you for standing by and welcome to the Adairs Limited First Half FY 'twenty one Results Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer I would now like to hand the conference over to Mr. Mark Ronan, Managing Director and CEO. Please go ahead.
Good morning, everyone, and welcome to the AdeA's 2021 first half results call. Joining me this morning on the call is Ash Gardner, our CFO and Jamie Adamson, our Head of Investor Relations. First half of twenty twenty one has been an exceptional period for the group. The results achieved by Adairs and MoCA through this period highlight the strength of our brands and the hard work of our teams to continue to adapt to the ongoing COVID-nineteen challenges, whilst delivering fantastic product and great customer experiences. The group achieved total sales growth of + 34.8 percent with like for like sales of +32.4 percent and an increasing gross margin rate of 545 basis points to 66.1%.
Over the half, Adairs achieved sales growth of 20.9%. Adairs stores delivered 4.6% sales growth despite 43 Greater Melbourne stores being closed for 82 trading days over the half. After adjusting for the closure of these stores, Adairs achieved store like for like sales growth of +14.4%. This was well supported by a terrific online result, which grew at 95% for the half. The sales result was supported by a strong 6.90 basis points improvement in final gross margin rate for Adairs, taking the gross margin to 67.8% for the half.
This culminated in the Adairs business delivering a record underlying EBIT of $53,200,000 Mokka also had a strong half with the business continuing to outperform initial expectations. Mokka sales were up 44.4% on the prior year despite the business trading on reduced inventory levels as a result of ongoing challenges with our supply chain caused by COVID-nineteen. This strong sales result was enhanced by the improved gross margin rate up 2 30 basis points on the prior year to 53.4%. This saw MoCA deliver a record underlying EBIT of $7,000,000 for the half. As a group, our omnichannel strategy continues to deliver with online sales now representing 37% of total sales or on an annualized basis more than $180,000,000 in revenue.
The exceptional results across Adaiyah's and Mokka delivered strong operating leverage allowing the group to achieve a record profit result with underlying EBIT of $60,200,000 up $166,000 on the prior year. This record result together with the group's strong balance sheet has allowed us to declare an interim fully franked dividend of $0.13 per share. The results outlined today do not include the net benefit of the JobKeeper wage subsidy received during the half as the Board has determined that based on the performance of the company, it is appropriate to return the JobKeeper benefit to the Australian government. JobKeeper has been an excellent policy enabling Adairs and many other businesses to confidently support their team members through this period whilst delivering significant stimulus to the economy in these uncertain times. I will now hand over to Ash to walk through the financials in more detail before I provide some more information on the strategies that will continue to drive the ongoing growth of the group.
Thanks, Mark, and good morning, everyone. As Mark said, the results for the half were outstanding, and it is an absolute credit to our teams. The group delivered an underlying EBITDA of $60,200,000 up 166 percent on last year. As we've done in prior years, our results are presented excluding AASB 16 and one off costs related to the acquisition of Mokka and our DC project as well as the exclusion of the JobKeeper waste subsidy benefit, which as Mark mentioned, will be repaid to the Australian government. Aderes achieved total sales growth of 20.9 percent with online sales up 95% and store like sales up 14.4%.
Mokka delivered sales growth of 44% on a comparable 26 weeks basis, noting that we only owned Mokka for 5 weeks in the first half last year. Total group like for like sales were up 32.4%, and as Mark mentioned, group online sales now represent 37% of total sales. Both businesses continue the progress that has been made in FY 2020 with further margin growth. AdeS gross margin in FY 2021 improved by 6.90 basis points to 67.8 percent with great quality ranges that resonated well with Our Linen Lovers and 29 fewer broad based promotion days in the half, which saw average selling price improve significantly. Mokka improved gross margin by 230 basis points to 53.4 percent following a review of product pricing and continued focus on understanding which promotions work best to drive strong sales and margin growth.
The margin outcomes for both businesses were against a backdrop of lower than ideal stock levels. It was pleasing to see both teams approach their promotional activity with a very clear focus on maximizing gross margin on limited stock and making that limited stock go further. While Sades is now in a better stock position, Mokka continues to build its inventory. Of our total stock balance of $67,000,000 at the end of December, some $20,000,000 of this is on the water. That's $12,000,000 higher than it was in June.
Operating leverage was a feature for the half. With strong like for like sales growth across all channels in both businesses, cost ratios were all favorable and EBIT margins expanded materially. Our Aderes store contribution margin improved by more than 10% to 36.1%, and the Aderes online contribution margin grew to 44.1%. Mokka also improved its contribution margin of 38.5% with improved gross margins and a low fixed cost base, driving material operating leverage in this online only business. Cost control continued to be a focus with significant improvements in pick and pack efficiency across our distribution centers, providing better customer experience outcomes and at a lower cost, and we continue to see high labor productivity in our stores.
Our rental cost for the period includes the full rental cost for the Victorian stores closed during the lockdown with discussions ongoing with our landlords. Whilst rebates from the first wave of the FY 'twenty COVID lockdown of $2,200,000 were booked in the half. Increased investment in digital marketing support our online sales growth and the growth of our Linden Lava program. DES achieved an underlying EBIT of $53,200,000 up $30,800,000 on last year and delivering an EBIT margin of 24.7%, well up on the 12.6% for the prior year. Mokka's profit also doubled in the half to $7,000,000 at a 25.2 percent EBIT margin.
And the results from Mokka continue to track ahead of our initial expectations when the business acquired just in December of 2019, just over 12 months ago. The strong operating result translated into cash flow with operating cash flows up 90%. Inventory is well up on last year as a result of the high stocking trends that I mentioned earlier, but our inventory is clean and we are well placed for the upcoming season. We know that additional stock will support our sales growth in both businesses throughout the second half and will help us to manage the instability that we are currently experiencing in our offshore supply chains. We closed the half with $22,100,000 of cash on hand and no bank debt.
And as Mark mentioned, the Board approved a fully franked interim dividend of $0.13 per share that will be payable on the 25th March. I'm going to hand back to Mark.
Thanks, Ash. As we've outlined for a number of years now, the business continues to perform well due to our focus on delivering on our underlying strategies. In the presentation today, we have highlighted 5 key drivers of our future growth that I'll briefly talk to now. If I start with our proven and resilient business model, the strong brands that we own, our vertical supply chain philosophy and our direct to consumer store and digital channels allow us to develop and control the expansion of our product offering and customer base. This enables us to be more agile and responsive to changing customer needs through the delivery of exclusive on trend product at higher margins.
Our strong brands combined with our large and loyal customer base delivers a lower cost of customer acquisition and provides significant opportunity to enhance and build upon our relationships with our customers. We see the combination of omni channel retail with loyalty as a key growth driver. Adairs is focused on continuing to grow its market share and the best way to do this is to grow our customer base while increasing our share of spend from our existing customers. Linen Lovers is the program through which we provide value to our members allowing us to achieve this. The Linen Lava program today accounts for more than 75 percent of Adaire's sales.
Through the program, we have seen 50% of new customers acquired during the Q4 of FY 2020 shop again over the first half of FY 2021, providing us with confidence that our growing Linen Lava program will support our ongoing sales growth. We will increase our investment in customer data analytics capability over the coming years to further enhance the value of this program for our customers and deliver ongoing returns for Adairs. Our focus on becoming an omnichannel leader is supported by our digital transformation strategy. We are investing in enhancing our digital platform and team to deliver an improved customer experience, driving customer acquisition and increased customer conversion. We are starting from a strong position and have seen significant growth over the half from customers that shop both online and in store or what we call omni channel customers delivering 60% sales growth.
We continue to think about how we deliver customers a superior and more flexible shopping experience and will actively explore and trial new technologies, including in store devices to showcase range, customer traffic measurement and analytics, both in store and online, online chat, call and collect and call and same day delivery services and augmented reality. We will continue to trial these different technologies to ensure that any significant investment truly delivers an enhanced customer experience. The combination of Adairs and Mokka allows us to capitalize on 2 great brands with well developed digital platforms. With strong online sales growth achieved by both brands and 37% of total group sales now coming from online, we are well positioned to win share as traditional store customers transition to becoming omni channel shoppers. The addition of Mokka to the group increases our exposure to the fast growing online segment of the market with the significant benefits of vertical integration.
Based on Mokka achieving the same penetration in Australia as it has in New Zealand, there is the potential for Mokka Australia to exceed $100,000,000 in sales revenue simply based on population size. Mokka provides the group with greater exposure to the Furniture segment and provides the opportunity to reach a different customer through design led value differentiated products. With a significant market to grow into, we continue to invest in product category expansion. Whilst this has been more challenging due to travel restrictions, the team have adapted to these restrictions and continue to work on enhancing our width and depth of offer at Mokka. This will enable us to provide customers with a more compelling offer and in time allow customers to fit out their entire home with Mokka product.
As a result, we have fast tracked our investment in the Australian warehouse facilities to support this accelerating product growth. We are also investing in additional talent to supplement the MoCA management team allowing us to build our brand awareness and deliver ongoing profitable growth. If I think about our digital channels, they are enhanced by our store network. The home category, as I've said before, is better with stores as they provide our customers with the ability to engage with the product and the team in an environment that allows them to be inspired to create a look that is right for them. Whilst online should provide you with the ability to easily find what you want, it is harder to recreate the experience of discovery that exists as you walk through a physical store interacting with the product.
Our in store team further enhanced this experience through their product knowledge and ability to help customers achieve their vision, providing the opportunity for improved customer conversion, cross selling and building loyalty to the brand. All of our stores are profitable and our store formats deliver strong contribution margins. Larger stores are more profitable and there is a strong pipeline of new stores and upsized store opportunities for us to capitalize on in the coming periods. Larger stores provide us with that opportunity to showcase more products and categories and generally deliver a higher contribution margin. We have highlighted here on Slide 9 the improved store contribution margin achieved in stores we have upsized over the past few years.
This combined with the sales increase has seen us average a 60% increase in store contribution dollars from the stores we have upsized. This highlights both the opportunity and the customer engagement that comes from within our store network. With a highly profitable store portfolio, we remain focused on deliberately creating flexibility within our store leases with over 70% of leases expiring within the next 3 years. This allows us to strategically manage our store portfolio through opening new stores, upsizing existing stores, obtaining more favorable terms on renewals or closing stores that simply do not meet our return hurdles. And if we move to our omnichannel business model and the need for it to be supported by an omni supply chain, our partnership with DHL provides us access to a global leader in the design, implementation and operation of flexible warehousing and distribution solutions to support our omni channel approach.
Construction of the National Distribution Center in Melbourne is well underway and remains on track to be operational in Q1 of FY 'twenty two. The project has experienced some delays due to Victorian building restrictions in August September 2020 and delays in receiving key components from overseas both as a result of COVID-nineteen restrictions. Whilst these delays may impact the savings realized in FY 2022, this important initiative will still deliver annualized savings of 3,500,000 dollars once fully operational. Consolidating multiple distribution center operations into a single national facility will improve our stock flow and online fulfillment, increase stock availability and improve service level for both our customers and stores during peak trading periods at a lower cost. The NDC is the foundation for Adairs integrated omni supply chain strategy to better enable customers to shop Adairs how, where and when they choose and has the capacity and flexibility to support business growth well into the future across all channels.
We look forward to the completion and transition to our new national distribution center in Q1 of FY 2022. So I move now to our trading update and outlook. And in the 1st 7 weeks of the second half of FY twenty twenty one, it continues to be a very positive story. Adairs online is up 65.9%, while store sales are up 12.4% on a like for like basis after adjusting for the various store closures throughout this period. Mokka has also continued to grow strongly being up 48.6% over the same period last year.
Our gross margins have remained elevated over this period and our focus remains on maximizing gross margin dollars. We expect to open 1 to 2 net new stores, upsize a further 3 to 4 stores and refurbish a further 2 to 3 stores over the balance of FY 2021. This will be supported by ongoing investment in our digital capabilities. The second half of FY twenty twenty one sees a cycle against a period of nationwide store closures last year and a strong finish to the year. As COVID-nineteen continues to impact our lifestyles, we see customers continuing to spend more on their homes over the coming half.
Whilst this current trading remains strong due to the ongoing uncertainty created by COVID-nineteen, the Board did not consider it appropriate to provide full year guidance at this time. Before I finish, I would just like to thank the Adairs and Mokka teams. Our teams are passionate about our businesses and this continues to shine through in the way they go about delivering for our customers despite ongoing challenges and changes as a result of COVID-nineteen. In particular, the way the Melbourne based team handled the lockdown period of the first half is testament to the culture of our organization. I would like to thank all the team members across Australia and New Zealand again for their hard work and dedication.
With this team, I'm confident that we are well placed to manage and capitalize on the new and evolving retail environment delivering shareholders ongoing profitable growth. And with that, I'll now hand over for questions.
Thank Our first question comes from Joe Little of Morgan. Please go ahead.
Good morning, Mark, Ash and Jamie. Thanks for your time this morning. Just the first question, just on that significant gross margin uplift, sounds like that's continued into the second half for various reasons. I guess the key question from that is how much you think you can maintain when we are in a more normal environment? You do have the differentiated product to protect you there, but just interested in any comments, please.
Yes. Thanks, Joe. I think one of the focuses of the business is how we continue to maintain those strong gross margins. Now whilst we acknowledge that some of the gross margin uplift over the first half and even today has been bought about by the lesser inventory levels and us really managing those promotions tightly. I think you rightly point out one of the things that we want to make sure of is as we continue to design and develop product, we maximize the margin on that product by not, in my words, giving it away too cheap by running promotions that are category wide or store wide.
So our focus continues on how we tighten up those promotions and still offer what our customers want, whilst maintaining a strong gross margin within the business. And I think we can do that through the differentiated product. And we've learned a lot over the first half around categories where the right level of promotion needs to be and how we start to manage that a bit better to make sure that we can maintain the reduction in-depth of discount and storewide discount days that we've managed to achieve over the last 12 to 18 months as well as ongoing work within the sourcing of product to make sure that we manage that well at the same time. So we'd like to think that we can hold on to a fair chunk of it. We understand that it's probably a bit of a unique period and we won't truly know until we come out of that.
But I think one of the things we've made sure of is that we have worked hard at trying to reconfigure our customers to their expectations on discounts and we certainly won't rush back to the levels that we were perhaps operating at prior to this period.
Okay, great. Thank you. And just looking at the cost base, I guess, if you exclude JobKeeper, obviously, cost base, I think, went up about 5% in ADES. It feels like you probably used that period to invest a bit harder. Can you maybe quantify that investment you made?
I guess it's in people talent capability?
Yes. I think if we think about what we've invested with there's a couple of investments in there that are ongoing. And I think you can think about that as sort of $500,000 to $750,000 and there's probably $500,000 that we see as more one off type costs that we can use in the business over that sort of period to set us up for future as opposed to necessarily talent more making sure that we set up the strategies that we then execute over the next few years and we've added a bit of bench strength to firstly develop those strategies and then that $500,000 to $750,000 is all about how we execute some of those underlying strategies. So that's been a big part of that increased cost base within there as well as there's probably significant incentives within that cost base given the performance of the business to the store team and broader across the management team as well.
Okay, great. So if you look at second half of last year and at that JobKeeper and you expect a similar amount of inflation perhaps in the second half?
Yes, that's probably not a bad assessment at this point in time.
Yes, great. Thank you. And Ash, just on the inventory, so it sounds like a lot of that stock is still on the water at balanced date. So would it be fair to say that trading update was still impacted by stock shortages, I guess, mostly in Mokka? Would that be fair?
And the other thing just on the trading update, what did online represented those total sales?
So yes, in terms of the stock flow, it's really coming good, particularly for a day, it's coming good over the last couple of weeks. So most of that trading update period was affected, particularly the January sale period. Mokka in New Zealand continues to be affected, but Australia is in better shape. And most of that benefit for that in stock position for Australia was there through the trading period. And I don't have at hand that answer that second question in relation to the online percentage of sales for the 7 weeks, but we'll get it.
Yes. Okay. Great. Thank you. And I guess if just talking about kind of fixed versus variable costs, just should demand conditions normalize in future periods, how you're planning to manage that cost base if indeed you did get negative comps into FY 2022?
It's all guesswork, I imagine. I'm assuming you can manage store labor costs relatively commensurate with sales, but just the other cost items, please?
Some of them will be there throughout FY 2022 to make sure we capitalize on the strategies that we are looking to execute. But that's where we've used this period in particular to think about some of the how we build the actual base of those strategies, which won't need to be ongoing costs. So I think we've got an element of that cost base that we can withdraw or not have in FY 'twenty two. And equally, we can think about the variable cost will obviously move around with sales. But there's a chunk of that that's sort of one off spend that we think is in FY 2021 that at this stage we'd only invest again in FY 2022 should the sales and profitability be there.
Yes, great guys. Thank you. And just lastly, sorry, on the balance sheet, I'm assuming that net cash balance was before the you're paying back JobKeeper post balance date, I assume. And just that CapEx profile is a bit more elevated. Would we assume that that continues for at least the next couple of years and then just balancing dividends, MOCA earn out, higher CapEx, etcetera?
Yes, probably I think sort of the $13,000,000 to $15,000,000 is probably where it will settle. I mean, we've got a couple of one off projects this year around particularly around the DC, which won't recur, but I think that will probably get replaced by our ongoing investment in digital initiatives, the data strategy that Mark talked to earlier and emphasis on customer analytics. And then obviously, we've got opportunities from store refurbishment perspectives, which upsize, which we know pays back. So, yes, 13 to 15 is probably the right level
couple of years.
Yes. And JobK is post balance debt that repayment?
Yes. Yes.
Yes. Thanks.
The answer to your question is 35% of our sales in the 1st 7 weeks that are online across Mokka and Nadez.
It
is.
Our next question is from Arianne Noorozi of UBS. Please go ahead.
Just in terms of sort of thinking out in fiscal 2020 onwards, I mean, has COVID changed the way you're thinking about your cost base structurally? In other words, should we expect a different cost during business margin previous post COVID? And I don't know, it's sort of the follow on to Joe's question, but I mean, have you rethought how you sort of allocate staff hours or rents, etcetera?
So I think in terms of sort of managing our variable costs, COVID has taught us a lot about how to manage it and manage it quickly. And those variable costs across our online platforms, so our DCs, the pick pack and fulfillment activities. Obviously, our store replenishment activities at the DC, we vary and they move very much in line with how we see demand. Our store teams, there is a level of minimum wage that needs to sit in our stores in order for them to operate. And we've learned different ways in which to manage that at different times.
Obviously, with stores being substantially closed, we run Victorian stores and call and collect for a period of time, which had lots of different options around how we rostered our teams. And we are continuing to invest in better rostering, labor scheduling, projects, activities so that we can continue to make sure we've got the right levels of service in our stores when customers are there. So I think COVID has made us a bit more agile and we understand our variable costs and we're able to quicker respond as things change. As time goes, see what we're required to shift and we know which channels are the ones that we can move quickly and we'll make the changes that we need to when that's required.
The only other thing I'd add to that, Ari, is that we've got to remember we're a service business. So we're not sitting here we don't look at labor in store as a cost. We look at labor in store as a customer service piece and how do we make sure we maintain that customer service. And I think it's critical for businesses that are retail businesses. And when you if you think that's part of your DNA, which we clearly do, that we continue to invest in that because it gives customers a reason to get up off their caps, leave the iPad and come into store and get the true experience and allows us then to work with that customer and obviously create the look that they want and really enhance the customer experience through both obviously digital and that in store experience.
So whilst we've looked at our cost basis and we've learned a lot, I don't want anyone sitting there thinking, well, one of the things we've learned is we could take labor out of store and these sorts of elements because that's not something that we would rush to do. We would make sure that we maintain it to Ash's point. It's about optimizing that and making sure we've got the right level of service in store at the right times as opposed to thinking there's a cost base there
that we would take out.
Got it. That makes sense. And just in capital management, in terms of the payout ratio, it's obviously below or materially below what you've historically paid out. I mean, do we should we rate into that as your confidence level in terms of the earning outlook in the next 6 to 12 months? Or is that just you being conservative and not knowing what the future holds?
I think it's a bit of sort of it is still an uncertain world out there. But historically, we've looked to pay out roughly half of what we expect to pay out in the year. So our payout ratio, we got a pretty wide range to work within. So our expectation is we'll land the full year inside the normal payout ratio of 60% to 85%.
Perfect. And just following on sorry, probably can get this out 100 times. On the gross margin, I mean, if I look at the last 12 months, it was up 6 percentage points. Can you just tell us how to think about what portion of that is you discounting worth taking out 20 days, 29 days of discounts versus other movements, whether it be FX or mix. So we just get an idea about how we sort of factor that moving forward.
A fair portion of that, I would say, is increase in average selling price. It's complemented by the work that we did earlier in 2018, 2019 in reducing cost process of product and working with our suppliers to make sure that we balanced the cost process and the sourcing initiatives that we put in place. And then equally there is an element of mix shift, which interestingly enough over the last 12 months has been a mix shift more towards some of our core categories, which due to the volume that we operate in operate at higher margin. So you think about something like bed linen. Bed linen, we've done a great job on sourcing, which has helped lift the price the margin, sorry, as well as we've done a good job on reducing the debts of promo across our bed linen category, which has seen us maximize the margin on that sort of category.
And equally, we've probably seen a bit of a mix shift back towards some of those core categories, whilst people have been stuck in homes and thinking about upgrading that sort of product over that period of time. So I think when you think about it, we believe that we should we will just work on how we maintain that increase in ASP, which we come back to that concept of making sure our products differentiated, making sure we reward ourselves for the effort that goes in from our teams around putting that together. And we continue to see strong response from our customers as we deliver that product that is truly differentiated from what else is out there in the market. And more importantly than that, we maintain a high level of quality in our core products that enables customers to feel really confident that the reason they pay a slightly higher price than theirs is because they're getting a high quality product. So a lot of it is ASP, but it is complemented I think by mix shift and that sourcing work that we've done.
And obviously as we head into FY 2022, there will be a slight tailwind in relation to FX and hedging as we currently see it today, where it's at $0.74 versus perhaps $0.70 in the past.
Perfect. And just final one for me. Just in terms of, Mark, you've also mentioned in the past you'll be accelerating reinvestment once inventory gets back to normal and that will impact EBIT margins. I mean, how do we think about the sales over the next sort of 2, 3, 4 years? I mean, is the current sales growth or sorry, maybe put it another way, is the reinvestment you're doing enough to maintain this current growth rate you're experiencing at modestly 40%, 50% growth rate?
Yes, we think so. We think so. You've got to add these resources in gradually over time and we think we can continue to add over time rather than think we need to do a big chunk now and then gain an EBIT margin uplift over years. Effectively, if we can continue to grow the sales at even 30% to 40%, we almost can't reinvest cost back into the business faster than that will deliver on EBIT margin. So we think that EBIT margin and perhaps with as we've learned more over the last 12 months and seeing the opportunity that is there, which is truly exciting, we think we can continue to grow that business at 30% to 40% per annum.
And the investment that we'll need to do that is not as significant as perhaps we once thought. And that's why we've done things like fast track the Australian warehouse facility to make sure that as we expand that product range, we don't run into difficulties with warehousing it and distributing it and then impacting on our customer service experience. So we think that EBIT margin probably remains elevated over the longer period, which is a slightly different story to what initially thought as we acquired the business just over 12 months ago.
That's perfect. Thanks, Tim.
Thanks, Harry.
Thank you.
Our next question is from Mark Waid of CLSA. Please go ahead.
Good morning, team. A question on the customer attitudes and the health. What do you think is going on in their mindset at the moment, Mark? Are they really itching to get out and travel? Or do you think there's still a little propensity to bunker down at home?
Look, I honestly think there's a bit of propensity to bunker down at home. I don't think it's helped at the moment by the fact that I call it border roulette as if you go and visit stores at the moment, you hope you can make it back home and don't have to do a 14 day quarantine when you get there. So I certainly think the environment in Australia at the moment makes it very difficult for people to think that there's interstate travel is easy to do and not without risk and maybe that's perhaps tainted a bit by being Victorian, because we tend to be the state that is quick to be shut out from other states at the moment. So I think there's definitely an element of that. And I think I see that even as I talk to the team around the country, Mark, as much as customers that the even our team are quite comfortable being at home and that I think that everyday Australian is taking this opportunity to maybe slow down a little, not try and squeeze as much into weeks and equally think of it as a time that they can spend that time around home and I think that's continuing to drive investment.
I think we haven't got to the end of what do people do in terms of working from home on the other side of COVID-nineteen, particularly not in Victoria and maybe there seems to be a slightly different attitude as you get into places like Queensland and even WA who have probably experienced a slightly different COVID-nineteen last 12 months to Victoria and even New South Wales. So I still think the consumer is generally highly focused on their home and their immediate environment. I'm sure there's plenty of busting for a holiday and the like, but equally I think the uncertainty created by border opening and closures is certainly making that more challenging for the consumer to think that that's something that they can do with confidence at this stage and perhaps that's leading to them thinking it's better to just bunker down and wait for a more certain period and potentially post vaccine and the like that might be a period where we see some change in the consumer behavior, which is probably not till the second half of this calendar year is where I sort of sit today.
Okay. Well, it's a good backdrop for you guys. I think you've executed well. You've got good products. I think you're in a good spot.
And just lastly, just trying to understand, right, like so if you get to, I don't know, FY 'twenty two whenever when things and everybody do settle down, what gives you the confidence that you've got a better business then than you do today or pre COVID actually? Because the main one of the investors look and they think, oh, earnings are going back to FY 'nineteen and just think this whole sector is kind of uninvestable. But what gives you that kind of confidence that you've actually you build a better business as a team?
Yes. It's a good question. I think a couple of things spring to mind immediately. I think the agility of the business has fundamentally improved over the last 12 months. And with that we've learned more.
So I think one of the things we've learned a lot about is depth of promo, how that works, little more on elasticity of our products. So that gives us greater confidence I think as a team to try some new things and evolve the business further. I think we've seen the great uplifting online over that period and that continues to be a key focus of ours and not one that we all of a sudden got on to during COVID. We were well invested in that space beforehand and we see a great opportunity there which continues the opportunity that we've been taking advantage of for a number of years that as customers select to do some of their purchasing online versus potentially all of their purchasing in store in the past, we're well placed to capture a great part of that share shift as they move to the online channel and support through our stores and online. And on top of that, we just keep focusing on our linen lovers.
How we grow that customer database, I think that's the big piece. If we can push that above 1,000,000 that's our next target. How do we get 1,000,000 linen lovers and how do we make sure we continue to grow that customer base? That has been the way that we believe we underpin both the growth that we've achieved to date and sales growth ongoing is continuing to build the relationship with our linen lovers and becoming an important part of their thoughts when they go think about how they do up their home and what their next purchase in their home is. So between linen lovers, as well as the stuff that we've learned whilst we've been in COVID, I think we come out of this a better business.
And excitingly for us, I think those two pieces together start to really drive the future of the business as to how do we think more and more about stores and online really complementing each other and working well together to deliver great success going forward. And I think the team have really built that over the last 12 months. And excitingly, the national distribution center coming online next year gives us great opportunity to do more in that space. We're investing in our platform in relation to our website, which will enable us to do more in that space. So I think the beauty of this period is we haven't taken this period and just banked the profits.
We've actually been already investing in the future of what retail looks like going forward. And I'm excited by the fact that we're going to be well positioned on the other side of this to have a really good platform for us to capture the changes in customer sentiment and customer shopping habits going forward.
There's a lot of there to unpack, so I appreciate that. Thanks guys. All the best.
Thanks, Mark. Thank you.
Our next question is from Ash Chandra of Goldman Sachs. Please go ahead.
Hi, good morning. Just one sort of top down question from me. Retailers are currently printing some phenomenal kind of EBIT margins as a result of all the changes that you've run through quite clearly on the call. When you think sort of 3 years out, I mean, is this representing a structural shift in the way profit pools and margins are distributed across your segment? Or should we expect that you're just you will need to reinvest to remain kind of a leading player in your space?
Yes, I guess you've gone from EBIT margins of 12% to 25%. And the question is just what do you think on a sort of 3 year view is sustainable?
Yes. It's a good question. Hard to answer to be honest with you, Ash. But I think 25% is clearly not something that I think is highly sustainable over a long period of time. I think it is a unique period in that regard.
The fact that the gross margin was there well supported by probably a slightly lighter in store team on the floor because we've seen this increase come through perhaps less traffic, but a higher propensity to shop. So our conversion in store has meant that we haven't needed necessarily to put a whole bunch of extra team on to drive these sales because conversion is lifted as well as part of that place. And I think that potentially does continue. That's one thing I think that does perhaps support our EBIT margins going forward. But to think that as a retailer that you see the 26% EBIT margin over a longer period of time, I think that's probably a little bit unrealistic.
But equally, we've always talked to 15% to 16%, but I think we have thought about this over that time. And you can see the contribution margin from online is clearly really strong and that's a great opportunity for us to build the EBIT margin over time as that becomes a bigger proportion of sales. Mokka as well delivers a higher EBIT margin. So there's a world where that 20% to 22% is something that we start to target over the longer term and we'll learn more as we go along. It's really hard to think 3 years out.
I always challenge even myself. You start to write a 3 year plan and you think about all the changes that have happened in retail over the last 3 years, it's going to be pretty interesting to see how that goes. And I think the other piece that plays into that is upsizing our stores. And that slide in the deck that we talk about how that improves our contribution margin from those stores and that naturally falls down through to our EBIT margin. That's an exciting part of the puzzle for us as well As we look to build our store portfolio and we've been quite clear in this over the last few years that larger stores are where we go after and larger stores are what we want, and they naturally deliver that higher contribution margin just due to the metrics we're operating within that store.
So I think there is room for growth. I don't think we revert necessarily straight back to what we were doing before this. And I think that's part of the joy of seeing the business adapt and become more agile through this period that enables us to not only take advantage of the opportunities that we saw during the period, but then work out how we build them into the business model going forward.
Got it. And could I ask with the linen leather sort of new additions that you've made in the period, is there any underlying trend there on the kind of incremental customer acquisition cost that you would call out? Like it's costing more and more for each incremental loyalty member to sign up or less or maybe it's costing more, but you're seeing that repeat usage come through faster, which is something you alluded to
in your
earlier comments. Yes, anything around that would be helpful.
Yes. No, it's not really costing us anymore. I think there is an element. There's a slight increase in cost over that half, but a big part of that is the Vicks store closures. So when our store teams are much it's a much more effective channel of signing up Linen Lovers.
So when you take 43 stores out for 80 odd days, that definitely impacted our ability to sign up Linen Lovers over that period. And our store teams our online sales are slightly lesser as a percentage to Linen Lovers than in our store environment. And I think a lot of that is we spend a lot of time staring at the online side. And how many barriers to check out do you put in place and how do you get the balance right between making sure they understand the benefits of Linen Lovers, but don't then get so distracted by that they don't get through the funnel and actually check out the sale. So there's a real balancing act whereas in store Linen Love is a far more a customer conversion and our team are selling it to the customer when they're on the shop floor and working that into the conversation.
So I think we have seen a slight increase, but I think that starts to normalize back to standard sort of levels as we move forward, simply due to the fact that we get our store portfolio back open and we add new stores. I mean, excitingly, we've opened a couple of stores in some new areas over the last 12 months or over the last 6 months, sorry, and seeing a really high take up in those stores of Linden Lovers and some really big numbers come through. So I think there's still really good opportunity. And ultimately, whilst there's been a slight increase over that time, we haven't seen that really impact the business. And I think that then the second part of your question there, when we start to think about that going forward, that's one of the things where we think an investment in customer analytics capability within the business is well probably overdue to be honest and something that we are looking at now to make sure that we really capitalize on our linen lover program and we're able to do more for those linen lovers a real focus on how we enhance the program for them, which will obviously make it more valuable to the business over the longer term.
Got it. And just one last question, if I could. As your online sales have been so strong across your portfolio, Has there been any obvious sort of change in consumer behavior with respect to the sort of buy now pay later payment services?
No, not really. Nothing I'd call out. We haven't seen that become any bigger part of the percentage of payment types. I think we continue to see good strength when those guys run promotions and the like through their platforms and that drives good outcomes for the business. Equally, we're probably participated in a much lesser way over the last 6 months in terms of discount and the like that might be offered to some of those and some of those programs simply due to where we were on inventory levels.
But yes, nothing specific to call out that they've significantly grown or declined over the period.
Thank you. Actually, I'll sneak in one more. Just on that inventory front, I'm sorry, is there any sort of time period over which you think this will normalize in the conversations you're having with suppliers? I mean, is this a sort of March, April, May type time frame for normalization? Or could this run a bit longer?
I think there are 2 issues in play. 1 with suppliers and generally we're tracking okay with suppliers. There are sporadic delays due to some material issues that they're having, but it's not that significant in the factory. The real issues come in trying to get it out of the factory into a container and then getting it on the water. And then we're also now having challenges actually getting it off both.
So exactly how long the shipping side of things is going to continue for is anyone's guess and a lot of other businesses have been talking about similar issues. So we're really part of our high levels of stock in transit is getting it moving. Also we had Chinese New Year which contributed to it, which is not unusual, but we did double down on getting stock on the move to make sure that once it's on a boat, it will eventually get off and we'll get it into our stores. So I think it's going to continue. We'll try and get ahead of it.
And I think by March, we expect to see Adez in pretty good stock position and New Zealand, they're about. So this is good now, but it improves as we move through March and head towards sort of high winter. And I
think from our point of view, Ash, one of the things we're doing there is thinking about how we add 7 to 14 days to our supply chain, which just allows us to ensure we execute really well across both businesses to manage what seems to be an ongoing challenge and we can then wind that back as we start to see things normalize in that shipping and supply chain type
space. Got it. Thank you, gentlemen. Our next question is from Claude Walker of A. Rich Life.
Please go ahead.
Hi there. You've just partially answered my question with your details about Linen Lovers. But I just had one thing I'd like to check-in, which is I imagine you track the health of the Linen Lovers engagement partly through spending, but partly through open rates, click rates and maybe other metrics. And I was just wondering if you can tell us as the list has grown, is it still looking equally healthy on all of those metrics? Or are some of them perhaps starting to come down?
Or what are you seeing there? No. Excitingly, they all remain really, really healthy. If anything, the last sort of 6 months has probably seen a greater engagement with some of our EDM type approach. We run a program in store to receive customer feedback on the shopping experience in store and that has seen an uptick as well with their response both their response to the survey and equally the responses we've got from the survey.
But I think that is it's an important part of when we think about growing the linen Lava database. And one of the things for us obviously is as a paid for program, we want to make sure that our customers are getting value for it and they feel like that the investment they've made in joining the program is returned to them over the life of the 2 year life of that membership. So we don't think about our loyalty databases, how big do we grow it. We think about how do we make sure we have a highly engaged loyalty database and I prefer to have 800,000 active members and rather than 1,600,000 and 3 quarters of them don't open an email. So we really try and make sure that we manage that piece as well.
And as I said excitingly over the period, we haven't seen those metrics slipping in some instances. We're probably seeing them step up, which is great. Great. Thank you very much. Thank you.
That's it from me.
Our next question is from Jack Stadwick. Please go ahead.
I just wanted to ask about the new customers or the new linen lovers and how many do you think are existing AdeS customers and how many are first time AdeS customers?
Well, of the new linen lovers, the way we run that, we have seen a significant number of customers reengage. So over the years, we've been running linen lovers for a long period of time. And of the new linen lovers we've acquired in that time and you think about that means they've now repaid their membership and rejoined or joined the program for the first time. 30% of those have probably reengaged with the brand. So they were customers previously that have now joined the program and rejoined the business and become a member again versus 70% of them being new customers.
And I think the other thing, we still have a relatively high and something we continue to focus on churn rate of our customers. So whilst we talk about if you think about often we've been talking about customers being greater than 800,000 and now greater than 900,000 that probably means over that 6 months we signed up or renewed 300,000 customers. So if you think about that sort of number, 30% of them are reengaging with the brand, probably 30% are renewing and 40% are new. So it's a big piece to keep building that database and something that we think is obviously how we think about the health of the business going forward is building that Linen Lava database.
Okay. So of those 100 odd thousand, do you know where they come from if it's from like above you from like the David Jones or more from the Kmart area?
No, not specifically. I wouldn't be able to give a lot of feedback in where they might have shopped previously. So we don't sort of track their customer history to that sort of level.
So you don't target, say, the lower end or the higher end in your new products that you develop to try and win new customers? Or do you just focus on what you're doing the middle market and then get people to come over if they want?
Correct. I understand the question and that's far more what we do. We focus on how we develop product that's on trend and at a price point that we think the middle market and really the middle market is where we play. So we think about that price point is to make sure that we are delivering customers what they perceive to be valued. Great product, well designed at a good value price point, not cheap.
So we let Kmart definitely own that lower price EDLP space. And equally, there's a bunch of boutiques and David Jones we are quite happy to let them own the top end. And we really aim to exist that if you want to move up into that slightly better quality product as you'll get a good price, then that's the Kmart customer who's happy to move up. And once upon a time, I think that Kmart customer would have seen the natural next step out of I want to step up slightly would be to Myer. And we definitely see that we act as a brand in there that instead of once upon a time going from Kmart to Myo, you're now going to Kmart to Aderes.
And equally at the top end, we think about how they might move back down. But we don't specifically go out and focus on how we acquire customers in that space. We really think about how do we make sure our product is on trend, put in front of all customers and then letting them choose if that's the right customer segment for them and that's the right product for them, then naturally they'll come to us.
Okay, great. And one last question is, obviously, you're net cash positive. Is that a reflection of the earn out of Mokka? And going forward, I know a lot might change in this area, but going forward, do you envision carrying that $25,000,000 of debt and not being cash positive?
So the Mokarone is still to come. So we expect the first payment is due in September of this year. So I think the cash position and the cash flow is largely a result of the operating performance of both businesses. I think as we look ahead, we've got access to credit. We've got cash on hand.
We'll continue to invest that cash where we think we can deliver a good return to shareholders. And we'll see what that plays out over time. But we certainly know that we've got a secure and strong balance sheet, and that's a position that we'll hold on to for now.
Mr. Ronan, there are no further questions at this time. Would you like to make some closing comments?
Thank you everyone for joining us today. We look forward to the half ahead as we continue to delight our customers in an ever changing environment and look forward to delivering another great half for DES and Mokka. And as I said, making sure that our customers enjoy the experience of shopping with our brands. Thanks.
Thank you. That concludes today's call. Thank you for joining us. You may now disconnect