Thank you for standing by, and welcome to the Lovisa Holdings Limited FY 2019 half-year results conference call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr. Shane Fallscheer, Managing Director. Please go ahead.
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 half-year results to the ASX this morning, and we would like to talk you through them. I will now do a page turn through the presentation, and we are happy to take any questions at the end. If we now turn to page five, we will talk through some of the details. We've had a solid result in a more difficult trading period than we have experienced in recent times, with EBIT up 5.1% to AUD 36.5 million.
Total sales were 12.3% as a result of the continued new store rollout, however same-store sales growth continued to be challenging, finishing the half at -1.8%, impacted by softness in comparable store sales from the previous year of positive 7.4% for the first half of FY 2018 and particularly strong comps through last year's Christmas and Boxing Day trading periods. Our gross margin increased 31% as a result of the benefits of higher USD hedge rates continuing through the period, combined with disciplined inventory management. We continued our global rollout strategy with a net 40 store openings, and I'm very pleased to announce today that following successful trading in the U.S.A. and France in recent months, we now have the confidence to move to full rollout in these territories, with the U.S. rollout to move outside of California in the near future.
We continue to invest in the structure of the business to support our global growth profile as we roll out new territories, including investment into global support structures and expansion of the global property team in overseas markets, as well as the upfront investment into e-commerce, which we launched in October. When combined with negative comp store sales for the period, this resulted in an increase in cost of doing business percentage compared to prior year. Pleasingly, cash flow from operations was again strong, rising 9.4% to AUD 49.1 million for the period, with operating cash conversion of 121%. With that, the board have declared a fully franked interim dividend of AUD 0.18, being a lift of AUD 0.05 on the prior year. If we turn to the financial overview on page six, revenue for the year is up 12.3%, with comparable store sales down 1.8%.
Just to talk to that for a moment, whilst we're generally happy with our execution on meeting our customers' product needs, we've not seen the same major trends in the fashion jewelry sector as we've seen in recent years. That said, we are happy that we have been able to deliver strong growth from the new stores and are well-positioned to react and deliver to whichever trends prevail in the market. We've continued to make important investments in both people and process to drive the growth of the store network and to support what is increasingly a globalized business, which when combined with negative comp store sales, has resulted in the CODB % being higher than last year.
Our EBIT increased 5% to AUD 36.5 million with earnings of AUD 0.242 per share. Our continued strong balance sheet and cash flow generation has supported an increased interim dividend of AUD 0.18 per share. If we turn to page seven, we've spoken to the increase in sales of 12.3% to AUD 133.2 million and the factors behind it. This chart shows the progression of the company's sales over the past five years. Very pleasing to be able to present a sales growth chart showing such a consistent increase. Importantly, we've remained focused during the half on preserving our strong growth margins and have not chased sales at the expense of margin. On page eight, you will see that we have had growth in total sales across all regions. While still delivering top-line growth in the Australia-New Zealand market, Australia in particular was impacted by generally softer trading conditions.
As this market has historically outperformed over a number of years, it has led to a result of negative comps for the half. Asia was again solid, with another strong sales performance in Malaysia offsetting store foreclosures in Singapore. The growth in the European and U.S. markets accelerated in the period, with 12 new stores in the U.K., eight stores now in Spain, seven in France, and eight in the U.S. South Africa again performed well with sales up 10.5% for the period, aided by both strong comp sales growth and the benefit of additional stores opened. Turning to page nine, gross profit of AUD 107.8 million was up 13% at an 81% margin, a 60-basis-point improvement from last year as we continued to benefit from higher USD hedge rates in this period.
We have maintained our focus on margins rather than chasing sales with continued focus on inventory management and promotional effectiveness, resulting in a small improvement in margin on a constant currency basis in spite of the more challenging trading conditions. Whilst we have again been able to deliver strong margins, as you can see from the chart at the bottom of the page, we are a fashion business and therefore our margins can experience some degree of volatility. We turn to page 10. We'll talk through our CODB. As we've said previously, we've continued to reinvest in the growth trajectory of our business, which has put pressure on our CODB % throughout the year.
We've invested in our senior executive team to ensure we have the capability to execute and grow in our new markets, invested for the future in the relocation of our Asian logistics function from Hong Kong to Qingdao, and have also had the impact of the launch of e-commerce in October. The rollout of stores in new regions has also had an impact on our CODB, with opening costs and higher than normal store wage costs throughout the opening period having an impact on the overall cost of operating in new markets. We continue to invest ahead of the growth curve to lay the foundations for future growth while still remaining focused on keeping tight control of the underlying cost structure of the business. I'll now hand over to Chris Lauder, our CFO, to talk through cash flow and the balance sheet.
Thanks, Shane. Turning to page 11, you will see that the company's cash flow was again strong, with cash from operations before interest and tax of AUD 49.1 million, supported by operating cash conversion at 121%, as we continue to manage our working capital well in the face of the ongoing investment into stocking our new stores. Capital expenditure for the half was AUD 12.5 million, predominantly from new store fit-outs and refurbishments on existing stores upon lease renewal. Overall, this represents a AUD 5 million increase on the prior year as we build scale and grow the store network in new markets. Cash dividends in the period were AUD 7 million higher than the prior year at AUD 14.8 million as a result of the increased final dividend from FY 2018, leaving us with net cash flow for the period of AUD 10 million and closing cash on hand of AUD 32 million.
Turning to the balance sheet on page 12, you can see that the cash generated for the period has further strengthened what was already a strong balance sheet position. Our inventories are up on the same time last year, growing in line with the new store rollout, e-commerce launch, and in preparation for coming store openings, with disciplined inventory management an important part of our business model. As with June 2018, we finished the period with no debt, significant headroom in our covenants, and AUD 25 million of undrawn financing facilities available to fund the future growth of the business, which has all combined to allow us to increase the interim dividend by AUD 0.05 per share to AUD 0.18 to distribute cash that is currently surplus to requirements and more closely align dividend payments with the profit and cash generation profile of the business.
We accelerate the store rollout in our growth territories, we will continue to assess on an ongoing basis the cash flow requirements of the store opening schedule and make future decisions on both dividends and capital structure of the business as required, reminding everyone that we do not target a specific dividend payout ratio. I'll now hand back to Shane.
Thanks, Chris. We turn to page 13, a quick update on store numbers. Lovisa finished the half with 366 stores trading, with a net 40 stores opening during the period, which comprised 51 new stores opened and 11 closed, as we continually optimize the store network. We now have 58% of the store network offshore. The U.K. store rollout has continued, with 12 new stores added in the region for the period to take the total to 36 stores. The pilot programs in France, the U.S., and Spain continued in the half, with the business trading seven stores in France, eight in the U.S., and eight in Spain through Christmas. The U.S. and French markets, in particular, performed seasonally through this period, and we will now move to full rollout in these territories, which I will discuss later in the presentation.
As we have said previously, sourcing quality sites is key, and we will take a measured and diligent approach to moving forward in any market we enter. As we enter larger new markets, a key learning has been to get leasing people on the ground in those markets right from the start to build a pipeline of sites as quickly as possible. We are pleased that now we have these resources in place, we've been able to drive more momentum in store rollouts through quarter two. We've listed our view of each market's estimated store capacity on the right-hand side of the table. As you can see, in Australia and South Africa, we are already ahead of our estimated store capacity. This is because these stores may ebb and flow based on renewals. However, this does not mean we will stop considering new store opportunities in these markets.
We'll take them on their merit. Again, me taking back to our investment metrics. These estimates are a general guide only. You will also note that we have not provided a guide in relation to where we see the store capacity of the U.S. and French market, as we feel it is still too early to determine this with any degree of accuracy. Turning to page 14, I will now talk in more detail in relation to the opportunity in the U.S. We have now traded in the U.S. since November 2017, and with the pleasing performance of the eight stores trading in the Californian market, we are now confident to continue our store rollout with the knowledge that the Lovisa offer is resonating with the American consumer.
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 confident that with scale and more experienced teams on the ground that this market will over time deliver returns consistent with what we are used to from our existing markets. Whilst we have started our journey in the U.S. in California, we have now expanded our attention to other states and expect to be additionally trading from at least Texas and Florida by the end of the financial year. We've also recently appointed a second leasing manager for the U.S. who will service the East Coast market. We obviously see the U.S. as a significant opportunity and continue to invest in the structures to support this.
However, the eventual size and timing of the store rollout is dependent, as always, on being able to deliver quality stores that meet our internal criteria rather than hitting ambitious store number targets. Turning now to page 15, I will talk to the European market, and in particular, the France and Spain pilots. We've now traded in France since 2018, February, and whilst the delivery of stores has been slower than we would've liked, we were able to go through the Christmas trading period with seven stores trading. Consistent with the U.S., performance of these stores has been pleasing. Whilst we still have a lot to learn to optimize our operations in this market, we have enough confidence to move this region out of pilot and progress the store rollout.
As with the U.S., our experience in this market to date has been that operating costs have been higher than our average. The store rollout is slower than we're used to. Again, however, we expect that with increased sales, we will be able to deliver returns more in line with our existing mature markets. We now have a leasing manager in place in France to support the growth of this market. Again, we will not sacrifice quality of stores or our operating metrics to deliver on store number targets. In relation to Spain, we went into the Christmas period trading from eight stores, having opened our first store in June 2017. Our performance in this region has been inconsistent to date. As a result, we have elected to slow any further store openings until we can deliver on the key metrics required to expand in this market.
As a result, we will continue to take a cautious approach on taking on any new sites in Spain. We will continue to focus on the stores we are already trading in. Turning to page 16. Operationally, we continue to focus on improving the structure of the business and the way each department operates to best support our growth strategies. Some key areas we've invested in during the period are supply chain and IT systems, including some of the following. We've moved our third-party logistics hub from Hong Kong to Qingdao, China, to find economies in the picking and packing of orders and to be closer to our suppliers. We've changed our logistics provider in order to deliver a more efficient supply chain. We've upgraded our in-store point-of-sale hardware and software to ensure that we can cater to the global languages and integrated EFTPOS and banking facilities in all regions.
We have changed our global store labor management and rostering systems to ensure that we can effectively manage the growing workforce we have across our nine company-owned territories in three different languages. In addition to the projects I've just noted, we've launched the Lovisa.com e-commerce website in October in the Australian and New Zealand market. We continue to refine our omni-channel operating model before launching globally. Turning to page 17. On the people front, we've made some significant senior appointments during the period to drive the growth of the business with the appointment in November of Mark Cripsey as Chief Operating Officer, James Shepherd to lead our European and African businesses, and Beatrice Vincent to lead the U.S. Each of these appointments bring with them significant long-term retail experience in quality global companies and are already adding a lot of value.
As I've already mentioned, we have also made some key changes in our leasing team with the appointment of a leasing manager for France and a second leasing manager in the U.S. to support the East Coast market, as well as the relocation of Tony Frigault, our Global Property Director, from Australia to London to bring him closer to our growth markets. We're also very pleased to announce today the appointment of Sei Jin Alt to our board of directors as an independent non-executive director. Sei Jin has spent her career in product and merchandising roles across the fashion retail industry, in particular fashion jewelry in some very large U.S. retailers and will be a fantastic addition to the board. We also announced today the appointment of Nico van der Merwe to the board as an alternate director to Brett Blundy.
Nico has been the Chief Financial Officer at BBRC for the past 12 years and brings significant retail investment and financial management experience to the board. On page 18, we will talk to the trading outlook for the new financial year. We continue to cycle four years of particularly strong comparable store sales, as in recent years we've had some strong tailwinds in the fashion jewelry sector that we've discussed previously. Trading since the end of the half has seen an improvement across all markets with positive comp sales for the period. However, they're still below our target comparable store sales range of 3%-5%. We continue to focus on ensuring that our strong growth margins are maintained and costs remain well controlled as we invest in the future growth of the business.
We do expect currency headwind to begin as we have an impact later in the financial year and into FY 2020 as our average USD hedge rate reduces. We continue our focus on expanding our store network and expect the increase in number of stores for the second half of FY 2019 to be higher than FY 2018. We'll continue to invest in our support structures ahead of the growth curve to drive store network expansion and support the larger business. In summary, on page 19, we've achieved an EBIT of AUD 36.5 million for the half-year at an 81% growth margin, being a solid result driven primarily from continued new store rollout, offset by declining comparable store sales of 1.8% for the period. We've again been able to deliver increased margins.
We've invested in resources to support our global expansion and disciplined approach to working capital management has resulted in strong cash conversion of 121%. We've opened net 40 stores and closed the half year with 366 stores trading across 15 countries. 58% of our stores are now trading outside of Australia. The U.K. rollout is continuing, and we are now moving into the rollout phase in the U.S. and France. The business has continued to generate cash, and we're pleased to be able to again return some of this to the shareholders by increasing our full-franked interim dividend to AUD 0.18 per share. Thank you, everyone, for dialing in, and we're now available to take any questions.
Thank you. 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 your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Sam Teeger with Citi. Please go ahead.
Hi. Good morning, Shane and Chris. Congratulations on managing profits so well in a tough sales environment. In terms of the first question, just on gross margins. In terms of your comments flagging currency headwinds to impact later in FY 2019, can you talk about what you can do to offset these pressures? Also just conscious about how much gross margin has swung around, as you can see on slide nine of the presentation. How low could gross margin actually fall, assuming the dollar doesn't get much worse from here?
The combat margin, I think we've spoken in previous trading periods when we've come to market, that a margin in the high 70s into the 80s is where it's going to sit, and we sort of flagged that there's going to be some volatility in that due to the sort of fashionability and ranges. I think what you're seeing through this period, because we haven't sort of cycled any big fashion trends, we're really just relying on our core ranges to drive our sales. There's probably a higher level of predictability in the margins from our core ranges, which is why you're seeing the margin land where it is. Obviously, the drive into Europe and the U.S. will have a larger drive in the future of where our margins will land.
Part of a pilot program is obviously ensuring all of the metrics or all of the inputs going into a new market sort of tick the box. The benefit of having people like James and Beatrice in their markets respectively is that we can probably get more of an insight and better quality intelligence about where our prices can land. Where I'm going with that is, we are in the process of doing a body of work as we've got through Christmas and got more senior people on the ground to sort of really drill down on our price point in the market, and is it the right price point, being that typically when we enter a market, we'll have a good look at what we think we can achieve.
As a general rule of thumb, we basically direct currency-convert our retail prices, and if they look and feel right, that's where we enter the market. To answer your question moving forward, we are doing a body of work about whether we're too cheap, too expensive, or just right. Yet to make any decisions there, as we expand those markets those two pivots, I suppose, will sort of dictate our margin in the future. At the moment, what we're seeing is we're holding our margins consistently across those regions, and we're not having a negative pull on our margins from the markets we're trading in. Assuming it all remains equal, we'll be able to expand at that similar margin and hopefully some upside, probably a bit early to tell.
Getting through Christmas, obviously in America especially, we open sort of leading into Christmas, through Black Friday, then Christmas, and then Boxing Day sales. As far as currency, I'll just maybe get Chris Lauder to talk to that.
Thanks, Shane Fallscheer. As we said, we expect our hedge rate drops off a bit in the second half towards the back end. Year-on-year, second half will probably be pretty flat in terms of hedge rate. We're around 75-level last year in the second half. We probably look to be around that level this year and maybe dropping off a little in the back end of the half. Into FY 2020, we start getting down towards where the current spot rate is in that 72 region. Obviously, you can see what the impact has been on margin when you look at the constant currency numbers we put in the pack. We have an AUD 0.02 improvement in the hedge rate in the first half, and that was about 50 basis points on margin.
Expect in the absence of all the things that Shane Fallscheer was just talking about, we'll see a similar sort of impact.
Got it. Thanks. Second question, just in terms of like-for-like sales. To what extent is Australia dragging on the group like-for-likes? Can this be resolved with just a few closures of underperforming stores? Is it more difficult than that? I mean, is there a big difference in state-by-state performance in Australia?
Look, if we talk at a global scale, we do customize our ranges to each market. As a general rule, I think part of Lovisa's success is we've been able to take a concept around the world. Global trends are just that, they're global trends. Typically, when you get a tailwind, which we've had over the last few years with trends above the norm, we do ride those around the world together. Australia has sort of been one of our strongest markets for a long time. It's really range related and product related more than store related. Our store operational standards, I'd like to think are high. Therefore, it's not a case that we walk into a store or a market that's trading badly from operational standards. It's really product driven and offer driven. When we win, we all win.
When we lose, we all lose. There's usually quite a narrow band between the out-performers. There are some markets that are still going through strong growth. We highlighted South Africa as being good for us. There are markets that are at the top end of the curve, it's not a case of, right, we've got five stores that are trading down 20%, close those, the average comes back. Probably, in my mind, pleasingly, there's a constant trend, which if we move the trend line, everyone comes up the trend line.
Got it. Do you think that like-for-like should improve as we move into the fourth quarter, given comps become easier to cycle, are you concerned about things like the upcoming election in Australia and the macro being weak?
Look, I've said before that I don't think our customer base is largely affected by the sort of macroeconomics. Obviously, if footfall in shopping centers declines, obviously that's going to have an impact. Things like elections and that type of thing historically don't really seem to have an impact on our customer, our market. As far as our views moving forward on like-for-likes, I can tell you we're working very hard to ensure we get positive like-for-likes back on track. Yeah, I probably don't want to pass judgment of where we think like-for-likes are going to land.
All right, cool. Thanks.
Thank you.
Thank you. Your next question comes from Jo Little with Morgans. Please go ahead.
Good morning, Shane and Chris.
Morning.
A couple of questions. Just following on from Sam's, just FX and a question there. Do you envisage putting through price increases to combat this at all, or is it not the right environment to be doing that?
Yeah. Look, in simple terms, Jo, unless we see opportunities in the new markets that we've entered markets at the wrong price point, which we're not seeing, we might be able to tweak a few things. We don't intend to chase. Look, we don't think we're in the right market to chase up the dial prices up to support margins. I can't see that. Again, there might be some little tweaks and consciously followed us from the start that there's been opportunities sort of two to three years ago where we were probably undercooked in maximizing our outcomes there. We're not seeing any sort of material move in our pricing that will combat that FX.
Okay, great. Just looking at the U.S. a bit, now you're not giving rollout targets for obvious reasons with landlords, et cetera. Can you give us a bit of feel on, I guess, the ease at which you're getting sites perhaps versus other markets or just any other general observations for us to hold on to?
Sure. Look, it's a bigger market, the benefit. If you look at the U.K., where the guidance we've given in the past is we believe there's a 100-store business there. I think whatever numbers we're up to in the U.K. now in the 30s, but theoretically it's sort of fishing for in a smaller pond, I suppose, is the simple way of looking at it. In the U.S., we've now got a leasing manager on the East Coast, a leasing manager on the West Coast, and that's simply because the market's too big to sort of pound the pavement in every shopping mall and look for opportunities. One of the upsides in America, we can try and net over 4 to 6 landlords that basically sit across the bulk of the malls across the U.S.
From a relationship point of view, it's probably easier to sit down in one place and talk and work through a number of opportunities. The American malls are physically large and therefore it's probably easier than we've found in, say, the U.K. to come across opportunities. For us, again, it's just the stringent criteria that we have internally to ensure that we hit our internal metrics. We don't sort of shotgun approach America and sort of end up with 1s and 2s right across America. That makes them very hard to manage. The next step, we have got deals agreed in Texas, and we've got deals agreed in Florida, and that's just a natural sort of run along the bottom, follow the sun and go to some of the big states with big economies and larger saturation of stores. Then the work continues.
As we said in the call, Tony, our head of leasing, has moved to Europe rather than the U.S. That's really just a location base, but at least he's only six or eight hours away rather than 24 from most of the action. To answer your question, Jo, because the opportunities are more, as long as we don't sort of spread ourselves too thin all over the States, then it's fair to say that the pipeline of stores should be larger.
Yeah. Great. It looks like you're advertising for staff in a further 11 odd locations. I guess depending on timing, chance we have kind of 20 by the year-end, giving us your initial first year kind of run rate?
Yeah. Look, I don't want to end up in a conversation on store numbers because it is. Again, because we're dealing with small group of landlords with opportunities, it really just comes down to what rolls through. Yeah, job ads, all that sort of stuff is going to be a reasonable guide. The lead-in to get stores done there. The learnings on America, which we've touched on, is the stores are costing us more than we'd like them to cost to build. They're taking longer to get open, and it's just the bureaucracy over there to get through. Yeah, we're probably not going to start a big sort of group of stores opening in a very short window. Whereas in Australia and Asia in particular, we can do deals and get open six weeks later.
The red tape to get stores open over there probably slows us down and therefore there's probably going to be less surprises that aren't accessible by people sort of farming around what we're up to.
Understood. Thank you. Chris, I guess just trying to understand the operating cost base going forward, you're going to have to support these offshore operations for probably a couple of years yet. Is it reasonable to suggest we probably won't see any OpEx leverage for a couple of years just as you build this scale in two very big markets?
Yeah. Obviously, we'd like to deliver some operating leverage coming through there, but in reality, we'll continue to invest as we grow. As Shane has said, some of these markets are more expensive for us at the moment, so till we get to some scale. Yeah, especially over the next couple of years, it'll be a challenge.
Jo, the way to look at it is we've just dialed in theoretically a COO, head of Europe, head of America. A lot of these guys sort of started in October, November, December. The full weight of the senior guys that even sort of all in the first half, so to speak. The full weight of that will trickle through in the second half. Leasing teams, store build teams. There is a structure that, it's a chicken and egg situation, and in the past we've been, I think, pretty good at managing reasonably tightly the structure to get going.
There's an inevitable tipping point, especially in places like France and the U.S., where there are high levels of bureaucracy, that you do just need to dial it in, otherwise the stores will. The key for us is to open cleanly and keep moving and not have a sort of play and catch up, I suppose. Yeah, I'd like to think that leverage is going to come down, but I think the full weight of it will roll into the half that we're in now, which will give us a clear view of what it looks like going forward. Then the key for us is the smaller stuff is managing the day-to-day cost of running more markets. Again, if we can get some saturation of stores trading well, then that's going to be the fastest thing that will sort of correct that back.
Okay, great. Just lastly, sorry, conscious of time, just on your pay, but your store level paybacks in U.S., France, is there anything you can share with us in the early stages? Obviously, it's costing a bit more, et cetera, but compared to probably your best markets in Malaysia, et cetera, doing a six-month on payback.
Probably too early to talk on paybacks.
Yep, understood. Thanks, guys.
Thank you. Your next question comes from Sean Wick with Macquarie. Please go ahead.
Hi, guys. Thanks for taking the question. Firstly, just year around current trading, can you just talk about the extent to which the improvement has been driven by, again, starting with softer comps versus improved product trend and also the subset, can you just talk about the performance in Australia versus the offshore markets?
Yeah, look, Australia is still from a like for Australia's 42% of trade, still probably around 50% of like for like performance, give or take. Of course, if Australia's up, then it helps pull everyone up. If Australia's down, it sort of gets harder to cycle those numbers. Again, because product is driven globally, trends are driven globally, and our product base is distributed and developed from one place and distributed. Typically, you can trial net over the comps. There's not a great variance between. We don't have outliers of +20 and then -30 or anything like that. It's usually a pretty tight range in our comps. As far as January, we don't like giving sort of month-to-month sales results, but history says that we give you an update of where we stand when we come to market in February.
We're six weeks in. Obviously, Boxing Day sale, January trade, even the fall of where Chinese New Year is, all of those things can have a factor on trading patterns. Typically, yeah, we had a very strong, for those of you that were following us through last year, we came into Christmas, into the last few weeks at Christmas, and when we, I think, last spoke to the market a year ago at the AGM and then came out with a stronger result. We had a very strong final week of Christmas and so on. We've cycled that. We'd like to think we're back into some sort of consistent trading pattern.
Okay.
Yeah. A guide on where we're gonna go.
Yeah, no worries. Then, you're adding about 80 stores this year or a minimum of 80 stores. At what level do you think it becomes more difficult or challenging, for the business to manage the store rollout?
Sorry, where did the 80 stores come from?
Just thinking about, you've added 40 stores in the first half, now you're looking to add more in the second half. That's implying a fairly material uplift in the pace of rollout. I was interested, I suppose, in getting your thoughts in terms of at what level do you think it becomes more difficult to manage and scale the rollout?
Just for clarity, the guidance we've given is we'll open more stores in this half than we did same time last year in this half. We're not saying second half will be bigger than first half. We're saying second half will be bigger than last year's second half. We're not saying 80 stores. To answer your question, if there's another question there about what can we manage-
Yeah
From a financial point of view, the downside of higher CODB is it's higher CODB, and therefore it affects your profitability. The upside of getting the structure right is you can move at reasonable pace. If you look at Europe, we've got James Shepherd. James' background is he used to be one of the senior executives at Swarovski. He's had across 3,000 stores across Europe. He's clearly got the capabilities of running as many stores as we've tried in. We've got quality teams who've built out leasing and so on. In America, it's a physically bigger market. As I said earlier, we've got a senior executive leading the way, leasing executive on both coasts, store build guys on both coasts, recruitment team, HR team. We've got that resource backed in.
We opened 50 stores in year one of Lovisa with a team of about six. I wish we could do it with six. It'd be a lot cheaper for everyone, but we don't think we've got to pull that off anymore. To answer your question, I don't think there'd be a capacity issue of operational ability. I think the capacity issue will be about how stringent we are on ensuring that the right deals are presented and signed off. Meeting our metrics will be the determining criteria how many we open.
Okay, great. Maybe I'll just squeeze in one more. Just your thoughts on trading through the e-commerce or online store to date, and then also just on the men's range in turn.
Sure. e-com, we've said in the past, e-com's a pillar of our business moving forward. Mark Cripsey comes out of that space, our COO, he's adding a lot of value there. At the same time, I've flagged that fashion jewelry is a category online due to the low transaction value, high freight costs, and so on. We're not seeing it being a material driver of our business in the short to midterm. That's e-com. What was the second part of your question again?
Just on the men's range.
Oh, men's. Yeah. Look, we trial stuff. Men's we put into a group of stores to see whether that would move the dial. Largely, our research to date shows that the girls are still buying it to wear for themselves, and it's just almost a more masculine range that some girls like wearing. It's pleasingly doing its numbers. Again, at any one time, we do test pods with maybe a certain range in 20 stores, and obviously, if it performs well, it rolls out some more, and if it doesn't perform well, we flush it out of the business if needed.
Okay, great. Thanks a lot.
Thank you.
Thank you. Your next question comes from Julian Mulcahy with Evans and Partners. Please go ahead.
Hi, guys. Just a question on France. Why do you think it's not really working yet? What sort of metrics are you looking to hit before you get more confident in that market?
I think you meant Spain. France is working-
Oh, Spain.
well for us, and we're rolling out. Spain. Yeah, look, we've been in Spain for a year and a half now. Look, we're a high-margin business, typically, if you get your sales line right, then typically most other costs fall into line. If you look at the Spanish market, it's not really a rental issue, it's really just a sales to other costs issue. By the time you roll in the cost of opening the store, trading the store, wages, if we can't get the sales line right, then it's fair to say that it's hard. We use the word inconsistent in our presentation, largely because we get green shoots in good stores, and then we get other stores that just don't seem to hit their numbers. James, again, James on the ground as a senior exec leading into Christmas.
The discussion we've had with James is get closer to it, figure out what we're doing right or wrong for it not to be giving us the confidence to roll out as we are in other markets. Over time, I think we'll just chip away at that and figure out the ingredients. Again, I've communicated in the past that typically when we open a new market, we have ranges catered to the northern hemisphere and southern hemisphere. We typically choose the range that we think will suit the market the best, and we roll that through. Once that range hits the ground, we manipulate and change the range to maximize our sales densities. We're continuing that body of work in Spain. We're very pleasingly off and running in two of the bigger markets with big opportunities. We feel focused on Spain.
We haven't given up on Spain, but we're also not ready to start rolling out at pace. Again, to answer your question, at a top-line level, it's really about sales levels and getting some consistency of top-line sales to give us the confidence to roll out.
All right. Just on the U.S. and just doing a simple calc, the average sales per store running at sort of AUD 350,000 in the half, which is still well below Australia, yet the store is much larger. Do you see that average revenue per store jumping above Australia in the near future?
Again, they're your sums not mine, but I don't want to talk to average sales per store and all that sort of stuff. Again, I think the guidance we've given is we're happy with where America's at. We're achieving our metrics. As time goes on, we'll learn more, but again, I suppose the positive sign is we've had Glendale open for over a year, then we rolled the other stores into the last half, and we're happy with where they're at. Long-term sales densities sort of yet to be rationalized as far as where we think that'll end up. Historically, with the sheer volume of shopping malls across America, historically, it's been harder to achieve the same sales densities as some of the other markets, and that's just my general market overview, not less about Lovisa.
Historically, when you research the American malls, the average sales per foot typically lower than some of the other markets in the world, just because of the sheer massive shopping centers and the sheer size of the shops.
Right. Yeah. Thanks, guys.
Thank you.
Thank you. Your next question comes from Sam Haddad with Bell Potter Securities. Please go ahead.
Yeah, good morning. Previously Shane , given a new term outlook as to what you're seeing in fashion trends, I think you've previously said that you see a window of 3-6 months as to what you're seeing.
Yeah.
You've mentioned a normalization over the last six to twelve months. Is that still more much of the same, or is there anything interesting in the mix to look forward to in terms of sales mix to gross margin and so forth?
Sure. Yeah, there's nothing on the horizon that we're jumping on. We'd love it to be there, and these things can pop up pretty quickly. At the moment, I think we're still in that normalized trade pattern. It's about trial and error, basically, and creating ranges and putting them in and maximizing the ones that perform and moving past the ones that don't perform. We're sort of keeping an eye on the horizon, but at the same time, doing the bulk of our work, working on what we can control within our four walls.
Okay. Just back on Spain, sounds like it's more of a function of location of stores rather than the general appetite of the consumer for the Lovisa offer. Is that a fair conclusion?
No, look, we're in good shopping centers and good locations with the sales densities and rolling that through. How that affects some of the key metrics of the stores, just again, we've sort of been just inconsistent in getting a clear outcome. We like consistency because if one store opens, and pretty quickly you can start predicting where it's going to land, then that gives us the confidence that we know enough about the market to keep moving. When we get that inconsistency, it sort of tells us that we don't know enough about the market to pursue that market, which is what we're still working on. Look, we may have gone into some of the wrong shopping centers. I don't think that's the case. Largely, it's just about sales density more than anything.
Will you consider other pilot territories given Spain's position at the moment, or you've got enough on your plate?
What we're acutely aware of is it probably takes anything up to about 2 years to research the market, get the 1st deal done, get a handful of deals done so we can learn about the market. As we stand today, we don't have anyone out there sort of knocking on doors in new markets, but we're also not afraid to keep moving, so to speak, so as much as If the question of is America and France enough for now? The answer is in the short term, yes, but in the midterm, no, and we'll keep pursuing other pilot opportunities. Again, reminding everyone the cost of a pilot, the cost of putting a few stores on the ground and someone there to run them, versus the potential upside of getting those right, is huge.
We'll continue to pilot, but we'll let the dust settle and get some traction on what we're doing before we go back to that.
Yeah. Just back in Australia, in the soft trading environment from 2nd quarter, did you notice any change in competitive behavior in the market? My observation is one of your largest competitors had a promotion that extended for almost 2 months, and I just wonder if that was any different than prior years and how you responded to that. Obviously, you did a great job in withstanding that.
Yeah. If I talk wider than our industry, typically, when you walk the malls in the middle of December, people are going on sale earlier. There's a lot of when do you go on sale and Black Friday and that weekend that end of November now probably changed the trading pattern slightly. Look, the retailers can go early for whatever their reasons. Yeah, we try and hold onto that period and maintain margin again, because sometimes it can just end up as wooden dollars that you're swapping out promotions for margin and chasing sales and so on. We believe for our long-term brand integrity, that we need to deliver the customer a consistent offer and not confuse them with, one day that we're 30% off store wide and the next day that we're back at full price and so on.
I think that just sort of causes long-term damage and confuses the customer.
Okay, thank you. Thanks for your help.
Thank you.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. The next question comes from Angie Ellis with 8020 Invest. Please go ahead.
Hi, Shane and Chris. Well done on managing the global expansion so well, and congratulations on an excellent result. I understand that it's not a material driver of the business at the moment, but are you able to add some color to the e-commerce sales, particularly at looking at offering online sales outside of Australia and New Zealand?
Yeah. We're not going to talk to actual sales in that other than to say that we're not planning for it to be a material driver of our top line or profit in the coming years. Probably the easiest way to answer that question is obviously the COO, Mark Cripsey, comes from that space. This is what he does. He's been part of some large rollout in the e-com space. The next step for us is to get some sort of representation in the European and U.S. markets for obvious reasons. We don't have a timeframe on that. The focus is getting our offer.
At the moment, our focus is on trading our site, refining our offer within the markets that we're best known, looking for opportunities of how we get our product in a cost-effective manner to our customers around our other key markets. That's one of the key drivers of where we are at the moment.
You don't have a timeframe for U.S. customers being able to buy online?
No.
No. Okay, that's fine. I just wanted to say that I've been doing my best with my own purchases to get those Australian sales up, so I have to continue that for the next year.
Thank you.
Thank you.
Thank you.
Thank you. Your next question comes from David Vile with Greer Capital Securities. Please go ahead.
Hi. Good day, Shane and Chris. Congratulations. I see at the end of December 2018, you had about 15% more stores than at the end of the PCP, but your inventory was up around 30%. Can you just explain why?
Back of the envelope math, we're saying what? Stock's up by X% per store?
Well, just looking at the end of this path, the 19 half to the 18 half, the stock's up 30%. I understand there's some timing differences with store openings, but the store numbers were up about 15%. I'm just looking at the increase in stock versus the increase in stores.
There's a little bit of an impact there. It's Chris here. A bit of an impact there with the timing of when stores were opening and how much stock sitting in the supply chain to be able to do that. Also, holding a little bit more stock in the warehouse for support e-commerce. They're probably the key things. Currency is obviously having an impact on it as well. I mean, it's really just mainly around timing of when stock's hitting the warehouse. We're not concerned about the level of stock that we've got in the business at the end of the half.
Okay, thanks. The one-off relocation cost of your logistics to Qingdao, have you got a number around that you can talk to?
It was in there. Again, being honest, Dave, we don't sort of strip that out and say, well, it cost us X, but ballpark figure AUD 300,000 in just sort of one-off cost. Because basically, there's a point in time where you've got to uplift everything. You're sort of replenishing out of Hong Kong and then over a weekend, you get the stuff to or over a five-day period, get the stuff to another warehouse and establish it. You're sort of looking in the ballpark of AUD 300.
Okay, great. Thanks, guys. Cheers.
Thank you.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Fallscheer for closing remarks.
Well, thanks, everyone. I know it's a busy day for announcement time, so look forward to meeting rest of you in the next few days. Thanks again. Talk soon.