Good morning and welcome to the Adairs Group FY 2025 Financial Results. I'm Elle Roseby, Group CEO and Managing Director of Adairs . Joining me this morning is Ashley Gardner, Group CFO, and Jamie Adamson, Head of Investor Relations. Over the past seven months, it's been an absolute privilege to connect with our customers, suppliers, and teams to deepen my understanding of how the group operates and where the opportunities lie. Long-term planning is vital for the Adairs Group, and our Vision 2030 strategy will provide a clear blueprint for sustainable growth over the next five years. The groundwork has already begun for FY 2026 in Adairs, and we will be rolling out this planning framework for Mocka and Focus on Furniture in due course. The framework covers brand, operations, technology, and customer experience. Now, onto Adairs Group FY 2025 performance.
I'm pleased to announce the Adairs Group delivered a 6.5% increase, a record for Adairs of 9.5% up, and Mocka up 14% in sales, its strongest performance since the COVID peak. Focus on Furniture performance was down 6.5% in sales. Group underlying EBIT was $55.2 million, slightly up on last year, supported by continued earnings growth in Mocka and Adairs, with both delivering up 21% in underlying EBIT. However, this was mostly offset by Focus on Furniture back 36%. It was a record performance for Adairs at $442 million. Stores and online delivered great results, reflecting a commitment of our store teams and improved performance in SEM, SEO, and Click & Collect, which is now greater than 10% of online sales. Our customers responded well to all categories, but there was a real emphasis on our famous four categories, which drove double-digit increases.
However, gross margins were negatively impacted in Q4, with increased promotions and clearance activity on a few inventory-heavy departments. Our cost of doing business remains a priority, and we saw a further reduction of 130 basis points on the year. We saw significant efficiencies continuing to be driven by the warehouse saving $3 million. Importantly, though, the DC service is now seen as a real enabler for Adairs, supporting our growth and efficiencies. Also, material cost savings across the brand saw underlying EBIT increase 21.2% on the year at $35.8 million at 8.1% versus 7.7% last year. The heart of Adairs, our Linen Lovers program, saw new memberships up 5% year -on -year, and renewals increased by 10% year- on- year, positively impacting ATV. This is a key acquisition and retention strategy going into FY 2026 with the partnership launch of Qantas Frequent Flyer.
As per the store network strategy, we opened four new stores, expanded five, and closed seven small stores. While store numbers reduced from 171 to 168, GLA grew by 2.7%. This really supports our strategy to transition to larger format stores that really showcase the range that we know our customers respond to and love. FY 2025 was a year of leadership renewal. We now have a stable, well-aligned executive team capable of delivery on the Adairs' strategic priorities for FY 2026. It was a very challenging year for Focus on Furniture, with sales declining by 6.5%, with total sales of $117.9 million. We did see pockets of tough product performance and initiated increased promotional activity to drive those sales. However, gross margins were impacted by 240 basis points at 50.8%. Despite the tough performance, inventory has been very well managed.
Unfortunately, tight cost management wasn't enough to offset the declining profit, which fell to $11.8 million, down 36%. In these tough times, it is important for us to reflect and to gain valuable customer and non-customer insight, to which we have completed a strategic insight review. This has really provided management with valuable insights, which are driving the initiative for FY 2026. These insights have also enabled me to really understand the leadership skill and experience required to fulfill our growth ambitions. From this review, we are now in market for the recruitment of a GM of Retail Operations and a GM of Marketing Digital. Positively, our new and refurbished stores continue to outperform the broader fleet, with pleasing results in South Australia, giving us confidence in our network strategy. Mocka delivered a strong performance, with Australian sales up 31% on the year, with increasing brand awareness.
New Zealand has been a challenging environment, but it's been pleasing to see it returning to growth in Q4. Impressively, Mocka's total sales were up 14.7% year- on- year, and this growth was driven by a team delivering on customer insight, a targeted marketing strategy, and new product categories, which resonate strongly with core customers. Gross margin improved by 100 basis points to 59.4%, helped by a greater uptake of new products and a deliberate reduction in promotional activity. The cost of doing business slightly increased due to providing additional funds to targeted marketing initiatives. EBIT finished up 21%, $7.6 million, representing 13.1% of sales versus 12.6% last year. I'll now hand over to Ash for more details on the numbers.
Thanks, Elle. Good morning, everyone. Just before I start, a reminder that the FY 2025 year was a 52-week year, and all the comparisons in the various reports we produced to FY 2024, which was a 53-week year, are being made to the same corresponding 52 weeks in FY 2024. As Elle touched on, FY 2025 delivered mixed results across the group. Total sales of $618 million was 6.5% up on last year, with strong sales growth from Adairs and Mocka offset by a sales decline at Focus on Furniture. Underlying EBIT for the year of $55.2 million was in line with the guidance that we provided back in June and slightly ahead of last year. Similar to sales, we saw strong profit growth from Adairs and Mocka offset by a decline in profitability from Focus on Furniture.
If I turn to each brand now, starting with Adairs, total sales at Adairs grew by 9.5%, with like-for-like sales up 7.8%. Pleasingly, we saw very strong growth from both channels, with stores up 10%, supported by improved stock availability in store, and online up 8.3%. Margin, however, did step back on last year and was below our expectations. Gross margin was over 61%, 170 basis points down on last year. Our strike rate on fashion bed linens and furniture was not good enough, and combined with higher average purchases, this did lead to higher stock levels and higher clearance markdowns, especially in Q4, which impacted negatively on margin. This issue has been a focus area and has been addressed through the final stages of clearance activity in June and into July.
It was pleasing to see further progress in the warehouse, with costs declining by another 8.5%, bringing the total cost savings since we took control of the site to more than $6 million, or 20%. That is despite the significant increase in volume that has gone through that facility throughout this period. The implementation of the new warehouse management system at the beginning of this financial year provided the tools for the team to deliver progressive improvements throughout the year, which we expect to continue into FY 2026. The underlying EBIT of Adairs, as Elle mentioned, was $35.8 million, up 21%, with EBIT margin increasing to 8.1%, up from 7.7% last year. At Focus on Furniture, as we said, we saw a disappointing result in FY 2025. Sales down 6.5% and margin also down.
Traffic throughout the year was mixed, and the conversion, which is within our control, was below last year despite the increased level of promotional activity. Costs were well managed, but this wasn't enough to offset the impact of the lower sales and margin, with EBIT coming in at $11.8 million for the year, down 36.6%, and EBIT margin stepping back to 10%. Mocka, however, achieved another strong result, with the benefits of the work done in FY 2024 continuing into FY 2025. Total sales were up 14.7%, with Australia up 31% and New Zealand down 3%. The results in Australia were driven by targeted investment in brand awareness, which has delivered a significant increase in traffic. Gross margins of 59.4%, up 100 basis points on last year, were driven by new product ranges, higher average selling prices, and less promotional activity that have enabled this margin improvement despite the weaker currency.
EBIT for the year of $7.6 million was 21% up on last year, with EBIT margin increasing to 13.1%. Before I turn to the balance sheet, I'd just like to briefly talk to the significant items that we've excluded from underlying earnings in the investor presentation and that are detailed in Appendix One. In addition to the normal AASB 16 lease adjustments, we had some additional non-recurring items in FY 2025. We incurred $800,000 in the first half, completing the warehouse management system transition. We also relocated the Adairs customer support office and the Focus on Furniture customer support office and warehouse. Costs associated with these relocations were $2.1 million and included the physical relocation of stock, furniture, and other equipment, make good each facility, and some non-cash asset write-offs related to the old offices and DCs.
Adairs implemented a new cloud-based marketing platform during the year and also commenced its business-wide technology and data upgrade, with project costs on these two projects of $4.4 million expensed in the half. In the past, we would have treated these types of software development projects as capital expenditure, but under the new cloud computing and accounting guidelines, we are required to expense these costs as incurred. Finally, $1.6 million of costs associated with the leadership transition were incurred. These included the duplicate CEO costs, as well as other changes to the senior leadership and executive team at Adairs throughout the year. On our turn to the balance sheet, group inventory closed at $96 million, up 14.7% on last year. Within this closing stock balance, we have some pockets of stock, mostly Adairs, that have required further markdowns to clear in Q1 of this new financial year.
This, combined with the additional operational activity in Q1, was necessary to bring stock levels back in line and set the business up for the important second quarter with Christmas and the peak summer trading period. There are no significant stock issues in Mocka or Focus on Furniture. Across the group, capital expenditure was $13.5 million, with, as mentioned earlier, a further $4.4 million spent on cloud-based software projects that were expensed. Cash conversion was impacted by the higher stock levels, investment in CapEx, and the cloud-based software projects, along with the other one-off costs during the year, which did mean that net debt closed a little higher than last year, up $3.4 million to $67.6 million. However, leverage remains at approximately one times EBITDA, and we have plenty of covenant headroom, and we also completed the refinancing of the group's debt facilities during the year.
The board declared a final fully franked dividend of $0.04 per share, bringing the total dividends for FY 2025 to $0.105 per share, representing a 72% payout. We have maintained the dividend reinvestment plan as active. I'll now hand back to you, Elle.
Thanks, Ash. FY 2026 marks a foundation year, a springboard for future acceleration, guided by clear investment priorities. This blueprint, otherwise known as Vision 2030, is a customer-anchored strategy designed to deliver sustainable, profitable growth. The vision sits on five pillars: deepening customer engagement, which is really, we want a greater level of insight into our customers' behaviors, the way they shop with us, why they shop with us, and how we can be more relevant to them. The second is shaping brand distinctiveness. From our packaging, our store design, our tone of voice, our unique assortment, it's about how we become more consistent and more memorable to our customers. Driving operational excellence is really about understanding our insights, knowing where we need to win, and executing with excellence throughout our value chain, and leveraging data and technology.
We've already started embedding AI to help improve efficiencies, and we will target our investment in technology that unlocks our future growth initiatives. Building operational foundations for long-term success is, as we grow, we want to really ensure that we grow efficiently and productively, ensuring that our processes and our structures really set ourselves up for success. Transformational work is already underway for Adairs in FY26, and we'll roll out Vision 2030 for Mocka and for Focus on Furniture on June 4th. For Adairs, I am really energized by the opportunities ahead. Over the past few months, the leadership team and I have aligned on the strategy and KPI metrics that will carry us through to Vision 2030, with real clarity on the foundational priorities for FY26, and the first being rebuilding value. We can't keep relying on very deep discounts, weekly discounts, week after week.
Instead, we need to show up differently, telling our unique quality product stories in a richer, more meaningful way. We are deliberately reducing the depth of discounting as part of the broader strategy to protect gross margins, strengthen brand equity, and ensure promotions drive genuine sales with improved margins rather than erode profitability. This strategy also aligns better with our inventory management goals of reducing excess stock. Importantly, this is not about pulling back on customer value. It's about shifting from really heavy, deep discount-driven offers week after week to respecting these beautiful, unique, well-designed, quality-led products that our customers love with a revitalized promotional offer. As an example, our test and learn programs in FY2025 have shown us what works.
Whilst this evolution requires us to reeducate our customers, and we are still in the early stages of this strategy, what we have learned by creating bundle offers on key categories, so offers of buy two and save 20%, have seen a 5% to 10% increase in sales in these categories and GM dollar improvement and improvement in GM percentage with lower units sold. The offer not only lifted ATV and items per sale, but strengthened performance in category mix towards higher margin lines. Our stock investment decisions are critical to maximizing returns and following a detailed review of our SKU base. In FY 2026, we will reduce overall SKU count by 10%, with targeted reductions in selected categories to improve productivity and margin. For Q2, we've also assessed unit buys and reducing in key categories to reduce stock overhang.
Our test and learn approaches to big moments during Mother's Day and Easter delivered strong results, with Easter products achieving a four-fold uplift. This proved our ability to leverage event-driven foot traffic to drive top-line growth. Through working with the team, these valuable insights have provided us great confidence with how we need to show up with our execution throughout our Christmas selling period. Throughout the FY 2026 calendar, we're extending this big moment approach, where we will invest in categories of high demand while reducing exposure to slower-moving lines and categories, which will also improve our stock efficiency. Through our test and learn approach focused on elevating key visual merchandising areas, the result has been encouraging, with customer satisfaction increasing by four to six points.
This new VM approach underpins the go-to-market calendar, allowing us to communicate our unique products, our quality, our value, and our experience in a more compelling way. In Q2, we're investing in fixtures to support major big moments and category expansion. Our customers and our shareholders will be able to come into our store and certainly see the difference from October onwards. We are also driving productivity improvement across the NDC and our stores. By investing in automation and voice picking at the NDC, we'll make routine high-volume tasks easier for our team and boost pick rates per hour. In our stores, we're streamlining operations by reducing non-selling activities, enabling our team to spend less time on admin and more time delivering what we're known for: exceptional customer service. Vision 2030 also enables Adairs to have a really clear guide path for growth across the next five years.
To unlock part of that growth, we must move off aged legacy systems that slow execution and require manual time-consuming workarounds. Our direction is having a modern platform that enables us to deliver with speed, scale, and agility, ensuring we can execute our growth strategy more efficiently and capture growth opportunities faster. For example, ship from store, flexible delivery for our customers, mobile polls, and even unlock our ability for flexible pricing and promotion. We will also continue to invest in AI-enabled technologies that produce faster, deeper customer and product insights and allow faster decision-making, like the new marketing platform, which has enabled us to communicate to customers through intelligent timing, more personalized communication, and even A/B testing subject lines for open rates.
Our suppliers are absolutely critical to the success of our business, and we know that it's imperative that we are aligned with our suppliers to maximize our margin benefits as we grow. On our recent trip to China, we achieved an average 5% cost reduction across key programs, and we will continue to enhance our strategic partnerships with key suppliers to unlock further efficiencies and ensure they are aligned with our long-term growth ambitions. One of our strategic pillars is strengthening brand loyalty. On the 30th of July, we launched an exciting partnership between Adairs Linen Lovers and Qantas Frequent Flyer. Linen Lovers can now earn one Qantas point for every dollar spent in store or online. With Qantas Frequent Flyer being one of the largest loyalty programs in Australia and over 17 million members, this partnership represents significant value for our 1 million paid members.
The objectives are clear: drive higher average transactional value, attract new members, retain existing members, and increase frequency of visitation. We've already seen 20% of our new members tag their Qantas Frequent Flyer number in their first transaction since launch. Early performance is encouraging, with ATV for Qantas-linked Linen Lovers running higher than the regular Linen Lover. It is still early days, and we'll continue to assess incremental behavior over time. Focus on Furniture has come through a tough period, but as always, these cycles are valuable learning moments. What's encouraging is that our refurbished stores, especially in South Australia, are outperforming up to 20% and on track for a payback in less than two years. This is a clear signal of the benefits from our investment.
We're harnessing recent customer research to create a better experience online and in store, with sharper visual merchandising, offering flexible payment options, and select product customization are all helping us respond directly to what customers want. Maintaining our in-stock model remains absolutely important, but giving customers the choice on fabrics adds another layer of value and new opportunities to customize their purchase, giving them a reason to shop with us. Expanding our footprint to 55 stores nationwide remains a priority. As we pursue new sites, we're also ramping up refurbishment, learning from our successes. We know there's much to do, and improving the customer experience is top priority. Investing in leadership remains essential too, with the key recruitment underway of the GM of Retail Operations and the GM of Marketing Digital to strengthen our existing team and drive our business forward.
Mocka is building real momentum into FY2026, with targeted branded investment continuing across digital marketing campaigns, PR, and other channels to lift awareness and drive engagement. The team are focused on growth in key categories like youth, lighting, outdoors, and Focus on Furniture, which is supporting higher full-price sales and strengthening margins. The product strategy remains tightly aligned to important life stages of nursery, kids, the first big bed, youth, and first home, ensuring Mocka's ranges resonate and add value for our customers. We've always had the ambition for Mocka to be an omnichannel retailer and to open a retail store. Throughout FY 2025, we initiated an opportunity in Tower Junction, New Zealand, with a store-in-store concept to gain an understanding of customer response in the Adairs Tower Junction store.
This approach to the test and learn has given us the confidence and, really importantly, the learnings to open our first standalone Mocka store this year. This proof of concept provides confidence of annual sales of $2 million per store turnover. Expansion in New Zealand is a priority. Store-in-store trials in Adairs stores will be expanded in New Zealand, alongside continuing innovation in products. It's an exciting business, and we believe we are well positioned to take it forward with momentum. As a trading update, I'm pleased to report that the first eight weeks of FY 2026 have delivered an impressive top-line growth ride across the group, with sales up 22.6% in real time, driven by targeted promotions and a positive response from customers. Let's take a look at each brand. Adairs has achieved an elevated sales of up 26.6%. That was supported by promotion and clearance activity.
There was an additional Adairs Linen Lovers event in August, which has performed exceptionally well. Whilst these efforts have resulted in strong sales and it has reduced our excess inventory of reduced stock, they've also impacted margins early in the year. Gross margins for Q1 will be about 300 basis points below last year, but we expect steady improvement in Q2 as promotional activity normalizes and inventory clears. Looking ahead, sales growth in half one should be up 4%- 7% compared to last year, with margins recovering to be 50 to 150 basis points down for half one overall. Focus on Furniture has started FY 2026 with encouraging sales up 6.7% as our team executed customer-informed initiatives. Gains in supplier costs and smarter retail pricing are helping to maintain gross margins even in the face of a weaker Australian dollar and the need for continued promotional activity to drive conversion.
We expect sales performance to remain steady for half one growth of 3%- 6%. Mocka continues to build momentum, especially in Australia, where sales are up 52%, and in New Zealand, sales are up 22%. We expect Mocka sales growth to be moderate over the rest of the half, but still running well ahead at 20%- 30% up on last year. Across Mocka, gross margin is forecasted to be 50- 150 basis points lower than half one in FY 2025, reflecting currency pressures and increased promotional activity in New Zealand. Whilst margin has been lower from a group perspective in these early weeks, we're confident it will improve over the course of the year as our strategies take hold. Overall, these results signal strong engagement and continued growth potential across all of our brands, anchored by targeted actions and disciplined execution.
As an outlook, I look ahead across the group. Our management focus is firmly on delivering our FY 2026 initiatives with strong execution. On the property front, Adairs is targeting the opening of three to five stores alongside three to four store upsizes to drive a 3%- 5% increase in our overall gross lettable area. For Focus on Furniture, we're planning to add three to five stores in the next 18 months, with a strategic focus on New South Wales, Queensland, and expanding into Western Australia. At the same time, three to five existing stores will be refurbished to showcase our latest format, strengthening our customer experience and network optimization. It's an exciting year ahead for Mocka, set to launch its very first standalone retail store throughout the year, a significant step in our omnichannel journey.
I just want to finish with a reminder that these results are a direct reflection of the incredible commitment and collaboration shown every day by our teams across Australia and New Zealand, as well as the unwavering support from our loyal customers. There's genuine excitement about what's ahead, and I want to extend a heartfelt thank you to everyone for your dedication, achievement, and continued focus on the opportunities in front of us. I'd like to thank the board for their ongoing support and guidance. Together, we're building a business with great momentum and purpose. Thank you for listening, and I'll now hand over to questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Apoorv Sehgal from UBS.
Hey, good morning, Elle, Ash, and Jamie. Can you hear me okay?
Yep, we got you.
Yep, I got you.
Brilliant. This first question on Adairs' product gross margins. First half of 2026, indicating sort of roughly down 100 basis points year-on- year. That'll take it as kind of 61.4% product margin for the first half of 2026. Clearly, the second quarter run rate is tracking probably a bit higher than that. I'm just wondering, looking into second half of 2026, how should we think about that product margin versus the first half?
I think our expectation is we've got a lot of opportunity in H2 because we're not going to be cycling all of these clearance markdowns. I think if you think of the second half of FY 2026 returning to sort of more where it was in FY 2024, it would be a pretty good starting point. There's a little bit of weak currency that's a bit weaker, so it might not get all the way back to $63.1 million, but it should certainly get a fair way back towards that number, without all this clearance activity in the second half, particularly Q4.
We're also seeing the benefit, aren't we, Ash, on the reduction of cost prices too.
Yeah, we'll get a full year benefit of that cost reduction as well, which is a big part of the currency strategy.
Okay, the way I'm interpreting it, yeah, second half of 2026 should be probably 62 point something.
Yeah, I think that's it.
Yeah, okay, that's good to hear. That clearance program of the fashion non-core type SKUs, when does it actually fully complete or has it fully completed yet?
By the end of Q1, we would expect to really have completed that cycle through that mid-season sale period, by the end of Q1.
Yep, okay. The next topic, just on Focus on Furniture. Nice to see a bit of a positive rebound in first half 2026 so far and on some stable GMs. Just talk us through what's worked incrementally in your favor in recent sort of months. I also wanted to touch on a comment in the media release. It sort of said, continued macro support. Is that just a specific reference to rate cuts sort of helping through? Are you suggesting perhaps that Victoria has turned a corner given that's obviously pretty important for Focus?
Interest rate reductions are certainly helpful for Focus on Furniture with the big ticket purchase. Obviously, similar to housing generally, the sentiment's becoming a bit more positive there. Focus on Furniture does kind of that. We haven't really seen any change in Victoria. The only, I guess, positive is that we're starting to sparkle those numbers. That's part of what's contributing to seeing some growth now.
If I sort of go down to the bottom line there, like Focus on Furniture, in FY 2024 it was 15% EBIT margins. That's obviously dropped in FY 2025 to 10% EBIT margins. If we're thinking about FY 2026, how do you see it? Maybe somewhere in between those two numbers?
Yeah, I mean, our goal is to, you know, see a return to sales growth. I think the margin is going to take a bit longer to rebuild it back to where it was, but, yeah, we should see margin improvement this year. We want to see sales growth, which should, say, deliver a 10%+ EBIT margin, and then sort of get us on the track. I think longer term, you know, we would expect to be mid-teens, but we've sort of got to sort of get the positive momentum moving again.
Yep, great. Thanks, guys. I'll jump back in the queue, maybe. Cheers.
Thank you. Your next question comes from Chami Ratnapala from Bell Potter Securities. Please go ahead.
Thank you, Moni O, Ash, and Jamie. Congratulations on the result. I think quite a few of my questions were answered earlier. Maybe just on the Qantas partnership, which looks pretty exciting. For the moment, it's on Adairs Linen Lovers. Is there any opportunity for it to be expanded to other brands? Not that the other brands are relevant to the same extent, but any comments there?
Thank you. At this stage, it's an exclusive Adairs partnership. We don't see it extending at this point in time, really past its financial year.
Perfect. Thanks for that. Just with the cost base in the business, I think you did call out some efficiencies and also referred to some of the AI or the tech work that's gone in. I'm more thinking about, you know, sustainable cost base or more medium to long term. Where do you see the most efficiencies in the cost base once you've embedded some of those efficient processes?
I think our priority is to make sure that our cost growth is lower than sales. I think actually, think about what the P&L looks like over time. We'd like to see the way that we get EBIT margin up, particularly in Adairs, is with that rebuild of the gross margin, which we talked about earlier, and then seeing cost growth lower than sales. I think we've still got cost savings to come in the warehouse, with the continuation of the improvements we've been seeing since the warehouse management system went in this time last year.
As we introduce new technologies, which will make work processes easier and more efficient, and sort of free people up and free hours up to focus on more customer-reliant things or take hours out, that will be another way in which we can see cost reductions, which will be around the business as we sort of implement those new tech initiatives.
Perfect. Thanks for that. Maybe on the Mocka first store, that's announced for FY 2026. Could you clarify towards which part of the year that should come through?
Yeah, during the year, we're thinking it's more half two at this stage.
Right. Thanks, Elle. What's the investment looking like there? Also, given the first store is now more fine-tuned, how are you all thinking about the store rollout? Would there be quite a big store rollout or a couple of stores first trialed?
We're just taking a measured approach to this. We took the opportunity to test and learn in that Tower Junction environment. The next phase is a standalone store, and we are working through the square meter use that's required for that based on our Tower Junction learnings. If that works, then we have certainly a list of opportunities, a list of sites, and a list of areas that we know are aligned to the Mocka customer, but we really want to get through this next transition of learning Mocka, really, when it's a standalone store.
Perfect. Thanks for that. Appreciate it. I'll jump back in the queue.
Thank you. Your next question comes from Max Moser- Finch from Barrenjoey .
Hi, thanks for taking my question. Just on Adairs' gross margin to H2 2025, it was down 340 basis points year-on- year. Could you break that down in terms of how much was just extra discounting in Q4 versus FX and other movements?
There's a bit of FX in there, so it's probably a quarter of it's FX, and the balance is promotional/clearance cost.
Okay, thanks for that. I'll jump back in the queue.
Thank you. Your next question comes from Ed Woodgate from Jarden. Please go ahead.
Hi Tim, thanks for taking the questions. Well done on the results. I just wanted to ask about the trading update. Obviously, it's very pleasing to see those numbers come through, but I appreciate that's been partly driven by discounting. Can you just talk to me about where your inventory levels are today and how much more you have to clear? I understand you're going to be finished by Q1, but it'd just be interesting to understand where it is now and the risk that that might finish earlier or continue on through the year, I think.
Our stock levels are well down. Elle can probably talk to a bit more around where we see the opportunities moving forward from what we've done.
Yeah, I think, you know, we ran a Linen Lovers event, and what that's really enabled us to do is really clean up that inventory. As you know, there's a real stickiness to that Linen Lovers program. You know, there's great engagement. By running that event, we're able to clear through that excess inventory, and we're in a really good position now with our stock health. Mind you, we are going into mid-season clearance, so we've just got a bit of stock to clear across from that July period. I think also what that Linen Lovers event has really been able to provide us an insight of is, you know, we saw some really great response, really early market response to products that we know sell well at Christmas time.
In actual fact, what it's enabled us to do is chase back into Christmas with a lot more confidence on quite a few key lines, and kids are the real standouts for that. It really gave us a, I suppose, if you like, a dual purpose of not only clearing that inventory, but also getting great, really important reads for that Christmas period.
Yeah, okay, thank you. Great to hear that you've negotiated some discounts in China. Can you just clarify when in the year these reductions were achieved as far as it actually hitting your P&L?
Yeah. It'll hit the P&L from Q2, and we'll get a full part effect in H2. They're all negotiated in May and started flowing through in purchase orders from then, as well as a bunch were retrospective, so it impacted on stock landing through June-July.
Okay, fantastic. The tech upgrade, I understand that makes sense why you need to do that. It sounds like it's important for future-proofing the business. Can you just talk through whether this is once off or you'd expect some of this to carry over into FY 2027?
Yeah, we've talked that we'll be spending $20 million- $25 million over the next couple of years.
We've already spent a little bit in FY 2025, and then there'll be another $13 million- $15 million in FY 2026, and then another $5 million- $10 million over 2027, 2028 as we work it through. The heavy lifting will happen in FY 2026, which is the replacement of the legacy ERP system in Adairs, with a view that the new platform will be live in Q1 of FY 2027, and that really opens up a lot of options for us around the things that we know we need to do to deliver on our Vision 2030 objectives. Elle touched on ship from store as an example, being able to give customers more flexible delivery options, and then having a new data platform and being able to use this information more effectively for stock management, which will drive improvements in stock returns, better assortment planning, better allocations to stores.
There's just a lot that we need to be able to do better, and moving to a modern tech stack will allow us to add the tools that are necessary to make those things happen.
Okay, great. One final one for me. Pleasing to see the research that they look like they're delivering good returns, but just to help us have a rough idea as to what potential returns might be. You've talked to CapEx of $600,00- $700,000. What's the appetite from the analysts as far as contributing to those? Are they happy to contribute more than they typically would for a standard refurb or is there any sort of color you can provide there?
That $600,000 effectively will replace, rebuild an entire inside of a Focus on Furniture store that's at a standard average size.
If you're a, and that includes external signage, internal signage, flooring, lighting, fixtures, and typically it isn't included in the $600,000- $700,000, but what we also then reopen with is new stock. Before they close the store, they clear the old stock. That formula, which we've now rolled out a number of times, is we're pretty clear on how we do it. There are things we're looking to do to try to create a faster, cheaper solution for other store types, you know, regional stores and so on. The payback or the result we're seeing in South Australia of that 20%- 25% up. We've also done this in a homemaker store here where that store has been outperforming consistently. It was done probably 12 months ago. We're pretty confident that the format works. There's always learnings.
I think one thing Elle's brought in her time is a different perspective on what we could also do better in store, both the refresh stores and the existing stores in Focus on Furniture. Those things will only overlay more opportunity and, you know, potentially faster payback.
I think that's a good point, Ash, because that's part of the work that we've been doing with the customer insights. With the stores that we already own today, how can we improve those? That is an initiative for FY 2026 with the Focus on Furniture team. Whilst we refurb stores with the stores that we already have, how can we improve our customer journey and the visual presence of those stores?
Okay, great. Thanks, Jamie. Really appreciate the questions.
Thank you.
Thank you. Your next question comes from [Akash Deep,] private investor. Please go ahead.
Hi, good morning, Tim. I just want to ask about Mocka. We have grown very well in FY 2025, and now we plan to open a store as well. I just want to understand why not only online and why we want to go via omnichannel scalability?
The practical reason is that if we make it an online-only business, it's playing with a 30% share of the market. We're an omnichannel retailer. We understand the value and importance of allowing customers to access us across whichever channel they choose. We also acknowledge that, you know, online, whilst it might be growing faster than physical retail in furniture, it still only represents 25%- 30% of the total market. I think from a customer perspective.
Yeah, and through our insights. Once again, we have customer insights on that Mocka business, and we know through those insights that customers also want to touch and feel the product. They want to be able to come into store. They want to see the quality of the products. We see the stores as enabling a real Mocka experience, if you like, where the customers can come in, talk to our team, have a look at the products. We've certainly seen the importance of that in our Tower Junction environment, where they have actually not only bought in that store, but they're also ordering online. They can be both shoppers as well.
Okay, just one more. What will be the metrics that will tell you that this model needs to be scaled? Which will be the key metrics you'll see when you open your first store?
Obviously, the traditional retail metrics around sales to square meter, and overall shop contribution. From a broader growth perspective, what we'll be looking for is new customers. The beauty of an online business is we know exactly who has shopped, where they live. We will put the stores in attachments where there's a high representation of like customers, and then expect to see business engage with and attract a lot of new customers. That is what we have seen at Tower Junction. We still deliver most of the orders to the customers that purchase in store. Therefore, we are able to overlay those customer details against our existing customer database. We can see that there's a lot of new customers in what is a relatively small market in Christchurch. That'll be the other key metric.
I think additionally to that, because we know who our customer is, we're very clear of the suburbs of where those customers are. We've been able to, through our property department, really strategically look at our customer through our customer insights, who's already shopping today, and where those next lot of locations potentially can be. We're really being very strategic with where we locate our stores and the convenience of those stores as well.
Okay, is everything already planned for the next three to five years, or will we see how it goes for a year or a year and a half, and then we'll see how we can scale and how many stores we can have in the future?
We have worked to a number. However, as we know, we do like to test and learn our concepts and make sure that any investment that we make is a real targeted investment. The first part was the test and learn at Tower Junction. The second one now is that freestanding store, once again, to really learn a lot about how a customer, how they interact with the store, what their requirements are, a SKU count in store, and following on. We've got key metrics that that store would need to achieve, and then that really unleashes the growth strategy or the store expansion strategy, I should say, for that Mocka business.
Okay, and my second question is on growth in overall group, but at the overall group level. In the future, do we plan to reduce maybe gross margins slightly to accelerate growth, or do we need to keep margins stable and grow in, say, mid-single to high single digit, or what the growth is going to be like in the future?
Our goal is always to grow gross margins, and I think we've got opportunities in Adairs in the second half to see a material improvement in margin on FY 2025, as I said earlier, to get it back to where it was in 2024. Focus on Furniture likewise. Our expectation is there's opportunities for us to improve margin as we continue to work on improving the customer experience. I think, broadly speaking, we see a lot of opportunity to improve gross margins, and we'll continue to work on that. Obviously, to the extent the market requires us to be a little bit more responsive, or we get it wrong, as you know, as we do from time to time, and as we talked about in Q4 of FY 2025, and we need to mark it down, we'll mark that stock down and move it on. Growing margin is key.
Yeah, and I think a good example is also if we just look at the Adairs business. Whilst we've got 168 stores, we've got a cohort of small stores. Our strategy for Adairs is expanding our store size because we know that the customer loves those, you know, those, I'm going to call it the larger format, the homemaker stores, which drive higher sales, and it really allows us to extend those product categories. Even within Adairs, the sales growth is going, and we already know what we want to get to for 2030, and that will be a mix of growing our store size as well as other product categories. Through a different approach to this promotional activity and through a new value equation for our products because they are uniquely designed, that's where we also see that margin improvement. Importantly, working with our supply base.
As we grow, yeah, we really do need to see the growth on the margins as well.
Okay, so basically the thing is we are more skewed towards gross margins, and growth will be, say, mid to high single digits, right?
We will be continuing to look to grow gross margin.
Absolutely.
Okay, all right. Thank you. Thank you. That's it from my side. Thank you.
Thank you. Your next question comes from Allan Franklin from Canaccord Genuity. Please go ahead.
Yeah, hey, morning everyone. Hope you're well. Thank you for your time. Just a couple of quick questions, please. On the Adairs side, perhaps I've sort of skimmed over given you have a lot of new materials to talk to, but just interested in things like kids and how you're thinking about that offer into the next six to 12 months. Gifting as well, I think you sort of touched on that a little bit into sort of Christmas. Also, the sort of change to postcodes, postcode settings, or potentially stock on shelf in certain postcodes and getting that more aligned. Is that all still flowing through in your mind?
Yeah, okay, I'll start first of all with the kids' business. The kids' is, and we know that the kids' business is an important entry point to Adairs. We know that it is important to have that store-in-store concept. That's why when we're thinking about our real estate strategy, that larger expansion of our stores will include the kids' component. It gives us great product differentiation and also, as I've said, is a really important entry point. We do see growth in kids. However, it'll come at an expansion of store-in-store concept for Adairs. When we think about gifting, we are a gifting business. If you have a look at, or you will have a look at what we're doing for Christmas, we've really made sure in this next big moment of Christmas, we've already seen Easter, we've already seen Mother's Day.
We know that when we show up and when we've got product that's specifically purchased for that period of time and we show it in a way that is really confident in our stores, we know that we really see that sales and foot traffic increase. That's where we see ourselves over this Christmas period. We've increased in really key lines. We've already got the insights. It's not about increasing our investment in all of our lines. It's about really key categories, key gifting opportunities that we know our customer responds to. It is, I'm going to say, it's a key driver, if you like, of Christmas and ongoing as we think about these big moments. The other part that you mentioned is around postcodes. We're undertaking mosaic profiling of the stores of what we already own today. Importantly, what is our mosaic overlay of our Adairs Linen Lovers?
We can really understand the parallel to that. Importantly, as we talked about AI and our enablement of our ERP system, that'll also unlock opportunities for us to get really finite in our range selection. We are already trialing higher price points in some of our key locations where we know the customer responds to that. Interestingly, we've also seen those insights from some of the promotions that we've also just driven through the business as well. Stay tuned on mosaic profiling and postcoding because it's certainly going to be underpinning our vision going forward of how we really look at our customer, how we really understand the insights of our customer, how that drives decisions, how that drives our ranging, and really importantly, how we can be offering a premium product to our customers as well.
Helpful, thank you. A couple of quick ones on Focus on Furniture. Just a reminder, please, in terms of the store closure impacts you had through fiscal 2025, and I assume we can expect some impact to closures as you're refurbing the stores into fiscal 2026, do those roughly net each other out? Just a second question on the flexible payment options, is the extent to which existing Focus on Furniture customers actually use those offers or products, rather?
The store closure will probably net each other out. We might end up with an extra closure in FY 2026 if we can get a few more away. We are targeting the better stores. The South Australia type example in terms of revenue stores are still, you know, they're the top 10 stores that we want to be chasing. I was thinking about...
Just around the flexible payment options.
I currently use Zip and Afterpay, which have a reasonable level of take-up but not massive. The addition of Latitude, we're hopeful, will also open up an opportunity to access a lot more pre-approved customers who are carrying that card around and give us a new angle to pursue market share from the likes of Harvey Norman particularly.
Makes sense, thank you.
Thank you. We have a follow-up question from Apoorv Sehgal from UBS. Please.
Hey, thanks, thanks guys. Thanks for taking the follow-up. I just wanted to ask about Adairs brand EBIT margins. We've been at 8% margins for three years in a row now. Is 10% through the cycle still the right way to think about it? For FY 2026 specifically, assuming you can kind of get mid maybe closer to high single digit sales growth in 2026, how close do you think you can get to that 10% mark in 2026?
The 10% is still the aspiration. I think if we get to high single digit comps in FY 2026, then we're getting a lot closer. We should be seeing EBIT margins above 9% this year based on the point of the guidance. The extent to which we can build the margin back faster is potentially a variable in that. We will keep costs down. A number of the things that I'll talk to in terms of the go to market strategy, the bundles and so on have an indirect cost benefit in that we are shipping less units at higher margins. We can achieve the sales growth with higher margins, less units. That does help us reduce our CADV as a percentage of sales. That's sort of the formula we're looking to move. The 10% is still what we're aiming for. We're still rebuilding. We're still transforming.
That's certainly what we want to achieve.
I think I'll get to that.
Yeah, that's our first.
Yeah, first hurdle.
Okay, no, that's clear. Can I also just ask on Mocka quickly as well? Would you expect the EBIT margins in Mocka to pick up a bit in 2026, or are those gross margins being down a bit? Does that kind of hold the margin recovery story back a bit?
No, I think margin, EBIT margin picks it up. I mean, we still get leverage in that business. Margin, gross margin is under a bit of pressure. Yeah, it's not giving up a lot. We know if we can deliver that 20% to 30% top line sales growth, even at a slightly lower margin, it's still going to give us good positive operating leverage because there's still enough fixed costs in it. I think Mocka margin continues to grow into the mid-teens in FY 2026.
Mid-teens in 2026 itself. Okay, that's.
It's going to continue to grow. I mean, we're at 30 now. It'll be 30 to 15, you know, if everything goes well. Down in Berwick, we open the shop. Obviously, we'll call it out so that we don't screw up your models. When we do get that shop open, there will be some upfront costs attached to it. Hopefully, that's a one-off which will pave the way for an exciting growth story moving forward.
Okay, can I ask one final sort of question? Just on the ERP, thank you. Okay, just on the ERP program. You've called out the $25 million- $30 million of total CapEx on the ERP program. Are there any expenses that go with that over the next couple of years, like into the P&L? Presumably below the line, but are there any P&L expenses that actually go with that?
Once we're finished, there will be running costs attached to it because we've got to pay for licensing and those sorts of things on these products. We are operating in legacy systems that don't have significant licensing costs attached to them. I think that those run costs that will incur post-completion of the projects will be offset by cost savings elsewhere in the business.
Okay, so basically, the ERP is done in, like, which is in three years' time, is it, Ash? The program will be sort of probably live.
The run costs will be hitting the P&L in Q2 next year. For example, I'm not saying those are the numbers, but if we're going to, we'll end up with, you know, we could end up with circa $1 million in software licensing costs to run the various systems. We'll fund that. That'll be offset by cost savings throughout the business. The P&L won't see an incremental cost attached to running these products once the projects are complete.
Okay, so it's sort of net neutral on the P&L, so that to be net neutral.
Minimum, because we are doing this in order. Business case attached to this investment does have a lot of other benefits attached to it. You know, net neutral at a minimum on cost.
Minimum, yeah. Okay, and those running costs hit the P&L with the second quarter of FY 2027? Yeah, okay.
Just a quick one, with the CapEx spend though, the upfront CapEx spend, because sometimes with the ERP programs you have CapEx, but you might have some OpEx below the line or something. Is that also a feature here in the next 12 months?
No.
Okay.
These are cloud computing initiatives, we'll be expensing them through the P&L rather than taking them up as CapEx. That's the reality of the new accounting guidelines. The all-in costs will be there and we'll be pretty transparent as to what it is and we're not going to carry costs below the line when these projects go live. These projects are like we would if they were capitalized. The running costs hit the P&L and we match forward there with a fully costed P&L.
Understood. Thanks for your time, guys. I appreciate it.
No worries. All right.
Thanks very much, everyone. Thank you for taking your interest in the Adairs Group. Thanks very much.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.