Thank you for standing by, and welcome to the City Chic Collective Limited Fiscal Year 2022 financial results. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the * key followed by the number one under your telephone keypad. I would now like to turn the call over to Mr. Phil Ryan, Managing Director and CEO. Please go ahead.
Thank you, and good morning, everyone, and thanks for joining us. I'm Phil Ryan, CEO of City Chic. I'm joined today by Peter McClelland, our CFO. This morning, I'm gonna give the highlights around what was another great year for City Chic. Peter will then talk to the financials, and I'll come back to discuss the outlook and current trade for the business before we open up to questions. Looking at slide 4, this shows our vision to lead a world of curves, and this went forward leaps and bounds in FY 2022, and we are now a truly global plus-size apparel business. We've not looked to consolidate over the pandemic. We've continued to pursue our ambitious growth strategy with an amazing team that know what it takes to deliver an assortment a plus lady will love.
We've entered new markets, struck many new partnerships, embedded new brands into the collective, all in the pursuit of our goal, to provide the largest range of plus-size products to our ladies all around the world. The more markets and partners we get to her with our products, the more we learn about her, the more I believe that the range has global appeal. Moving to slide 5. We've achieved this through remaining focused on our 3 strategic pillars of plus, digital, and global customer acquisition. Since 2019, we've achieved a CAGR of 54% in customer numbers. Now with 1.4 million active customers, our online revenue CAGR, both organically and inorganically in that time was 65%, and online sales penetration is now 81%, with 78 million visits to our global websites on a yearly basis.
We did this all through very volatile times, and what slide 6 shows is that we translated this into sustained profitable growth with a revenue CAGR of 34% and 24% in profit. Slide 7 shows the investment that has occurred through our distribution and supply network to transform us from an Australian-based store retailer to a global omni-channel business with 6 distribution markets. The key here is the expansion of our factory base from 43 to 100 and production from 1 to 6 regions. This was all achieved with an exceptionally volatile supply chain and is part of the reason for our year-end inventory position. This was undertaken to drive cost benefits through going to higher volume factories and sourcing in regions that specialize in products such as Bangladesh in denim, and also to diversify our sourcing risk given the times.
This led to further need for buffers as we were forming new relationships. To achieve our initial orders and buffers were allowed materially above what we can achieve now, the relationships are established and order volumes have normalized with cost benefits achieved. We are also shipping to 7 destination ports globally and have a third-party warehouse plus partner warehouses in all regions. This has been a significant undertaking, especially given we could not travel for a large part of this, and I'm very pleased with the progress we have made. More importantly, it sets us up for growth over the long- term while de-risking our supply chain. Moving to slide 9. In FY 2022, the business continued its history of profitable growth. Our revenue was AUD 369 million, up 39% total and 25.5% on a comp basis.
The USA grew 54%, Australia grew 11%, and EMEA is now a $45 million business in the first full-year of Evans. All of these are very pleasing numbers in another uncertain year. The partner business globally showed its potential in H2. It achieved a full-year of sales of $30 million, and $22 million of this or 74% was in the second half, and many of the key partners really only started in March. This growth again demonstrates that our product range and lifestyle mix across all of our assortment has global appeal across varying regions and channels and really supports our vision to lead a world of curves.
Our EBITDA grew 11.3% to AUD 47.1 million, a strong result, and again, shows the profitable nature of our business model, with the second half eclipsing the first half for the first time. The two years are not entirely comparable. In FY 2021, there was a benefit of AUD 10 million in austerity measures relating to COVID-19, and in FY 2022, we lost AUD 4 million in EBITDA through the 13% of lost trading days due to mandated store closures in the first half. EMEA was profitable in the second half as we corrected logistics issues and grew revenue through all channels, including partners. Gross margin of 59.9% against 62.8% in FY 2021 reflects our evolving geographic and channel mix and is in line with our strategy.
Underlying cost of doing business of 47.2% is low and shows our lean operating model and outlines our ability to leverage our fixed cost base to grow. We invested in our store network in FY22 and have now 12 premium flagships. They're around 220-250 square meters, and they're all trading very well. In addition to these, we have 36 new stores in what we're calling the gold design or the same design as a premium flagship with a slightly larger footprint of the historical 110 at 150 meters. These are also showing strong performance. Turning to slide 13. I wanted to talk a little bit more about the inventory build. I've talked about all of this before. However, given the inventory level, I thought it was important to reiterate our decisions and actions.
I will start with the strategy and give a little more detail on what we actually did and how it ties into our investment in the global distribution network and how we will get to the target of 125-135 at the end of FY23. I will talk to why I'm confident I can sell it and the risk of obsolescence is low. I'll do that with pictures. In FY20 and FY21, we saw material delays in shipping and production for many reasons, as we all know. A strategic decision was made to change the way we source product for FY22. We did this to achieve supply chain diversity, minimize disruption, and avoid price rises caused by the geopolitical landscape and the pandemic.
We were building the foundations of a global distribution network through increasing our factory bases, as well as mitigating these risks. What we were trying to achieve is to move to factories that made bigger volumes and had more economic production capabilities, and we've achieved this. The key actions I want to point out from the strategy are, firstly, we accelerated inbounding. What we did is we bought our classic shapes, seasonless product, and core ranges through FY22 for two seasons rather than one to get the volumes up to drive the relationships with factories, to get product quality we need, and price we needed, and also have the stock in the warehouse to mitigate the supply chain risk. We increased our factory numbers, as I've outlined earlier, and origins, and we added two months buffers.
Lastly, given the expansions of origins we source from and ports we ship to, we took control of our shipping. Where historically partner factories we had strong relationship with had controlled this part of the supply chain. This is just a timing issue and added around AUD 20 million in FY22. Given that 80% of the range is seasonless core or known shapes, which I'll talk through in a minute, I was confident to do this and to hold the inventory for future periods through accelerating inbounding. Through the pandemic and in the last two or three years, we've moved inventory between seasons as we adapted to all the kind of risks and volatility that was thrown up. In doing this, we put a CAGR of 35% in revenue.
Through doing this in the last three years, we've driven revenue, and I'm very confident it can work. Slide 14 shows the areas of growth we invested in for inventory. Firstly, and , our strong organic growth in the U.S. and Australia. We then had to set up a base of inventory in EMEA for the Evans and Navabi acquisitions that have both been depleted materially. We built a partner business from a standing start for AUD 30 million globally, and we have concession stock in new partners that we had to invest in ahead of time. We also created stock buckets in new markets like Canada. It's important to note that our closing inventory had some early receipts of AUD 28 million that we had planned for FY 2023. In May and June, some of our factories had inventory ready that we expected to receive in Q1 of 2023.
To maintain and keep the relationship strong, which we've ordered a shipment early and got it on board. This is only a timing issue, not an overstock issue. There was also an FX revaluation impact given the lower than anticipated US dollar at year-end. We hold our U.S. stock in US dollars in our books and have to reevaluate it to Australian dollars at year-end. The lower US dollar meant a higher paper Australian dollar value. Our inventory levels through sourcing initiatives gives us confidence we can manage further supply chain disruptions, and we can now start to unwind the accelerated inbounding. The key message out of slide 15 is that inventory is now peaked and will start to unwind. This will be achieved through the reduction of our future period inventory to a normal level.
The conclusion of the accelerated inventory purchases you can see on the graph that relate to around AUD 64 million in FY22, and that will be sold down in 2023 and not replaced with the applied buffers. We will also sell through core and seasonless ranges that were bought in FY22 for two seasons. From all this, we will reduce our forward orders into FY22. We will remain agile and only buy forward when demand dictates, allowing us to move the inventory levels in multiple demand scenarios. We can also move inventory between regions as season and demand dictates. There's a lot of moving parts in this, and we will remain adaptive and review our order book in line with the market sales in FY23. This leads us to a target of AUD 125 million-AUD 135 million as at FY23 year-end.
With the release, we expect a strong cash position as at year-end. All of these actions really drove our 39% growth in FY22. Now, if I look at slide 16, it wouldn't be a CC presentation without some garments. Slide 16 shows an example of our core product. This time I gave a little more color than just black because it doesn't have to be black to be core. These styles we can run all year or from season to season. This shows the volume of categories we have in core, including bras, denim, boots. There is a lot more I haven't put on the slide because fitting 8,000 styles on a few slides is very challenging. I think these really drive home why I feel like this. Right.
Sorry, this is where we invested a lot when we accelerated inbounding and bought two or three seasons. We now have relationships with new factories in this space and can purchase closer to demand. If sales slow down, the life of this garment extends, and we do not buy further replenishment later on. Slide 17. In here, this really shows how amazing our lady is, and how when we find a shape, it sells through seasons in both brands and both prints and plains, and how a majority of our product is seasonal. I'll talk through the top right corner. This CC dress, sorry, shows we can sell known shapes in different prints through seasons for multiple years all around the world.
What we've done to increase volumes and move to bigger factories is buy 12 months of styles like this in various prints in one run to increase volumes and establish relationships and set the new price levels. We can now buy more in line with demand as the relationship's cemented, and this is why I'm very confident the obsolescence risk is low. We talk to our shareholders and analysts regularly, and we know that we're operating in an environment where competitors in some of our new markets we're growing in have elevated levels of inventory and are more aggressive in their promotional activity. However, this retail environment does not mean we should not be investing in inventory to support our entry and expansion in these markets. Holding on to additional stock in our fulfillment centers does not mean we don't need to discount more heavily than normal.
I've talked through the highlights of the channel and regional overview. However, what slides 20-23 do outline is the many growth drivers that we have in all of our key markets. On top of this, we have the trial markets of Canada and Middle East. I'll now pass to Peter to talk through the financials.
Thanks, Phil. Before diving into the detail, there are a few important matters to highlight when interpreting the results. Firstly, FY 2022 was a 53-week trading year. The revenue and results that have been shown in this presentation reflect the group's statutory reporting, i.e., inclusive of the week 53. Management's estimate of the effect of the fifty-third week is about AUD 5.4 million of revenue, which accounts for less than 2% of the total revenue growth for the year, and between AUD 1 million-AUD 1.2 million in EBITDA. Delivery fees that are charged to customers were previously treated as an offset to fulfillment costs. These have been reclassified to revenue. This has no impact on the group's EBITDA, however, it does impact on the various ratios that measure against revenue.
This reclassification has been reflected in the comparative revenue and financial information that's provided. For consistency with historical reporting, we have also continued to present underlying EBITDA on a pre-AASB 16 basis. In the future, we will report post-AASB 16 in line with more recent market practice. More detail of these items have been included in the appendix. Phil has taken us through the details and drivers of the strong revenue growth, which is both organic and inorganic as we build a global business and continue to put in place building blocks for future growth. Pleasingly, as well as growing top-line, we have continued to deliver profitable growth with an EBITDA of 12.8% of revenue. Our financial results are influenced by both channel growth and COVID.
The strong growth of our online business has contributed strong profit dollar growth, however operates with lower operating margins. The business expansion with EMEA acquisitions of Evans and Navabi both trading for a full-year this year, and I highlight traded profitably in the second half. However, these businesses are still building towards maturity, and as such, with higher logistics and operating costs than we would anticipate once revenue maturity is achieved. We also saw strong growth in our partnership revenue, particularly in the second half. In respect to COVID, FY21 benefited from the AUD 10 million of austerity measures relating to employment, advertising, and landlord relief that in FY22 have returned to more sustainable levels. Also, in FY22, government-directed store closures are estimated to have impacted EBITDA by about AUD 4 million.
Gross margin grew with revenue to AUD 221 million, a growth of AUD 54 million or 32%. However, the gross margin rate of 60%, while strong in itself, declined by 3% compared to the prior year. This was primarily driven by channel and product lifestyle mix changes. We also saw the improved product costs achieved from the group inventory initiative offset by global logistic cost increases. While we see these global costs stabilizing and expect them to normalize in time, it is not clear when these costs will materially decrease.
Fulfillment costs have a large variable component, and therefore has increased with the growth of online revenue, and also due to the geographic expansion into EMEA, where, while we've made a significant improvement to product availability to customers and has been reflected in our growth in revenue, we still operate with a higher-cost warehouse network. We have also experienced warehouse and distribution cost inflation in all regions. To address this, we continue to work closely with our 3PL warehouse providers to improve operational efficiencies and plan for future growth in the business, and we regularly review our delivery structures to optimize service and cost.
Our underlying cost of doing business, as Phil mentioned before, has been maintained at 47%, despite the fact we've had the growth in fulfillment costs, a more normalized EMEA cost structure, and the AUD 10 million of austerity measures in the prior year. The additional cost of doing business from the full-year impact of EMEA alone accounts for 40% of the total increase in our cost of doing business, meaning that the other costs have grown but have grown much less than the rate of revenue, demonstrating our ability to leverage our cost structure. In summary, CCX has delivered both top-line and profitable growth with an EBITDA of AUD 47.1 million or 12.8% of revenue.
On top of this, the business, we've continued to deliver a business structure to support our future growth and deliver better operating leverage as the business scales. In respect to our balance sheet, we've provided an overview of the balance sheet. However, we believe the balance sheet flows are best explained by turning our attention to the cash flow on page 27. The business invested available cash in working capital to support the strategic investment in inventory and ended the year with an AUD 4 million net debt position. Pleasingly, you can see that the business has continued to deliver strong cash generation of AUD 37 million from trade, being EBITDA net of taxes and interest expenses.
The AUD 90.3 million working capital movement is driven by the AUD 129 million investment in inventory, as has been discussed earlier, offset by other favorable working capital movements, predominantly in payables, which have increased with inventory and also as the business has grown. The investment of CapEx of AUD 15.8 million is higher than previous years, but included the acquisition of Navabi and Coedition, store-related investments of about AUD 7 million and head office refurbishment and further development of our core operating systems. In respect to our debt facilities, we have entered into a new three-year, AUD 60 million multicurrency facility. The facility has working capital and acquisition tranches and has financial covenants typical of this type of facility, being a net leverage ratio and a fixed cover charge, both of which we are well in compliance with. Handing back to Phil.
Thanks, Peter. Moving to slide 29 on current trading. Trading in the first several weeks of FY 2023 has been broadly in line with the prior corresponding period, with a return to positive momentum through August. Our Australian stores are trading above expectations, which is ahead of last year, of course, given the impact of store closures in FY 2022. I will not talk growth here as I do not think it's right to given the closures last year and the impacts. AU online was below last year in the first couple of weeks of July, but it's performed well since and is now trading above last year and has grown strongly into August. Excuse me. Our U.S. market has been volatile. The City Chic website and brand has been trading above last year and been addressing demand and workwear demand has remained strong in the market.
The more casual and Avenue business is trading below last year, but is showing week-on-week improvement to last year through the August period. We did have a strong July last year in Avenue, and I'm looking to see improvements into the second half. The U.K. has continued to show growth, and our partner business has continued to perform well across multiple geographies and is expected to drive incremental revenue growth through FY 2023. To hedge against our anticipated promotional activity that I spoke about earlier, City Chic is leveraging its unique market position to implement, where appropriate, retail price increases to help mitigate the risk of margin compression and continue to grow market share. Moving to our outlook on 30. In FY 2023, we expect to deliver another year of profitable growth, notwithstanding the ongoing global economic and geopolitical uncertainty.
This is underpinned by our expanded market penetration, category leadership globally, and investment in distribution infrastructure. There are some key building blocks to achieve this result that are above a normal organic growth rate. In FY 2022, the partner business globally achieved AUD 30 million, as I've said, and 75% of that was in the second half, starting late in the half. This will annualize in FY 2023, delivering incremental revenue. We've moved to a concession model with key partners, Orlando and Walmart, leveraging our available inventory, and this is just starting in the first half. Amazon in the U.S. is now operating wholesale that is initially showing great promise and started just a few weeks ago.
Our Australian stores were closed in the first half of FY 2022 for 13 days, and we're not expecting this to happen again, and this is just driving incremental revenue. Evans didn't trade well in the first half of last year, given all the logistical issues that are well- documented, and we didn't have the inventory we had in market available for sale. This inventory is available this year in the first half, and we're ready for a big winter. Before we could implement the supply process changes in early FY 2022, deliveries were delayed, and the range was not as strong as I would've liked, especially in the U.S. We now have the inventory there and are ready for this period, and I believe it will drive sales even in a volatile environment.
As mentioned, we are targeting closing the inventory of AUD 125 million-AUD 135 million at 30th of June as the 2020 supply chain normalizes. This will allow us a strong free cash flow as inventory unwinds and will be in a net cash position in the second half of 2023. Thank you. I'll now open up to questions.
Thank you. If you wish to ask a question, please press * then 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press * then 2. If you're on a speakerphone, please pick up the handset to ask your question. The first question today comes from Marnie Lysaght with Macquarie. Please go ahead.
Good morning, Phil. Good morning, Peter.
Good morning, Marnie.
Just looking at slide 19, and you've given us the growth since the trading update. You've kind of given us the geographies and, sorry, the April trading update. You've got the geographies there and the channels. Just to kind of understand, like I remember this, the back end of the second half of 2022 was cycling, reopening in the U.S. and also cycling some, you know, delta volatility in ANZ. What's kind of grown that 40% sales growth? Is it the, you know, new marketplace partners coming online? Did you see some sort of normalization in Avenue and, City Chic USA?
Look, I think a few things, Marnie. You're right. I'm actually very pleased with the numbers since. Look, I will say, the number of 37 does come down to the 53rd week, but it's still a very pleasing number in 27. I'm sure you all calculate that. I think it's really range, Marnie, and having the available product to sell. We were seeing, you know, a lot of supply issues and deliveries around this time. Also, the U.S. was a little challenging for us in June last year, and we cycled that well. But I think, you know, the key thing I would say is range, Marnie. S tores didn't really start in June. June was okay in Australia last year. Delta didn't hit until end of June, July, so it's not as big an impact.
Does that answer the question?
Yes. That's all clear. It's fair to say also just the uptake of this new channel marketplace building momentum and also.
Without a doubt, Marnie. I'm sorry. Without a doubt.
Yeah.
I should have added that. The momentum that's run into is very strong. Look, I think the momentum into the end of the half, what was pleasing, and the partners were a part of that, and they show the opportunity that we have globally to get our range across eyes, not just our own eyes, but there's a lot of people selling plus-size product that are very keen on inventory around the world, and we are finding a lot of people to do it. It gives us that omni-channel range, Marnie. It gets our product out to so many more people, and it's accretive at an EBITDA level, but challenging at a GM level.
Just to follow up on that kind of with Evans, because I remember Evans, you know, tracked along nicely at the back end of June 2021, and then you started to peak.
Yeah.
It did that also have a good positive momentum over May, June?
Yes. Evans, as I said, is probably the one area. Look, I think, Marnie, you're correct in saying June, July was strong months for us last year in 2021 and into 2022 because we did have product and then we just, we fell into the logistics challenges after that. We were able to cycle and beat those years because the assortment has increased. It shows to me that we're just starting in that market and-
Mm.
that our range has appeal and that when we do it well, we can grow in what are volatile times.
What's the consumer like with Evans? Just 'cause every headline you see regarding, you know, for the U.K. and the average consumer there's a lot of macro headwinds facing that. What do you think is driving the resilience? Is it range and pricing, positioning in the market?
I think the easiest way to explain that is, look at what we did with Avenue and how we grew it very fast and very quickly because we brought to it the assortment that the collective adds.
Mm.
I think we're doing that, and I think, you know, we will drive growth because of that. The question of the headwinds you're talking about is really for us market penetration. We're very low there, Marnie.
Mm.
It's how big could the growth have been, perhaps rather than will it grow?
Mm-hmm.
I think that's that. You know, the you know, as I said in the speech, we don't you know, I don't miss the world, Marnie. We see all these things. What we've got to do is put our best foot forward in all of our markets, ready to sell product where we can. U.K., given the environment, has been pleasing.
Okay. Just two more from me. With the reclassification of this delivery fee income from it being an OpEx side and putting that up as revenue, are you able to kind of give us an idea of what the first half did in 2022 and first half of 2021, like, just so we can start to, as analysts, kind of, you know, match our modeling to your updated reporting?
Yes, good question, Marnie. In the appendix, we've provided the full-year impact, which is AUD 9.9 million in 2022, and AUD 7.7 million in 2021.
Mm-hmm.
That is in direct proportion to revenue.
Yeah.
You can calculate it out, but it's in FY 2022 just over AUD 5 million in H2 and just under AUD 5 million in H1, and proportionally the same mix to the prior year.
Mm-hmm.
Does that help?
That's clear. A final one for me, and I'll jump back in the queue. Is this , on inventory, it's the most very topical for you guys. Normalizing to it, this AUD 130-ish million is kind of what's the new normal? Walk us through, the unwind over the December half, because you've got markdown in there, you've got stock in there for Black Friday.
Yeah. That's more money. I think firstly it might be worth me briefly explaining a few of the purchasing patterns. You're sort of January into March are your big months for summer, and then your July, August are normally your big months for winter, second half and first half, because the seasons change around the world. You know, you do have, given what we've had, the way we buy, we are very heavy in these months, and that hence the timing issue that led to the 28th, when the factories had it, because we had built-in buffers that really show that the factories are now actually performing better than we think, which is a positive from my view.
What we'll do is the products we bought through season, like the dress I outlined, Marnie. We have 4 or 5 of them ready, probably more than that. We have product bought for almost through the season, and we'll put that live over time so that as it sells down, we're able to buy more into the market rather than the full-year that we have so far.
You're still of the view that the stock that you've been procuring is that core range, your best sellers, wrap dresses, trench coats, et cetera, et cetera?
Yes. I'm very confident of the inventory profile. I'm confident of the obsolescence risk, and I've learned this over time through the way we've traded in the last few years. Even this week as we start to see things starting to go live in the winter, Northern Hemisphere, the performance of it has been very strong. As I said, having it in a warehouse or a fulfillment center doesn't mean it's any more or less risk than any other product. Really, our clearance is very low. It's sort of single- digits. It's not a material part of it.
Okay. Look, I'll jump back in the queue, but thanks for taking my questions.
Pleasure. Thanks, Marnie.
Going forward, if we could please limit ourselves to one question, and then you could go back into the queue. Thank you. Our next question comes from Shaun Cousins with UBS.
Thanks, Sean.
Please. Good morning. Great. Thank you. Good morning. Just talk a little about your commentary regarding the U.S.
Yes.
In terms of highlighting the websites being volatile, City Chic, Avenue below. Are you seeing growth in the U.S. particularly? T he key basis for this question is the U.S. is a key market in which you will sell this inventory. Are you currently seeing growth at the moment, please?
Last week, through August, we've started to show positive total growth over the full period. Avenue is such a large part of the business, we're slightly down, but we are seeing that momentum turn around. As the partner business annualize on top of it, Shaun, as City Chic continues to perform, and even on the Avenue website, the better dressing and workwear product that we are offering to this customer is getting traction in the market. Shaun, does that answer your question?
Yeah, it does. Thanks so much. Thanks, guys.
No worries, buddy.
The next question comes from Sam Teeger with Citi. Please go ahead.
Hi, Phil. Hi, Peter. Throughout Q4 2023, should sales start to be weaker than expected due to macro and increasing cost of living pressures, are you more likely to discount to reach your AUD 125-AUD 135 target by year-end, or are you more likely to retain margin even if it means having a high- inventory at the end of the year?
Look, Sam, there's so many parts in that question. I think the first part I'll say is that we still have an order book. We still need to order products, and I can flex that up and down as demand does around the world. If certain products are demanding in certain regions, we can move them to meet demand. It's not as linear as you're making it. I think the message I want to get across is our story is about revenue growth, Sam, and we want to make sure we're getting our products across eyes because I know that, you know, when she gets our product, she's voted for it through all our channels, including partners.
We're not gonna go and clear as you would or overly promote, you know, just to clear the stock and to drive the stock number down. I have many other levers than that to get to the number. Otherwise, I wouldn't be so confident to put it out there, Sam. It's not like a store in the old days where, you know, the back rack's got to go to fit the new stock in, so I've got to sell it at AUD 5. You know, it's in a warehouse, it's in a fulfillment center. If I can push it through seasons or run it well as I have for the last two or three years and trade the inventory as is my job, and, you know, we've done it pretty well so far, I think.
You know, I've got to remain flexible and agile. What the base inventory gives me the ability to do that, because last year we didn't have a lot of that, especially early in the first half of FY 22. That wasn't that hard to say. Yeah, I've just got to keep. There are so many moving parts. It's not as linear as lots of stock, discount, get number if don't get sales. That isn't how my thinking is. It's essentially, you know, what I do, and I've got to keep on top of it. The good thing is, Sam, I'm confident of our makeup and the value of stock. You look at that dress I showed in City Chic.
If we've got 10 prints and 3 plains in that over the season and demand wanes, I put 2 more of them into the next season and 1 of the plains and then don't buy them into the next season. That's why I try to give the item-level detail. I know it's gonna be a big, big topic over the next few days, so I wanted to try and help you guys understand what I do a little bit more. I think in previous, you know, we've taken a very sort of clinical approach to it. I was trying to bring in how and what I would do through that, so you don't sort of get that impression because I can do what I just said if I phase that through seasons.
Yeah. No, that's really helpful. Do you mind also just talking a bit more about what you attribute the divergence in performance between City Chic U.S. and Avenue, and to what extent is Avenue being impacted by competitive discounting?
Well, another good one, Sam. We definitely are talking and thinking about this. It feels like that we get, you know, that sort of, I'm not gonna say more upscale customer, but there is a real need for better dressing and workwear, and it's a reason to buy. I think when inflation hits, you know, the knit top can be pushed out, and you can wear the one that you bought last year. But if you're going to an event, you wanna wear something else. I think that's why City Chic's holding up. We're also very under-penetrated in the U.S., Sam. You know, it's a little bit of a big market. We grew 54% there last year in, you know, good, bad times.
My answer is, I think Avenue had that more casual purchase that isn't as rewarding emotionally to someone. When the money is a little tight, that can go, but that comes back very quickly. Even in last year, we saw through early in the second half, you know, there was a bit of a feeling of Delta and things were a little challenging in the U.S., and then through March, April, it changed right back up. You know, to me, the first question and the second question are combined because I've got to watch what happened there to manage how the inventory goes through and what I use at an item level.
I have a wonderful team of people that do that for me, that I've worked with for years and years, that we make sure we manage and maximize the asset as best we can.
Got it. That's clearer. Just last question, can you just help us understand first half, second half phasing of profit growth for the full-year?
In last year, Sam?
No, no. In terms of FY 2023, just what we should be expecting. I know you're guiding into profit growth for the full-year, but just how we should think about the phasing between first half and second half?
Look, I think, Sam, there's a lot of moving parts and, you know. You know, you mentioned macroeconomic environments, there's partners annualizing. There's a lot of things that are moving in that. We're not providing guidance at that level. But, you know, what we're doing is whenever and wherever it is as best we can because we've got it there. So it's a lot easier to sell a dress you have than a dress you didn't have. So for me, I've got to just make sure it's in the right place wherever possible and that we don't have to, you know. The same applies for an Avenue knit top, I should have said.
If I've got 10 knit tops that I've bought in the shape and their demand slows down for them, I will just push 3 of those into the next season and then not buy them in the next half. I really have that flexibility, Sam.
All right. Thank you.
The next question comes from Craig Woolford with MST Marquee. Please go ahead.
Good morning, Phil and Peter. I might try the old analyst trick of a two-part question so I can sneak in two like Sam did.
You don't wanna put a sub point to that as well, do you?
Yeah, I might. Can I just understand how you came up with the AUD 125 million-AUD 130 million as the target? Are you looking at a particular inventory days or stock turn on a fundamental basis? That was the first part of my question. The second part was just the commentary made about the gross margin impact as related to product lifestyle changes within the mix effect. I'd like to understand that as well.
Yep, I'll take them. The 125 to 135, we looked at the current stock holdings in categories, lifestyles, and items, and we worked through how and what, given various scenarios we could do, Craig, rather than, you know, a more traditional days in stock type thing. I think, you know, we'll still have a solid base of inventory at that level, given even if you look at historical COGS, although we are always buying for growth, and we made that sort of choice in good faith in a different market, perhaps through the years. We look at an item level and how we're gonna do it, what we're gonna trade. I look more at a category and lifestyle level. I used to get to look at an item level, Craig, but I don't anymore.
You know, we really try and see where and how we can do it and what actions we can take in certain scenarios to get to that number. Now, the next of product lifestyle is about, like in Australian Online, we've introduced the conservative stream as is well documented, and that is generally at a lower margin percent in Australia than what the City Chic brand is, especially given our market penetration in City Chic is so high and the fact that we're trying to get an additional share of wallet. Also, share of wallet categories like bras and boots, as I put up in the core, although the core products are always good, as we do other things and try things, they are generally lower margin and are pushed online.
You understand the geographic one, the product and lifestyle is that. Does that make sense? Am I clear?
Generally, the categories that are additive, you know, the way you're expanding in product or markets is slightly dilutionary to gross margins.
Exactly. Craig, I think with things like shoes, as it becomes more of our business, I can go more direct to the factory, right? You know, intimates, we started through agents ten years ago, and now I have a direct team that does it ourselves, giving us better margins because it's now a material part of our business. But before we have demand, I don't go setting up infrastructure in case. We leverage other people's and take that margin sort of, you know, I'd say hit, but smaller margins in those categories, and then once we establish demand, we'll then go deeper into the supply chain.
To that point about dilutive to the margin, remember, as we pursue some of these channels and some of the new channels, it's incremental dollars that are being driven at the same time. That's, you know, that's what we're managing is channel growth, product mix growth to optimize the dollars that we bank at the end of the day.
Sure. Thanks, Peter. Thanks, Phil.
Very much.
The next question comes from Wilson Wong with Jarden. Please go ahead.
Hi, Phil and Peter.
Hi, Wilson.
Hi, how's it going? Just an extension of the previous question. So what level of discounting are you factoring into your inventory guidance?
A normal one is my answer to that. Really what we're saying is, as I said, we run scenarios, you know. What we're factoring in is promoting to drive market share, not clearing to remove stock. You know, I'm a retailer, right? To me, that makes a hell of a lot of sense. I understand that my audience perhaps sees things differently. I think it goes back to the fact, you know, you hear what Macy's and Nordstrom's and Torrid has said in America, that they've got stores. Right? Now, we don't have to. If I have inventory left that is only, you know, that seasonal style, I can push it through, right? I don't have to clear it all week one.
If it's on whatever sell-throughs and covers, I can really manage through that. We do run scenarios to make sure that we know we can get it in. We have a very small single-digit % of our inventory in any form of clearance, you know, and that's normal.
Sure. Thanks for that. I've got another question, but I'll jump back in the queue.
Everyone else would ask it. Can I say that? I know I laughed it.
The next question comes from Aaron Rossi with Barrenjoey. Please go ahead.
Hi, guys. Hi, Phil. I'll be checking out too, if that's all right, please. Just in terms of the inventory, that's AUD 125-AUD 135. T hat's not calculated in a vacuum, so there's an assumption you've made around sell-through. Just maybe one way to ask it is what sales growth, roughly, I'm not asking for exact number, but range of growth, if any, you're assuming. Maybe another way, if you can't answer that, is if your sales are flat in 2023 on 2022, what happens to that inventory balance? How much higher will it be?
Look, what I'll say, 'cause I won't answer the first question, Aaron. I appreciate you saying that. There are scenarios. We haven't bought everything in FY 2023 in that season bucket that I've shown you in the graph on page I can't remember, but the graph on inventory. Sorry, I should know the pages. You know, see how we've got seasonal purchases. You know, they're like AUD 30 million in each half. A lot of these are our smaller runs, our more I can move and shake and then ship some of those dresses out, you know, if I ever, let's say, if I have 10 and demand halves, I can move 5 into this year and 5 into next year. I've run scenarios to allow me to get there in scenarios, including what you said to very varying numbers.
Okay. Basically, like, no matter what happens to demand, you're still confident on that 125-135? Or like, at what point does that build higher and you can't, like, you physically can't move it? Like, 'cause there will become a point where it just builds too much, right? Or am I wrong?
No. Well, you've got to take that down to item level and look at how much. It's not as linear as that, and it's not that. I've got many other channels, and then I can move it between regions, and then I can look at different partners. To me, it's about moving and shaking and trading the inventory. But yeah. As I said, there's many levers I can pull to get to that number. I think, yes, I have to say, Aaron, if the world, you know, capitulates and things happen as everyone seems to think it's going to, except, you know, there's caveats around the geopolitical situation in the world, you know, further pandemics.
I mean, I'm assuming a relatively normal world, not something that's there. You know, even in strong headwinds, as people are putting it now, I'm confident. I have to put a caveat that there are other things that impact demand. If that does, we'll be, but we wouldn't have put that out if we weren't fully confident.
Yeah. Perfect. Just to reiterate or clarify, when you're saying you expect profitable growth in FY 2023, are you saying you're expecting to grow EBITDA year-on-year, which I think is one way someone on Sam interpreted, or is it just basically you expect to grow-
I mean, we showed.
Every dollar sales at a profit.
M y comment to that is we showed 39% revenue growth to 12.8% EBITDA last year, and we're expecting to continue growth at a profitable level.
That makes sense. Thanks, guys.
Thanks.
The next question comes from Hayden Wong with Evans and Partners. Please go ahead.
Morning, both. In the outlook commentary, you called out anticipated promotional activity and putting through price rises where appropriate. I mean, are you able to give a sense of what extent of promotional activity you're sort of expecting, or has that sort of come through? Have you already started putting through price rises?
Where appropriate, yes. I don't really wanna go on a call around more detail than that around the price rises. In differing markets and different categories, it's all gone through. It's a complex spreadsheet of SKUs around the world and matching to competitors' prices. There's not an easy answer to, you know, it's going up by this much. We are looking in market. I mean, as I've said in Australia, guys, we haven't really reviewed our pricing architecture for probably nine or 10 years up to last year, and we're continually doing that in line with market. I'm sorry, I forgot, Hayden, the second part of your question.
Oh, sorry. It was just to what extent.
Promotion activity
of promotion activity do you sort of expect?
Yeah, look, I think with increasing intake retail, you know, we're able to drive promotion out of where we are even a little bit more and maintain margin. The idea of an intake lift is that it allows you that room at margin. We have the inventory, the cost, and we know its cost. So if I can get a little bit more, even if I have to promote the same or equally as more as the price rise I've put in, then I can maintain margin. Look, this is not an exact science, but what I wanted to say is I'm aware of what's happening in the world, and we've taken actions around it to try and mitigate that.
You know, the discretionary environment is competitive, and we wanna make sure we're driving market share. You know, we will do what's needed to keep that customer growing. You know, it's not an exact science, as I said, but we are really trying to make sure we, you know, continue our journey of growth at a profitable level and that we meet the market and continue to get market share and market penetration. We've got the inventory in these markets to do it, right?
Yeah. Okay. No, that's helpful. Thanks for that.
The next question comes from John Hynd with Wilsons. Please go ahead.
Good morning. Thanks for taking my questions, or question.
Good morning.
Thank you. Can you help explain where your position would sit for the full-year, excluding the AUD 28 million delivered early, the AUD 20 million taking ownership early, and then the FX impact? I haven't quite got to that. Where would your inventory sit excluding those three points? How does that compare to perhaps where you were in the half, and then the guidance that you're giving for 2023?
It would be at least $28 million lower, John. Is that the first part? The FX, there's moving parts in that 'cause we hold a material volume in our U.S. company in US dollars that in order to consolidate the amount, you know, I'm not gonna go into what we internally did. What I can say is that the FX rate at year-end was around the 68 mark. That is public information. I'm not the only one that knows that. We're anticipating a lot higher, and a material portion of our stock is held in the U.S.., in US dollars that had to be revalued accordingly.
You know, it was sort of higher than it was at the half , but not as high as we've reported now. That's just timing. It's not about the inventory or purchase or there. It's just more product on a boat or in a warehouse that I'll have to sell through the next 12 months, and I'm very, very confident I can do it.
The next question comes from Joseph Michael with Morgan Stanley. Please go ahead.
Morning, Phil. Morning, Peter.
Yeah.
Thanks for taking my question. Just on EMEA business.
Yeah.
You talked about positive EBITDA in the second half. Just wondering when you expect the EMEA business to approach group margins. Do you think that's possible in FY 2023?
Joe, I think the first thing is, you know, someone asked about European headwinds in the first part. I see it in time, Joe, is my answer to that. I do think, you know, there's a lot of, I'm not gonna say moving parts, but volatility in the EU, and I'm very happy that it's returned to profitability because it has been volatile even up till now. I think we're in very different parts in the U.K. with Evans than we are in Europe. Europe is challenging, I will say. We've shown good growth. To be AUD 43 million revenue is really strong. You know, and I'm not quoting growth numbers 'cause they sound silly. Again, you know, I see through that, so I assume you guys would.
What we really do is building a strong business to offset the market headwinds, right? In the U.K., Joe, we're really at the stage where we were at the start of Avenue, meaning we've got huge upside with bringing our assortment, but we're just. My belief is that we may not see completely the upside, but hopefully we can at least maintain where others might struggle a little bit more. With our actions on retail prices, we believe we can be equally as promotional or to drive the market share, I'd say, where possible.
Okay, great. I might just sneak one quick one in.
No, please.
Just on the net cash position, so you've guided to, I think, strong net cash by the end of second half 2023. Just wondering, at first half 2023, do we expect to go into a bigger net debt position before going to net cash?
Look, I think, Joe, there's a lot of moving parts through the first half and second half and, you know, a lot of volatility. What we're confident of, given all the questions we've had so far, is where we can get to by the end of the year. We do expect decrease in working capital by the year-end. How material and what that is, again, I don't have as much flexibility in the 6 months as I do in the 12 months around the buy. I just. There's a lot of moving parts. What we can commit to is at the end of FY 2021, there'll be AUD 125-AUD 135 releasing a material volume of cash.
The next question comes from James Casey with Ord Minnett. Please go ahead.
Hi, good morning, gents. Just a question on the costs, just from slide 25. The fulfillment costs are running at round numbers, say 18% of sales, up from 12% of sales, a couple of years ago. Is this a permanent shift in that cost, or will there be some relief over the next 12 months?
Yeah, look, it's a good question. You know, as you sort of mentioned, mix drives that, and probably it would be good to have a look at the fulfillment costs more as a percentage of the online revenue, because that's what drives a lot of that volume that's driven, a lot of that cost is quite variable and therefore driven by the growth of that online revenue. But to the point that you say, it has stepped up in the second half and in year-on-year. Now, there's a couple of drivers of that. As I said, there's the online, the mix of online revenue. There is also the geographic expansion of the EMEA. We've still got to reach maturity there.
We've still got work to do in terms of the warehouse structure and the warehouses that we operate to fully optimize that. In terms of the underlying costs themselves, you know, we have seen that warehouse and distribution cost inflation across all the regions. You know, globally, fuel prices, labor costs are putting pressure on, you know, warehouse operations. We use third-party providers in all those marketplaces, and we have very good relationships with them. We've actually shifted our model a little bit to have people embedded within the warehouses, so we can really work closely with our 3PLs to drive operational efficiencies.
There, what I mean by that is, you know, our product planning, how that drives costing, you know, pick module optimization, all of that, you know, really working side by side with our partners to help manage those costs and manage them down. It is a combination of mix, that drives that as the online revenue grows and new channels come online. There's a great deal of proactive management to actively look at the underlying costs, and we'll continue to optimize those. We also regularly review our delivery structures, and how freighting works and looking at the mix of suppliers, parcel size and packaging.
It's all, you know, very active management to help optimize both quality, sorry, when I say quality of service and cost. Yeah.
Look, James, while you're on costs, I think the other one that we are seeing actually improvements through the first-party data is marketing and advertising. We've gone into Google's Performance Max campaigns, and we are seeing reduction in cost per click. As we've been holding more data, you know, a lot more people go to our website that don't buy than buy. Because we're now holding the data and cleaning the data that I did say at the half, I believe, we're really getting improvements in that and efficiencies. Really our aim in the next 12 months is to get better at that data, to really hone that in. You work with Google to get our Performance Max up.
I'm not gonna give the numbers, but I can say that it's down fairly materially across all of our regions as we've gotten into that first-party data that I spoke about last time.
There are no further questions at this time. I'll now turn the call back over to Mr. Ryan for any closing remarks.
Look, I just wanna say thank you all for your support. It's been an amazing three years as we've built a global business to go from a store-based retailer in 2019 through the pandemic into what is now a global business is something I'm really proud of. I have a great group of people that work with me, and we're only building that team more and more every year as we learn. I know that in the long run, leading a world of curves through our plus digital global customer acquisition is a strategy that will take market share globally in what is a huge market. Thank you, everyone.
This does conclude our conference for today. Thank you for participating. You may now disconnect.