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Edited Transcript of LOV.AX earnings conference call or presentation 18-Feb-21 11:30pm GMT

·44 min read

Half Year 2021 Lovisa Holdings Ltd Earnings Call MELBOURNE Feb 19, 2021 (Thomson StreetEvents) -- Edited Transcript of Lovisa Holdings Ltd earnings conference call or presentation Thursday, February 18, 2021 at 11:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Chris Lauder Lovisa Holdings Limited - CFO & Company Secretary * Shane Roland Fallscheer Lovisa Holdings Limited - MD & Executive Director ================================================================================ Conference Call Participants ================================================================================ * Callum Sinclair Macquarie Research - Analyst * Josephine Little Morgans Financial Limited, Research Division - Senior Analyst * Julian Mulcahy Evans & Partners Pty. Ltd., Research Division - Executive Director of Small Caps * Mark Wade CLSA Limited, Research Division - Research Analyst * Sam Haddad Bell Potter Securities Limited, Research Division - Industrials Analyst * Sam Teeger Citigroup Inc. Exchange Research - Research Analyst * Wilson Wong Jarden Limited, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [1] -------------------------------------------------------------------------------- Thank you. Good morning, everyone, and thanks for taking the time to dial in. On the call today, you have myself, Shane Fallscheer, Managing Director; and Chris Lauder, our CFO. As you are aware, we published our half year results to the ASX this morning, so we would like to talk you through those results. I will now do a page turn through the presentation, and we're happy to take any questions at the end. If we turn to Page 4, we will talk through some of the details of the first half of FY '21. After a challenging start to the financial year, with markets going through various stages of closure due to the impact of COVID, we saw an improvement in sales through the second quarter to deliver comparable store sales for the half year of 4.5% in minus, with total sales down 9.8% for the half. Our cost of doing business was well managed, finishing at 50% for the half, delivering a half year EBIT, which was down 24% on the year prior, to $30.9 million. This is excluding the impact of the new lease accounting standards. And for the sake of clarity, all of the numbers we will talk to today and included in our presentation are after removing the effect of the new accounting standards, so that they are more easily comparable with prior years. Our global rollout remains a key focus with a net 25 new stores opening for the half year. And in the U.S., we now trade from 62 stores across 15 states. Our European expansion has been fast-tracked with the acquisition of beeline's European retail business. And we are ready to start to take on these stores commencing the 1st of March, with the first market being Luxembourg. Cash flow from operations was $52 million and cash conversion at 131%, reflecting tight cash flow management and inventory control as well as the impact of rent deferral. At half year end, we held $42 million of cash and no debt. As a result, the Board have announced the resumption of dividend payments after no final dividend was paid for FY '20, and we are pleased to be paying an interim dividend of $0.20 to be paid in April. If we turn to the financial overview on Page 5. As I noted earlier, revenue for the period was down 9.8% with comparable store sales also down 4.5% for the half. Gross margins were lower, with CODB well managed to come in flat on last year at 50% of sales, and this resulted in our EBITDA being down 15% to $39.6 million. Depreciation was higher as a result of the CapEx spend in prior years on new store openings. And as a result, EBIT finished the half down 24% to $30.9 million. Pleasingly, despite the continued disruption to our business throughout the period, we were able to finish the year with a very strong balance sheet position. Turning to Page 6. We have tried to make the impact of COVID on our store network clearer for you. As you can see, our store network was impacted by a number of temporary closures throughout the period, with the Victorian market closed for approximately 3 months from August to October, followed by closure periods in the U.K. and France in November and December. If we turn to Page 7. We've spoken to the sales impact from COVID. And whilst our sales for the half were down overall, we did see an improvement in our sales trends through the second quarter, delivering positive comparable store sales for the quarter off the back of a strong Christmas trading period. As we've said previously, the store closures we have had to deal with over the past year has given us a strong impetus to drive online, and the investment made in our digital platform has helped us to offset some of the lost sales from our physical stores, with total online sales up 335% on last year for the half. On Page 8, you'll see our sales by region. Whilst our sales are still down on last year as a result of COVID, the Australian and New Zealand markets have been our strongest performers in the period with faster recovery than other markets as a result of less restrictions in place. This allowed these 2 markets combined to deliver strong positive comps for the half. Our Asian markets were the first to face disruption from COVID, and that had continued to be the slowest to recover as tourism levels and the overall restrictions on retail trading impact heavily on mall foot traffic. Europe has again impacted -- been impacted by COVID, with the bulk of the U.K. stores closing again in December, impacting our Christmas trading period. And in the U.S., our stores continue to be disrupted. However, total sales are continuing to grow as a result of continued new store openings. Turning to Page 9. Gross profit was $113.4 million at 77.2% gross margin. If we looked at our margin on a constant currency basis, it would be tracking at 77.8%, and this reflects the impact from a lower USD hedge rate in this period. The remaining decrease in margin is a result of our decision to maintain higher levels of inventory provisioning at the end of the half as a result of the lockdowns experienced across a number of markets late in the half, and these lockdowns are continuing. Gross margin was also negatively impacted by an increase in freight costs due to COVID and the general shortages in freight availability. If we turn to Page 10, we'll talk to our cost of doing business. A strong focus on store wages during the half enabled us to deliver a lower store wage percentage than prior year, which was a pleasing outcome, especially given the lower sales over the period. Our refocus on our support cost structures implemented in FY '20 to combat COVID also helped to keep our cost of doing business under control and helped offset some of the one-off costs associated with the beeline acquisition. Additional to this, we have been able to negotiate improved rent terms as well as abatements across a number of stores during this period that also contributed to our strong cost of doing business management. I'll now hand you over to Chris Lauder, our CFO, to talk through cash flow and the balance sheet. -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [2] -------------------------------------------------------------------------------- Thanks, Shane. Turning to Page 11. You will see that despite the ongoing disruption to our business and associated lower profits during the period. Cash flow was again strong with cash from operations before interest and tax of $52 million for the half and operating cash conversion of 131%. We were able to again keep tight control over our working capital with inventory well managed, and continued rent payment there also assisted in delivering this position arising from situations where we have agreed such deferrals with our landlords as well as where rent has been withheld pending finalization of the statements, both of which we expect to reverse in the second half. Inventory continues to be well managed through the first half with lower closing stock levels than prior year, even with a net 21 more stores trading at the same time last year. Capital expenditure for the period was $6.8 million, predominantly from new store fit-outs and refurbishments on existing stores upon lease renewal. This represents a reduction on prior year of CapEx spend with 29 new stores built in the period compared to 55 stores built in the first half last year as well as a reduction in the number of store refurbishments undertaken as we temporarily pulled back in this area to conserve cash and focus our energy on trading our stores through the period of disruption. Whilst CapEx for the half was lower than prior years, we still saw a large increase in depreciation expense as the impact of prior year CapEx spend flowed through. These items combined helped to deliver a closing net cash of $42.5 million, a net $22 million increase on the position of June 2020, with no debt at the end of the period. Turning to the balance sheet. On Page 12, you can see that it remained strong, which has allowed the Board to announce an interim dividend of $0.20 per share payable in April, franked at 50%. You will recall that in the prior year, the Board elected to defer the payments of the interim dividend, which was ultimately paid in September, with no final dividend paid in relation to FY '20. So it's pleasing that our strong balance sheet position has allowed us to return to the payment of dividend, with interim dividend representing a $0.05 increase on the interim dividend in the prior year. As we've said previously, the Board will continue to assess dividend levels each half year and determine the appropriate level of dividend based on profitability, cash flows and future growth CapEx requirements in the context of prevailing economic conditions. The Board do not currently have a specific dividend payout ratio and will continue to base its dividend on the cash flow needs of the company and the structure of the balance sheet. I'll now hand back to Shane. -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [3] -------------------------------------------------------------------------------- Thanks, Chris. If we turn to Page 13, a quick update on store numbers. The key driver of future growth for Lovisa continues to be our international store rollout, with 66% of our store network now trading outside of Australia. We finished the period with 460 stores trading, with the next 25 new stores opening during the half year, which comprise of 29 new stores opening and 4 stores closing as we continually optimize our store network. The rollouts in the U.S. and France continued through the first half. And whilst this slowed as a result of the COVID disruption, we now have 25 stores trading in France and 62 in the U.S. across 15 different states. Our negotiations for new sites have been slowed, both by having to negotiate rent abatements and reductions due to COVID across numerous markets and the landlords' reluctance to agree on new long-term deals that both parties would be comfortable for with new location. That said, we remain confident in our expansion plans, and we continue our diligent approach in the selection of new store locations at appropriate rent economics. Turning to Page 14. I will talk to the progress we have made in recent times in relation to digital. Our focus on our digital capabilities accelerated during the initial COVID lockdown period in FY '20, and this has continued with a sales growth of 335% for the first half. The digital channel remains an important part of our global strategy, critical to providing our customers with a full range of shopping options that they're looking for. We continue to invest in support structures to drive ongoing growth in this area and remain focused on maintaining the profitability levels of our online sales. We'll continue to enhance our digital capability with current initiatives, including a new dedicated European warehouse and increasing our digital storefront to 6 new European markets, aligned to our acquisition of the retail stores in those markets. Turning to Page 15. I will now talk in more detail around the beeline acquisition we announced in November. As previously discussed, in November, we signed a deal to acquire the European retail business of German accessories and fashion jewelry wholesaler beeline, consisting of retail stores across 7 European countries, 6 of them new to Lovisa as well as adding additional stores to our existing French footprint. Under this deal, we will convert the existing beeline retail stores, currently branded as either SIX or I AM, to Lovisa and trade them in line with our Lovisa stores globally. Whilst there were 114 stores in the beeline retail network, after rationalizing the portfolio of stores, we currently anticipate trading from around 90 of these stores, with the remaining stores either having a lease expiry or lease break having already taken place or to come in the near future. We have also added to our leasing capability in the European market with a new leading executive joining us in Germany to complement our leasing team in France in order to continue to source new locations. We will initially focus on the markets that we are soon to have stores operating in and hope to add to our portfolio of stores in these markets in the near future. We take possession of all of the beeline stores from March to May this year, with the Luxembourg stores being refitted at the start of March. As previously announced, the purchase price for this business is EUR 70 for the shares. And we want to clarify this because there seemed to be some confusion when we announced this deal. Further to this, it was negotiated that at the time of the takeover of stores, that there is a requirement that the business contains EUR 11.8 million of cash at handover and no debt, resulting in beeline effectively paying us EUR 11.8 million to take on their store network. We expect to incur approximately EUR 6 million in cash outflow to fit-outs and stock out these stores with the transaction, therefore, cash flow positive immediately. As a result of the much larger European business following completion of this transaction, we are also investing in additional support team in both our global support office in Melbourne as well as in Cologne, Germany, which will provide the platform to drive continued growth in these important markets for us, with this transaction giving us the opportunity to drive a number of new markets that paid. On Page 17, I will talk to the trading update and outlook for the coming financial year. Trading for the first 7 weeks of the second half has seen continued strong performance from the Southern Hemisphere market and challenging trading conditions in the Northern Hemisphere with comparable store sales for this period of positive 12% like-for-like overall, a continuation of the improvement in the comparable store sales in Q2, with Australia and New Zealand leading the way with strong comp sales. The acquisition of the beeline retail business is expected to be completed as planned from March to May this year, and we continue to focus on opportunities for expanding our store network. However, aside from the addition of the circa 90 beeline stores, our store opening progress is expected to be slower in the short term, as discussed previously. The store network is currently at 460 stores globally, excluding the beeline stores that are about to come into the portfolio. Our balance sheet remains strong, with available cash and debt facilities supporting continued investment in growth. We currently have 42 stores in the U.K. and 23 stores in France closed temporarily due to the continued government lockdown, with stores in Malaysia now back open after being close for a period of 4 weeks. We've also experienced the impact of short lockdowns in Australia and New Zealand over the past 7 weeks. However, all stores are now currently back to trading in those markets. As a result of the current uncertainty in the global economic environment, we are not in a position to provide any further information in relation to our outlook for the business. So in summary on Page 18, our sales levels have shown a solid recovery through Q2 after the challenges faced through the first quarter. However, some markets continue to remain heavily impacted by COVID. We are pleased with the progress we have made in digital with increasing our contribution from online sales, and we're also able to control our CODB well during the period, which has enabled us to continue to invest in building the platform for future growth. Our international expansion continued through the period with 25 net new stores opened, and the opportunity to accelerate our European expansion with the beeline acquisition bringing us 60 markets all at once. Our continuing strong balance sheet position has allowed for the announcement of an interim dividend of $0.20 per share and leaves us in a strong position to again move forward with our global growth plan. So with that, I want to thank you for your time today, and we're happy to open that up to any questions. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question today comes from Jo Little from Morgans. -------------------------------------------------------------------------------- Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [2] -------------------------------------------------------------------------------- Just firstly, you mentioned that inventory provisioning. So it sounds like you went pretty hard there, particularly in the Northern Hemisphere, I suspect, as we went into further lockdowns. I guess how much did that contribute to the GM step-down in the period? And how hard do you think you'd go on, on that? -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [3] -------------------------------------------------------------------------------- Thanks, Jo. Chris here. So I think, from memory, the constant currency margin was down around 100 basis points. So probably around half of that is the provisioning impact. As you said, with those markets closing just after the end of the half, we [focused trading] to provide a little bit extra to make sure that we covered for that stock that's sitting there and aging, unable to be sold at the moment. -------------------------------------------------------------------------------- Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [4] -------------------------------------------------------------------------------- Okay. That's great. And I'm assuming you accrued full rent in the Northern Hemisphere where you haven't kind of finalized any abatement. And therefore, should we assume we'd get some reprieve this half or into FY '22 as those deals are concluded, should you execute on them? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [5] -------------------------------------------------------------------------------- Jo, Shane here. Yes, look, we -- if we haven't finalized deals with landlords, then we've accrued the full rent. Obviously, working towards locking down those negotiations, we're fortunate enough to get -- with our strength in Australia and good relationships with landlords, we managed to get those down -- locked down in prior periods. But we're sort of working through the U.S. and the U.K. in particular, so any discounts or abatements we achieve in those markets would then see a reversal of the difference back on to the P&L in the next 6 months. -------------------------------------------------------------------------------- Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [6] -------------------------------------------------------------------------------- Yes. Great. And Shane, look, you've said that the store rollout will slow, and understandable, over the balance of the calendar year. I guess you did 25 in the first half, 90 in beeline and maybe we'd get another few in this half, so maybe say 120 new stores, including beeline in '22. How far should we -- I know you're not giving guidance, but how much should we assume that kind of slows down from an organic perspective? I mean would you be happy if you got kind of half that number in FY '22? Or is it just too early to say? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [7] -------------------------------------------------------------------------------- Yes, it's probably too early to say because the lag coming in new stores in the Northern Hemisphere is probably longer than we are used to in previous reporting periods with Asia and Australia. But we're -- I mean where we sit today is the landlords are probably more distracted than the retailers or, in our case, I can only talk for ourselves, at sorting out abatements, rental discounts, lease expiries because, of course, any retailers who got lease expires at the moment are sort of renegotiating their rents. But we do believe that as sort of the sun comes out, so to speak, that everyone has to start looking further down the road at vacancies and incentives. And we're a willing negotiator of new locations, all being that we need to be prudent at the moment with what we're negotiating because we're in a bit of a bubble in Australia, of course, with the challenges that the rest of the world are facing. So as the weeks go by, months definitely, but as the weeks go by, and there's a bit more clarity about what everything is going to look like and, hopefully, that this COVID is in decline in the Northern Hemisphere, then it really turns our mind to getting more deals done. As we discussed earlier, we've got leasing execs about to start on the ground in Germany, on the ground in France, on the ground in America. And the landlords are aware that we want to get deals done. But we do think it's probably going to take another 3 months for us to have a clear view on what -- how fast we can get back into our rhythm. We know we'll get back into our rhythm. But it's the willingness of landlords to come to the tables and acknowledge there are some short-term issues to getting deals done that's preventing us moving faster. -------------------------------------------------------------------------------- Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [8] -------------------------------------------------------------------------------- Okay. And just lastly, then I hand over to somebody else. Just on beeline, incredible terms to that acquisition. I guess Chris and Shane, any further insights or thoughts on the quality of the deal you've done a few months down the track? How many [pull] is this business for you? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [9] -------------------------------------------------------------------------------- Yes. Look, I mean, we'll know soon enough because we step into these stores in the next few weeks. The positive is these stores were already trading with -- 60% of their offer was fashion jewelry, and 40% was other products. So the benefit we have is we're taking over stores that don't need full refits because, of course, the raw cost of building 100 stores from scratch is a huge number in itself. So we're budgeting not to have to spend that much money on each store to get them transformed into a Lovisa store that will take us from the short to the mid-term. And then as we find our feet, we'll go back to landlords and renegotiate new terms and do full fit-out in their stores. But the -- for those of you that have followed our stock through a period of time, the hard part for us has been to get that foothold of the first 3 to 5 stores in each market, and that can take years. So to fast-track the sort of footstep into these markets with a considerable number of stores, I think, it's going to prove to be a big benefit in the long run. And again, we're already talking to landlords about filling in the gaps in those markets. So yes, it's in front of us to get this done now because we now have to transform 90 stores, in 2 months, into Lovisa and get them up and trading. And we've got aggressive targets -- internal targets on how quick we can turn those stores around to Lovisa stores. So yes, the next few months are going to be interesting for us. But the pleasing thing is we've got a very capable team in Europe. Obviously, in normal times, half of our crew would be up there to help, but we're pleased with the quality of the crew we've got on the ground in Europe to get this transformation of store done. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Your next question comes from Callum Sinclair from Macquarie. -------------------------------------------------------------------------------- Callum Sinclair, Macquarie Research - Analyst [11] -------------------------------------------------------------------------------- Just one or 2 for me. Just on the gross margin side of things, just the hedge rates when they roll off in the full year, if you can just provide some clarity on that. -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [12] -------------------------------------------------------------------------------- So Callum, say that last bit again, so when they roll off, you said, in the full year? -------------------------------------------------------------------------------- Callum Sinclair, Macquarie Research - Analyst [13] -------------------------------------------------------------------------------- Yes. So when -- obviously, the hedge rate in the first half was obviously lower than spot, so just when those hedges roll off and you start to get a bit of a benefit from the high Australian dollar. -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [14] -------------------------------------------------------------------------------- Yes. So we won't -- I mean the current spot is up in the 77% range, and it's only really just pushed up there. So obviously, we take hedging over time, and that gradually increases as we average up. So for the remainder of the second half, yes, our average hedge rate would be a little bit higher than what it was in the first half, but it won't be up to sort of 77% levels. So we won't see that until it's '22 that would come through. Obviously, it has to stay there for a little bit of time to average out up to that sort of level. -------------------------------------------------------------------------------- Callum Sinclair, Macquarie Research - Analyst [15] -------------------------------------------------------------------------------- Yes. So it's only a small benefit in the second half. It's more FY '22, if we stay there? -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [16] -------------------------------------------------------------------------------- That's right. -------------------------------------------------------------------------------- Callum Sinclair, Macquarie Research - Analyst [17] -------------------------------------------------------------------------------- Yes. And then just on the tight cost control during the period. Just wondering how much of the support cost side of things is permanent or whether you add some of the savings back as things recover in the Northern Hemisphere. -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [18] -------------------------------------------------------------------------------- Yes. I think that's a probably good way to look at it, Callum. Obviously, we took a lot of action through FY '20 to reduce the cost base when COVID really hit. We have reinvested a fair bit of that in support structures to run the much larger European business. So as I mentioned earlier, that we've put a lot of heads on here in Melbourne as well as in Cologne in Germany to make sure that we get that down effectively. So we're running the business to try and hold that cost of doing business percentage consistent with where it was pre-COVID. And then, obviously, start to get that down if we can. There's obviously a lot of investment we have to make to deliver these sort of things. Are you there, Callum? -------------------------------------------------------------------------------- Callum Sinclair, Macquarie Research - Analyst [19] -------------------------------------------------------------------------------- Sorry, I was on mute. Just I know Jo already asked on the store rollout, but just with the [rollout] if the beeline acquisition, if landlords do sort of come to terms and reduce their rents down to what you see as appropriate, would you be happy to sort of step into that and sort of grow stores or roll out stores faster than what you're indicating? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [20] -------------------------------------------------------------------------------- Yes, I think -- I mean to give clarity there, the landlords are acutely aware of what we're looking for, as any retailer would be looking for, to open in this environment. In simple terms, what Lovisa is looking for is them understanding that we're not out of the woods, in the Northern Hemisphere especially, and there needs to be some protections around entering and opening stores in the middle of COVID. And that's sort of like a new -- that's a new thing for everyone to come to terms with. So the landlords are aware of what we want. We're ready to go. I think over time, the landlords will come to terms with what we're looking for -- and probably not what we're looking for, but what most retailers, especially in Northern Hemisphere, would be looking for to expand in this market. So I don't think it will take years, but I don't think it will take weeks. So it's somewhere in between there where the meeting of the minds will take place because if there's vacancies in shopping centers, it's no good for anyone. But it's just probably -- obviously, doing deals outside of the norm has an effect on valuations of shopping centers and so on. So it's sometimes bigger than getting a deal done that works for Lovisa and works for the landlord. So I think that's just going to take a bit of time to wash through. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Your next question comes from Mark Wade from CLSA. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [22] -------------------------------------------------------------------------------- Just starting with the second half to date figure you put out of 12% like-for-likes. I mean that's an outstanding number. What would it be, Chris, if you -- unfortunately, if you included the stores that are closed in there, so the so-called unadjusted number, would it be more like 0? -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [23] -------------------------------------------------------------------------------- Well, we don't call out those numbers specifically. So you can probably work backwards and work it out using some averages -- average store sales, so yes. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [24] -------------------------------------------------------------------------------- Okay. And moving on, and maybe one for Shane. When you're thinking about the brand's longevity, what are some of the real critical factors in there given -- I mean the brands are, what, 10 years old or so? And just what's going through your mind as you think about the next 10 years? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [25] -------------------------------------------------------------------------------- Yes. Look, I mean, that's an interesting question because there was a similar question that we got asked for when we actually went to market and became a public company. We are -- I mean we're fixated on our brand. We only do fashion jewelry, and that's all we do. That's what we worry about. So it's all about quality of product, quality of offer to our customers and not letting them down, so every experience they have in the Lovisa store, be it a physical store or online, as being a good one. So we -- our simple belief is if we can stay true to our product offering and be first in market with great pricing to our customers that we'll continually grow our customer base. And we really just try and keep it as simple as that, keep the store economics in each store tight. And we expand where we see appropriate opportunities. And we don't expand -- we sort of probably don't absorb the pressure that sometimes comes upon us from the market or others to expand at a rapid pace or any pace that anyone else wants. Every deal has to stand up for itself. So we've got tight disciplines in our leasing and then tight disciplines in our buying and product selection. And those 2 things, combined with some strong operational discipline in the field, has allowed us to achieve what we've achieved to date. So if we stick to those basics, we should continue to see achieve a good outcome in the future. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Your next question comes from Sam Teeger from Citi. -------------------------------------------------------------------------------- Sam Teeger, Citigroup Inc. Exchange Research - Research Analyst [27] -------------------------------------------------------------------------------- Can you talk about your ability to get products out of China now given some of the freight delays going on? And I guess how many weeks at the moment is it from design to getting the product on the shelf in-store to sell? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [28] -------------------------------------------------------------------------------- Yes, Sam, it's probably -- we had some challenges between -- well, recent challenges around the Chinese New Year, in just getting freight out. At one stage, there was a massive shortage of shipping containers ex China. But really, what we've seen over the last 6 months, in particular, is freight costs going up, supply and demand issues with getting freight out of China. So it's probably not the timing as much as the cost of getting it uplifted out of China and getting it around the world. In simple terms, because we airfreight the bulk of our products, because there's so few passenger flights going around the world, then the cargo haulers are basically in a good position or basically monopolizing the market of freight around the world. So from that point of view, we had seen our freight costs increase, and we assume they'll come back down as the supply and demand of getting freight around the world sorts itself out. As far as from design to shop floor, we're probably still in that 6- to 8-week turnaround from getting stock ordered to getting it into our stores. And then as we expand into Europe, those time lines, depending whether we airfreight to sea freight, may change slightly. So the timing hasn't changed much. It's the cost of getting it around is probably where we've seen the impact. -------------------------------------------------------------------------------- Sam Teeger, Citigroup Inc. Exchange Research - Research Analyst [29] -------------------------------------------------------------------------------- All right. Cool. And then what would be the key lessons that Lovisa has taken from Spain to ensure some of these new beeline markets will be successful and they don't follow the same path as Spain? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [30] -------------------------------------------------------------------------------- Yes. I mean Spain -- we're making progress in Spain. However, landlords took a sort of hard response. If you go back to sort of March, April last year, when those stores were closed, and again, don't quote me on the exact date, but early last year, calendar year, the response or the support from landlords were poor, so we closed those stores. So that's probably one of the main drivers of exiting that market. The ranging across each individual European market, we've got the team structure in place to manage -- I mean, at the moment, we manage 3 or 4 main buckets of products: Asia, Australia, America and Europe. So we'll have to adapt to the market changes and the nuances that we see in those European markets. But ultimately, we've got to get up and trading and start selling product and start taking a read of what the customers are buying for us to react to that. So I think we're in a slightly better position and with a bigger structure to -- if there are nuances that we need to adapt to, we will. One of the main drivers from Spain was just a lack of support from landlords at the start of COVID. -------------------------------------------------------------------------------- Sam Teeger, Citigroup Inc. Exchange Research - Research Analyst [31] -------------------------------------------------------------------------------- Got it. Okay. So there's nothing structurally wrong with Spain. So if the landlords came back and said we want to be more supportive, you could go back there again. -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [32] -------------------------------------------------------------------------------- Yes. We're probably not going to hurry back to Spain. Our sales were at the lower end of the spectrum from other markets, which is why we haven't expanded at pace. But yes, the catalyst was COVID, not performance. -------------------------------------------------------------------------------- Sam Teeger, Citigroup Inc. Exchange Research - Research Analyst [33] -------------------------------------------------------------------------------- Okay. Cool. And then just in terms of beeline, sort of the 24 closures, which countries have you concentrated in? And what's the risk of more closures than 24 if you kind of look out in the next 6 to 12 months? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [34] -------------------------------------------------------------------------------- I'll talk to the macro, and then Chris can sort of work through the numbers or talk to the numbers. So basically, we've taken over a portfolio of stores, and the average lease tenure with lease breaks is somewhere between 3 to 5 years. So at any one time, you've got roughly 20 or 25 leases in each year, giving us the option to either break a lease, end a lease, et cetera. And some of the bottom dwellers in those markets we've looked at, either a duplication in France, which is we're already there, or some bottom dwellers in other markets that we took a view that -- to sort of cut the tail off somewhat to ensure the rest of the stores performed strongly. So the stores that we're moving into have other ones that we believe has got a strong future for us. And so we'll get in and trade those stores. And again, once we get a trading pattern on those stores, we'll have a better view of what the long-term future look like for each of those stores. -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [35] -------------------------------------------------------------------------------- Sam, I think if you have a look at the table we've put in the presentation, if you compare that back to what we've put out when we announced the deal, you can see where the changes are, mostly in Germany and France, from memory. The bigger markets, obviously, Germany, there's a lot of stores there and lower trading ones where the leases are up, so we decided to not go ahead. -------------------------------------------------------------------------------- Sam Teeger, Citigroup Inc. Exchange Research - Research Analyst [36] -------------------------------------------------------------------------------- Okay. Cool. And then last question. I appreciate that you guys have indicated it's really the landlords, which are delaying the speed of the underlying rollout. But given this is going to be a big year of beeline integration, are you comfortable you could roll out a lot of stores, excluding beeline, if the landlords came to the party and executed on that and the beeline execution -- and the beeline integration, sorry? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [37] -------------------------------------------------------------------------------- Yes. Look, I mean the beeline integration, we've been working on it since last year, calendar year. And sort of there are pressure points on the business as we get closer to handover and then handover. So theoretically, our store leasing team, our store build-out team, once the stores actually get transformed to Lovisa, theoretically, their job is done. And then the operational team at store level, their function starts, which is, in my mind, the most important one to -- we're taking on a lot of the Beeline team in the stores. So their job then becomes the reeducation of how we do things around here at Lovisa and so on. So the capacity with our build-out teams and our store -- build-out teams that's around the world is there to take on more stores. But as I said earlier, it's -- I think it's going to take a bit of time for retailers and landlords to find a new norm and getting deals done, especially in the Northern Hemisphere as, hopefully, COVID starts winding back. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Your next question comes from Wilson Wong from Jarden. -------------------------------------------------------------------------------- Wilson Wong, Jarden Limited, Research Division - Analyst [39] -------------------------------------------------------------------------------- Can you just clarify how much of the decline in employee expenses in the first half was due to temporary store closures? -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [40] -------------------------------------------------------------------------------- So you broke up a bit there. What was the question again? -------------------------------------------------------------------------------- Wilson Wong, Jarden Limited, Research Division - Analyst [41] -------------------------------------------------------------------------------- So the decline in the employee expenses in the first half, how much of that was due to temporary store closures? -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [42] -------------------------------------------------------------------------------- Yes. I mean we called out a specific number on that. Obviously, there was a component of that because we still came down and went to paying them while they were furloughed or governments paying them well. But yes, I think we called out we've managed store wages well during the half and holding that percentage to sales in spite of lower turnover. So yes, I'm not sure exactly how to answer that question for you because we don't generally break out that level of detail. I mean our focus is on managing the store wage costs relative to what's happening in sales. And that's what we're able to achieve. -------------------------------------------------------------------------------- Wilson Wong, Jarden Limited, Research Division - Analyst [43] -------------------------------------------------------------------------------- Sure. Just on beeline, can you talk to the expected payback period of the range of beeline stores upon conversion? -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [44] -------------------------------------------------------------------------------- The structure of that deal is such that they paid us to take on that store network. So obviously, in doing that, some of the rents are higher than what we would normally pay. So in their own right, before that amount of money, that payback period is longer for those that basically releases that against the P&L over the lease term. We would expect to see the same sort of metrics that we see in our other more similar markets, so the U.S., U.K., France. So you're really talking in a normal store -- with a normal store fit-out cost, it should be in that sort of 2- to 3-year range, at most. But in this case, we're not really fitting anything much to fit-out the stores, so it could be a bit shorter than that. -------------------------------------------------------------------------------- Wilson Wong, Jarden Limited, Research Division - Analyst [45] -------------------------------------------------------------------------------- Sure. Just in terms of how it compared to the rest of the group, what would you sort of be expecting in a normal state, less than 12 months? -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [46] -------------------------------------------------------------------------------- Sorry, can you say that again? -------------------------------------------------------------------------------- Wilson Wong, Jarden Limited, Research Division - Analyst [47] -------------------------------------------------------------------------------- Yes, sure. So how it compares to the rest of the store base that would you expect these stores to essentially have a payback period of less than 12 months as well? -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [48] -------------------------------------------------------------------------------- Our payback periods vary around the world. So it's not less than 12 months everywhere that we operate. So in some of the markets that are lower cost, obviously, the payback is a lot quicker or where we've got lower profitability stores. So the beeline stores are more likely to be in line with what we've been saying about the Northern Hemisphere market, so longer than that, that 1 year. That's a little more around 2 years -- 2 to 3 years. -------------------------------------------------------------------------------- Wilson Wong, Jarden Limited, Research Division - Analyst [49] -------------------------------------------------------------------------------- Sure. And just my last question, just around the online sales mix. So are you able to just provide a sense of what [major sales] were conducted online in the first half and where you sort of see it over the medium to long term? -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [50] -------------------------------------------------------------------------------- We don't call out the contribution of online sales. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- (Operator Instructions) But we have a question in queue from Julian from EAP. -------------------------------------------------------------------------------- Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Executive Director of Small Caps [52] -------------------------------------------------------------------------------- Just a couple of questions from me. Firstly, on that wages bill. I see that you've received JobKeeper payments of $10 million. Would it be fair to assume probably $3 million in the current half to come through? -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [53] -------------------------------------------------------------------------------- That's the number for the current half, Julian. -------------------------------------------------------------------------------- Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Executive Director of Small Caps [54] -------------------------------------------------------------------------------- No, just for the second half. Would you expect another $3 million given it ends in March? -------------------------------------------------------------------------------- Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [55] -------------------------------------------------------------------------------- We stopped getting JobKeeper. -------------------------------------------------------------------------------- Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Executive Director of Small Caps [56] -------------------------------------------------------------------------------- Okay. That's good. Cool. And second question, with, clearly, the lows in getting some new stores with just the rent negotiations or whatever, can you just confirm that it hasn't changed at all, your enthusiasm, for the U.S. market and even the U.K. as well? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [57] -------------------------------------------------------------------------------- No. I mean we're watching closely what's happening with COVID. So we're going to be diligent in what we do. Obviously, the U.K. has been closed since the middle of December and still is closed. So -- but we're also confident that this will sooner or later move behind us, and the world will resume to some sort of normality. So at the moment, for us to do a deal today, there has to be a lot of protections around trade and what happens if the stores go through a closure and what level of trade is going to be running through the malls in the short to mid-term, which is why it's been hard for us to achieve deals because there's a lot of things that we want that the landlord probably had to come to terms with. And that's just going to take a bit of time to flush through. So we do believe that these big powerhouse economies are going to continue to be powerhouse economies in the future. But at the moment, in the middle of COVID, it's just hard for us to find a way through and commit to a deal without a lot of protections. And the landlords, they understand the protections we're looking for, but it's -- everyone's busy at the moment, again, working through the sort of crisis management, so to speak. So it's probably hard to get a good audience to get some new deals done. And we think that, as the sort of crisis management slows down, then things will start finding their feet again and get back to normal. -------------------------------------------------------------------------------- Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Executive Director of Small Caps [58] -------------------------------------------------------------------------------- Right. But in terms of like in the U.S. where the less restricted stores have been, just the resonance with the customers, it's at least as good as you are hoping for? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [59] -------------------------------------------------------------------------------- Look, from my -- this is not a political statement, but they're quite resilient over there because they -- most stores have stayed open right through COVID. And there's still -- I've lost track of the infection rates but probably most of it are stores that slowed down from looking at exactly what's happening in each market as much as we stay close to it, for obvious reasons, with our business over there. But yes, we think it's just going to take a bit of time to come good, but there's not many pockets of America that haven't been severely affected. And therefore, it's hard to say if ever -- we can't see it today and say, well, if every store continues to trade like they do in Florida, we'll be fine because America has just been affected across the board. But yes, so hence, our position today is trade the stores we have and continue to talk to landlords about what we need to open in the short to mid-term. And then we'll see ourselves resume back to normal. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- Your next question comes from Sam Haddad from Bell Potter Securities. -------------------------------------------------------------------------------- Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [61] -------------------------------------------------------------------------------- Just want to get some -- just on the 14 stores that were opened in the second half -- sorry, in the first half in the U.S., were they on previous deals done? Or were there any new deals? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [62] -------------------------------------------------------------------------------- Yes, they were on -- basically, the bulk of those were on deals agreed prior to COVID that we delayed through the openings. There was a couple of deals done with the sort of terms I've just spoken to that they're probably harder to get through. So the bulk of those deals were deals that were already in play prior to COVID. -------------------------------------------------------------------------------- Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [63] -------------------------------------------------------------------------------- So it sounds like the immediate future in the U.S., there won't be much at all opening in this current half given that negotiations across the 4 major landlords are still ongoing? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [64] -------------------------------------------------------------------------------- Yes, that's -- our focus in the next -- in the half that we're sitting in today, our focus is getting beeline executed well, and there'll be small numbers of other stores. -------------------------------------------------------------------------------- Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [65] -------------------------------------------------------------------------------- And those other stores will be mostly in other territories outside the U.S. and the U.K. by the sounds of it? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [66] -------------------------------------------------------------------------------- Yes, there'd be a scattering of stores across the world with 1s and 2s. -------------------------------------------------------------------------------- Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [67] -------------------------------------------------------------------------------- Yes. And just my last question, just on the acquisition opportunities and competitive environment that you're seeing. Would you be happy to execute on the acquisition even though you're in the midst of integrating beeline? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [68] -------------------------------------------------------------------------------- Yes, we would, but we're not actively looking. I mean -- and I've said that consistently. beeline, however, that deal got done, we sort of -- and it's today's news now, I suppose. But if anything rolls around, yes, we look at it. Again, for the people that have followed our stock for a period of time, in previous results, I've talked to sort of SIX and I AM Group in Germany, being one of the larger European operators in our space. So this deal worked for us because we could step into their stores. And as much as we have to invest a certain amount of money per store, it's not far from a new store build-out. So that's what's made this deal workable for all parties. And again, the founders and the owners of beeline were keen to see the continuation of the employment of 100 teams worth -- 100 stores worth of team. They were excited and pleased to come over to Lovisa and sort of continue their career in the industry. So that's been one of the main drivers of getting that deal done. So the short answer is yes, when deals present themselves, we'll have a look at them, but that's not in our equation in the near future. -------------------------------------------------------------------------------- Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [69] -------------------------------------------------------------------------------- Yes. And just briefly on the competitive environment, are you seeing your close peers continuing to look for new store openings? Or what's the dynamics across different markets there? -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [70] -------------------------------------------------------------------------------- Look, I mean, it's probably the same with everyone else. There's not a lot of activity going on because everyone's in the same boat. So yes -- so we haven't seen a lot of aggressive activity anywhere largely because everyone is getting in exactly the same position. -------------------------------------------------------------------------------- Operator [71] -------------------------------------------------------------------------------- (Operator Instructions) Because we have no further questions at this stage, so I'll hand back to your presenters for any concluding remarks. -------------------------------------------------------------------------------- Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [72] -------------------------------------------------------------------------------- Great. Thank you. So thanks, everyone, for your time this morning. I know it's a busy time of the year, and look forward to talking to some of you individually over the next few days. So thanks again. Bye-bye. -------------------------------------------------------------------------------- Operator [73] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude our conference today. Again, thank you all for participating today, and you may now all disconnect.