Ladies and gentlemen, thank you for standing by, and welcome to the Lovisa Holdings Limited FY 2020 full year results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, press star one on your telephone. I must advise you that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Managing Director of Lovisa, Shane Fallscheer. Thank you. Please go ahead.
Thank you, and good morning, everyone, and thanks for taking the time to dial in. On the call today, you have myself, Shane Fallscheer, Managing Director, and Chris Lauder, our CFO. As you're aware, we published our full-year results to the ASX this morning, and we'd like to talk you through them. I'll now do a page turn through the presentation, and we're happy to take any questions at the end. If we turn to page four, I thought we would start with a recap on our business and strategy for those of you that aren't familiar with Lovisa. 10 years ago, we created the Lovisa brand, which is a fast-fashion jewelry concept. The benefits of this concept is we can operate generating high margins while operating in a small store footprint.
In May this year, we celebrated our 10th anniversary with 435 stores across 15 markets, delivering significant sales and profit growth over that period, with a compound annual growth rate of 30% at the sales line. We now employ over 3,000 team members around the world. As we stand today, like most businesses, we have some challenges brought upon us from the COVID pandemic. However, we intend to stay true to what has made Lovisa a great company. We are continuing to develop over 100 new lines of product for our customers every week. We are continuing to invest in our people and structures to support our future growth, and we are pleased with the progress we are making in the digital space. With continued cost control, we have a strong balance sheet and no debt to take us into the future.
To that end, we've done significant work through the current period of disruption to ensure our business is fit and ready to take on the advantages of opportunities that we are confident will arise. We will continue to invest in the growth of the business, including new market opportunities as they present themselves, and we remain excited about the future. We now turn to page five, we will talk through some of the details of FY 2020. After delivering a solid first half of the financial year with strong growth in our store network and sales growth of 22.2% in the first half, the impact of temporary store closures due to COVID in the second half, and in particular Q4, meant that our full-year EBIT was down 42% to AUD 30.6 million. That is excluding the impact of the new lease accounting standard and impairment expenses.
For the sake of clarity, all of the numbers we will talk to today and included in our presentation are after removing the effect of the new accounting standard, so that they are comparable with the prior year numbers, which have not been restated. Also excludes the one-off impact of impairment expenses, primarily from the exit of the Spanish market. We continued our global rollout strategy during FY 2020, with 66 new stores opened for the year and a net increase of 45 stores. With the U.S. rollout gaining momentum, we added 29 new stores, and we're now trading across 13 states as of today. Our execution and geographic coverage in the digital space improved and has now begun to become an important part of our model. Cash flow from operations was AUD 51.7 million and cash conversion at 115%, despite the impact of COVID.
Via tight cash flow management and inventory control at year-end, we held AUD 20.4 million and no debt. As a result, the board has confirmed the payment of the AUD 0.15 interim dividend that was deferred back in April this year until end September, with the only change being a reduction in the franking percentage to 50% as a result of lower tax payments made during the year. If we turn to the financial overview on page six. As I noted earlier, revenue for the period was up 22.2%, with comparable store sales up 2.1% for the first half of the year. We were happy with where we were tracking. However, unfortunately, due to COVID, we were forced to close down our store network to varying degrees around the world through April, May, and part of June.
As each market was able to reopen, we generally saw sales recover more slowly than we would have liked as our category was impacted by the continued enforcement of social distancing and most major event opportunities unable to occur. This resulted in our comparable store sales for the period since reopening to the end of the financial year trading down 32.5% on the year prior. The new store rollout and increase in CapEx spend prior to the slowdown from COVID resulted in an increased depreciation expense for the year, and combined with the impact of the lower sales through the second half, which resulted in EBIT decreasing 41.6% to AUD 30.6 million. The effective tax rate for the year was negatively impacted by the drop in profitability for the year, particularly in newer markets where we have taken a conservative approach to the recognition of tax losses.
In particular, those losses have increased as a direct result of government tax concessions. The statutory results for the year were also impacted by the recognition of impairment provisions in relation to the exit of the Spanish business, as well as provisions against a small number of stores in other markets. Pleasingly, despite the disruption we've experienced throughout the second half of the financial year, we were able to finish the year with a very strong balance sheet position. Turning to page seven, we've tried to make the impact of COVID on our store network clearer for you. As you can see, almost all of our store network was closed from the end of March, with stores gradually reopening from mid-April through to the end of June.
We were able to get our Australian and New Zealand stores back up and running relatively quickly. With less restrictions at that time than other markets, we were therefore able to achieve better results coming out of the closure period. Unfortunately, more recently, you can see that we've again been impacted by store closures through August across a number of markets. We are also grateful for the support provided by governments around the world in the way of wage subsidies, which helped us retain our team through the lockdown period and made it easier for us to get back up and running as quickly as possible. If we turn to page eight, we've spoken to the sales impact from COVID already. Whilst this chart shows our sales declining for the first time since we started the business, we see this impact as temporary.
With 50 new company-owned stores opened during FY 2020, we built a strong store base to build as the global economy begins to normalize. It has also given us a strong impetus to drive online, and the investment made in our digital platform has helped us to offset some of the lost sales from our physical stores. On page nine, you will see our sales by region. While still down on last year, the Australian and New Zealand markets have been our strongest performers in the period since reopening, with a faster recovery than other markets as a result of less restrictions in place until more recently. Those markets were also trading well prior to COVID, with strong first-half performance. Our Asian markets were the first to face disruption from COVID-19 and have been the slowest to recover.
Whilst our European and U.S. stores continue to see disruption to normal sales levels, their total sales have increased strongly as a result of new store openings. Turning to page 10, gross profit of $187.3 million was down 7% at a 77% gross margin, which was impacted by the lowest U.S. dollar hedge rates for the period, with constant currency margin tracking at 79%. The remaining decrease in margin was the result of most stores reopening post-lockdown into our June sale period, along with our decision to take higher levels of inventory provisioning required at the end of the financial year based on our normal inventory provisioning policy. If we turn to page 11, we'll talk to our cost of doing business. As we've said previously, we continue to reinvest into the growth trajectory of our business, which has put pressure on our CODB % over recent periods.
We have, however, been able to lever on some efficiencies in this area, which helped us to keep our CODB in line with last year through the first half. We expect these newer markets to continue to operate at a slightly higher CODB than our more mature markets. However, we remain focused on delivering further efficiencies to manage this. With the impact of the fall in sales due to COVID in the second half of our CODB, we've not been able to be reduced efficiently to offset this. This resulted in our CODB for the year increasing to 59% compared to 56% in the prior year. Various government wage subsidies and rental abatements, where they've been provided to date by landlords, helped to support our CODB through the closure period and to ensure we were able to keep our team employed.
Whilst we have been able to agree some rental assistance to date, in particular working closely with our larger Australian landlords, Scentre Group and Vicinity, among others, we continue to engage in productive discussions with our landlords on both abatements as well as future deals. I'll now hand you over to Chris Lauder, our CFO, to talk through cash flow and the balance sheet.
Thanks, Shane. Let's turn to page 12. You can see that despite the disruption to Q4, cash flow was again strong, with cash from operations before interest and tax of AUD 51.7 million and operating cash conversion of 115% as a result of tight working capital management during the period of COVID-19 impacts and rent payment deferrals. Inventory was well managed through Q4 despite the disruption to our supply chain and temporary store closures, with lower closing stock levels than prior year, even with a net 45 more stores trading than prior year. Capital expenditure for the period was AUD 25.6 million, predominantly from new store fit-outs and refurbishments on existing stores upon lease renewal, with 66 new company-owned stores opened for the year, resulting in a further increase in depreciation expense of AUD 14.1 million.
Lower profit levels and the one-off benefit of tax deductions related to share options exercised during the year resulted in an AUD 17 million reduction in tax paid for the financial year. Actions taken to protect our cash flow early in the COVID shutdown period helped to deliver closing cash of AUD 20.4 million and no debt at the end of the period.
Turning to the balance sheet on page 13, you can see that it remains strong. Importantly, we were able to refinance our existing debt facility during the second half of the financial year, with the overall facility limit increasing to AUD 50 million, with maturity of the term debt component extended for three years. At financial year-end, there were no cash drawings on this facility, with an available limit of AUD 45 million after taking account of AUD 5 million of bank guarantees we currently hold on issue.
Our continued strong balance sheet position has enabled the board to confirm the intention to pay the previously declared AUD 0.15 interim dividend on 30th September 2020 as planned. The franking percentage of this dividend will be reduced to 50% from the originally announced 100% franking as a result of lower tax paid during FY 2020. Given the ongoing uncertainty in the global market at present, the board has elected not to pay a final dividend in relation to FY 2020.
The board will continue to assess dividend level each half year and determine the appropriate level of dividend based on profitability, cash flows and future growth CapEx requirements in the context of the 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 now hand back to Shane.
Thanks, Chris. If we turn to page 14, a quick update on store numbers. The key driver of future growth for Lovisa continues to be the international store rollout, with 65% of our store network now trading outside of Australia. We finished the year with 435 stores trading, with a net 45 stores opening during the financial year, which comprised of 66 new stores opening and 21 stores closing as we continually optimize the store network. Reminding you that nine of the store closures related to the exit of Spain. The rollouts in the U.S. and France continued their momentum through the first half, and whilst this slowed as a result of the COVID disruption, we now have 21 stores trading in France at the end of the year and 48 in the U.S. across multiple states.
As we have said previously, sourcing quality sites is key, and we will take a measured and diligent approach to moving forward in both our current market and any new market we may enter. With the uncertainty introduced as a result of COVID, we need to ensure that we remain true to this focus while still taking advantage of growth opportunities as they arise. Turning to page 15, I will talk to the progress we've made in recent times in relation to digital. The focus on our digital capabilities accelerated leading into lockdown, and we now service all eight of our major markets via digital storefronts across the globe. With new sites rolled out in South Africa and the USA during the second half. As a result, we were able to grow our online sales by 311% for FY 2020, with growth of 382% during Q4.
That trend has continued since financial year-end, albeit off a low base. In addition to increasing the geographical coverage of our digital business, we've also been able to deliver a number of other key digital initiatives, including fulfillment from store, live chat, and multi-warehouse fulfillment to improve our supply chain capacity. We've also recently appointed a head of digital and marketing to maximize the results in this area, with a further pipeline of digital developments in progress for FY 2021. Turning to page 16, I'll now talk in more detail in relation to the U.S. market. As I mentioned earlier, we were trading from 48 stores in the U.S. at the end of the financial year across 10 states.
Since then, we have been able to get started on store openings following the lockdown and have opened a further five stores in the U.S., including our first stores in Louisiana, Missouri and Connecticut, taking this to 53 stores in 13 states in total. Results to date indicate that the Lovisa offer is resonating well with our American customers and operating metrics are in line with our expectations. Whilst operating costs in this market have been higher than some of our other markets so far, in particular new store build costs, we are happy with the progress and outcomes to date in the U.S. even though the expansion continues to put upward pressure on overall CapEx and depreciation. Despite the short-term COVID challenges of the past few months, we continue to see the USA market as a significant long-term opportunity and continue to invest in the structures to support this.
Turning now to page 17, I will talk to the European market. At financial year-end, we were trading from 42 stores in the U.K. and 21 in France. Talking to Spain, we were disappointed in the response we received from landlords in relation to rental support, and as a result of that, combined with uncertainty of a future return level in this market, we made the decision to exit and not reopen our nine stores exiting the Spanish market. In the U.K., store rollout progress has continued to be slow as a result of the site availability and then COVID taking landlords' focus away from doing new deals. However, we are pleased with the progress we have made with the existing store network in relation to sales and cost management.
In relation to France, we continue to be pleased with the performance of the stores we have opened to date and are focused on sourcing appropriate sites to grow this market. We have a leasing manager in place in France to support this growth, and again, we will not sacrifice quality of stores or our operating metrics to deliver on a store number target. As with the U.S., our experience in this market to date has been that operating costs have been higher than our average. However, we continue to see the European market as a strong growth opportunity for us. On page 18, I will talk to the trading update and outlook for the coming financial year.
Trading for the first eight weeks of FY 2021 has seen continued challenging trading conditions as most markets continue to experience economic disruptions, with comparable store sales for this period of -19%, being an improvement from comparable store sales at Q4 of -36.5%. We continue to see positive signs across our markets. However, this has been tempered somewhat by recent government-imposed lockdowns in a number of locations, with 30 stores currently closed in metropolitan Melbourne, 19 in California, two in New York and eight stores in New Zealand. We continue to focus on opportunities for expanding our store network and as I mentioned earlier, have opened eight new stores since the end of the financial year. Our strategic plans remain in place, and we are ready to continue our store rollout as we continue growth discussions with our landlords globally.
We also continue to build our global executive team with the recent addition of a senior leasing executive based in the Northern Hemisphere and a head of digital and marketing. Our balance sheet remains strong with continued net cash position above AUD 20 million and undrawn cash debt facilities supporting investment in growth. As a result of the current uncertainty in the global economic environment, we're not in a position to provide any further information in relation to the outlook for our business. In summary, on page 19, after a strong start to FY 2020 with 22% sales growth and strong momentum in our store rollout, unfortunately, COVID-related closures and impacts on our category had a major impact on our sales and profitability in the second half, resulting in EBIT for the year of AUD 30.6 million.
We are pleased with the progress we've made in digital, with increasing contribution from online sales, and we were also able to control our CODB well during the year, and in particular through the Q4 disruption. As a result, we have been able to continue to invest in building a platform for future growth. Our international expansion continued prior to COVID lockdown with a further 66 new stores opened during the year and a total network of 435 stores at year-end. With 65% of our store network now outside of Australia and the rollout continuing to gain momentum in the U.S.A. and France, markets despite the COVID disruption.
Our continuing strong balance sheet position has allowed for the deferred interim dividend of AUD 0.15 per share to be paid on the 30th of September 2020 as planned and leaves us in a strong position to again move forward with our growth plan. With that, I want to thank you for your time today, and we're happy to open it up for any questions. Thank you.
Thank you, Shane. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question please press star one on your telephone and wait for your name to be announced. If you wish to cancel a request please press the pound or hash key. Your first question comes from Jo Little from Morgans. Please ask a question.
Good morning, Shane, Chris, thanks for your time. Just firstly, on the AUD 20 million net cash position, which is great, and you said that's still intact today. Is there anything we just need to consider in terms of deferrals or inventory rebuild? I guess that's going to be reliant on sales performance, but just trying to profile that a bit, any make good into the first half of the new financial year.
Yeah. Hi, Jo. I'll talk inventory, I'll throw to Chris for the hard ones. As far as inventory goes, we basically just run our inventory straight through. Running into the March period, we obviously reassessed our stock positions, being that we can get in and out of stock in that six to seven-week timeframe, we've been fortunate that we could manage our inventory through without some of the other challenges. From an inventory position, we're comfortable with our position. There's no big ramp-up of stock to come, I'll get Chris to answer the other half.
Yeah. Just clear that there's a little bit of a catch-up in terms of payment terms with the inventory suppliers, not much, Jo. That's largely already reflected in that update as at now that we've still got more than AUD 20 million of cash. We have been paying some rent through the last couple of months, we have caught up some of that rent deferral already, there's obviously still a catch-up to do there. If you think about it, we've got the dividend to pay, which is about AUD 16 million coming out of that. Then probably a good couple of months' worth of rent still to pay on top of what we're incurring at the moment. A little bit of that's dependent on what we can negotiate in terms of the payments that we haven't done already.
Okay, great. That's helpful. Thank you. Just on the stores, Shane, obviously you've opened eight post balance date, I think five in the U.S. despite sales being still at a material deficit, I guess reflects your long-term focus. Can you just talk about the psychology behind that and maybe a bit more color on where you're at with rental negotiations and the shape of some of those outcomes offshore? Understanding that a lot of that will be confidential, but some kind of color would be great.
Sure. The way to look at the stores that we've opened since July 1 was really about deals that were already in play. Working on, I mean, we can turn our stores reasonably quick, but there's still a three or four-month lag. Those stores were probably deals in the can coming into January, February, March this year, and we really came off site and came back on site. As far as landlord negotiations on rent issues through COVID, it's just an ongoing issue. Some markets have been more cooperative than others, but we're confident that we'll find a position that works for us across the world.
As far as new deals moving forward, there has been clearly disruption to our ability to keep doing new deals, being that we're still here and ready to go. Obviously with landlords, it's been well documented, have got other challenges that they're prioritizing. In simple terms, we're ready to keep moving, but it's probably only been the last three or four weeks that the landlords have been ready to reengage in new deals moving forward, being that everyone had to pause and regroup. We're confident those discussions are starting again, and we're confident we'll get to a position that we're all happy with on new deals. It's been slow going over the last three or four months, therefore, that's going to see a lag effect on our store openings as you mirror that down the calendar.
Yeah, got it. I'm not sure if you're willing to do this, but just any idea of how many stores are in the pipe if the right deals were actually done from your perspective or from a return perspective?
Yeah. Not willing to go there. There's a lot of moving parts. As I said, we're disappointed in the Northern Hemisphere senior leasing executives because up until now we've got leasing executives in most markets, but really we've had one Head of Leasing. We've split that in two, so we've now got a Head of Leasing Southern Hemisphere and a Head of Leasing Northern Hemisphere. We've got that in place to keep those discussions going, especially with travel being more compromised moving forward in the short to midterm. There's too many moving parts for me to put a number on it.
No worries. Just lastly, can we all jump back in the queue, just on the gross margin, I understand impact when you do open into a sales period and demand's tough, but just thinking about trajectory in FY 2021, hedge rate versus how you're thinking promotionally while demand is impacted, just any idea there would be great.
Look, from a promotional schedule, obviously we lost a lot of trade through April, May, which are traditional full price trading months. We reopened in June, and we opted to open into sale to make sure that we could clear down any issues that we may have had a buildup on. Now we're back into a normal schedule. Again, the benefits of short lead times with our suppliers is probably beneficial for our business in the current environment. We're anticipating just rolling into a traditional promotional schedule moving forward.
I find currently, I guess it's basically stabilized consistent with where it closed or what we did for FY 2020. I think that the number that we put out there is about AUD 0.71 on average for FY 2020, and that's pretty much where our hedge will be at the moment, with the spot a little bit higher than that. There is a fair amount that is hedged out in the second half. At the moment, we're in pretty good place. We're not expecting that to be as big an issue for this year as it has been in the past.
Thanks so much, guys. I'll jump back in the queue.
Your next question comes from Sam Teeger from Citi. Please ask a question.
Good morning, Shane. Morning, Chris. When you guys say like-for-like sales are down 19% in the trading update, can you please confirm whether that includes or excludes the stores that are closed? I guess if it excludes the store closures and kind of true like-for-like sales would be down by a larger amount.
Yeah. That is a true like-for-like in the like-for-like sales based on stores that are actually trading. It excludes the stores that have been closed because of government closure orders, if that makes sense. I simply could tell you what the trading performance is in stores that are actually trading.
Okay. Yeah. Got you. I think you recognized AUD 11.8 million of wage subsidies in FY 2020. Based on, we're quite familiar with JobKeeper in Australia, but based on all the different kind of wage subsidies around the world, at this point in time, how much would you be anticipating to recognize in FY 2021 and when do they start tapering off?
Yeah. It would be less than that because that was generally a lot of countries other than Australia with wage subsidy programs that aren't necessarily in place anymore. It's really just JobKeeper at the moment in Australia and a couple of other countries to a smaller degree. We're not planning on going through detail of what we expect JobKeeper to be for the year because it's a number that includes a big component of top ups where we're having to pay people above their normal weekly wage. It's a little bit misleading, that number.
Yeah. Got it. Makes sense. Then, just wondering, you guys seem like you've been doing a really good job around face masks. Well done for adapting to the current trends. Just kind of keen to get a sense of right now what proportion of sales face masks represent and, without going into specifics, is it fair to assume that face masks are a lower gross margin?
Similar margin. A very small percentage of our business. We basically brought them in to ensure that we could, as a recognized brand, supply them to our customers. A very small percentage of our business. My question, we saw a spike in Melbourne as we went into phase four. Most people, depending on where they live, if they've had to live through wearing masks, what happens very quickly is you end up with five different ones on the end of the kitchen bench. Yeah, to answer your question, it's a very small piece. Nowhere near a material amount of our business. It's a small part of our business.
Okay. Thank you.
Thank you. Your next question comes from Colin Sinclair from Macquarie. Please ask the question.
Hi, guys. Thanks for taking a couple of questions. Just a few quick ones. Maybe if you can just provide, I guess, a bit of color in terms of the trading since reopening globally versus Australia. I understand ANZ is doing better, I guess how wide should we expect this difference to be at the moment?
Look, prior to COVID, I think I've always been reasonably consistent in saying that the span of like-to-like numbers is usually in quite a tight bracket. Being that we create all of our own products and distribute it around the world, ultimately, typically product drives our success. Typically, we've seen those brackets of like-to-like sales be a reasonably tight band between the high outliers and the low outliers, I suppose. In this case, we are getting large variables. We're not really in a position to talk to like-to-likes per individual market. We are seeing a wider stroke of like-for-likes really coming down to everything from basically infection rates and how each society is dealing with COVID, how each government is enforcing COVID restrictions, and so on. The only thing I would say is Asia has probably been a low-lier.
It was affected early, and it's a harder recovery out of Asia that we're seeing from a formal Asian store. Other than that, I think if you were to overlay how each government and how each society is dealing with COVID, then it's probably fair to say that's going to be representative of our numbers.
Yeah. No, that helps. Maybe just, I guess, give you that ANZ being better, does that give you confidence, I guess, that eventually those other markets will follow suit, just in their own timeframe according to, I guess, government restrictions and how people treat going back out again?
Yeah. That's a good question. If you overlay. You just need to look at the infection rates around the world and if you overlay. I've lost track of the numbers in the last week or two, but Florida were at 10,000 cases a day and trading through, and then Melbourne got to 400 cases a day and went into full lockdown. It's really just, again, the impacts, and that's not a political statement, by the way, but it's just the impact of different governments and how that's affecting trading patterns in each market. We do see blitz when you get something happens and there's a new hotspot or whatever you want to call it, and you do see blitz of sales come off reasonably quickly. A few good days of lower infection rates around the world, then you see results come back.
You've got markets such as W.A. that have probably, unfortunately, touch wood, avoided a lot of the issues that other states and countries have got, and then they're trading very strongly. At a macro level, it really follows the level of infections and how the governments are choosing to deal with it in each market. I suppose I can't answer any more detail than that, but it really is a bit of a moving feast.
No, that helps a lot. I guess people could guess that, but it helps that that's what you're actually seeing. Maybe just a follow-up to the gross margin question. Can I just confirm that the inventory provisioning that you've mentioned in the slide deck has actually been included in the results? The gross margins for FY 2020 and the second half includes that provision being put through?
Yes, that's right.
Are you able to share, I guess, how material that is and what the gross margin, I mean, you've done it on a constant currency basis, but I imagine there's still double-digit basis points impacts from that provision as well?
Yeah. Pretty much, I mean, half of that, the reported movement in gross margins from currency. When you look at the constant currency, you can see that. The rest of it, a big chunk of that is from provisioning, and then the rest of it's from the opening in the June sale. It's probably a bigger part of it's the provisioning component.
Great. That helps. Maybe just one last final one around the materiality of online sales. Obviously, it's growing quite fast. If you could just talk how you're seeing margins here and some of the initiatives to drive sales in stores. Do this to help with delivery costs and actually delivering a sort of, I guess, underlying margins below those costs.
Yeah. I guess the approach that we've taken with the online business to date has been not to push. Push volume hard at the expense of profit. That in a lot of respects is limited to growth so far because we want to make it profitable, make sure it's a profitable business as it grows, and we've been able to maintain that. What we look for is the online business to be as profitable as our stores. Obviously, we've got a lot more volume going through there now. If your question is, do you expect to see a degradation in our overall profit margin because of that, then the answer is no.
All right. That's it for me, guys. Thanks.
Your next question comes from Sam Haddad from Bell Potter. Please ask your question.
Hi, Shane. Hi, Chris. Just on the ANZ, just want to clarify that all rents have now been agreed on new terms with the COVID environments?
No. We've agreed a number of terms, and we've agreed the majority of sites and current locations in Australia. We've agreed rent deals that we're comfortable with, but not all.
Well, that's a majority, is that right?
The majority, yes.
Okay. On those, can you sort of give color on the structure of those deals? Is it more shifted as a percentage of sales, or is it just a reduction in fixed cost or?
Yeah, no, we're just not in a position to talk to the deals we've agreed.
I'm just wondering, right, with renewed restrictions and the fact that you've closed stores again, are you still paying rent on the stores that you've closed now in Melbourne and Auckland?
Same answer, unfortunately. We're comfortable with what we've achieved with our landlords, but we're not in a position to talk to the detail.
Okay, sure. Just back in the U.S., just wondering, given that negotiations are starting to reengaged in the last few weeks, and given the lag to open up stores from when you start engaging, should we then assume that store opens, in terms of the pipeline in the U.S. in the short term, it's fair to assume that there won't be material number of stores in the first half, given engagements You're only just starting to reengage with landlords in that respect?
Yeah. It's a fair assumption globally that the first half will be quieter.
Right.
That's really off the base. I mean, as much as we can do deals reasonably quickly, it's off a base that different markets, again, it's globally documented, different markets went into lockdown at different periods. It's fair to say that March, April, May, June, sort of was hard to get any sort of proactive activity, and probably even into July. Ironically, now in Europe, we're dealing with people going off on holidays and having trouble to get hold of people to get the right deals done. Yeah, for that said, it's gonna be a slower first half, due to the fact that the deals, the lag effect of the closure. We were open and ready to go for business right through, but unfortunately, hard to get landlords' attention in the middle of a crisis.
Yeah. Understood. Just in terms of GD on prospecting new sites, how do you go about that with restrictions between states and flight restrictions? Just obviously you'd want to get a feel for the foot traffic. I know foot traffic's hard to measure feel of the store location.
Yeah. Look, if we go in the different markets, we've now got a very senior leasing executive based in L.A. to cover the northern hemisphere. We've got a senior management team that have been in place for a couple of years now. We're comfortable with both desktop analysis and ability for the team on the ground to visit these locations. We're comfortable that that won't compromise our site selection in the short to midterm.
Okay. Just on the online channel, just curious how profitable is that channel and who's paying for the fulfillment. Over a certain basket, there is some reductions and just curious as to profitability of that online channel.
Yeah. As a status, I won't say. We target that channel should be as profitable as our stores. As you said, we have a threshold for delivery. To make sure that we can recover the cost of fulfillment, given the low average unit price of our sell. Yeah. That's really all to say at the moment. I think it's the same question as before, that it's not accretive to our EBITDA margin.
Okay. Great. That's helpful. Thank you. Thanks, guys.
Your next question comes from Mark Wade from CLSA. Please ask your question.
Good morning. Thank you, guys. The question is a little bit of an overlap on what you touched on before, but I'm thinking, with the travel restrictions in place, how has that affected your product development?
From a product perspective, our product is basically either developed internally. Obviously, we like to see what's going on around the world for aspiration. Our buyers are traveling.
I was about to say less, but at the moment they're not traveling. We do have senior design-orientated individuals in America and the U.K. that basically have pivoted into a role of basically fashion spotter-type scenarios where we're getting weekly feedback of what's happening on the high streets around the world. We're reasonably comfortable we're not missing. Of course, it would be better for us to be in and out of China every four weeks like we were, and in and out of the rest of the world every eight or 10 weeks. We're comfortable that the senior executives in our business that have been in our business for a long period of time and understand what to look for, have now sort of moved into some of those roles to keep the feedback flowing into our support center.
Just pivoting to the franchising opportunity. It's something, as an outsider, you'd think would be marvelous, but I guess internally it's pretty hard to manage. What's your current thoughts around that? Can that be a big opportunity for franchising?
Yeah. Our simple belief is that we like to control our own destiny wherever possible. Our first priority is to open company-owned markets around the world and have control of our expansion plans, et cetera. The franchise markets that we've operated in or we operate in at the moment are the markets that either government ownership laws restrict us from owning our own business, or complexities, levels of corruption, and all the different variables that we look at before we open into a market. We're not proactively pursuing those at the moment. Really, if someone approaches us in a market that we're not currently looking at from a company perspective, and we do some work on it and make a decision. It's fair to say at the moment, no one's really in that space looking for new opportunities.
I wouldn't imagine there'll be much movement in that space over the next 12 months.
Okay. It's really preferred the company own stores most of the time. Lastly, just on margins. Obviously, it's been an extraordinary year you've been through, and your margins kind of almost halved. Is there any reason to think they won't just snap back in time once you really get your sales velocity returning to the business? Is there something more structural in place that will mean it's going to be harder? I know you touched on, you're saying the U.S. and the prices are higher Cost of Doing Business, but in general, should one think margins are permanently going to have a step down or they're due to snap back in time?
When you say margins, are you talking?
EBIT, I was thinking.
Sorry. EBIT.
Yeah, we can take into account both cost of goods and cost of business.
Obviously, the EBIT margin is heavily impacted at the moment by the drop in sales. Well, we haven't been able to pull some of the fixed costs down as fast. I guess getting back to EBIT margins where we were previously is heavily dependent on how quickly we can get sales back to where they were pre-COVID. I think gross margins in general should be able to maintain at least back to level, excluding the impact of currency. Remind you that we were at an AUD 0.76 hedge rate last year and at AUD 0.71 now. Does that answer your question?
Yep. That's top line. Anything I should be thinking about in the Cost of Doing Business, which could be a permanent change there?
We've talked a bit over the last 18 months around the newer markets and the higher costs that we've had going into those. There is still a little bit of that flowing through as we roll out more and more stores in those markets. Obviously, the depreciation side of that with a higher CapEx spend is the impact as you can see in the numbers.
We're making some progress on that. I think in the first half, our CODB was back on the prior year. Yeah, we'd expect to be getting back to that sort of level of sales in the near.
Sorry, could I just put a fourth one in? Do you ever see any competitors coming down the road at you? Given those margins historically have been just so attractive. That's something as an outsider that I've tracked and really pondered and referenced reports on is how can you guys maintain margins that are going up there in the top handful of whole jewelry operators in the world? Why doesn't that attract more competition?
I think to answer that question, over the last decade, we've had numerous competitors in our space. Off the top of my head, we've had South Africa, a major competitor, that we absorbed some of their stores. In Australia, we've had Colette, which is still on the papers.
Trying to find a buyer. Had Equip with 150 stores or 130 stores. I think to answer your question, our business looks simplistic from that outside looking in, but the complexity is to operate our business and all the ingredients that go into running a successful business probably restrict it. It probably looks easier than it is potentially, or at least I tell myself that. You just make it harder.
Well, it must be like the KFC secret herbs and spices as well. Well, thanks, guys. Look, tough year and all the best and see you in shape and getting it moving again. Thank you.
Your next question comes from Julian Mulcahy from Evans and Partners. Please ask your question.
Hi guys. Just a few questions. Firstly, the inventory write-off of AUD 6.8 million in COGS, much higher than previously. Is that mainly just writing off Spanish stock, or is it's a line discontinued that you took such an aggressive hit?
Part of that's the Spanish stock and part of it's just the increase in the number of stores during the year. Obviously our overall stock level didn't go up. We had an increase in stores from the number in the prior year, we took extra provisioning at the end of the year as we came out of the shutdown.
With the rent subsidy, which you got AUD 1.8 million, do you see any in this half or that was just last quarter only?
In terms of do we expect to continue to get rent subsidies into the second half, into this financial year?
Yeah.
Yeah. Well, as Shane said before, we're still talking to landlords about abatements and trying to negotiate that. Yeah, there'll be some there. It's a number that we're not talking to.
Basically you've expensed your rent as if you were paying it less that subsidy. In terms of the cash outflow, you haven't necessarily paid that completely in the final quarter. Is that correct?
From a cash flow perspective, we've expensed the rent. If this deal is done, we've obviously reflected that in FY 2020. We may not have paid the net rent by that point, some cash flow flowing into FY 2021.
Yeah. Okay. Switching to the U.S. and back talking to landlords, I mean, there wouldn't be too many retailers in the U.S. looking to roll out hundreds of stores. Does that just really put you up the sort of priority list in terms of them now wanting to sign you and offering you baskets of good locations?
It's Shane here. Yeah, look, I guess the way I can answer that question is we're ready to go, but everything takes longer than everyone would like, especially when we're sort of a young, aggressive business that wants to keep moving through. There's no doubt there's going to be distressed retailers. Probably too early to see any sort of macro opportunities. Being that the American landlords, again, reasonably well documented are different. It takes a different performance because there's one sort of public. I think the short answer is it's just going to take a bit more time than we would like to get the traction that we think will be there. I don't think there's any question that there'll be opportunities.
Tying those opportunities down, and getting those deals away, there's a lot of landlords still worrying about who's paid rent in the last three months and who's capable of paying rent in the future and so on, tends to be their number one priority at the moment. As I said earlier, that with our new leasing executive based on the ground there now and well known to the business and the different landlords, it's fair to say the audience, the ability to get an audience and the ability to sort of work through some of those opportunities, is starting to get more prevalent, and therefore get some more traction.
Well, there's no bottleneck from your half in terms of getting fit outs ready, assuming you've got the opportunities with them?
Yeah.
Great. Okay. Just finally, you mentioned that W.A. performed the best. Is that in positive, like-for-like territory?
Yeah. Again, we're not really giving away the details. W.A. is one of the stronger ones. I really just use that as an example of the markets that have had very little impact from COVID. Fortunately, we're seeing very strong results.
Okay. Thanks guys.
Thank you.
Your next question comes from private investor, Greg Hoffman. Please ask your question.
Hi, guys. I may have missed it, but have you given an AUD figure for online sales? I know you've called out the huge percentage increases, but, just without putting those in context, it's a bit hard for us to gauge, is this the equivalent of one store, 10 stores? What kind of figure we're talking?
Yeah. No, we haven't and we don't intend to. We've talked about the percentage increases year-on-year because everybody was very interested in it, but we don't plan to talk to what percentage of our business it is at the moment. Still a small part of our overall turnover.
Okay. Could you just talk a little bit maybe about Vietnam? You haven't sort of called that out at all. What are you seeing there? Have you learned anything of interest in that market?
No. Look, again, every market has been affected differently through COVID, so there's nothing really different there than we've learned from Malaysia or Singapore or anything like that. Some of those Asian markets have had a bigger impact. With Vietnam, via the franchise partner, it's sort of getting along at the moment. Obviously, every business is pretty gripped through lockdown and dusting themselves off, and that's probably the same with our franchise partners.
Okay, thanks.
There are no further questions at this time. I'd like to hand the conference back to Shane. Please continue.
Thank you for your time this morning, and I look forward to probably talking to most of you again over the next two to three days. Thanks for your time.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.