Thank you all for standing by, and welcome to the Baby Bunting Group Limited FY 2021 results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question at that time, you'll need to press star one on your telephone. I'd now like to hand the conference over to your first speaker, Mr. Matt Spencer. Thank you. Please go ahead.
Thank you, Tara, and good morning, everyone, and welcome to the Baby Bunting's results presentation for the full year ended 27 June 2021. Joining me on the call today is Darin Hoekman, our Chief Financial Officer. Good morning to you, Darin.
Good morning, everyone.
Before we begin, I'd like to acknowledge the traditional owners of the land upon which we meet today, and we pay our respects to their elders, past, present, and emerging. As Tara said, we will be taking questions at the end of the presentation. If we turn to slide four, our financial highlights. We present the numbers on this page on a pro forma basis. Our long-term goal has been to achieve an EBITDA margin of 10% of sales on a pre-AASB 16 lease accounting basis. I am extremely proud to say that we achieved this in the second half of FY 2021. I'm delighted by the performance of the business, and I'd like to take the opportunity to thank and acknowledge all the members of the Baby Bunting team who have contributed to this result in what can only be described as a very difficult and unsettling trading period.
Thank you all. Sales of AUD 468 million, a growth of 15.6% in the prior year, reflect the strength of our brand and the preference of shoppers to shop with Baby Bunting. Comparable or same-store sales growth for the period of 11.3% was outstanding. In fact, on a two-year basis, we have grown sales by 29.2%, or AUD 106 million, and this is reflected in the return on invested capital of our mature stores, which is now on average greater than 100%. Mature stores or stores over four years old are on average doing AUD 8.2 million in sales with a store EBITDA margin of around 19%. Online sales of AUD 91 million were up 54.2%, making up 19.4% of sales for the year. Interestingly, click and collect sales grew 110% for the period and now make up 57% of all online sales where Baby Bunting has a store presence.
We continue to see gross margin improvement up 83 basis points to 37.1%. This has been achieved while still ensuring that we offer great value to the consumer every day and every visit, backed by our 5% price beat guarantee. Contributing to the gross margin expansion has been the building of our private label brands and exclusive brands and products. This differentiated product now makes up 41.4% of sales. We have also made significant headway on our supply chain strategy, which all adds to our gross margin improvement. We have achieved cost of doing business leverage, impressively 94 basis points at a store level. Of note is our labor to sales rate improvements in store and the weighting of marketing spend away from traditional mediums such as print catalogs.
This is now trending down to the extent that on a year-on-year basis for the last promotion is down 50% in number, with a switch to a greater investment in digital mediums. Overhead costs included around AUD 2.2 million relating to COVID expenses and expenses relating to a biosecurity event response. There has also been a significant investment in capability within the organization across IT, cybersecurity, digital supply chain, and operations. In summary, sales up, gross profit up, and cost of doing business leverage achieved, resulting in a pro forma EBITDA uplift of 29.2% to AUD 43.5 million and a pro forma NPAT growth of 34.8% to AUD 26 million. EPS growth of 33.2% and a full-year dividend of AUD 0.141 per share, the result of an AUD 0.083 final dividend. An extremely pleasing set of numbers achieved in difficult times. If we just turn to slide five, please. Our operating highlights.
Our number one focus in the business is to keep our teams and our customers safe. I'm pleased to say that we've continued to progress this with further improvements in our safety performance. Throughout FY 2021, all our stores have remained open as we provide essential goods and services to parents-to-be and new parents. Sales patterns do get affected during lockdown periods. As a business, during this difficult trading period, we did not receive any JobKeeper payments and nor did we receive any rent relief from landlords. We continued to grow our private label and exclusive brands and products, which now make up 41.4% of sales. It was tremendously exciting to launch our private label hard goods brand, Jengo, which has performed very, very well. We're also excited to announce our exclusive access to the Steelcraft, Baby Love, and Joie brands.
Steelcraft, in particular, is a well-known, trusted Australian household brand that has served and supported the needs of parents for over 50 years. These brands deliver differentiation and gross margin benefits and were previously sold through many other retailers. We have a store network plan of over 100 stores in Australia, and through the year, we opened four new stores to end the year with 60 stores. We open between four and eight stores per year, and for the year ahead, we have a strong pipeline of new store opportunities. We continue to sell from our website to New Zealand and have recently launched babybunting.co.nz, employing our headless architecture, the forerunner to the Australian website being launched later this half. We have a store network plan for 10 plus stores in New Zealand.
While the project is progressing well in terms of consumer offer, supplier discussions and resource planning for the securing of property and the opening of new stores is delayed, largely due to the impact of COVID and our inability to spend time in the market. At this stage, it is more likely that our first physical store will be open in Q4 FY 2022. We will continue to grow our digital footprint and representation online ahead of physical stores opening. A key element of our strategy to grow market share is through our investment in digital. This encompasses the improvement of our customer experience online. We have a long-term ambition of being able to leverage our store network to fulfill 90% of online orders in metro areas same day. In this respect, we have continued to progress significantly.
For the full year, around 41% of online orders have been processed through our store network. Digital investment and the move to a headless online architecture is part of our broader transformation program. This will lay the platform for long-term sustainable growth. I'll elaborate a little further, but I'm pleased to say that despite substantial impacts as a result of COVID-19, we have made significant inroads this year to our transformation agenda. Another key part of the transformation program is our supply chain strategy, and in the second half, we moved into a new 22,000 sq m distribution center and co-located store support office. This project has enabled us to streamline our storage and handling costs by removing the need for two additional 3PL warehouses in Melbourne. The new DC has also facilitated a 60% increase in container volume and supported our private label and exclusive product strategy.
The business has certainly developed, and we have progressed our environmental, social, and governance or ESG agenda through the development of our ESG roadmap. This roadmap focuses on our people, our community where we operate, and our environmental impact. Our plan is to release our first sustainability report later this year. If you could please turn to slide six. What brings me great pride and confidence in our future market share growth is the way we've grown as a brand and the great relationships we enjoy with our customers. Our core purpose is to support new and expectant parents in their parenting journey, and we do this in many ways. In particular, through our multi-channel approach to providing our customers support they need at a very special time in their lives.
Since 2015, we've been tracking our brand health every two years through an independent survey of mothers at various stages of early parenthood and gift-givers. What we have seen over time is the growth and recognition of Baby Bunting brand and the preference of new and expectant parents who say Baby Bunting is their preferred physical store to shop. We track a number of measures, but most pleasing is that virtually nine out of 10 people record with no prompting that Baby Bunting is a place to shop for essential products such as car seats, prams, and nursery furniture. 71% of people surveyed who have shopped for these types of products rate us as their preferred physical store to shop. In our surveys, these numbers are far superior to any other retailers who stock Baby Bunting products or baby products.
Having such a great brand awareness provides us with great confidence when we have plans to roll out new stores into new catchments, reinforcing our vision of being the most loved baby retailer for every family, everywhere. With around 300,000 births per year, our loyalty program plays a significant role in customer retention and frequency of visit across all channels. We have around 1.1 million loyalty members, of which around 600,000 have been active in the last 12 months. What we do see is that our customers have a higher frequency to visit and spend in the early part of their journey, being pregnancy through to 12 months of age. Our customers then reengage with us when they reach the next milestone, such as toilet training or moving from a convertible car seat to a forward-facing car seat, or when a subsequent child comes along.
This customer lifecycle management through our loyalty program is significant, and I've been delighted by the success of the Phase 1 launch of our new loyalty program called Baby Bunting Family. I'll elaborate further if you can please turn to slide seven. We launched Baby Bunting Family, our new loyalty program, early in the financial year, and we've seen some really promising results. To date, the conversion rate from non-loyalty members to becoming a loyalty member is extraordinarily high, and this is translating to around an additional 25,000 new Baby Bunting Family members per month. Impressively, on average, loyalty members are spending around 36% more per transaction than non-loyalty members through the higher average item values and increased average items per transaction. Leveraging our marketing automation tools, we have around about 90 customer journeys we can personalize that keeps customer engagement levels high.
We're now looking forward to the launch of Phase 2 of the loyalty program, which will go live with our new website and will leverage our headless digital architecture. This phase is expected to transform the program, delivering greater benefits and rewards to those members who shop with us. Phase 2 will also unlock greater personalization and will be omni-channel in design, supported by a new loyalty management system. This transformation program is expected to be implemented in the first half of the financial year. I'd like to now provide you with a brief summary of where we're at in the transformational agenda. On slide eight. Our transformation program has continued through the year, and although there has been some impact to timing as a result of COVID-19, our transformation program is a series of significant one-off large-scale investments that will underpin future growth.
We are well progressed with the program of work, and over the past year, we've seen a number of these transformation projects completed. As highlighted, COVID-19 has impacted our transformation agenda, and I'd like to give a brief summary of other areas affected by the COVID-19 pandemic. If we could turn to slide nine. The essential nature of the products we supply and the customers we service with around 6,000 births per week meant that all our stores remained open throughout the year, despite the challenges associated with the many lockdowns experienced across the nation. Our priority is the health and wellbeing of our team and our customers, and our large format destination stores has meant that we can operate safely, providing our customers a safe place to shop for their essential needs.
To support our team, we have introduced the following: two weeks paid COVID Leave, Appreciation Leave to say thank you for going above and beyond and the great efforts by our team, eight hours Vaccination Leave to support the national vaccination effort. To complement this, we've also provided financial gifts to all team members in recognition of their efforts in a difficult period, and a chance to enter into a draw for AUD 10,000 worth of prizes for our team members who are fully vaccinated by the end of November. COVID lockdowns, of which there have been 15 across the country, do impact the flow of sales. Given the less discretionary nature of our category, we are seeing historically that sales are not lost, they are deferred until they become absolutely essential.
When a customer is in the final trimester of the pregnancy or when they have just had the baby and the requirements post-birth become a necessity. For example, breast pumps or feeding aids, sleeping aids or car seats and capsules. We have communicated all the different ways for the consumer to shop with Baby Bunting. However, the predominant response has been to shop in-store for essential items where customers can get the appropriate service and tailored advice for their needs. Our stores are also the place customers come to get their car seats fitted. In the last year alone, we have fitted over 130,000 car seats for our customers. Just another example of the importance of our stores being open.
Our financials, which Darin will talk to in a moment, reflect the fact that we do not receive any JobKeeper support, nor do we receive any rental support from our landlords, and the cost of doing business includes around AUD 1.1 million in COVID-related expenses. I might pause here to hand over to Darin, who will run through the FY 2021 financial results in more detail. Thanks, Darin.
Thanks, Matt. If I can get everyone to turn to slide 17, the profit and loss statement. 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 on slide 26 of this presentation, and also in the annual report. In summary, the current prior year differences relate to the exclusion of employee equity expenses, significant business transformation project costs, and the AUD 2.4 million payment received from a former digital technology vendor. The key call-outs for profit performance are again, sales, 15.6% sales growth driven by 11.3% comp store sales growth, four new stores and annualizing stores opened last year.
Gross margin, 83 basis points increase in gross margin delivered year-on-year with 119 basis points in the second half and 41 in the first half. Retail costs, a 94 basis point improvement in our retail cost to sales ratio and overheads. Investment in our overhead cost base to support future growth. It is worth emphasizing here that as a business just over halfway through its network rollout, we will continue to invest in our cost base over time and ahead of the growth curve. Our overheads were impacted by three items in FY 2021 that warrant calling out. The first is the AUD 1.1 million of biosecurity costs that we incurred in the first half. The total cost to manage the biosecurity event was AUD 2.2 million, but at this stage, AUD 1.1 million of those costs will be covered by our insurance and sit as a receivable in our balance sheet.
The remaining AUD 1.1 million sits within cost of doing business, and we do not expect these will reoccur going forward. The second call-out is our COVID cost of AUD 1.1 million. The majority of these costs were incurred in the first half and should reduce significantly going forward with some residual and ongoing minor costs pertaining to PPE purchases and COVID leave for team members that may be forced to isolate. The final call-out is that we accrued AUD 2 million in staff incentive payments in FY 2021 relative to nil in the prior year. These are financial bonuses to reward our staff for the outstanding results they have delivered for the FY 2021 financial year. To summarize earnings, EBITDA of AUD 43.5 million was 29.2% up on the prior year, delivered with 100 basis point improvement in EBITDA margin from 8.3% up to 9.3%, noting EBITDA margin got to 10% in the second half.
Finally, it was great to see the sales and margin gains flowing all the way down the P&L to deliver pro forma NPAT growth of 34.8% year-on-year. Slide 18. Looking to the balance sheet, we have again finished in net cash position despite the significant investments and transformation we are making on the business. The net cash position gives us significant headroom to further progress our transformation and growth agendas in the coming years. The primary call-out on the balance sheet is the AUD 15 million investment we made in our inventory, now AUD 80 million.
Of this, around AUD 10 million is recovering our in-stock position from the prior year, which was depleted below our planned holding level due to the extraordinary growth we saw in May and June 2020 after the initial national COVID lockdown in April 2020. In addition to recovering our base inventory position, we also added AUD 3 million for the four new stores we opened and a further AUD 2 million to maintain appropriate weeks on hand inventory relative to our higher sales profile. Looking forward, we will build our inventory levels further in the first half of FY 2022, which is similar to the year just gone, where we held AUD 92 million of inventory at the half. This will further mitigate risk in relation to potential COVID-related supply chain impacts and to ensure sufficient inventory coverage for post-Christmas sales and Chinese New Year shutdown.
With capacity at our new DC and low financing costs, the benefits of protecting future sales outweigh the associated holding costs of higher inventory. You will also note our right of use assets balance and the associated lease liabilities provisions have increased by around AUD 20 million year-on-year. This is primarily due to the addition of our new DC, where we've taken out a 12-year lease. Moving now to the cash flow statement on slide 19. We had free cash flow of AUD 4 million, well down on the prior year of AUD 23 million, which benefited from a significant short-term working capital benefit as we came out of lockdown in the prior year, which I just described when talking about the balance sheet.
Our operating cash flows after this working capital investment were AUD 22.8 million, of which we invested AUD 18.8 million into our capital and transformation program, as well as paying out AUD 15.7 million in dividends. Adding the AUD 0.083 dividend we have announced today, along with the interim dividend of AUD 0.058 paid back in March, we will pay out 70% of our pro forma EPS to shareholders. Turning now to slide 20, 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 is now above 100%, delivered through continued expansion of market share in the markets that we operate, plus higher gross margins and strong management of our store cost base. Our mature store cohort is now up to 36 stores. 33 of those are metro and three regional.
For our mature metro stores, 23 of the 33 are delivering over +100% return on invested capital, with the lowest being around 70%. Regarding our regional stores, of which there are six that have now completed more than two full years of trade, these stores are delivering capital returns of between 70% and up to 100%. Virtually all of our stores are performing incredibly well, with the one outlier probably being Chadstone, which after a sensational first year, really felt the effects of the COVID lockdown and shopping center avoidance more than any of our other stores. We are expecting this store, which is in a great location and has a terrific team, to recover quickly when we return to a more normalized trading environment.
Notwithstanding, all our other shopping center stores, of which we now have four, show encouraging signs in their first year of trade, and we will continue to look for the right opportunity in these centers as well as our traditional large format center locations. That concludes the financial update. I will now hand back to you, [Ben].
Thank you, Darin, I reiterate, a very pleasing set of numbers for the year. Turning to slide 21. Speaking of looking ahead, we have, I think, apart from an exciting transformational agenda, including the new website and Phase 2 of the loyalty program , we also have some other exciting things ahead of us. We look to roll out new stores, probably at the top end of our range of four to eight, with a number of leases already signed. We look forward to opening our first stores in New Zealand and continue to focus on margin improvement through the strengthening of our supply chain and logistics capability. We will continue with our focus on our private label and exclusive brands, with the aim of this being 50% of sales in the medium term.
Finally, we hope to see vaccination rates improve and see fewer lockdowns and disruption to our lives as a result of COVID-19. Slide 22. Over the page, we track the Medicare 12-week scan data, which is highlighting a potential uptick in births through the first half of FY 2022, which I believe sets us up well given our high brand awareness and brand preference. Before talking about the outlook, I might take a moment to provide some detailed context about the impact of lockdown on our business and the flow of sales. Turning to slide 23. As highlighted, the baby goods category is essential and a non-discretionary category. People who are having babies in the next few months are already well progressed in their pregnancy and the needs are established. What may not have occurred as yet is the act of actually purchasing product.
In lockdowns, we are mainly seeing those customers in our stores when the need becomes essential. It's important to emphasize that in our category, in-store service and tailored advice is critical. Things like checking the car seat fits the car or having it installed correctly. In addition to this, products for feeding and baby and mother's health, and the technical items that need tailoring to the customer's needs. We also stock a range of items specifically focused on premature babies and parents of premature babies who are working through unexpected circumstances and need the help and guidance of in-store service.
To help break this down a bit further, we have provided a table which highlights that consumers in third trimester and those that have just given birth are actively purchasing products predominantly in-store when they can experience a product and get the service and advice they require. Customers in trimester one and two and gift givers are more likely researching online, purchasing online, and deferring their store visits to post-lockdown or when the need becomes essential, as in the case of long lockdowns. It is our view and experience that these sales are not lost, they are deferred. The graphs below reflect the impact of comparable store sales when we have a three-day lockdown, a five-day lockdown, a medium-term lockdown of around 12 days, and then a long lockdown. In all cases, we see comparable store sales recover quickly.
This gives us confidence in relation to the current impact of lockdown on a year-to-date sales performance. Now let's turn to the outlook on slide 24. Year-to-date comparable sales have been affected by lockdowns across most states and significantly Victoria and New South Wales. As at 12th of August, comparable store sales were -6.4%, impacted by the current state home orders. I would remind you that this time last year, the only stores in lockdown were 12 metro Melbourne stores and comp store sales were running at around 20%. We've seen a recovery of comparable store sales during the period in line with expectations and historical lockdown trends. About 80% of trading year-to-date has been impacted by various state lockdowns. Online sales are up 32.6%, cycling 123% PCP.
This period is our lowest sales period for the year, following our largest trading month of the year in June, and we're confident based on historical sales performance and patterns post-lockdowns that sales will recover. The Medicare 12-week scan data and the strength of our brand underpins our confidence in the future. We anticipate opening three stores in the first half with a strong pipeline of stores in the second half, plus two stores in New Zealand. Given the uncertainty caused by the pandemic and consistent with last year, we're unable to provide guidance at this time. On behalf of Darin and myself, we'd like to thank you for your support and attendance today. We will now take any questions you may have. To assist, please state your name and who you represent. Thank you so much.
Thank you, Matt. We will now commence the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you need to cancel that request, please press the pound or hash key. Our first question comes from Jo Little at Morgans. Please go ahead.
Morning, Matt and Darin. Can you hear me?
Yes, Jo. Good morning.
Yep. Great. Good morning. Congratulations, guys. Another strong year of growth. Just a couple of questions. Just firstly on the DC, so that's all up and running. I think at the last result you said you'd be in a better position to provide some clarity on the benefits we should expect. Just wondering, can you confirm the immediate benefit to the gross margin, maybe in FY 2022? I think from memory it's around 20 basis points. Perhaps some color beyond that, now that we're through that kind of project.
Hi, Jo. I'll take that one. That is correct from a margin perspective. That will flow in over time as we transition our direct-to-store vendors. They'll be fulfilling direct into our DC. The other benefit that that DC will give us is we will be able to add additional stores and then leverage the cost base of that DC. In the FY 2021 financial year, we did incur around AUD 1 million worth of variable warehousing 3PL costs in Victoria to sort of hold inventory because we just ran out of space in the DC, that will go away in the new financial year as well.
Okay. Not willing to kind of talk about the benefits longer term? Is it just too early? You know, quantify, I mean.
Well, I think that, I mean, very quickly we'll transition those suppliers through FY 2022 from a margin perspective, and then we'll hold that, and then beyond that, then you're looking at sort of leveraging because your variable costs, which were increasing as we're adding stores into the network, that won't be the case. They'll be flat relative to the addition of new stores and additional inventory as we roll those stores out.
Okay. Thank you. Sounds like you're gonna do about eight stores this year there, or thereabouts. Where are they kind of located? I mean, should we expect much cannibalization or are they in new markets?
It'll be a blend of regional and metro. There'll be four regional, four metro, three in the first half, of which one will be in metro Sydney, and then in the second half it'll be three and one. The reverse. Three and two. Three metro and two regionals.
Okay. Thank you.
Yeah. Okay.
Thank you. Just New Zealand, obviously, you said when you initially flagged the four stores, you said obviously we are assuming we can get over there and travel, which has not been the case. Two in the back end of the next financial year. I think we kind of on the last conference call talked about kind of modest losses from that region. Would that still be intact, Darin?
Yeah. We're still investing in standing the business up, and so there'll be costs of around AUD 1.5 million to actually get the business stood up.
What we're anticipating occurring was as we rolled out, which we were planning to roll out four stores in FY 2022, that the margin and the profit from those stores would defray those opening, those sort of standup costs. Obviously, that will be lower now that we're having to defer the opening of the stores.
Yep, understood. Thank you. Sorry, just lastly, great to see that mature store margin up at 19%. I guess the next question is 12% the new long-term EBITDA margin, if we assume that your overhead as [audio distortion] sales is about right?
I think that looking ahead, we see more opportunities for margin growth, and we see opportunities to deliver efficiency gains. That's what our transformation agenda's all about. We know that there are things that we could do more efficiently today. We've got our eye on sort of driving those costs out of the business. Also we see sort of more opportunities in the supply chain and sort of getting those costs down, which will help our margin over the long term.
Grow our market share.
Absolutely growing our market share, which will also sort of help deliver leverage through the overhead base.
All right. Thanks so much, guys. Appreciate it.
Thanks, Jo.
Our next question comes from Marni Lysaght at Macquarie Capital. Please go ahead.
Good morning.
Hi, Marni.
My question is just around, I understand the gross margin improvements that have been recorded, and particularly that in the second half as a result of various initiatives. Are you seeing any kind of cost inflation coming through, particularly from the likes of logistics? You're confident that, I guess, the move to private label and other initiatives will help you offset that?
The second half included, our international freight rates did increase.
We saw that cap. The margin that you see in the second half, which was up over 110 basis points in the second half, includes the increased international freight costs. It also includes. Very late in FY 2020, we added our 5% price beat, and that's actually had a decreasing 15 basis point margin on the result in both the first half and the second half. You're actually seeing a very strong gross margin performance when you are casting in that in the light of those two downward elements, too.
Okay. Have you seen any other changes in, say, since the end of the 30th of June, any other changes coming through in that and you're quite confident that the initiatives that you have underway will continue to offset that?
As I sort of pointed out to Jo, there's plenty of initiatives that we've got coming down the pipeline.
From an FOB perspective, it's still the smaller proportion of our cost of goods sales base, and so around 15% of our purchases are in U.S. dollar. It's still not a significant component of the profile of our sales. We are confident that we can continue to grow our gross margin.
Yeah. No.
Not withstand-
There you go.
I was just going to say notwithstanding that, I think we're facing the same challenges as everybody else with regards to the international freight. We've got contracted rates locked in at the moment.
No, that's all clear. That's, yes. We could pick that up from the slide. Those are my questions. I'll jump back in the queue. Thank you for your time.
Thanks, Marni.
Our next question comes from Tim Lawson at Macquarie. Please go ahead.
Hi, guys. Thanks for taking my question. Just on slide eight, you provide a good profile of CapEx and OpEx out FY 2022 and 2023. Just the profile of that, you've got sort of OpEx slowing initially and then accelerating again. Can you just talk through the various initiatives there, and what the investment is?
Well, what we've got coming up is we're finalizing the Australian digital architecture is occurring. In addition to that, we've got people systems occurring. We're bringing in an advanced order management system. We're standing up the second phase of our loyalty program. We'll commence work on ERP point of sale and a number of other elements. When we sort of originally forecast out this program, we had estimates around CapEx and OpEx, but that evolves over time. Because the majority of the systems that we are introducing are software as a service, what you find is the standup costs of these systems are actually items of OpEx as opposed to CapEx.
And there's nothing to-
No, I think.
That OpEx versus CapEx trend that
Margin should improve more strongly from CapEx versus OpEx or vice versa? We had a defined transformation agenda, Tim, which you see on that page. All of these items, those OpEx items, we pro forma'd out of our result. That is because they are not operating costs. They are costs associated with the establishment of all of these systems that you cannot capitalize under accounting standards. Going forward, once these systems are introduced, for example, in FY 2022, we'll have annual OpEx costs in relation to our people systems of around AUD 300,000 per annum, which is the licensing to run that and also maintaining that. The capital costs and the OpEx costs are actually one-off operating costs to stand that system up in the first instance is a lot more than that. They do have ongoing costs. It's like renting a store. Yeah. Yeah.
Got it. Thanks. Cheers.
Our next question comes from Sam Teeger at Citi. Please go ahead.
Hi, Matt. Hey, Darin.
Hi, Sam.
Just wondering if you can talk about in terms of the high inventory that you carry now, what categories and brands is this primarily relating to?
I wouldn't call it high inventory. If you look at our stock turns, we've actually improved our stock turns. What we got depleted on, you'll recall, we really need to go back to FY 2020 to sort of explain. First of all, our inventory profile matches our sales profile. You look back to FY 2020 and what did we do? We had a national lockdown coming up in April 2020. No one in the Australian landscape really understood what COVID was going to mean for their businesses.
What you do in that situation is we started to defer orders in anticipation of a significant fall away in sales and to sort of manage and preserve cash. The lockdown finished, and then very quickly after that, then our sales in May and June jumped over, +20% comp sales growth in both of those months, and then that continued into the new financial year. At that point, we were then playing catch up, and so whilst customers continued to take lay-bys, we were actually experiencing out of stocks, and that continued right through the first quarter and into the second quarter of last financial year. Where we are now is we've got a very strong in-stock position, so it's around 95%. We're very happy with that. Our weeks on hand is consistent with what we've historically.
In fact, it's improved on what we were sitting at in FY 2018, FY 2019, and pre-COVID FY 2020. Really it was just recovering inventories that we deferred, and then followed by a very sharp increase in our sales profile. I think also, Darin, I think the investment in the replenishment tools and the financial planning tools have meant that we right-size the inventory, and we've got total visibility of that, which historically has been a challenge for us because we've had a lot of store-based ordering and direct store vendor refill.
Got it. That makes sense. You talked about investing in additional inventory over the first half 2022. Are you able to provide any color in terms of millions, how much more you think you need to get where you want to be given the uncertainties we are seeing around freight and supply chains?
Well, look, we're still sort of working through that, but I wouldn't be surprised. I mean, mostly it's cyclical, right? We got up to AUD 92 million at the half in the prior year, and I'd expect us to be pushing up around that number. I think very much to your point is that security of supply and having that inventory available for sale is very important. Good news is we started the year in a net cash position with borrowings capacity of up to AUD 70 million. We won't need anywhere near that, but we've got plenty of capacity to invest.
Got it. Just given what we're seeing with shopping center foot traffic more generally, how is this making you think about opening new stores in shopping centers compared to how you were thinking about it maybe one to two years ago?
No change, really. I think that the thing that we've all got to look forward to is everybody getting the nation up to a 70% vaccinated state. At that point, then we know or we've been told that there'll be change from that point onward. That gives us confidence. Our three shopping center stores, Castle Towers, Knox, Belconnen started very well, have all performed very well. Certainly Chadstone's bounced back in the second half. There's things to note like they were using that as a testing center for a while, the car parks there. It just wasn't a particularly desirable place for people to come and shop and feel safe at the same time.
We're very relaxed about our program and what shopping centers have done for us is, we'll always look at all opportunities and catchment and then make a decision with regards to what we think is the opportunity that will maximize our market share within a catchment.
Got it. All right. Thanks, guys.
Thanks, Sam.
Our next question comes from James Bales at Morgan Stanley. Please go ahead.
Thanks, guys, for taking my questions. I wanted to understand a little bit about how you're thinking about comps given the first six weeks. The two-year stack still looks pretty good and we've been in lockdown. Is it fair to extrapolate that sort of performance on a two-year stack basis in terms of how we're tracking for the rest of the year?
Can you just play that one back to us again?
Yeah. This time last year, your comps were 20%, you're down 6.4%, so your two-year stack still looks pretty strong. Is there any flaw in the logic in sort of suggesting that if you've got a cycle, 11%-12% for the rest of the year, that the trajectory you're on puts you still in pretty good stead?
I think we're looking at two very different scenarios. What we're dealing with now is in the prior year, we had Victoria with 12 stores in lockdown. What you've seen, if you look at the outlook slide, what you're looking at at the moment is we've had between 50% - 75% of our stores have basically been in lockdown for the first six weeks of trade. The first six weeks of trade is very short. People can defer their buying decisions for a short amount of time. That's really what we're seeing. We're starting to see a bounce back in the comparable store sales growth from week four. I think the other thing we need to sort of tie in here is that the scan data from Q3 was +6% year-on-year, and Q4 was +4% year-on-year.
That is the births that are coming through the first half of FY 2022 are locked in. The people that'll have babies in the first half of this year were pregnant at the start of the financial year. Really you're seeing a short-term deferral of purchasing as and where people can. Matt, is there anything else you'd like to add there?
No, I think you've covered most points. As the vaccination rates go up and that creates a more COVID normal state as well.
Is it fair to think when you look at that scan data, that if they're 12-week scans and you've got a deadline on making a purchase around the time of birth, that the lag is maximum six months?
I would suggest that you can certainly defer through the first trimester and the second trimester, if you need to, but you're really starting to think about your purchasing at that point.
Your health professional will give some advice that says, "Get yourself ready around week 35." That's the trigger point that you need to be in store. You need to get your car seats, your cots, your prams, those sort of things all set up. Then obviously when you have the baby, there's those immediate needs that once you've had the baby, feeding aids, et cetera, they come into play as well.
Okay. The other element that might really impact comp sales over the next six to 12 months is last time you changed your website, it really changed behavior in terms of traffic and conversion. You've sort of talked about this migration to headless e-commerce in 2022, plus the loyalty phase too. How should we think about the impact and timing of each of those elements?
The headless architecture is going to give a great experience to the customer. It's multiple pieces of software that are tied together. They're all best of breed. You're going to have a great search component, there'll be great checkout component. We're really expecting that that's going to reduce friction on the website and it's going to drive up conversion. Once we've locked that in and at this stage we're sort of looking around August, September, then we move on to sort of standing up the loyalty software in the business. What that will do with that is, that's going to have a lot of personalization associated with it, it's going to the reason we're investing in this system is that we identified through our customer data analysis that a lot of our customers are still only buying once or twice with us.
We're going to sort of lift up the lifetime spend of our customers by getting them back in the store and buying repeat purchases.
You talked about the trade-off between that loyalty sales growth and gross margin earlier. How should we think about that impact of Phase 2? Will that have a decorative impact on the gross margin?
No, I don't think that's how we're looking at it from a margin perspective. What we'll do is we'll at the moment, we've got a 5% discount card. That'll turn off and then that'll fundamentally fund the offers that we'll have for the new loyalty program.
Got it. Okay. Thanks, guys. I appreciate the help.
Thanks, James.
Our next question comes from James Casey at Ord Minnett. Please go ahead.
Well, good morning, gentlemen. Just a question with regards to your cost base. The overhead expenses have increased 200 basis points over the last few years, up to 7.1%, and Darin, you called out a number of one-off costs that impacted that number this year. Is the 7.1% overhead expense, is that going to decline over the next couple of years and get back to a sort of 5% number as you bring more stores on, or is 7% kind of the new normal?
We will continue to invest in our overheads, James. As you rightly point out, as we add stores, we will see leverage on that. I'm not going to sort of do a sales forecast out that sort of suggests that we're going to see a significant sort of decline in our overhead sales ratio. I mean, a very important point to note with regards to your overheads is that, historically, your systems and your software and apps as a significant component of your investment profile these days, they were historically an amortized or depreciated investment. What you see now is you've got much lower CapEx investment in these systems, but they become a part of your operating cost base, and so they're included in your overhead cost base.
As we continue to transition to those software as a service, then they'll sit within the OpEx line they were previously sitting in the depreciation line.
Okay. That's fine. That's all I have. Thank you.
Our next question comes from Divik Nigam at Macquarie Capital. Please go ahead.
Morning, Darin. Morning, Matt. Great result, congratulations for the past fiscal year. Just had a quick question regarding the improvement in margins and whether you could provide some color as to why there's a skewed improvement towards the second half. I mean, despite I think what was mentioned earlier about the freight cost inflation that you experienced in that second half.
We had a number, our flex increase over the course of the year, and so we had de-annualizing benefits sort of coming through on the second half. In particular, we launched our Jengo hardware product in the second half, and we also had some additional exclusives come through in the second half as well.
Right. Okay. Yep. No, that's it for me. Thanks a lot, guys.
Thank you.
Our next question comes from Aryan Norozi at Barrenjoey. Please go ahead.
All right. Thank you all. Just a quick one from me. The Medicare data obviously bodes quite well for you guys moving forward. Are you going to strategically step up marketing and sort of other shorter-term cost investment to capture a larger share of those potential customers? Are you comfortable with the current level of investment?
Look, I think we're comfortable with the level of investment we're making. We certainly have seen the brand health grow substantially. What we do see, though, is how do we get the reach and more benefit from our spend. The digital medium and that will assist us through that. A lot of the work that we've been doing around socials, our investment in capability around SEO and SEM in our business is certainly paying dividends. Look, I think it's just about how we leverage that spend in a digital way. I think also very important is the call-out that we make is the programs we associate ourselves with, certainly over the coming period. We do work with Life's Little Treasures Foundation, which is a very high profile, and also PANDA, where we raise funds.
I guess that all sort of our big fundraising drives occur basically in the first half or the second half of the calendar year. That also lifts our profile quite enormously. For a really good reason that we're out there supporting parents at that critical time that the people in that scan data will be engaged with. It's also worth noting that we've got a very strong digital presence already with over 30 million visits to our website per annum.
That's perfect. Thanks, guys.
Our final question in queue comes from Sam Teeger at Citi. Please go ahead.
Hi, guys. Just one very quick follow-up. I think Darin made a comment before about sales starting to bounce back from week four in first half FY 2022. Just wanted to understand, did I hear that correctly? Sales are now positive after week four?
Certainly, you can see on our outlook slide that the trend from week four has been that we sort of dropped down to around a -12% comp and went back up around 6%. You can see from that we are in positive territory from that point.
Now, that's all. Thanks very much.
Thanks, Sam.
Thank you. That was our final question, so I'll hand back to Matt and Darin for closing comments.
Just like to say thank you once again for your support and for your time this morning. Much appreciated.
Thank you both very much. This does conclude our conference today. Thank you so much for joining. You may now disconnect.