Ladies and gentlemen, thank you for standing by. I would like to welcome everyone to the City Chic Collective FY 2024 Results Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press the star followed by the one once again. Thank you. I will now hand the call over to Mr. Phil Ryan, Managing Director and CEO. You may begin your conference.
Thank you, speaker. Good morning, everyone, and thanks for joining us today. I'm Phil Ryan, CEO of City Chic Collective, and I'm joined today by Peter McClelland, our CFO. I'll run through our presentation, starting with the results overview, and then I'll give an update on our strategic actions and a little more detail on the financials, finishing with a trading update and outlook. Moving to Slide 4, we gained momentum into the second quarter in all of our strategic initiatives around our customer, product, and costs. We've returned gross margins to targeted levels in Australia and New Zealand and delivered the expected improvements in margin in the U.S. through the second quarter. We've right-sized the business for the current demand and are progressing as expected on our path to profitability.
Our focus is now on driving demand through reacting to customer-led learnings around product that our more reactive supply chain facilitates and refinements on our customer targeting to drive sustainable growth in customer numbers. Our revenue was down 29%, with cost of living pressures impacting our customer, with the first quarter impacted by inventory clearance, as we'd already outlined. The store's performance was the highlight. The full price comparative stores were down mid-single digits through the second quarter and then are now positive into the third quarter. We successfully focused our assortment improvements in this channel and delivered margin and revenue performance. We made significant progress in our key trading metrics in the second quarter against what was a challenging first quarter as we cleared inventory.
The gross margin was 10 percentage points up in the second quarter against the first, driven by the sell-through of the new product, and we're on track to achieve our target of 60%. This was driven by strong sell price increases, up 31%, and order value improvements of 7%. Our strategic initiatives delivered results at a customer, product, and cost level. We've seen improved sell-through as the ranges are refreshed, and customer feedback and engagement has been strong, with our Net Promoter Score at 71. We now have an annualized AUD 25 million out of our cost base, including further support office headcount reductions that we made in February of this year. The underlying EBITDA loss was AUD 7.5 million, as outlined in January. This includes a AUD 3 million realized cost base.
If the actions around our cost base were actualized in the first half result, it would have meant a further AUD 6.3 million reduction in cost. With the targeted margin improvements, we have the path to profitability. Our inventory has reached the three stock turns. However, this is due to lower gross margin, and I would expect this to stabilize below the current AUD 39.5 million level. At December, we were in a positive cash position of AUD 3.5 million and have the support of our banks through the FY 2025, with liquidity covenants that are right for the business. Moving to Slide 6. At the full year, I outlined the strategy that would deliver our path to profitable growth, focused on the three key areas of customer, product, and costs. Today, I will talk to the progress made against each, each area.
Our strategy is to focus on high-value customers and the emotional connection that drives our loyalty. Excuse me. In order to do that, we need to continually reinvigorate our ranges through listening to her and anticipating her needs. With the right size cost base, our focus is now totally on customers and products to drive demand and get it back to our historical levels. Moving to Slide 7.
The key measure here was the average order value, and on this measure, we have seen strong recovery. In the second quarter, average order value was up 5% on the prior corresponding period, and our sell price was up 12%. This is positive as it shows she's seeing the value in the product, in the fit, and the styling that we are delivering. And all of this has resulted in the customer Net Promoter Score of 71.
We've continued to complete extensive customer research and have determined what it is that she wants that will drive demand. We sent out a survey in Australia and New Zealand and had over 20,000 responses from our customers, and her appetite to give us feedback was the most telling. She wants us to hear her. We got amazing product-level insights and feedback on the additional lifestyles and ranges, and we are implementing them through the second half. Of the customers that responded, it was interesting, we had almost 5,000 customers that hadn't shopped in the last 12 months, and for this group, the major issue was the cost of living increase. Of them, less than 1,000 were detractors, meaning most of them still were associated and liked the brand.
We're doing the same survey in the USA now, and the initial numbers are pleasing. We are launching a through-the-line advertising campaign with a market-leading retail agency, not just focusing on who we see she is today, but ensuring we have a broad appeal with long-term sustainable customer growth. In the second quarter, we targeted our spend on the high-value customer, aligning with our strategy. Our cost per click has increased as we focus on growing our targeted customer base. However, she's spending more per basket.... To offset the increase in costs, we are looking to broaden the marketing funnel and invest in alternate channels to drive top and bottom of funnel engagement, ensuring we remain at above a 3 ROAS through testing and learning and changing our approach. Moving to Page 8, the second focus was product.
We have transitioned away from the low-value ranges in line with our strategy. I'm pleased to say we've seen strong margin and sell price improvement and positive sell-through of new products. Our aim is to revitalize our range and deliver product that delights her, in line with our targeted customer. In this area, we've achieved it a lot, and most importantly, I think we're listening to her. What we've heard is she's looking for value, which she sees in fit, fabrication, and versatility of end use, not just price. This aligns with our strategy and the shift of our mix in the range to cater for this value proposition. From the research, we're looking at a good, better, best strategy in all of our lifestyles and categories, offering different levels of value in each and broadening our price offering.
This doesn't mean we'll charge more or less for the same product. We'll be more balanced in the price levels in all categories to ensure we're offering her a strong value proposition. Our option count has significantly reduced on all sites, and we are working towards getting the optimal level in all of our websites around the world. With the new lifestyles and product mix, we've already seen the higher average sale price and margins, with margins up 10 percentage points in the second quarter against the first quarter and trending towards our target of 60%. And inventory is now on 3 stock turns, as outlined earlier. Moving to Slide 9. The third focus area is to simplify the business and drive down costs.
We've achieved a lot, already exceeding our AUD 15 million target at the last results in August, with annualized savings and mitigations now totaling AUD 25 million. Headcount restructuring has delivered an annualized saving of AUD 12 million. We've had store roster efficiencies and completed a further round of support office redundancies in February of this year, with headcount in the office reduced a further 20%. These actions have resulted in an additional AUD 3 million to the savings from the AUD 9 million that we disclosed at the AGM. In logistics, we've reduced the cost by AUD 12 million, AUD 6 million of reductions due to range and SKU decreases, and AUD 6 million of mitigated contract extension clauses that have been renegotiated with our global logistics partners, who have been very supportive. These will phase in over the next seven months, and we'll see little benefit in the second half.
Other cost initiatives are in place again and will annualize in FY 2025, with some benefit into the second half. This further cost reduction shows our commitment to right-sizing the business to the adverse environment we are seeing. We are back to a culture of cost containment, where our key focus is delivering a quality garment at a great price through having an efficient business model that can drive lower prices and costs to increase margin. We have made further changes to our supply base and are in the process of moving back to historical models and partners to increase our flexibility, leverage, and release working capital. This will mean more focus on China for production and a concentrated partner and factory base to become more meaningful with vendors, so we can work together to get the best product and listen to our customer and react in real time.
The team have worked very hard and achieved a lot in a short time in all of our strategies, and our focus is now on driving demand through product and communication refinements that will be the cornerstone of our future profitability. Moving to Slide 11, summary of financial performance. To start, it's worth noting here that the first half FY 2023 results are now presented, excluding Avenue. Our cost base has reduced to AUD 11.6 million, with around AUD 3 million of this due to management actions and the balance being variable cost reductions. This outlines the ability of the cost base to scale down with revenue and the amount of cost runway we still have in our business with the actions we have taken.
The margin in this half is flat year-on-year, with material clearance activity in the first quarter, as outlined, and a 10 percentage point recovery in the second quarter as trade normalized, especially in Australia, where margins are back to targeted levels. Marketing spend was flat year-on-year as we kept digital spend variable to demand, with our goal to optimize margin dollars and focus on the high-value customer. As we return to a more regular product delivery cadence, there was an AUD 600,000 normalization of operational marketing spend on items like e-commerce photography. If you strip out this increase, digital advertising reduced by 12%, reduced, resulting in a sales drop of 29%. However, we did achieve more gross margin dollars for our spend. This is again due to us focusing on the high-value customer as per our strategy.
Including operational marketing, we see the need to invest around the 8%-9% mark to drive sustainable target customer number growth, and we are reviewing this each month in our business review. Moving to Slide 12, we have achieved a lot in our cost-out program in a very short time, and it's an important part of our journey to rebase the business on a path to profitability. The graph outlines the level of the cost base if all of our strategic actions were in place from the start of the half. It shows a further AUD 6.3 million in cost savings, made up of 2.9 in both logistics and headcount and 0.5 in other costs. And this represents a more normalized cost base of AUD 53 million and a cost of doing business percentage of 50%.
With the AUD 3 million realized this half, this gives us a AUD 9.3 million cost out for a half, or circa AUD 19 million for an annual benefit. The balance from there to the AUD 25 million in savings is the mitigated cost of AUD 6 million outlined earlier in logistics. Moving to the Slide 13, summary of financial position. We had a net cash position of AUD 3.5 million as at December and have the bank support with covenants that are right for our business. Inventory is down 26% from year-end FY 2023 at AUD 39.5 million. We have achieved the three stock turns due to lower margin in the last 12 months. However, we are still targeting the three stock turns as we work towards our 60% gross margin target.
There is still a small reduction in inventory this half, however, the majority of the work has been done. Moving to Slide 15, our trading outlook and update. The margin recovery has continued into the third quarter, and we've seen positive momentum in margin in all channels and regions, especially the full-price stores. Total revenue is down 33% on a prior corresponding period that was heavily driven by promotion to drive top-line revenue. However, gross margin dollars are only down 16%, showing just how strong margin recovery has been and its material improvement on the first half. Australian stores are the highlight, with full-price comparable stores up 6% and margins are back to historical levels.
We have focused a lot of our effort on rectifying the assortment in the stores, and this has delivered results and will grow into the second half of FY 2024 as the range improvements, driven by her feedback, flow into store. Our online channel has been challenging as we transition our customer and our range. As we said, the USA had worked to do an inventory clearance in the third quarter, and we are expecting a stronger performance into Q4 with the delivery of new spring and summer ranges. This has driven the first eight weeks of our revenue trends. We are reshaping our assortment in this season with where we are seeing the customer demand, which is more versatile product with a casual feel and a good, better, best pricing ladder in all categories and lifestyles.
We are seeing very positive results in average order value, up 11% on the prior corresponding period, and average sell price at 31% on the PCP. Our target is to increase conversion with a new product, and it is delivering to market through the second half and drive traffic through focused marketing campaigns on the higher value customer. Traffic levels in all markets have already shown improvement through February. January and February are seasonally low revenue months, and in the prior corresponding period, as I said, we promote heavily to drive demand. I am confident we can improve the revenue trend into the fourth quarter and do this at higher margins with new seasonal product deliveries that are at materially greater levels than they were in the second half of FY 2023.
This is why we expect to trade profitably in the second half, despite cost of living pressures creating ongoing uncertainty. This will be driven by our refined marketing programs, improved product mix, and cost initiatives. We have right-sized the business and are focusing on driving demand. We'll drive targeted metrics of gross margin at 60%, logistics at 19%, three stock turns, and average sell price and order value increases. But most importantly, we're getting back to what made us great, an agile supply chain focused around her, managing inventory with discipline and data-driven decisions leading to strong unit economics. I'm very optimistic about the future for City Chic and have the right team around me to continue to execute on our strategy and our path to profitability. Thank you, and with that, I'll now open to questions.
Thank you. At this time, I would like to remind our participants, in order to ask a question, please press the star followed by the number one on your telephone keypad. We kindly request that analysts limit their questions to one, and if time permits, you may poll for a second question. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Craig Woolford of MST Marquee. Please go ahead.
Good morning, Phil. Can I ask a question about the sales trend? Being down 33%, as you say, it's a smallish part of the season, but in what months or when do you start lapping deeper discounts? How can we, as, you know, outsiders, have comfort that the sales base will start to stabilize soon?
Yeah, look, Craig, we were discounting the heaviest probably last January, last year, and that really drove a lot of revenue that we are cycling right now and we've cycled through in the last eight weeks. Where we weren't doing the discounting in our stores, we've already seen positive responses, and the full-price comparative stores are up 6% and at materially higher margins, which shows for me where we put the effort into the range and we've driven that, we're getting the results. I think obviously from the numbers online for both Australia and America have been the challenge.
I think they really respond to the promotion a lot more than what stores had, and we've just got to get a new season range up into March, into Easter, and through Easter, and really north into spring, summer in the U.S., and winter, autumn, winter in Australia, with a new product assortment.
... So to be clear, I'm sorry, go.
No, go.
So to be clear, as at March, there wasn't that much promotions in the prior corresponding period?
March still had promotion, but was easing off through the first week or two, and then we are more normal through the April, May, June period. Yes.
Okay. Great. Thanks, Phil.
No worries.
Thank you. Our next question comes from the line of Chami Ratnapala from Bell Potter Securities. Please go ahead.
Hi, Phil and Peter.. Thanks for taking my question. Quickly, maybe two parts on the U.S. business a bit. How far are the current growth margins away from targeted levels in the U.S.? Any color you can provide there?
Look, we don't—we haven't ever provided margin by region, but what we've said is that Australia is a lot close, is pretty much at targeted levels, and the U.S. has some work to do through the third quarter in inventory, and we're looking for it to move towards those levels in the fourth quarter.
Perfect. And is that supportive in the early signs that you're getting in the customer survey as well, as you launch that new range in the fourth quarter?
I'm sorry, can you repeat the question?
You pointed out to some early signs in the consumer survey that you're running in the U.S. How is that sort of resonating with the product launch that you target for the fourth quarter, if I'm not mistaken?
Yeah. Sorry, I did just miss the first bit, Chami. My answer-
Yeah, sorry about that.
We've only just started. We've only just started the customer survey, so I'm really too early to get sort of empirical insights. What I will say is we're seeing the actual sell-through. I mean, the problem in America now, in many different parts, you're not launching summer at this stage. We've sort of vetted Easter or just before Easter as the time to launch into the new season and start what we see as the right seasonal time to get into those kind of categories, the dresses. And that's our strength. We have always been better in that season than we have before. Some of you might remember when we had the second half was bigger than the first half for the first time.
It was majorly driven by the USA summer, and us being a summer business, that is often much bigger. So the initial reads of what we're putting in through February, which is more transseasonal, have been good, but you don't really start a new full range until March, in really mid-March into April. And look, the feedback so far, it's too short of a time to say, and we'll have more about that in about three weeks from our view.
Perfect. That's very helpful. Thanks for that.
But I think it's worth saying we are seeing the margin growth. The U.S. is still, you know, that, I think we said 10 percentage points up in total in the first half, and the U.S. is achieving that. It's just got a little bit further to go. So we are definitely seeing momentum and improvement in margin in the U.S. We've just, you know, it's just got a little bit further to go given the stock levels.
Thanks for that.
Thank you. Our next question comes from the line of Sam Teeger of Citi. Please go ahead.
Hi, Phil. Hi, Peter. In a world where City Chic potentially no longer has the North American business, what would that do to your global supply chain and your scale with factories and your supply chain partners?
Look, you know, that is not something I'm thinking about right now, Sam. We, we've got to get the momentum and the margin working through our, our business scale as, as it is today, and I've got to set up supply that, that can do that. What I'll say is, in 2019, we had a, a business without the U.S., and we were able to manage scale of supply quite easily. And what I've said in this speech is we're referring, returning, excuse me, to a lot of historical partners and levels. But right now, for me, it's about that momentum I've seen with margin in the U.S., getting the sell price improvements, getting the order value improvements, and delivering a product that she sees value in.
Got it. Okay. And then just in terms of the guidance to trade profitably in the second half, you wanted to confirm, one, that's post AASB 16 EBITDA, and two, what's the revenue assumption to get to profitable earnings?
I'll leave that for Peter.
Sorry, the question about pre- and post-AASB 16 , because we report and have migrated to reporting post-AASB 16 . So, you know, we're sort of comfortable with the guide that we've given in the past, on both a, you know, some small pre- and post-AASB 16 basis. And-
Sorry, when you say trade profit, profit, profitably, is that EBITDA?
EBITDA, yes. Yeah, underlying EBITDA.
Great. And then what's the revenue assumption behind that?
Well, I mean, we've not, we've not given guide to, you know, the revenue and revenue growth assumptions. You know, what we have indicated is that we've seen strong momentum, you know, coming into our stores, which is pleasing, and expect the, you know, the momentum into the online ranges to improve. I mean, that's the area of focus, you know, really right at the moment, we'll get a lot of the marketing support, marketing support as well. And Phil sort of outlined earlier some of those trends in revenue versus the prior year. So, you know, we are expecting is that, you know, we note in the presentation that still, you know, the market is uncertain, particularly in the discretionary retail space.
But we are expecting that to sort of stabilize and particularly to comp more favorably than where we have been versus last year.
Okay, thank you.
Thank you. Our final question for the day comes from Sam Haddad from Petra Capital. Please go ahead.
Hi, yeah, Phil and Pete. I may have missed, I missed the start of the presentation. Just, can you outline City Chic's position in the U.S.? Are you guys still committed to that market? I've sort of made any commentary on that.
Sorry, is that my phone or Sam, you've cut out on my end, mate?
I'll just ask you a question about your strategic position in the U.S. Do you see that as a market as a key opportunity still, in terms of the company's strategy in terms of growth?
Yeah, Sam, thank you. Sorry, mate. You did cut out there. I apologize, buddy. As we said at the last half, we did a lot of research into the U.S. market through an external party around May, June, July last year, and what they came back with is that we have a very strong position in the US, and it needs to be seen on the value of fit, not the value of price. And I think we've driven it a certain way for a period that, you know, we're still managing through now. But the opportunity is very strong. I've traded in the U.S. since 2010, when we opened the first website. We've traded with Nordstrom and Macy's since 2015.
Right at the top, as you know, we had 150 Macy's stores, and the City Chic product has done a very good job for us, and we see that as a key opportunity. I think what we got to sit down and assess is what is the level of the opportunity and what is the right business model to deliver that profitably, which is why you see a lot of the actions we're taking now. But, you know, we always said that the first half would be challenging in the U.S. and even the third quarter, and then into the second half, we'd see performance improved as we drop summer and spring ranges, because that's where we're at. But if I look at our business, Sam, I think the question you're asking is, do we see the U.S. as important?
I think from a growth perspective, it's important. I think it's not just got to be just revenue growth, it's got to be profitable revenue growth, and we're really getting the business set up to make sure we can do that and find and reengage the customer that spent with City Chic for many years, even as early as 2008, 2019, 2018 into 2021, when we did it at very good margins.
Yeah, that's helpful. Just as part of your strategic update, you mentioned that you're looking to focus on higher fashionable products at higher price points. How does Avenue.com now fit into that business model? It still feels like that, that's a platform that's no longer compatible. Is that-
Sam, first thing I'll say, mate, and I probably left this off my strategic comment. America gives a lot of revenue and a lot of leverage on our cost base, Sam. You know, you can see half our revenue is U.S.-based now, and it does allow us the leverage on the cost base. And that's a very important part of our strategy, is to get as many eyes across this great product we create and deliver it in many areas. Now, with Avenue.com, when I first bought Avenue, Sam, I think you were obviously around, and what I said then was, you know, we'd expect 30%-50% leakage of sales as we reposition the customer to be more in the City Chic ilk. Now, what we've seen is that customer is still there.
We just haven't talked to her well in the last 18 months. You know, as we chase lower value product that delivered high volumes, we got a certain type of customer that was very easy to acquire and inexpensive, and, you know, we got that real online uplift in that few years around that kind of product. What we need to do with Avenue is focus on. There is a lady on that millions and millions of database that's prepared to pay $30, not $20 for a top. We've just got to find the right lady, we've got to have the right top that suits her, and instead of selling thousands, we might sell 100s, but we'll sell them at a lot more profit.
Okay, thank you.
No worries, Sam. Thanks, mate.
Thank you, ladies and gentlemen. As we have no further questions, I will now turn the call back over to Phil Ryan, Managing Director and CEO, for closing remarks.
I just want to say thank you all for listening in today. I'm very excited about what this half shows and our path to profitability. We've taken some really hard calls in the last six months to make sure we set the business up to leverage whatever growth, whatever revenue levels we get to, and make sure as we grow and we get that product and customer communications right, which I know we can do, that we have the ability to continue profitable growth. Thank you.
Thank you. This concludes today's conference call. We thank you for participating, and you may now disconnect.