Thank you for standing by, and welcome to the Adairs Interim Results Call for the 2020 financial year. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr Mark Ronan, Managing Director and CEO of Adairs. Please go ahead, Mr Ronan.
Good morning, everyone. Welcome to the Adairs first half 20 results call. With me this morning is Ashley Gardner, our CFO, and Jamie Adamson, our Head of Investor Relations. The first half of financial year 20 has seen Adairs deliver a record sales and profit result. Our omnichannel strategy has seen us grow sales across both our physical and digital stores, with stores delivering 2.4% like-for-like growth, whilst our online store grew 31.6%. Our gross profit result was a real highlight, with our gross margin up 20 basis points to 61.1%, despite our FX headwind of approximately 160 basis points. The team have worked hard on a variety of initiatives across the business to deliver this result. It shows that we are capable of managing our margin despite the declining Australian dollar.
Our cost of doing business increase reflects an investment in team within our support office to drive the growth while achieving efficiency gains across our stores and, importantly, our supply chain. This has resulted in underlying EBIT growth of 4.2% to AUD 23.2 million, allowing us to declare an increased fully franked dividend of AUD 0.07 per share. I will now hand over to Ashley Gardner to cover the key highlights of the results before I provide some more information on the strategies that will continue to drive the ongoing growth of the business.
Thanks, Mark. Good morning, everyone. As Mark said, we are very pleased with the results that we're reporting today. The strong sales growth, combined with our focus on margin and cost control, has allowed us to deliver improved contributions from both our stores and our online channel. Our focus on gross margin improved our margin relative to last year by 20 basis points, despite the weaker AUD. We've been implementing a coordinated strategy to manage the impact of the weaker AUD while also building a stronger sales base that is less dependent on sale and promotional events. In addition to the reduced markdowns, we have also negotiated lower costs on key merchandise programs and reviewed our price points during the season to improve our initial margins.
We are fully hedged for the balance of financial year 2020 and have ongoing programs in place to manage the impact of the weaker AUD into FY 2021. We remain focused on cost control. During the half, we reduced our total cost to sell by 40 basis points, and we saw improved productivity from our DCs, albeit off a high-cost base or a cost base that was too high last year. We have invested in our customer support team in key areas including marketing, online, supply chain, and IT, as well as in the executive leadership team. These investments, and the capabilities that come with them, will enable the business to continue to deliver on its growth strategy over the coming years. Our balance sheet remains strong.
The acquisition of Mocka in December has had little impact on earnings in the half but has reshaped our balance sheet with the upfront consideration funded through debt and new shares. We refinanced our debt facilities as part of this transaction and extended their expiry through to March 2023. We remain comfortably within the covenants. We expect our forecast gearing over the next three years to remain around 1x. I won't talk to the impact of AASB 16 and the Mocka acquisition in detail. Of course, I'm happy to take questions later if the information provided in the deck isn't sufficient. Cash flows for the period were strong. As Mark said, that's allowed us to increase the dividend to AUD 0.07 per share for the half. I'm going to hand back to Mark.
Thanks, Ash. As we've covered in the highlights, it has been a good first half, all based on us continuing to deliver on our underlying strategies. On slide eight, we have the underlying strategies that supported the business. I won't talk through them all, however, I would emphasize a few. Our product strategy has continued to deliver results for Adairs. Over the half, we delivered growth from both our expansion categories and, importantly, our core categories also performed well. We also acquired the rights to the Mark Tuckey brand. We're excited by the opportunity this acquisition brings to our product strategy, in particular around building a premium sub-brand within Adairs and adding significant furniture expertise via Mark's ongoing involvement with the business.
As we have considered a variety of strategies to mitigate the decline in the Australian dollar, we have maintained and always looked to improve the quality and specifications of our product across a variety of categories to ensure that, as always, we remain focused on providing great product for our customers. Our more inspiring larger stores and our best-in-class omni-retail capability strategies have seen us deliver ongoing sales growth. This has come through new and upsized stores, like-for-like growth from our physical store network, and continuing strong online sales growth. We are always thinking about and improving how we best utilize the combination of physical stores and online to deliver a more inspiring customer experience and drive ongoing sales and profit growth. Importantly, the half has seen us invest more in our team with significant experience and capability added to the Adairs leadership team.
Whilst this has come with some one-off costs during the half and a step-up in our support office costs of doing business, this investment brings with it considerable benefits across finance, supply chain, digital, and most importantly, strategy execution. These changes have enabled the business to move ahead with key projects that will help deliver ongoing profit growth for the business. One of these was the acquisition of Mocka in November. The addition of Mocka, a vertically integrated, profitable, pure play online home and living products designer and retailer operating across Australia and New Zealand, provides Adairs with another growth channel. As we noted at the time of making the acquisition, Mocka is an excellent strategic fit with Adairs in that we operate with a very similar mentality, focused on delivering differentiated product at a good price for our customers.
Adairs and Mocka are complementary businesses in that Mocka is a business that has a real focus on hard home or furniture with an element of soft furnishings, whilst Adairs is a soft furnishings business with an element of hard home. I want to reiterate that we will continue to run both businesses independently, thus making the integration of Mocka into Adairs relatively seamless. Importantly, during our initial few months working together, we have identified the key areas where Adairs can add value in supporting and de-risking the Mocka growth strategy and are working together on planning and executing the next steps around these strategies. We are excited by what Mocka brings to the Adairs group, and we look forward to giving the market more insights into these strategies and the broader Mocka business later in the year.
Another of these key projects was around our supply chain, and excitingly, we can announce today that we have entered into a heads of agreement with DHL as our 3PL partner for our new national distribution center. This project has been ongoing for the better part of 18 months, and considerable work has gone into analyzing the available options, working with potential partners, and in the end, coming to an agreement with DHL. DHL are a global leader in the design, implementation, and operation of flexible warehousing and distribution solutions. We believe that via this partnership, we will be able to deliver a local supply chain that supports our strategy of allowing customers to shop how they want, where they want, and when they want.
Partnering with DHL will also see us reduce the risk associated with this project based on their expertise, significantly reduce our CapEx requirements, and will see us achieve annual savings against our existing model of approximately AUD 3.5 million per annum. We expect that the consolidated national distribution center will be fully operational by July 2021, providing benefits and enabling opportunities across our supply chain at a materially reduced operating cost. Overall, the first half has seen us build upon and deliver elements within our existing strategic pillars whilst executing on the day-to-day across the half particularly well. This has delivered a good result and sets us up well for the coming year. If I move to the outlook, where we have maintained our guidance for the full year. Over the first seven weeks of the second half, we have focused significantly on delivering like-for-like GM dollars within Adairs.
This has seen us reduce both our depth of discounting and time on full sale over these seven weeks with like-for-like sales of + 2.3%, but more importantly, like-for-like gross margin dollars of 8.5%. Over the half, we will continue to manage the Adairs business with a view to generating ongoing like-for-like GM dollar growth whilst growing our market share. Over the same period, Mocka generated 16% sales growth, which was in line with our expectations given prior year promotional activity. Like Adairs, we expect the Mocka business to deliver ongoing sales and gross margin dollar growth across the half as we continue to execute the underlying strategies of the business. Obviously, coronavirus is impacting the supply of product and global supply chains across a range of industries.
We are regularly receiving updates from our suppliers on the impact of coronavirus on their workforce and their ability to manufacture our products. In most cases, our major suppliers have recommenced production, which is likely to result in some delays across a lot of our orders. In some smaller categories, the impact is still being determined and is changing regularly. At this stage, we believe we will be able to manage the potential impact of coronavirus. However, given the constant changing nature of the situation, we are closely monitoring this impact to give us the best ability to mitigate any potential impact ongoing delays might cause on our overall results. To finish, I would like to thank the Adairs and Mocka teams for their hard work and dedication across the half.
The result is a good reward for their efforts. We look forward to working together to deliver ongoing growth across both brands. I'll now hand over for questions.
Thank you. If you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from John Hind from Wilsons Advisory and Stockbroking. Please go ahead.
Good morning, Mark and Ashley. Thanks for taking my question. If we can maybe start on the strategy of less discounting and the impact it's had on like-for-like sales to date. Was that expected? Should it change the way we think about the profile of the business going forward? How does it impact the online strategy as well, please?
Well, it was expected. I think we knew what we've been trying to do is think about the depth of discounting and in particular, how often we are on full sale and how many days we are actually on full sale. If you think about the first half, we're very happy with the results we obviously generated there. In the first seven weeks, that result is significantly impacted by taking almost a full week out of sale versus the same time last year, which was a deliberate decision, and we think over the course of the year or the half, we'll get that back.
You're seeing quite a short period of time, and we did it deliberately and with a real view that we think the less time we can spend on full sale, we can improve our overall margin result and improve the profitability of the business with that in mind.
Thanks. How did your customers react over that period as well?
Well, ultimately, when you take out a week of sale, you're going to cop a like-for-like sales decline over that week. What we've seen is the bounce back has been harder, stronger post, and that's why we're seeing that like-for-like GM dollar growth really come through. Net-net, our aim is obviously always to grow market share, but we want to do it really profitably and not do it by giving away margin to get there. It's always a balancing act. We don't shy away from the fact we're a high-low business, so we have to manage the ups and downs of that. I think more and more we have to back ourselves when we've got great products customers want, keep delivering that, and then make sure we're getting the right price for it.
We have seen a decline in transactions, but an increase in the basket size that's actually driving that like-for-like growth. We're still getting a transaction growth in that +2.5%. I don't want that to be misconstrued. What we're trying to do is continue to drive basket size and price of item, as well as driving that transaction piece. We're quite happy to have flat transactions if we're growing the other two.
Great. Got it. Just on the DC update, can you give us a little bit more color on capacity, and what's the CapEx profile look like now as well, please?
In terms of capacity, the DC is going to be designed with us taking on what we need initially, and the DC will be big enough for us to then grow into it without having to relocate over the next 10 years. It will meet our requirements for the next 10 years. In terms of CapEx, because we're outsourcing it, most of the CapEx will fall to DHL, and obviously come back to us through operating costs. We're expecting our CapEx cost to be around AUD 2 million. Most of that related to the integration of our systems with DHL. Obviously, there'll also be some one-off costs associated with the transition to them. The ramp-up and the restructuring of our workforce around the outsourced arrangement, and we think that'll be circa AUD 3.5 million, which Mark mentioned in his talk.
Okay. Just the last one from me around Mocka. Four weeks of trading, and I think it's about 2.4 of revenue. I'm assuming given the nature of the product, December is not really the strongest, or I guess, trading month for you. Can you maybe just give us a little bit more color on how things are going, what December means for the business normally, and perhaps some more color on when the better trading periods are?
Yeah, you're right. Like most online businesses, if you think about taking four weeks in December, you've got two weeks that are realistically trade periods, then two weeks that are a bit quiet as shipping cutoffs and the like impact that back end. You get post-Christmas, which is reasonably strong, but trying to get goods out of DCs, effectively there was one day of operational post-Christmas this year that you could be moving stock around and obviously getting the revenue that goes with those orders. December is not the main month for Mocka. That figure there doesn't reflect, obviously, multiply it by 12, you're not going to get the full year result. Realistically, January is a good period for Mocka, then what we'll see is that'll continue to grow over the half.
What we aim to be is a business that looks at trying to be fairly consistent and see consistent growth month-on-month, rather than being a business that's got lots of big peaks and troughs in it and moves about based on promotion, giving us more a full price or a small discount style of product mix that we're going with. If you think about December in isolation, you've also got a bunch, some one-off costs and the like associated with that EBIT result, which has impacted that in relation to the transaction. Going forward, I think you'll see it start to meet the profile that we outlined as we announced the acquisition in November, December last year. We're very comfortable with the way it's trading at the moment. It's right on plan for where we think it's going to go for the half.
Obviously, they've got the same issues around coronavirus, and they're working with their suppliers just like the Adairs product team are working with our suppliers. The two businesses are keeping in contact with all that sort of stuff and working out how we can help each other if something comes about. Overall, we think early days, as I said in there, we're really excited by the opportunity. We certainly haven't found anything in the first three months of working together that we've got any concerns with, and we look forward to, as I said, providing a little more color as we start to build out those strategies and make sure they're well articulated and documented for the market to understand going forward.
Great. Thank you very much, guys.
No worries, John.
Thank you. Your next question comes from Arian Mirovski from UBS Investment Bank. Please go ahead.
Hi, guys.
How are you?
Good, thanks. In the absence of coronavirus, it seems to me that you would have lifted your guidance. Is that the message you guys are trying to put out in the release?
We think the first half was pretty good. It's a long way to go in the half. I'm not sure we would have been out here with an increase in the guidance. We are feeling confident that the underlying business is in good shape. We've obviously started work. In signing a heads of agreement, there's a lot of work now to be done to actually execute on that supply chain piece. There's still lots of work to do with Mocka. We are feeling like the strategies and the execution over the first half was particularly good. We didn't see anything stopping us from achieving those results in the second half. Coronavirus has probably just meant that we're a little more cautious of how that could impact particularly supply chain as we move through. We really won't know until we hit Q4. That is probably realistic.
With Chinese New Year, a lot of stock gets moved beforehand. All of that product's come in. We're really happy with the way that's performing to date. There is still a long way to go. We've dropped two in styles into our season or two lots of new product, and we've still got a lot to go. We probably wouldn't have been out here upgrading, I don't think. There's no doubt that coronavirus has put a little bit of a cloud on just making sure that we're really carefully managing and monitoring that over the half.
Thanks. Second one from me, can you guys please quantify the increase in support office cost and just give a bit more color around what that was for?
On slide five. Yep. You can see that our support office costs percentage of sales increased by around 160 basis points. There's some one-off things in there, both in last year and this year, that relate to some of the changes that were made to key roles in the business. We've got the ongoing cost associated with some new roles that have been introduced or enhanced. We have invested in supply chain capability, and that's one of the things that's allowed us to bring the project to this point quite quickly since that team's been, or those individuals have been on board. It's predominantly in people, and in areas where we've either added roles to enable us to grow or deliver on our strategy, or enhanced our capability with upgrading existing roles to deliver on the strategy.
It's in the areas that are going to drive growth. In digital, in online, in IT, and obviously we talked about supply chain and strategy. I think some of that won't be there forever. The step change, we don't expect for that to be seen each year. There's certainly nothing like that, but there is a point at which we needed to invest in order to create the ability to deliver some of these things, and it's an investment today for a return tomorrow.
Yeah. You said there's some one-off costs in that line item this year and last year. Can you quantify that, please? Has the one-off cost become larger this year versus the same time last year?
There's some costs associated with changes that are in the base that we need or in this year that won't recur. Quantifying them wouldn't really be appropriate if you understand the types of costs we're talking about.
Perfect. Can you guys talk about the magnitude of rent reductions you're getting on renewed leases, and also maybe how many stores you actually on holdover, please?
We've always got a handful of stores on holdover, and I don't think it's any higher than normal. We are making progress with the landlords, and you can see in our numbers that our op cost has come down and the team is doing a great job both in renegotiating existing leases and making sure that they meet our criteria for enduring profitability as well as the upsizing strategy, which is delivering lower op cost per meter and improved profitability. Store by store, it's a never-ending war, but it's important and we're making pretty good progress.
I think that's the point, is there's no generic number that we call out across all stores we're getting a 10% rent reduction. That's just not the way it works. Homemakers continue to be good performers within the business, and they're much harder to eke out some of those rent reductions in. As we've talked before, there's A-grade shopping centers where you want to be in there, and the landlords are investing the money. We have seen that reduction in 60 basis points in the occupancy cost overall, which is a good result for the business and helps drive that operating leverage that we saw out of the store network.
Thanks. Just final one from me, please. Just on the trading update of 2.3%, can you please split out the rate of growth between online and in-store?
Yep. Primarily, stores are relatively flat over that period with online driving the bulk of that growth. Stores are up, but not up by a lot. Talking point two, point three.
In top-line sales, obviously.
In top-line sales, yeah. Yeah. Much better result in GP dollars. Online is continuing to drive the bulk of that, but it has also traded at a slower like-for-like growth in that period once you pull out a week of sale. With online in particular, they love the sale. We're very comfortable winding that back, particularly given the variable cost nature of that business. If we wind back sales at a lower margin whilst still growing sales at a higher margin, we end up with a much more profitable online business. We haven't seen a lot of growth out of those stores.
As I said in my update, a lot of that really came out of me taking a week of sale out. Before that, they were ticking along quite nicely. We take a week of sale out, that's always going to hurt the top line, like-for-like sales growth number.
Perfect. That's helpful. Thanks, guys.
Thank you. Your next question comes from Aaron Yeo from Goldman Sachs. Please go ahead.
Good morning, Mark, Ash, and team. Congrats on a pretty pleasing result from my perspective. Just a couple questions from me this morning. Just with regards to Mocka, I think you commented that like-for-like sales growth at the moment is tracking around 16%. I was just wondering over, I guess the equivalent of what would be the first half of this fiscal year for that business. Do you know what sales growth it did over that period?
Not in front of me, Aaron, it was stronger than that. As we said there, that realistically, January was impacted by prior year promotional activity that we collectively all knew we were never going to aim to repeat in this year. We'd expect that over the half you'd see that number grow from 16% in the first seven weeks, we'd expect that like that growth number to increase or accelerate over the half going forward.
Okay, great. Just on your like-for-like gross profit growth, just doing the rough numbers, it looks like your overall gross margin at the moment might be tracking a little bit higher than the first half. Is that a fair assumption?
Yeah, because we've taken out that week of sale activity, which comes with high markdown.
Yeah. I guess given your comments.
And the other-
Sorry, go ahead.
Obviously we're continuing to get the benefit of the ongoing work we've done on price and sourcing and so on. That continues. That's not a one-off.
I think that's the key, right? A lot of those changes we made over the first half, which really helped Q2 as opposed to Q1, so they've got a lot of runway still to go, and we don't actually need to make more changes. We just need those changes to annualize through price increases, cost reductions from suppliers, depth of discounting we've got to continue to manage half on half. Some of those fundamental changes that we've made will see us grow gross margin over the second half at before currency, quite comfortably. We think obviously with the currency hedging we've got in place, we're in a good position to manage that over the second half.
Right. I guess your previous gross margin guidance used to be within the sort of 59%-61% range. Given the initiatives you've put in place and notwithstanding the sort of currency impacts, which are clearly hedged in the second half, do you think that range sort of gets pushed upwards, at least, in the near to medium term?
No. I think you've also got to allow for the fact that we're going to provide consolidated accounts, and the Mocka business doesn't trade at that sort of gross margin rate. You'll see that we've removed gross margin guidance, which has been a deliberate piece for us because of the changes in all the accounting standards. It's actually made it incredibly difficult to work out what a gross margin rate is in terms of a statutory number that we present to the market. Internally, we think we can continue to tick along at those sorts of numbers that we once were out there. We don't think that at Adairs. Obviously, the blended rate will start to come down with Mocka not running at that sort of high 50s, low 60s margin. It's more like a low 50s margin, sort of high 40s margin.
That's where that business will come in at. That will also impact, obviously, the overall result. At Adairs, we're comfortable that range remains really where we operate in, and as we continue to tick along, we're getting more and more comfortable and confident that we're at the higher end of that range.
Okay, great. Then just on the new DC, you've called out $3.5 million Of annualized cost savings from FY 2022 onwards. Can you just provide a bit more detail where those cost savings within your sort of cost lines will be coming from? I was just interested, are there any sort of scaling benefits with your arrangement with DHL, such that if you were to take more room, you would get more than that $3.5 million Cost saving?
Well, theoretically not, but as we take more, we'll pay for it. I think where we're gonna see the benefits are gonna come through operational productivity gains. We currently operate out of multiple DCs that will consolidate into one. Obviously, that comes with significant benefits associated with overhead reductions in management and so on. The single facility with DHL's expertise will allow us to put in enhanced mechanization automation technologies, which will improve the flow of products, obviously at a lower cost with less labor involved, and improve the speed at which we can move product through. We expect to see the benefit to coming through consolidation and new technologies, which aren't even sort of bleeding edge. They're proven technologies around materials handling. The last part would be designing those processes to integrate or facilitate a online and a store process in one.
We get the full benefits of speed for both sets of customers.
Okay, great. Sorry, one last question from me. Just could you provide some color on how the New Zealand business is going? With regards to the store openings in the next half, does that include any in New Zealand?
Yeah. New Zealand has performed particularly well over the first half. We've got good sales growth. We've seen good margin growth. We know there's more room to go. We're really quite comfortable with how that business is tracking along today. The next step for us is obviously to open some more stores. We've got a few deals in the pipeline. I'm not sure they get done this half, but if they're not this half, they'll be early next half. In that extra couple of stores, there's probably one of those that may be in New Zealand, but it may also kick into the second half.
It won't have a big impact on this half regardless, because it currently would be planned towards the back end. The New Zealand business overall, we're starting to see the fruits of the work of improving the supply chain, better stock management in New Zealand. Team continue to be more engaged with the Adairs business and understand the selling techniques and the like that we have there. We're really quite comfortable with where that's at, and we think there's good upside over the not-too-distant future. However, it'll never be a big business. We continue to see good growth, but it won't be any more than 10 to 12 stores over the next couple of years. We're not sitting here suggesting there's a significant, massive uptick in EBIT driven by the New Zealand business expansion.
Okay. Thanks very much, guys.
No worries. Thanks, Aaron.
Thank you. Your next question comes from Mark Waite from CLSA. Please go ahead.
Thank you, good morning. Firstly, on the like-for-like sales showed a really good uplift, I think, during the half. Could we just try and unpack that a little bit? I'm just thinking, could you talk to some of the initiatives that might have attributed to the improvement in the customer offer during the period? Lastly, where do some of the opportunities to improve that still remain?
Yeah, well, I think keeping our focus on product and thinking about what product we wanted to, in particular, mix.
We paid a lot of attention to where we wanted to sell, what we wanted to sell, and how we would construct that offer and construct that range. Those two things, which are quite hard to articulate when you're thinking about spreadsheets and the like, but the guys did a great job on delivering a range that really resonated with the customer over Q2 in particular. We knew it was coming. We'd picked the trends. The trends were there. We delivered to those trends. Those trends continue into the business going forward. We're not seeing significant changes in some of those key trends, which have been probably aimed at color without real pattern. There's been a significant change in the consumer over that period that they like color, but they're not all that interested in high pattern as part of that color mix.
That combined with thinking about how we drive a higher average item price, has definitely helped drive those like-for-like growths over that back half. As a business, we continue to see how we can improve season on season, year on year, and take those lessons and apply them. We knew we had good opportunity in Q2 if we executed well on product. We saw great work in the kids' range in particular and across the kids' linen. We saw some terrific results from some licensed product and some collaborations. For instance, the Frozen piece and collaborating on that with Disney in line with the release of the movie delivered some great sales across our kids' range.
We also saw the guys in the kids' area do a lot of great work on gifting around that key Christmas period, and they got some terrific results out of those sorts of products. The guys in bed linen delivered a terrific season. We knew we had good opportunity in there. Again, they really had a high focus on fashion colors. For those who are interested, it was things like mustards as well as the clay and terracotta style colors that actually we thought would deliver great results and did across the season. Those continue. I think the trends, we always get nervous where the trends that we're really seeing a big change in trend. This half, we don't see a big change in trend.
Color remains a key element of it, and together with texture, and then also continuing our thoughts around our expansion categories and what other opportunities are within those. We see good growth coming out of a number of those expansion categories over this half. Whilst the Kids' team probably have a bigger challenge in making sure they continue to deliver growth against some really good numbers from prior half. So far, so good. I think we've got good opportunity. As far as risk goes, in terms of changing trends and seasons, we feel like we're pretty much on track this half, and we don't have a significant shift that we're having to manage over that time.
Just sounds like it's all about product rather than anything around the staff training. You alluded to something there with New Zealand around engagement and how they sell stuff. Okay.
Yeah.
Fair enough.
It's largely product, but you'll find that when we get product right, the team are more engaged.
Lines up.
There's interesting things coming through all the time. There's a real focus on how we coordinate that product across a range of categories, and then our training comes back to that team around, right, well, remember, these cushions go with this bed linen. How do we build a basket versus just sell the bed linen? A lot of our training's gone back to, it's really retail 101 on the basics, but making sure that as you've always got changing team members out there in the retail store land, how do we make sure we continue to develop and evolve that training so they've got all the tools in their toolkit to make sure they deliver a great customer experience, and that customer can go home and create the entire look in their house.
I agree. It's retail 101. That's at its heart with what makes a difference of a good retailer like yourselves and some of those are not so fortunate. We touched on New Zealand already. Last one was just on the general branding strategy. I know on and off over the years you've tried different store names like the online Home Republic. I think that's still a couple of stores now. Within the store, you've tried different sub-brands, and then you mentioned this Mark Tuckey, was it? Was that how I missed it?
Mark Tuckey.
Tuckey. I beg your pardon. Mark Tuckey brand has come in as well. Just trying to understand that brand strategy. If you can elaborate on that'd be terrific.
There's probably a few elements to it. It's never easy, a brand strategy. What we're actually aiming on doing more and more is thinking about what sub-brands belong in Adairs and what sub-brands we can start to disappear and don't resonate with the customer. We always start from the customer, what brands do they recognize, what brands do we think need to exist within the business.
This is the conference operator. We have temporarily lost connection with the speaker line. Please continue to hold, and the conference will recommence shortly. Pardon me, this is the conference operator. We now have the speakers back online. Mark Waite, you're still in the Q&A session.
You there, Mark?
Really dig into the brand strategy, I was trying to reconcile the different elements that we've seen come and go over the years. You're saying you're focused on the consumer and starting there, what resonates with them.
Right. I didn't notice that we dropped out. I gave quite a detailed answer to that. Now I've got to repeat it. That's all right.
Well, look, we can catch up after in a couple of weeks if you like.
Yeah, okay. I'm happy to.
Happy to touch on the high elements if you like.
Yeah
delve a bit more detail.
Well, effectively, if you think about Mark Tuckey.
that's a brand we're adding in as a sub-brand, but at the same time, we're taking a bunch of brands out in terms of those sub-brands. The history of the business is we were selling third-party brands for a long time, and over the last 10-15 years, we've obviously removed those third-party brands from the business. In some instances, a sub-brand matters and adds value, and in other instances, we think it doesn't really add value. What we're working on is an overarching brand strategy and where we think a brand adds value to the customer and adds a reason to be. You think about something like Mark Tuckey, it's a premium product that he produces today, made in Australia, bespoke furniture with a real sustainable element to it.
We will leverage what he does today and how do we bring that into the business. If you think sustainability, you think about premium products, and you think about a real concept of thinking about long-lasting pieces, then Mark Tuckey adds value to that, and that's why we think it's a great addition to the business. There's some other brands within the stores that we think we can start to de-leverage and disappear because the other thing that your digital world and all the rest of it is if you're going to run a sub-brand, it almost needs that additional support in terms of a website so people can go and understand why it exists, and all the rest of those sorts of things.
There's a number of elements to our brand strategy. What you'll see over the years is, I think we will reduce the number of sub-brands that exist within Adairs. Any that we add in will have a real purpose to be.
Yeah. Thanks for going through that on the second occasion. Appreciate that. Thank you, gentlemen.
No worries.
Thank you. Once again, if you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. Your next question comes from Josephine Little from Morgans. Please go ahead.
Morning, Mark and Ashley. Just firstly, if you look at your second quarter, obviously very strong comps and certainly an acceleration. I'm assuming the market you operate in didn't grow by circa 10% in the second quarter. Is it mainly the department stores you're still taking share of?
Well, it is hard to tell, Josephine Little, because it is difficult, obviously, to get detailed numbers. I think in the second quarter, we probably took share off a number of people, if we are honest. I agree that the market wouldn't have grown at that sort of 8%-10% that we saw us grow at. What we did see over that period was some changes in promotional activity at someone like Bed Bath. Sheridan continued to discount significantly over that period and are starting obviously to anniversarize some of those ongoing discounts. We would expect that we probably took some share from department stores. I think the product was pretty good, and I think we would have taken some share from a number of people.
I think the growth we saw, particularly in our Adairs Kids product, that probably came from a consumer trading up out of some of the discount department stores. We might have even managed to take some share from those guys, given that's our biggest competitor in that Adairs Kids space.
Okay, great. Thank you. Just the comps in the second half to date, we've talked a lot about that. If you exclude that one week you ripped that last week off the sale, were your comps pretty well on trend with what we've experienced historically, four or five%?
Yeah, I think that's fair. Yep.
Yep, okay. Just I might have missed this, sorry, on Mocka in the second half where that growth is a little bit lower than what we might have been thinking, but you are obviously cycling an anomaly. Has that still been trending around 20%, 30% growth excluding that?
Yeah. As we said, we expect that number to grow over the half. Yeah, I'd expect to see the growth accelerate. With the exception of some of the weeks that we were trading up against, we're starting to see that come back towards those numbers.
Okay, cool. Just on the CODB into the second half. We're now cycling a lot of that investment, as I understand. Should we think about that as a pretty flat proposition in the second half, percentage of sales-wise?
Yeah. It might be a little bit less, but it's substantially, Steph, it's substantially through.
Okay, cool. I guess just lastly, I couldn't see anywhere that reiteration of an AUD 100 million online target. Just your thoughts there, and would you care to comment on time horizon?
Look, it's still there. It's still our target internally. We've bounced it around, I think that time horizon that we gave at the time, which was within two to three years. So what are we, six months into that two to three years? I think that's still realistic for us to continue to chase. Good growth first half again. We don't see any reason that we're not going to continue to grow the digital business at Adairs. A lot of the strategies are seeing us expand product offering in online, in particular, as opposed to trying to squeeze all this extra product into stores. We see that continuing to go and, yeah, I think the two to three-year time horizon remains a good target for us to chase down.
Perfect. Thanks so much.
No worries, Jo.
Thank you. Your next question comes from John Hind from Wilsons Advisory and Stockbroking. Please go ahead.
Thanks, guys. Just following up on the previous question around competitors. Are you starting to bump up or hear or feel like you're bumping up against players like TPW with some of your range?
We probably have been for a while, to be honest. They've got quite a wide range.
Yeah. Obviously, you've seen the materials they've expanded, I guess, quite rapidly in the last half. I'm just wondering if you're feeling any of that.
Not specifically. I'm not sitting here thinking that particular categories are being particularly impacted by what they're doing. I think the key for us, as we've always done, is focus on delivering that great product. We're certainly interested in what categories are growing for them and what opportunities, because at the end of the day, I see them as a good competitor and they're clearly focused on home, right? The two of us are gonna go head to head in the digital space for many years to come. It's always important to know what they're doing and what's working for them and their subcategories. We've got a real focus on how do we just continue to curate the look, make it easy for the customer, focus on the customer experience and drive all of those elements.
We probably look at ours a little more on what's the trend look like in home and how do we capitalize on that trend and provide a curated look rather than thinking that our strategy is a massive width of offering that TPW are definitely driving through their more marketplace style strategy.
Yeah. Got it. Okay. On the DC again, Ashley Gardner mentioned that there is obviously going to be an increased cost profile there. Is the AUD 3.5 million you mentioned, is that a net cost saving? Can you give us some color on what the cost will look like moving forward in 2022?
FY 2022, our comparable cost base will be AUD $3.5 million Less than what it would otherwise be if we continued the current model. Taking our view on forward growth and stores and everything else, and for all intents and purposes, it's pretty close to what most of that is what we would save if we did it today, but we can't turn it on today.
Yeah.
There is one-off costs that we will incur as part of the transition during FY 2021, which will be in that range of AUD three and a half mil to AUD 4 mil. That will be one-off and non-recurring. They largely relate to the cost of transitioning into the new facility, having a tail of rent on our existing facilities because they expire post that completion, as you would expect us to do. Then bringing teams and other key aspects of the facility up and running, along with paying DHL during that commissioning period for various other fixed costs that they will incur.
Great. Thank you very much.
Thank you. Your next question comes from Jack Strudwick. Please go ahead.
Hi, guys. Congratulations on the good result in the half. I've just got two questions. One on the Linen Lovers, and you've obviously been winning market share. How much has that grown in the first half?
Well, Linen lovers has grown as a % of sales over the first half. It's circa 75%-80% of our sales comes from our Linen lovers. When you're seeing the growth in obviously the overarching sales, Linen lovers has also grown as a % of that, so is growing faster than our underlying growth. We deliberately don't publish those sorts of numbers and the database growth and all the rest of it on the basis that we prefer not everyone to know exactly how that's going, given how important it is to our business.
Yeah. Sure. The other question was you had one upsizing and one refurbishment, and you've said before that like-for-like sales growth of those stores was about 20% increase. Is there much scope to do more of those, or are you more looking at new stores?
I think upsizing remains a real opportunity for the business. What we're seeing more and more is as we do them, landlords are understanding the benefits they bring to their centers, they're understanding what they look like, and are pretty excited by what they're seeing. What we are now seeing once upon a time was us explaining to a landlord what they were going to get, is far more now us talking to a landlord about where do we want them, as opposed to every man and his dog calling us and wanting to expand our stores and what that means for them in terms of their CapEx contribution and potential rent that they're going to get on a larger site. We're definitely seeing more traction in that space and getting lots of opportunities put in front of us, which is great.
It allows us to really pick the eyes out of those stores where we think it makes sense, where we think the capital investment from Adairs, plus the uplift in sales and the operating model going forward all contributes to a more profitable store. We see upsizing, I think you're going to see a lot more of them come through. We're actually in the process today of the two that are underway in this half already and will reopen in the next couple of weeks. We're excited by that opportunity and think that, as we've said in the past, we think the GLA increase at Adairs will definitely far outstrip our number of stores % increase as we do those larger, more inspiring stores and upsizing is a big part of that.
Okay, great. Thank you.
Thanks, Jack.
Thank you. Once again, if you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. Your next question comes from Aaron Yeo from Goldman Sachs. Please go ahead.
Sorry, guys. I actually jumped back in, but my question's been asked, so I'll jump back off. Thanks.
All right. Thanks, Aaron.
Once again, if you wish to ask a question, please press star then one on your telephone. We will now pause momentarily if anyone wishes to register. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.