Welcome to the Baby Bunting Group Limited full year results presentation. Your presenters today will be Baby Bunting CEO, Matt Spencer, and Darin Hoekman, Baby Bunting CFO. There will be an opportunity to ask questions at the end of the presentation. To queue to ask a question, please press star one on your telephone keypad. To withdraw your question, press the star one again. The operator will announce your name and company and then open your line. For operator assistance at any time, please press star zero, and finally, I would like to advise all participants that this conference is being recorded. Thank you. I'll now hand you over to Matt Spencer.
Thank you, Paul, and good morning, everyone. Thank you for joining us and welcome to our investor presentation and review of the FY 22 financial year. Joining me today is Darin Hoekman, our Chief Financial Officer. Welcome, Darin.
Good morning, everyone. Hi, Matt.
Before we commence, I'd like to acknowledge and pay our respects to the traditional owners of the lands upon which we meet today, and I'd like to pay our respects to all First Nations people, past, present, and emerging. I've been presenting the financial performance of Baby Bunting for several years now, and I'm pleased to report another year of solid growth and positive financial performance. I'd like to thank all of my colleagues at Baby Bunting who make these results possible and acknowledge their outstanding efforts in what I describe as another unusual year. Turning to slide four, the FY22 pro forma financial highlights. I'm very proud of our financial performance given the backdrop of macroeconomic issues that prevailed during the financial period. We continue to focus on growing market share and executing on our growth agenda and managing those aspects of the business within our control.
We surpassed the half a billion dollar mark in sales and continued to grow gross profit percent at a time where supply chain costs and inflation were big inputs during the year. I'm pleased to report that the EBITDA margin as a percentage of sales under the pre-AASB 16 lease accounting standards measured reached 10%, a significant milestone and a target we set ourselves a few years ago. Pro forma NPAT at AUD 29.6 million, grew 13.6% for the year. The pro forma NPAT result does include some New Zealand start-up costs, and looking at the Australian business alone, the EBITDA margin was in fact 10.4% for the year. The balance sheet ended the year in a very healthy position, and of particular note is our strong inventory position at the end of the period.
A final dividend of nine cents per share has been determined, a full-year rise on the prior corresponding period of 10.6%. Turning to slide five, our operating highlights. Keeping our team mentally and physically safe and our customers safe is an absolute priority as we support new and expected parents. The improvement in our safety performance achieved during the year is a real highlight. We opened four new stores, relocated two stores, and refurbished a further two stores in the store network. We had planned to open four stores in the second half. However, some of these stores have experienced handover delays from landlords due to challenges around building material supply and trade shortages. The impact of these delays on sales is in the order of around AUD 10 million.
We've now had Hornsby open last week, leaving the other three stores to open in the first half of FY23. During the year, we deployed a new headless digital architecture, including a new website for both Australia and New Zealand to complement our store network. I'm pleased to report that the website launch has gone really smoothly, and we've seen some really strong upwards in conversion and sales. We continued to leverage our omni-channel capability through the year, and we widened our store online fulfillment capability to 23 stores, such that 48% of online deliveries were processed through our store network, and this number keeps on growing. This complements our long-term goal of fulfilling 90% of our metro online orders same day. With the implementation of our new digital technology platform, we were able to launch our new loyalty program, Baby Bunting Family, across all channels.
This new program is performing very well as we seek to increase the lifetime value and frequency of visits by our loyal customers. We have once again improved our gross margin percentage, this year by a further 151 basis points. That is a significant highlight. There are a number of contributing factors to this growth, including private label and exclusive products, and the realization of benefits as a result of our transformational investment in our national DC and supporting merchandise systems that are now underpinning financial performance. For a long time now, we have reported our differentiated product assortment under the banner of private label and exclusive products, otherwise referred to as PLEX. We have a long-term goal of 50% of sales being exclusive to Baby Bunting.
We ended this year with 45.3% of sales as exclusive to Baby Bunting, another positive performance. These sales can be broken down as follows. 37.1% of sales are exclusive national branded product, and this is up 16% year-on-year. The other 8.2% of sales are through our own private label brands, being 4baby, Jengo, and Bilbi. This was a growth of 31.5% year-on-year. As evidenced by this breakdown, national branded exclusive product remains an important avenue for suppliers to grow their market share in Australia. There is also plenty of upside opportunity to grow our own private label ranges, given that this product only makes up around 8% of total sales. As you may recall, our national distribution center opened in Q4 FY 21.
In its first full year of operations, it is already driving efficiencies and delivering gross margin benefits as we increase our import program and transition direct-to-store suppliers to a centralized retention model through our distribution center. This transformational investment, coupled with our relatively new automated replenishment and merchant bar financial planning systems, has underpinned improved stock availability and gross margin improvement. Finally, this morning, we opened our doors to the first of 10-plus stores in New Zealand. This is a significant achievement. During the year, we had over AUD 2 million of sales to New Zealand fulfilled from Australia, and we have commissioned a new distribution center in Auckland, recruited a New Zealand-based management team, and made the necessary system changes to support our international expansion. A very exciting time for us here at Baby Bunting.
In summary, a very busy year with many highlights and a true reflection of a great team effort. I'm gonna take a couple of minutes to share with you some specific financial highlights in a little more detail. Please turn to slide seven. At AUD 507.3 million of sales, we have delivered total sales growth of 8.3% and comparable sales for the year of 5%. This is a very solid performance given the challenges presented as a result of the pandemic. As an omni-channel retailer, through the year, we saw that the omni-channel shopper spent on average two times more than an in-store-only shopper and on average five times more than an online-only shopper. This really supports our omni-channel expansion and investment strategy to grow market share.
The variance to consensus sales number largely reflects the delay in store openings. This was around AUD 10 million of sales and around AUD 3 million was delayed sales as a result of supply challenges, in particular with one of the top-selling prams. These sales are not lost as we were able to secure the orders in the form of lay buys, which will be fulfilled this financial year. Go to slide eight. While it's been longer than expected birthing process, we did successfully launch our new online store and it's supporting headless architecture stack in January 2022. Our conversion rate is up overall 46 basis points versus the prior year. This investment positions us at the front of our industry to further progress great growth opportunities in our immediate market, which I'll expand upon later.
It has also significantly improved our online security posture and is central to the progression of our omni-channel strategy. Having great online experience alongside a great in-store experience is essential if we want to maximize our market share opportunity. Skipping ahead to slide 10. We continue to invest in the business as we progress our store rollout and drive market share growth. We're at around 50% of our store rollout and supporting investment is critical to support our growth. Pleasingly, we continue to see leverage of our store expenses through operational improvements and in-store efficiency gains. Of important note is that our store leases are not linked to CPI, a positive in times of high inflation. The overhead expense increase of 90 basis points is largely due to the introduction of our new DC and full-year associated costs, which adds around 40 basis points cost.
The gross margin benefits the new DC is enabling mean it is, as we expected, a net EBITDA accretive investment. Our one-off initial investment to get the New Zealand operation established added around AUD 1.5 million for the year or an additional 30 basis points of costs, and the changes in the accounting treatment for cloud computing reduces depreciation and increases OpEx. We are well progressed in the reduction of printed paper catalogs and moving towards digital marketing and leveraging our new loyalty program to drive sales and promotional awareness. Speaking of our loyalty program, can we please move to slide 11? We launched our new loyalty program, Baby Bunting Family, during the year. This is an omni-channel program that offers members a range of rewards and benefits.
The program has been very successful with about 1.4 million loyalty members, of which around 705,000 members have been active through the past year. We believe this is to be the largest specialty loyalty program for new and expected parents in the country. Loyalty customers spend substantially more than non-loyalty members. We're in the early stages of the journey to really unlock the commercial benefit through personalization and leveraging the customer insights. On slide 12. New Zealand is a NZD 450 million market opportunity. Opening our first store in New Zealand has taken longer than we anticipated, largely the result of COVID restrictions and our inability to be in market. It opened today, and we're excited. We anticipated opening our second store in Christchurch in Q3 FY23.
We've made significant investments in customer research, brand awareness campaigns, and the recruitment of local talent to bring the tailored New Zealand offer for New Zealanders by New Zealanders. Our strategy is to sell the widest range of products backed by great service and low prices every day. Super exciting for us as we open the doors of our first store today. I'll now hand over to Darin, our CFO, who leads our transformation program and will provide some further commentary on financial performance. Thank you, Darin.
Thanks, Matt. I am on slide 13, which describes our transformation program, which was defined back in FY18. It comprised of a number of large investments to overhaul or modernize the business across systems, branding, and supply chain. To date, the program is well progressed and already delivering value, notwithstanding it has taken longer than anticipated, largely as a result of COVID and the delays we experienced in launching the new website, which pushed some projects back two years. In FY22, launching loyalty and our new online tech stack were big milestones for the business, and we also progressed works on advanced order management, payroll and time and attendance systems, which were all complete in FY23. We had also planned to complete the implementation of a new ERP and point of sale systems in FY23.
We have now elected to defer further progress on these two projects to instead prioritize a significant growth opportunity, which Matt will expand on a little later. The decision to change the timing of these very large projects will change the phasing of spend we had previously communicated, but not the expected value or cost of the overall program. Slide 15. Matt has already given some insights into margin and costs. I would like to add a little more in relation to the impact of COVID. A reminder that all of our stores across the country remained open the entire time through the pandemic. We did not receive any JobKeeper payments, and there was little rent relief received.
Predicting the flow of sales during the pandemic has been difficult, and this last year was no exception as we experienced lockdowns, cycle lockdowns, lived through Omicron, and saw fluctuations in customer buying patterns and channel switching as a result. During the year, COVID costs were in the order of AUD 1.2 million, which was similar to last year. As we highlighted earlier, direct revenue impacts of new store opening delays were AUD 10 million, which will now be picked up in FY23 as these stores roll out. As we all know, the pandemic has impacted supply chains across the globe, and we have not been immune from this. Turning to slide 16. We focus on great value every day, every visit. Where possible, we've absorbed cost inflation through finding efficiencies in the supply chain. However, inevitably, some prices have increased.
The impacts to us have been in the area of international freight rates, which have substantially increased this calendar year, and product availability from local suppliers who import. In the majority of cases, we have alternative substitute products for the customer. In addition, by utilizing our lay-by capability, we've been able to secure customer orders if product shipments have been delayed. Logistically, we saw disruption to Western Australia and Queensland in the second half of the year as a consequence of flooding, plus we also felt the effects of higher fuel prices. I would like to turn our attention to the financial schedules starting with slide 18. We are presenting the income statement on a pro forma basis to clearly demonstrate the underlying trading performance of the business.
There is a reconciliation explaining the differences between the pro forma profit and the statutory profit in the appendix, and also in the full year accounts. In summary, the current prior year differences relate to the exclusion of employee equity expenses and significant business transformation program costs. Key drivers in our profit performance this year has been the 151 basis points of gross margin improvement, delivered without any change to our promotional program, and another year of strong comparable store sales growth of 5%. These two elements in combination delivered EBITDA margin growth of 90 basis points for the Australian business, resulting in that 10.4% EBITDA margin. At the NPAT line, the Australian business was up 20% year-on-year, which converted into 13.6% profit growth at the group level.
The delta between these two numbers is the start-up costs for New Zealand, which were around AUD 1.5 million, plus we incurred three months of warehousing and staffing costs, as we initiated operations in New Zealand. I might just take a second to refocus in on sales. While comp sales growth of 5% overall for the year was very pleasing, this did feature a higher first half comp of 6.8% and lower second half comps of 3.3%. There is a few elements to this half-on-half difference. Generally, the broader economic overlays present in the second half were Omicron, plus growing commentary in the media and throughout the election of increasing cost of living pressures. We also had significant flooding across WA and Queensland, which impacted stock flows in the second half.
Through the second half, we did see increased market pressures by smaller players as they remained on promotion for longer periods and discounted the number one selling car seat in the market. As our commitment to value and to ensure we remained in front of the competition, we met these activities head on, as evidenced by us also moving a number of our Bugaboo range to everyday low pricing and to maintaining our price leadership on car seats. More broadly, in terms of our own data points, we didn't see any evidence of the consumer trading down as ASP was up in both the first and second halves. In terms of the specifics that drove a lower second half comp, the key factors were a stock out of the number one selling brand, which Matt mentioned earlier.
This impacted sales by 3% or a little over 1% for the half. We know this as we secured these lay-by orders, but delivery delays from the supplier meant these orders remained open at year-end. Secondly, as the first half was featured by national lockdowns due to the exploding COVID case numbers. People staying at home loaded up on playwear items. As thankfully, lockdowns didn't feature in the second half. As such, a half-on-half impact of close to 1% on sales. This contributed to comp growth. Its contribution to comp growth was lower. Can you still hear us? I hear we're having some tech difficulty at head office.
Yes, we can hear you coming through.
Oh, you can hear us coming through? Thank you. I'll continue.
Yes.
My last point on comp sales differential is while ASP was up in both halves, its contribution to comp growth was lower by 1% in the second half, and this was due to a couple of things. We had significant growth in our mid-price point private label, Jengo pram, noting that we launched a new range later in 2021. This has exceeded all expectations in terms of popularity, and while impacting comps, it has delivered significant second-half margin growth for us that helped to offset the margin impacts of things such as higher container freight rates and the lower FX rate we had to manage through the second half. Finally, also having some impact, but to a lesser degree, with our response to that competitive pricing that I mentioned earlier.
To summarize, overall, both transactions and units were up in both halves, and it was pleasing to see ASP growth in both halves. The impacts on total sales growth were delayed store openings, lower second-half sales of playwear, and some transition to lower price point, but much higher margin pram products. Overall, the continuation of some very positive trends for the business. To close out the discussion on the P&L, while we have been transacting in New Zealand for two years, to date, this has essentially been a brand-building exercise as we reinvested margins into customer research and digital marketing. We are looking forward to what can be achieved through the new stores and the local website now that we are live in both. Onto the balance sheet on slide 19.
We continue to run our balance sheet with plenty of headroom, with the key call-outs being higher inventory and increases in the lease-related asset and liability balances. A few things to call out on inventory, which has increased by circa AUD 17 million year-on-year. The key part of the increase relates to a two-week increase in safety stock to mitigate variations in the timing of international delivery receipts. Secondly, four new stores opened during the year that added about AUD 3.5 million in store stock. Lastly, we commenced infilling inventory to our new warehouse facility in New Zealand. This will give us capacity to fulfill 5,000 SKUs nationally, both stores and online customers in New Zealand. At year-end, stock on hand in this DC was around AUD half a million dollars, which will build closer to AUD 3 million through FY23.
Regarding leases, the changed balances primarily relate to a significant number of renewals executed during the year, four new leases in Australia, our Auckland store now open, and our New Zealand warehouse. We continue to retain plenty of headroom in our AUD 70 million borrowing facility, which we renewed for a further three years with NAB back in March. Moving to the cash flow statement, slide 20. Pleased with the improvement in our operating and free cash flow conversion ratios year-on-year. Regarding free cash flow, our conversion ratio is impacted relative to more mature businesses that aren't investing as much as we continue on both our transformation and organic growth through the new store rollout programs.
Next year's capital investments will again be significant in FY23, as we plan to roll out at least eight stores across Australia and New Zealand, continue to invest in our digital architecture and progress the transformation program, and hopefully get a couple of store refurbs in also. I'll now hand back to Matt, who will discuss some exciting news around future growth opportunities.
Thank you, Darin. Some really pleasing numbers that feeds well into what I want to talk about now. That is essentially why Baby Bunting is an attractive investment with significant opportunities into the future. I'm on slide 22. I just want to highlight that this slide talks to the unique position Baby Bunting is in a less discretionary retail sector driven by the approximately 300,000 births per year. On slide 23, we're the only national specialty baby retailer with a clear omni-channel advantage over our competitors. Our positioning and advantage provides us with future growth opportunities. Some of these opportunities are summarized on slide 24. We conduct a store network review by third-party demographers every two years and have done so since 2008.
The latest iteration of our network plan, which is based on our market share and financial performance, has seen our potential network plan increase to 110+ potential stores in Australia and 10+ stores in New Zealand. In addition to this, our current addressable market sits at AUD 2.5 billion. We believe that through the opportunity of range and product expansion, we can redefine this as being more like AUD 3.5 billion now. We have the leading specialty nursery website, and we see the opportunity to implement Australia's largest and most comprehensive baby or nursery marketplace to support new and expectant parents with all their needs in one location. Clearly, the one-stop baby shop. We see further opportunity to grow within our new total addressable market with a focus on everyday value.
Our best buys or EDLP range in FY22 was 37.7% of sales, and we see room to expand this further backed by our 5% price beat promise. We see opportunities to leverage our loyalty program further to deliver growth. Darin, can you please provide a bit more detail behind the network growth opportunity and the economics of new and mature stores?
Thanks, Matt. I'm on slide 26, which presents our updated store economic slide. When we first presented this slide back in 2016, our average mature store return on invested capital metric was 70%. This average is now +100%, delivered through continued expansion of market share with higher growth margins and strong management of our store cost base. Our mature store cohort is now up to 42 stores, 39 metro and three regional. For our mature metro stores, 27 of the 39 are delivering +100% ROIC, with 9 between 70%-100% and two below 50%. Regarding our regional stores, of which there are 6 that have completed more than two full years of trade, these stores are delivering capital returns on average of 80%.
Virtually all our stores are performing incredibly well, and on a further positive, our shopping center stores, which were hit hard for traffic, are also improving well. Our regional stores, without exception, have exceeded our expectations on sales and returns, such that we are now taking larger tenancies, which will also serve to perform local area online fulfillment. Matt, back to you.
Thank you, Darin. If we can go to slide 27. When we presented the half year results in February, I raised the concept of increasing the size of our addressable market, which today stood at around AUD 2.5 billion. The pandemic has impacted retail in many ways, but positively, it has accelerated the growth and maturity of the transition to online shopping and the omni-channel experience. In Australia, we are now at levels and experience consistent with other markets. The baby category is no different. Many categories such as car seats and prams, cots and furniture lend themselves to a tactile in-store and omni-channel offer, and categories such as toys, apparel, soft goods and feeding have seen a growth online. Traditionally, our online range has been governed by our store footprint or format and the associated shelf space.
We have historically identified the total overall baby goods market at around AUD 5.2 billion. Our analysis, should I say, has highlighted that within the overall market, the online channel has expanded significantly. With our significant investment in our digital platforms and our national distribution center, we are now in a position to be able to expand our online offer and therefore contemplate a significantly larger addressable market. For example, online baby wear as a channel has grown from AUD 130 million to AUD 370 million in recent years. This traditionally has not been a product category we have supported in our online offer.
Alongside our expansion of our online offer, the introduction of a marketplace provides us with a platform to broaden our offer of first-party products by dropship and present the opportunity for third-party suppliers to leverage our online traffic to sell differentiated product and hence broaden our range and ultimately the total addressable market for Baby Bunting. On slide 28, we break down the addressable market opportunity a little further. In particular, the categories of baby clothes and more apparel, where we see range expansion to 0-4 years as an opportunity. Likewise, toys where we currently have a limited offer, we see an opportunity to increase our addressable market to up to five years old, leveraging online and marketplace capabilities. There are other categories where we're looking to increase our range within the already substantial addressable market. Slide 29. I've mentioned marketplace a few times now.
Today, we're excited to announce that we have plans to introduce Australia's most comprehensive specialty marketplace for baby products. We're planning to build on the proposition of the one-stop-shop, one-stop baby shop, leveraging our 32 million-plus website visitations to bring together a marketplace that will showcase more products, more brands, more suppliers, and ultimately give parents and parents-to-be more choice through their parenting journey. The work has commenced as we build out the offer and establish the technical platform. We have selected a marketplace technical solution provider who is working with us to establish this capability. We see the marketplace as an ideal way to grow existing categories and grow our market share of our expanded total expandable addressable market or TAM. We'll do this via first-party suppliers, both existing and new suppliers, and dropship capability. We'll also be introducing third-party suppliers to sell a range of products.
We're expecting to launch the Baby Bunting Marketplace in the second half of FY23, and we look forward to updating you on progress as the year progresses. Moving to slide 29, a brief trading update. As of the tenth of August, comparable store sales growth is strong at 15.3% year to date. Overall sales growth has been 19.3%. We expect comparable store sales growth to moderate as we cycle periods affected by lockdowns throughout Australia. We are committed to great value every day, every visit, and we'll be expanding our Best Buy range and our loyalty program as part of our commitment to delivering the greatest value to new and expectant parents.
We anticipate opening new stores, eight new stores in FY23. Six will be in Australia, and this includes our recently opened store at Hornsby, New South Wales, and two will be in New Zealand, including our Albany store, which opened today. Given the continuing economic uncertainty, FY23 guidance cannot be given at this point in time. Thank you so much for your attendance today. We will now open the floor to questions. Please remember to state your name and where you're calling from. Thank you so much.
Thank you, gentlemen. At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Alexander Mees from Morgans. Your line is open.
Good morning, Matt and Darin. Thanks so much for taking my questions. Just starting with New Zealand. I'm wondering, obviously you have a new DC that you flagged and a new management team. You've got one store opening already and one later in the year. Should we expect New Zealand to contribute positively to the bottom line in FY23?
Hi, Alex. I'll take that question. At this stage, I'd say no. You know, we're investing around that AUD 1.3-AUD 1.5 million in terms of fixed costs into that business in the next financial year, adding to that to our cost profile. It really will be dependent on what the new stores and online achieve. At this stage, I only anticipate that you know a loss between you know AUD 1-AUD 2 million for the financial year. As we scale up stores and as we grow our online presence, that should be you know we'd expect to move that you know into positive over the future years beyond FY 2023.
That's great. Thank you. Just secondly, if I may, with regard to the gross margin, you have seen some improvements in the ASP, and you continue to see private label moving up, and exclusives moving up. I just wonder, can you hold gross margin in the current financial year, or is that too much to ask?
We've certainly got a number of programs in place that we're gonna try and grow it, but it really will depend on the kind of the potential cost changes that may come through. Certainly, you know, we're focused on trying to maintain or grow that to a degree in the current financial year.
That's brilliant. One more very quick one. Just with regards to the marketplace, which is obviously exciting news, just wondering what sort of investment you might have to put in terms of your own inventory to facilitate the growth of that marketplace in 2023 please.
Well, marketplace specifically won't be an investment in inventory. The sales, 1P sales will be facilitated by dropship, so we don't touch that inventory, we don't hold that inventory. Then the 3P or the commission-based revenue model, that's which goes from supplier to customer, that's similarly, we don't touch that inventory. In terms of, you know, what it means for the metrics for FY23, there'll be start-up costs of around AUD 1 million, and then in the current financial year, and then ongoing, you know, we've got a people investment of around AUD 1 million again per annum, and then there'll be a pay-per-click charge as we utilize, as orders flow through the new platform.
That's kind of what it's gonna look like in the current financial year. I wouldn't anticipate, you know, anything significant or anything material with regards to sales performance, but we're expecting to get that up live and going in the second half.
I think it's also fair to add that we've added some further buying capability into our organization, and some of that cost are already starting to run through, back at the end of the half.
Yeah. I sort of stand back and look at this and go, it's a low cost investment for a potentially great ROI and with, you know, low risk around it.
Great. Thanks. Good results.
Thank you.
Thank you.
Thanks, Alex.
Your next question comes from the line of Sam Teeger from Citi. Your line is open.
Hi, Matt. Hi, Darin.
Good morning, Sam.
Good morning, Sam.
Good day. First question. Can you help us understand how we should be thinking about CODB growth in FY23? Perhaps if you can maybe step through some of the key line items such as wages, rent, marketing, and anything else you think it's worthwhile calling out.
Yeah, sure, Sam. Our award for our retail stores lines up with the Fair Work wage case, which handed down a 4.6%-4.7% wage increase. We will absorb that into our retail store staff and also our distribution center staff. In the absence of any sales growth, then the impact on that in terms of our cost base is around 70 basis points. But obviously, you know, we're a growing business with expectations around further market share growth. You know, we think that that's a quantum that we can hopefully absorb.
In terms of head office costs, you know, which aren't attached to that wage case, certainly there are some sort of pressures with regards to wages in the market, but you know, that'll add, you know, CPI would, you know, add something in the order of AUD 2 million to our cost base in the current financial year, I would've imagined. You then overlay that with regards to, in terms of the stand-up cost in New Zealand, that will, you know, we've mostly invested all of that. There might be another, you know, AUD 300,000-AUD 500,000 to close that out.
We're adding three new category buyers, which is really exciting, and we're gonna sort of support that, targeting the expansion of the TAM from AUD 2.5 billion up to AUD 3.5 billion. We've got those fixed costs that we're adding into New Zealand that I talked about. As we add stores in, that will obviously increase our retail cost and then there'll also be some scaling costs in head office to support that expanding store network and the operations in New Zealand.
Right. Just in terms of just your rent, I know you guys aren't linked to CPI, so what should we be expecting for your existing stores?
Our existing stores are on average. Actually, you know what? That is a commercial number and I'm not gonna call that out, but it doesn't change the profile of the P&L at all. The depreciation and the interest costs go up as we add new stores, and then as you pay the lease rent, you can see them sort of, you know, you can see those balances on the balance sheet sort of slow down. It doesn't change the profile. The good thing is, as you point out, and the thing to highlight is that we have got fixed, low single percent numbers and they're not CPI attached.
Got it. On the subject of stores, you're saying at least six for 23. What's the first half, second half split and just the mix between metro, regional, and shopping center?
It's six in Australia, two in New Zealand. New Zealand has opened one now, and then with a second one, we're getting handover. It's gonna be between December to January where we take handover of that store. In the first half we're expecting to, well, we've opened Hornsby already. We're opening in the outer western suburbs of Melbourne, a store called Burnside. That'll be opening in late August to mid-September.
Around there.
We take on Hectorville in South Australia.
Still around there.
in the second half. We've got Loganholme, also in the second half. Yeah. It's basically a half-on-half split. I might add just on that store rollout as well, they are all committed leases undergoing builds. We're in negotiation on a number of other opportunities that could potentially land in the financial year. Just given what we've experienced in FY22, we're sort of calling out those stores that are opening more near-term and we've got confidence around. As we go through the year, we'll give another update at the AGM and then another update in February as to the store rollout, as it progresses through the course of the year.
Sure. Just final question on the marketplace strategy. Will the customer be able to differentiate as to what's on the marketplace versus what's kind of on your existing website? You know, to what extent will the company be screening new brands that wish to sell on the marketplace for things like product quality, safety, ability to fulfill, just so any customers on the marketplace have a good experience?
Yeah, absolutely. Good question, Sam. The marketplace actually is one integrated feed, which is Baby Bunting or [Pombado] either effectively. It is very clear, and we're still going through the technical build of all this at the moment. It'll be clear that where the product is being sourced from. That will be, you know, if it's sourced by somebody who's a third party, that will be very clear to the consumer. We certainly wanna put some rules around it from a customer experience point of view. Obviously we'll be managing and monitoring fulfillment, the fulfillment policies, et cetera. We're doing a lot of work around fulfillment in our organization today with also with advanced order management occurring in the first half of this year.
Certainly we'll be looking at making sure that customer experience is in line with where we're at. You know, there's some finer detail around how do you manage you know, calls, returns, et cetera, and we're working through all those individual pieces. We've certainly started building a team around this to give us the best possible opportunity to understand where the pressure points are in this space. You know, as we are from a product compliance and safety perspective, you know, essentially the seller is the person who's accountable for making sure that all the compliance things are right, but we've certainly got a very strong compliance program in our business, and we won't be. We're making sure that, you know, what we open on our marketplace is absolutely in line with our expectations.
Right. Sorry, just on the subject of marketplace, will you try and make the marketplace from a supplier profitability perspective more appealing than other marketplaces such as eBay and Amazon to try and give it a real kickstart?
I think from our perspective, we are already the largest specialty baby goods retailer with the highest amount of traffic there. We'd expect that there'll be many suppliers or people who would like to get on, take advantage of the eyes that we already have. We're around 32 million unique visitations to our website through the year, you know, and it's certainly a destination for specialty baby goods. Clearly, we believe that there'll be a significant uptake of suppliers wanting to participate. We're still working through what that commission and revenue-based model is. I mean, that's all commercial and in confidence at the moment, so we're working through all that.
Look, we certainly see that there's a benefit for, first and foremost, the customer to go to one location in Australia for all their baby goods needs. For suppliers, it's great to have their products showcased, especially when there's niche or sustainable products et cetera, which might not have broader audiences at the moment. Got it. Thank you. Thanks, Sam.
Your next question comes from the line of Rachael Harwood from Macquarie. Your line is open.
Yeah, good morning, Matt and Darin thanks for taking my questions. Just first one is on the online. I know you mentioned the shift to online is growing as a proportion of sales. Could you maybe just comment on the mix shift in terms of the impact on margins, and then how you're thinking about this going forward, and maybe how you're seeing the competition in the online market?
I think the only real differential in terms of online margin to in-store margin is the cost of delivery. That is offset by lower fulfillment costs being related to fulfill that. On a store level, relative contribution perspective, it is consistent with our mature stores, so 20% above. In terms of the online, the categories that we're sort of targeting in terms of the expanded TAM, they are higher marginal categories. Then we're certainly sort of building out our online range. We've got 4,000 pick slots open in our DC that we're planning to put product in there.
If you then look at what is the impact going to be on marketplace in terms of overall margin, I think it's too early to say because we don't understand what the balance between, you know, 1P and 3P is going to be. 3P is essentially commission that is 100% margin, and then the 1P, which is drop ship product, the cost of goods flowing through our PNL and then you've got the, you know, the margin there. I think what the opportunity though does present is, you know, we can get a lot of great brands onto our website that we currently don't range. There's no, you know, there's no risk, you know, there's no inventory risk associated with that.
You've got a low cost to serve. Has that helped to answer the question for you, Rachael?
Yeah. That's great. Thanks for that. Just last question from me. Apologies if I missed it, but just looking at inflationary costs, I mean, you mentioned some inflationary costs like wage increases. To what extent are you able to manage this with price increases or promotion? And then could you maybe just comment on freight costs and FX rates heading into FY23?
There's three elements there which I think, so if we miss one, we'll call it out. We did talk about our stores and our DC staff will they get the benefit of the Fair Work wage rate rise, which was between 4.5%-4.7%. That flows through. Assuming if on a zero sales base, and we're certainly not expecting that, to give you a sense of scale, that would add around 70 basis points of cost. But as you. It's really around will it leverage or de-leverage? It depends on what our comp sales are really relative to that number.
You know, we're anticipating probably around a 4% CPI for our head office staff also. Now just give me the other two elements of the question.
Yeah. Are you able to manage this with price increases?
Yeah, look, I think the important point here is, we've got a price beat guarantee out there or price beat promise. Ultimately, we wanna make sure that we deliver great value to our customers every day, every visit. You know, our price beat is sub 1% in terms of overall sales at the moment. So what we try to do is we try to absorb as many price increases as possible through leveraging our scale and leveraging our supply chain capability and bringing things through into the distribution center, such as, you know, taking direct store supplies and bringing it back through the distribution center, and then, you know, being able to buy better.
Instead of putting the price rise up, we were sort of trying to, you know, make sure we keep great value each day, and each visit. Essentially, we're trying to absorb as much as we can. There are inevitably some price rises that have occurred, but we've always got to sit down and be conscious that we want to be seen as the place to go for great value every day. You know, where possible, we'll keep on putting, you know, trying to maintain that commitment to our customer of value. We've also got our loyalty program that sits over on top of this overarching, where you get a cumulative spend of AUD 200, you're gonna get a AUD 10 award. That also plays into our pricing as well.
That's great. Thanks very much.
Thank you.
The next question comes from the line of James Casey from Ord Minnett. Your line is open.
Good morning, gents. The inventory position and the AUD 12 million in safety stock, is that a permanent shift or is that just temporary? If it's temporary, what's sort of the timing on the unwind?
Well, I think that there's been no real change in terms of certainty with regards to international shipping lines, James. And that's what I point to on this one. Yeah. You know, I think that's
I also think, James, one of the things that we're also doing is we have got you know, over the period of time, we have got a reasonably immature supply chain. We are actively growing our import programs on FOB, and that means we're bringing in container loads, you know, buying further up the supply chain. You know, there is a relative natural increase of inventory in our DC at that point as well.
I mean, the very pleasing aspect of our store return on investment performances was that despite that increase in inventory, you know, we still managed to have or improve marginally our return on capital for the stores 'cause we actually add that into the calculation. The margin improvements that we've achieved and delivered have certainly offset or set that investment in safety stock for the time being.
I just want to clarify, Darin, I think you said the contribution from New Zealand in FY23 would be -AUD 1 million to -AUD 2 million. Is that correct?
Yeah. I can tell you that. I mean, we don't have a sample size to go on in terms of store sales growth, right?
Yeah.
What I can tell you is that our fixed, you know, overhead costs, we expect them to be around AUD 1.5 million for the full year, and I can forecast them with reasonable certainty. In terms of what the business might do overall, it will be really dependent on sales. You know, I still think we're gonna get reasonable growth margins over there, but it's really gonna be a sales game in terms of how those new stores perform and how much we can grow our online revenue.
Is your expectation they will be at similar productivity levels as the Australian stores in terms of sales per m² ?
I would say given that the level of our brand awareness in that market, that's a question mark. However, putting our offer in to New Zealand relative to our competitors, you know, I'm kind of really excited by that. It's gonna be a really interesting watch to see how this plays through. I know that, you know, talking with our general manager of operations this morning, you know, the staff, some of them have been in the industry for some years, were really excited to see so much range come together in one place.
Yeah. Just last one. Just given you did mention the cost of living pressures, I know it's early in FY23, but is there any evidence of trading down in certain categories at this point, or are consumers unchanged?
No, we haven't really seen anything. We saw, you know, ASP growth in the second half.
Yeah.
We saw ASP growth in the first half. It was to a different level, but that would be there was some underlying factors due to that. Yeah, it's nothing at this stage.
Okay. Thanks, guys.
Thank you very much.
As a reminder, if you would like to ask a question, press star then the number one on your telephone keypad. Your next question comes from the line of James Bales from Morgan Stanley. Your line is open.
Hi, guys. Just maybe firstly a clarifying question on New Zealand profitability. You guys called out costs in New Zealand of AUD 1.5 million in FY22. Is the loss that you're-
Yeah.
Calling out in FY23 incremental to that?
Okay. The start-up costs that we incurred were AUD 1.5 million in FY 22. We'll incur another AUD 300,000 of start-up costs to complete our launch of the website, the store, and DC. But they've largely been incurred now in the first, you know, month and a half. In terms of the overall cost profile, ongoing, it'll be you've got a DC in place, and you've got some head office costs, and you've got some buyers in place and merchandising teams, some operational support team in place. We expect those costs to be around AUD 1.5 million. In terms of what the result is for New Zealand, that will be dependent on how the stores perform and how online sales perform.
The fantastic thing about where we've landed in terms of our cost profile is that we've gone into New Zealand with 5,000 SKUs available online for the New Zealand customer, and I think that's probably the leading offer in the market. You know, we're really excited about the potential in terms of growth and what we might be able to do online. You know, we know we've got a really compelling offer for the stores that is very differentiated in terms of scale and range relative to the competition.
Okay, got it. Maybe just shifting into inventory. I think you guys have called out an extra AUD 2.5 million that'll be required for New Zealand from the sort of AUD 97 million that you ended the year with. What are the other moving pieces that we should think about in terms of where that's gonna take the balance? You know, you need to have inventory for eight new stores. Are there any other moving parts that we should be taking into account here?
Not really. We've moved around 10% of our costs from direct-to-store fulfillment into our DC. We haven't seen an overall material change. It's been a very minor change in the inventory level associated with that movement. That's really pleasing. We did gross margin gains, and we haven't really changed our inventory play stock profile, but we've got a better in-stock position as a result because, you know, we're sort of managing it through our own supply chain.
The real moving part will be. We're expecting at some point when, you know, the pressure on those international supply chains moderates, then we'd like to think that we can sort of, you know, take our safety stock levels back down to more normalized levels that we've had in previous years.
Got it. Finally, I just wanted to touch on comps for the first six weeks. You talked about some of the pressures you'd had in having the right inventory on hand. Has that strong comp number for the first six weeks been impacted by that pent-up demand and been inflated or is that timing not really a factor?
I think some of the inventory is coming in, so we've probably picked up some of those sales. Primarily, you know, the big factor is cycling the lockdowns of the prior year.
The sort of two-year stack of sort of +9% that you've called out is something that you think reflects the underlying trading performance of the first six weeks.
The first six weeks of the financial year is the smallest trading window for the whole year of the business. I don't think that reflects the underlying trading performance. I mean, we have moved a couple of our categories into every day low pricing. You know, that will sort of like, you know, that smooths out our trading profile. You know, the first six weeks, you know, four weeks, four of those six weeks are off catalog. You know, we get a bit of a sales benefit there. We haven't really quantified it, but I would have thought that, you know, what we're expecting is for us to move more back in line with our historical growth profile of comps, which is sort of mid-single digits%.
Got it. Thanks, guys. I appreciate the help.
Thanks, James.
Your next question comes from the line of Chad Mikhael from Barrenjoey. Your line is open.
Good morning. Can you hear me?
Speaking a little bit briefly, Chad.
Yeah. Great. Sorry about the background noise. I'm on the trading floor . Look, I wanna ask a more, you know, medium to long-term question rather than go through some of the near-term stuff which was covered off in the Q&A. The business, it's clearly a growth business, and there's three aspects of the business just want to touch on. Firstly, revenue margin and then the overall category itself. Just on revenue, you know, when you look at consensus numbers, typically we'll go back to a, you know, like for like scenario of, you know, 2.5%-3%, which probably mirrors, you know, GDP in the medium term. My question around revenue firstly is what percentage of market share do you think the business is now? Obviously this is a market share gain, you know, story and business.
Can you maybe give us perspective on how big you are in the current market, if you've got some of those metrics, and a little bit of a comment around market share, and I'll go through the others after that?
Yeah. A very interesting question. I would say if you contrasted our sales to FY22 against our historical TAM, you're talking about half a billion dollars over a 2.5 billion-dollar market. That's a 20% market share. Higher in some categories, lower in other categories. Contrasting that number to a 3.5, then we're more talking about something in the order of 15% market share. The TAM are the ones that we've got lowest market share penetration in today.
Sorry, you just cut off at that last sentence. Maybe just repeat that quick.
In terms of the change in TAM from 2.5 up to 3.5, we feel that, you know, the categories or the elements, the categories that we've added are the categories where we've got the lowest market share in today. You know, it represents a significant upside for us given where we're investing all of our capital. Yeah.
Great. Just second question on margins. I appreciate you've covered some of the margin questions already, but this business is seen as a margin expansion story. The market does have margin. You know, I'm looking at EBITDA margins growth of, you know, call it 100 basis points or so in the next couple of years. You beat on EBITDA margin expectations today. How do we think about the continued ability to grow margins? It's quite interesting because I think FY22 was a very hard year given freight costs, FX, and other factors. How should we think about the business growth in margins over the more medium term?
Yeah, I think immediately we're certainly facing, still facing into some, you know, really, you know, really sort of tough environment where we're sort of managing. You know, the opportunities for a margin expansion is, you know, if we can, you know, deliver some significant growth off this broad term, you know, we'll be able to deliver leverage because we've had a significant investment in our cost of doing business platforms, particularly our overhead platforms over the last three years. If you have a close look at the metrics, you know, that is, you know, relative to the last two years, that is sort of coming on and it's slowing in terms of its rate of growth.
The bigger story, you know, into the medium term will be what we can do from a leverage perspective versus a margin perspective. The one caveat I put on that is we will be putting a second DC in either in New South Wales or Queensland. That will take significant interstate freight cost out of the business. That will deliver growth margin expansion, but it will add cost like the distribution center did in Melbourne. It will add cost into our overhead profile, but it will be EBITDA accretive. If it's not EBITDA accretive at the business case sanction level, obviously we won't go ahead with it. You know, we're expecting that is gonna deliver some margin growth and some EBITDA uplift over the course of time.
We're still only in terms of direct import penetration at 15%, and we think that over time we'll be able to continue to lift that, and that'll deliver margin over time also. I think also that our private label product that 8% of sales at the moment is something we've got headroom to move in as well.
Very good. Just finally on the actual category itself, given you've listed the amount of SKUs in your offering has become a lot broader, how much of your offering overall would you say is nondiscretionary or how much of it is now pushing to a discretionary type category?
Look, I think what we're really focusing is what we always do is, you know, making sure that we have the broadest range for the consumer. Our focus is, has and will be on the less discretionary aspect. You know, things like for instance, you know, high fashion apparel for young babies, that's something that we're not contemplating. It's something that we would have potentially a marketplace opportunity for somebody else. You know, we're still concerned with, you know, the basics, what people need every day, whether it be, you know, the basic T-shirts, the basic underwear for young kids or, you know, the basic learning through play type toys.
There's clearly, you know, we see opportunities through the furniture departments. We see opportunities still through wheel goods and car safety as well, which are, you know, less discretionary.
Thank you. Maybe just a final one. Is there anything on the horizon with regards to, you know, Australian standards around some of the products you sell and either becoming more stringent or, you know, others not being able to comply that we should be aware of?
No, Chad, it's been the same. Certainly, Australia has got very differentiated standards and it's probably I would consider the highest standard in the world of product safety. It doesn't. I can't imagine that they're gonna look to change that. You know, safety is the number one priority for our kids.
Thank you for your time. Appreciate it. Darin, I much.
Thanks, Chad.
Thank you. There are no further questions at this time. I would like to turn the call back over to Matt to close out the presentation.
Thank you so much, Paul. I just wanna say to everybody thank you very much for your support during the year and also thanks for joining us today. It's much appreciated by both Darin and myself. Thank you.
Thank you.
This concludes today's conference call. You may now disconnect.