Good morning, and thank you for joining us at short notice. We've got 30 minutes this morning, so I just wanna give everybody a heads up on that before we start. I'm joined in the room here today by, with Neil, Carol, and Mahmoud. Today, we will be running through trading for the three months ending 30th of November, 2021. Since we announced our half year results in September, growth sales have remained robust, up 28% across the period ahead of the growth achieved in each of the first and second quarters of the financial year. Demand in the U.K. has remained exceptional across the group's established and new brands, validating the strength of our business model where our leading proposition across price, product, and service continues to resonate strongly with customers across our brand portfolio.
We have achieved one-year and two-year growth rates in gross sales of +58% and +102% respectively. However, we have experienced higher than expected return rates, which have now pushed ahead of pre-pandemic levels. They are around 12.5 percentage points higher than last year, and 7 percentage points higher than before the pandemic. This has been driven by an exceptionally high dress mix. As a result, net sales in the U.K. grew 32% in the period on a one-year basis and 78% on a two-year basis, highlighting the group's significant multi-year gains in share in its core market where the proposition continues to resonate strongly. In international markets, our performance has been impacted by significantly longer lead times than it is taking to deliver parcels to customers as a result of the pandemic.
With all products currently shipped globally from within the U.K. network. In key European markets such as France and Ireland, demand has softened since October to our key peak trading months due to the increased local restrictions, consumer uncertainty from the pandemic, and continued delivery related impacts. Trading in the U.S. has been behind expectations as we continue to be affected by significantly extended delivery lead times compared to our proposition pre-pandemic. Our belief is that this will improve as air freight capacity increases and lead times will shorten. Over recent months, global supply chain disruption has created significant inbound freight cost inflation, which has been more pronounced than anticipated, impacting gross margin in the period, which was down 100 basis points year-on-year.
While this cost is temporary and expected to unwind when the pandemic eases, it is estimated to impact EBITDA by approximately GBP 20 million over the course of the full financial year. With GBP 3 million incurred in the first half of the year, the majority of that falls into H2. Operationally, in the last few months, we have seen really strong performance. Having taken our four new brands through their first peak trading period, opened two new distribution centers and having onboarded and commenced shipments to our first two international wholesale partners with further partnership plans for next year, unlocking future growth opportunities. Moving on to guidance and outlook. We now expect revenue growth for the full financial year ending in February 2022 to be 12%-14% from the 20%-25% previously guided.
Noting the higher than expected return rates in the U.K. and weaker international demand, along with our expectation that the ongoing uncertainty we have seen recently continues. Recent developments surrounding the Omicron variant could pose further demand uncertainty and elevated return rates. The adjusted EBITDA margin for the full year is now expected to be 6%-7% from the 9%-9.5% previously guided. This implies an adjusted EBITDA figure for the full year of between GBP 117 million and GBP 139 million. This is as a result of the significantly higher return rates impacting net sales growth and costs, with extended delivery times impacting international demand, both of which drive lower returns on marketing expenditure, along with significant ongoing pandemic related inbound freight cost inflation.
We remain extremely confident in our future prospects given the exceptionally strong growth reported in the U.K., where we have maintained our leading proposition. We also continue to make significant investment into infrastructure for a network capable of delivering in excess of GBP 5 billion of net sales with our first U.S. distribution center expected to go live in 2023, with options currently being considered to expedite this process, supporting a return towards our normalized growth rate of 25% per annum post-pandemic. We are also confident in our medium-term guidance of a 10% adjusted EBITDA margin. Our financial performance this year contains pandemic-related costs that we expect to unwind, along with investment into our recently acquired brands that will leverage as they scale. These costs consist of inbound freight cost inflation of approximately GBP 20 million.
Outbound freight cost inflation of approximately GBP 45 million as a consequence of higher carriage rates compared to pre-pandemic levels. Startup costs of approximately GBP 10 million into the brands we acquired earlier this year. Summarized, since we last reported, we have seen continued strong growth in our core U.K. market, which is where we have been able to maintain our leading proposition. While the return rates have continued to increase above pre-pandemic levels, the strong performance clearly demonstrates how the proposition resonates with customers and how successful it is when the product, the price, and the delivery are right. Internationally, there continues to be delays to delivery times, and that has affected that leading proposition, and we expect continued headwinds until international air freight capacity returns to more normalized levels and the delivery times come back down to normal.
This is clearly temporary, but uncertainty remains around exactly when we will start to see that ease. On the core side, we have seen pandemic-related inbound freight cost inflation significantly above what we experienced in the first half of the year. This is expected to continue for the remainder of this financial year and into next. We have gained significant market share during the pandemic, and our focus now is on improving the international proposition through continued investment in our global distribution network to deliver in excess of GBP 5 billion of net sales capacity to support our future growth. Looking ahead, we are very positive about the post-pandemic outlook when the headwinds I've talked about begin to ease.
As demonstrated in our international markets before the pandemic, and as we continue to demonstrate in our core U.K. market, this is a great business with great potential, great growth ahead, and we are continuing to invest for the future to take full advantage of that potential. I'm now gonna pass over and start the Q&A session.
Thank you. If you'd like to ask a question today, please press star one on your telephone keypad. That's star one to ask a question. We'll take our first question from John Stevenson from Peel Hunt. Please go ahead.
Morning, John. Apologies, I missed the start of your call, but I'm wondering if you can just give a little bit more information around sort of the brand versus market, your perception of that, certainly in Europe. I think you talked about September being normal. As sales have deteriorated towards the back end of the quarter into peak, can you draw on any sort of data or just your experience in terms of why you perceive this to be at a more market driven, the extent to which your service proposition has deteriorated against what it was before, behind the sales drop?
Thanks, John. Hi there. It's Neil here. I think we can give you some of the-
Morning, Neil.
Morning. I think we can give you some of the shape as to what's happened since we last updated in September. Back at the end of September, we were seeing positive trajectory changes in the U.K. and also in Europe in our major markets of France and Ireland. The U.S. was not so much, but what we saw in the U.K. then, as you can see from the numbers, that we saw continue to accelerate. We saw
Yeah.
A good acceleration in gross sales year-on-year increases from the mid-30% year-on-year to the mid- to late-50% year-on-year. We've seen that through the period in the U.K. That's been accompanied with a sharp continued increase in returns rates.
Yeah.
In the U.K., the returns rate's been the big factor, but it's or at the net level continued to form exceptionally well. The returns rates back at the end of September, we expected would continue to be at pre-pandemic levels because they'd return to that level in Q2. What we saw on returns rates in the U.K. from there on in was that they continued to increase and actually increased more sharply towards the last few weeks, actually, and over the peak Black Friday weekend. Now those returns rates have started to moderate a little bit, but seasonally, not as much as they would normally do. I think you've got that Omicron effect there.
Now, the big myth is around the international sales and
Yeah.
Europe as well as the U.S. . What we've seen in Europe was that trajectory that we'd seen through September continued into October, but then reversed. Those key markets went into growth in September. That flattened off in October and then went into reverse to decline again. Now, looking at the market, I think we did see correlations around not lockdown restrictions, but just restrictions generally around COVID. When things opened up a bit and we came into the new season in September, we saw that positive trajectory. Now, we expected that to continue through October, November, and December, but it flattened off and then started to reverse in November. We saw the 11% decline over the whole of Europe during the quarter. That was the European dynamic.
I think. Well, there does seem to be a correlation with market factors around whether people were as buoyant in their purchasing for going out, et cetera, in Europe. We didn't see that at the same level as we saw in the U.K. The big factor there is our delivery proposition in Europe isn't as competitive as the U.K. A different dynamic. But of course, you've got the full High Street competition set there, and we're competing against that from a, you know, same-day delivery as opposed to our extended delivery times, which in Europe have been around seven days-eight days. Pre-pandemic, that would have been three days-four days.
That's the factor that we had been there, but we didn't see that buoyancy in the demand continue from that we did see in September through the peak period. Then similarly in the U.S., we were expecting the market factors to be more buoyant too in the holiday season we'd expect to have led to higher levels of demand for us relatively year-on-year, and that hasn't manifested as well. While we did see an improvement in the U.S., which was in decline at the end of the previous quarter, we didn't see that improvement come through to the extent that it did. Again, as we've got closer to the end of the calendar year, we've seen that soften again.
We have seen times of good improvements in the U.S. , and we've seen that in recent weeks as well. You can get from that, there's also a lot of volatility in the demand, which we had seen through different periods around the pandemic. It's those factors which are all transitory and that we firmly believe that they will change once we're in the wake of the pandemic rather than in the midst of it, which we seem to have been for the last two years now or 18 months now.
Okay. Neil, was the delivery proposition for Europe running at that level really from autumn or did it actually deteriorate into peak?
It didn't significantly deteriorate into peak. It's been at those levels for the last 15 months at least.
Fine. Okay. Brilliant. Thanks, Neil.
John, what we did see, John, is back in the pandemic in the early stages, when people were spending more time at home, and actually it was all about athleisure and hoodies and joggers, actually, that waiting time wasn't so bad for them because they weren't doing anything. As actually fashion has switched back on again, and as we've seen that mix of dresses go right back up, actually suddenly now I'm going out at the weekend, and actually that sort of seven days-eight days is just not good enough. Equally in the U.S., you know, to wait 10 days for that dress is not good enough for a fashion consumer.
Yeah. No, brilliant. Very clear. Thank you, John.
Thank you. Our next question comes from Adam Cochrane in DB.
Good morning, guys. A couple from me. I'll do one at a time. In terms of the returns rate, is this all a mix impact towards the dresses, as you say, or is each category seeing higher returns, please?
The main driver here is really dresses. If you go back to the early stages of the pandemic, you had that massive swap from sort of athleisure and people not wearing dresses anymore. We've seen that obviously completely flipped towards the end of summer and as we went into autumn, and dresses actually back and above pre-pandemic levels. The interesting thing within that is actually the mix of the dresses that we're selling within the dresses category is again very much around going out and equally in terms of fabrication very much around woven fabric. It's absolutely the key driver here is dresses, and then within that, going out dresses.
Okay, fine. The other categories are staying roughly the same rate of returns. It's just a movement towards. Is that because people are buying three dresses, sending two back? Another way of thinking about it is the net demand. We've been covering online stocks for the best part of 10 years, and we've always talked about net and never really about growth. The returns rate was some kind of trade secret that companies didn't want to discuss, and now it seems to have become really relevant. Isn't net sales the best way to think about underlying demand rather than gross sales?
Net sales is the bottom line, and that is the best way to think about demand. I think understanding the dynamics of how things have changed, and I think we definitely also did see in Q2 a situation in the U.K. where the returns rate went up and that net sales growth rate came down quite a lot. There was a lag then between people returning and then reordering, should we say. There's also that timing impact, and that becomes relevant in times like this where you've got exceptionally sharp changes in the returns rate. You're absolutely right, the bottom line is the net sales demand.
We saw that being very strong in the U.K., but we felt it's good to show you that, the impact of the returns rate from the gross sales. But of course, if there's still a differential on gross sales to net sales from the two-year stack as well, because we've got now higher returns rates from the pandemic. But you're absolutely right. The net sales is the key metric because people could order more things and then just select and return. We don't tend to see much of that behavior, but we see an underlying returns rate that is relatively low compared to others in the industry.
We've got an acceleration in that returns rate in the quarter, and that's been generally driven by that dresses mix impact. The dresses mix, as John said, was higher than pre-pandemic, and that's largely around fashion rather than people just ordering more and sending more back.
On the outbound GBP 45 million of additional freight costs, should that be a bit lower in volume terms because you've actually distributed less product to the U.S. than you were expecting, but the rate card has gone up per order to keep it at GBP 45 million?
That 45 million is the impact of this year's volume. We're still seeing growth during the year on the U.S. and although it hasn't been as strong as we expected. The rates have not come down. If anything, we've seen higher rates. You've seen the other impact there is that returns rates are higher as well from the U.S., but not anything like as significantly increased in the returns rate compared to say the U.K. market.
Last one. You talked about the marketing being less effective. Does that mean in this situation as a strategy, you cut the marketing because it's less effective or you keep spending to maintain as much demand as you can? Thanks.
We've definitely focused on keeping the strength of the brands going, and that's why we've got that high marketing spend. We were anticipating that to come back in to a lower percentage of sales, and it indeed did do at the start of the quarter. But then as we've moved through the quarter, the increase in returns rate, so if you're looking at your returns on marketing versus gross sales, we should do to a certain extent on a day by day basis. We've been pushing that to where we think the point of diminishing returns is. But generally with the lower levels of demand at the net sales level, it's been a higher percentage of sales. It's been very competitive for the demand that's out there.
Of course, this year compared to last year, you've got the full set of competitors, including the High Street brands. I think that's meant that it's been pretty competitive and the returns on marketing have been lower.
That's great. Thank you, guys.
Thank you. Next question is from Georgina Johanan in JP Morgan.
Hi. Good morning, guys. I have three questions, please. Should I ask them separately or together?
Separately is probably easier.
Great. Cool. I guess the first one was just following up on Adam's question, please, around the returns rates in the U.K. . I understand the point on mix. I guess I just wanted to cover off whether you're confident that there's no, you know, product issue here or from the kind of comments you're getting from consumers in terms of, say, quality or something like that. I'm not sure if you have pushed some price increases through. Is there any question from consumers that the value is not there, how it was previously, for example, please?
No, we're getting no feedback from consumers in terms of anything to do with quality, pricing, et cetera. You know, we have a full, obviously, quality control process as well that examines all returns when they come back in. Definitely not an issue.
Great. Thank you. The second question was on the U.K. performance, which has obviously, you know, continued to be very strong. I just wondered if you could share within that growth number what the established brands in the U.K. were doing, please.
I think if you think of the U.K. as being a 10 percentage point differential in the growth rate from established brands versus the acquisitions. We've seen strong organic growth in the U.K. from the established brands and then the organic growth from the recently acquired brands and then growth from the new acquisitions this year, which is Dorothy Perkins, Wallis, Burton, and then the Debenhams marketplace as well.
Boohoo and PrettyLittleThing in the U.K. growing by something like 15%-20%?
Round about that level, yeah. It varies, but that's the differential there.
Thank you. Just on final question, please. I appreciate, you know, this is a sort of an unscheduled update and so on, but just given how close we are to your new financial year, how should we be thinking about like the EBITDA margin rebuilding or not, as the case may be, into next year? Because I imagine certainly in the first half of the year, and as you've alluded to, a high number of these pressures will continue into the start at least of next year.
Yeah, I mean, first off, I'd say that we're not giving guidance for the next financial year right now. You can see the visibility as a result of the pandemic is problematic. That's clearly not that helpful. I think what we've factored into the guidance for the rest of the financial year is a conservative view based on that. You can see that from the implied growth rates for December, January, and February for the final quarter.
For next year, I think while the real return of our EBITDA margin to the double digit depends on that unwind of particularly the international distribution costs and then those inbound freight costs, which together are around about 300 or more basis points or 3 percentage points. That's the bridge to the 10% is those pandemic factors unwinding. We really can't say that. I think for conservatism, it's sensible to think of growth rates for next year in a similar area to what we've seen in the second half of the year. Obviously, if there's any unwinding of demand or lead times for us, then that's an opportunity to reaccelerate the growth in overseas markets.
On the EBITDA margin, I think it's conservative to think of the EBITDA margin for next year being in a similar place to this full year, so in that 6%-7% range. Again, if the pandemic factors unwind, that would be accretive to that.
That's incredibly helpful. Thank you very much.
Thank you. Next question from Anne Critchlow in Société Générale.
Thank you. Good morning. I've got two. First of all, given the challenges in getting the product into overseas markets, did you early on in the three months, decide to promote more strongly in the U.K. or discount or, you know, whatever you want to call it, just to sell stock through faster because you knew that you'd have a lot of stock left over?
No, we've always managed our stock.
A lot of inventory.
Yeah. No, we've always managed our stocks quite closely, as you're aware, in terms of our test and repeat model. You know, there's obviously times at the end of the season where you've got to promo a little bit more. No, we haven't been driving promo any more than what we would have planned.
Okay, thank you. Secondly, just looking at the stronger pound year-over-year, has that fed into the slowness in overseas sales, given that the product would look more expensive to overseas customers, do you think?
No. I mean, we hedge our currency cash flows well in advance to make sure that we don't have to price through any changes in exchange rates. That's not been a factor. You could see that earlier in the year, the reported numbers where we've not got much of a difference between constant currency growth rates and local currency growth rates.
Great. Thank you.
Thank you. Next question is from Charlie Muir-Sands in BNP Paribas.
Thanks very much. Yeah. You gave some of the figures before, but I wondered if you'd just clarify around what your current delivery promise is and how that's rendered. I think you gave the Europe one as being just stable. The U.S. is now around 10 days, I think you said. Is the U.S. getting worse or better or staying the same? Finally, sort of the same question for Australia on the delivery side. You sort of alluded to perhaps being able to bring forward the localization of warehousing in the U.S. How much earlier do you think that might be feasible to do? Would you consider doing that into Continental Europe as well, given consumers clearly don't seem too willing to wait very many days for clothes for social occasions?
Thank you.
I'd say on the first one, delivery times are stable. They're not getting any worse. I suppose like we would have thought in November 8th in the U.S. with international travel reopening, that would have improved things. We haven't seen that from a lead time and equally from a cost point of view. In terms of the U.S. warehouse, we're looking at a number of options. We're looking at the timing of that. We had spoken previously about that being live for 2023 calendar year. We're looking at lots of options currently in terms of how we can execute that and how we can make that as quickly as possible.
Perhaps we'd start off there with a returns option in the U.S., which we could get into earlier. Obviously the pick, pack, and dispatch is the key one. We're looking at all options there to see how quickly we can have that operational now. In terms of Europe, that is on our map. Europe was always planned to follow quite quickly after the U.S. Clearly, the U.S., from an overall business point of view, is our real priority. Both U.S. and Europe are for sure on our critical path. Looking at all of our options there at the moment.
Great. Thank you.
Your next question from Simon Bowler in Numis.
Good morning all. Thank you. I was just wondering, in terms of the impact of returns, has the cost of actually kind of getting returns back to yourselves also kind of gone up? Is that part of that cost then with now that return rates are high, you're having to send out items more to make the same net sales and also receive them back in more?
That cost, Simon, is factored into the guidance, but it is an increase in cost as well. We'd anticipated that returns rates would go back to pre-pandemic levels. They're above that at the moment. It costs around GBP 2.50 per unit to ship out more units and then bring them back. That cost is in there. We would normally expect to have that cost of returns factored in, but it's been slightly higher in the second half of the year than we would have anticipated when we planned for the year, and that could have added up to about GBP 10 million higher in the second half of the year.
Okay. I thought kind of John's comments earlier were quite interesting around kind of the delivery proposition hasn't changed, but because the nature of what people want to buy has changed, it's become more important and more impactful. Just in light of that, with the impact you've seen that having, are there routes to improve that delivery proposition beyond local warehousing, which is gonna take a while to come through or beyond the pandemic kind of moving through? Are there more expensive or different routes to getting products through to consumers that you would consider?
They're quite expensive actually in terms of. Obviously you're gonna go for more of an express service. If you look at even our standard shipment to the U.S. has sort of gone from pre-pandemic about sort of GBP 6 a parcel to almost double that level. When you go to express, you go really up on that again. It's quite an expensive option. I think really the coming out of the pandemic and the warehouse are really the best options that we have as we look forward.
Okay, great. Thank you.
Thank you. Next question from [audio distortion] please.
Morning all. Just one question, which is, on freight availability and costs, how confident are you that we are going back to where we were before? You know, there are studies out there which suggest that, you know, air freight rates were underpriced and are going back to a significantly kind of higher level in the medium term. Does that affect your planning around your business or the underlying economics?
The biggest issue we have on air freight is that most of our air freight flies in the belly of passenger planes. We don't actually use a lot of actual cargo planes in terms of moving our freight. Really the real key for us is when international travel gets back and becomes more normalized, then equally, that puts more capacity into the market, therefore more supply and that will drive down costs. We're quite confident this is all about passenger aircraft going back in the air, particularly in international.
Yeah. There are studies which suggest that, you know, the 747s where most of the excess, the big spaces will be the last to come back in, and more modern planes where there's much less capacity will be used first. You know, there's certainly a concern, you know, that passenger kind of belly capacity doesn't increase as fast as passenger traffic does. Is that something that you consider?
Absolutely. I mean, if you think of, it's quite rare to see a passenger 747 at the moment if you've been doing any international flying. You know, it's mostly been around the new Boeing Dreamliners and around the Airbus aircraft that are on those long haul. Again, if you think of a 747 probably in a cargo plane carries about 100 tons roughly of clothing cargo, whereas a 777 as an example carries 50 million tons. There is a big difference, of course. Actually, if you look at any of the international travel, you know, it's mostly made up now of non-747 aircraft and has been for some time.
Thank you very much.
Thank you. We will take our last question from Tony Shiret in Panmure Gordon.
Thanks very much. It's a really simple short question, following up on Adam's question earlier. In terms of marketing costs, can you just tell us what you think it's gonna be as a percentage of sales, for the current year, please?
For the current year, it's going to be above 11% of sales, and that's based on those lower returns and the lower levels of net sales that we've seen.
Okay. Is that sort of just above 11 or materially above would you say?
If you think 11.5% to be conservative.
That's great. Thanks so much.
Thank you. Just passing the call over to the speaker today, Tony, please. John, please go ahead with closing remarks.
Okay. Listen, really thank you everybody for joining us this morning at such short notice. We strongly believe we've got a fantastic business with great growth potential, and we're continuing to invest for the future to take full advantage of that potential. Thanks, everybody, and speak to you all soon. Thank you.