Thank you for standing by, and welcome to the City Chic Collective Limited H1 FY 2023 results. All participants are in a listen-only mode. There will be a presentation followed by a question and answer section. If you wish to ask a question, you'll need to press the star key followed by 1 on your telephone keypad. I would now like to hand the conference over to Mr. Phil Ryan, Managing Director and CEO. Please go ahead.
Morning, everyone, thanks for joining us. I'm Phil Ryan, CEO of City Chic Collective. I'm joined today by Peter McClelland, our CFO. This morning I'm gonna talk you through what's been a challenging half and outline our pathway to sustainable and profitable growth. Peter will then talk to the financials, and I'll come back and discuss current trade and outlook before opening up to questions. Moving to slide 4. Sales were AUD 168.6 million, 8% below last year, with a pleasing 38% up on the first half of FY 2021. This highlights the strength and demand in the prior corresponding period, where we had almost 50% growth in the half. The connection we have with our loyal customers is as strong as ever, and our returning customer numbers are up in all of our regions, which is very pleasing.
Our traffic increased 7% in the last 12 months, and our email engagement remains strong globally. The fact that traffic, email, and our loyal customer numbers are maintaining means she's not leaving us. She's just a little more cautious around her discretionary spend. Our range has global appeal and we've learned a lot about what she wants, in what volumes, and more importantly, in what region, and we're adjusting our forward purchases to match that. Market-driven promotional activity was prevalent all half through the USA and EMEA, with Australia escalating around the Black Friday period. Combined with input cost increases and period end adjustments, this all led to an eight basis points margin decrease and fulfillment was five basis points above last year. I'll talk more to these on slide 6.
As part of the half year and seasonal inventory review process, we provided additional AUD 19.6 million for inventory focused in EMEA, predominantly due to the duplicated logistics costs and duty costs as we reposition the inventory, warehouse consolidation, and EMEA excess holding. I'll talk more to all of this on slide 7. Operating EBITDA, pre-AASB 16, and before the additional provision, was a loss of AUD 3.4 million and in line with guidance. After the provision, it was a loss of AUD 23.1 million. Recognizing this position, the C-suite have elected not to receive our incentives for FY 2023, and the board has reduced directors' fees effective in February. We've taken action on our controllable costs with marketing down 34% in line with demand, which we managed to our ROI expectations as we saw conversion decrease.
The increase in wages on the prior period is the majorly due to the store openings through July to October, with some inflation obviously, with headcount below our budgeted numbers in the support office. CapEx at AUD 2.4 million was 54% down. Store rollouts and refurbs have slowed as the store network is predominantly in the new format now, which is very pleasing. Our IT spend remained as it needed to for the business to continue its journey. Inventory reduction remains on track and net debt was AUD 13.4 million, with AUD 500,000 of buy now, pay later reclassified into receivables after the January announcement. Lastly, with the support of our bankers, we've amended our debt facility to have covenants focused on liquidity that have been extended through the year end of FY 2024 to better suit our capital needs.
Moving to slide 5. This shows demand was impacted in all regions as shoppers returned to stores after a strong online performance in FY 2022. The USA saw the largest decline with sales down 14% on what was a strong 60% growth half in FY 2022. On the first half of 2021, we're up 36%, which highlights our strong midterm growth. Avenue had the largest impact from weak consumer demand given the customer demographic. With City Chic performing well early in the half, however, it had a challenging Black Friday period as the event dressing category slowed. In the half, we saw a drop in the marginal one-time customer. However, in the U.S., our loyal and returning customer base is growing, which is very, very exciting. EMEA was up 2% on constant currency basis. However, it was well below expectations in all channels.
Evans' website grew, again, well below expectations as demand was materially impacted in the all of EMEA by what was a challenging economic environment. Australia had a good start to the half, shifting in November with disappointing Black Friday and Christmas period to end down 3% for the half. We saw a return to stores, with store revenue up 27% and online down 19%. Partner growth at 133% shows the opportunity globally, even in an uncertain environment. Moving to slide 6. This slide outlines the 2 key factors which impacted our results: the decrease in margin and the increase in fulfillment costs. On slide 10, I'll outline actions we're taking to remedy this.
Margin reduced 8 basis points in the half before the additional inventory provision, with 5 basis points due to trading margin decrease and 3 basis points due to business as usual provision movements, all occurring in December. The trading margin decline was due to 3 key areas. Firstly, responding to the heightened levels of competitive promotional activity that we needed to drive demand focused in USA and EMEA. Second, the higher shipping costs in the current stock base. Driven by the complexity of our origins and destinations that we were shipping to at a time when shipping costs were materially elevated, and again, this is focused in the northern hemisphere. Lastly, a higher mix of partnership revenue that we said before is at a lower GM %. The movement in ordinary course provisions in December was due to 2 key areas.
The higher inventory levels in this half led to increased operational provisions that will unwind as the inventory reduces. Secondly, in the prior corresponding period, there were favorable adjustments relating to EMEA acquisitions as we sold through Evans and Navabi legacy inventory through the half that had been provided for. Fulfillment costs increased 5 basis points as guided to, predominantly due to, firstly, the lower basket size, which drove up the cost per unit as a % of revenue. The inflationary pressures increased our rate cards from our 3PLs. We had in-elevated inventory levels, especially in EMEA, led to higher storage costs that unwind as the inventory sells through or we move it around the world. Our multiple warehouses required double handling, which of course increases the cost. Lastly, higher return rates focused in EMEA. Moving to slide 7.
Our inventory reduction remains on track to deliver the full-year targets, which have been reduced by the amount of the additional provision to be AUD 105 million-AUD 115 million. We reduced operating inventory by AUD 32.7 million in the first half, as expected, and we have product in market ready for the second half, meaning limited purchases are required. EMEA is the focus of our excess inventory position due to the lower than anticipated demand. Evans is the premier plus-size brand in the U.K. and has a huge database and brand heritage. We anticipated this would show a similar trajectory to Avenue after the acquisition, and that didn't eventuate into what became a downturn.
To compound this, in the first year and a half in EMEA, we had logistical issues, meaning a material portion of the inventory, as had been outlined, was not available to sell as it had been planned. The inventory remains commercially appropriate for higher demand markets, accordingly, we've been repositioning this inventory to Australia and the U.S., where seasonally are market appropriate. This move and the excess inventory are the main drivers of the additional provision. The provision has three components. Firstly, as I said, the duplicated logistics and duty costs to distribute the product from EMEA around the world. Second, an allowance for stock loss and fragmentation as we close all of our warehouses globally in the second half. Lastly, slow-moving categories we're electing to leave in EMEA.
The balance of the stock in the USA and Australia remains healthy and as previously discussed, can sell through seasons if required. EMEA, with these actions, will be better placed in FY 2024. It will take longer to sell through all of the inventory than we originally planned. This has been reflected in the provisioning. However, I am confident in the value of the inventory. Moving to slide 9, a pathway to sustainable, profitable growth. Our strategy to lead a world occurs through delivering our product range into global, digital, partner, and storefronts to the huge global plus-size market has been consistent and very successful over many years. I know this will return. There are five key focus areas we have been and will continue to target. I'll talk through them all starting on slide 10.
The first is targeting a return to historical gross margins through increasing sell price and reducing cost price. Our actions to increase sell price are tightening our range of volumes in line with demand. With multiple seasons now of history in all of the markets, we have a better idea of what she buys, at what volumes, and what price. It has been hard to learn through COVID and what's happened within the last six months with the economic headwinds. We are consistently adjusting our buy from what we've learned and reducing our volumes in low demand categories or lifestyles in each market. We'll move away from low price commodity items and focus our customer towards a more emotive purchase that she's prepared to buy into at a higher price and is less competitive.
This is really where our expertise in fit and quality are more of a unique selling position. If you look at all of our partner business around the world, this is where we're driving the growth. We'll return to an agile supply chain and follow demand. COVID supply issues and the volume of inventory restricted our ability to react to our customers. As these are both unwinding, we'll be able to get back to the following her demand and being nimble. It was this operational agility and following demand that's underpinned our long history of success. As the market conditions normalize, and obviously in line with the market, we'll reduce our promotional cadence. Lastly, we'll finalize the retail price increases globally in line with our competitors.
Our actions on the cost price side are focusing on a core factory base in 3 key regions, simplifying to 3 origins and 3 destination ports, meaning volume shipped in each lane increase and the complexity that adds cost decreases. That will materially reduce our cost to ship the garments. Compound this, the global shipping costs have already started to reduce and reliability is improving. With a new freight forward partner that comes on board very soon, we'll be able to both reduce costs, sorry, and also reduce our lead time. The second key focus is to return fulfillment costs to historical levels through building long-term scalable facing logistics operations. Our actions to reduce this include removing complexity in our warehouse network by rationalizing 3PL facilities from 12 to 4.
This will reduce double handling costs and mean more inventories for sale, increasing our efficiency. In the next few weeks, we are launching our automated facility in the U.S. to better serve customers, and our new partner there also has materially reduced last mile freight rates. We're serving emerging markets from larger regions rather than having pools of stock in market, and we're doing this to reduce the fixed costs while increasing the assortment to customer. With the closure of the E.U. warehouse, we are now serving all of the E.U. from the U.K., and it's working. As the inventory unwinds, the cost of storage and rehandling will decrease, and we are reviewing our returns process and customer experience while not sending our product categories in market that we've observed high return rates in.
Lastly, as we increase sale price and basket size to historical levels to initiatives outlined above, fulfillment costs as a percentage of sales will decrease. The third focus for the business is on reducing operating costs and CapEx in line with demand. To illustrate what we've achieved, we managed a marketing spend down 34% in line with demand in the first half. This was done as we're not seeing the required ROI as customers were just not converting. When conditions normalize and conversion improves, we'll increase our marketing spend to drive acquisition, which has been historically very successful for us. Moving to slide 11. Our fourth point on the pathway to profitability is that the international business is set up for growth. The hard work is done, and we have a global footprint.
It's difficult to build a brand and a customer base in new markets. We've achieved this, and it's not always smooth sailing. To service this, we have scalable operating structures that when demand turns will be ready to grow. In FY 2022, the USA and EMEA both contributed to the EBITDA growth. In this half, they're impacted by lower demand and the competitive environment. They will return to profitability as conditions improve. I'm very confident in the future of these great heritage brands, Evans and Avenue. Our geographic diversity reduces concentration risk. As demonstrated in the last two years when the Australian stores were closed, the U.S. business delivered our profitable growth. We have a product range that has global appeal and well-recognized brands in all markets. We are constantly learning and editing that assortment for each market after what she tells us.
The fifth focus is our partner business, and this has shown exceptional growth and is a huge opportunity. Although they're at lower GM %, they provide leverage on our cost base and contribute strongly at the EBITDA line. Most importantly, they deliver eyes for our existing brands and product ranges in all markets and support our omni-channel approach. Turning to slide 12. Ethical trade is woven into our operations at CCX. We continue to build on our ethical sourcing policies and practices. Our goal is to work together with our global partners for a more positive impact to people and planet. The key achievements here for the half are we completed our first cotton DNA test and traced it all the way back to region. We achieved a nice rating from Oxfam, and we continued to develop more sustainable packaging options. Peter will now talk to the financials.
I'll throw to you, Peter.
Thanks, Phil Ryan, and good morning, everybody. On slide 14, as Phil Ryan has indicated, our revenue is impacted during the period by lower demand across our markets, in particular the Northern Hemisphere over the key trading period of Black Friday, Cyber Monday, and the Christmas new year period, as we've reported. Total revenue for the 6 months was 8% below last year. The importance of our diversified geographic and channel mix is shown by the fact that while the online channel was down 21%, stores grew 27% post-reopenings, and the partner channel grew 111%, contributing an additional AUD 9 million of revenue to the half. The gross margin before the additional inventory provision was 51.7%, which was 8.3% of revenue lower than last year.
As Phil has outlined, of the decrease, circa 5% relates to the trading margin with higher promotional activity to drive demand and respond to competitor activity, and also due to the higher logistics costs related to the disruption of global supply chains. Of the balance, circa 3% related to the provisions raised prior to the seasonal review and the prior year benefiting from acquisition-related provision releases that happened late in that half. Regarding the additional inventory provision of $19.6 million, the review of inventory was undertaken as part of our half year and the usual year-end review processes. As a reminder, the season traded below our expectations, and inventory was reviewed in this light.
With the higher levels of inventory in EMEA and the lower sales in that region, the decision to redistribute the inventory across the business has been taken, and we have provided for the duplicated freight and duty costs impacting on the net realizable value, as well as additional provisions for slow-moving lines in EMEA. Also, given that the warehouse consolidations are as in the process of implementation, decisions were taken to provide against inventory risk and the inventory that won't be moved. The management of cost is an ongoing focus of the business with a combination of both structural changes and tactical cost management programs underway. The increase in the fulfillment cost in the half were a result of inflation-driven rate card increases by our 3PL providers and the inventory holding costs.
This is being addressed by the consolidation and closure of warehouses in the Northern Hemisphere and other efficiency measures and will see us moving in time from 12 facilities to four. Beyond fulfillment, the total of all other costs was below last year. Our advertising and marketing costs reduced in line with demand and with a focus on higher return on investment promotional channels. While the resultant spend as a % of revenue is lower than last year, it was in fact in line or slightly above, sorry, the H1 financial year of 2021.
In respect to other costs, the business maintains tight cost management disciplines, noting that the prior year benefited from lower store labor and rental costs of $2.6 million due to the COVID-related store closures. Underlying EBITDA before the additional inventory write-down was a small loss of $3.4 million. After the write-down is a loss of $23.1 million on a pre-AASB 16 basis. On a post-AASB 16 basis, the loss was $17.8 million, including the additional provisions. Note that we are transitioning to post-AASB 16 reporting and have included both in this report for comparative purposes, and there is a slide in the appendix that will assist in the reconciliation. Moving to slide 15, where I'll talk about the balance sheet. Pleasingly, the reduction of inventory is on track despite the tough market trading conditions.
We've spoken about reductions in inventory and the provisions, I won't go into this further. From a working capital perspective, the reduction in inventory in H1 was offset by the unwind of trade payables. This, with other trading and non-operating expenses and capital spend, has resulted in the net debt increasing from AUD 4 million at the end of last financial year to AUD 13.4 million this half, in line with expectations. In respect to the working capital movements during the half, trade payables has come down by AUD 34 million to a more normalized level, whereas inventory is still in the process of normalizing as we work towards the full-year inventory targets.
In respect of the second half working capital, as we now have the majority of next season's stock in markets, there will be significantly reduced levels of intake during the half, which will result in more favorable capital, working capital movements. That is to say, we expect strong cash flow conversion in the second half, and that is why we expect to be in a positive net cash position by the financial year-end. As we've noted in our January update, we've amended our debt facility in line with current business requirements and to reduce line fee costs. The overall facility size was reduced to AUD 46.5 million. However, the amount available to working capital was increased. This steps down to AUD 36.5 million post the financial year-end.
As part of these and subsequent amendments, the current net leverage ratio and fixed cover ratio covenants are replaced by a liquidity covenant from now through to the end of the 2024 financial year to give the business flexibility in the current trading environment. I'll now hand back to Phil.
Thanks, Peter. Moving to slide 17. The first seven weeks have seen an improvement from the November, December trading patterns, with sales down 17% in a continued challenging operating environment. Compared to the November, December trends, stores have been much stronger, cycling Omicron last year. ANZ and USA online have improved and EMEA remains at the November, December levels. Our competitors' discounting moved to heavy clearance in January, February in both the USA and EMEA as they work through inventory issues. Following this, and with all the warehouse moves globally, we have been trading clearance and outlet to sell all the fragmented end of lines and seasonal product that will not go to a new warehouse. We are changing this with the transition of season in the next week or so and expect this will drive a normal promotional cadence.
Our logistics simplification programs are on track, and the warehouse closures are doing well. We've adjusted the half 2 buys to reflect the market demand, and we're following our customer wherever we can. Moving to slide 18, this will show how we plan to navigate the economic headwinds in the next few periods. The benefit of our actions in margin logistics are expected to materialize into the second half, focused in quarter 4 and into FY 2024. For the second half, we have seasonally appropriate inventory in market and are moving stock globally to limit purchases and are on track for inventory to be at AUD 105 million-AUD 115 million at year-end. Our reduced inventory position into FY 2024 will allow us to be more agile and follow demand and get back to what made us a successful business.
From all of this, we have strong free cash flows and expect to be in a net cash position at year-end. We'll continue to control our manageable, manage our controllable costs in line with demand. Look, I've been involved in a lot of product ranging over the last few months, I'm just really excited to see the learnings we've taken and what we're giving her, and I know that we've bought into what is gonna be a better customer experience for her 'cause we're using all these learnings and then getting back to what we're good at to make sure we're delivering a better experience for her in all of our global channels. I wanna wrap up on page 19 by reminding you of the enormous opportunity we have ahead of us.
We have strong fundamentals and a significant growth runway as a market leader in the huge and growing global plus-size market. We have strong brands in all markets and are still early on our journey. Our simplified, more agile operating model will allow us to leverage customer-centric approach as we focus on her and the insights she gives us. I'm very optimistic about the future for City Chic and have the right team around me to make sure we execute on the key focus areas I've outlined today, which will set us on a path to sustainable, profitable growth. Thank you all for listening, and I'll now open up to questions.
Thank you.
Please.
If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the headset to ask your question. We ask you to limit yourself to 1 question. If you have more questions, please rejoin the queue. Your first question comes from Marni Lysaght from Macquarie. Please go ahead.
Hi, Phil and Peter. Thanks for taking my questions. Just to make a start, can you give us any color on the depth of promo going into the second half versus, say, what it was over the first half of 2023 and kind of compare your depth relative to some of your peers?
It differs very much by region, Marnie, is the first thing I'll say. I'll move into the US. The US was heavy clearance. For us it's been a big warehouse move, as I've said many times, where we're really trying to make sure the fragmentation and any end of lines aren't in that warehouse move. I'm buoyed by the fact that both Ashley Stewart and Lane Bryant had similar outlet style activities over the last few weeks. It's been a really heavy market in America, I don't feel that we have been. Even though we've been excessive, I'd say the whole market in the US has been really, as I said in my speech, January, February's been very much clearance. A lot of people are dealing with their excess inventory positions.
The UK has been different. I think it's just driving for demand. I think it's a challenging market over there. Into Australia, we've been probably not materially different to what we had in previous years. I would say as a whole, it's just really been America that's driven very hard.
Okay. We can take away from that is that sort of the depth of promo is being more accelerated January, February, compared to, say, what it was pre-Christmas in the United States.
Yes.
Cool. Cool.
In EMEA as well. All of that. Yes.
Okay, higher promo. Yeah. You haven't seen any alleviation, from EMEA being more seasonably warm, same with the United States.
Yes.
After sort of a few arctic chills and things like that?
Yeah. Look, the U.K. definitely wants to move on to season. If you go and look at our website, Evans, today, they've moved on. I think she's over the winter period now and is moving into summer. I think the U.S. has, you know, we expect to transition in the next few weeks as we move into the season. Australia, I think winter's going live as we speak now, regardless of what happens outside. I think it's amazing, Marni, what you see with the behaviors. If she wants a coat leading into winter and it's a good coat and the style's desired, she buys it.
Um-
Same with a dress into summer in the northern hemisphere.
Just on this, on, like, early calendar year 2023 trading, just if we go back 12 months ago at your updates, then, you know, Avenue started to really slow. How much is Avenue when you talk about Avenue being up? Is it easy comp versus, like-
[crosstalk]We didn't say Avenue's up.
Like, because we've got this... Yeah.
What we said, Marnie, was it's better than it was in November and December.
Oh, okay. Okay.
The comment. Like, it's gotten better. I think we said publicly that, you know, Avenue towards sorta the end of half 1 2023 and middle was more challenging last year. With the commentary we've given so far.
Yes. Okay. That's clear. Okay. Then when you think about the promos, that sort of gives you a bit of a color, a bit of an idea of what's going on.
Yeah.
My other question just relates to about your, I guess, your trying to play around with you improving your growth margins over time. When you talk about changing the diversification of origins, just how should we be thinking about that, given that I remember like, you know, with the onset of COVID, you guys rushed to change sourcing, and diversify away from China?
The three key regions we've been able to, we're operating now are China, Bangladesh and India. We can pretty much do all categories if need be in the event of a, you know, something happening that renders one source not well. We're sort of diversified enough to make sure we have categories covered. It's not gonna be easy if that happens, but I'm confident with where we, where we've gone. I think it's about being meaningful to a few factories and suppliers. We went out over the last 12, 18 months and really tried a lot, and I think we bought a lot of our volumes through seasons, but we won't be repeating those behaviors.
I think, we've learned the kind of factories that can really do our product well. We'll be focusing on them to make sure that we're meaningful to them.
Okay. Just to make that clear now, the new plan will just be China, Bangladesh and India, 'cause I remember you.
We do still have.
Have a bit of Vietnam.
Yeah. Vietnam's been a little more challenging. The volumes required are high at this stage.
Mm-hmm.
We're still trying and talking to people there to see what they can do. you know, there is other complexities that come with multiple origins if the volumes out of that origin aren't sufficient to fill containers, et cetera, Marni. We have to be measured. I think a lot of that, the inefficiencies I talked about in our shipping related to, you know, all these origins having volumes that necessarily weren't especially into EMEA, that weren't the most efficient way to ship it. That was done when shipping costs were very high.
Just a final one from me, of the provision recognized of AUD 19.6 million, and you say it's largely relating to EMEA. Like, how much of that is EMEA, as you say, being slow to clear versus some of the shift of the stock to the other regions?
Look, what we've said, Marni, when you stand back and look at the entire provision, we're very comfortable with the amount it is. It really focuses on EMEA because that's where we've seen the challenging period and where we overestimated where demand was. I, you know, we're sort of looking at the three key components of the duty logistics and handling move, plus the warehouse closures and some slow-moving stuff we're leaving in EMEA. They're the big three components. As I said, it's predominantly in those three areas, as I said in my speech.
Thanks for answering my questions. I'll jump back in the queue.
Once again, please be reminded to limit yourself to one question only. Your next question comes from Sophie Carran from Goldman Sachs. Please go ahead.
Hi, Phil and Peter. Thanks for taking my question. Just one around the inventory. Could you give us a little bit more color around sort of the newness of that inventory? I mean, how much of what's sitting there now is sort of old product that still needs to be cleared versus new product ready for new seasons? Then just to sort of follow on to that, I mean, how are you thinking about sort of what you need to see in the market before you can sort of look to increase price? I guess, given sort of not only the inventory clearance that's impacting margins, but also the weaker consumer environment. I mean, are you comfortable that you can increase prices in this environment, or do you need to sort of wait until things improve?
I'll answer the first question. The predominant purchase is into the second half around Australia and the stores to make sure there is enough newness and consistent newness on a weekly basis into our stores. In America, we had a lot of inventory that never went to our customer, and we sorta assorted the range towards the May, June, July period as demand, you know, tailed away to the end of quarter four, FY 2022, we've got more than enough inventory in that that hasn't been seen that will be derived as newness, and the team are very excited about. In EMEA, the it will all be new for them this year 'cause there was a lot that didn't go live but
Really it's Australian stores on making sure we are getting that newness in, there's more than enough in the main market of the US and EMEA is going. As I said in the speech, has a lot of product that never saw light of day. There's a lot of newness to the market. We've had good history of managing through those processes and bringing new back over the last two or three years and making sure we position the flow of inventory and the look flow and lifestyles in to meet what she's buying. I think when I said in my speech, that's what I'm excited about. You know, we're really getting back to monitoring that on a tactical basis to make sure the newness is in line with what she wants.
I'll be really excited over FY 2024 as we can more react to her and do those kind of things that I think made us strong and get back into chasing demand rather than buying for long periods and supply chain risk and political risk, et cetera. That's sort of been the story for the last sort of 2 years. The next one, you're talking about the retail price increases. Really we've done a lot of the work already, leaning into it. Summer in America, most of the prices are done. It's really the stores as they're ticketed, we've got to work through and that'll happen in winter and why that hasn't happened. We have seen, especially in America, the intake price being the first retail has gone up materially in most of our competitors.
I spend a lot of time on this, so I could talk about it forever, but the headline is most of the market are already doing that, especially in America. EMEA, I'm not as sure, but Australia we have as I said last time, we haven't increased our prices for many, many years and I'm confident, and that's happening here in the second half. I think what it means, Sophie, is we need to think about the kind of promotional cadence and then get you to an end price. What I've said before is what we're doing with the retails is trying to style a little bit more to give her some more back through the promotions and achieve the same sell price is the goal.
Great. That's helpful color. I'll step back in the queue.
Thank you. Your next question comes from Craig Woolford from MST Marquee. Please go ahead.
Good morning, Phil and Peter.
Hey, mate.
Just wanted to ask about the inventory target that you've given us a level for the end of the year, which is obviously reduced given the provision. How are you thinking fundamentally about how much inventory you now hold? On my calcs, it's still around a 2-times stock turn that you'll be on, you know, exiting fiscal 2023.
Look, I think first thing we have to do, Craig, is get through the target of June. That's my first hurdle, and I wanna sorta talk through that, and then we've got to assess where that's at and what we're gonna do, and make sure that the right inventory is there and it's clean in each market when we get to there. You know, that's sort of top of mind right now and then making sure we're buying into getting good, strong stock turns and not having, you know, just losing a week, losing a month in your lead times through shipping means a month less stock, Craig, we're working towards a lot of areas to bring that down in all of our business and all of our regions over the next sort of 12 months.
Right now it's getting it to that AUD 105 million to AUD 115 million for the June number and focusing on that.
Thanks, Phil.
Thank you. Your next question comes from Sean Cousins from UBS. Please go ahead.
thanks. good morning, Phil and Peter. Maybe a question just on fulfillment.
Hi, Sean.
Given the ongoing challenges in Europe, have returns continued as they were in the first half 2023? Maybe can you just discuss the pipeline of savings from the D.C. consolidation, in terms of U.K. and U.S., just how we should see those savings come through, any in the second half of 2023, more fiscal 2024 related, please.
I'll take the first question, then I'll throw to Peter on the logistics one, Sean, if that's okay. EMEA has continued the return rates, Sean. The UK's actually gotten a little bit better, but we're assorting our range now for things that don't sell and, you know, we're moving out of there the product that she's returning on more than others. A lot of styling in our dresses hasn't worked as well in the market as we thought it would have, or it's demanded well and then returned. What we're doing is trying to edit the assortment to make sure what we're putting to market is the most likely not to be returned. That's an iterative process where we're learning on a weekly, monthly and quarterly basis. EMEA hasn't changed.
The U.K. has gotten a bit better. The U.S. never really got materially worse and neither did Australia. On the pipeline, I'll throw to Peter.
In terms of the fulfillment activities, as you know, Sean, these sort of programs where you're restructuring warehouses and supply chains take some time to implement. We've been working on them for quite a while, knowing that some of the structural changes in terms of inflationary costs were sort of coming through. They're all well and truly on train at the moment. In terms of the warehouses, we've finalized the closure of the Canadian warehouse that's consolidating into the US. There's another fulfillment center that was a storage center in the US that's been closed and the stock being consolidated. We're in the final stages now of the go live into moving to a new 3PL operator in the US.
They're all programs that are underway just as they are in the EMEA market. We've closed one warehouse already, we're in the final stages of closing the German warehouse. Those programs are all well and truly underway. You know, the structural reforms and other efficiency programs. We will start to see the financial benefit of those flowing into Q4 and certainly into FY 2024, where we'd be expecting... Our target is to get back to, you know, closer to some of those historical levels we're at when you're, you know, you've got the mix of online business. Our view is we will start to see those costs reduce as a percentage of revenue into Q4, mainly into 2024. All those programs-
Fantastic.
Are well and truly on track.
Yeah.
Great. Don't quote me. Go on, Phil. Pardon me.
No. Yeah. I'm just agreeing.
Oh, great. Thanks so much. Thanks, Phil. Thanks, Peter.
Thanks, Sean.
Thank you. Your next question comes from Sam Harder from Petra Capital. Please go ahead.
Hi, Phil. Just on that.
Hi, Sam.
Hear me now. Just on Brett Blundy's investment, is he bringing anything to the table so far? Has he been active in the business? How much can you leverage off his contacts?
Look, I, as I would with any investor, you know, I can't sort of talk openly about what they say. I've, Michael Kay and Brett have a relationship through Lovisa, and I've known Brett well, and I look forward to him being on the register. He's a great strategic investor in retail and an astute eye for what is value, I would say. You know, we're very lucky to have someone like that on the register.
Has he been active in the business yet or is it still-?
No.
Right.
Can't comment on that, Sam. I, you know, I can't comment on things like that.
Okay.
He's an investor.
Thank you.
Thank you. Your next question comes from Wilson Wong from Jarden. Please go ahead.
Hi, guys. My first question is just around, can you provide a breakdown of the sales trend in the second half to date? More specifically, like how have City Chic U.S. and Avenue been performing, and also for Evans and Navabi?
Let's Look, what we've said is 17% down at a total level, Wilson. We, you know, I think that we haven't historically given the number at this time of year, and we really thought long and hard about it and thought it was the right thing to do given the environment. What we've said is that the stores were much stronger and obviously I think everyone that has an Australian store business really understands that. The USA and Australian online were continuing those, the trends from November, December, and EMEA was. Sorry. The U.S. and Australian online are better than the trends, and EMEA is continuing. It's only really been seven weeks, you know, so there's not a lot.
I think when you look at, Avenue and CC, as, you know, we've been really trying to prepare ourselves for what is a huge structural efficiency move in the warehouse, and, obviously that has a big impact in the market, and that's almost done right now as we sit, which is very, very exciting. Evans is, as we said, is continuing the trend in EMEA.
Sure. If I can just squeeze in one more. Can you just clarify what McGrathNicol's involvement has been to date?
Certainly. I'll throw to Peter for that one.
We use McGrathNicol across a number of their consulting divisions. You know, we use them to get some debt advice, as we discussed more recently with the changes and the amendments facility. We also use them across a number of other consultancy areas as well, like cyber, et cetera. It's just the consultants we chose to use.
Sure. Thanks for that.
Thanks. Thanks, mate.
Thank you. Your next question comes from Chamithri Ratnapala from Bell Potter Securities. Please go ahead.
Hi, Phil and Peter. Thanks for taking my question. Just wanted to explore with the inventory provision. Can we talk about sort of, you know, at a broad level, what sort of assumptions for market weakness in EMEA have you considered sort of going into the second half and considering the risk?
Yeah. Look, I think what we're trying to do is rebalance the inventory around the world. I think your question, Chamithri , was how do we see EMEA into the second half? If I can just clarify that, is that what you're asking?
Yeah. EMEA. Yeah. EMEA into the second half versus the current provision that you have taken. What are you accounting for as per the risk in the region?
Yeah. Well, look, I think the risk is we, the reason as we said, is the three items I won't outline again. You know, EMEA has been the focus of it because demand has been challenging in that region. You know, I'm not. You pick up a newspaper on that one, I'm not the only person saying that. There's many of the online traders in the US such as ASOS and Boohoo have had very, very challenging areas, and we're looking to reposition the inventory into the right commercial market for it.
Chamithri , just going back a little bit on that one. With the inventory, the excess inventory that was in EMEA, part of it is certainly demand. Remember, when we were buying into that business, we were buying for the growth that Phil had identified and we'd seen in other channels and, you know, unfortunately, we hit this macroeconomic headwind. There was also some supply chain issues which we've outlined in the past, which again, more macroeconomic, around supply chain disruption in the UK, which is why we saw this buildup of inventory. For the first part of the question, we're using that inventory to rebalance it or reposition it across the globe because of that.
You know, that has an underlying, you know, there's an underlying assumption that we are still expecting, you know, that there's an uncertain market in the, in the EMEA, in the, in the European marketplace. We're making changes to consolidate the warehouses to take that cost structure out, and we're rebalancing the inventory across the globe to where it can be better utilized.
We're very lucky as a global business to have the ability to do that within market. Excuse me. That the product will still be commercially viable. If we, you know, only had one region or you only had one area, you can't take the opportunity to grow and the risk that's needed. We have repositioned and done what we think is the right thing with the inventory to do it, and that is then reflected in the provision.
Perfect. Thanks for that. Probably the second question from me would be, I mean, you've talked about more sort of historic level of GP margin that you sort of considering getting back to. Thinking about, you know, probably the next 6, 12 or 18 months, what sort of GP margin would you like to think about for the business? Thank you.
Yeah. What we've said is we're targeting, you know, where we've been historically. I think there's a lot of caveats on the next 6 to 12 and 18 months around what happens. What we've done well is all the controllable parts of, you know, shipping costs and input costs and factory costs. I'm very confident in what we've done there in relation to our controllables and that we've got a hand around them. Then it's, you know, the next question is how long does the market reply and what's she prepared to pay? You know, as we learn about more about our range, get the right product, it will only improve.
Perfect. Thanks for taking my questions, Phil and Peter.
Pleasure. Thanks.
Thanks, Chamithri .
Thank you. Your next question comes from Aryan Norozi from Barrenjoey. Please go ahead.
Hi, guys. Can I just make a few clarification questions first? Just on when you're saying the trading update was an.
Hello, Aryan
Just when you're saying the trading update was an improvement in ANZ and US versus, what you've reported, are you talking relative to November, December or?
Yes
full first half of 2023?
November, December. We did call them out, Aryan .
Yes. In terms of the gross margin returning to historical levels, obviously your mix of your business has changed because there's lower gross margins in the, in the partner brand. If I just look at the... First of all, how do you account for that? How do we look at what time period do you define as historical? Also, if I just look at your EBITDA margins, your loss making at the moment, you were doing 16% EBITDA margins pre-COVID. How do we think about the return to that margin given your commentary? Should we be expecting that in the first half of 2024 as your gross margin is normalized? Can you just give us some color on that, please?
Yeah. Look, there's a lot of uncertainty in the next 6 to 12 months, Aaron. You know, you've done a great job of outlining exactly where our business has been and what it's done and why I'm so confident we can get back there. I think if we focus on the right product, not just for us, but for partners, I think we can get back to some level of where margin was. You can see it's gone from sort of 62% in 2021 to 60%, 59% to 60% and right down to 51.8%, excluding the additional provision this year. You know, there's some of those parts are very controllable by us that we'll be able to get back very quickly. It's really gonna depend how the market fares over the next 6 to 12 months.
Our logistics is more in a controllable state, and we expect that's why Peter outlined into 2024, we expect to see them.
Gross margin back to the reference point is the 59%-60% gross trading margin. Is that right?
We're saying historical levels, Aryan , and that we're targeting them to get back to something where we were before.
Fulfillment cost as a % of sales, historical levels or as a % of online sales? 'Cause again, the mix of your business has changed, the
Stores closed for 6 months and then open for 6 months. Well, where do you grab your point? Yeah, online is a reference point for us.
As a percentage of online total online sales.
Yeah.
Okay.
Look, a big part of that, Aryan , you know, a large component of that is your sell price and your basket size. Because, you know, if your basket size increases, a fixed logistics cost per item becomes less of a %. They are very, you know, they're very intertwined. What we are doing well is taking all the controllable things around logistics and warehouse closures and efficiencies and complexity, and where by 2024 we'll have them all removed.
When you're saying online sales, do you mean wholesale and marketplace included, or you're just saying digital sales through your website as a fulfillment cost has changed on online sales? Are you referring to including marketplace and wholesale?
You have to, because they have to be picked and packed through the same way. Is that?
Perfect. Thanks, guys.
Sorry, Aryan .
No concern.
Thank you. Your next question comes from John Hynd from Wilsons. Please go ahead.
Good morning, Phil and Peter. Thanks for taking my question. Not, notwithstanding Avenue and Evans and I guess how they were acquired, and the position they were in when you acquired them, are you confident there hasn't been brand damage done here with, you know, the, with the, I guess, continued aggressive discounting and promotional activity that's happening across the, you know, the businesses at the moment? I guess, how do you think about the business trading out of this and being able to put through the right sort of price increases in FY 2024 to get back to these gross margins that we're asking questions around?
There's a lot of questions in there, John. I'll start with the Australian brand. It's probably the first one. Look, I mean, firstly, I think it's been very market-driven. I would say we're not the only ones in that spot, and I watch what she buys at an item level, and the changes of that have not been material. I know that our lady's been so strong to us and our loyal customer numbers are increasing in both America, UK and Australia. I think that marginal customer we were chasing with marketing and getting them into our funnels is where we've had challenges. I'm very confident of the strength of the brand in Australia. Excuse me. I think Avenue and Evans are similar. I think they've suffered in a more, more competitive marketplace.
I mean, the database alone and what she's buying, the traffic have maintained. Again, the fact the loyal customers have grown has been very, very positive, and that's really the driver. If my key ladies are spending, I know she's coming back to us and picking up that one that's moving out and in is then the job of growth. Does that answer the question, John?
It's sort of halfway through. It's just more what I think.
One second.
we're concerned about is. That, it's great that the customer is coming through the database and, and transacting, but they're transacting on a, like, you know. In through November, December, there were $4 bras on the website. They're transacting at those levels. Are you gonna be able to get the customer, the core customer come back when that bra is back at $16 or $19?
Look, I have had no problem in transitioning into a new season and moving that on. I'd like to see the AUD 4 bras. You must have picked up a day in Australia that you saw those kind of levels. You know, we know we need to get back into our normal seasonal buy and that the first half of FY23 was market-driven, exceptionally promotional. You know, who knows what the next 6 months is gonna hold, John. Like, if our lady's staying with us and she's spending, as I said in my speech, she's not leaving us. She's just a little cautious around her discretionary spend, and we're trying to move with her now. I'm happy she's with us. That is the important part.
Okay, thanks. Thanks very much, Phil.
Thank you. Your next question comes from Joseph Michael from Morgan Stanley. Please go ahead.
Hi, Phil. Hi, Peter. Thanks for taking my question. Just a straightforward one. Just on the balance sheet. Can you confirm, are you back to net cash position already as of sort of the end of February, just as that inventory comes down?
We haven't given that as a, as an indication, as a read. What we are targeting to be is a net cash position, by the end of the financial year. We haven't given an interim read.
Okay. Just so I can make sure I understand the mechanics of how it works. I guess, inventory, you've given guidance that it's coming down AUD 35 million. Should we expect payables will be flat? Then I guess the plug is, you know, what we think EBITDA will be. Is that a fair way of thinking about, I guess, some sort of bridge to get back to net cash?
Yeah, that's the right way to be thinking about working capital. As we said, you know, there will be some intake into the second half, but that's significantly lower than what it would have been in the first half because we've got stock located in each of the key markets for the second half. You'll see the inventory come down. As I noted, payables are back to a more normalized level. There will be timing around where orders have come in, et cetera. Clearly, payables were a lot higher in June of last year based on when, you know, inventory orders had been made and getting product in place given all the disruption that was happening to the supply chain. Payables have sort of normalized in the first half.
Inventory will normalize, you know, across the second half, which is why you'll see that favorable working capital movement.
Perfect. Thanks for clarifying, Peter.
Thank you. Your next question comes from Craig Woolford from MST Marquee. Please go ahead.
Hi. Hi, Phil. Just to follow up on your decisions around marketing investment.
Yes.
You mentioned it's down 34% in the first half. Always a tricky one to try and measure an ROI on. How do you know that there won't be a consequence or a follow-on impact to sales from reduced advertising and marketing?
I think what it should show is our reactivity to what she's doing in the market, Craig, and how that's happening in a live level. Like what, you know, As I said, conversion has been the hard part around it. The last thing you wanna first thing, you don't wanna drive people to your site to give them an expectation, especially new people, of heavy promotional activity. In some ways, you do pay for your sales through your promotion. we have, you know, pretty strong disciplines around our marketing and, you know, we're not in there to just drive sales. We've gotta make sure that the customer experience when she comes on is strong. Now, this has not been a long period. We can turn this on fast.
As outlined, I think the marketing's about what it was in the first half of 2021 or around that level, Craig, and we're able to ramp that up and get back to an acquisition very quickly. I think I said that in my speech, that when we see the conversion increasing, we will turn back on the marketing to make sure we can put some new customers into the pot, so to speak.
Yeah. I guess, I mean, your first half 2021 sales was about AUD 123 million, you know.
I was talking %, I think not necessarily.
Okay.
Yeah, it's a bit.
The marketing.
Yeah. We also had given the inventory position, we had a lot of operational marketing in that that wasn't spent as well, Craig, around photo shoots and model rights, which are in a digital business are obviously costly.
Sounds good. Thanks, Phil.
See you, man.
Thank you. Your next question comes from Sam Teeger from Citi. Please go ahead.
Hi, Phil. Hi, Peter. Good morning. Can you please talk to us a bit about just how you're managing the supplier relationships at the moment? You know, given your orders will be down in the second half, presumably they were down in the first half. I guess from a supplier perspective, is it fair to say they would prefer more frequent, regular, consistent ordering patterns than denormalize on the other side? Do you still expect to get the same pricing in terms from suppliers?
I think the good thing that's happened around sourcing around the world is there was a huge influx of orders from America to every destination through, like, the last 18 months. They've really slowed down. What we've seen, we've worked with, we know the capacity of our strong core factories, and we make sure that they are okay, is my comment, and make sure that we are working with them to understand their needs. You know, in relation to orders, at this stage, there's been a big drop in what has been ordered around the world. We're not the only ones that have done that. We've just gotta make sure the people that are important to us, we're working with well to make sure we can get what we need.
All right. Just in terms of the 17% of the trading update, what proportion is driven by the price discounting versus underlying volumes?
Yeah. Are you saying what percent of the 17% down is, Sam? I mean, we don't sort of.
Yeah
...go into that level of detail. What I will say is we've moved really in January to clearance rather than promotion, as I'm sure many of you would have seen through our websites. You can see on both Evans and Australia and CC USA, we've turned back to a now seasonally right summer, now, but it's been much more clearance than normal promotional cadence.
All right. Thank you.
Thank you. I'll now hand back to Mr. Ryan for closing remarks. Please go ahead.
I wanna say thank you to everyone for listening. I hope I answered all the questions well, I'm really excited about what's to come into FY 2024 and beyond as we keep going our vision to lead the world of curves with our global distribution setup and a real key focus and a great team. I wanna say thank you to all my team for everything they've done this year and thank you to shareholders who supported us. Thank you.
That does conclude our conference call today. Thank you for participating. You may now disconnect.