Thank you for standing by, welcome to Adairs Limited FY 2023 results call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Mark Ronan, Managing Director and CEO. Please go ahead.
Good morning, everyone, and welcome to the Adairs 2023 financial year results call. Joining me this morning on the call is Ash Gardner, our CFO, and Jamie Adamson, our Head of Investor Relations. 2023 financial year saw the group deliver record sales despite the more challenging trading environment encountered over the back half of the year. The group delivered sales of AUD 621.3 million, up 10% on FY 2022, on the back of strong product execution across the brands, uninterrupted store trading through the year with no COVID-related store closures in FY 2023, and a full year contribution from Focus on Furniture. Across the year, we saw a normalization of the sales between stores and online channels, with group online sales coming back to 28.6% of sales as customers returned to stores.
The group saw price increases help maintain product gross margins, with gross profit impacted by cost increases across the domestic supply chain, and in the case of Adairs, the ongoing impact of the inefficiencies of the National Distribution Centre, which resulted in the decision to take operational control of the NDC that was announced a couple of weeks ago. CODB was up 15% on prior year, with the additional costs of uninterrupted store trade, a full 12 months of focused operating costs against seven months in the prior year, both compounded by cycling COVID-related rent rebates and cost increases across most areas of the business. Given this result, the group has undertaken a cost-out project to reduce the group's CODB, given the current trading environment.
We saw the group deliver EBIT of AUD 63.9 million, down 16.4% on last year, net debt reducing to AUD 73.6 million. Despite this net debt reduction, the board have made the decision to not pay a full-year dividend, given the recent decision to take over the NDC and the capital commitment that accompanies this, together with an ongoing desire to maintain a strong balance sheet. I'll now hand over to Ash to walk through the financial results by brand in more detail.
Thanks, Mark, good morning, everyone. As Mark said, the group reported record sales result of AUD 621 million, but profit was impacted by lower margins and higher costs of doing business. The EBIT for the year is AUD 63.9 million, was down 16% on last year, with an EBIT margin of 10.3%. Turning to the brands now, starting with Adairs. Total sales were up 2.9%, with store sales up 7%, cycling the prior year, where store closures due to COVID continued to impact in the first half. Online sales were down 6.7%, but still represented 27% of total sales, up from the 17% contribution pre-COVID. Gross margin was down 170 basis points to 61.5%, more promo, promotional activity than in the prior year.
The benefits of lower inbound container freight rates began to be seen in Q4 and will continue into FY 2024 to offset the impact of the weaker Aussie dollar. Costs were higher across the business, albeit the cost-out program that commenced in the second half reduced the extent to which costs would otherwise have grown. We agreed an interim pricing agreement with DHL that commenced in January and implemented an across-the-board cost realignment process. As a result, the rate of cost growth reduced from 17% in the first half to just 4% in the second half, with the cost realignment process continuing into FY 2024. The Adairs EBIT of AUD 35 million was 37% lower than last year. Focus on Furniture had another excellent year, with strong execution and a compelling value proposition, delivering growth in sales, gross margin, and EBIT.
Total sales for Focus on Furniture increased 5.3% in FY 2023 to AUD 142 million. Margin improved by 60 basis points to 52.6%, with the benefit to the lower container rates in the second half retained, and like Adairs, providing an offset to the weaker Aussie dollar moving forward. Focus on Furniture continues to operate with a lean cost structure, with the cost increasing only as a result of stores being open for the full 12 months and performance-related incentives. EBIT for the year for Focus on Furniture was AUD 27.4 million and slightly ahead of last year. Mocka reported sales of AUD 48.6 million, down 24% on last year. Whilst we didn't see a major shift in the sales run rate in the second half, we did see the underlying business metrics improve significantly.
Gross margin in the second half increased to 63.4%, up from 47.7% in the first half, and almost 15 percentage points higher than the second half last year, as a result of clearing excess inventory and well-managed pricing and promotional activity. Operating costs were also lower. This combined to deliver a second half EBIT of AUD 1.3 million. More importantly, these underlying improvements will be retained as we move forward. If we now look at the balance sheet, the group continues to maintain a strong balance sheet, with inventories 11% lower than June last year and 17.5% lower than at December. The supply chain risk-related inventory buffer is now being removed.
Net debt was AUD 73.6 million at the end of the year, AUD 20 million lower than the same time last year and represents leverage of approximately one times. The group continues to maintain significant headroom with its covenants. I'll now hand back to you, Mark.
Thanks, Ash. Over the past 12 months, all brands have taken good steps in advancing their strategic priorities. If I start with Adairs, and as many of you who will have followed Adairs for a number of years would know, the strategy always starts with product. A continual focus on refining our offering of exclusive products with a strong value proposition is the starting point for our strategies. Over the past 12 months, we've seen good growth in our fashion furniture range, which looks to leverage our on-trend positioning to provide those more interesting pieces customers are looking for to deliver their individual visions. We've also seen ongoing growth in our Adairs Kids' ranges, supporting our position as the place to shop for kids' bedrooms across a range of categories. There remains a good opportunity to grow our kids' business through both range expansion and market share growth.
These initiatives have been supported by the ongoing development of new products within a number of categories that look to create that new reason to shop, on top of our trend, design, and great quality at Adairs. This ongoing focus on both the trends within home and product innovation remain the fundamental building blocks of growing share in the category. To support the product strategy, Adairs has continued to build upon the strength of our loyalty program, Linen Lovers, utilizing this program to drive our customer acquisition and retention. I think it's important just to remind everyone that the Linen Lover program is a paid-for program, with members paying AUD 99.95 for a two-year membership, that entitles them to everyday savings across stores and online, free standard delivery, extended return periods, and access to our VIP shopping events.
With more than 1 million members, our Linen Lover program delivered 83% of sales in FY 2023 and enables us to continue to talk directly with our customers. Using the data from our Linen Lovers, across the year, we launched a new website in November 2022, that has provided us with the foundational platform to deliver an improved customer experience. The new site has improved customer conversion, and with ongoing enhancements, we believe we can continue to make it the logical starting point on any customer's journey to creating a home they love. Off the back of the new website, we are currently rolling out click and collect functionality across the store network, which will replace our previous call and collect service.
This will then form the foundation to look to optimize our inventory holdings by moving towards a single pool of inventory that can be accessed by all channels. On top of this, over the past 12 - 18 months, Adairs has invested in bringing together the variety of customer or Linen Lover data we have access to into one platform to enable us to create a single view of customer. This foundational piece of work now enables Adairs to start to deliver at scale, the personalization of content for our customers. Whilst we are just commencing trials of a number of initiatives, the early signs are positive, and with the investment made, the opportunity for us to identify and test different scenarios, and then move successful trials quickly into ongoing programs, is a great opportunity and will be a key focus moving forward.
Across the year, we've also seen customers come back to store and benefit from the ability to touch and feel products and talk to our store team members, which drives stronger conversion and growth in average transaction values. Over the year, we opened two new stores, upsized four, and closed three, with two of those closed stores being absorbed within an upsized store. As we look forward, there is a solid new store pipeline, with our ongoing preference being to opening larger stores while maintaining our convenience to customers in their local shopping centers. Store space growth is a key driver of sales and Linen Lover growth, supporting our ability to both expand our product ranging and customer reach. We remain committed to growing our GLA and expect the pipeline developed through FY 2023 will deliver 5% GLA growth over the coming years.
Finally, for Adairs, I wanted to touch on the recent announcement to take operational control of our NDC. The last 12- 18 months have been incredibly frustrating, as we've not been able to deliver the experience Adairs customers expect from us as a result of the issues within the NDC. This has seen us impact customers via poor delivery experiences and stock outs in store. Unfortunately, when working through a 3PL, the changes we need to make were always going to take time, and whilst progress was being made, it was simply going to take too long. Whilst this decision comes with a significant capital investment of AUD 20 million, this is largely in line with the investment we would have made if we'd elected to operate the NDC ourselves at inception.
Further, operating warehouses is not new to Adairs, as up until we moved to the NDC, Adairs operated all of our own warehouses, and importantly, a lot of the team that led these warehouses have remained with the business, working with DHL on attempting to improve the output and efficiency of the facility. Across the last 12 months, our team have identified the most immediate areas of priority and had the benefit of observing how the technology utilized within the facility works, which has provided us with a clear roadmap of what needs to be done. Importantly, with us taking over the facility, we will deliver ongoing improvement in both service and cost. We will see improved order picking accuracy and faster dispatch times, leading to less refunds and more repeat customers for online.
In stores, we'll improve product availability via faster store replenishment, delivering both a better customer experience and increased store sales. In retail, we know that supply chain speed is critical to today's customer, and by having the end-to-end supply chain operated by Adairs, we'll be able to constantly drive this requirement. If I move on to Focus, where our growth will be primarily driven by delivering the national store rollout. Whilst we are working for obtaining new sites for Focus, we shouldn't overlook the importance of continuing to deliver a strong underlying customer proposition. Focus had another very good year, with the team successfully developing and delivering new on-trend products that support our ongoing best sellers at strong price points.
Within Focus, the combination of new product that enables us to showcase current trends for the middle-market customer, combined with a higher in-stock position to offer faster delivery and a knowledgeable store team, delivers our strong customer proposition. We are constantly looking to enhance these key aspects of the business, which are then supported by our other growth drivers. Hoppers Crossing store refurbishment was completed during the year, delivering the first store with the new fit-out. Initial results have been very promising, with sales up 6% against the store network since it was refurbished. I think for anyone looking at the investor presentation, you will see that the images showcase our strategy to have the new store design reflect the modern Australian home, with increased lighting and a simple color palette, really enabling the product to shine, increasing the customer's value perception.
Our Focus store rollout has started slowly due to the tight market for homemaker space. In saying this, we have made some good progress, with three stores confirmed to open and a number of other opportunities in advanced discussions. We remain focused on opening stores across Queensland and New South Wales, and we'll also look to utilize space within our Mocka warehouse in Queensland to support this initial phase of the Queensland store growth. I move on to Mocka, where after a disappointing 12- 18 months, we delivered a much improved second half, as Ash outlined. Clearly, the last 12 months has been heavily focused on delivering a stable operating platform that sees us execute the fundamentals week to week. The team has done a good job in delivering this, which has seen us restore customer confidence, reduce refunds, and inbound customer inquiries.
As with all of our brands, product remains critical to our success. Over the past 12 months, Mocka has been working through identifying the core product options and bringing the range back to being primarily better designed and highly functional flat pack furniture options at good value for money. This has seen Mocka significantly reduce the number of home decor options, and this will continue as we look forward. This reduction has seen an improvement in our product gross margin through less markdowns, improved supply cost prices, and increased retail price points. With the initial work completed, Mocka will look to continue with its plans to build out great flat pack furniture options across the home, with a real focus on the young family and value-orientated customer, driving on-trend furniture options for the lounge, dining, and bedrooms to support our very strong kids and nursery business.
This good work done throughout FY 2023 will support our underlying EBIT growth in FY 2024, with the higher gross margins, lower delivery costs, and stabilized CODB, all supporting improved profitability. With the improvement in the product range and gross margins, Mocka is now in a position to explore a variety of different customer channels across FY 2024 to support the top-line sales growth. We will look at a number of options, including a physical presence, to enable Mocka to access the 70% of home customers who shop in stores today. We don't expect this strategy to play a large role in our FY 2024 result, but it will remain a key plank of our longer-term plans for the brand. With all the significant work going into the underlying brand results, the group also remain committed to continuing to uphold our focus on our environmental, social, and governance priorities.
We've called out in the presentation a number of initiatives in this space. I thought I would highlight a few today on the call. Across the group, we've completed the work on measuring our emissions, with an 8.5% reduction in Scope 1 and 2 emissions achieved and 560 tons of waste diverted from landfill. Our teams are continuing to work on improving the recyclability of our product packaging across all areas of the business, that we can look to reduce the amount of waste ending up in landfill. Adairs also took a leadership position by removing plastic bags from all stores across the course of the year.
This will eliminate more than 2.3 million bags, potentially ending up in landfill each year. We are also in the process of finalizing the recycling of the remaining plastic bags within the Adairs business. I'm also very proud of our partnership with Orange Sky. They are an amazing organization that work with people experiencing homelessness and hard times across Australia and New Zealand. The Orange Sky team do an amazing job, unfortunately, are experiencing an increase in demand currently, as we see the cost of maintaining homes continuing to rise. With how important homes are to our customers, we see this as a way we can play a small role in assisting those in need get back into accommodation.
Finally, if I move to the trading update, the first seven weeks of FY 2024 have largely been in line with our expectations, with sales down 8.9% against the prior year. We anticipated sales to be softer, particularly after we came out of the traditional July sale period, and have developed our FY 2024 plans and budgets around this expectation. Interestingly, we've seen online, driven largely by offers, perform better over this period, with customers electing to take advantage of those offers via our online channels. Overall, we see that center traffic is down, with Adairs and Focus obtaining a higher share of passing traffic than last year, and in-store conversion declining off historically high rates.
Given this reduced center traffic, the brands have focused on gross margins over this period, which are ahead of last year, with customers visiting stores, continuing to shop traditional offers, and more aggressive offers not delivering enough additional customers to justify them. This is in line with what other commentators have been calling out in the market currently, that there are a number of different customers within the Australian market today, and the current cost of living pressures seem to be impacting them all differently. This background, the group expects to continue to maintain a focus on those customers that are shopping, with a strong emphasis on the profitability of each transaction. The near-term trading environment is likely to remain challenging, with all brands focusing on strong product execution and providing a new reason to shop, supported by ongoing offers to enhance the customer value proposition.
Material cost reduction initiatives have been implemented across all brands to manage the underlying businesses in line with the current environment, while maintaining our culture of customer service. This will deliver savings in our cost of doing business across the group, with reductions occurring both in the store networks and the brand support offices. As you can see from all that I've said so far, that the brands are very focused on profitability and maintaining that profitability through gross margins, optimizing inventory levels, reducing our cost of doing business, while maintaining our focus on the longer-term strategic priorities, in particular, those that have the opportunity to improve productivity.
Given the uncertainty of the trading environment over the next 12 months, the board does not consider it appropriate to provide guidance for FY 2024 at this time. Before I finish, I would like to thank the team. We know that our commitment to delivering both great product and an outstanding customer experience across all brands is the foundation for delivering ongoing growth for the group. I'll now hand over for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the headset to ask your question. Your first question comes from Alexander Mees from Morgans. Please go ahead.
Thanks so much. Good morning, Mark and Ash. Just firstly, on like-for-like sales in FY 2023, I think I found a number at the group level of - 10.9. I'm just wondering if you could give us those numbers for Adairs and Focus, please.
No, we, we haven't put them out there, Alex, because there's so much moving around in those numbers as always. We've, we've run with the update as it is.
Okay, fair enough. Just secondly, I wonder if you can comment on the outlook for new stores and store refurbishment next year, and specifically with Adairs Kids. I mean, you mentioned, Mark, that there's some good opportunities in that brand, but I, but I noticed we're only down to, I think, what, six Adairs Kids stores. I'm just wondering what the future for that format is, please.
Yeah. I, I think more and more what we're seeing is driving customers to a larger Adairs store, which incorporates a better kids offering into the way to do it, and we get the efficiencies of the upsized store. In terms of labor and the like, being shared across a bigger space rather than having the standalone formats. However, we, we are continuing to trial a couple of standalone formats that where we haven't got enough space in some of those homemaker centers, and they're, they're delivering good results. Our primary aim on the kids business is to continue to grow the range and see it take up a larger amount of space within the within the Adairs Homemaker store and, and support the ongoing growth of that format, from a from a kids perspective.
Rather than trying to drive customers to specific kids' destinations, I think we'll, we'll have a few of those, as we look forward, but more and more, the bulk of the sales will come out of the, the larger Adairs formats that enables us to showcase it in line with the rest of the, the range.
Excellent. No, that makes good sense. Then just finally, I'll keep it to three. With, with regard to stripping out of warehouse-related costs and putting it into gross profit. Just wondering, can you just comment on, on the rationale for, for doing that and whether that's going to be the disclosure going forward, please?
Yeah. Basically, we reclassified it in FY 2023 and FY 2022, pretty much in line with consultation with the auditors. The costs of warehousing are costs that are associated with getting stock to its final point of sale, so they're eligible to be included in the cost of inventory. By including them in cost of sales, that sort of reflects the fact that they're in inventory. You'll see in the investor deck, we've called that line out all clearly. I think it'll also provide a useful reference point for you all moving forward as we progress the improvements at the DC, and we expect to see that those costs are reflected in reductions in that line in the investor deck.
That's very useful. Thanks. Thanks very much, Ash.
Thanks, Alex.
Your next question comes from Aryan Norozi from Barrenjoey. Please go ahead.
Hi, guys. Hope you're well. Just some from me around the cost out you're talking to. Can you just give us some quantification about how much cost was actually taken out in the second half of 2023, and how do we think about the extra cost out in fiscal 2024? A rough range would be just helpful in terms of bringing out earnings, please.
Most of the cost out program has been focused on Adairs because it's got the biggest cost base. As I said in my notes, you know, we were running a double-digit rate of cost growth in the first half. We brought that back to almost zero. What I'd expect to see in FY 2024 is that we maintain that level of very little cost growth. If you think about our cost base, we've got wages, wage rates going up by almost 6%. We've got rents going up across the board at 3%-4%. We're offsetting all of those and looking to hold costs at zero in absolute dollar terms.
Okay, flat cost growth, mainly for branded Adairs, and then the other businesses do what they do around store openings and, and whatnot. Is that fair?
Yeah. Well, Focus will just be store openings. There's no other real cost in there that will increase. Mocka, expect the cost to remain pretty much the same as in terms of sales, knowing that a lot of it costs are variable.
Perfect. Then if I just look at the Focus EBIT margins, it was 21% in the first half, 17% in the second half, still very strong. How do we think about EBIT margins into 2024 and 2025? Just sustainable sort of run rate of margins, please, for the business.
I think, I think the variable, apart from the general sort of market view, and you can form your own view on where you think that's gonna go, the Focus cost base is, you know, is pretty lean. On the basis, we can maintain the current level of sales, then we'll be able to maintain, you know, a margin that is, you know, in the sort of mid-teens. Then as we look at opening new stores, that will be margin dilutive in the near term, partly because, you know, just take those stores a bit of time to get up to speed to reach the average margins achieved by the existing stores. Secondly, just by virtue of you take an order and then you deliver it six weeks later, there's a natural lag.
In, in simple terms, we'll open stores, and in the first 12 months of their operations, we'll only get the benefit of 10, 10 and a half months of actual sales, but the costs will all be there. That will, you know, sort itself out in year two, but in year one it'll be dilutive. I think long term, our objective would be to maintain even margins and, and [audio distortion]
Sorry, long-term objective is to maintain mid-teens or the 17?
15%-17%. I mean, in a good year, it'll be higher, in a bad year, you'd like to hope it stays. I think, yeah, it is highly leveraged. You know, there's not a lot of variable cost in this business, so, when sales come back, you know, EBIT margin will be pretty directly impacted.
I see. Sorry, just on the dividend, so obviously second half, no [divi]. How do we like, is this just a six month thing and next sort of half, obviously, you'll start reintroducing that dividend for, for the interim dividend, or is that obviously subject to board discussions? How, how should we think about a dividend, please?
Well, I think it's always subject to board discussions, trading at the time, profit, all of those sorts of elements. I think what you can take from, from this one, Ari, is there is obviously a fairly unique circumstance around the step in to the NDC that impacted the short-term capital requirements of the business, and weighed heavily on that, that dividend decision. You know, as we move through the taking, taking control of the facility and, and those- that sort of one-off, capital cost that was, you know, not expected at the, at, at the time, until such time as we made the decision, that obviously played a bigger part in it. I'd expect that, you know, we-- and we haven't moved our, our dividend policy in any way.
You know, the board will obviously make the, the discussions and, and have those discussions at the time. but there's some pretty unique circumstances around the decision made at this point in time.
Great. Thanks, guys.
Your next question comes from Ben Gilbert, from Jarden. Please go ahead.
Hello, guys. Just on the cost side, you sort of spoke to Ash, is that all else equal, you're hoping to keep them flat, because, or are you assuming sales declines in there? Because it's a pretty good outcome if you're just assuming all else equal. Obviously, if your sales are going backwards, you guys have probably got more flex to adjust things like labor, et cetera.
It's always taken a view moving forward that the environment will be pretty tough. You know, variable costs obviously move with sales, but we brought our store wages back to reflect lower level of base team hours. To the extent that traffic is maintained, then we'll see higher levels of productivity from those team hours, and we'll feed it back in. We've got ahead of it. You know, our objective is always to grow sales, but if we plan on that basis, the cost base is too high. It's not a very clear answer for you, but our expectation is that we'll hold costs flat, and if sales are stronger, then we'll get more leverage. If they're weaker, then we'll continue to tune up the cost base as, as is appropriate.
How are you seeing the competitive backdrop out there at the moment? Because there seems to be sort of mixed messages coming through about how people are seeing competition. Are you seeing it more aggressive now, your inventory is pretty clean, do you think you have an opportunity to pull that back a bit through next year and continue to sort of lean on and leverage Linen Lovers a bit more? How do you think about the promotional backdrop going forward?
Yeah, I think, I think the promotional backdrop is, it's noisy. I think that's the term that I'd use. There's a variety of offers being thrown around in home. We're probably seeing a couple of the bigger players play deeper and longer, into, into promo and sale and, and the like. We've largely tried to hold, hold the line. To your point there, what you'll see from us is more of those offers being directed towards Linen Lovers. If we're going to provide an offer and, and try and drive sales via the offer, that offer will be provided firstly to Linen Lovers in an effort to make sure that they, they feel rewarded for being part of the program. I think noisy is the word I use.
There's lots and lots of offers. Often there's times it doesn't feel like there's heaps of stock behind them. You know, I think at this point in time, a lot of us, or internally, most of us are sitting here saying, "Right, well, what we do is control our controllable." How do we think about that? Rather than react and respond to everything that's going on out there in the market. You know, set our, set our goals each week and make sure that we're delivering to those and, and react according to what we expected, as opposed to what else is going on out there. I think, yeah, I, I think there's a variety of brands using different, different techniques, and it, it's just become pretty noisy, would be the way that I describe the competitive market at the moment.
Right. Thank you. Just follow up for me, just following on around the divvy. In terms of the decision for the second half, was it, was it purely just sitting on the fact that you've got the NDC costs, or are you thinking now just moving forward structurally, that the business is probably something that should be moving or operating closer to sort of net cash ex borrowings? Because it, it's interesting now, if you look at sort of five years ago versus today, most, a big chunk of these discretionary retailers will operate around sort of net neutral or positive from a net cash standpoint ex licenses. How are you thinking about sort of the optimal balance sheet position for the business?
I, I think primarily, you say the NDC was the biggest factor in that decision. It's, it's interesting when you start to think about what's the right net debt position and the like. We think, you know, the business can comfortably carry debt, and it should probably carry some debt. When you hit trading periods like this, then everyone tends to move to the extreme and say, "Right, well, actually, I only want businesses with no net debt." Then when times are good, we come back to the other side, and we have the conversation around, "You've, you've got a lazy balance sheet. What are you, what are you thinking about that?" You know, we think there's a, there's a right balance position. It should be south of one times.
We took the opportunity here, or we, we made the decision here that on the back of the NDC, that if we did the NDC and paid a dividend, then we were probably thinking that our net cash position or our net debt position, got a little further or a little higher than we, we would have liked. This gave us the opportunity, or we took the opportunity to make sure we maintained the strength of the balance sheet that we think is there by not paying the dividend in this instance. We know that will impact some shareholders, or will impact all shareholders, and it'll impact some more than others. We made that in a medium-term sort of mindset.
It's, we're, we're not sitting here thinking we, we run an aggressive program to bring the debt down to zero. We just think that at the time, given the NDC, that it was the prudent decision was not to pay the dividend for, for this second half.
Sounds clear. Thanks, guys, appreciate it.
Your next question comes from Allan Franklin, from Canaccord Genuity. Please go ahead.
Good morning, guys. Thanks for your time. Just, hopefully, would be good to get a bit more detail on foot traffic and conversion across a couple of different, different brands, please, and also a bit of commentary just around state-by-state patterns. Are you, are you sort of feeling anything different about the Victorian consumer, say, relative to, to New South Wales and Queensland, please?
Well, let's start with foot traffic. I mean, foot traffic's down year-on-year from our data. Year-on-year, foot traffic down, you know, well north of 10%. When we look at our results, what we're seeing is that foot traffic's down significantly more than our, than our sales results are down. That's coming off the back of we're maintaining the highest share of people coming into store. We're seeing conversion in store come off slightly, but not heaps. That sort of points to this consumer out there. The customers that are out there are shopping, and it's more that there's a selection of customers or a group of customers that have decided not to shop, that aren't out there at all. What we're seeing is...
That sort of comes back to our thoughts around how we operate the business, that when we if we drive a harder offer, it's got to deliver a lot more customers to actually make that, that offer worthwhile when you think about it from a gross margin dollars perspective. You know, what we've seen and played around with over the last six to eight weeks, and even before that, as we came through May and June, was that when you ran a harder offer, you didn't see an uptick in significantly in customers. You might have got a slight uptick in conversion, but you net, net, you weren't making a lot more GM dollars, so it didn't make a lot of sense.
We've been playing a bit more of a margin game across all brands, and making sure that we maximize the customers that are out there shopping, as opposed to think that there's an ability to drive a heap more into store by running a deeper, harder offer. On your state-by-state question, I think it's Adairs is probably the brand that has the biggest reach when we start to think about states, given Focus is largely Victorian-based. I would suggest that, you know, we've seen probably better trading in WA for Adairs. That's traded up, up more strongly over the last sort of three, four months.
If anything, New South Wales is the, is the weakest of the states, which for Adairs is a sort of a, it's, it's a historical thing that we often see when times get more, a bit more challenging, the New South Wales customer tends to step away a bit faster. They're, they're probably the two, two standout, New South Wales being a bit weaker and, and WA being stronger, as the, in a state-based view.
Sure. Powerful, thank you. Just on Mocka, yeah, maybe just half a step back, please, how to think about that, that business. Are we... what we're cycling in terms of if you have trimmed that, that offering back, do you think that is mostly out of the numbers now? Then sort of, you know, a broadly clean revenue base moving forward from just the flat pack offering. Then just putting a lens over the top in terms of where your, where your target for that business was for getting to AUD 150 million.
I mean, just to help us bridge, bridge that gap, please, sort of what else do you, do you need to roll into that offering or, or does it now, you know, materially need a store footprint to help to get, to get to that five-year target of yours?
Yeah. Well, I think, I think you can say that you, as Ash mentioned, you can take the second half results, and we should continue to see the improvements we got over the second half, play out through first half 2024. Probably deliver a bit more as we look forward on the back of. The second half was a good half, but, you know, we got more in the last quarter than we got in the Q3. I think you'll see that result continue to strengthen. As I talked about, all the work done will, will help build the profitability of that business at or around the similar sort of sales levels. As Ash mentioned, a lot of the costs in there are, are variable.
What we've managed to do, I think, is now put that back where it's got the option to start to think about what are the right distribution channels and how do we go to market and, and what, what gives us the opportunity to build out towards those, those targets that we've, we've set the brand over, over a longer-term horizon. I think what we've seen off the back of COVID is, we do need to think about how customers can interact with the product in a physical sense. We know that, you know, we're, we've, we've not shied away from the fact that we think omni-channel retail works, but we are giving consideration to what's the right way to enable that in, in the Mocka business.
I mean, there's many ways there's many brands out there that don't have their own store, and customers can still access that product. We're, we're thinking more broadly than the only way to do this is open stores and start rolling them out. One of the great pieces of work that the team have done over the last 12 months is by improving the gross margin in our business. That gives us more options when we start to think about our channel strategy and our distribution strategy to customers. On the back of, you know, even if you think about stores, physical stores are not cheap things to run, so you need a reasonable product margin in there or a lot of turnover to make sure that you're driving a profitable outcome.
The, the work done to date puts us in a good position. We think about the different distribution channels. We probably are in the, in the process of reviewing whether AUD 150 million is the right number, you know, off the back of COVID and what we've seen as the customers have gone back to store, and equally, we've seen the cost of digital marketing only continue to grow. There's a thought that you, you could get to AUD 150 million if you really pushed hard on the digital marketing, but I'm sure it wouldn't be profitable.
Getting the balance right between driving a profitable business and driving that top-line sales growth is what we're reviewing over the course of FY 2024, whilst banking the profitability gains that we've, we've got in place from the, the good work done over FY 2023.
Helpful. Thank you. That's all for me.
The next question comes from John Scranford-Hein from Wilsons. Please go ahead.
Morning, gents.
John?
Yeah, hi. Just a couple of quick questions on, how is, how are your shoppers responding at the moment? Is it more sheets and less sort of plastic plants and homewares? Then following on, I think, from your other question as well, is the weakness in New South Wales, is, is that because that New South Wales customer is, is more of a Sheridan or Myer inclined shopper? What, what do you think there?
Yeah, okay. First one, we're, we're probably seeing the, the, the sales come off relatively consistently across departments, so we're not seeing a big change. There's not a big swing out of one department into another or huge changes going on in terms of our percentage of sales overall by department. We certainly haven't seen a move back to the thought about a, a needs-based customer buying more towels and sheets and less home, home decorator items. We've probably seen the customers more continue to shop in line with their historical percentages and, and follow the trends. You know, as you, you pointed out, faux plants were huge a couple of years ago.
We, you know, we see them continuing to come back off the back of that trend is starting to dissipate and more and more people are putting live plants inside their houses and these sorts of things. We're seeing some the trends probably drive that more than the consumer and the way they're behaving. When you think about the general consumer, they've what we've seen is that, that step back has been pretty consistent across most categories within the business. The New South Wales customer, I think we find that the outer regions of New South Wales tend to decline faster. When you get out, outside of the CBD and surrounds and the inner, inner suburbs is where you really see the decline coming in the New South Wales customer.
I'm not sure that makes them a Sheridan or a Myer customer, but it's probably more aligned to mortgage belts, higher cost of living type challenges and a lesser want to keep updating their home and other things taking priorities, I think, more so than what we see in some other states.
Yeah, that makes sense. That's, that's great, Mark. Just, just one more. Given, I guess, the movements we've seen with Mocka and Focus on Furniture, can you talk to average sales prices for those two businesses on a year-on-year basis? Are the shoppers, I guess, responding to the products that you're putting out well, and, I guess the appetite for promotions in this environment for those two?
Yes. If I think about, I'll do them brand by brand.
Yeah.
For Focus, we've been able to, we've probably seen a slightly, slight reduction in average transaction value, in Focus, off the back of an element of people choosing to spend a little less. Equally. We've also sharpened up a few of our prices off the back of what the reduction in international freight rates. I mean, at 1 point, it was costing us more to ship a sofa from China to Australia than it was to make the sofa. Obviously now, with the decline in the international freight rates, that's that's come off a bit. We've handed back a portion of that to customers in, in some of our newer product, while still maintaining a higher gross margin, and we're seeing customers respond well to that.
Overall, Focus is probably seeing a small decline in their, their average transaction value. Mocka, on the other hand, we've gone the other way. With the reduction in the decor items, the reduction in the number of options, increasing prices more generally to make sure that we maintain the order economics within the Mocka business, supporting the-- what we're seeing, that higher local delivery costs and the like, has meant that we've actually, whilst the traffic numbers are down at Mocka, our ATV is up and our average price per unit is up. We're-- that comes back to us really focusing on making sure that we're thinking about the quality of the transaction and the profitability of each transaction in each of those brands.
You know, where Focus has probably got the, a bigger advantage on the international freight rates, we've been able to think more holistically around, you know, some of the prices that we've put up over the course of the last two years, we've maintained, and some others we've been able to, as we've brought in some new product, we've actually given a bit back. Whereas at Mocka, we're really focused on the furniture piece, higher ATV, higher gross margin per order, which obviously allows us to recoup some of the costs in relation to the local delivery charges that we've seen increase over the last couple of years.
Yeah. Just, just last one. With, with Focus in particular, I think one of the strategies was to perhaps move some of the Adairs product through those stores. Is, has that, has that taken place yet? How, how have you found the responses there?
What we're keen on in Focus is to make sure that Focus remain very clear on delivering that furniture offering. One of the reasons we obviously acquired Focus was, at the time, we, we thought long and hard about whether Adairs would build out a, a, a furniture-type business. You know, when you think about that traditional furniture-type business, you know, dining room tables, chairs, lounges, et cetera. What we thought was we wanted a team that were really clear on making sure that was their primary focus and that they were all over it, and the Focus team are, are very, very good at that. What we've done then, as we've, you know, thought about it and worked together, is there's a, there's a range of items from Adairs that complement what's going on in the Focus stores.
If you go into most Focus on Furniture stores today, you'll find Adairs cushions on a lot of the sofas, potentially some throws, and we'll move into some home decorator items. Our primary focus isn't to move products and sell those items. It's actually more about, you know, that's how it comes to life. In some instances, we've seen good, good work between the two stores in sharing customers where our stores are co-located in, in similar locations. We're more thinking about it that way than trying to put a whole lot of home decorator and smaller value items in Focus on Furniture that end up confusing the team, and more looking at it as it's an easy add-on.
If that customer loves those cushions that are on that sofa, they've got two choices: They can sell them straight out of Focus, and away they go, or alternatively, they can point them in the direction of Adairs, which in most instances is, is not very far away in order to, to access those. The Focus team know the cushions, know which ones they're looking at, and, and have that ability to transfer that sale, so to speak, or, or recommend that sale to the customer. I don't see there being a big place for lots of Adairs product being sold through Focus. It's more about giving them the highlights and enabling that to then, to, to cross-pollinate between the two brands.
Great. Thank you very much, Mark.
The next question comes from Mark Wade from CLSA. Please go ahead.
Good morning, gents. On the state of play in the macro environment, is that entirely what's driving, you think, your result, or is there something more internally you could be doing with the offering?
I think primarily the foot traffic's the big one, Mark. I think, I mean, you and I have spoken a lot. There's no doubt that we continue to look at product, and there's a number of new initiatives that are being rolled out. It's always early in the season. I love these seven week trading updates 'cause generally you haven't, you know, July and August aren't big months in most retailers' calendars. We don't tend to launch too many new initiatives in that period of time. Across all the businesses, I think the foot traffic is the biggest driver of the result at the moment.
That doesn't mean that we're not continuing to think about how do we grow share and how do we bring it back into our own accountability to try and maximize the results. You know, Adairs has got a couple of new initiatives coming up. I think they've got a great, we've got a great spring sale offering, which brings back a bunch of color and real excitement. Where at Adairs, the focus is on a lot of new products and looking to really upweight new versus ongoing, because I think when you get to these sorts of times where the consumer is a little tougher, you need to give them a reason to shop. If you just deliver them another white bed linen design, they go, "Well, I've already got three.
I don't need a fourth." That's an easy to spend decision versus putting something new in them. I think you'll see, I know at Adairs, you'll definitely see a lot of color and the like over the next three months as we see that as a key vehicle to driving the result. The last seven weeks is, is sort of, you're still in the midst of winter-particularly down here in the southern states. We, we tend to see a lot of that start to launch over the next two or three weeks, and I'm, I'm hopeful that delivers good results from the products perspective. You're right. You know, I think, I think in the moment, I don't see execution as being a problem, Mark.
I, I don't see that, you know, that I would... I'm sitting here going, you know, we're not doing that well or we're not doing that well. But I equally think up weighting execution and really delivering on product is an opportunity for us every season, and this season is no different. And we'll be, there's a lot of newness coming in the, in the Adairs business. And, and Focus has done the same thing. I mean, they've done a terrific job of cycling through products over the last 12 months to make sure that despite really good top-line sales and a really good result, we're not growing number of options. So we're being really disciplined there. There's only so much space in the store.
What that means is net net, each option on the floor becomes more productive, so they're getting this efficiency gain as they start to think about it. There's, there's good work being done across all brands in that, in that respect. Unfortunately, if you've got an overarching macro environment, it's one of the things that we, we sit here and balance is making sure that, and particularly internally, where we're doing a good job in some areas, that that team know they're doing a good job, even though that may not be reflected necessarily in the overarching results of the brand, given some of the macro environment conditions.
Yeah, I think that's right. I mean, it, it feels a bit like you're taking one step forward and two steps backwards in a way. I mean, you've had so much on your plate trying to get Mocka right initially, then integrating Focus and now the macro period, the NDC. There's a lot on. I mean, do you feel like you can kind of commit to the, to the company for the next five years and, and then really get through this?
Well, I, I think there's, there's some really good work done, as I said, over the last couple of years, which we'll now start to benefit from over the next couple of years. Yes, the, the, the winds have perhaps moved in terms of the macro environment, but there's no doubt as we, as we work through the NDC over the next 12 months, that that becomes a big catalyst for us to not only improve the profitability, but removes an impediment to us doing a bunch of stuff that it had become, whilst it was operating as a 3PL. I think that's, that's a big win.
The Focus on Furniture guys, as we start to roll out stores, we start to see the upside on that brand on top of just that great underlying proposition that I talked to. Yeah, I mean, I'm, I'm super excited about what comes, and it's a shame that the macro environment is what it is, but that equally is a good opportunity for good retailers to still continue to perform reasonably well, regardless of what's going on around them. I, I, I think it also might provide us the opportunity to accelerate some of our store rollouts and those sorts of things as that space has been really tight.
When it gets a bit tougher, potentially it, it frees up a bit, and we start to get the opportunity to get some of those stores away that we have been looking for over the last couple of years.
Okay, thanks so much.
The next question comes from Chami Ratnapala, from Bell Potter. Please go ahead.
Thanks, Brad. Thanks, Mark and Ash, for taking my question. You did talk a bit on the online sales performance earlier. Just curious to know, within the trading update for the first seven weeks, how has online performed? I mean, for Mocka, you provided that maybe it in Adairs. How has that online through offline performed? Thanks.
Yes, online has performed better than stores over the last seven weeks in all brands, Focus on Furniture, Adairs, Focus on Furniture and Adairs. Obviously, Mocka doesn't have the, the offline. Largely that's on the back of people taking advantage of the promotion. What we see is the online particularly if you're running anything with a, with an end date or creating a little bit of urgency in there, the results have tended to pick up towards the back end of those, those offers. We've always seen the online customer as looking for a bit more value.
You know, I think most people, you know, would, would appreciate that often people out there shopping online are bouncing around from one site to the next, to the next, and looking potentially for the best offer, and how can they access that good offer? If you're running some of those offers, which, you know, we have done across all the brands over the last seven weeks, just to keep the customer e- engaged and, and interested in it, we've seen the, the opening up of those offers and the close down of those offers both deliver pretty good, online sales over that period of time. We're not talking, you know, online's up 20 and stores are off more.
They're, they're marginally better, in, in terms of, and, you know, maybe slightly up, in a like for like sense over the, first seven weeks versus, the store network that's, that's obviously being impacted more by that, that decline in, in foot traffic.
Perfect. Thanks for that, Mark and Ash.
The next question comes from Peter Cooper, from King Invest. Please go ahead.
Good morning, Mark and Ash. Just a couple of questions on the National Distribution Centre. Firstly, when you step in and take over the operations next month, are you taking over the entire workforce, including the management team? Are you expecting any sort of attrition in that group? What are your top two key priorities for the next 12 months for the NDC reset?
Answer to your first question, Peter, we're not taking over all the workforce. However, we have been able to offer roles to a number of people that are currently familiar with the site, who have accepted those roles. We expect to have an experienced workforce there on day one, plus the added experience of our own team and a number of other people from outside of the existing operation that will assist us in running that shed moving forward.
In terms of the things that we're looking for to see as the priorities over the next 12 months, the first one is going to be around obviously settling the operation down and ensuring that we deliver on a better customer experience, both in terms of faster online fulfillment of the dispatch of orders, as well as making sure that we maintain stock levels in our stores to an acceptable level, so that we reduce the impact of stock outs in stores and the sales that we lose as a result of that. Then as we move into the next calendar year, we'll be looking to really pursue operational efficiencies within the shed.
We don't think costs are gonna go up at all in the interim period. Once we get our warehouse management system in, that really relieves us of all the legacy DHL processes and allows us to actually operate the shed in line with our product requirements, our customer requirements, and our business requirements. We'll start to see those benefits in Q4 of financial year 2024 with the WMS scheduled to go in prior to that.
Okay, great. Thank you very much, Ash.
Thanks.
Your next question comes from Aryan Norozi from Barrenjoey. Please go ahead.
Hi, guys. Thank you for taking the follow-up. Just a quick one around the gross margins. If we look at just brand new gross margins before freight or warehousing, just product margin, how do you think about FY 2024 in the context of all these moving parts? Like, you've obviously got stronger effects, a weaker Aussie dollar, but then you've got better freight rates, negotiations from sort of offshore manufacturers are favorable. Is a flat FY 2024 on FY 2023 outcome a sort of a reasonable base case?
I think so. I think, the currency, we've hedged a fair chunk of, of our FY 2024 commitments at sort of circa AUD 0.70. I think we've got 2/3 of it covered. Obviously with the rate where it is at the moment, if it stays there, we're exposed to that at the back end of the year. Freight and the improved or the materially reduced costs of inbound freight, largely offsets any currency costs that we incur. Really, I think it comes down to product. There's some benefits coming from offshore in terms of, of sourcing and production. Cost pressures are not as significant as they once were. You know, that's, that's the important part, and then just quality of product and how we trade the business, is always the biggest variable.
I think we've established different tools within our toolkit to manage margin through difficult trading periods. We'll continue to use those so that we can maintain, if not improve, our trading margins over the course of the year.
Then your online freight so online freight as a percentage of online sales, that's stepped up a lot in the second half of 2023. Obviously, carriers are putting up their rates as well. Like, for example, for Adairs, it's gone from 15%-17% of online sales in the first half to second half. Like, is the second half of 2023, like, the right number we should be thinking about structurally for your business, or will it go back to sort of being that to the 14%-15% of online sales?
I don't think it goes back to 14%. I think what we've seen over the last few months has been that Australia Post costs particularly have increased significantly, and they're still cheaper than an alternative, but there's, you know, they're filling that gap with the ways, the way in which they're raising their prices. The other part that isn't as visible in this, but is contributing, is the growth of our furniture category within the Adairs business. So Adairs has a fashion furniture offer, which has been one of our faster-growing categories, and that includes a large proportion of big and bulky furniture items that need to be delivered through specialized delivery networks and not Aussie Post. And the cost of delivering a sofa or a, an occasional chair is significantly different to delivering a satchel of bed linen.
That's also flowing through within that. I think, as we look ahead, getting control of the NDC gives us the opportunity to look at different solutions for packaging for our online orders. The less air that we ship, the cheaper the overall cost of shipment to customers will be. By having direct control of the shed and the operations out there, there are things we'll be able to do quite quickly in order to try and offset any further increases in whether it be Aussie Post costs or other factors that are beyond our control.
Great. Thank you.
There are no further questions at this time. I will now hand back to Mr. Ronan for closing remarks.
Thank you. Whilst the current environment is more difficult, the group is well placed to navigate these times. With strong underlying businesses, a loyal customer base, and proven management teams, all brands are well-positioned to maximize the short-term sales opportunities, whilst continuing to build out those medium-term strategic priorities. I'd like to thank you all again for joining us today. Thanks.