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Edited Transcript of MYR.AX earnings conference call or presentation 4-Mar-20 10:30pm GMT

Half Year 2020 Myer Holdings Ltd Earnings Call

Melbourne Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Myer Holdings Ltd earnings conference call or presentation Wednesday, March 4, 2020 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Anthony King

Myer Holdings Limited - CEO, MD & Director

* Nigel Chadwick

Myer Holdings Limited - Company Secretary & CFO

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Conference Call Participants

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* Aryan Norozi

UBS Investment Bank, Research Division - Associate Analyst

* Bryan Raymond

Citigroup Inc, Research Division - VP & Analyst

* Mark Wade

CLSA Limited, Research Division - Research Analyst

* Phillip Kimber

Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer

* Shaun Robert Cousins

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning. Welcome to the analyst investor call with Myer's Chief Executive Officer, John King; and Chief Financial Officer, Nigel Chadwick. I'll now hand the call over to Mr. John King.

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [2]

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Good morning, everyone, and thank you for joining the call today. My name is John King, CEO of Myer, and I'm joined today by Nigel Chadwick, Myer's Chief Financial Officer. Please note this call is being recorded.

I'll begin with a quick overview of the results. I'll then hand over to Nigel, who will provide you with more details on them. I'll then speak further on the progress of our Customer First Plan, which, as I've stated before, is and remains our focus. After that, there'll be an opportunity to ask questions.

So if you could please turn to Slide 4.

Today, we announced our financial results for the 26 weeks through January 25, 2020. As far as trade goes, total sales were down 3.8% to just over $1.6 billion, but comparable store sales excluding sales in Apple and Country Road Group are up 0.4%. Operating gross profit is down 2.3% from a cash position to $629.3 million, but OGP margin rate is up 62 basis points to 39.14%. And the cost of doing business is down 2.6% to $516.1 million.

In terms of earnings, EBITDA is broadly flat at $113 million. EBIT is up 1.2% to $64.5 million.

NPAT pre-implementation costs and individually significant items is up 0.4% to $41.5 million. Earnings per share were $0.05, and the dividend continues to be suspended.

To the balance sheet. Net cash improved $65 million, $103 million at the end of the period. Operating cash flow before interest and tax is down $8 million to $179 million. And inventory continues to fall, down 5.4% to $340.7 million. And all our banking covenants continue to have substantial headroom.

First half result was solid as far as we're concerned despite the macro headwinds, but the result demonstrates our continued focus on profitable sales, a disciplined management of costs and cash and on strengthening the balance sheet. And it shows that this is the right plan to transform our business for future growth, and this is the plan that we'll be executing against today, tomorrow and for the years ahead.

If you could turn to Slide 5, I'd like to run through some operational highlights.

We continue to put our customers first. They are the basis of all our decisions across the business, and we've seen this with customer satisfaction metrics improving over the period in both in-store and online experience. We have improved OGP margin rate. And pleasingly, the margin for our online business grew faster than sales grew as we continue to chase profitable sales.

We delivered gross margin growth in key categories such as Menswear, Homeware and Childrenswear. Menswear was particularly pleasing because the growth in operating profit was achieved despite the exit of several major brands including Country Road and Politix. Cosmetics business continues to perform strongly. And I'm pleased to report that the clearance floor formats are now finally closed for good.

We have continued to ensure we're operating as efficiently and productively as we can with further simplification of the business undertaken, and this has delivered substantial cost savings.

Prudent fiscal management of our [bank] has resulted in a strengthened balance sheet.

And now to work in progress. We executed our key trade events well including Black Friday and Christmas. During the 4-day Black Friday period, online orders were up more than 100% from the previous period last year. Our systems and processes coped well with the increased volumes seen during these key promotional periods. However, there remains future potential to improve cost efficiency benefits during these periods.

We have seen weakness in our Womenswear business and have responded to this by putting in place a new team under the leadership of Sue Price to rebuild this core category, with improved design capability for our Myer Exclusive Brands and also introducing a raft of new brands. We have a very clear plan. I look forward to changes rolling out in the coming months. However, it will take us some time to deliver improved results.

Importantly, and yet again, we see further strong growth in the online business, which continues to be our largest store and shop window. Online sales are up over 25% to $168 million, now representing 10.5% of total sales. There is still considerable work to be done in this space to grow online even faster to reach our initial target of online being at least 20% of sales, which will continue to be a major focus for us.

We continue to work with landlords via a portfolio partnership approach to reduce our footprints and refurbish stores whilst delivering material cost savings, and I will talk further about this later on.

We are focused on continuing to execute our Customer First Plan, and that has led to the solid results we've seen today. I've made it very clear at previous results and AGMs, our focus is on profitable sales, a disciplined management of costs and cash and on strengthening our balance sheet.

Before handing to Nigel, I want to take this opportunity to acknowledge the significant impact that bushfires have had on many communities across Australia. And I'd like to thank our customers and team members for generously supporting our fundraising activities.

I'll now hand you over to Nigel to take you through the financial results in more detail. Nigel?

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [3]

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Thanks, John, and hello, everybody. As John has said, these results were achieved in a relatively subdued trading environment. Despite this, we've been able to deliver a solid overall outcome with continued growth in our online business and prudently managed cost and cash outcomes. The results we're presenting today are complicated by the introduction of the new leasing standard, AASB 16. Like many others, we have adopted the modified retrospective approach of implementation, which essentially means this year's result is on the new standard and last year's result is on the old standard. To enable easier comparisons, most of our discussion today will focus on numbers presented in the slides on the old accounting standard.

So turning to Slide 7, the income statement. I'll start with a detailed look at the P&L with all numbers stated pre-AASB 16. So total revenue, including concession sales decreased by 3.8% from last year. Some of this was due to the exit of Apple and the Country Road group of brands, some due to a smaller store footprint as we closed Logan at the end of the first half last year and some due to the subdued trading environment. As noted here, if we normalize for the exits of Apple and CRG as well as store closures and refurbishments, comparable sales were marginally up.

Online sales grew 25.2% from last year, which partly offset the decline in store sales. Whilst OGP declined in dollar terms, our margin continued to improve, reflecting the exit of lower-margin products, improved mix in online sales and further progress in reducing shrinkage. Also worthy of note is that FX negatively impacted OGP to the tune of about $4 million relative to the prior year.

Pleasingly, CODB is down again year-on-year despite continuing inflationary pressures from labor rates and increased costs associated with our online growth. I will talk to this in more detail shortly.

So when we put all that together, EBITDA, before implementation costs and individually significant items, was essentially flat for the period. Worthy of note is that our EBITDA margin hit 7% for the first time since the first half of FY '17.

Depreciation was down for the period in part due to a change in useful lives, which I'll touch on shortly, but offset by the shorter depreciable lives of online developments where we are continuing to spend at higher rates than we have been historically. As a result, EBIT and NPAT are up marginally year-on-year.

Turning to Slide 8. This slide shows the key P&L line items on both a post-AASB 16 basis and a pre-AASB 16 basis compared to last year. As in prior periods, we've highlighted the implementation costs and ISIs that are included in the results, which this year were significant at $21.6 million before tax and $15 million after tax.

The principal items included in this year's results related to the previously announced closure of our clearance floor concept and the consequential actions taken in relation to clearing inventory during the period and through to today as well as removal of some underperforming designer brands. From a practical perspective, we needed to decide what to do with the inventory on those clearance floors and inventory in other stores that would have eventually have made its way to these floors. We assessed whether to continue to sell it through our network at normal historical sell-through rates or look to sell it more quickly either ourselves or through a third party.

So during the half, we decided we would accelerate our sell-through on this inventory by undertaking increased promotional activity, including improved visibility and deeper discounting than would normally be undertaken at this stage in the inventory life cycle. We determined there were knock-on benefits to doing this including improving the look and feel of our stores, enabling us to pursue space reduction, removing a potential cannibalization effect on our full-priced product, reducing the potential for multiple handling of product and decluttering in both front and back of house.

To complete this activity as efficiently as possible and with minimal customer and team member disruption, we utilized the expertise of a company that has previously assisted us with exiting inventory when we closed stores such as Logan and Hornsby. Some of the activity was done through December and January, and therefore, it was accounted as sales in the half year with the remainder done in February against which we have recorded provisions against any sales below cost.

The amounts we've highlighted as ISIs are only the amount below cost but clearly, there are other heavily discounted sales sitting in our margin which have not been separately identified. Overall, the inventory-related adjustments amount to $15 million. In addition, there were approximately $3 million of asset impairments predominantly related to the closed clearance floors. And we've also highlighted $3 million of redundancy costs which will translate into lower payroll costs moving forward.

Lastly, as mentioned earlier and noted in our half year accounts, we have undertaken a review of useful lives during the period and determined some IT developments should have a longer life than we originally assigned, and so those lives have been extended, which reduced depreciation by $3 million during the period. Accounting standards require us to do this reassessment every reporting period. This change has not been disclosed as some implementation cost or ISI as it represents an expense that is no longer in the account as opposed to an item included as a one-off item in the accounts. Further details on the implementation costs and ISIs are shown in Appendix 1 or Slide 25.

Also on Slide 8, you can see the differential in the results due to AASB 16 implementation. The outcomes here are consistent with our disclosures at year-end with EBITDA up significantly but NPAT down marginally from last year. Statutory NPAT after AASB 16, implementation costs and ISIs was $24.4 million for the period.

Moving to Slide 9, 1H '20 trade. On this slide, you can see the relative impacts to comp sales from both the Apple exit and the CRG brand exits. Whilst Apple was not directly replaced, I think it should be noted that we did replace CRG product with a mixture of new brands and expansion of existing brands, which compensated for the CRG revenue and margin loss. We had good momentum in a number of our categories, including Menswear, Childrenswear and Home, but we have more work to do in a number of other categories including Womenswear.

Our MEB sales mix moved backwards for the half from 17.5% during FY '19 to 17% this period, largely as a result of the underperformance of Womenswear. Concession sales also fell from just over 20% in FY '19 to just over 19% this half, primarily from the exit of CRG and again the underperformance of Womenswear.

National brands increased from 62% in FY '19 to nearly 64%, partly due to the addition of a number of Only at Myer Exclusive Brands.

Growth in online revenue was again strong with 25% growth on the same period last year as we continue to enhance our offerings and customer experience, and John will talk about further improvements we are making over the coming months.

Inventory was down from this time last year, and we continue to expect to drive down our purchases and inventory balances in the future. We are continuing to focus the business on sell-through metrics to encourage lower purchasing and elimination of stock at the end of season.

John will cover in more detail what we are doing with space. However, the main reduction we are showing is the closure of Hornsby. Whilst we have closed the clearance floor concept, we are still in discussions with landlords on the future of that floor space with some currently not being traded. Overall, in addition to the 27,000 square meters for Logan and Hornsby, we have a further 73,000 square meters of store floor space which has either been agreed for reduction or is under negotiation. If all of that space was taken out of the store network over the next couple of years, it could potentially result in annualized savings of $15 million to $20 million, plus the additional savings for labor, maintenance, power, cleaning and lighting, et cetera.

In terms of store contribution, if we exclude the now closed Hornsby store, we had 1 store, which delivered a negative EBITDA contribution on a 12-month rolling basis, and that store had a clearance floor in it. At the EBIT level, there were 2 additional stores that had a negative EBIT contribution, again on a 12-month rolling basis. We have improvement plans for each of these stores. If I look at the 6-month period only, but acknowledging we are heavily skewed to the first half, all stores had positive EBITDA and (inaudible) contributions for the half year.

Moving to Slide 10, OGP. As I mentioned earlier, our OGP margin continued to improve despite a fall in [overall] GP dollars, caused by the lower sales volumes and the negative [impact] from Perth.

In terms of OGP dollars, the lower sales were estimated to have affected OGP negatively by around $26 million, and the deteriorating AUD-USD FX rate has had a year-on-year negative impact of approximately $4 million. These negatives were offset by, one, an improvement in GP rate from national brands due to both lower markdowns and lower sales in low margin brands such as Apple and slightly higher supplier contributions from relatively stronger performances in the home and entertainment categories. Two, higher brand -- higher national brand sales mix, which came at the expense of concessions and net revenue. And lastly, reduction in shrinkage, which was down nearly $1.8 million on the prior year and now stands at 1.1% of wholesale sales versus 1.2% this time last year.

As we've previously discussed, we continue to believe there are substantial opportunities to improve our OGP both in terms of the performance of our categories, but also on the cost side from areas such as our factory to customer initiative and shrinkage management, where we've continued to invest and have further initiatives landing this half.

Moving to Slide 11, cost of doing business. CODB has fallen again from $530 million last year to $516 million this year despite inflation, largely in wages and store operating expenses. The primary inflationary effect came from the EBA increase in August last year of 3% applying to our in-store staff as well as in-store operating costs of power, lighting, rent and outgoings. We continue to invest in our online business both through our marketing efforts, but also within our fulfillment network, including stores, DCs and cosmetic supercenters.

As John has said, our physical network coped well with the significant increase in volume of orders in the peak periods, and this helps us fulfill a higher proportion of the orders. However, some of our assumptions around single and mixed baskets, which educated the fulfillment plan did not unfold as we expected, meaning the orders were directed to relatively higher cost fulfillment locations. And this led to a small increase in unit cost of fulfillment during the peak period compared to the prior year. Despite this being a disappointing outcome, it obviously presents a future opportunity for us to improve our fulfillment efficiency. And we'll be taking these learnings into our planning for later this calendar year.

Offsetting these cost increases, we had savings in rent and labor in relation to the closure of Logan and other savings in rent and outgoings. Further savings in store wages as our revised [values] model annualized, these changes were largely deployed towards the back end of the first half of last year. And lastly, savings within the Support Office across a range of functional activities, including IT, property and HR. Again, we see opportunities for further cost reduction in CODB moving forward, including occupancy costs as a result of space reduction initiatives from the factory to customer project and further simplification in our central Support Office operations, all of which are yet to be realized.

Moving to Slide 12, cash flow. For ease of comparison, we've again set this out on a pre-AASB 16 basis. Operating cash flow declined during the period, primarily due to the lower EBITDA after taking into account the implementation costs and ISIs and also due to a small increase in inventory between year-end and now compared to a reduction in the same period last year, offset in part from a higher buildup of creditors in this period than last year.

Working capital shown here also includes the movement in provisions as a result of the one-off inventory and redundancy provisions in ISIs.

After tax and interest are taken into account, operating cash flows were down $6 million to $166 million. Offsetting that, our cash CapEx paid of $22 million was again down on last year by nearly $5 million, meaning free cash flow after CapEx was in line with last year at $144 million.

In terms of CapEx, we spent approximately $5 million on maintenance CapEx mainly in facilities management and IT, $3 million on efficiency initiatives, such as supplier automation and supply chain; $12 million on growth initiatives such as our online presence including checkout and the Parramatta Cosmetics Hall refurbishment and around $2 million on store renewals including amounts for the Cairns and Karrinyup refurbishments, which we expect to recover in future periods.

Whilst this spend is low compared to previous periods, we continue to have a healthy pipeline of projects ahead of us including the Sydney City store refurbishment, a new point-of-sale system, and we have started to commit towards upgrading some of the vertical transport infrastructure in our stores. For full year, we expect our CapEx to land in the region of $50 million to $60 million.

Moving to Slide 13, balance sheet. On this slide, we've shown the balance sheet after applying AASB 16, the balance sheet as it would have been if the standard had not been adopted and the balance sheets both last year-end and this time last year. It's important to note that the AASB adjustment shown here do not represent the initial transitional adjustment on day 1 of the start of the year, but rather the removal of the effect of the standard at the end of the period. As you can see, the major impacts of the new standard have been to bring $1.8 billion of lease liabilities and $1.4 billion right-of-use assets on balance sheet. When combined with the removal of deferred income related to landlord incentives and deferred tax adjustments, they translate into a net adjustment to return profits of just under $250 million. Importantly, our financing allows for covenants to continue to be measured on the old accounting standard basis, and our banking syndicate supports this approach.

Moving to covenants now on Slide 14. As shown on this slide, at the end of the half year, we had $103 million of net cash, which is $65 million more than the same time last year. And we continue to have substantial headroom in all 3 covenants under our financing facility despite the FCCR covenant stepping back up to 1.5x at the end of this month. Our peak gross debt requirement for this period occurred in early November and amounted to $220 million. That compares to our facility size at that time of $380 million and a peak of $290 million in the prior year. As a result, in our net refinancing, which we have recently commenced, we anticipate requesting a significantly reduced overall limit, reflecting our lower requirements.

In terms of where to from here, it's important to note that whilst we are strongly cash positive at the half year, this is in part due to the timing of our peak trading period from late November through to January. For most of the rest of the year, we run in a net debt position. So whilst we are driving our peak down aggressively, our focus continues to be on deleveraging the balance sheet even further.

In terms of our refinancing that I just mentioned, we've literally just started that process, and we expect to be able to complete it before the end of the financial year.

So in summary, on Slide 15, our performance this half year is consistent with what we've been articulating over the last 12 to 18 months: including lots of activity on our product portfolio with a view to improving our margins and returning to gross profit growth over the medium term; continued focus on costs and cash demonstrated by the fall in CODB and the strengthened balance sheet; continued growth in profitable online sales with plans to capture savings in fulfillment moving forward; good progress on our discussions with landlords and our planning for changes in our supply chain which will lead to efficiencies in the future; disciplined control of working capital with more opportunities in inventory management; and further significant cost-out opportunities in occupancies, costs, supply chain, shrinkage and simplification. We expect these dynamics to continue into what we suspect will be a challenging second half with uncertainty relating to the coronavirus. The effects of which are currently unknown, but we are obviously monitoring that situation closely.

On that note, I'll hand back to John to give an update on the Customer First Plan.

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [4]

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Thank you, Nigel. If I could ask you all to turn to Slide 17. So let me provide you with an update on our Customer First Plan. It is and remains our focus for this business, and the fundamentals of it have not changed. It is about ensuring that we are Australia's favorite department store, providing friendly helpful service, high-quality and exclusive brands with compelling value. And it's great to see our team members delivering against this plan.

It's focused on 3 key areas: transforming the customer experience in store, Only at Myer brands and our own Myer Exclusive Brands and aggressively growing our online business, myer.com.au. And this is all supported by simplifying our business processes and by us being more efficient from factory to customer.

If we can turn to Slide 18. We are continuing to improve our stores with refurbishment works underway at many of them, with the aim of improving the appearance, layouts and brand adjacencies in these stores as well as adding new and exclusive brands. We continue to focus on our front-line and delivering what our customers want. With better rostering, more product training and improved systems, this has delivered customer satisfaction increases.

Our refurbished Cairns store will open in November this year across one larger floor. Works have commenced, including new lighting fixtures, fitting rooms and new amenities, and new brands to be out in store will include JACK & JONES, Rodd & Gunn, Benefit Cosmetics to name but a few.

Our smaller renovated Belconnen store will open in November 2020 as well. And our refurbished Karrinyup store will open in August 2021. Works at both stores include new flooring, lighting fixtures, fitting rooms, amenities and new experiences as well as a host of new brands coming to these stores.

Albury will be fully refurbished and will open in November 2020 with the expansion of Menswear and Womenswear, and store improvements will also be carried out at our Ballarat store.

As I've previously talked about, we'll be exiting the Melbourne Emporium level 4 by March this year, and we'll be re-laying merchandise categories in Bourke Street building with the expansion of several categories and a much more efficient store.

Importantly, we'll undertake a substantial refurbishment of the Sydney City beauty ground floor, the atrium and level 2, which will open in November 2020. There will be all-new cosmetic installations in the champagne bar on the ground floor. There will also be a new handbag and accessory shop-in-shop installation with upgraded watches and jewelry fixture suites on the atrium ground floor level, and there will also be new intimate apparel fixture suite on level 2.

We've also completed upgrades to our Melbourne handbag accessory area, the stunning new Parramatta Beauty Hall and the Sydney homeware shop-in-shop format.

During the year, we also launched our Harry Potter concept in Melbourne, 1 of only 3 in the world with thousands visiting during the season, and it continues to be very popular with our customers, especially at weekends.

In addition to this, we put forward some great offers supported by effective marketing. And for Black Friday, this was a very strong event for us. And this sale event has well and truly cemented its place on the Australian retail calendar.

Our Christmas Giftoriums were in every store, and the gifting and personalization was bigger and better than previous years, and our customers responded very well to our personalized [Cabriere] and Moet & Chandon offer, amongst other things.

We're also trying to make it easier for our customers to pay, so we rolled out Afterpay and Humm, providing further choice when it comes to paying for their purchases.

Moving on to Slide 19. Our aim is to grow our own label brands to over 20% of our sales mix. And alongside that, we'll be launching new Only at Myer brands. And I'm pleased to advise that we launched more than 135 new brands since August 2019, including YD, Forever New, curve, Litmus Labs, Lorna Jane, Reebok to name but a few.

We will continue to focus on new, exclusive and profitable brands which appeal to our customer base. Our strategy of making the big brands bigger by agreeing strategic long-term growth plans with our key brand partners has seen the performance of Menswear, Childrenswear and home categories outperform the rest. We will now accelerate this strategy across all categories. Some of our best performers include Polo Ralph Lauren, Maxwell & Williams, Industrie, Rodd & Gunn, French Connection, Seed, Tommy Hilfiger, Radley, Chanel and Salt & Pepper.

In athleisure, footwear has seen an increase of over 40%, with the biggest growth coming from brands such as Skechers, Lacoste, adidas and Tommy Hilfiger. Much of this growth has been fueled on the popularity of sneakers.

We've continued to see strong growth in our handbag business despite the exit of MIMCO from affordable premium brands like Radley, Status Anxiety and DKNY and new brand entrants, Tommy Hilfiger and Karl Lagerfeld Paris. Online growth in this category was up over 50% on last year, and we've seen significant positive growth in our flagship stores. We have seen no impact to our Menswear business through the exits of Country Road and Politix. And profitability has grown as customers are choosing to buy alternative higher-margin brands. We're also focusing on growing our big and tall men's offer, and we also have the European classic brand GANT launching in 18 stores in June.

In kidswear, we are seeing exceptional growth in our baby business, led by our own MEBs, Jack & Milly and Sprout. We're also seeing strong activewear sales across both boys and girls with the expansion of adidas and Champion as well as new brand entrants, Nike and Puma.

Myer's premium beauty business continues to be one of Australia's largest, and we had an exceptional Black Friday and Christmas trading period. We sold a record 800,000 beauty gift sets through the summer season, more than any previous year. Premium fragrances continue to perform within expectations, and we delivered 17 new fragrance launches last year. As previously announced, we launched our Beauty Emporium in 4 stores, which now has over 20 new and exciting beauty brands exclusive to us, and this is being well received by our customers.

Please turn to Slide 20. As mentioned, online sales are now at 10.5%, with gross profit margin growing faster than sales growth. November saw our biggest day ever with Black Friday with online orders growing at over 100%, which is now in line with Boxing Day where we saw sales grow by 49%.

Like in the previous year, the enhancements of the last 18 months have seen our website perform well, especially given the unprecedented volumes. But going forward, we have 3 key priorities for our online business. We're continuing to match and enhance our ranges, with 50% of our store range now online and 50% of concessions now online. We will continue to focus on scaling our products to that of in-store and well beyond.

Our Myer market is very popular with our customers, and we've made the decision to integrate it with our main Myer website. This will continue to scale over the next year and provide our customers with more diverse product ranges. And we're going to focus on improving the online experience with an improved checkout and enhanced search and navigation to make it much easier for our customers to shop.

In terms of loyalty, we are leveraging MYER one and other loyalty partnerships to drive our sales. We are doing this by providing MYER one customers with personalized offers and content through owned channels and are progressing plans to develop the MYER one value proposition and personalization capability across other channels to further enhance customer engagement in the program.

Additionally, we continue to develop partnerships with third parties, such as retail banks to drive sales by providing offers via their loyalty programs. We are continuing to make operational improvements through our factory to customer program and online fulfillment through the development of our DC capabilities and the use of excess space to deal with order volumes in key product categories at key trading periods.

I'd now like to talk about some of our efficiency levers on Slide 21. Reducing excess space continues to be a major priority for us. We continue to have productive discussions with our landlords as we see significant opportunities across our portfolio to reduce space. And more importantly, our rent whilst improving sales and margin through smaller stores. So far, as Nigel said earlier, we've seen a reduction of 27,000 square meters as a result of the closure of Logan store in January 2019 and the recent closure of Hornsby in this January just gone.

In addition to this space, hand backs of 22,000 square meters have been agreed for stores, including Belconnen, Cairns and Emporium. There are also 8 stores under negotiation -- active negotiation, which results in a reduction of 50,000 square meters when all are executed. We expect agreement shortly on these stores, most of which are just waiting for documents to be signed. So total space will be reduced by circa 100,000 square meters when all are executed.

As previously announced earlier this week, our store Support Office relocation will be in March '22. This will result in a reduction of 5,000 square meters from our current location. And this will deliver a more appropriate store Support Office with improved commercial terms and significantly lower rent.

In relation to our fulfillment, it worked well for peak trade across Black Friday, Christmas and the stocktake sale. However, as Nigel said earlier, expected savings in cost per order were not realized due to the amount of cross-mixed baskets, which limits our ability to use central location with orders going back to stores.

Tony Carr and the team have commenced evaluation of the central stock facilities with a future state supply chain operating model, which will commence in full year -- financial year '21. The first focus of this is online fulfillment, which we will have before Christmas '20, and this will be followed by store fulfillment in the early parts of 2021.

Our shrinkage program is continuing to deliver results -- positive results, and I believe there are further opportunities in our total loss program, outsourcing and IT efficiencies.

So in conclusion, if you turn to Slide 23. We see this as a solid result despite the macro headwinds, with EBITDA broadly flat at $113 million and EBIT up over 1% to $64.5 million on the previous year and also with very strong cash generation.

We know that we will face macro headwinds with ongoing impacts to discretionary spending. But regardless of this, at Myer, we will continue to forge ahead through our Customer First Plan. We will exit brands that are not popular or performing. We will focus on new, productive, exclusive and in-demand brands with a focus on making our bigger brands even bigger and on rebuilding our Womenswear business. We will continue to grow our online store to ensure it remains our biggest store and to capitalize on our MYER one loyalty program.

We will continue to operate as efficiently and productively as we can with a focus on reducing space whilst improving our store and brand mix. We will progress our factory to customer work, which will bring considerable benefits to our business and to our customers. We will absolutely continue to focus on profitable sales, a disciplined management of costs and cash and on strengthening our balance sheet. And all decisions will be made in the interest of our customers and our shareholders. We will continue to deliver against this plan as the right plan for today, tomorrow and the coming years ahead.

I'd like to take this opportunity to thank the Myer team and all our brand partners for their hard work over the Christmas and summer period, but there is so much more to be done. I thank you for your time, and I'll now open the line up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Bryan Raymond from Citi.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [2]

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My first question is just on the below-the-line charges on the clearance activity. Can you just give us a bit more color around what proportion of the total after-tax amount was driven by the clearance floors directly versus -- you mentioned, I think, Nigel, other items, which were bound for the clearance floors in the future being cleared and put below the line. Could you give us a bit more color on the proportions there a bit?

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [3]

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Well, it was all related to items that had been already labeled as clearance inventory or were due to come into clearance inventory, whether in a clearance floor itself or throughout the rest of the network. So it's not really separable from a perspective of what was physically on the store floor because it would have ended up on the store floor in those clearance stores in any event, Bryan.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [4]

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Sure. I'm just trying to work out what the underlying number would be then on that basis? Because obviously, every year, you have clearance activity. I understand you exited those clearance floors, and that's sort of a slightly separate item, which I can see how you call that out. But just to be cautious on the gross margin move and the underlying earnings performance if you put in a lot of other stuff, which it would have been normally clearing, [give] that number below the line.

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [5]

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Yes. Maybe I can try and answer it in terms of time frames. So we'd normally get rid of that inventory sort of over 18-month to 24-month period, maybe a little bit longer. And what we did here was do that over 8 weeks.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [6]

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[It was] 18 months' work in 8 weeks. So okay. So then, I guess, the other way to put it, your inventory levels are down 5%. I assume that's the head -- well, I can say that's the headline number, including the -- that accelerated clearance activity.

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [7]

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Well, some of that relates -- so the stuff we cleared pre the end of the half, obviously, that's embedded in the result. And then the stuff we cleared in February, we had to obviously provision for that, and we know exactly what we cleared it for. So the provision aligns to exactly what the NAV needed to be. So the reduction in the inventory on the face of the balance sheet, in part, reflects increased provisioning of about $12 million related to that clearance activity. So when you gross that back out, we actually had, from year-end, a slight increase of about $5 million from year-end in gross inventory value.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [8]

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Okay. That's helpful. And then just on store wages. I saw your overall wage is down $8 million, and it seems like you split out Support Office. So I assume, is that -- is it fair to say that $8 million is all customer-facing or largely customer-facing out? Or is there a back of house in it?

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [9]

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Back of house. Back of house, Bryan.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [10]

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So still -- the customer-facing hours in store, how did they look year-on-year?

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [11]

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They're roughly the same year-on-year.

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Bryan Raymond, Citigroup Inc, Research Division - VP & Analyst [12]

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Right. Okay. And then just my final one is just on the Country Road exit. It seemed like a bigger driver of like-for-like than Apple during the period in terms of the headline like-for-like number. And you mentioned it didn't impact Menswear. So is it fair to say that Womenswear -- the softness in Womenswear was at least in part driven by the Country Road exit?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [13]

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Yes, part -- a small part, not a big part. But yes, absolutely. And Men's recovered. I mean the margin in Womenswear with -- the margin recovery was quicker than the sales recovery because the Country Road deal wasn't a great deal for us. So we were able to generate better margins from more profitable brands, hence, the Menswear number. So Womenswear, country-wise, is definitely part of the decline, but we're quite optimistic about what the future holds for Womenswear going forward.

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Operator [14]

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Our next telephone question comes from Mr. Mark Wade from CLSA.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [15]

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Look, I realize you said customer satisfaction with staff was up 1%. John, I was just wondering what else are you hearing from your customers and your staff when you're talking to them about the offering, particularly among the more younger generation.

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [16]

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Yes. I mean look, I think we have a really broad church of customers across the Cosmetics business. I think we -- a few years ago, pushed the needle too far in terms of more expensive fashion, which was one of the reasons for the clearance stores, I think, so we've got out of that. And I think it's really about making the big bigger. So things like in Womenswear, Seed; in Menswear, Ralph Lauren, Rodd & Gunn, I mean, these brands really resonate with our customers. And I think also our online offer, it really need -- we really need to drive that much harder. That's certainly something we're getting from the younger customer. The experience, I don't think is as good as it needs to be in terms of navigation, checkout search, and we can certainly offer a raft of new brands quickly into our online platform, and that's a major area of focus.

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Mark Wade, CLSA Limited, Research Division - Research Analyst [17]

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Well, just following on from that. I mean there was a lot of encouraging initiatives that you shared recaptured spend as well as certainly all the new brands, Christmas Giftoriums across all new stores -- across all the stores, new payment options, et cetera. So a lot of good things happening there, executed well at peak treat -- trading. And yet, I look at it and I kind of back out, the Country Road and Apple sales are both basically flat. And I'm just trying to get a sense of maybe it's just Womenswear or really in your sense, I mean, what you could have done better?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [18]

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Yes. I mean category -- yes. Look, category -- I mean I would never use the top line as an indicator of the health of the business. It's the profit line that I look at. So we've been saying for certainly all my time here, which is getting on for 2 years now, that we are focusing on to turn the ship around changing the mix. All categories performed well apart from Womenswear. Womenswear has been a challenging market, certainly, in the last 20-odd years that I've seen. And around that, we've had traffic and headwinds in terms of consumer discretionary spending. But in terms of the business, if I look at it, we've got a good home and entertainment business, a great Cosmetics business, a good kids business, a good men's business, accessories and footwear has performed well recently, Womenswear is one area that needs focus on. And we're not the only retailer in the world who's having this conversation. But I believe that the underlying performance of the business is pretty solid, considering the macro headwinds that we've been in, and we're going to continue to face throughout the rest of this year.

But I think for us, our online platform is a massive opportunity for us to grow across a wider demographic, and you'll see that over the next 6 months.

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Operator [19]

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Next telephone question is from Shaun Cousins from JPMorgan.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [20]

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Just a couple of questions. Maybe on footfall, you highlighted that, that was down. I'm just curious how you're seeing footfall. I guess, now how is coronavirus impacting potentially certain CBD stores, other sort of suburban stores. And then more generally, why do you think sort of footfall is down? And potentially, does that matter as much given your online is growing there? So some broader questions around footfall, please.

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [21]

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Yes. Certainly, there's -- some of the stats that we see, I mean, I think the ARA came out with some big numbers the other week in terms of footfall down around CBDs and some big centers. So certainly, that -- the footfall has been pretty -- it's been subdued in -- on the main part. But around the key trading periods, we've seen significant uplift in footfall. So it's a combination of what's been going on over the last 6 months. So I think discretionary spending, people have been quite tight with spending, but they do come out. Black Friday and Christmas were big cases in point. The CBD and any of those sort of tourist destination stores certainly saw traffic slowdown post the announcement of the news around coronavirus. I can't say what the future holds. I mean we know -- we'll see. We're driving online as aggressively as we can because if people are afraid to come out, they can still shop at home. And certainly, we've seen that with the significant growth in the performance of our online business.

As to how the future goes, look, we're all in the same boat, whether you're a retailer or an airline, a restaurant. We just have to see what happens over the coming months. And if I had a crystal ball, I'd be in the crystal ball retail business. Unfortunately, I don't, Shaun. But for us, all we can do is mitigate the top line with savings, efficiencies and all that kind of stuff.

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [22]

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Yes. The only other thing I'd add was we're looking at how we can mitigate through various activations. And a really good example of that was last weekend, where we did the leap year offers that we did, and that really created a massive increase in footfall and really worked for us. And so we're looking at how we can continue that over the next several months.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [23]

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Great. And maybe a second question related to coronavirus. What sort of supply chain disruptions are you seeing? Maybe if you can highlight if there are certain categories that are exposed more than others? And how much of -- I assume apparel comes somewhat from the subcontinents and other ASEAN countries as well as sort of China, maybe just sort of talk a little bit about how you're seeing delays on supply and how much visibility you enjoy.

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [24]

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Yes. If you look at our overall mix, so our own brands, so the private label, the MEBs, are about 17% of our mix. About 65% of that comes from China. In terms of what we've seen currently, all our factories by the end -- by tomorrow will be back and up and running. So we were 85% last week back and running. 80% of the fabric mills, we understand are up and running. We're going to probably get about 40% of our normal traffic of containers through March with catch-up through April and May. So we reckon there's about 4- to 6-week delay. So what we've done is we've obviously canceled out.

The flip side of that is that it's a great opportunity to actually destock and refocus on how much inventory you actually really need. So it's given our buying teams and our merch team some food for thought in terms of how we flow merchandise in, and I see it as a cash flow opportunity in the short term.

As for the long term, we'll see what happens. I mean it's -- who knows. But as Nigel says, we have a number of plans in place. The leap year activation last week was almost as big as Black Friday for us. It was a really good event. And I think in terms of how we go forward, for us, it's about how do we drive -- give people a reason to come in. And then also, how do we manage our cost base. So we're very -- as you've seen over our last 3 or 4 sets of results, we're very tight in terms of managing that.

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Shaun Robert Cousins, JP Morgan Chase & Co, Research Division - Senior Analyst [25]

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Great. And finally, just in terms of -- further on costs, you highlighted the 50,000 square meters of GLA reduction that's currently being negotiated with landlords. I guess maybe just to clarify that, so are you confident that occurs, the uncertainties around the timing? And then -- or is there the risk that you're sort of reminding [them to be] patient. And then when does this all come through?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [26]

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Yes. There's -- a lot of these are stores that have leases that expire in '22 and '23. And some of these will accelerate and bring forward so in terms of downsize because they want to do something else with their centers. I mean clearly, we're part of the jigsaw when it comes to the landlords. And obviously, they've seen quite a bit of distress around the place and that whole stuff, et cetera. So it affects how they plan their -- what they're going to do with their centers. So a lot of what we -- of that 50,000 meters is pretty much agreed but not announced. And the reason for that is that it's part of a bigger plan for what they're doing with the center and the development of those sites. So we anticipate over the coming sort of weeks/months to be able to make individual announcements as we go through that, but we were very confident of getting it.

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Operator [27]

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The next telephone question is from Aryan Norozi from UBS.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [28]

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First one for me, and not expecting a trading update. But just on your Cosmetics & Fragrances business over the last sort of 4, 6 weeks, how has that performed given I would have thought you're probably over and actually in the sale in these stores, and there's a lot of sort of Chinese tourists and just tourism in general driving the sales in that business?

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [29]

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Well, I think anybody who has cosmetics is going to be starting to feel an impact from lower people coming into the country, but also anybody who's sort of focused on the high-end product market will be feeling it really badly at the moment.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [30]

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Okay. Cool. And then just on the space reductions of the hand backs. I think in the fiscal '19 result, you said 5% to 10% of GLA is in active discussions, and you had 29,000 square meters of hand backs agreed. Today, you're sort of suggesting around 5%. So what -- like, can you just give us a bit more color on how those discussions for the other 5% have gone and what the pushback was from landlords, please?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [31]

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As I just said to, I think, Shaun last question, we're pretty close to getting to 100,000. So we're -- the last 50,000, we're in conversations with now. Some of which are already signed, but just due to confidentiality, we're not quite there yet. But we're confident of getting circa 100,000 square meters of space out.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [32]

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Okay. And then...

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [33]

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Sorry, Ary, just on that one as well. I think it's important to note that the stores that we are talking about with landlords here can change over time. So as we change our stores performance and other things happen around us that might influence the effect on a particular store, we might pull things off the list for discussions with landlords and substitute them with other stores as we go forward. So it's not a static list so -- yes.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [34]

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Perfect. And just your CapEx and D&A for '21 -- fiscal '21 onwards, is it sort of -- should we expect sort of flattish CapEx versus what you're doing in FY -- guiding towards for FY '20 and D&A is slowly coming down? Is that the gist of it?

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [35]

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Sorry, could you just say that again?

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [36]

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Yes, CapEx and D&A. So for fiscal '21 onwards, should we expect CapEx to be in line with what you're spending now, and D&A sort of coming down over time?

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [37]

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I think CapEx will be higher than our current run rate. So I still think we're going to be in that sort of plus or minus 10%, around $75 million potentially in '21 and moving forward.

I think D&A -- so there's a few impacts going on there as we sort of continue to spend $10 million to $15 million on online developments, our depreciable life on those developments is actually quite short. So it's sub-5 years definitely on those developments. And so that has an offsetting impact to what you might ordinarily see in terms of a reduction in depreciation.

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Aryan Norozi, UBS Investment Bank, Research Division - Associate Analyst [38]

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Yes. Fair enough. And then just a final quick one for me. Just a clarification on the clearance floors and how you account for it. So am I correct in saying that the stock from the clearance floor, that's reflected -- the sales of that's reflecting in your like-for-like growth, but the gross profit loss on them is in -- is pulling the significant items? Is that correct?

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [39]

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No, it's not correct. So I'll just sort of try and explain this again. So if we have discounted something more heavily, but it's still sold above cost, that is in our normal operating margin that we've reported. If we've sold it and we've sold it below cost, then the amount -- the differential between cost and the amount that we sold it for, so only the portion that went below cost have we pulled out into the individually significant items.

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Operator [40]

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Next question in queue is from Mr. Phil Kimber from Evans & Partners.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [41]

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Just another one on the space issue. So the sort of 73,000 square meters to come, and I think the bulk of that is 15 negotiations. Is that sort of '21, '22? Or is it sort of even over the next 5 years. Can we just sort of get a ballpark figure?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [42]

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It's still under negotiation, Phil, because some of the leases are '23 expiry. So the work may not happen until '23. There's a couple that we're actually in discussion with the landlords, where they're looking at bringing forward some of these. So I'm not trying to be woolly. It's just a bit of a moving feast as to -- we then get planning to do what they want to do with the centers because some of these centers have been extended or rezoned, so it's a moving feast. But I think we'll know a lot more over the coming sort of couple of months, and we can sort of update -- and we'll update the market. As we sign off each one, we will release the news to the market as and when they're agreed. So at least that everyone's in the loop.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [43]

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Okay. And I mean it's great that you're shutting and I think it works out 7% or 8% of GLA. I guess a devil's advocate question would be if you strip online out, your sales are going backwards circa 5% at the store level. Is this enough space reduction? Shouldn't there be more?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [44]

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Yes, I think so. I mean look, the 5 -- the low -- we've said -- and many times, we've spoken about it. We expect low single digits in stores for the -- we said a year ago for the next 18 months, 2 years. It takes time for us to rebuild brands. So the new brands coming in takes time for it to incubate, et cetera. Also trying to expand some of these bigger brands that are double-digit growth for us. So I actually think that's about the right level of sales -- right space for us. So I believe we can get the store portfolio turning around into positive territory sometime in the next sort of 18 months. So as online grows, and online will drive more traffic into stores as well through Click & Collect, I think that's about -- we're happy with that level of space.

And as Nigel said earlier, there's 1 or 2 stores that -- certainly, when I came in nearly 2 years ago now that we had up for a floor out or 2 floors out, and they've turned around because some of the category performances particularly in men's and home have done really well, that we actually do not need to downsize those now. If we can take more sales, then why would we?

So it's a commercial conversation, and it's pretty fluid. But we generally think that circa 100,000 meters is the right number for us to rebase the stores. And as we said, it's a few store closures, but predominantly, it's floors not stores.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [45]

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Yes. And then on the banking agreements that you've started, I mean what are the -- you mentioned on the call, Nigel, that you want to reduce the total facility, which I think at the moment is $390 million. What other things are you looking? I mean are you looking to get lower rates, different debt covenants? How does this all sort of tie in with your ability to pay dividends? What -- can you give a little bit more color on that?

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [46]

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Well, it's really early days. So I don't want to sort of pre -- sort of hint where we might get to. But obviously, we would like a little bit more flexibility if we can. We totally like a little bit more tenure if we can. But -- and see what the market is prepared to give us. And we started those discussions with our banking group, and they're showing good support at the moment.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [47]

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And with respect to dividends, I mean, you're 0.01 away from the covenant that you needed to be able to pay dividends. And sorry if I've missed it somewhere in the release, but have you made a comment about what you're thinking on dividends?

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Nigel Chadwick, Myer Holdings Limited - Company Secretary & CFO [48]

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Well, I mean, clearly, we'd like to turn them back on when we think it's prudent to do so, but we're not at that threshold quite yet. And actually, the requirement is for us to be at that 1.65 for 2 consecutive quarters. So we've got a bit of work to continue to do there. But longer term, and I would just remind you that last time we did pay a dividend, I think we were at 1.79x FCCR. And we actually suspended the dividend at 1.65x. So I think from our perspective, we like to see ourselves up in that sort of 1.7-ish or higher region.

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Phillip Kimber, Evans & Partners Pty. Ltd., Research Division - Executive Director of Consumer [49]

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Okay. And one last one if I can. You might not be able to answer it. But if you look at the CBD stores, in particular, say, Sydney and Melbourne. I mean do you have -- is tourism a meaningful percentage of the sales? I don't know if you can measure it at all. But I mean how much do you think tourism is important to those big volume stores?

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [50]

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I think it is important certainly to Melbourne, to Sydney, Chadstone and obviously, Chatswood in terms of the student population and probably Doncaster down here as well. But for us, it's not as important to say some of the luxury good guys because they're the ones who are going to get hit harder I think. So we've seen it, but we can mitigate against that. We have a healthy domestic business. So that's one of the good things about our reach is it's broad and it's wide across Australia and not focused in on luxury Asian tourists. So from that perspective, I think we're a bit more robust than maybe others are.

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Operator [51]

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There's no more further questions in the queue. I'd like to hand the call back to the speakers for any closing remarks.

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John Anthony King, Myer Holdings Limited - CEO, MD & Director [52]

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Thanks, Kevin. I should say thanks for joining us this morning, guys. So we look forward to speaking to you over the coming days and weeks either one-to-one or in groups, and have a great day. Thank you.

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Operator [53]

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Ladies and gentlemen, that does conclude the call. You may all disconnect. Goodbye.