Hello, and welcome to the Lovisa Holdings Limited Fiscal Year 2024 Half Year Results Briefing. 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 have a question during this time, please press star one. I would now like to turn the call over to Victor Herrero, CEO. You may begin.
Good morning, everyone, and thank you for taking the time to dial in. On the call today, we have our CFO, Chris Lauder, and myself, Victor Herrero, CEO. As you are aware, this morning, we published our half year results to the ASX, and we would like to talk you through them. I will now do a page turn throughout the highlights of the presentation, and we are happy to take any questions at the end. If we turn to page four, I will talk through some of the detail of the half year. I'm pleased today to present another solid result for the first half of financial year 2024, which is again, evidence of a strength in the team, the product, and the potential of the business.
Despite a more challenging trading environment, particularly in the earlier part of the half, we were still able to deliver a strong sales growth of 18.2%, including comparable store sales, down 4.4% on last year. The store rollout continued through the half, and even though it was at a slower pace than last year, we still managed to open 74 new stores in the period, taking the store network to 854 stores at half-year end. Pleasantly, we were able to open a further three new markets during the first half, including the significant growth opportunity markets of Mainland China and Vietnam. Gross margin was strong, and total cost of doing business was stable, while making significant investments into growing the business.
As a result, we delivered an EBIT of AUD 81.6 million, up 16.3%, and an NPAT of AUD 53.5 million, up 12%, which has allowed the board to announce an interim dividend of AUD 0.50 to be paid in April. If we turn to page six, you can see the sales performance for the period that shows the benefit of a stores network expansion, which allow us to deliver 18.2% sales growth despite negative comp store sales. Looking to our regions, more markets show more challenging trading condition in the first quarter, with improving trends on Q2. However, with the exception of ANZ, the growth in the store network was able to offset this to deliver growth in total sales across the regions.
Growth was particularly strong in the Europe and Americas markets, with those regions providing the majority of new store growth. I will now hand over to Chris Lauder, our CFO, to talk through our financials.
Thanks, Victor. Morning, all. If we turn to page seven, our gross profit was AUD 301 million at an 80.7% gross margin, up on last year by 40 basis points. Source from tight management of pricing and promotion and strong focus on optimizing gross margins and building on the 200 basis point improvement we saw in the first half of FY 2023. We've continued to focus on the efficiency of our inventory position, and are very pleased that we've been able to close that half year in a good state. Turning to page eight, let's talk about profit. As you can see, we've again been able to deliver growth in both EBIT and NPAT, despite the impact of negative comps and inflationary pressures on the cost base of the business.
This outcome was assisted by the reduction in the CEO LTI expense from AUD 15 million in the first half of last year to AUD 6 million in the current period. NPAT for the half year also includes higher interest expense on our debt, with increased borrowings on the balance sheet throughout the half and higher interest rates having an impact. We've made a deliberate effort to continue to reinvest in rollout of new stores in existing markets, as well as the opening of new markets and structures to manage the growing scale of the business, and we'll continue to do so to ensure we're able to continue to deliver operational excellence for our customers.
Turning to page nine, you will see that the cash generated by the business has again been strong, with cash from operations before interest and tax of AUD 150 million for the half year, reflecting tight management of our working capital. Capital expenditure for the period was AUD 14.3 million, predominantly for new store fit outs, which represents a decrease on the prior period as the store rollout in the half was slower than that delivered in FY 2023, with 68 new company-owned stores built for the half, versus 101 built for the same period last year.
Cash interest payments were significantly higher than the prior half year, primarily due to the larger store network, resulting in an increase in lease payments classified as interest, but also from the deliberate strategy to introduce additional debt into the capital structure of the business, combined with higher interest rates, resulting in higher interest payments on that debt. Turning to page 10, you will see that the balance sheet remains strong, with a clean inventory position and significant liquidity available to fund growth, with net cash at the end of the half of AUD 15 million and total cash debt facilities of AUD 120 million. Focus on distributing surplus cash to shareholders and the introduction of debt into the capital structure combined to result in the increase in gross debt you can see on the balance sheet versus December 2022.
The solid profit result for the period and continued strong cash flow and balance sheet position has allowed the board to announce an interim dividend of AUD 0.50 per share, franked at 30%. As we've said previously, the board will continue to assess dividend levels each period end, and determine the appropriate level of dividend based on profitability, cash flows, and future growth CapEx requirements in the context of prevailing economic conditions. The board do not currently have a specific dividend payout ratio, and will continue to base dividends on the cash flow needs of the company and the structure of the balance sheet. I'll now hand back to Victor.
Thanks, Chris. If we turn to page 11, a quick update on store numbers. The key driver of future growth for Lovisa continues to be in our global store rollout. We finished the period with 854 stores trading in over 40 markets, with 74 new stores open for the period. Although the pace of rollout was slower than prior year, we remain focused on continuing to grow the store network globally. Pleasantly, we were able to deliver our first new stores in a strategically important Asian market of mainland China and Vietnam, both of which provide us with significant growth opportunities in the region. You can see photos of these stores on page 12. We were also able to open a number of new franchise stores in the half to continue our growth in the South American market, with new franchise market open in Ecuador during the period.
On page 13, you can see a recap of the business strategy, which sets out the keys of our success to date and our focus for the future. Our strategy is unchanged. We continue to be focused on the continued global expansion of our physical and digital store network. As you have already heard, we have made strong progress in delivering on this strategy during the current half year, and have laid solid foundations for continued growth in the future. We have continued our focus on delivering an omni-channel experience to our customers, and have improved our e-commerce execution, at the same time as expanding our customer reach by adding presence on a number of new online marketplaces during the period, adding The Iconic in Australia to our existing presence on platforms such as Zalando.
On page 14, I will talk to the trading update for the second half to date. Trading for the first 7 weeks of the second half saw comparable store sales for this period up 0.3%, and total sales up 19.6% on last year, as the improved trend from the Q2 has continued. Since the end of the half, the first half, we have opened 9 new stores, together with three closures, taking the store network to 860. Pleasantly, we have also recently opened our first store in Ireland at Henry Street in Dublin, adding another new market to our growth potential. We continue to focus on opportunities for expanding both our physical and digital store network, and our balance sheet remains strong, with available cash and debt facilities supporting continued investment in growth.
To summarize, the first year, the half year on, on slide 15, our sales performance was solid for the half, with strong sales growth from network expansion, offset by negative comp sales for the half. Our global expansion delivers 74 new stores open in the period, finishing the half with a total network of 854 stores. Gross margins were again outstanding at 80.7%, an improvement on, of 40 basis points on prior year, which was achieved along with clean, with a clean inventory position and growing on the 200 basis points improvement we delivered in prior year. This combined to deliver good profit growth, with EBIT of AUD 81.6 million, up 16.3% from prior year.
An NPAT of AUD 53.5 million, up 12%, with our strong cash flow and balance sheet position, allowing the board to announce our interim dividend of AUD 0.50 per share to be paid in April. I want to thank you, thank the entire global Lovisa team for the outstanding work they are doing to deliver these results. With that, I want to thank you for your time today, and we are happy to take any questions.
Thank you. If you have a question, please press star one on your telephone keypad. If you have queued up and want to withdraw your question, simply press star one again. Your first question comes from the line of Marni Lysaght. Oh, my apologies. Of Shaun Cousins with UBS. Your line is open.
Okay, good morning. Thank you, my, I've got two questions. Maybe just, Victor, just on the six net stores open to date, nine openings, any reason in the slowdown in store growth, specifically, is it landlords that are becoming more difficult, or is Lovisa seeking better rentals or other impediments to growth? I'm conscious that you're quite, the company's quite consistent in not providing guidance on store network outlook, which is fine, but just keen to get a better understanding of what's produced a slower rate of net new store openings, so far this calendar year.
Hello. Thank you for your question. At the end of the day, we, it depends on each, it depends on how many... For example, several weeks, you cannot draw conclusions by how many stores we opened exactly on the last seven weeks, you know? I think that it's better to think a little bit about how many stores we opened during the first six months, which is 74, and from there, from there working, it's two-- it's a period very short, it's a short period of time in order to draw conclusion on how many stores we are going to open, because we open in seven, in, in, in seven weeks, only nine stores.
All right, but I mean, is there anything about rents or anything on landlords or anything that's sort of impacting this?
Yeah. Well, as you, as you hear us over the last years, I think we've been very consistent, no? We open stores whenever we believe they are profitable and that we believe has potential, no? And over the last seven weeks, we found nine stores, so we opened nine stores that they are doing this. But there is not a significant reason that we are seeing in the marketplace why we are not opening neither less stores nor more stores.
I think. Thank you.
Those sort of considerations are always a factor, no matter what, you know, how many stores are opening. So, there'll always be arguments with landlords about rents and the like. But, as we always say, the rollout of new stores is not a straight line, so don't draw too many conclusions just on the first seven weeks.
That's fine. And my second question is just—and maybe this is more for you, Chris—maybe just gross margins. You've, you've commented there about the ongoing management of pricing structures. Could you just discuss price rises or how promotional management has occurred? And then just any sort of benefit, given that the strength of that gross margin result, any benefit in changing sort of COGS, be it lower sourcing costs out of Asia or reductions in the, the cost of air freight, please, just in terms of trying to get a better understanding of what's driven the gross margin and the resilience of that strength, please.
Yep. Yep. Yeah, as we said, I mean, the management of price has been a key factor in that, and as it has been for the last year or so, it's probably more a built-in part of what we're doing at the moment, just given the inflationary environment. So, you know, back in, I think it was 2022, we did a big shift in prices, and that gave us a bit of a step up at that point in time, but now it's more just ongoing.
So as we're bringing new ranges in, we're constantly tweaking the prices, and then, you know, if we think there's work to be done in a particular market, then we'll put an increase through, but it's sort of not across the board all at once or anything like that. So it's kind of just built into, you know, make sure that we're keeping pace with inflation. So that's definitely an important part of it. The input cost side of it, there's probably not too much to talk about there.
It hasn't really, that hasn't been the driver other than obviously a bit of improvement in freight costs in there through just better negotiation of logistics contracts and that sort of thing, and just general price decreases overall in the freight side of things.
Great. Thank you, Chris. Thank you, Victor.
Thank you.
Your next question comes from the line of Tom Camilleri with Wilsons Advisory. Your line is open.
Morning, Chris and Victor. Congrats on the solid result. Could you please talk to us a little bit more about the improving sales trend you noted in that second quarter? I guess, is that specifically to certain markets, and is it consumer driven, or is it to do with, I guess, the pricing changes and promotional activity that you're implementing in stores? Thanks.
Thank you for your question. We have seen an improvement on Q2 on the trends, and we are seeing the same trend over the last seven weeks. We are pleased on that, and it's all over the place. It's not really one particular region, and we are quite satisfied with these positive comps over the last seven, the first seven weeks of the year.
So, am I, if I'm interpreting that right, it's a broad-based improvement that you saw in the second quarter across countries?
Correct. Yes.
Okay.
It's not one country specifically. I think it's all over, in the 40 markets where we are present.
Okay, great. And then just second follow-up: How are you thinking about, I guess now that you've been in China for a couple of months, how are you thinking about the velocity of that rollout there? And I guess, can you comment on, I guess, if the performance of that Chinese store is meeting expectations?
As we mentioned on AGM, we are starting to understand the market, you know, from a Lovisa point of view and trying to interact with the customer. We believe that the market has a lot of potential, but so far, for the time being, we are cautious. We opened one store, and let's see how is the performance of the store, and then we will see the potential of the market. The good news is that we already opened China, and I think so far, so good, and the market, as you know, has a lot of potential.
Great. Thanks, Victor. Thanks, Chris.
Thank you.
Your next question comes from the line of Edward Woodgate with Jarden. Your line is open.
Oh, hi, guys. Great result. Can you hear me okay?
Yep, no problem.
Oh, great. So just wanted to check just whether, you know, OpEx obviously has been a bit of a tough thing for everyone to navigate right now. Have there been any reduction in number of hours worked per store location? Is that something you've been implementing to manage your state of demand?
Yeah, I mean, generally, we obviously try and manage rosters as well as we can to deliver the right level of service for the sales level that the stores are, you know, currently delivering. So, you know, we obviously manage that on an ongoing basis, whether sales are going up or down or whatever. But I mean, generally, yeah, we have to that level of detail on these sort of calls. But, you know, I think there's a point where we go, "Right, well, customer service will suffer if we cut any further or take any of that sort of action," and, you know, our focus is on making sure that we deliver for the customer.
You know, that means that sometimes when you've got inflation in store wages, that can come through in higher cost of doing business, which it has in the first half with negative comps. So yeah, I mean, it's basically what we think the customer needs, not just a financial decision.
Yeah, sure.
You know, one thing that I want to tell you that is operating in more than 15 languages is something which can be a challenge, but I think we overcome that challenge because I think in 40 markets, we speak more than 15 languages, you know? And I think that's an important thing to say, you know, that the complexity that we are having by operating in so many languages, I think we overcome that complexity, and I think so far, so good. We continue training the people in order to have great Lovisa store managers and people in the store.
So at the same time, so far, so good, and I think we are quite satisfied with the outcome of working in more than 20, more than 40 countries or markets.
Okay, great. And then the like-for-like trading update is like a very like an incredible result given the comp and the consumer headwind. So I guess just in relation to the pricing, Chris, that you were just talking about, just following up on a question there, but could you just provide like some color as to the timing of the price rises? It would just be useful to understand that for the following comps. And then also with the GPA, how sustainable do you think that is? And can you just remind us what the air freight is of percentage of your COGS?
Yeah, I think the point I was trying to make before, Edward, was that the price rises are just embedded in the business now, so that's not just sort of one lumpy hit necessarily that you see all of a sudden, and it's only for the last two weeks of the quarter or a half or whatever. So we're not gonna sit here and break it all out for you in terms of market by market, where we did price adjustments and what the impact of it was. So yeah, there's probably not much more to add on that other than it that did give us a benefit.
In terms of the gross margin sustainability, yeah, I guess there's nothing in the outcome for the first half where we go, "Yeah, that's got some one-off thing or some issue where it's not - we don't expect it to be sustainable." So there's probably nothing to call out there. And we generally don't sort of break out the different components of our product costs, so in terms of freight. So just, I guess, you know, it gave us a benefit in gross margin, but most of it was from the price, in gross.
Sure. And, and then just, I mean, a couple questions just to finish. Good to hear you're on Iconic now. Can you just talk about the unit economics and margin impact that is, like, per, I guess, per unit of sale? And, and then also with Asia, it looks like there was a bit of weakness there, if you look at it on Asian sales per average store. Was that, you know, consumer-driven? Was it tough, just that it was a tough comp, timing of new stores? How do you think about that?
First of all, thank you about THE ICONIC. We don't disclose much, well, or we don't disclose anything on the split between retail sales and e-commerce sales. But having said that, I think we already disclosed that we opened several marketplaces. We are happy with the performance of those marketplaces, and we will continue opening relevant marketplaces across the world. This time we open in Australia, THE ICONIC, which is great, and let's see how we perform over there, and we'll continue with this rollout of marketplaces over the next few years. And regarding your second question?
Sorry, what was the second question again, Ed?
Asia sales per average store in the half looked like they were down quite significantly, if I've got my numbers right in the rush of the morning. So, what was the driver of that, do you think?
Yeah. I think you gotta be careful with taking averages. It does depend on, you know, when during that period the store was opened and, in, you know, which markets. So we opened a few in Malaysia, but, you know, a lower turnover than those they are in Singapore. But generally, that does have an impact. But yeah, I mean, that market has been, you know, soft for a little while. Same impacts as the rest of the business in terms of, you know, negative comps in the period, so you'll see the averages come down.
You know, it's an interesting question, but I think at the end, now with 40 markets, sometimes some markets were performing better one time, and now the other markets are performing better. But at the same time, I think that we have not to analyze market by market, because different circumstances, when they end up the COVID period, for example, as well, can affect that performance. So there are plenty of things that can affect one specific market, no? And in Asia, as you may know, we have Malaysia, Singapore online, and we opened Hong Kong, Taiwan, and now Vietnam and China.
All right. Thanks, guys, Ill. Appreciate you taking the questions.
Thank you.
Our next question comes from the line of Sam Teeger with Citi. Your line is open.
Oh, hi, Victor. Hi, Chris. Good morning. I just wanna ask a question on the balance sheet. You're back now in a net cash position. Under what scenario do you expect to use most of the AUD 120 million in available bank facilities? And if you're not planning on using it, are you thinking about reducing it to save fees and potentially get a lower rate?
No, I mean, just you gotta remember that the cash position or the net cash position at December, that's as good as it gets for the year, right? 'Cause that's the end of, you know, the busiest trading period that we have in the whole of the year. The half year fell on the thirty-first December. You know, a couple of days later, we paid a hell of a lot of cash out for rent and payroll and the like. So it's obviously comparable to the prior year and a great outcome. But, you know, that does fluctuate during the month, so it's not like that's a nice, simple flat number throughout the whole period.
We just announced a AUD 0.50 per share dividend, so that will obviously put us back in a net debt position, not a net cash position. Obviously, we'll continue to look at that in terms of, you know, how much facility we need and how much dividend we pay versus how much CapEx we're spending. So it's. You know, but we're happy with the size of the facility at the moment. If we get to the point where we think that it's more than what we need, then yeah, obviously we'll look at it and save the fees on the facility. But at the moment, we're comfortable.
All right. And just in terms of costs, they were better than we expected. How should we think about CODB to sales in the second half versus the first half? Is the pace of investment into new markets and support structures likely to change much in the second half?
Look, I mean, we're not gonna give any guidance on it, Sam, but yeah, I guess-
Just directionally, not... Yeah.
Well, it's in every time you ask this, this question, so I'll give you the same answer. We always are focused on that continuous investment into the business to support growth. It doesn't stop. So, you know, and that it doesn't really change. You know, we were negative comp in the first half, and we still continued to do that to make sure that we can execute on the new markets that are opening and the store rollout. So, you know, the existing levels that you've seen are probably a good way of looking at it. I guess, you know, we've just returned a positive comp, so if you're looking at CODB as a percent of sales, then that in theory gets easier if we can continue to be on positive comps.
So, yeah, that's probably what I'd give you.
Okay, thank you.
Your next question comes from the line of Julian Mulcahy with E&P. Your line is open.
Hi, guys. Just a couple from me. Firstly, with the store rollout, there's quite a market slowdown in the U.S. Is there any particular reason for that? Is it part of the haggling process, or are you just finding better returns in other markets?
Hi, Julian. Victor here. Thank you for your question. The US, we have at this moment 206 stores in plenty of states, and I think there is not a slowdown. It's well, it's obviously a slowdown in number of stores, but at the same time, what is as we mention always, whenever we find the right deal, we do the right deal. This time, we found less deals than before, but this doesn't mean that we are slowing down the number of stores open in the US. US right now is the largest market for us in number of stores, and which is a great news, followed by the Australian market.
At the end of the day, you can see the dimension of our global footprint.
Right. Is that sort of impasse or getting the right deals starting to ease up now?
Yeah, it's getting the right deals. You know, whenever we get the right deals, we'll open more stores. Till we get the right deals, we don't open stores.
Right. And with the China store, you said you're kind of testing and just seeing how the market operates. What are you kind of looking for, and, you know, when you're sort of going to the next lot of stores?
Well, at the end of the day, we have to stay prudent, trying to understand the potential of the market, the interaction with the customer, and, as you know as well, customers in China are really into social media, creating buzz on social media, creating also some noise on e-commerce platforms. So, it's kind of a market where we have to build up and that will show the real potential of the market for Lovisa.
Right. Cool. And just finally, so with your LTI, is that, that's foregone, or is there scope to sort of catch up in the second half?
So when you say forgone, what do you mean, Julian? I mean, it's an LTI that vests based on the performance for the full financial year, so that will determine what the outcome is. The number that's in the P&L is an estimate of what we think that's gonna be and has been for the last three years. So remember that this tranche that vests this year is part of that was expensed in FY 2022, part of it in FY 2023, and the rest of it this year and a little bit into FY 2025. So yeah, I'm not quite sure I understand that.
No, but like, it was like based on the, like the original terms, there was another sort of AUD 22 million that could have been earned this financial year. So do we sort of... Is it, 6 and then, you know, 16 in the sort of second half type thing, or?
No. So like I just said, the way that it hits the P&L, so this is why there's a big drop this year in the total LTI expense. That was AUD 15 million for the first half last year, and it's AUD 6 million this year. Last year we had a year's worth of the LTI that vested at the end of FY 2023, and we had, you know, a third of the FY 2024 amount hitting last year. This year, all the only amounts that are hitting are related to FY 2024. So that set amount's been expensed over three financial years, if you remember. So we were always expecting that number to come down this year, just purely for that reason.
So there's no other real change there in expectations from what we've been booking previously. So it's just a mathematical calculation.
Right. So just so another six in the second half, assuming all things being equal?
Yep, that's right.
Yep. Okay. Thanks, Chris.
Your next question comes from the line of Mark Wade with CLSA. Your line is open.
Hi, Chris. Hi, Victor. Just starting off with, can you tell us about the adaptations that have gone into selecting the new markets like Ecuador and China? I'm specifically interested in some of the similarities or differences in the product range, the price points that you might use in those different markets.
... It's more or less the same in every market. You know, we open, we allocate the right, the right product with the right ranges that we develop everywhere. So I think there is not much difference between markets. Maybe some of the things that some of the ranges are allocated in a different density, but apart from that, more or less, it's all the same across every single market.
Okay. And just lastly, on the how important is the role of those Chinese marketplaces like Taobao and JD, Tmall? You know, like, you kind of touched on it before. I mean, I guess it's a really online savvy customer, but on the other hand, this kind of fashion jewelry tends to be more of a spontaneous purchase. So how do you find that balance?
Well, at the end of the day, we are learning about the market for Lovisa, as I mentioned before, and clearly, it's an important thing to have. It's an important understanding for the knowledge of the Lovisa brand inside China to be part of the marketplace footprint that they have there, a part of the physical presence in shopping malls. So it's kind of a balance in a way. So this is what we are planning to.
Mm. Okay, all the best for the year ahead.
Thank you, Mark.
Your next question comes from the line of Wei- Weng Chen with RBC Capital Markets. Your line is open.
Hi, guys. Yeah, just wanted to throw back to the questions about the LTIs. Just wondering, how much has been expensed in FY 2022 and 2023 for FY 2024?
Off the top of my head, I can't remember, sorry, but if you go back to the annual report for 2023 and have a look at the remuneration report, it should be in there, so you should be able to find that pretty easily.
Yeah.
I mean, what we're booking this year is still in line with that.
Okay. And then if I think about the reduced LTI payments this half, it looks like pre-LTI EBIT only grew 3%. Is that correct, or is that the wrong way to look at it because of the expensing in prior years?
Yeah, whatever the math comes out to, it's pretty simple. Just take the two numbers out and whatever that works out to.
Yeah. Okay. So, I guess, how much should investors kind of read into that AUD 6 million LTI payment versus AUD 15 million last year, in so far as, I guess, you know, what it means to likely EBIT outcomes for the year?
I'm not sure. You'd probably have to ask them. I don't think I'm understanding your question.
Well, I'm just saying LTIs are directly—I guess—tied to EBIT performance, like pre-LTI EBIT. You guys did AUD 6 million in this first half. I guess there was some expensing in prior halves. But I guess you guys have a first half skew. Should LTIs kind of also skew to that first half?
No, I think, Julian just said the answer before that, you know, expect that that cost would be the same first half, second half. It's basically just we book half of it in the first half, half in the second half.
Yeah. Okay. All right, thanks.
Thanks.
Your next question comes from the line of Johannes Faul with Morningstar. Your line is open.
Good morning, Victor and Chris. Thanks for taking my questions. I had another one on the GP line, and what I was wondering is if the gross profit margins are different across regions now? You know, starting expanding in Asia, should we expect GP margins to be roughly the same, or is there a mix shift there? I guess that also ties into Mark's question on pricing across regions.
Yeah, I mean, they can be slightly different between regions, but not massively. I mean, it does depend, particularly for new markets, where we decide to go in, in terms of price points. So we may decide to go into a brand-new market a little bit cheaper than a more mature market or vice versa, depending on what we think. So the relativity can be slightly different, but nothing material. You know, things like shrinkage rates and that sort of stuff can vary it a little bit, depending on what's going on in a particular market. But yeah, generally, it's not enough to swing the margin substantially, you know, if the mix between markets changes.
Okay, great. And then I guess you also speak about store profitability and to take action if the required levels of return on investment aren't met. Have you ever spoken about where that sits, that required level of return?
Generally not, no.
And I guess, yeah, so there's no percentage out there. Yeah, maybe a related question then. What's on the CapEx number and thinking about CapEx going forward, what's roughly the average fit-out cost? I'm aware it varies quite a bit across regions, but what's like an average currently that we could work with?
Yeah, I mean-
Fit-out cost per store.
Yeah. I mean, it does vary between markets. Yeah, you can pretty much probably divide the CapEx, net CapEx spend for the period by how many stores we opened, and it'll get pretty close, on average. Obviously, the SKU in the Americas is higher, so the US is the most expensive market to build stores in, which can be sometimes double what it is to build a store in somewhere like South Africa or Australia or whatever. But yeah, I mean, historically, you know, so in the more mature markets like Australia, it's about AUD 150,000 per store.
And then in some of the cheaper markets like South Africa, Malaysia, are a bit less than that, and Americas are a lot more than that.
Right. Thanks for the call.
Your next question comes from the line of Chami Ratnapala with Bell Potter Securities. Your line is open.
Thank you. Good morning, Victor and Chris. Just two questions from me. Firstly, good to see the Ireland market opened. Just in terms of the opportunity for the European region, I mean, anything you can sort of point to in terms of the opportunity that you see there?
Well, the European region has been a very good, well, a bunch of markets, no? It's where we have the most markets, and Ireland is the last one, no? And we open in a pedestrian street called Henry Street in Dublin, which is kind of a good pedestrian street, and we are happy of being already in the Irish market. But at the same time, we have a lot of potential in... I think we have almost 15 markets in the European region, which I think is a great news, because I think our product is a very, or resonate a lot to the European customer.
Well, as you saw, the growth in that particular region is significant, and we will continue rolling out the stores over there and continue as well with our online offering in our own platforms and as well in several relevant marketplaces, such as Zalando.
Perfect. Thanks for that, Victor. And then secondly, just on the rental expense, more for Chris, I suppose it's come in slightly higher than we expected. Just keen to understand, has the trending base rent where you said change much, or are there any particular markets where it's a bit more difficult than others?
Yeah. Are you talking about the line in the P&L, property?
Yeah. Yeah, Chris. Yeah. Thanks.
Yeah. So, I'm assuming everybody noticed this. We're, we're no longer providing any breakdown between pre and post AASB 16 numbers. We've, we've moved on. Hopefully, everybody else has, so we're only talking to the statutory numbers now, which means that that line for property expenses will be a little bit volatile because it depends on a little bit on the timing of where we are in terms of lease renewal and things like that.
Because all what's on that line now is any stores that might be in holdover percentage rent payments over and above base rents, and you know, just general outgoings for under its lease, as opposed to the base rent, which is captured in the depreciation line and the interest line now, because of the way the accounting standard works. So, that increase is largely just a factor of that, and you kind of need to look at the combination of the property expense line, the depreciation of the Right of Use Assets and the interest expense on the lease liability to try and get a view for what's actually happening there.
I guess the answer to the question is really, you know, it depends on the site. So, you know, we're getting good renewals with you know, leases that we've renewed during the half, where we've got good reductions in some locations. In others, we've had to pay more because they're the premium locations, and you don't really get those reductions on those ones. So it's the same message as has been for a while. We're not certainly not seeing big increases in rents that you've probably implied from looking at that line on the P&L.
Perfect. Thanks for that, Chris. Congratulations once again on the result, and thanks for taking my questions.
Thank you.
Thank you.
Your next question comes from the line of Aryan Norozi with Barrenjoey. Your line is open.
Hi, guys. Hope you're well. Correct me if I'm wrong, but I think you've got a maximum level of LTIs left to expense, so that's AUD 13 million, given you've over-provisioned in prior years. Given that you're gonna do about AUD 12 million this year, you've done AUD 6 million in the first half and AUD 6 million likely in the second half. Am I correct in saying that you're basically provisioning for about AUD 155 million of EBIT for this year? I mean, and it's obviously nothing that's not public, it's what you're assuming. Is that right?
I'm not gonna give you exactly what we're assuming in that calculation, Aryan, but, again, there is actually a component that falls into FY 25 as well, because the LTI doesn't vest until the end of August. We have to expense it all the way up until that point. But yeah, obviously, we've made an assumption around what we think the outcome is, and you can do your own math based on all the stuff that we've got out there to work out what that is. We're not gonna tell you exactly what that number is.
That's it. But based on, and the, the calculation of AUD 13 million left to be expensed, is that, is that roughly right, based on the disclosure? It's a bit all over the place, but is that right?
Yeah, I mean, I actually can't remember what the number is off the top of my head. Sorry. Not the current calculation.
Yep, that's fine. And just in terms of—I mean, one of the pushbacks or concerns investors have in the business is, you're opening into newer markets which have lower sales per store, for example, Poland or other Eastern European countries. The unit economics or maybe like the EBIT per store, the profit contribution of those stores, are they similar to the, like, the group average? In other words, your sales contribution might be lower, but the actual margins are higher, that sort of offsets that sales. Can you just give us a bit of color around that, please?
Yeah. Yeah, that's a good question. I mean, it does depend on which markets you're talking about, but that's, you know, what we wanna see is, yeah, if it is a market that does have lower average sales per store, that the cost structure of that market is also lower, so, you know, the EBIT outcomes are similar or better. So, you know, we've probably talked a lot over the years about, you know, the beauty of places like South Africa and Malaysia, where the cost structures are really low, and they perform quite strongly. So we end up with more profitable markets than the average, even though the average sales per store might be lower.
So yeah, it does depend, and we don't kind of break it all out in minute detail, but your guess, your hypothesis is probably right in terms of where we aimed it.
Great. And then, have you been surprised about the lack of negative sort of volume impact from price increases? 'Cause I mean, to your point, a few years ago, there was a bit of a reluctance to raise price because of the elasticity, and you've done it once, last or two years ago, and you've done it again now. Like, yeah, have you seen any negative volume response, and are you confident that this sort of is the new setting in the business, i.e., moving price in line with what cost inflation is?
You know, regarding the price increases, it, it is opportunistic, you know? Whenever we believe that this kind of higher inflation or higher cost on doing our products, we decided that in one particular market, maybe we have to increase prices, and right now we are adding flexibility because we are in 40 markets, you know? So sometimes we decided to increase prices in one particular market with one particular microeconomic conditions. I think what is adding is flexibility to our business model, because we can increase prices in 40 markets whenever is need, you know? But at the same time, we have to be very cautious, because we still are an affordable jewelry company, you know?
This is something which is very important to take into consideration whenever you increase prices in any market.
Perfect. And just, sorry, just a clarification on the gross margin. I mean, historically, second half has always been about sort of 0.7, 0.8 percentage points lower than the first half. Is that a similar relationship that holds every year, or is that volatility in the past?
It doesn't always hold that way. There can be factors that come to my mind. I can't, off the top of my head, what it would be this time around that would make it any different. But, yeah, I said earlier, there's nothing in the margin improvement that we saw in the third half that we varied. So, yeah, you could use the same sort of assumptions to land on where you think it's gonna be.
Great. And sorry, I missed the first part of the... on those, the bad line in the first part. But did you say that the first take, what you did in the first half in terms of gross store openings, and that's a pretty good run rate for the second half, 24?
I'm not sure if we said it, but I think we would like to be able to achieve that sort of level.
Yeah. Okay, perfect. Really appreciate it. Thanks, guys.
Thank you.
Our next question comes from the line of Rupesh Kirai, private investor. Your line is open.
Hi. Great results, guys. Yeah, I've just got a quick question in terms of how long the company's exceptional growth is going to continue. So at the moment, you've got about 850 stores. What's the kind of a target that you're trying to get, and in terms of what your market share is and who your, you know, best, most, important competitor is? Just wanting to see how long to keep this growth before treating you as a mature company. Any kind of guidance on that?
I mean, yeah, I think we don't give guidance on where we think the end is, because, you know, in our mindset, we expect to continue to be able to grow and keep driving the business forward, so it's not something that we put a number on.
The important thing, I think, to answer your question, is that we are becoming a truly global company-
Yeah
... with a lot of opportunities everywhere, you know? Every time we open a market, a new market-
Yeah
... you have, an additional white space, you know, in the market. So-
Yeah, that's what-
We are far from-
Yeah
... far from, from our limit, no? There is 850 plus stores. I think we continue-
Yeah
... opening stores. We opened 74 stores during the first semester.
Yeah.
We will continue opening stores because I believe that there is plenty of wide space everywhere.
... Oh, okay. And the results for, especially return on equity, is amazing, close to 100%. That's unheard of, but obviously it's not gonna continue that way in forever. So that's what I was trying to determine, when to when that slow growth is supposed to slow or expected to slow. Anyway, yeah, great results. Thanks. Yeah. Thank you.
Thank you.
Thank you.
Your next question is a follow-up from Edward Woodgate with Jarden. Your line is open.
Oh, hi, guys. Thanks for taking a follow-up. Just wanted to talk about Victor's LTI. It seems like there's some confusion there. I think the prior slide seems to have sounded okay, but just seems like the low LTI expense this year is just because you accrued expenses in the previous years, and still, performance is still going well from a cash perspective. Sorry, from a, from, I guess, hitting the targets this year. But I guess it might be worth getting some color from you, what happens into calendar year 2025? Sorry, FY 2025. Have you already asked and answered this, but are you guys any closer to firming up Victor's comp for FY 2025?
Yeah. So no, there's nothing in place as yet. As we've said previously, that will be a discussion between Victor and the board, obviously, in the next little while. But whatever that ends up being will obviously impact on FY 25 in going forward. So yeah, the current one obviously runs out end of this year, and that's why the expense is lower this financial year.
Yeah, sure. But I guess if we just to, I guess, make sure the consensus stays, appropriately conservative or like, I guess, maybe conservative is the wrong word, but reflects what's going on. I guess next year, it'd probably be reasonably to, for us to assume some sort of run rate, based on the previous LTI package, and so that you- there'll be a bit of a step up in OpEx next year. But, then I guess offsetting that is like the, you're cycling easier comps and you have more stores and more operational leverage. But is that, is that fair that we should be assuming, at least, you know, in the absence of any other information, a step back up on some of these LTIs?
Yeah, I'm with you. So yeah, obviously we can't answer that question because there's nothing agreed, and we don't know what that will look like. But yeah, you have to make some sort of assumption. So, you know, you've got to decide what you think it might be and factor that into your numbers for next year. Hopefully by the time we get to full year results, we've got a better idea. But yeah, I think you're on the right track, but you'll need to assume something.
Yeah, sure. Okay. Well, I guess, the result and the discipline in the store rollout was paid to some of the concerns around the market had, at least on the bear side, that you guys would roll out excessive numbers of stores so that just to hit LTIs. It seems like the unit economics are strong enough to do that anyway. I'm not sure I can... I'm sure you can leverage whatever comps are put in place next year, but, yeah, we'll leave that to the smarter people in the room. Thank you. Thanks for taking the questions. I'll leave you to it.
All right. Thanks.
Your next question comes from the line of Peter Calog ero, private investor. Your line is open.
Hi, just a couple of short questions. On the South American market, why we go with a franchise strategy compared to basically the rest of the world where we're going company-owned stores? And on average, my second question, on average, when you open a new store, how long does it take before it basically pays for itself?
Regarding the franchising markets, we are in South America, but also we are in North Africa and Middle East. No, it's not only there. And the reason why we are doing franchisees, because sometimes some of the, the operators in those region and on those particular markets are top-notch, and we believe that we can partner with them in order to reach our product offering and our brand into consumers in those regions.
What was the second part of the question?
Second question was, when you open a new store, how long, on average, how long does it take for it to pay for itself?
Yeah, and the answer is, it depends on the store. You know, some stores are amazing and pay for themselves within a year, because they all generally cost the same amount in a particular market to build. Others will take longer, so there's no sort of simple answer to that one. But, yeah, it's it can be... It can be a year, it can be a couple of years. Depends.
Thank you.
No problem.
Yeah.
There are no further questions at this time. I will turn the call to Victor for closing remarks.
Okay. I want to thank you for your time today, and we will talk to you on the full year results in August. Thank you.
This concludes today's conference call. We thank you for joining. You may now disconnect.