Thank you for standing by, welcome to the Adairs results call for the 2019 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'll 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.
Thank you. Good morning and welcome to the Adairs 2019 financial year results call. With me this morning is our new CFO, Ashley Gardner, and our new Head of Investor Relations, Jamie Adamson. We target the 2019 financial year result, where Adairs achieved a very good sales result with top-line sales growth of +9.7%, driven by like-for-like sales of 7.2%. The like-for-like result was off the back of another great year in online, up 42%, and a solid store like-for-like sales result of +1.5%. We were very pleased with the sales result and the execution on product throughout the year. Our gross margin result was in line with our guidance, coming in at 59.2% pre AASB 15 adjustments. Throughout the year, the gross margin rate was impacted by higher distribution costs and the weaker Australian dollar.
Excitingly, New Zealand was profitable over the year, giving us additional confidence to open new stores and continue to develop the brand and the business in New Zealand. The overall impact of the reduced gross margin rate and an increase in our cost of doing business, in particular around the supply chain, saw us deliver an EBIT result of AUD 43.4 million, which was down 2.4% on the prior year. Given this result, the board declared a fully franked final dividend of AUD 0.08 per share, taking the full-year dividend to AUD 0.145, which is up 7.4% on the prior year. I will now walk through some of the key areas in more detail. If we move to slide three in the sales result. Total sales were up AUD 30 million over the year, with stores driving AUD 13 million in sales growth.
The store sales growth came through like-for-like sales of 1.5%, driven by the performance of our expansion categories, in particular Home Decor and Adairs Kids, with ongoing growth from our core categories of bed linen, bedding, and bathroom. Further supporting our sales growth was the opening of five new stores and the upsizing of five stores. We expect all these new and upsized stores will meet our sales expectations over the coming year. A disciplined approach to reviewing our store portfolio saw us close seven stores during the year. It should, however, be noted that these closures focused heavily on the smaller stores within the portfolio, including the three Myer concession stores and two kids stores that were merged into larger Adairs stores within the same center.
This saw us finish the year with less total store numbers, but with a larger average store size and growth in our total lettable area, or GLA, of approximately 4.5%. We continue to review our store portfolio with a view to increasing the profitability through optimizing the existing portfolio via upsizing, closures, relocations, and complementing this with new additional stores. Our online sales grew strongly as we continue to enhance our customers' omnichannel experience. Online sales were up 42%, largely driven by increasing traffic to our site. This increased traffic has come by growing our social media engagement, continual improvement in our search engine optimization and marketing, and improving the integration of our Linen Lovers program with the online channel.
This increasing traffic combined with improved conversion allows us to build our number of new customers online, providing us with ongoing growth opportunities as we look to increase Adairs' share of our customers' purchases across our expanding category ranges. Despite the higher variable nature of costs associated with the online business, we saw strong contribution growth from the online channel over the year, even with there being less operating leverage available. The sales growth across stores and online is being driven by both new customers shopping at Adairs and existing customers buying across more categories. On slide five, you can see the impact that our product strategy is having on driving the growth of the business, and importantly, the combination of our expansion categories growing as a percentage of the total business, combined with ongoing growth of our core categories.
This strategy provides our customers with more reasons to shop at Adairs and at the same time diversifies the Adairs business. Over the year, we have seen significant growth in our kids range across bed linen and bedding, combined with kids decorator and furniture items. This growth has come from both our store network, in particular the Homemaker stores, and via online. We have seen good success across categories such as wall art, storage, and other home decorator categories. In these categories and across the majority of our expansion categories, we remain relatively small players in generally fragmented markets, providing us with scope to continue to grow our market share. The focus on developing a wider, more comprehensive range allows us to furnish more of our customers' homes.
This enables us to both attract a new customer to Adairs and importantly allows us to capture a greater share of our existing customers' spend on their home. We see our product expansion strategy as being a strong contributor to continuing to drive our sales growth over the coming years. If we move to slide six and the gross margin rate. I'd like to take a minute to highlight the impact AASB 15 has had on the classification of costs within the statutory profit and loss this year. The changes have resulted in postage costs related to our online sales now being recorded as a cost of goods sold and as such, reducing our gross margin.
We consider it more appropriate to treat these costs as an expense. As we always have, and as such, have completed our analysis for the financial year for both gross margin and our cost of doing business based on online postage costing and operating expense of the business. With this in mind, we saw gross margin decline 110 basis points over the year. This decline in gross margin rate can be explained by three key drivers. The impact of the decline in Australian dollar. As a business, we tested a number of price increases and started discussions with suppliers around cost prices. However, we did not move fast enough to mitigate the impact of the falling Australian dollar over the year.
Whilst this will remain a headwind in FY 2020, we have now obtained a number of cost price reductions and have implemented a broader price increase strategy based on the learnings from FY 2019, which have seen us start to improve our underlying gross margin rate to combat this decline. Further impacting the gross margin rate was the impact of increased distribution costs. Distribution costs increased during the year due to the growth of the business in areas outside of Victoria and New South Wales, ongoing growth in the sales of our bulkier products, and the impact of some costs associated with the activation of the additional DC capacity to support the growth of the business.
The underlying margin made up the balance of the decrease against the prior year, with this impacted by us driving the business harder towards the end of the year as we saw sales decline, combined with some challenges in selected product categories that resulted in further markdown activities to ensure we finished the year with clean inventory. In relation to our cost of doing business on slide seven, our operating costs increased by 11%. However, we were able to maintain costs as a percentage of sales across the key areas of salaries and occupancy expenses.
Ultimately, our other expenses grew as a percentage of sales, reflecting increased costs to support the online sales growth, including online postage and additional DC operating costs, as we ended up with inefficient processes brought about by running multiple distribution centers in Melbourne to cater for the growth of the business, including set-up costs across labor, freight, and establishment of the facilities. FY 2019 year saw Adairs grow sales in line with our expectations and maintain a relatively stable underlying trading margin that was impacted by the speed at which we reacted to the weaker Australian dollar, and our costs that were significantly impacted by the supply chain not having the capacity to manage our continued growth.
Importantly, both of these challenges can be managed by the business, we are already actioning plans that better manage both the overall supply chain costs and improve our underlying trading gross margin to reflect the current Australian dollar. I now move to our strong balance sheet position, as highlighted on slide eight. A closing cash position of AUD 16.7 million saw our net debt reduce to AUD 8.2 million, with our net debt to EBITDA ratio falling to 0.16 times. Our inventory position increased AUD 9.2 million, with AUD 5.9 million of this coming from stock in transit as a result of system improvements providing greater visibility of stock at overseas ports and in transit to Australia. Further increases came from the revaluation of stock based on the lower Australian dollar and a small increase in actual stock held to support the sales growth across online and our upsized stores.
The increase in other liabilities reflects the impact of AASB 15, which sees deferred revenue relating to the Linen Lovers membership reflected as unearned income. Ultimately, the balance sheet is strong and provides us with a great platform for growth. Throughout the year, we continued to invest capital for growth via opening stores, upsizing stores, and through ongoing expenditure on technology, as highlighted in slide nine. The capital requirements for the year were less than anticipated, largely due to the contributions received from landlords to support our larger, more inspiring store strategy. The cash flow of the business remains strong, as highlighted on slide 10, although we did see an increase in working capital requirements, in particular around inventory and changes in the timing of tax payments, reducing the level of cash flow from operations.
As I mentioned previously, we reduced our net debt to AUD 8.2 million and have declared a fully franked final dividend of AUD 0.08 per share, to be paid on the 25th of September. Slide 11, we've highlighted our FY19 year and how we've delivered on the underlying strategies of the business. Our product, product strategy, which sees us focusing on delivering differentiated product and growing our expansion categories, delivered the like-for-like sales growth of 7.3%. The team delivered a year of on-trend, well-curated product that inspired our customers and delivered a strong sales result. Our focus on more inspiring larger stores saw us open five stores, upsize five stores, and refurbish another six stores. Whilst we did not increase our overall total number of stores, we increased the average size of our store and executed well on merging two big stores into a larger store within the same center.
International expansion in New Zealand had a good year. The sales results improved throughout the year, with stores and online growing strongly, particularly across the last quarter. This improving result in New Zealand provides us with confidence that we can build a successful business in New Zealand, and we will look to open additional stores in FY20. We continue to grow our teams who are enhancing our management capability, in particular in key areas such as finance, supply chain, and digital. Further, we increased our investment in our team's learning and development across the year that will reward us in the future through leaders in our business being developed from within. We have continued to build upon our omnichannel capabilities with online sales increasing 42% and now representing 17% of our total sales.
Further, we grew our Linen Lovers loyalty members by 17%, with these members now representing 75% of total sales. Our omnichannel capabilities are being constrained by our supply chain. This has seen us add an additional strategy focused on creating an agile and efficient supply chain. Support growth in both online and stores. We know there is significant value to be created by optimizing our supply chain's capacity, productivity, and efficiency over the coming years. This will be supported by the consolidation of multiple DCs into a single DC facility in FY 2022. On slide 12, we have highlighted the creation of this sixth strategic pillar around the improvements required to deliver an agile and efficient supply chain.
The FY19 year was a challenging year in supply chain as we exceeded the capacity in our primary DC and took too long to develop an operating rhythm for supply chain across the multiple facilities. This resulted in the business incurring not only one-off costs associated with establishing the additional facility, but ongoing increased operating costs. Whilst we expect it to be in a position to provide a more detailed plan of how we expect to create an agile and efficient supply chain and the costs associated with this, we are currently in negotiations with a number of parties around finalizing detailed plans to support a restructure of our supply chain, anchored by a single new facility that will be operational by FY22.
This restructure will provide us with the platform to support the ongoing growth of the business, both through stores and will assist the achievement of our medium-term online sales target of AUD 100 million. As we conclude these negotiations, we will provide shareholders in the broader market with more detail. However, given the length of time of the project will take and the operating costs incurred in FY 2019, we are making changes in the interim. We will see an improvement in our supply chain over FY 2020 and FY 2021 by our investments in the management team and their execution of initiatives that will improve our capabilities and productivity within our existing facilities. These initiatives will see us both lower our costs and improve our customer experience over the coming years. If I move to the outlook for FY 2020.
We remain confident in our ongoing like-for-like sales growth numbers and expect to open 4 to 6 stores and upsize a further 3 to 5 stores over the year. We've seen our first seven weeks of trade in FY20 deliver like-for-like sales growth of +4.8%, with online growing at 26.9%. Given the changes in accounting standards, we no longer believe that we can provide gross margin guidance. We acknowledge the currency headwinds that we will face in FY20. However, we believe that we are better placed based on the learnings of FY19 to manage these headwinds and have already implemented widespread price increases and negotiated reduced costs early in the year. This has seen the business improve underlying trading gross margins over the last seven weeks. Given the introduction of AASB 16 in the coming year, we have provided EBIT guidance pre any impact of this standard.
In appendix five, we have highlighted the likely directional impact on our statutory accounts, although we note that the standard should not have any economic impact on the business as it will not change our cash flows, debt covenants or net assets. With this in mind, we expect to deliver modest EBIT growth in the coming year, reflecting our sales expectations, the additional investment in our team to drive our growth initiatives, and better management of our supply chain costs and our underlying gross margin rate. Whilst the FY 2019 year didn't deliver the bottom-line result we were looking for, we executed well on our underlying growth strategies and believe the business is well-placed to continue to grow. I'd like to thank the Adairs team for all their work and support over the year, and we look forward to delivering on our underlying strategic plan.
With that, I'd like to open the line up 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 are on a speakerphone, please pick up the handset to ask a question. Your first question today comes from Aaron Yeo with Goldman Sachs. Please go ahead.
Good morning, Mark. A couple questions from me this morning. Just the first one, with regards to the improvement in the like-for-like sales growth for the first seven weeks in the year, is there anything you could call out as to sort of what has driven this improvement? I guess just your comment around expecting revenue growth to continue to be strong over the course of the year. I guess what gives you the confidence that we should expect this, particularly given what we saw in June?
Yeah, it's a good question. We saw it bounce back as quickly as we saw it disappear. Ultimately, we've delivered a good set of numbers over the first seven weeks, driven by the new ranges coming into store, the ongoing growth of some of those expansion categories and the additional ranges we're adding into those. We think there's continued growth around those expansion categories and increasing our inventory investment and width of those categories to drive increased sales, together with some refinements we've made to our underlying core categories that are delivering good numbers over the first seven weeks. The hard part of this game is that you're only as good as the last little trading period, and we've seen these results. The good news for us is we're not seeing them being particularly driven by one thing in particular.
A combination of those core elements that we've been looking to put in place that has really driven it. The new season ranges in particular have driven a lot of that. Does that mean it continues over the year? We wait and see what the customer's reaction is as we continue to deliver product. As we sit here today, we feel good about what's going on. We've moved prices, driving a better margin in the business and driving that like-for-like sales number, that we continue to see that we think we should be able to execute it on that. If you think even to the full-year result for last year, we delivered plus seven in the first half and plus seven in the second half. We had a rough patch there in June that knocked us around a bit and made us think about some things.
Ultimately, the underlying strategy of the business continues to deliver a good like-for-like number, and we don't see that dissipating unless we see something macroeconomic that isn't there today impacting us.
Okay, great. Thanks. Just second question on gross margin. I'm a bit confused as to what's your comment on gross margin tail as around sort of what we should be expecting for gross margin next year relative to this year? Are you saying that gross margin should we expect it to be lower than this year, or around the sort of same level? Just with regards to the commentary on pricing, have you seen any of your competitors make price changes to combat the FX headwind as well?
I'll start with competitors. We've definitely seen competitors start to move prices, and we're hearing it both through wholesale and retail components of that. I think we all know that we're all in the same boat. We're all exposed to the USD and the Australian dollar. Therefore, we expect to see that come through the market. We've decided that with the learnings we took out of the second half of FY 2019, we pushed some price increases through, we tested, we trialed, and what we've identified is a plan to bring that through more fully in FY 2020, and so far, we've seen that resonate with the customer or not impact the customer.
Therefore, whilst I'm seeing it come through other competitor set, I'm more interested in how ours is working with the customers, and we're seeing some good results in that in terms of increasing underlying gross margin delivered week on week as we've moved those price increases through. Back to gross margin. Well, I think what we've done in gross margin there, and the reason why we haven't given a lot of guidance is it really does start to play into a number of points. The statutory gross margin is going to be impacted by the impact of online postage and how big online is as a percentage of the overarching business. We have our underlying expectations on what that looks like. We're just adding in additional factors.
At this stage, we sort of think that we can continue to trade the business in or around the same gross margins as we've experienced in the past. That underlying trading gross margin, including FX, and that's really our aim for the year. That flows through into those EBIT numbers that we've obviously put out with the results or with the guidance there.
Okay, great. Last question, just with regards to the near-term initiatives on the sort of CODB line, can you give us some more specific details around that?
Well, a lot of it will be in supply chain. What we can see in supply chain is currently we have a complicated element within there, particularly around our online orders. Those that have seen my facilities and come out and visited us in the past, at the moment we consolidate all of our online orders through one distribution center. That will be amended. We will be distributing from multiple distribution facilities that will take out some costs associated with handling that stock.
We're also doing a lot of work on improving a number of elements within the supply chain upstream out of China, working with some freight forwarders to how we improve our freight rates, working on how we might be able to reduce costs coming through into the Australian market in terms of that cost of delivering product into Australia, and then working with our local providers on how we provide a more efficient and more cost-effective delivery into store. We have a lot of work going on in supply chain all at the same time in order to not only look at the underlying costs of that, but how we can improve the productivity and efficiency within that supply chain piece. Ultimately, that's where a lot of our focus is on that CODB line. We still think there's opportunities within rent, occupancy expenses.
It's definitely something that as all retail businesses are doing at the moment. We think there's good opportunity for us to continue to focus on how we drive additional savings out of occupancy lines. Ultimately, I think the other piece for us, Aaron, is that the business will continue to focus on that CODB and increase the focus on the CODB over the next couple of years across all areas of the business. It won't be one individual silver bullet. It'll be the combination of all of those sorts of mini projects that will do it, but there's some big ones, particularly in supply chain, that we think can deliver real value and we should be able to execute early in FY 2020.
Okay, great. Thanks very much.
No worries, Aaron.
Thank you. The next question comes from Jordan Rochester at UBS Investment Bank. Please go ahead.
G'day, Mark.
Hey, Jordan.
Just a first question around the online margins. I know you've talked in the past about it being sort of where you think it's right at the top in terms of the pecking order, in terms of the incremental margins. Given the extra supply chain costs, I know some of them are sort of one-off, I'm just interested in your thoughts. How do you think now it compares relative to your group EBIT margins of 12.6%?
Yeah. I mean, it's really hard to think of it at a group EBIT margin line, Jordan, on the basis that how do you allocate the cost of the product team who are creating the product for stores and online? The best focus we put on it is how does it contribute at a, let's call it a channel line or a store contribution line is where we see it, and it continues to sit at around the same as Homemaker. We call that out at circa 30%, or thereabouts, of sales delivering that through to a store contribution or a store profit line. We don't call it profit because it sort of doesn't fall down to EBIT quite neatly as we think about the consolidated costs.
Ultimately, the supply chain increases across a lot of areas have impacted both online and stores, and we need to be efficient across both of those and come back to thinking about our supply chain in an omni-channel mentality rather than thinking about it specifically for online versus stores. We definitely saw over the year that if I think about it from a store contribution level bit online increase its contribution as a percentage of our overall EBIT, yes, it did. That driving that sale through there is driving additional profit into the business. The supply chain costs are more broadly than that, they're supporting growth. If you allocated a portion of them, it probably would dip in as a net contributor to the overall result.
What we're seeing is, we need to work harder at driving operating leverage out of our store portfolio when you think about the cost increases that run through there in terms of occupancy and wages and making sure that we create that really efficient store portfolio to support or to work together with the online business to build this business going forward. It's a hard question when you think about it at EBIT margin levels, but, I still see it as a solid contributor to the business, and we think there is net incremental profit being driven by our online sales growth. What we need to do is work harder at getting a more efficient back end to support both stores and online in that sense.
Great. Then if I just go to your medium-term online target, what in your mind, you rattled off a bunch of things you're doing, what worked for you in FY 2019 with lifting that traffic so significantly and conversion rate? What do you think are the sort of biggest factors in getting you from under AUD 60 million to the over AUD 100?
Yep.
Yeah.
Ultimately, I think it comes down to the combination of those two again, which will be more traffic and improved conversion. Preferably if you add in a third, we'd increase the ATV, which would make the orders more profitable as well. We think that comes about largely through thinking about our product width and our expansion strategy. When we think about our stores, obviously the challenge within the stores is they are the size they are. Despite our upsizing strategy, we're not going to be able to increase every store size. Working hard at developing additional products that stores can sell via a home delivery option and our online then gets access to more widths of products, is definitely helping drive. We think that drives both conversion and in additional categories it'll drive traffic.
The combination, as always, of our strategies of expanding our category ranges and offering, together with driving more traffic to the site, and the larger, more inspiring stores. Those three things combined are all aimed at building out that online piece. We think there's still significant room to grow traffic. We know there's room to grow conversion, and we know there's enhancements to ATV. Things like better product recommendations, thinking that through to emails, so product recommendations within email. We've got a whole bunch of pieces of the puzzle where we are not doing today what I would think best practice omni-channel retailers are doing, which gives us great upside and means we're not sitting out here with leading-edge opportunities. We're actually well and truly sitting, some would say perhaps even slowly following others and building the business.
We'd like to think we could move towards fast followers, but again, that supply chain piece is probably holding us back a bit on really trying to crank the handle on traffic and driving it if we can't make sure it comes out the other end with a great customer experience. We know that's what a lot of people talk about in the online space, is that delivery experience must be good and must be able to keep up with the front end. Otherwise, we're going to create damage to the overarching online business. Getting those two things and those ducks in a row over the next little while, I think gives us great opportunity to push that towards AUD 100 million.
ultimately in here I can say that the list of things we want to do, the biggest challenge is what don't we do to get us towards AUD 100 million, not what are the ideas that get us towards AUD 100 million.
Sure. Do you think click and collect will be material?
Do I think click-and-collect will be material? No. It'll form a part of the solution. I think it will only form a part.
Yep. Okay. Just to follow up on the like-for-like post-balance date, the 4.8%, is that majority price? You said you did widespread price increases post-balance date. Would that be more than the 2.4% of that?
Yeah, price will make up a fair chunk of it. It's price and still transaction volume. Price is definitely-- I don't think it'll be more, it's not more than 2.4%, but it is a portion of it. We're seeing that definitely drive that through. There's more to go, Jordan. We're still very much a test and learn business, so we've implemented a bunch of price increases, and given the success of those, we've got more confidence again to push through them in some other categories and selecting when we do it and how we do it over the course of the first half. Over the first half, there is significant price increases to be pushed through. I would think in terms of your percentage, it's probably more like 1%-1.5% than a 2.4%.
Yep. Okay. On that, with your hedge rate, where did your effective rate end up for FY 2019? Just comparing your 51% hedge to AUD 0.715, where do you end up?
Well, that's a good question. We came in at about 73 over the year.
Yeah.
If you take the full year.
Yeah. Okay. I appreciate you haven't finalized the new DC, so you can't talk to the details yet.
Yeah
is that going to take a little bit longer than I think previously you thought? It's going to take at least another sort of 18 plus months rather than sort of 12 from today. Is that just because you haven't finalized negotiations, or is it a more complex build?
I think what we've wanted to do is, depending on the final solution selected, I want to be careful about what I say, given we're in the middle of negotiations, I expect that by FY22 it is fully operational and delivering. Just depending on the solution and the final components of that. I don't think it impacts FY20 at all, when it comes online in FY21 and how long it takes to get up to speed is probably the couple of points that we're working through at the moment. I don't expect it, the next 18 months, I don't expect it to be impacting.
That was probably always, once we got further into the detail, our expectation, but that's probably been an evolving piece of the learnings that we've undertaken over the last six months in getting to this point where we're now in these final negotiations.
Okay, last one from me. Have you noticed anything competitor-wise that's changed, like the Myer store closures or floor closures, rather? Has it impacted anything else sort of competitive landscape-wise?
Not significantly. I think there's still a lot of driving of sales. We're seeing a lot of discounting in the market and heavier, maybe not heavier, but more prolonged discounting rather than actually depth of discount. We're in that quite a competitive environment, and I think what we're trying to do is make sure that we're focused on curating the range and giving the reason to shop as opposed to driving it all on price, and giving up any of those price increases that we've pushed through. We're not seeing significant changes in the competitor set at this stage.
Right. All right, chief. Thanks a lot.
Thanks, Jordan.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. The next question comes from Jared Little with Morgans. Please go ahead.
Morning, Mark. Sorry, just a bit further on those prices. Sorry to harp on about it. Would it be fair to say you probably want to put them up by, I don't know, in the range of 3%-5% this year, or don't want to put an exact figure on it?
Well, I think that's a reasonable range for us to go on. Of course, it gets a little bit distorted given how much of our product is sold on promotion. It's all about how we move the promotional price and it varies by category, that's where it becomes a little bit tricky for me to say 3%-5% price increase across the board. It is fair to say that what we're actually aiming to do is lift our average selling price of products. We look at it more at that level and how we move that number, which is a combination of increase the full price, in some instances, reduce the depth of discount in other instances, combination of both, and in some instances, we've actually gone the other way.
We've reduced first price and then reduced depth of discount and started to move towards how do we sell more at full price rather than necessarily having to sell it all at promo when we felt our promo price was too far away from our full price number. That's why it's a little bit tricky to sit here and say it's 3%-5% across the board, but that's definitely the aim of the underlying business is how we move our average selling price, and we'll start to look at it by numbers in that sort of range. Probably towards the bottom end, though. We're probably more looking at 3% across the entire business because there's categories that are harder to move than others. That's where we're really targeting at the moment.
Okay, great. That's helpful. If you think about some of the wholesalers out there, you've got Sheridan, et cetera, there'd be much more pain at that point in the channel. Can you give us an indication of what the wholesale price move's been for some of these retails?
We don't necessarily get access to it, but I have heard through the rumor mill that it could be as high as 10 in some instances.
Okay.
Selected products rather than across the board. As I said, I don't necessarily get that information handed to me visibly, but there are definitely price increases being pushed through by wholesalers.
Yeah, great. Thank you. I'm just interested to know how your like-for-like sales performance has gone, summer this year and in the back end of FY 2019, between when you're in a sale and out of sale. Just trying to understand if that's really moving the dial for your customer at the moment or not.
Yep, that's a good question. What we are seeing is we're actually performing better out of sale than in sale, which is both a great result for the business in terms of it shows the strength of the product. I think it comes back a bit to potentially that sale fatigue, how long we run some of those promotions for, and how we get the balance of the right promotion length and the right depth of discount, and when we're on sale versus not on sale. As most of you are well aware of the business, we generally permanently have promotions running within the business that are driving the business. What we're finding is out of sale, we're definitely delivering better numbers.
That is really good for us and a real positive in terms of the product that we're putting out there in front of the customer, that they're happy with what we're curating for them, and they're buying into that look and feel. That gives us good confidence that over at least the next little while we're in more of that inspirational mode, we don't see why it should change. It also means we've got to think about our sale periods, which definitely drive big dollars and didn't deliver as well as we would've liked in the back half of last year. That's something for us to challenge our marketing calendar and what we want to do to drive the numbers.
Okay, thank you. Just lastly, sorry. Just whatever the cost will come out to be for the new DC, ultimately, I guess just from a CapEx perspective, will that still be reasonably evenly split do you think, FY 2021, probably more towards FY 2021 at this stage? Just trying to think from a capital management perspective, will, if it's split more evenly, we can see the dividend payout perhaps be a little bit higher than previously thought, certainly lower than this year?
I think what you'll find is there'll be minimal spend in FY 2020, and bulk of that spend will be FY 2021, depending on what the final solution is and where those numbers come out. We don't see there being a real big investment, although we're still just negotiating on some of those key terms, in particular around some of it. I say that, but I think more will be FY 2021 than FY 2020 will be where we sit today.
Awesome. Sorry, just one more, Mark, sorry. By the time we get to the new DC being fully operational, we'll probably be a bit closer to your store target. What's the view for growth for Belle & Beyond online? I know it's a couple of years out, but I guess any more indications around New Zealand, other territories, aside to the store rollout, et cetera, please?
Yeah. I think we still see good opportunity over the relatively short term, if you think three years in rolling out the stores. I think, Jo, what we're now in a position is we've solved the supply chain challenge or at least put the supply chain plan in place for us to start to think about what are the next opportunities within that in terms of, is it international expansion, what other growth opportunities sit within the business? As we sit today, I'm probably not comfortable commenting too much on what they look like, but I think what you will get over the next 12 months is more commentary from us in relation to that as we solve the supply chain issue and are able to bed that down.
Within that, we are also thinking about how does that supply chain help us, and particularly some of the work we've done upstream on what that might look like if we did think about other markets and the like, how do we make sure that we've got a supply chain that we're building that doesn't hamper our ability to continue to drive the overall growth of the business? What we've seen over probably the best part of the last three to four years even, is we're often trying to keep up in supply chain. This supply chain strategy that we're putting in place now is not aimed at solving today's problem. It's aimed at providing us a platform to not only support the growth within Australia, but where else that growth might come from.
Okay. Thanks so much, Mark.
Thanks, Jo.
Thank you. The next question comes from Mark Wade with CLSA. Please go ahead.
Okay. A question around the just the general health of the consumer, how you're seeing that, and then more specifically to Adairs, some of your customer perceptions calls and how they've played out over the last wee while.
Yeah, I haven't walked away from my commentary on the consumer for quite some time in that I continue to think customers have money. They are happy to spend it if you put the right product in front of them at the right price. Whilst I'm not quite sure what went 100% wrong in the back half of last year in those few weeks of really poor trading compared to what we'd seen for such a long period of time, and whether the consumer stepped out. We've probably done a bit more work since then and found that perhaps there was some underlying product that wasn't quite as good as we wanted it to be.
Not meaning it had a massive impact, because we were selling it three or four weeks before then, but definitely there were some results through that overarching six or seven-week period that didn't quite hit the mark that we would've thought we could have delivered on. I think the consumer still is relatively okay in most markets in Australia. I think they're happy to spend, and as I said, our focus must be on providing them the product and giving them the reason to shop with Adairs over that time. I don't think the consumer's going out backwards or anything like that. I think we still feel pretty good about that. Sorry, what was the second part of that question, Mark?
I think just around the customer perception, like I know you do your own surveys and you get a bit of a sense or a pulse, take a pulse of your own, what the consumer thinks of the brand and just how that perception has moved.
Yeah. Well, I think what we're seeing is, generally, we're still being rewarded for our service that we're providing in store, and we really see that as a key differentiator between us and others in the market, and making sure that we continue to build and develop upon that. We continue to get good feedback on that. I think overall, we continue to be seen as a bit more contemporary and more fashion-forward, which has been a big driver of our success over that time. I think the final part of that is we haven't quite got them there to how we get more of the customers home.
We're still in bedroom and bathroom and some of those areas that we think with additional work, what a good part about that is because we haven't quite transitioned customers to thinking that broadly about it, particularly if your floor is just a regular shopping center floor that perhaps doesn't have the category width that you will see in a Homemaker store. We see there being good opportunity for us to continue to drive the growth of the business by expanding those categories and getting more customers to buy into the fact that Adairs is the place to shop for those.
Yeah, I think generally, if we call out the challenge part of that, it comes back to our supply chain and our ability to deliver to customers through the online channel has definitely impacted our customers' feedback on us over the last 6 to 12 months. That's something that we think we can, with the work we're doing now, we should be able to resolve at least to get it to a point where we're comfortable the standard has got back to a more expected standard. It's not exceptional, but it should meet more customers' expectations. Hopefully that covers that.
No. Perhaps from Ashley.
Oh.
If it's possible for him to just share his thoughts on the business, what attracted him to the role, and what he sees as kind of the immediate and then the longer-term opportunities for Adairs.
I'll defer answering the last part until I get a little bit more time in the business.
That'll take about a week or two. Yeah.
Certainly from an outsider, I'm probably not even as informed as you are just yet. I've been here for less than two weeks, but it's a great business that resonates well with its customers. Mark touched on the service, and there's absolutely no doubt that is a key differentiator of the business, and I think it has great potential. I'm excited to be here and looking forward to what the next few years has in store, but there's great potential and it's a great place to be.
Terrific. Thanks, Ashley.
Thank you. Your next question comes from Peter Greenhalgh, Private Investor. Please go ahead.
Good morning, Mark. Just a couple of quick questions. Mostly, over the last 12 months, was there a lack of visibility on the DC capacity issues?
No, I wouldn't say there was a lack of visibility on them. There was a combination of lack of management of them, which you'd see us invest in additional team and leadership in that space over the last 12 months. I think if we went back 18 months ago, there was a lack of visibility. We identified that, obviously the challenge in supply chain comes back to length of time to get a facility set it up, put it in shape, and make sure that we could do that with a view to not altering our view on what a longer-term strategy might look like. In that I say ultimately we needed to find some additional DC capacity for a period of somewhere between 18 months and three years, which not too many people leasing DCs are overly happy to provide that sort of term.
It was a bit more challenging to find the space. I think over the year, adding the DC capacity, it definitely started with potentially a bit of a lack of visibility on it, and some poor planning. We've now, I think, resolved that internally and put us in a space where we've got much better planning around it as opposed to visibility. I think the visibility was there, but what people were necessarily doing with all the information didn't necessarily gel for the overarching strategy.
Yeah. Okay. That's one other question. Just in terms of your product lines, with such a strong sales growth, are there any product lines, rather than whole categories, any product lines that you're looking to discontinue?
No. Well, it depends how you define that. There will be lines within the business that we will always discontinue. I think as the business is constantly changing. If you think about bed linen, we talk about the fact that within our bed linen wall, if you go into the store in 12 or 13 weeks' time, you will see significantly different bed linen than you see today. It may not be significantly different. The trends and themes might be there, but the bed linen won't be the same, and that's in view of giving customers different options and different choices and the view of constantly trying to reinvigorate the store. There'll be lines within that. Even within core lines, we see things come and go over time and we tend to work them through.
Products have a life cycle of they start, they're new, they're exciting, then we move them into a more core ongoing piece of the business, and then as they start to wane with customers, we start to bring them back out and out of the business over, depending on the product, it could be a six-month life cycle, it could be a two-year life cycle, depending on where it fits in the overarching business. Is there individual categories within the business that we start to think that we wouldn't be in going forward? Not at this stage. We've definitely tweaked some things. I think tabletop is a good example of a category where we exploded the category for a while there and found that actually we had a real niche, and we needed to bring that back to the niche and what we were good at.
Something like lighting falls into that same sort of category as well, where we exploded it for a while to see how big we could make it, and have found where our niche is and made sure now, well, actually let's focus on the niche because we're not a lighting business, and what we need to make sure of is we know what our customers want and what they come to us for, and how we provide that for them rather than trying to be all things to all people in all categories. There's nothing specific that I'd call out and say we're not going to be in going forward. I think what you're seeing from us is ebbing and flowing and rebalancing the percentage of the overarching business dedicated to each of the categories within it today.
Okay. Just one quick follow-up question. What can we expect to see on your social media campaign over the next few months?
I think you'll see a lot of collaboration. I think the customers have definitely responded to it. When I talk about collaboration with artists, collaboration with different designers, collaboration with different brands, I think those sorts of elements will not only fall out as part of our product strategy, but that will then naturally link back into our social media strategy and being able to work collaboratively with some of those sorts of influencers and other brands to help drive the visibility of Adairs and get more people looking at it is a great opportunity and one that the team are definitely working on today.
Okay, that's great. Look, thanks, Mark, and good luck for the rest of the year.
Thanks, Peter.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Ronan for any closing remarks. Sorry, I do apologize, we have one more question from John Hynd with Wilsons. Please go ahead.
Good morning, Mark, and thanks for the question. I just wanted to focus on the outlook statement, if possible, and maybe just some of the changes that we're seeing, if you could help illustrate some of the changes we're seeing come through the business. The previous guidance statements you've given us throughout FY19, you were guiding to similar EBIT with substantially less sales. The sales line for FY20 is now well ahead of the consensus range that I look at, but EBIT hasn't moved too much. I'm wondering why you're more confident on the sales, and can you just maybe break down what the change between the EBIT from previous to now?
I think we're confident on sales because I think we've largely delivered that over a number of years now. We tend to be very, or better, not very good, but we're better at actually identifying our sales and where we think that's going to come from and how we're going to deliver that. I think what you're seeing in the numbers we've provided highlights that. I think within then the EBIT, what we're acknowledging is there's a number of underlying challenges the business needs to work its way through this year. Be that the falling Australian dollar, be that our continual supply chain improvement strategies that we're working on. Occupancy costs will rise as they always do with a lot of the leases incurring plus fours and the like year on year.
The same with wages in store and the general increase to the underlying rate of pay. With the business heavily focused on service, our answer for increases in rates of pay is what we need to do is become more efficient and not take away service, because that's a key differentiator in our business. How do we get good at managing those? I think what you're seeing from us, John, is that we know there's a number of challenges within the business. We think we can continue to grow the top line, and we think we should continue to grow the top line whilst we have the customers engaged with us. The worst thing I think we could do is try and scale that back and then try and work the rest of it in the background.
What we're better to do is continue to grow that top line, understand more and more, which gives us great opportunity for growth going forward. In the meantime, we're seeing through the EBIT number that we've put out there that we know we've got to manage a bunch of these challenges that the business faces today, and we'll get some more right and probably less right. Overall, we think we can grow the underlying EBIT of the business modestly in FY 2020. The structural change of the business comes back to structural change in the way the business operates as opposed to structural changes in the macro environment comes down to ultimately the combination of supply chain, Aussie dollar, and how we work all of that through the business rather than a specific point within that.
If you sit here and you take from this call what are the guys heavily focused on as a business, we're heavily focused on the gross margin rate and the underlying trading margin once we factor in what we're seeing in the Australian dollar. We're heavily focused on making sure we have a better year and a much more efficient and productive year in our supply chain. The changes we made last year are now all done, and now what we should be doing is operating those facilities and trying to improve our efficiency within those facilities rather than spending time setting them up and getting some things wrong and then changing them up and getting it to where it is today. That work's been done. We just don't know. You never know quite the success of each of those elements.
What I do know is I think we can deliver, that's why we see that underlying EBIT number come out at more like it's a lesser % of sales than it has been in the past. That's something that we think as we start to improve the supply chain over the coming years, we hope to improve that number and push it back towards where it was once upon a time. That's sort of the change that I see in where we are today. Does that answer your question?
Yeah. My follow-up question as well. Thank you, Mark.
Great.
Thank you. I'll now hand back to Mr. Ronan for any closing remarks.
Thank you. I'd like to thank all of you for your attendance this morning, no doubt we'll see many of you over the coming weeks. I'd again like to take the chance to thank the Adairs team and our loyal customers for their ongoing support. We look forward to a good FY 2020. Thank you.