Thank you for standing by, and welcome to the Adairs Limited 1H19 Results Conference Call. All participants are in a listen-only mode. There'll 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. Please go ahead.
Thank you. Good morning, and welcome to Adairs' half-year results call. With me this morning is Mandy Drake, our CFO, who will take you through the company's financials as part of this morning's presentation. If we go to slide two, where I'll take you through some of the highlights of what was a strong first half. Sales were up 10.6%. This is driven by our like-for-like sales growth of 7.3%, the opening of four new stores, and the upsizing of two stores. The like-for-like sales numbers achieved were well supported by another strong online growth period, with our online sales up 42% and now representing 15% of total sales. Whilst achieving the sales growth, we delivered an improving gross margin rate coming in towards the top end of our long-term guidance of 60.9%.
New Zealand was profitable ahead of our previous guidance, which stated that we would be profitable in the second half of this year, a very positive result. With good success in sales and gross margin, we delivered an EBIT result up 7.2% to AUD 21.9 million. The board amended the company's stated dividend policy to increase the payout ratio to between 60% and 85% of net profit after tax, and declared an interim fully franked dividend of AUD 0.065 per share, which is up 18% on the prior year. Further, the company's balance sheet is in a strong position with net debt now reduced to 0.2 x annual EBITDA, and is well positioned to support the company's future growth strategies. If I move to slide three, the company continues to generate growing sales across both of our channels.
Total sales were up AUD 15 million over the half, with stores driving AUD 8 million in sales growth. The store growth came through like-for-like sales of 2%, driven by the performance of our expansion categories, including home decor and Adairs Kids, with good support from our core categories of bed linen, bedding, and bathroom. Further supporting our sales growth was the opening of four new stores and the upsizing of a further two stores. We expect all of these stores to meet our expectations over the year. Our review of our store portfolio saw us close the three Myer concession stores and an additional two stores over the half. We continue to take a disciplined approach to our store portfolio, as a result, we expect to see additional closures over the second half where we don't believe the store profitability can meet our expectations.
Our online sales continue to grow strongly as we strive to provide our customers with a true omnichannel experience. Online sales were up 42% over the half, driven by increasing traffic to our site via the continual improvement in search engine optimization and marketing, together with growing our presence through social media. Excitingly, we significantly grew our number of new customers online, providing us with ongoing growth opportunities as we look to increase our share of their purchases in our categories into the future. Our Linen Lover program continues to grow in size and importance to Adairs. We are seeing that our continued investment in the program is providing us with the ability to more easily communicate to our customers, leading to an increase in the frequency of their shopping at Adairs across both channels.
If I move to slide four, our product strategy is delivering like for like as our focus on range expansion provides customers with more reasons to shop at Adairs, and at the same time diversifies the Adairs business. Our ability to grow these expansion categories whilst delivering like-for-like growth out of our core categories provides us with the capacity to continue to deliver mid-to-high single-digit like-for-like growth over the coming years. Our product expansion strategy continues to drive this sales growth, and with the ongoing upside in this approach as we remain relatively small players in most of these categories, providing opportunities for us to grow through market share.
Further, developing a wider, more comprehensive range allows us to furnish more of our customers' home, allowing us to focus on getting a greater share of our existing customers to spend on their home rather than continually relying on acquiring new customers to deliver growth. If I move to slide five, our New Zealand business was profitable over the first half. We delivered sales growth of 30% as we continued to improve our inventory management in New Zealand. The change of 3PL provider, together with our ongoing focus on inventory, has seen us better able to deliver inventory into New Zealand and, more importantly, into store. This has allowed us to improve our stock turn and inventory freshness, leading to a significantly improved gross margin rate, up 540 basis points as compared to the prior year.
More importantly, these changes have led to a much better customer offer and delivering an improved sales line. Our online sales in New Zealand also grew strongly, enabling us to continue to build our brand profile as an omnichannel retailer in the New Zealand market. We see ongoing upside in online in New Zealand and the focus on how we improve the customer experience and brand awareness to drive sales growth across both channels. With our improved momentum in New Zealand, we see there is an opportunity to open one to two stores over the coming half as we look to build a profitable New Zealand business. If I move to slide six, I've spoken before as to how we believe that the execution of our existing strategies will continue to be the key to deliver ongoing growth for Adairs.
The first half results highlight the importance of our continued execution of our underlying strategies. Walking through them briefly, the product, product strategy has seen the expansion category growth driving like-for-like sales. More inspiring larger stores have seen us open four new stores, upsize two stores, and close the Myer concession stores where we couldn't deliver what we wanted of that customer experience. Best-in-class omni-retail capabilities is driving our online growth with our online sales now representing 15% of total sales and our Linen Lover program continues to grow in number of members and share of revenue. International expansion has seen New Zealand profitable with room for growth. Finally, our passionate, high-performing team members strategy has seen us continue to invest in our people and our capabilities.
We have added capability into supply chain and digital to drive the opportunities in these areas and enhanced our leadership development program as we look to build our future leaders from within the business. It has been a good first half in what has been called a more challenging retail environment. We remain focused on ensuring we execute our underlying strategies well and on remaining focused on what the customer wants to deliver ongoing growth for Adairs. I will now hand over to Mandy to walk you through the company's financials.
Thank you, Mark. If we now move to page eight, I will talk through the profit and loss results. Mark has already spoken about the revenue drivers that delivered a 10.6% increase in sales for the half, and we achieved a like-to-like sales growth of 7.3%, starting from a strong 14.8% from the prior year. Our gross profit dollars increased 11.3% to AUD 100 million with a gross margin rate increase of 40 basis points to 60.9%. Our expenses came in at AUD 74.3 million, an increase of 12.4% over last year and an increase in our cost of doing business % of sales of 70 basis points on the prior year. This is a disappointing result which I will talk to in a moment. EBIT increased AUD 1.4 million on last year to AUD 21.9 million, a 7.2% increase and 13.3% for sales.
If we now move to page nine, I will go through the gross profit and cost of doing business lines in more detail. With like-to-like sales in line with our medium-term outlook, we are pleased that we can continue to deliver like-to-like sales against strong prior year periods with the growth continuing to come from an increased volume of transactions. The chart on page nine shows the progression of our sales and more importantly, our gross profit dollars have increased over the last couple of years. Our GM rate has also steadily increased over the last three halves, a reflection of both the execution of our product expansion strategy, which typically delivers higher margins and less markdowns taken with the cleaner inventory. If we now move to page 10 on cost of doing business, our CODB as a % of sales increased 70 basis points on last year to 45.2%.
The chart shows that our store costs remain well controlled at 30% of sales, while our DC and online costs have increased. Salaries have increased 20 basis points on last year, mainly in online and the DCs to support the increased volume of transactions. This increase also includes an element of higher labor costs in digital and supply chain as we continue to invest in capability to support our supply chain initiatives. While our online expenses have grown as a % of sales, it is worth noting that online operations have less operating leverage than stores due to the high component variable costs incurred for each incremental sales dollar. In saying this, online is a highly profitable channel of our business and the costs are in line with our long-term average.
Other expenses have increased 90 basis points which is predominantly attributable to the increase in DC costs with two additional temporary DCs and extra costs that have been incurred to transfer stock between multiple warehouses. Our supply chain plan is expected to be finalized over the next few months with execution taking place during FY 2020 to look to reduce the CODB costs related to our supply chain. If we now move to page 11, I will walk through the balance sheet. Our balance sheet continues to be well positioned to support future growth with our net debt position improving AUD 2.1 million from June 2018 to now being at AUD 10.1 million. Our inventory grew to AUD 43 million, a AUD 10 million increase from June. We acknowledge that this increase is higher than what we would have liked and reflects a combination of a few factors.
Firstly, there is an increased level of stock to support the natural lift in inventory from sales growth both in store and online of around AUD 2.5 million. There is additional stock to support the six new and two upsize stores added to the store portfolio. The decline in the AUD to US dollar of around AUD 0.035 from last year has also increased the inventory valuation by approximately AUD 0.9 million. The change in timing of inventory ownership and our purchase commitments from factories have resulted in an increase in stock in transit of AUD 2.2 million. It is worth noting that the other side of this entry is trade creditors. There is no impact on earnings, net working capital, cash flow, net assets or net debt.
Lastly, we were overstocked at the end of September by around AUD 2 million which was a result of lower sales than expected in the last week of September as well as the timing of stock purchases arriving due to Chinese New Year. We will continue to focus on inventory levels and can say that there is no issue in the quality or aging of this stock. We also don't believe there will be any impact on gross margin as we trade through this stock during the second half. For those who want more detail, a bridge of the movements in stock from December 2017 to December 2018 has been included in the presentation deck under Appendix five. I will now move to page 12 to talk through capital investments.
We continue to invest for growth in the business across both our store and digital networks with our capital investment for the half at AUD 3.5 million. New and refurbishment store capital expenditure was AUD 2.1 million, with four new stores opened and six refurbishments completed. The balance of the capital expenditure of AUD 1.4 million predominantly relates to purchases of fixtures and equipment for the two additional temporary DCs, which will be reused as part of our long-term supply chain strategy. If we now move to slide 13 on our cash flow position, our net debt is at AUD 10.2 million and AUD 6.8 million lower at the same time last year. Operating cash flow did decrease to AUD 2.4 million on the prior year, reflecting the increased investment in inventory in the business. Net cash flow improved and was up AUD 3.4 million.
Our net debt to EBITDA sits at 0.2 x and our gearing ratio has reduced to just under 8%. As Mark mentioned, the board has reviewed the company dividend policy and increased the payout ratio to between 60%-85% of NPAT. The previous payout ratio was 55%-70% of NPAT. The total interim fully franked dividend has increased to 18% or AUD 0.01 on last to AUD 0.065. The interim dividend payout ratio represents 72.4% of NPAT. The fully franked interim dividend will be paid on the 17th of April 2019. I will now hand back to Mark to discuss the FY 2019 outlook.
Thanks, Mandy. For the outlook for FY 2019, we remain confident in our ongoing like-for-like sales growth numbers and expect to open three stores and upsize three stores over the second half. Supporting this confidence, we have seen our first seven weeks of trade deliver like-for-like sales growth of 7.1%, with strong growth in online and lower growth rates in store, as we saw over the first half. With the depreciating AUD, we expect to see some impact on our gross margin rate. The second half gross margin is expected to be in the lower half of our long-term range of 59%-61% due to an estimated unfavorable currency impact of circa AUD 2 million. Given the gross margin impact, we've refined our EBIT guidance to between AUD 46 million-AUD 50 million for the year, which will see us continue to grow our full year on the prior year.
We are confident that we can continue to deliver sales growth and are working with our suppliers and reviewing our pricing to look to minimize the impact of a weaker Australian dollar on the overall result. The first half has been a good result. This wouldn't have been possible without all the hard work of the Adairs team. I'd like to thank the team and our loyal Linen Lover customers for their support over the half and look forward to a good second half. With that, I'd like to open up the line for any 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 your question. Your first question comes from Jordan Rogers from UBS Investment Bank. Please go ahead.
Good day, team.
Good morning, Jordan.
Just could you talk a little bit more, you touched on it in the preso around those additional costs and the other expenses line on the DC side, because if I just look at when you've given that breakdown of CODB by percentage of sales where online's increased from three percentage points to five, and that other expenses line has been one of the biggest movers. It looks like online costs are growing faster than online sales. Is that right?
No. What we've seen is that costs continue to remain in line with what we've seen go through that channel in the past. However, as online is now growing faster overall, we've seen those and a more incremental in terms of variable costs adding for each online sales dollar. It's taking a bigger percentage of the overall cost of doing business across the entire business. There's also an element of we've had to up-spec some space in the DC to support those online growth numbers. There's a little bit of a step change in there and the ongoing incremental costs associated with online sales. Overall, if I look at online CODB as a percentage of online sales, it's still running in line with our long-term average of what we've been producing in that space.
It's a little bit distorted, and there are some other costs that have hit that other expensive line.
Yeah. There's some other costs that also hit that line in terms of some additional costs in technology that we've had to increase our security over our customer database. The other one is that we've also added some additional costs as we've rolled out some improved internet in our stores.
Okay. What is likely to continue over this half or next couple of halves in that sort of additional online spend to-
Yeah. I think you're likely to see it continue at about this rate. We'd like to pull it back a little bit, Jordan. We think it's a little bit high. As you said, it's a disappointing part of the result that we didn't manage to keep that a bit more in line. As Mandy mentioned, we've got the supply chain plan that we are toward the final stages of putting together, which we see should start to pull that back. I think the positive for us is we actually think there's big upside if we can put that plan in place to actually driving out some costs, in relation to supply chain and online, more in the pick and pack area, to make sure that we continue to drive profitability through those channels.
I think in terms of looking forward, second half largely in line with what we've seen in first half, I would like to pull a little bit out. In FY 2020, probably first half FY 2020, same again. I think we start to see some of the impact of what we're doing now will start to hit second half 2020 and full impact into FY 2021.
Okay. That supply chain work you're doing is largely the merger of the two DCs, or is it broader than that?
I think it's a bit broader than that. I expect that Yes, merger of DCs will be one element of it, and then looking at how we improve the efficiency of our picking and packing, whether that's via a level of automation in there. There'll be some form of what we're working through now is level of investment to level of CODB improvement, and what that investment looks like, which is why we're saying over the next few months we'll have sorted that out. I think you've got a natural improvement by putting most product under one roof. That's a win. I think going forward, we also need to look at
Efficiency
Some automation which will improve efficiency and improve our ability to offer a better service, in particular to that online customer in terms of speed of pick, pack, and out the door in terms of dispatch. We're working on a couple of elements together in order to bring it all together in the next 12 to 18 months.
Okay. Great. Just an update on click and collect?
Oh, gosh. Click and collect. Yes. It's a work in progress. We're just working through some other elements within that. I don't want to promise anything because I've promised about four times and missed every one. I prefer to get that over the next couple of months and give you a definitive answer than what I give you now and then change my mind on.
Yep. Sure.
Although well aware of the Accent Group and MSA are delivering ours.
Yep. Okay. Just around your comments on the potential for additional closures in the second half, because if I look at the closures that you had in the first half, it was mainly the Myer Concessions, plus you rolled one of the Kids stores into.
Yep, closed another. Yep
it looked to me like it was one closure.
Yeah
outside of that. Has it changed your thinking again, in terms of long-term targets? I know as your online keeps going, you don't need as many stores, where are you thinking for the long-term?
I think in the second half, Jordan, there's likely to be another one of these non-closures, which will be a Kids' store rolled into a bigger store, if not 2. I think we'll only get 1 done in the first half, and that's in this half coming. We've got a couple of stores that we think are excess to requirements, not delivering the numbers that we want. That's more due to where they sit in the portfolio and what we've opened around them in terms of Homemakers. That's 2. We've got a store in Queensland that we'll probably look to exit, and we've got a couple of outlets in W.A. that we're just thinking about whether we need 1 or 2 over there. There's 2 or 3. There's not significant closures on the horizon.
It's more that we wanted to give the message that it's not just an ongoing store opens plus 3 equals roll it out. There's a few of these machinations happening in the background. I think there'll be 2 to 3 closed, with 1 of them, as you say, with sort of not a closure. It's a combination of 2 stores into 1 and then a few stores that we're just sitting marginal and having a look at whether they're actually good contributors and whether we need them in the portfolio going forward. I think on the longer-term view, we still think there's still Homemaker to be done. The message from us remains more inspiring. Larger stores remain a key part of our strategy, and we'll work that through.
I think rather than opening 10 stores a year, we're probably more likely to grow our GLA, and that'll be a combination of these, let's merge into a bigger box and maybe take a store and expand it within the existing center to drive sales and then add border 6 stores a year type processes through new stores into that portfolio as we go forward.
Yep. Okay, great. Just one more from me, and I'll give someone else a go. What are you anticipating re average pricing to offset that lower effects in the second half? What's sort of embedded in the guidance?
Embedded in the guidance, to be honest, is almost BAU. I think it'll be tough to push through too many price increases over the second half. We'll continue to monitor what happens and how it works, and we'll do some testing. I think you're more likely to see a bigger impact in the first half next year. We're using second half to test and learn some things and see what we think we can push through. We're going to need to start pushing through some price increases, and really, we haven't seen a lot hit the market. Once again, we've done this before, and we've spoken about it before. It's all about being quite selective about where we think it is, focusing on stuff that's truly unique to Adairs rather than trying to really jack up the price of white queen-size sheets.
I think that'll be not something where you'll see it. You'll see it more in our fashion and our ability to charge a slightly higher price in there. I think circa 1.5% would be a good outcome, to 3%. That's sort of our target. We're going to do a bit of testing over this half. I don't think it impacts this half, we certainly haven't banked in big price increases into that guiding range that we've given you.
Great. Cheers. Thank you.
Thank you. Your next question comes from Aaron Yeoh from Goldman Sachs. Please go ahead.
Hey guys, congrats on the result. Just first question from me. Just with regards to the 2% like-for-like in offline. How would the Homemaker Centers compare to that?
Look, I think to be fair, over the first half, pretty much in line. We haven't seen a big disparity between Homemakers and regular stores over that half, which we've seen in the past, we've called out that our Homemakers are probably trading stronger numbers than our rig stores. Over the first half, they were pretty much, you wouldn't sit here and think that there was a big difference for them.
Okay, great. In terms of the first half like-for-likes, how does that compare against foot traffic versus basket size?
Well, yeah, foot traffic's hard to. We haven't got great data on that, so I can't give you too much on that. What I can tell you is, if you think about what we're growing is transactions, if we look at it in transactions versus basket size, we're seeing transaction growth really strong, basket size slightly down. Not significant enough that we call it out. Really, the 7% like for like is coming out of transaction growth.
Okay. In terms of the like for like starting the second half of 2019, it's fairly consistent in terms of the breakdown versus the first half?
Yeah, correct. Yeah. We're not seeing significant changes to stores or online. They're ticking along at about those rates.
In terms of your 5%-8% like-for-like guidance, does that imply that online will continue sort of growing at a similar rate as the first half?
Yeah, it'll be about that.
I guess what gives you the confidence that it can continue at that sort of run rate?
We're not seeing anything that's stopping it yet. We continue to drive more traffic week on week to the site. We've got a series of initiatives that we want to roll out, which, I won't sit here and rattle them all off, but we're not sitting there thinking people are just going to turn up. The team are working on how we increase engagement with customers, drive more traffic to the site. I think what the investment we've made in that team allows us to really focus on what's working, what's not working.
You can almost treat online and driving traffic a bit like. It's another market where you can move your money as to where you're investing in driving that traffic quite readily, and you can actually trade that market quite well to work out where's the most profitable traffic coming from, how do we continue to drive profitable traffic to the site and the like. The guys are doing a lot of work there, and we're really confident that we have some plans in place for the second half that will continue to see that number come out of transaction growth and out of driving more traffic to the site. I think that's where we see it, when we're not seeing anything stop that. Feel as strong as we do, we'll continue to forecast those sorts of numbers.
I think we continue to see that. The other thing we're doing is increasing our inventory availability online, which also helps us to drive that sales. There's nothing worse than people getting to the site and not being able to buy what they want. A combination of those factors, feel quite confident that we can deliver that growth rate.
Okay. Just one last question. Just in terms of the inventory balance, I think one of the things you called out was change in timing of inventory ownership. Is that with regard to that same comment that Mandy made around the timing of Chinese New Year?
No.
No, I can answer that, Aaron. It's basically just more the timing when we recognize our purchase commitments from the factory, and that just caused an increase in stock in transit of the AUD 2.2 million. That's because we've got greater visibility in some of our reporting and everything that we get from our freight forwarder.
Okay, great. Thanks, guys.
Thank you. Your next question comes from Olivia Bible from Lennox Capital Partner s. Please go ahead.
Hi, guys. Thanks very much for taking my question. I've just got a couple of questions just in relation to your store rollout program. You mentioned that you closed a number of stores due to them not hitting your sort of target profit levels. Was that mainly due to lower than average like-for-like sales, that you weren't getting the rent deals you were expecting or a combination of both?
As Jordan mentioned earlier, the two that we closed in the first half, one was a kids store where we weren't delivering the sales numbers. The location wasn't great, and we merged that back inside a bigger upsize store, which is part of that store rollout strategy. You'll see where we can, we'll move the kids store back inside a regular or a larger Homemaker store. Then some of the others were in relation to rent deals that we weren't happy with and couldn't deliver the numbers. Some of that was actually just in relation to center redevelopment and waiting for our spot in the queue to come up. I expect that with the right rent deal, we'd be back in some of those centers. We're definitely working on both elements. We look at the store portfolio.
Some of the stores or one of the stores we've got earmarked for the second half would be more around, not so much like-for-like, but just the store is generally over the years not traded as well as we would have liked. We could get the cheapest rent deal we want there, but ultimately it doesn't sit well within the store portfolio. When you review a store portfolio, you do it on a number of factors, but we have quite high benchmarks for our profitability because you've got to factor in then cost of getting stock to the store and all of those sorts of things. While the store PNL might look profitable, there's a variety of other costs that actually go into supporting that store. We're just reworking those, and that'll be an ongoing piece.
As I said before, there's still upside in our store numbers, and we don't have any lack of stores we want to open and lack of stores that we'd like to see how we could open, but we're just working through those deals at the same time.
Going forward, how do you think about the number of new stores that you guys could open versus the improvements that you're making to your online piece?
I still think there's circa four to six new stores a year plus upsizing over the next two to three years. When we talk four to six, it could be eight in one year because the deal will come to the table. Michael and I sit there and have a look at a portfolio of stores where we say, could we be there probably, right rent deal, all of those sorts of things, and we've got a pipeline of 40 to 50 stores.
As we've always said, you never do them all, but that gives us good runway to continue to grow those store numbers, continue to support our online business with increased investment in there, and then look to how we upsize particular stores to really capitalize on the product expansion strategy and the range expansion to ensure that the customer experience in the right centers and the right stores is what we want it to be. I think you'll end up with a portfolio that covers a variety of different looks. Overall, we still see an increasing number of stores over the next two or three years as opposed to we've hit a rationalization point. I think you'll continue to see that number pick up. It just isn't going to pick up at 10 to 12 stores a year. It's probably more like that four to six number.
How do you think about when you upsize a store, the lifting like for likes that you're getting?
Well, in terms of our like for likes, we don't. If we upsize the store, it doesn't count in our like for like calculations. We take it out until it's traded 12 months in its new format and under its new size. What we've found historically as we've done these stores is if you double the store space, you won't double revenue. We are seeing a significant increase of circa 30% store profit generated from the upsize stores that we've done to date. When we look at it, we think there's upside in sales revenue of somewhere between 40% to 80%. In some instances, we have doubled revenue. Overall, we sort of look at that 40% to 60% revenue growth, which generally delivers a 30% plus store profit growth of the upside stores compared to what it was trading like in its previous format.
Cheers. Thanks very much, guys.
No worries.
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. Your next question comes from James Casey from Baillieu. Please go ahead.
Well, good morning. I just had a question with regards to the balance sheet. The trade and other receivables, they look like they're being reclassified into other assets. I assume that's part of the accounting standards change. Can you just explain what's happening?
Yeah, of course. It's Mandy here. Just basically we've reclassified into other assets our prepayments and deposits. That's moved from our trade and other receivables into other assets. Also then just there's a small amount that has increased our other assets this year for the IFRS 15 adjustment for the right of return, but that's less than AUD 100,000. The same has also happened in our liabilities as well. We've basically moved some of our money from trade and other payable to unearned income into other liabilities, and that basically is about AUD 3.8 million that we've moved to current liabilities and another AUD 1.9 million in non-current liabilities, which is all the deferred revenue from IFRS 15.
Right. Okay. Thank you. Just following on from that, Mark, I just wonder if you could comment on the competitive environment currently. The DDS or the discount department stores in particular are sort of talking repositioning, not for the first time. Are you seeing any impact there or any potential impact going forward?
Look, we always try and stay aware of what the competitors are doing. Do I see it having a significant impact going forward? Well, it's a bit of wait and see. As we've always said, we pay particular attention to the guys. We try and remain focused on what we see as the upper end of the market. When I sit there and talk about our competitors, Myer, David Jones, Bed Bath N' Table, Sheridan are our key competitors, and the DDS, then we need to be well aware of what they're doing at the same time to see what they're doing to, I guess, more the value perception in the market. An end game for us is not to go and compete with those guys.
At this stage, I understand what you're talking about, but I've sort of taken a step back and wait and see what actually flows through before we try and overreact or jump at shadows and come back to executing really well should keep us well away from a discount department store, I guess, customer demographic and requirements to try and really compete on price. Our aim is to make sure that our product's differentiated and that we're providing the quality and the service that then all enables us to meet the pricing and the style of-Customer presentation that we're looking to do.
Okay. That's great. Thanks for your help.
No, thanks, James.
Thank you. Your next question comes from Peter Cooper. Please go ahead.
Oh, hi, Mark. Peter Cooper from Melbourne. Just looking to get some clarity over what's happening with basket size in online only.
Basket size in online only. Look, basket size across the business, as I said before, is slightly down, not significantly, but otherwise, we would've called it out in some way, shape, or form. Basket size in online is about the same as this time last year, slightly down. Like the rest of the business, is being driven by both our online growth and our in-store growth is coming out of the growth in transaction volumes as opposed to significant movements in that basket piece.
Okay. Thanks, Mark.
No worries, Peter.
Thank you. Your next question comes from Josephine Little. Please go ahead.
Morning, guys. You're clearly taking share. You just comped 13% with a seven in the first seven weeks. A bit further from the last question, I had a little question before, sorry. Just DJ's and Myer, what kind of quantum of sales do you think they command of those of your addressable market at the moment?
That's a good question. I'd love to know a more definitive answer, but I bounce around about AUD 500 million, sorry, not half a million. AUD 500 million of revenue that they've got in our true addressable market, in terms of Bed Bath N' Table . More in our core because neither of them do significant, I would think, in our expansion. In our core market, I think they're somewhere between AUD 350 million and AUD 500 million of revenue.
Okay, thank you. Do you think that's where you're getting a bulk of the share from, Mark?
Without any other evidence other than their sales numbers and their high-level sales numbers without any of that being broken down, you'd have to think that some of it's coming from there. I'd like to think that we continue to capture it from a variety of places. I think part of the strategy in online is by delivering a better online experience than some of our competitors, as people maybe transition from a bricks and mortar shopper to an online shopper. Better yet, an omni-channel shopper, that they're finding Adairs a better place to shop, whereas they might have once shopped in one of your Myer or DJs. We know in the online space, we're particularly stronger than some of those guys, I would think in terms of the way our sites work and the curated experience we're trying.
I think some of it comes out of there. Trying to work out how much is probably not something that we spend a heap of time trying to work out. We're probably more focused on how we go up that top line and continue to build the share that we've got in the market overall.
Okay, thanks. I think your first fleet of upsize stores land in the comp basket somewhere September, October. Can you just remind us how many stores and what kind of comps they're doing into their second year?
Well, that's a good question. There's about three of them. They're all comping still strongly on the prior year. It's not going to make a massive point into there, in terms of our overall number. You're probably looking at them comping still that 10% to 20% like for like, depending on the store. We're getting some uplift, but we're three out of 160 stores in terms of like for like is not driving the top line significantly. We're seeing a good ongoing growth from those, which is really positive for that upsize store strategy.
Yeah. They'll continue those, the next fleet will just continue to flow through whatever the next six to-
Yep
-12 months, I imagine.
Yeah, that's right.
Help out.
Our aim was to make that a little more meaningful than two or three stores, and then we might start to provide a bit more color on it as we start to see what comes of them rather than quite a short, three months, two to three stores. Let's wait until we've got a bit more runs in the bag and the like to really start harping about it.
That sounds about right. Just the average hedge rate, please, in the second half and then in first half FY20, where you're at there?
Yeah. Jo, sorry. Our average hedge rate for second half is roughly sitting just under AUD 0.74, with about 60% of that hedged.
Sorry, when was that? What period was that for?
That's for the next half, second half of 2019. For first half 2019, we basically sat at a blended rate of about AUD 0.7470.
Okay. Sorry, were you talking the second half 2019? Sorry, just under AUD 0.7470.
Sorry. Yeah. Second half 2019 is what we have currently got hedged in our books. It was roughly 60% of our purchases at an average rate of about AUD 0.74.
Okay. Mark, if you just say you put through that 1.5% price increase in the start of FY 2020, in addition to supplier support, I suppose you're starting to have that kind of conversation, is should you be able to lift your GM off second half 2019 or?
Yes. Yeah. Look, I still think we will aim to deliver gross margin in the top half of that 59-61 long-term gross margin rate. I think we can get it there. Just going to take us six months, I think, to work our way through some of, as you said, working with our suppliers, trying to work out what price increases we think we can put through and do that testing and drive that piece. Mix and all of those sorts of things as well obviously plays into that. I think we can continue to put a gross margin number in the top half of that guidance range into FY 2020 at this stage. We'll see what we learn over the next few months, but I'm pretty confident that that's where we will sit first half 2020 next year.
Perfect. Thanks so much, guys.
No, thanks, Jo.
Thanks, Jo.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Ronan for closing remarks.
Thank you. Obviously as the management team here, we look forward to producing a good second half result and catching up with many of you over the next couple of weeks. Thank you.
Thank you.