the retail store land, how do we make sure we continue to develop and evolve that training so they've got all the tools in their toolkit to make sure they deliver a great customer experience and that customer can go home and create the entire look in their house.

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

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No, I agree. It's Retail 101, but that at its heart is what makes the difference at the end of day. A good retailer like yourselves and some of those are not so fortunate.

We touched on New Zealand already. Last one was just on the general branding strategy. I don't know if over the years you've tried different store names like online Home Republic. I think that's still a couple of stores now. But then within the store, you've tried different sub-brands and then you mentioned this Mark...

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [42]

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Mark Tuckey?

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Mark Wade, CLSA Limited, Research Division - Research Analyst [43]

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Tuckey. I beg your pardon, Mark Tuckey brand is coming as well. So I'm just trying to understand that brand strategy. If you can elaborate on that, that would be terrific.

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Ashley John Gardner, Adairs Limited - CFO [44]

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There's probably a few elements to it. That's -- it's never easy, a brand strategy. But what we're actually aiming on doing more and more is thinking about what sub-brands belong in Adairs and what sub-brands we can start to disappear and don't resonate with the customer. So we always start from the customer what brands do they recognize, what brands we think need to exist within the business. So what we're aiming...

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Operator [45]

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This is the conference operator. We have temporarily lost connection with the speaker line. Please continue to hold, and the conference will recommence shortly.

(technical difficulty)

(Operator Instructions) We now have the speakers back online. Mark Wade, you're still in the Q&A session.

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Ashley John Gardner, Adairs Limited - CFO [46]

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You there, Mark?

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Mark Wade, CLSA Limited, Research Division - Research Analyst [47]

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(technical difficulty)

really dig into the brand strategy. And I was just trying to reconcile the different elements that we've seen kind of come and go over the years, and you're saying your focus on the consumer starting out with what resonates with them?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [48]

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Right. I didn't notice that we dropped out. I gave quite a detailed answer to that. Now I've got to repeat it, but that's all right...

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Mark Wade, CLSA Limited, Research Division - Research Analyst [49]

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We can catch up after -- in a couple of weeks, if you like...

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [50]

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Yes, okay. I'm happy to...

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Mark Wade, CLSA Limited, Research Division - Research Analyst [51]

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If you can touch on the high elements, if you like and we can discuss more details...

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

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Well, effectively, if you think about Mark Tuckey, that's a brand we're adding in as a sub-brand, but at the same time, we're taking a bunch of brands out in terms of those sub-brands. And the history of the business is, we were selling third-party brands for a long time, and over the last 10 to 15 years we've, obviously, removed those third-party brands from the business. And in some instances, a sub-brand matters and adds value and in other instances we think it doesn't really add value. So what we're working on is an overarching brand strategy and where we think a brand adds value to the customer and adds a reason to be. So you think about something like Mark Tuckey, it's a premium product that he produces today made in Australia bespoke furniture with a real sustainable element to it. We will leverage what he does today and how do we bring that into the business. So if you think sustainability, you think about premium product and you think about a real concept of thinking about long-lasting pieces, then Mark Tuckey adds value to that and that's why we think it's a great addition to the business.

There's some other brands within the stores that we think we can start to deleverage and disappear because the other thing with your digital world and all the rest of it is if you're going to run a sub-brand, it almost needs that additional support in terms of our website so people can kind of understand why it exists and all the rest of those sorts of things.

So there's a number of elements to our brand strategy, but what you'll see over the years is, I think we will reduce the number of sub-brands that exist within Adairs and any that we add in will have a real purpose to be.

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Operator [53]

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

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [54]

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Just firstly, if you look at your second quarter, obviously, very strong comps and certainly an acceleration. I'm assuming the market you operate in didn't grow by circa 10% in the second quarter. Is it mainly the department stores you're still taking share of?

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

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Well, it's hard to tell, Jo, because it's difficult, obviously, to get detailed numbers. I think in the second quarter, we probably took share of a number of people if we're honest. I agree that the market wouldn't have grown at that sort of 8% to 10% that we saw us grow at. But what we did see over that period was some changes in promotional activity. If someone like Bed Bath, Sheridan continued to discount significantly over that period and are starting, obviously, to anniversarize some of those ongoing discounts, then we would expect that we probably took some share from department stores. So I think the product was pretty good, and I think we would have taken some share from a number of people. And I think the growth we saw particularly in our Adairs Kids product, that probably came from a consumer trading up out of some of the discount department stores. So we might have even managed to take some share from those guys, given that's our biggest competitor in that Adairs Kids space.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [56]

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Okay. Great. And just the comps in the second half, today, we've talked a lot about that. But sorry, if you exclude that 1 week, you ripped that last week off the sale, were your comps pretty well on trend with what we've experienced historically, 4% or 5%?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [57]

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Yes, I think that's fair. Yes.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [58]

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Okay. And just I might have missed this, sorry, on Mocka in the second half, where that growth is a little bit lower than what we might have been thinking, but you're, obviously, cycling an anomaly. So has that still been trending around 20% to 30% growth excluding that?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [59]

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Yes. As we said, we expect that number to grow over the half. So yes, I'd expect to see the growth accelerate. And with the exception of some of the weeks that we were trading up against, we're starting to see that come back towards those numbers.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [60]

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Okay. Cool. And just on the CODB into the second half, so we're now cycling a lot of that investment, as I understand. So should we think about that as a pretty flat proposition in the second half, percentage of sales-wise?

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Ashley John Gardner, Adairs Limited - CFO [61]

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Yes, it might be a little bit less, but it's substantial -- that is substantially true.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [62]

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Okay. Cool. And I guess just lastly, I don't -- I couldn't see anywhere the reiteration of $100 million online target. Just your thoughts there. And any -- would you care to comment on time horizon?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [63]

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Look, it's still there. It's still our target internally. We've bounced it around. And I think that time horizon that we gave at the time, which was within 2 to 3 years, so, what are we, 6 months into that 2 to 3 years, I think that's still realistic for us to continue to chase. Good growth first half again. We don't see any reason that we're not going to continue to grow the digital business at Adairs and a lot of the strategies are seeing us expand product offering in online, in particular, as opposed to trying to squeeze all this extra product into stores. So we see that continuing to go and I think the 2- to 3-year time horizon remains a good target for us to chase down.

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Operator [64]

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Your next question comes from John Hynd from Wilsons Advisory and Stockbroking.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [65]

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Just following up on the previous question around competitors. Are you starting to bump up -- or hear -- or feel like you're bumping up against players like TPW with some of your range?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [66]

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We probably have been for a while, to be honest. They've got quite a wide range. So yes...

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [67]

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I mean, obviously, you've seen the material that sort of expanded very -- I guess quite rapidly in the last half. I'm just wondering if you're feeling any of that?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [68]

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Not specifically. I'm not sitting here thinking that particular categories are being particularly impacted by what they're doing. I think the key for us, as we've always done, is focus on delivering that great product. We're certainly interested in what categories are growing for them and what opportunities because at the end of the day, I see them as a good competitor, and they're clearly focused on home, right? So the 2 of us are going to go head-to-head in the digital space for many years to come. So it's always important to know what they're doing and what's working for them and their subcategories.

But we've got a real focus on how do we just continue to curate the look, make it easy for the customer, focus on the customer experience and drive all of those elements. So we probably look a little more on what's the trend look like in home and how do we capitalize on that trend and provide a curated look rather than thinking that our strategy is a massive width of offering that TPW are definitely driving through their more marketplace style strategy.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [69]

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Got it. Okay. And on the DC, again, Ash mentioned that there is, obviously, going to be an increased cost profile there. Is the $3.5 million you mentioned, is that a net cost saving? Or can you give us some color on what the cost will look like moving forward in '22?

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Ashley John Gardner, Adairs Limited - CFO [70]

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In FY '22, our comparable cost base will be $3.5 million less than what it would otherwise be if we continue the current model. So taking our view on forward growth in stores and everything else, and -- for all intents and purposes, it's pretty close to what most of that is what we would say we did it today, but we can't turn it on today. It's one-off costs that we'll incur as part of the transition through FY '21, which will be in that range of $3.5 million to $4 million. They'll be one-offs and nonrecurring, and they largely relate to the cost of transitioning into the new facility, having a tail of rent on our existing facilities because they expire post that completion as you would expect us to do and then bringing teams and other key aspects of the facility up and running, along with paying DHL during that commissioning period for various other fixed costs that, that will incur.

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Operator [71]

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Your next question comes from [Jack Strudwick].

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Unidentified Analyst, [72]

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Congratulations on the good result in the half. I've just got 2 questions. One on the Linen Lovers. And you've obviously been winning market share. How much has that grown in the first half?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [73]

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Well, Linen Lovers has grown as a percentage of sales over the first half. So it's -- circa 75% to 80% of our sales comes from our Linen Lovers. So when you're seeing the growth in, obviously, the overarching sales, Linen Lovers has also grown as a percentage of that. So it's growing faster than our underlying growth.

We deliberately don't publish those sorts of numbers and the database growth and all the rest of it on the basis that we prefer not everyone to know exactly how that's going given how important it is to our business.

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Unidentified Analyst, [74]

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Yes. Sure. And the other question was, you had 1 upsizing and 1 refurbishment. And you've said before that like-for-like sales growth of those stores was about 20% increased. Is there much scope to do more of those? Or are you more looking at new stores?

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Mark Ronan, Adairs Limited - MD, CEO & Executive Director [75]

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No, I think upsizing remains a real opportunity for the business. And what we're seeing more and more is, as we do them, landlords' understanding the benefits they bring to their centers, their understanding what they look like and are pretty excited by what they've seen and what we are now seeing. Once upon a time was us explaining to a landlord what they were going to get is far more now us talking to a landlord about where do we want them as opposed to every man and your dog calling us and wanting to expand our stores and what that means for them in terms of their CapEx contribution and potential rent that they're going to get on a larger side.

But we are definitely seeing more traction in that space and getting lots of opportunities put in front of us, and -- which is great. It allows us to pick the eyes out of those stores, where we think it makes sense, where we think the capital investment from Adairs plus the uplift in sales and the operating model going forward all contributes to a more profitable store. But we see upsizing. I think you're going to see a lot more of them come through. We're actually in the process today of the 2 that are underway in this half already and will reopen in the next couple of weeks. So we're excited by that opportunity and think that -- as we've said in the past, we think the GLA increase at Adairs will definitely far outstrip our number of stores percentage increase as we do those larger, more inspiring stores and upsizing is a big part of that.

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Operator [76]

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(Operator Instructions) Your next question comes from Aaron Yeoh from Goldman Sachs.

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Aaron Yeoh, Goldman Sachs Group Inc., Research Division - Equity Analyst [77]

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Sorry, guys. I actually jumped back in, but my question has been asked, so I'll jump back off.

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Operator [78]

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(Operator Instructions) There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.