Hi, good morning, everybody. Well, they're all with me, the guys are with me, Shaun, John, Carol. Been interesting times. Really looking forward to the future. We've had days and days of a year of every day there's a higher cost, and we've gotta deal with this, and it's like the dodgem cars, and we're just moving and swerving. Now, as it opens up, it's not only exciting, it's fun, 'cause the opportunity's opening up everywhere for us. I'm really looking forward to the next part of the journey. I've said enough. Hand over to the guys. Thanks.
Thanks, Mahmud, and good morning, everyone. I'm gonna give an update this morning on our group and performance last year, how we are navigating the macro backdrop and getting the business back to growth. Shaun will talk through the financials, I will then come back to talk in more detail about the initiatives we are taking. After which, Carol, Shaun, Mahmud, and I will take any questions that you guys may have. What we've seen has been significant growth over the last three years, with sales plus 43%, we have taken meaningful amounts of market share. More recently, trading conditions have been tougher for the sector, with supply chains disrupted and inflation impacting costs and dampening consumer demand. During this period, we've made substantial progress with operational priorities.
Macro conditions are improving, and we're reinvesting into price and lead time to reinforce our value credentials and our test and repeat model. Inventory is leaner, lighter and turning faster. Significant progress has been made with key infrastructure projects, including automation and our U.S. distribution center that goes live later this year. This is all geared towards ensuring that we are well-placed so that the group can rebound strongly as headwinds ease and we get back to growth. Macro headwinds are improving, this gives us a good degree of confidence for the year ahead. Inflationary cost pressures remain, but the outlook into the second half of the year looks more promising. Freight costs have been reducing from record highs, particularly within sea, and we have been reinvesting gains into more expensive air routes to improve speed to market.
That said, consumers continue to face cost pressure right now, and we have to navigate the business carefully through this period. Looking at the markets we operate in, we remain optimistic about the huge opportunity ahead with a target addressable market approaching half a billion customers across the U.K., U.S. and Europe. In the U.K. and U.S., there has been a significant acceleration in that online channel shift, with more than 40% of spend taking place online today, and that will continue to grow in the coming years. In the U.K., we've materially grown our market share from 6.2%- 6.9% of spend online, where the right price, product, and proposition has resonated strongly with our customers and our focus is to replicate this at scale in key overseas markets where we have low levels of market share today, but massive potential.
There are three areas that I want to outline on how we get Boohoo back to growth, and between Shaun and I, we are going to share the details of the strategic programs that we are putting in place to deliver this. Customer first, investing for growth, and delivering sustainable ROI. We have a clear list of priorities, the execution of which underpin future growth. Firstly, our customer. We are getting back to our tried and tested test and repeat model now that we are seeing a degree of recovery in supply chain disruption. We will be using tailwinds from lower cost inflation to drive speed and enhance our value offering, and through continuous investment to upgrade the user experience, we will focus on driving lifetime value. Secondly, investing for growth. Key enablers will unlock our growth potential.
The U.S. distribution center is a significant game changer for our U.S. proposition. Our automation projects are delivering exceptional results, and there is more to come here. Elsewhere, internationally, we see wholesale and marketplace partnerships as key for growth. We'll be investing in the brands to expand our global reach and awareness. Lastly, we want to deliver sustainable ROI for our shareholders. We will drive a leaner, lighter, faster inventory model with a focus on rebuilding profitability where we can deliver a return to growth, combined with the significant improvements in profitability. Before I hand over to Shaun to present the financial review, we have a short video which I want to play for you to demonstrate the strength of our group.
Okay, thanks, John. Good morning, everybody. It's great to be here for what is my first Boohoo results presentation. I'm now going to walk you through the financial review, as well as talk to delivering sustainable return on investment as we get the group back to growth. My focus is on four key areas. Firstly, on stock management. We've made great progress bringing inventory down significantly with a 36% reduction year-on-year and more than GBP 100 million in absolute terms, and we see further opportunity to move this further. We're prudently managing all of our costs in our business, ensuring that the cost base is appropriately sized. It's lean and right-sized for the current environment and gives us the right platform as we get back to growth.
Cash is queen and careful cash management is a key focus area, and the cash that we are generating is then being selectively invested to support future growth opportunities, of which there are many. Sales for the year totaled GBP 1.77 billion, down 11% year-on-year, albeit slightly ahead of what we'd previously guided in January. Performance in the year was impacted by consumer demand softening due to the cost of living challenges, as well as reflecting the shift back towards offline channels following the pandemic. Gross margin at 50.6% was down 190 basis points year-on-year. A resilient performance given the significant cost headwinds facing us last year, along with the work done to proactively bring the inventory position down in H2.
Adjusted EBITDA was GBP 63 million, as operating costs have been impacted by rising inflation, as well as the ongoing elevation of international shipping costs. We have a robust liquidity position with GBP 5.9 million of net cash at the end of the period, which was better than expected due to the positive actions we've taken on CapEx, on working capital, and on costs. We finished the year with GBP 331 million of liquidity headroom. On inventory, we've significantly reduced this, down 36% year-on-year as we've managed through a period of uncertain demand. A key driver of unlocking cash is the work we're doing on our stock management as we push to drive a leaner, lighter, faster Boohoo. As mentioned, inventory is down 36% year-on-year. Our lead times are improving, three weeks faster alone in April compared to a year ago.
We've accelerated our stock turn, delivering an additional turn improvement to date. Whilst we're pleased with the progress made in recent months, there's more opportunity ahead as we look to unlock further lead time improvements. Speed matters and shorter lead times are critical in our drive to get back to growth. The execution of our strategy, and specifically the focus on inventory turn, has driven significant working capital inflows over the last year. We've continued to make significant investments with GBP 91 million of CapEx in projects we believe underpin our plans to get back to growth. We generated GBP 30 million of free cash flow and ended the year in a strong liquidity position with GBP 6 million of Net Cash and GBP 325 million of committed credit facilities via our RCF, giving the group over GBP 330 million of liquidity headroom.
We've taken steps to rationalize costs. Pre any reinvestment, we'll reduce overheads by over GBP 50 million through headcount reduction and other initiatives, all of which are in flight. This ensures that the business is right-sized for the current environment and has the headroom to selectively invest in key growth initiatives. The percentages we show here are costs as a percentage of net sales, excluding D&A. You'll find it no surprise to hear that marketing is absolutely vital to the success of our business. 10.8% of net sales in FY 2023. As we look out to the medium term, we will continue to invest in marketing to ensure that we continue to acquire customers and build excellent brand awareness across our U.K. and international markets.
Distribution costs in FY 2023 were 23% of net sales, as fulfillment costs remain elevated in the teeth of a global supply chain challenge. Looking ahead, with the existing automation we have in place and optionality for U.S. automation as volumes grow, we expect to be able to benefit from operating leverage in the medium term. Finally, admin costs of 13.2% of net sales in FY 2023 are expected to reduce as we leverage overheads through efficiencies and scale. We exited the financial year on an improved trajectory. By the end of the summer, the first phase of our 1 million sq ft U.S. distribution center will go live.
Opening the D.C. in the U.S. will help unlock our growth potential, providing a delivery proposition that can service 95% of the U.S. within three days, compared to seven, eight, or even 10 days that we've been facing over the last couple of years. As we grow, this will provide the additional capacity that the group will need. We're in a key focus market with proximity to our customer. However, as with any new operation, one thing I can tell you for certain is that we will see some initial operating inefficiencies. As we open the distribution center and as we expect the group will also incur additional freight and import duties as a result of the shift to the U.S. local fulfillment. Therefore, we expect the site to be a net investment for us this year, but of course it unlocks that growth potential.
Over the medium term, we expect this to become neutral as we scale. From day one, this investment fundamentally transforms our capability to service the U.S. market and unlock growth with the right product, the right price, and the right delivery proposition. Where we stand today, we have an EBITDA margin of 3.6%. As we look forward, we see a clear path to profitability. We believe 6%-8% EBITDA margin represents a realistic ambition coupled with getting back to double-digit growth in the medium term. I've detailed key areas to support this. First of all, input cost deflation. We've already started to see deflation in areas such as inbound freight and raw materials, prices like cotton coming down. This will clearly take some time to fully flow through.
Even after we reinvest into pricing and lead time, there is a clear opportunity. We saw the cost prices of our products increase as inflation bit into raw materials, into energy prices, into freight prices. Now we see all of those input prices decreasing, and we need to capture that deflation. Returns have risen through the pandemic. Our focus is on taking steps to lower returns in a way that doesn't negatively impact the customer experience. For example, through a focus on size and fit improvements with our suppliers, quality checks further upstream in our supply base, and improved processes in our supply chain. Volume, growth, and overhead efficiencies from our back to growth strategy will drive operating leverage, supporting margins alongside tightly controlled costs. International growth, we're well underway with our US distribution center. We have many other markets internationally where we see growth opportunity.
For example, through wholesale and marketplace partnerships. This gives us clear line of sight to an Adjusted EBITDA margin of 6%-8% in the medium term, while investing in price, in product, and in proposition in a manner that will deliver a return to double-digit revenue growth and sustainable ROI. Moving finally on to guidance. The group's focus for the year ahead is on rebuilding profitability and getting back to growth. For the year ending 28th of February 2024, FY 2024, revenues are expected to be between flat and a decline of 5% versus the prior year, with increased emphasis on driving profitable sales. In the first half, revenues are expected to decline by 10%-15%, a result of this action being taken.
In the second half of the year, the group expects to return to revenue growth as it benefits from the investments being made across price, product, and proposition under the back to growth strategy. Adjusted EBITDA for FY2024 is expected to improve year-on-year as a result of operational gains, cost efficiencies, and cost deflation in our supply chain. With Adjusted EBITDA margins of 4%-4.5% and Adjusted EBITDA of between GBP 69 million-GBP 78 million, in line with market expectations. CapEx will be GBP 80 million-GBP 90 million and year-end net debt to Adjusted EBITDA of approximately 1 times. To summarize, we have a strong financial and operating model. Right now, we're focused on getting the group back to growth through self-help in the delivery of our strategy. With that, let me hand you back to John. Thank you.
Thanks, Shaun. The boohoo group was built on the test and repeat model. In an industry where customer tastes and preferences are constantly evolving, we need to stay on top of trends and ensure we are offering the right product to customers at the right price. We need to get that onto our platform and deliver to our customers quickly as possible. Over the last year, we have seen a worldwide supply chain crisis, which impacted how we execute our test and repeat model. As market conditions have shown signs of improvement, we want to ensure we reinforce the strengths of test and repeat as the world gets back to normal. For example, investing into air freight to drive down lead times and investing in pricing to upweight our entry price product mix, all of which is geared towards building a leaner, lighter, and faster model.
At the heart of Boohoo's DNA is fashion. It is crucial that whatever market we find ourselves in, we have a fantastic fashion offering across our brand portfolio, appealing to everyone from 16- 55 years old, of all sizes and demographics. We visually wanted to show you here how the product mix has changed over the last few years. Of course, 2019 was our last year comparison point, where we had a traditional mix of products across all lines. As COVID hit, the years of 2020 and 2021 were all about athleisure and all things jersey as people stayed at home. In 2022, as the world started to open up again, we saw a resurgence in premium and occasion wear with no restrictions for the first time in three years.
Finally, in 2023, we are seeing a return to normal with strong shifts into swim, beach, and holiday wear with more normal product mixes compared to the last three years. Crucially, we are approaching the first summer holiday season which has had no COVID impacts for three ears. The key takeaway here is that we are always at the forefront of what people want. We are leaner and faster and will always remain agile thanks to our test and repeat model. At the end of the year, we had 18 million active customers and over 65 million followers globally across our brand's social channels. We work with high-profile celebrities on big name campaigns and, for example, in the last year, we have partnered with Kourtney Kardashian through Boohoo, Liz Hurley through Karen Millen, Jade Thirlwall at PLT, and Trippie Redd at boohooMAN, amongst many others.
We also work with hundreds of influencers who allow us to target huge audiences that are specific for our brands and geographies. The combined reach of influencers that our brands work with totaled in excess of GBP 400 million. We recently launched on TikTok Shop, enabling followers to purchase directly through the platform, and we are focused on engaging our customer base across the platforms relevant to them, as well as through our customer journey, such as our apps to upgrade the shopping experience. Infrastructure plays a key role in our proposition. At our Sheffield site, we have invested GBP 125 million to build a state-of-the-art facility, which will have doubled our capacity, driven significant increases in throughput, and comfortably delivered savings in double-digit millions of GBP.
This summer, we expect the first phase of our U.S. distribution center to go live, launching with one brand and then rolling out the group brands later in a considered and phased approach. We already have a significant business in the U.S. with over $400 million of sales last year. The distribution center's opening will transform our proposition, allowing for next and express delivery across key states with 95% of the U.S. covered within three days compared to the eight to 10 days we currently have. This, we believe, will be a real game changer, ensuring our product price and crucially our proposition is as strong as possible. Moving on to Debenhams, our digital marketplace. Our strategy is to add more partners, more brands, and more products, and through this, to grow our customer numbers.
You can see in the table the rapid progress we have made in growing our customer base, the number of brands available for consumers, and the impressive number of products available across fashion, beauty, and home. Looking forward, we want to accelerate Debenhams, focusing on premiumization, turbocharging our marketplace, and accelerating beauty. This will allow us to capitalize on Debenhams' huge brand awareness and significantly scale its capital-light, stockless model which, at scale, can deliver superior margins. Our partnership strategy is focused on working with partners that can extend our global reach through their direct-to-consumer platforms and help raise our brand's awareness in a manner that offers complementary and incremental revenues in a low-risk way. In turn, our wholesale partners get access to our fashion, our newness, and our short lead time model.
Our sales portal allows them to select from the same ranges that our teams are buying and benefit from the group's buying scale. We have today a large wholesale footprint around the world with five key partners as outlined on this slide. Looking ahead, we are working on partnership opportunities across new regions to continue to expand this offering, elevating our brand's presence across existing and exciting new markets. To summarize, we are focused on a leaner, lighter, and faster model, and we're focused on getting this business back to growth. We are putting the customer first, we are investing, and we are looking to deliver sustainable ROI as we get back to growth. Looking ahead, we will continue to invest selectively where we see clear opportunities to support these strategies.
These include reinforcing the strengths of our test and repeat model to deliver amazing fashion and great value to our customers, our digital marketplace, Debenhams. Expanding our wholesale partnerships and developing our global infrastructure network. We're extremely confident in our medium-term outlook as we continue to offer customers unrivaled choice, inclusive ranges, and outstanding value, giving them even more reasons to shop with us. Thank you, and we'll now open up the floor to questions.
Good morning. It's Caroline Gulliver from Stifel. Thank you. My first question, just relates to international, and in particular, can you give us some of the catalysts to getting back to growth in rest of Europe and rest of world? You've obviously talked about the U.S. and the U.S. D.C., but what's it gonna take in rest of Europe and rest of world?
I think, if I take that one to start with, a couple of things. I think we talked about our overseas partnerships. In terms of getting our brand awareness in Europe and rest of the world, we're working on some new partnerships which we hope to announce in the next couple of months. That will be one in terms of our brand awareness. Like other parts of the world, we're seeing lead times improve in terms of getting our product to consumers in a more in time fashion. U.S. still been our longest one at eight to 10 days, but if you look at rest of the world, Australia as an example, we're now getting key cities in Australia in just under five days.
It's really about being able to, you know, for the first time in a couple of years, been able to push some of those markets again. They're probably two of the key in terms of getting that back to growth.
Okay. My second question just relates to beauty. Just if you could give us some examples of how you're intending to accelerate beauty. I know you've had some wins, just a few more examples would be good.
If I take Debenhams to start, Debenhams now carries, I would say, 85% of the premium beauty brands. Obviously Debenhams is making huge progress in terms of their beauty business. We're not very strong, I would say, in our core brands in Boohoo, PrettyLittleThing, Karen Millen, Nasty Gal, as an example. We've big ambitions in terms of own buy and own brand in terms of development there with those brands. Obviously we've kind of recently invested in Revolution Beauty. You know, that's obviously given us more insight into the beauty market and what potentially we can do with our internal brands. You know, quite a lot actually going on in the beauty space.
Thank you. It's Anne Critchlow from SG. A question please on current trading. What have you seen in March, April, May? Particularly in the U.K., where I think the fourth quarter was quite weak. Secondly, are you still sourcing 60% from nearshore countries? How is it trending? Thank you.
Let me take the current trading question. We haven't shared an update on current trading, but what we have done is given you some guidance around first half performance. We've pretty consistently said, I think, now that in our expectations are the first half remains challenging. There's, if you think about a year ago, we were coming out of Omicron. We were seeing a lot of pent-up demand, John spoke to that, around occasion wear. You know, year on year, the gaps that we see right now are all about occasion wear. Everything else is there or thereabouts. Puts and takes, but there or thereabouts, and the gap is occasion wear. That really speaks to the strength of occasion wear last year.
We're not gonna give you an update on current trading, but we have given you the first half, which should give you enough to sort of understand where we're currently operating.
On the sourcing point, I would say, yeah, pretty much kind of, let's say 60/40. What I would say is that everything is back to normal. The global supply chain crisis where, you know, goods were taking double-digit weeks to get. You know, back to our test and repeat model, we could in a lot of cases test, but we couldn't repeat because basically the lead time wouldn't allow us to do that. If I look at China today, you know, I can order in China, and I can have air freighted in 48 hours in a couple of weeks. You know, kind of what we had to pivot to in COVID to get more near sourcing because of expensive freight out of Asia, but also slow freight out of Asia, actually, that's all back to normal.
Depending on the product category now, we can pivot quite easily. You know, there's no delays anymore. Everybody talks a lot about sort of the $1,500 container going to $15,000, but we don't talk so much about actually the impact on lead time, and particularly for somebody like us, the Test and Repeat. You know, being able to do the test, but most cases not being able to do repeat was quite a big impact.
Hi, it's Miriam Josiah from Morgan Stanley. Just a question firstly on the guidance. Could you just talk about what gives you confidence to be able to get back to growth in the second half from the sort of -10%, -15% you're expecting in the first half? Is that purely driven by the pricing investments you've mentioned, or are there other factors as well, and how are you thinking about macro in that as well? Sort of linked to that, I guess, how much flex do you think you have in your OpEx space to be able to hit that guidance on top line if demand is slightly weaker? Are there areas that you perhaps could cut further? Because I know you said that the cost base is sort of rationalized at the moment.
Hey, Miriam. Nice to see you. Let me give you my perspective on that. I think there's probably four reasons that give us confidence that we can get back to growth in the second half. A couple of them external and a couple of them internal. If I start with the external, the first part is the comps. The comps are just easier in the second half. I spoke earlier about, you know, that first half comp against the occasion wear. Second half comps are easier. Also, I think, you know, as we segue through this year, what I expect to see is headline inflation coming down. I think just consumers will feel better as we get back down to what I expect to be kind of mid-single digit inflation, not double digit inflation.
They're kind of the macro factors. And that's pretty consistent with what the banks and commentators on the market are saying. If you think of the internal factors, we are investing for growth, right? John talked about we're investing in price to drive growth, and we're investing in our proposition, and we speak to our U.S. fulfillment center capacity. So we are investing for second half growth. I feel like there's a lot in the tank for us to run at. This is a great business, and we've got a ton of headroom. So, yeah, I do feel confident about getting back to growth. The second part of your question?
Just on the-
Yeah, the cost base. Yeah. Look, I think we've demonstrated over the course of the last few months our ability to manage the cost base accordingly. You know, this business was set up for growth. During a period of decline, managing decline, we've adjusted the cost base accordingly. That's right across all the costs. I think our ability to be agile around costs, I think is, we've been able to demonstrate that. I absolutely see more opportunity there if that's where we need to go. Right now, our focus is on getting back to growth, but we can pivot and adjust as necessary.
All right. I'm sorry. John Stevenson at Peel Hunt. A couple of questions, please. First up, just on the U.S. launch. Can you touch on sort of plans for marketing? Also plans for sort of local supply chain. I don't know how quickly you would hope to sort of start testing something a little closer to the US. Second question just on Debenhams. Don't know if you can talk a little bit about how Debenhams performed last year and what you're looking to achieve, you know, coming to peak this year, whether that's in terms of number of brands or, you know, the profitability of the platform and sort of the progress that you think you can get to.
Yeah. If I kick off with the U.S. and local supply chain. We're already active is what I would say in the U.S. That's working with partners in the U.S. who may be making in China, Asia in some countries, but importing directly in. That's mostly in L.A. and in New York. We're looking at Mexico. We're looking at Central America, Guatemala, in terms of what's coming through there. We're active. We've already opened up. We're already working with suppliers, in advance of that, and ready for when our first brand, PrettyLittleThing, goes live, sort of towards the end of summer. All happening there. We've got actually our own team on the ground.
We're beginning to build a team in Los Angeles. That's all progressing really, really well. In terms of U.S. marketing plans, you know, clearly we want consumers to know that you can now get a parcel within three days and in some cases next day. We'll be actively communicating that. We have some events planned as we go into September, October, particularly on PrettyLittleThing, to really begin to build that brand awareness again. I'll hold back on those plans for the moment. Just sort of, you know, we kind of give those to the consumer first. Obviously, yeah, we're preparing in terms of marketing for that as we come through. Finally, just a question on Debenhams. Look, we're really pleased with Debenhams.
You'll have seen some of the numbers that we've got. I can say it's a profitable Debenhams already. Really now it's about onboarding more brands. We're way ahead of number of brands that were on old Debenhams. Clearly having, you know, online only allows us to do that. It's really about scoring more and more brands, getting more customers. You know, we're excited. You can see we mention it, you know, it's one of our key brands, one of our key focuses. You know, it's from an investment point of view.
Yeah
Sean's very happy. You know, it's stock light, less in terms of infrastructure. You know, we just see a super opportunity ahead for us on that brand.
I love a good marketplace.
Are you still seeing sort of decent sort of traffic growth as people sort of rediscover them?
Yeah. Yeah. Yeah.
Hi, it's Nikolaos Konstantakis from BNP Paribas Exane. I have a couple of questions, please. The first question is just on the net debt expectations for the full year 2024. It looks like those have gone up versus 2023. You're expecting slightly better profits, and sounds like there's still more to go on working capital. Could you explain what the bridge is there?
Yeah.
Secondly, you commented on the neutral impact in the medium term of the U.S. distribution facility. Could you expand a bit more on the puts and takes on the Gross Margin versus the fulfillment leverage you expect? Thank you.
Let me start with the net debt question, the bridge for 2024. Yes, we've guided to kind of one times EBITDA for net debt for this year. You know, from where we are, I think we delivered a good performance for FY 2023, got to a net cash position. A lot of that about the improvement in inventory, the work we've done on the cost base and on cash and working capital more generally. All of those lessons that we've learned, and all of those muscles that we've started to develop, we take forward. The real driver, Nick, of the net debt increase is simply the CapEx that we're gonna spend on U.S. fulfillment, but also on phase two of automation in Sheffield, which is about increasing the capacity.
It's those are the two big infrastructure initiatives that we've got in the plan for this year. On top of that, of course, you've got some exceptionals, cash exceptionals in the U.S. As we launch, there's gonna be some, you know, building up the team. There's gonna be some split shipping as we get the proposition and the inventory and the stock in the right place. There's cash exceptional as well. There's a bit of interest as well. Interest will be a bit higher in this year. It's those typical things. The second question was on gross margin. What was the specific?
The question was, on the neutral impact that you spoke to.
Yeah
... in the medium term for the U.S. distribution, but how does that work between gross margin and fulfillment?
Yeah.
Yeah.
There are some gives and takes, of course. As we move into the U.S., what we'll definitely expect to see straight out the gate is inefficiency. I mean, we've got a big shed, and we're gonna start with one brand, and maybe we'll get the second brand up and running pre-peak. It's a lot of capacity for one brand, and we're not at scale. The cost per unit is gonna be a drag for this year until we get to scale and get the rest of those brands launched. There's gonna be a higher import duty and a higher inbound cost of freight as well, moving product in directly into the U.S. Offset against that is the benefit that we get to outbound shipping.
Instead of shipping from Sheffield to the U.S., as John spoke about earlier, we'll be shipping from Pennsylvania to the U.S. We get the... on a cost basis, as we scale, we expect the costs overall to be broadly neutral. Of course, the win here is that we get the opportunity for local fulfillment and a much better proposition. John spoke to 95% of U.S. households within three days. It just gives us the opportunity to compete in the U.S. You know, we've talked about how for us, this isn't really optional. You know, if we are serious about growing our business in the U.S., and we absolutely are, then we have to have a local fulfillment and a local proposition, and this is the step.
I'd rather make that step and then work to optimize the cost base and optimize the speed and the delivery times and all of those things, and just get out the gate and get going with that.
Hi, it's Simon Owen from Credit Suisse. Three questions for you. Following up on your guidance for next year, can you just tell us how much exceptional cost then there is going to be next year, either or both P&L and on OpEx and cash flow basis? It's clearly going to be quite a large number that you're gonna be declaring to be exceptional.
Do you want me to take the questions one by one?
Yeah.
Yeah.
Do them 1 at a time.
Yeah. I would say expect mid-20s order of magnitude on exceptionals. It will almost all be to do with the U.S. distribution center launch. It is things like the building of the team pre-launch. It is the split shipping cost, which is probably the largest single cost. If you think about that, what we're trying to do there is we'll put as much inventory as makes sense into the U.S. for launch. That will be all of the continuity lines, all of the best sellers, all the new stuff for a moment in time. We'll split our inbound, and newness will go into the U.S. and also into Sheffield. What we won't do is we won't move end-of-range products or products in markdown into the U.S.
There'll be a period of time where we service a proportion of US demand from both Pennsylvania and from Sheffield, and so we'll create those split shipments, and it will be for a period of time. That, you know, creates some exceptional launch costs.
More broadly, why is deflation a competitive advantage? That seems to be the core of your optimism around future margins, is that costs are coming down and therefore your margins are gonna go up because you're going to invest. Why isn't everyone else gonna do the same thing?
I can't answer for everybody else, but I can answer for us. I think, if you look at shipping rates as a clear example, you know, we're circa, I'm gonna say $1,500 for a 40 foot from China, most ports in Asia into the U.K. That had hit $15,000 at its peak. If I look at air freight, you know, even in last year versus this year, air freight today is what sea freight was a year ago, and has come down dramatically. If I look at raw materials, cotton, polyester, again, they've come over the top of the mountain. They've come down substantially versus last year. They're still higher than two years ago, but they've come down a lot there.
If I look at energy, again, well documented in terms of where energy prices are. They're just some examples of where deflation is happening. Our job at the top of this table, we paid on the way up is absolutely to make sure we grab it on the way down, and we're being quite aggressive on that.
Can I give you an example why I think it's-?
Can I just rephrase that then? Saying of all the benefits that are coming through, how much do you think that you'll take to the bottom line, and how much do you think you'll invest in price and proposition?
We're not gonna give you a split of that 'cause actually we don't know the answer to that. It will be about investing in price, so improving the price for the customer, and it will be about taking some to margin, but it'll also be about investing in lead time. Your question was about why is it competitive advantage? Let me just give you an example of why I think it does give us a competitive advantage. When we capture that deflation, what we saw a year ago, Simon, is air freight was so egregiously expensive that we shifted a whole bunch of our inbound to sea. Of course, that adds to lead time.
John spoke about how the test and repeat model is very difficult in an environment where you can test but you can't repeat. You just don't have the lead time to be able to get the product back fast enough. In a world where we can invest those deflation, those savings back into air freight, that allows us to get the test and repeat model really working for us again, and that's why I think it's a competitive advantage because the test and repeat model is the kind of lifeblood of our buying model.
Great. Thank you very much.
Hi. Tony Shiret from Panmure Gordon. Couple of things. First of all, Debenhams. You talk about turbocharging Debenhams, and the slide's got a few brands on it, quite a few brands admittedly. It doesn't really come across as very turbocharged, and I just wondered if there's something else you're gonna do. Is there gonna be a sort of big marketing push on Debenhams at some point, you know, focusing more of the marketing on Debenhams to get behind it? The second thing is, I sort of appreciate your presentations are a bit different this time, and I've missed the slides on product and stuff.
I just wondered, if you could give us some sort of ideas about what you're planning to do in the launch of the autumn winter, just in terms of themes and stuff like that, just so we can hear from the person on the table who hasn't spoken yet?
Okay. I'll take Debenhams. Do you wanna take the autumn?
Yeah.
Yeah?
Yeah.
Yep. In terms of Debenhams, look, we're in discussions with lots of other brands. you know, we're launching new brands on Debenhams every week is what I would say. you know, we're clearly have a lot to go in terms of brands that we want to attract and get on it. It's a slow process. actually, you know, if I think even in the next month the number of new brands, well-known brands that you'll be very familiar with that we'll have on board. We continue to push brands. Marketing spend continues to increase obviously as we get more consumers and we get more brands and we look to attract more people. you know, we've got ambitious plans for Debenhams for this financial year.
Obviously, that's gonna be through more brands and further marketing spend, in Debenhams.
In terms of the 10.8% marketing spend, what would that figure look like for Debenhams?
Well, we don't break down our brands by marketing spend, but we have different spends depending on brand and depending on region in terms of is what I would say. Some of our more mature brands in the U.K. have got our lowest marketing spends as an example, and some of our newer brands have got higher percentages. Equally, if we go into the U.S. or go into Europe, the percentages tend to be a little bit higher. Clearly, we see the opportunity is what I would say in Debenhams, and we'll be making sure we get behind that opportunity.
Yeah. Just to add on to John on the Debenhams question. We have actually already just launched a TV campaign, which is our bigger, better, bolder campaign, which is, you know, it's about relaunching and actually telling the consumer that Debenhams is still here. It hasn't gone away. It is a pure play. It is online. We have done quite a lot in terms of inventory with our partners. We have just landed some of the big premium brands, which John said, you know, earlier, which is really helping drive that positioning of Debenhams becoming more premium than I think it was when it was on the high street.
Certainly if you looked at the online shop today, you will be able to see that it's actually getting a much more premium feel than the old Debenhams that we used to know. There is quite a lot of marketing going on in the background. I think when we get all our new partners on board, it's just, you know, that is gonna turbo that growth. Just in terms of fashion going forward, going back to test and repeat, we're not a business that forecasts so far in advance into autumn winter because we're actually currently landing in summer. Obviously there's gonna be all the traditional categories that we do buy in advance. Obviously, outerwear, and our jackets, our knitwear and the occasion wear pieces, the long...
The stuff that's got beading and everything else that comes out of China that we have to buy in advance. All of that is business as usual. What we are doing is going back to, depending on the brand is how we're working. The likes of a Boohoo and a PrettyLittleThing are working on really fast leads. Karen Millen's probably working on a slightly longer lead. With Karen Millen, we've seen.
A return to working on collaborations. We've just worked with Karen Millen, the founder, for example, collection, it launched last week. Absolutely flew out. I'm actually wearing it today. We've done that, and then we've worked with Elle Macpherson, we've worked with Elizabeth Hurley, we've worked with loads of iconic kind of people on Karen Millen. Equally on the Boohoo brand, we've just launched with Pantone, we're seeing these collaborations really come through as quite a fresh approach as well. That's in our leisure collection. PrettyLittleThing we've just launched with Kappa just last week in L.A. There's quite a lot of marketing, and I can't give those marketing kind of fashion collaborations to you at this stage. That'll be second-half loaded and will actually come into play for the U.S. launch.
Hi. Thank you. It's Simon Bowler from Numis. I'll go one at a time in terms of theme. Both focus around the U.S. How long a period of time do you expect to be doing split shipping in the U.S.? Whilst you're doing split shipping, I assume you're not gonna be able to present kinda next day through to consumer, given some of the items may be coming from the U.K. How do you plan to kinda communicate that through to the consumer at the point of basket or before?
The consumer, when they come onto PrettyLittleThing, do their order, it'll be very clear in terms of what's gonna be within three days and then what's gonna come from the U.K. that will be eight to 10 days. That will be very clear message in terms of as part of that process. In terms of split shipping, look, clearly we want it as short as possible. You don't really want to be running it very long. You know, it's a temporary while we get up and running, but, you know, the shortest period we can make that effective, the better for us. The teams will be working.
It's good because the consumer can get their full order, but equally could be a little bit frustrating because something may take eight to 10 days and something takes three days. It's a, it's a temporary is what I would say, in the initial stages. You know, we'd like it to be weeks into months rather than any longer than that.
The way I think about it, Simon, is we'll put the inventory in the U.S. from the start around the bestsellers, around the continuity and the newness that will have moved in. Then over the period of the next few weeks and months, we'll be just adding more newness in and more newness in until we get to a point where actually almost all of the range is then available in the U.S. My estimate is it's probably three to four months. That's how long it will take us.
I'll be going to the U.S. next year.
[Ladies] as well.
It's a bit late for that. Just regards the idea of the U.S. DC being kind of cost neutral, does that require automation and, kind of local lower duty inbound sourcing? Or do they offer kind of further upside on the cost profile of it there?
Yeah. Expect us to optimize every part of that facility, whether it's import duties and making sure that we're sourcing product from the right location. It's interesting. When John mentioned Mexico earlier. You know, Mexico looks a lot like Leicester, funnily enough.
Oh, my God.
Yeah. Look, it's small quantities and it's short lead time. Right? It's also low, no duty into the U.S. Finding these sourcing locations that allow us to optimize duty is helpful, I think. Expect us to optimize all of those costs as we just get up to speed in the U.S. I don't expect us to get it right straight out the gate, but we will do over time.
Okay. Thank you. One final one, if I may. Just, I think your guidance for next year kind of implies CapEx to sales of around 5%. Is that kind of a sensible number to be thinking about over the mid-term and aligning with that EBITDA guidance that you've given?
Yes, I would say. I mean, I don't think about it as a percentage to sales typically, Simon, because some of our CapEx is a bit lumpy. I would say if you look at the two big things, CapEx spends this year will be U.S. fulfillment, and it will be the U.K., the Sheffield, second phase automation, which is a capacity play. Then ongoing, we've obviously got our capitalized development time as our engineers are always building new products and features. Our CapEx can be a bit lumpy, of course, you know, the guidance that we've given, GBP 80 million-GBP 90 million, I think puts us in the right space for next year.
I expect the following year to probably be lower than that because we won't have some of those lumps. Yeah. Look, you could say 5%, but I don't really think about it as a % to sales because of that lumpiness.
Cool. Thank you.
Hi. It's Adam Cochrane from Deutsche Bank. Couple of questions please. You mentioned you have a clear line of sight to 6%-8% EBIT, EBITDA margin. Can you share what sales base is required within your clear line of sight and what the Gross Margin that is really embedded within that 6%-8% is, please?
Yes. I'm not gonna give you a breakdown of what sort of margin improvements we might make or where exactly we're gonna get those EBITDA improvements from, but the sort of things that we're gonna see. You know, John spoke to the capturing of deflation in our, in our...product cost prices. Whether that's raw materials, as we've seen cotton prices dropping, whether it's freight, whether it's energy costs, all of those things we need to go and get that. That is a big chunk. But there's other stuff as well. In the supply chain, you know, We went from, two fulfillment centers to four and now we've reduced back down to three as we've, as we've closed our Wellingborough facility. We've made ourselves more efficient in the supply chain, for example.
You know, as we've managed through a period of decline, we've seen some inefficiency in our marketing. We'll make sure that we drive that efficiency back into our marketing spend and use our, you know, customer acquisition cost versus lifetime value of customer equation to make sure we're in the right place by brand, by territory. There's just a lot to go at. I think Miriam asked the question earlier about OpEx. You know, there is more for us to go at, if that's what's required. You know, we're always looking at the cost base. We've had this narrative over the last six months, which is really about control the controllables, and that, you know, that's what we've tried to do.
In a period of demand being difficult, then we've tried to control the controllables. The cost base, inventory, cash, all of those things, lead times. I think we've put ourselves in a good place to be able to pivot now back to growth. Whether that is, you know, later in the first half or the second half, you know, our expectations are very clear that we expect to get back to growth and certainly by the second half.
To get to that number, you're saying it could be some gross m argin increase, but it could not be. It could be some OpEx increase as a percentage of sales. Is it sales really the driver here of that margin recovery?
No. The key driver. Sales to volume obviously helps. I'll take it. The key driver is the capturing of the deflation, because that was a. If you think about the bridge that took us from, you know, FY 2021, a shade under 10% EBITDA margin to 3.6% EBITDA margin for FY 2023. If you look at that bridge, the biggest component of that bridge was a Gross Margin headwind as we saw those cost prices go up. What we could have done is we could have taken those cost price increases that we got, and we could have pushed them all through to retail prices, and we didn't want to do that, right? We wanted to stay as competitive as we could on retail prices.
We took that haircut on margin as a result. Also, you know, there was investment in making sure we came out with clean inventory, and so we were marking down product to come out clean. I think it's important that we're in a position that once demand starts to turn, and it will, that we are able to pivot straight back to growth. It's that agility I think is important. It's a particular focus for us to make sure that our inventory position is clean, that we're able to bring product in. Our lead times are shorter. We're able to bring product in faster. We're able to repeat the winners.
All of those things that make our model a great model, that we're able to operate those effectively as we segue into this financial year and into the second half in particular.
Just two really quick ones. Share-based payments was grew a bit this year. Can you give us an estimate of what it will be for next year at all?
Yeah. Mid to high 20s.
Thanks. Secondly, the actions that you've taken on to preserve profitability during the year and into this year, are you able to ascertain between all of those actions that you've taken, what the impact on sales has been, so that when they annualize, we can think about effectively adding it back, if that makes sense?
Yeah. It's obviously a hard question, as you know. Of course, we try to do that, right? We try to say what's... when we do any of these initiatives, we think about the business case. We think about the impact on sales and ultimately on profitability and the cost base as well. Some of this is hard to take the sugar out the tea. I'm not gonna give you a, you know, what upside possibilities are on volume. I think the key one is, as we've talked about this getting back to growth and the strategies behind that, particularly around lead times. As we get shorter lead times, just having that ability to repeat the winners.
That's just a massive impact benefit for our business, that we're able to see the winners and then get back after them very quickly and get them back on the shelves. That, that to me is a clear growth driver. There's others, of course. U.S. fulfillment is a clear growth strategy. You know, the whole wholesale international expansion is another growth strategy. Marketplace is yet another. There's lots of them. I think if I was to pick my favorite child, I would say it is really about getting that lead time back down to something that allows us to operate, test and repeat effectively.
Sort of meant more like what was the impact of paid for returns and stuff?
Yeah.
In terms of more questions. Alistair. Do we take one more, guys?
One more.
Yeah.
Come on.
Yeah.
One more. Make it interesting though, yeah?
Is it one more?
Okay.
Okay. That's great. Listen, thanks very much everybody for coming this morning. Thank you.
Thank you, everyone.