Earnings Call: H1 2021

Mar 3, 2021

Thank you for standing by. Good morning. Welcome to the analyst and investor call for Meijer's 2021 half year results with Meijer's Chief Executive Officer, John King and Chief Financial Officer, Nigel Chadwick. All participants are in a listen only mode. There will be a presentation followed by a question and answer session for analysts and investors. I will now hand over to Mr. John King. Thank you, and good morning, everybody. Thanks for joining the call today to investors and analysts and also to the media who join on a listen only basis. I'm John King, CEO of Myer, and I'm joined today by Nigel Chadwick, our Chief Financial Officer. Please note that this call is being recorded. I will begin with a quick overview of the half year 'twenty one results, then I'll hand over to Nigel, who will provide you with more details, and then I will speak further on our customer first plan. After that, there'll be an opportunity to ask questions. The first half results reflect several positive achievements, including the continued strength of our online business as well as a sustained disciplined management of costs, cash and inventory achieved in an ever changing environment. This strengthened financial position is reflective of our continued focus on profitable sales, management of cash and costs and continues to put us in a solid position to navigate the volatility COVID continues to present for our business as we continue to work through the challenged CBD environments and the impact of forced business closures. As a Board and executive team, we've continued to prioritize the health and well-being of our team members, our customers and the broader communities in which we operate. And customers will have seen this with our enhanced health and safety measures in place across our stores. As a business, we have also supported respected governments across the country in response to their mandated closures. As mentioned, COVID continues to have an impact on our top line results, particularly with the challenges that remain inherent for the country's biggest CBD locations and the closures in Victoria particularly. But again, the work we've undertaken in the past few years to deleverage and derisk the business has been essential in offsetting these headwinds. We were assisted by the federal government's JobKeeper program, which ended for us last September. This has kept us connected to our 10,000 team members at a time when there was significant sales impact to our business, has continued to allow us to maintain our workforce as we manage this volatile environment. The dividend continues to remain suspended at this time. So to our results today, turning to Page 4, there are 4 key takeouts for me to share with you on the call today. Record online sales, improved cost of doing business, increased profit and a strong balance sheet. And in talking to those results in more detail, we had record online sales. Group online sales, now the engine room of the business, up 71% to $287,600,000 However, our comparable sales were down 3.1%. But if you exclude our 6 largest CBD stores, which reflect the current impact of CBD traffic more broadly, our comp sales would have been positive by 6.3%, reflecting the strong performance of our regional and suburban store network. Total sales were down 13.1% to just under $1,400,000,000 which was inclusive of the forced closures and the traffic impacts in our CBDs and OGP was down 14% to $539,800,000 As I previously mentioned, our focus on costs mitigate the trade impacts in parts. Cost of doing business was down just under 21 percent to 325 $200,000 EBIT increased by $2,700,000 to $109,000,000 Net profit after tax was up 8.4 percent to $42,900,000 and statutory NPAT of $43,000,000 was up 76.3% on last year, which reflects the individually significant items and implementation costs that were incurred last year. To our balance sheet, net cash position of CAD 201,000,000 at the half end, which is an improvement of CAD 98,000,000 on the previous year. Working capital facility from our banks was not required at all during the half. Inventory was 22% lower year on year to GBP 265,800,000 and we have substantial headroom existing across all of our banking covenants. On to Page 5, operational highlights. There have been some significant deliverables over the half. As mentioned, online continues to grow at record levels, now representing 21% of our business in the first half. This is double what it was a year ago. Investment in our digital experience continues to allow us to take advantage of the consumer shift to online with improvements made to our browsing and checkout contributing to continued improvement in conversion, up 81 basis points on the year. Our customers are responding to this with the highest levels of NPS recorded, our best level of MYO-one engagement online and continued record traffic numbers. There's also been a great deal of work undertaken during the last year to ensure better integration with MyoONE, which has led to improved results in this area. Enhancements to the MyoONE reward program, including the introduction of a lower minimum of $10 rewards, has led to over 1,000,000 more customers earning rewards in the first half. We've also increased Myerone engagement across online and in store with Myerone sales improving to 69.2% of total company sales at the end of the half, representing our highest levels to date. Again, the work has been undertaken during 2020 to get even closer to our customers, to understand what they want to buy, when they want to buy it and where they want to buy it and how they want to buy it. We are using this data and analytics for targeted promotions and offers as well as advertising and marketing to better engage with our customers and MYA1 members. Building momentum in MYA1, delivering better insights by leveraging this data will enable us to continue to connect with our customers across all of our business. In terms of supply chain, as we continue to grow online, we announced our introduction of our 3PL facility last October. This has already fulfilled over 1,000,000 units from the new site. In addition, we have over 800,000 units and 45,000 SKUs in the facility with enough capacity now to double the SKUs and the stock holding during the coming months. Put simply, this is a more efficient process for us with 25% of all online units fulfilled from the 3PL in Q2 post opening in September and growing fast. It means importantly, a better, faster online experience for our customers with significant efficiencies for the business. And to our stores, we've again recorded our highest levels of customer satisfaction results with our in store team members. As mentioned, the focus for us was safely executing key trade periods and we did this with Black Friday stock take and events like the Meyer Melbourne Christmas windows. And great news for our loyal customers, we reopened Cairns and Belconnen store refurbishments. These smaller formats have been refurbished and look fantastic with an improved store layout and look and merchandise offer. Local customers have responded positively to this, and we are seeing significantly improved performance in both those stores. And we're also continuing to focus with our efforts to reduce shrinkage, which is down £5,000,000 year on year. If you could turn to Page 6. As mentioned, group online sales are now £287,600,000 in the first half. Beauty and Home continue to be standouts with significant growth, up 129% 116%, respectively. Pleasingly, we've also experienced significant growth in our menswear business of plus 96%, as you'll see from the chart. This continued rapid growth reflects several factors, including extensive improvements to the website undertaken during the past 3 years and the widespread trust associated with the Meyer brand now ranking 10th in the Roy Morgan Most Trusted Brand Index. We also benefited, as I said, from the improved fulfillment capacity and efficiency resulting from that new 3 pillar arrangement that was introduced prior to Christmas. I will close by saying that we don't anticipate online growth to be at the same levels during the second half as we experienced during last year's lockdown, particularly during April May. However, we do expect continued growth as this channel continues to gain momentum as we build range and choice for our customers and operational efficiency. Turning to Page 7. In summary, online scale momentum has accelerated our digital transition. We've continued to focus over the past half to improve the online customer experience, especially in the area of fulfillment. Our stores network continue their enthusiastic and motivated approach with record customer service satisfaction scores, particularly in our regional and suburban stores as more people shop their local Myer whilst working from home. Importantly, we have a strong balance sheet and minimal debt and we'll be looking carefully as we invest in the future across digital, Myer 1 and the store network. We have a clean inventory position and improved stock turn with aged stock and clearance stock significantly reduced during the period. However, we are mindful that we continue to face macro challenges, which we but we believe we're in a strong position to mitigate, especially with all the improvements we've made to the business over the past few years. I'd now like to hand over to Nigel, who will talk in greater detail on our financial results, And I'll be back later to update you on our customer first plan. Thank you. Over to you, Nigel. Thanks, John, and good morning, everybody. So now we'll do a quick run through the financials, starting on Slide 9. And given this is the 2nd year of AASB AASB16, all the numbers we're presenting today are on a post AASB16 basis. So total sales including concessions were down 13% for the half year and obviously heavily impacted as John said by COVID-nineteen closures, mainly in Victoria and reduced footfall in CBD stores, particularly on the Eastern seaboard. To give you a sense of the trading impact from the Victorian store closures, the year on year revenue delta across the Melbourne Metro stores whilst they were closed was just over $130,000,000 Comparative sales after excluding closed stores were down 3%, again reflecting the reduced footfall in CBDs, including of course our 2 largest physical stores in Sydney and Melbourne, but offset in part by the strong growth in online sales, which were up 71% on the same period last year and also solid performance in the rest of the store network. OGP was $540,000,000 for the period and the OGP margin was down slightly by 55 basis points, which we'll touch on a bit later. CODB was $325,000,000 which was 21% down year on year, reflecting cost containment initiatives, but also significantly impacted by the first JobKeeper wedge subsidy program and rent waivers in relation to the Victorian lockdowns as well as some waivers rolled over from last year, which had not been formally agreed at year end. So overall EBITDA for the period was $215,000,000 down just under 2%. Depreciation was down $6,000,000 or 6%, reflecting lower CapEx over the last couple of years and lower depreciation on our lease right of use assets following the impairment taken last year end. EBIT was $109,000,000 which was up nearly 3% year on year with EBIT margin sitting at 7.8%. NPAT before minor net individually significant items and implementation costs was up 8.4% to 42,900,000 dollars And as John said, statutory reported profit after tax was $43,000,000 up 76% on last year when we reported some one off accelerated write downs of inventory as we closed down the clearance store concept and some redundancy costs. Overall, this was a pleasing result considering the subdued trading, particularly in Victoria and the CBD stores during the half. I'll now move to Slide 10 and talk a little bit more on revenue. As mentioned earlier, total sales were down 13% during the half. When we break that down further, we can see the main contributor to this were Myer CBD stores, which were down 32% across the period, with the rest of the department store business comprising the non CBD stores performing substantially better, but still down 5.7%. As I mentioned, comp sales for the group were down 3.1% overall. If we exclude CBD stores from the comparison, then overall, the rest of the business traded up 6.3%. Q2 comparable sales improved compared to Q1, reflecting strong execution, particularly across Cyber Weekend with the period from 1 November to 2019 December comp sales down just 1.6%. And again, if we excluded CBD stores from that, the rest of the network traded up 7.4%. To some degree, we believe the diversification of our product offering, multiple channels to market and breadth of store footprint have provided some protection in the current environment. For example, some categories have been disappointing in trade, but others such as electrical or home have traded up. 2nd, when people have been working from home impacting foot traffic in the CBDs, the consumer has switched to shopping at their local store instead. And also where lockdowns have caused physical stores to be closed, customers have moved to online shopping. So arguably, the diversification of the portfolio has helped mitigate some of the impacts of the pandemic and is something we need to be mindful of as we move forward with space rationalization and editing the product offering. Moving on to gross profit on Slide 11. As I mentioned earlier, our GP was down to $540,000,000 and our margin declined to 38.6 percent with a number of factors contributing to that. As you can see from the chart, clearly the major year on year movement has been from lower volume of sales primarily from the Vic Metro store closures and the lower CBD footfall. Whilst there were changes in mix between national brands, Meyer exclusive brands and concessions, these netted out from a year on year comparison perspective. In terms of margin rate with the prolonged shutdown of the Melbourne Metro stores, we were left with some seasonal inventory that needed to be cleared quickly and so we discounted that stock to move it through and met where for new season stock. In addition, there was less new inventory in the business early in the period, which resulted in a lower proportion of full price sales than would normally be the case. In addition, lower supply support due to lower purchases overall and unfavorable year on year delta on FX and higher relative MYA-one program costs following the introduction of the $10 reward card all had negative impacts. These factors were partially mitigated by higher mix in the home category at higher margins and a further significant step down in shrinkage expense, which is now sitting at just under 0.9% of wholesale sales compared to over 1.3% a couple of years ago and we're pushing to take it down even further moving forward. As I mentioned earlier, we continue to make improvements to our inventory management, including our ordering and supply chain all the way through to the store floor as well as clearing seasonal stock on a program cycle. And this is improving our stock turn and ultimately our working capital position. Moving to costs on Slide 12. Here we can see the major items influencing CODB year on year. Once we remove the lease rental expense from the pre AASB 16 total for last year, we have 1H20 CODB at $411,000,000 on a post AASB 16 basis. We spent an additional $15,000,000 of variable costs in relation to our online sales, which is primarily volume driven fulfillment costs. We managed to again reduce the operating costs in the stores by further optimizing store rosters off the back of previous technology investments and efficiencies in store management. We also took our cost of operating head office down by $14,000,000 which was again primarily headcount and also marketing improvements. Then the final three bars to the right of the bridge are the more direct COVID related items. So the reduction in staff costs and operating expenses from the Melbourne store closures was $12,000,000 Rent waivers recorded in this half amounted to $18,000,000 You will recall at last year end we mentioned that we'd only recorded rent waivers for when we were closed in April May to the extent that been formally agreed with landlords. So there were further agreements reached in this half year in respect of that period and also additional rent waivers agreed for the Victorian store closures this half. And finally, the amount of JobKeeper that allowed us to maintain roles during a period of subdued trading and importantly to bring the workforce back up quickly and to a higher operating level than we might otherwise have been able to with $32,000,000 And the chart on the right shows our sort of gradual progress over time from 1H-eighteen to today in reducing CODB. Moving to cash flow on Slide 13. As you can see from this slide, our operating cash flow before interest and taxes improved markedly to 326,000,000 and cash conversion at 152 percent largely driven by lower implementation costs and well controlled working capital improving cash flow by $20,000,000 despite the unwind of deferred positions from last year. We recovered $7,000,000 in tax as a result of the statutory loss made last year and net interest was down period on period reflecting our lower gross debt levels and higher cash balance more than offsetting the increased margin on our facilities. Cash CapEx was just $14,000,000 reflecting the significant landlord contributions to refurbs at Cairns, Belconnen and Carinyup, but also our decision to pause or slow down some projects such as our point of sale replacement project, whilst we were waiting to see the implications of COVID-nineteen. And happily, these projects are now in the process of ramping up again. And so we expect the run rate on CapEx to return to more normal levels in the second half and beyond. As you can see from the split of CapEx on the right hand side, the bulk of our spend continues to be directed at our online business and supply chain optimization. So moving further down the cash flow that results in free cash flow before financing of $273,000,000 up 29% on last year. Lease principal payments were up significantly year on year, but that reflects incremental outflows in this half from the rent deferrals last year. Net cash flow after lease principal payments was $193,000,000 and was up 35% year on year. Clearly, our focus on cash has helped us deleverage the business even further and we'll continue to be disciplined in our approach to both OpEx and CapEx moving forward. Having said that, we've got a number of potential investment opportunities in the pipeline, including continuing to improve our online presence, moving further into a centralized distribution model and modest upgrades to physical stores and core systems upgrades. Moving on to Slide 14 and the balance sheet. So the main items I wish to call out on this slide, inventory, which as John has mentioned already is way down from this time last year. Most of that reduction occurred prior to the last year end, but we've held that relatively steady at those levels during the half. And we're still in that sort of 20% to 25% down sort of range today even though we are replenishing the stores with new season sort of winter inventory at the moment. Importantly, in conjunction with the disposal of clearance inventory this time last year, we implemented a quick cycle, which requires us to regularly exit seasonal stock from the business and ensured edge inventory does not build over time. This has resulted in our clearance inventory being at its lowest levels for years, as John mentioned, and it's just 6% of total stock at the half year, which is down from 13% this time last year. And much of that clearance inventory has already been moved on since the half year end. Creditors are roughly the same this time as last year, but up from year end reflecting the normal seasonality of our purchasing. Importantly, and I said this at the full year, but we'll repeat it again, we paid all of our merchandise supplies according to agreed terms or better throughout the pandemic and continue to do so. Other assets and liabilities are down from year end reflecting the payment of rent arrears and agreed government tax deferrals. And lastly, but most importantly, our net debt position or I should say net cash position. As you can see, we've improved our net cash position from both this time last year and since year end. So at the half year, we were $201,000,000 net cash positive, and I'll say a little bit more on that on the next slide. Just to finish off on this slide and John mentioned this already, you can see from the table on the right, we continue to be well within our banking covenants, which continue to be calculated on a pre AASB 16 basis. As you might recall, we do have some step ups in our FCCR covenant over the next 6 months to 1.25 times at July. However, I'm really confident in saying we have and will continue to have substantial headroom in all of our covenants over the next several months. Moving on to Slide 15, we have a little more detail on our debt position. So just as a reminder, our current facility has 2 tranches. Facility A, which is a term loan facility of $80,000,000 which remains fully drawn at all times and Facility B, which is a working capital facility of $260,000,000 where we draw down and repay depending on our working capital needs. A step down of this facility occurred of $20,000,000 on the 31st December, so it's currently now a $240,000,000 facility. So if I can refer you to the chart at the bottom, there are a few points I'd like to make. The blue dotted line shows the gross available to be drawn down within our facilities, including agreed seasonal restrictions where we don't need the availability and so don't pay the commitment fees. The green line shows the actual drawn gross debt we had for the period. So as you can see, this was the same throughout the period at $80,000,000 which was just the term loan facility. Just to be clear, and John said this, this means we did not need to draw down on the working capital facility at all during the last 6 months. The peak gross debt I've just mentioned of $80,000,000 compared to last year's peak of $220,000,000 The orange line on this chart is our actual net debt across the 6 months. And as you can see, we were net cash positive, so we had more cash in the bank than we had drawn debt for the vast majority of the 6 month period. And again, just to be clear, this line is net cash or debt. So our actual gross cash balance was $80,000,000 higher than this line. As you can also see from the orange line, our fixed net debt of just $30,000,000 was in August. And finally, I'd just like to highlight the significant gap between both the green line and the blue dotted line. So total drawn versus total facility. And also the gap between the orange line and the dotted blue line, which if you add $80,000,000 is an indicator of liquidity. Just to finish, as we sit here today, we have nearly $400,000,000 of liquidity, which is significantly more than we need. So we will factor that into our next refinancing. So if I can now move to Slide 16 to summarize. Clearly, in the first half continued to present significant challenges in the form of forced shutdowns, lower CBD foot traffic, reflecting reduced tourism and the fact that people continue to work from home and more likely we're seeing the emergence of shorter slip lockdowns. Throughout, we've continued to manage the business tightly and are focused on cost control and cash. This has resulted in a continued reduction in our debt and a reduced reliance on debt financing. We've done a massive amount of work tightening our purchasing and managing the inventory cycle, which has resulted in a significant decrease in inventory and in particular the proportion of clearance inventory within the business. It is also contributing in other ways such as less handling and rehandling of stock, which frees up time to focus more on customer service. Our supply chain continues to evolve and is reducing the cost of getting inventory into store and fulfill for online orders. Even though the 3PL only commenced operations in the Q2, the blended rate per unit of just the pick and pack element reduced by over 15% from the same time last year. There are savings in many other parts of this process and we're just at the start of this journey, so we expect more substantial savings to come through in future periods. We're continuing to invest in our online business, which continues to grow strongly and we expect we'll continue to do so. However, just to reiterate what John said, the second half will be comping a period last year where our store network was closed for the best part of 2 months and our only sales channel was online, which had outstanding sales performance during that period. Our strong balance sheet now gives us improved flexibility to continue our investment in online, supply chain and selective modest reinvestment in the store network. While there is no doubt this result has been supported by assistance from landlords and the government, Given the forced closures, continuing snap lockdowns and challenges with CBD footfall, we're encouraged by several elements, including the cash position, the continued online growth, improved inventory and the year on year earnings growth. So I'll finish there. Thank you. And I'll pass back to John. Thank you, Nigel. If you could turn now to Page 18, I'd like to talk more about our customer first plan. The customer first plan and its focus on retail execution, both physical and digital, continues to underpin our approach for the business. Our future vision for Myer is a digital and data led retailer supported by a smaller network of store space, where we will take an approach similar to Cairns and Belconnen, with smaller, better stores with a curation based on local customer needs. We will make improvements to the store itself and to the brand and the product offer. So let me run you through the key parts of our customer first plan and our COVID overlay, which is about accelerating, resequencing and expanding key areas of the customer first plan. So to Page 19. I'm pleased to report that inventories are cleaner than it's ever been with clearance levels the best I've seen since I've been here. Lower inventories improved the in store experience for our customers and contributed to the improved cash position. We've also reweighted our merchandise offer towards home and casual product in the light of the COVID shopper requirements. We will continue to use customer data to drive our buying decisions, making sure we have more of what our customers want and need in our stores and online. And as mentioned at the full year, we will continue to make the big brands bigger. For example, Tommy Hilfiger, Maxwell Williams, Salt N Pepper and our premium fragrance offer to name a few. And this work will continue at pace. Just to take one example, our best performing wholesale brand, Tommy Hilfiger, beat last year by 46%, and we accelerate this growth by refurbishing 10 locations and investing in stock for key events such as Father's Day, Black Friday, Christmas and Stocktake sale. For other key brands, we've seen strong growth. Sorts and Papples was up 110% on the year and Maxwell Williams was up 80%. In terms of the customer experience in stores, we've mentioned we've seen customer satisfaction with team members at a record high 83%, up 10% from last year. This is a great result and testament to the work of all our team members across the country, but we have more to do. We have undertaken refurbishments, as we said, in Cairns, Belconnen and Carinyup. These stores look great. The office is fantastic and the customers are responding. As well as these, we've undertaken lower cost relayerage and enhancement to the product offer at East Gardens, Carousel, Joondalup, Townsville and Dubbo, seeing significant improvement in performance post this work, both in sales and profitability. We saw for their launches some of their most profitable trading periods with, for example, Bellconn and Singa sales uplift of more than 20% on a third less space and customer satisfaction increasing by 10%. Going forward, we'll continue to be tactical in our approach around store investments and make sure that it's focused on stores that provide a greater and quicker return. But we'll also be focusing on programs to support the CBD recovery as we start to see workers return and interstate travel returns more levels hopefully in the near term, whilst we do believe international tourism will be probably a year or so away. On Page 20, we will talk about online. It still is a major part of our focus going forward. For us, we just see the potential for this business to grow and grow. Over the coming 6 months, there will be a focus on the online experience improvements and we'll continue to improve the customer journey from the moment they log on to the moment they log out. We'll continue to enhance the online fulfillment model to a more centralized distribution model, driving costs down. We'll actively curate and expand the offer and try new products and brands and continue to build and leverage MYA1. In relation to improving online experience, we will continue the work of the past few years to enhance the customer journey, primarily search functionality, navigation and product sequencing, which we focused on leveraging the data and automation. These changes will drive a step change in conversion. We'll continue to enhance the online model as we've talked we just moved to a larger facility for 3PL and we'll continue to expand this under our current hybrid model. Over the next 6 months, the team will focus on cost per order as we drive more of our online sales through our 3rd party centralized facility, but also provide greater options for the last mile delivery and improving overall delivery options for our customers using our stores as well. And we'll continue to actively curate and expand the offer by extending our range via dropship vendor, giving our customers more choice in the brands that they love. Also, as I mentioned in the last results, the work has concluded in moving our popular Myer marketplace to myer.com.au and we are continuing to grow this offer and test new product categories. Moving to Page 21, I'd just like to touch on a bit more about Myer 1. Myer 1 provides us with a competitive advantage with over 5,000,000 members across our omni channel network. They are engaged valuable customers and this program is really starting to regain momentum. As a result of increased focus on MILE 1 in store and the experience improvements online, MYRE 1 engagement has improved significantly with MYRE 1 sales improving to 69.2% of total sales. Online has improved to 66.4% of sales, up from 53.7% from the prior year. New member acquisition has grown by 66% year on year with 184,000 new customers joining MileOne in the first half, and this is the same number of the total new customers that joined in the full year in 2019. Notably, this has been achieved without any investment in above the line promotion. In October, we enhanced the MYA1 value proposition with the introduction of the $10 reward card. This change means that in the first half, over 1,000,000 additional customers earned rewards compared to the first half of full year 'twenty. These customers have engaged strongly with these $10 rewards with significant revenue being generated through the issuance of these cards and a much greater multiple of spend with those that use them and a great reason to return to our store more frequently. More focus has been placed on engaging our customers via MiOne channels to improve the efficiency and effectiveness of our marketing campaigns. Our trade focused and customer lifestyle management programs have significantly improved by providing more contextually relevant and personalized content to our customers, whilst providing members with more exclusive content and offers. This includes bonus shopping credit promotions and expanded VIP shopping night, which includes an exclusive online execution available only to all Maya One members, and we will do more of this in the coming months years. Combined, these changes have ensured that MyoOne owned channels and promotions have become a significant and efficient driver of sales. In terms of future developments, Myo will continue to focus on enhancing the MyoOne value proposition and further developing customer driven office benefits and communications in order to support the execution of the Customer First plan. This will include providing more exclusive Mile One pricing and bonus shopping credit promotions to provide increased value for our members, improving the tier structure and associated benefits to provide a more engaging and motivating experience for our members, allowing them to move easily up tier as they trade through the year with us, engaging customers with a more personalized and contextually relevant content to meet their preferences and their needs. If you turn to Page 22, we're continuing with our work to reduce space and improve our stores. Whilst the impact of COVID has slowed down its progress as we negotiated with landlords last year on COVID specific related issues, the plan is still on track in terms of the space reduction. Over the period, our priority was executing the rent waivers, as Nigel touched on, dollars 18,000,000 in first half 'twenty one, with the focus now shifting to trading well through key trade periods, which I think our teams delivered. Furthermore, new leases were negotiated at Morley and High Point, including the handback of 1 floor at each store with handover scheduled to occur in March June, respectively. Our approach remains still to have either less stores or smaller, better curated stores, and we will provide further updates in the coming months in relation to this. So on Page 24, in conclusion, we will continue to deliver against our customer first plan with the revised COVID overlay to ensure we capitalize on the opportunities that exist in this new COVID normal retail world. We have a plan. We're continuing to develop, deliver against it irrespective of the environment we're in. We'll continue to focus on profitable sales and disciplined management of cash and costs. We'll continue to optimize our space and make strategic store improvements, and we will be digital and data led retailer supported by a smaller network of stores space. We will continue to accelerate key parts of the plan where we see opportunities arise, and it's clear that online is the key focus of this work. However, our suburban and regional stores are a core strength, and we will capitalize on these over the coming periods as the CBD store starts to recover. As an exec team, we believe the business is on the right footing for this new COVID normal retail world, and we will be seizing on the opportunities that exist, putting customers first in everything that we do. Thank you. I'll finish there and we'll now open the call up for questions. Thank you. Thank Your first question comes from Brian Raymond from Citi. Please go ahead. I just want to dig into this gross margin decline a little bit. I mean, I think it is I understand the reasons you've outlined there, but the overall industry wide reduction in promotional activity has swamped a lot of those factors for other retailers. So I just want to maybe get a feel from you guys how you see how you saw the promotional environment, particularly in Black Friday, Boxing Day and whether you've participated in that reduction in promotions? Thanks. Yes. I mean, we also reduced our promotional activity. So from a year on year dollar versus promotions were down 18% in dollar terms year on year compared to wholesale sales down 11%. So there was a 3% reduction from 36% to 33% of wholesale sales position. But that's been offset by mix within our portfolio moving to and really we've tightened purchasing really heavily into probably in the second half of last year. And so that's what sort of caused us to have a greater proportion of seasonal sort of discounted inventory than we would normally have had. So it sounds like the first part of the half, I guess, was a real tough one for you when you had You obviously didn't buy enough so there wasn't enough new stock on the floor at full price, but then you also had to clear all that stock in the Melbourne stores. Yes. Yes, that's right. Okay. I understand the Melbourne lockdown, clearly. The question I've got more is, you've got a national network. Is there a way to and your stores outside of Melbourne and outside of CBD has performed quite well. I mean, I know you're still building out a centralized distribution model, but was there any way you could have communicated some of this by shifting that stock into other markets, so bringing it to Sydney, bringing it to other I mean, it just seems like it's quite a while there was construction everywhere, Melbourne is obviously far worse than elsewhere. So was there a way to mitigate some of this? So could you try that? We moved some where it was appropriate to do so. And obviously we shifted a lot of it to online. But the sheer cost of moving vast amounts of stock interstate with intermittent border closures just wasn't practical, right. So we just decided to sell it where it was, move as much as we could to online and then move where it was. It wasn't all clearance, it was a mix of seasonal product. But as Nigel said in his words, we've moved to a quick cycle. We don't want to let inventory build up and become aged. And that was why we took the cash position. Yes and Brian you might recall the stay at home orders in Victoria were quite strict and so our staff would not have been allowed to go into our stores to actually package up inventory and put it on a truck. That was not an allowed activity in Victoria. So whilst we managed to do some in allowed periods for the vast majority of that lockdown period, our staff were not able to actually go into store and do that. Okay. I just wanted to say that sorry, did you going to add something here? No? Okay, great. Just on the CRD side, obviously, we're all moving parts with subsidies and so on. But looking through that, looking at the waterfall on Slide 12, I would say the store cost reduction and support office reduction, how much of that is permanent in a way versus, say, because you had store closures in the temporary store closures during the period and variable costs sort of obviously would have come up a bit. I don't understand how much that we should be building into next year's or second half of next year's numbers. Yes, it's a good question. I mean, undoubtedly, it's been difficult to sort of fully separate all of those bars. I think in terms of the store cost reduction, the vast majority of that is permanent because as you can see, we've actually reallocated particularly for the Metro's Melbourne Metro store closures into the Bar 2 across. Now in terms of SSL, it's a real mishmash. And the reason why I say that, so there's marketing cost savings with a predominant sort of contributed to that. And we think that is repeatable, but it's obviously something that will vary from time to time. IT cost reductions of $3,000,000 we think that is sustainable. But then an area like our sort of merchandising sort of team, their costs were down $3,000,000 for the period. But if you think about that, there's been no international travel sort of allowed over the last 12 months. And so where our teams would normally go searching for new ideas and new product overseas on sort of buying trips, etcetera, that's all been shut down. And so to a degree, some of that is going to not be sort of repeatable into future periods once international travel opens. So just to confirm, you said the vast majority of the store cost reduction is permanent, but surely there'd be some wage, some variable sort of cost in that with wages, particularly inside the CBD stores, you would have pulled back wages there, which I would hope will rebound with sales. Is that or is that in another part? Well, no, it is in there. But obviously, the way that we manage our rosters is that we actually run them off our weekly sales forecasts. And so we take sort of a real time sort of cuts of what we think next week sales look like. And then we push that through Cronos to develop what the store roster looks like for staffing, etcetera. So that will be sort of variable. And so it won't be a case of sort of us plowing additional unwarranted labor back into stores before we see the sort of increase in footfall and sales revenue coming from those stores. Okay. Okay, great. One final one for me, just around the free cash flow and balance sheet. So when you see CapEx normalizing, is that going back to sort of FY 2019 type levels? And so how should we think about that? And then I guess second part of the question is just around the balance sheet, obviously, north of $200,000,000 or just around $200,000,000 net cash currently. Once inventory normalizes any other timing things come through, should we expect that number to moderate a fair dip? Or is that sort of a go forward figure? Thanks. So with CapEx, in a normal year, we've sort of guided to sort of 65 to 75 as a run rate. But given we've only spent sort of 14 in the first half, I think it's going to be a number sub-fifty, mid-40s probably for the full year. But then I did mention also that we've got a pipeline of additional activity. We want to sort of step up our investments in the online presence. We are digging further into central distribution, given particularly given the positive sort of results we've seen from the 3PL to date. And so we've got plenty of opportunity. Some of our stores need a bit of a spruce up as well. So we'll be looking at where we can make some of our store appearances look better where it's economic to do so. So, yes, next year, I'd say, we're back up into that for the 75 ish potential region. And we've re kicked off sort of our point of sale project and that's building. We're looking at doing a trial of that in selected stores in this half year actually. Okay. And then the net cash position is around the right to go forward or should it be a bit less than that? Luke, I mean, we are cyclical sort of business as we've been replenishing stores that has moved downwards over the last few weeks, but we expect to be back somewhere similar to that around year end. So our current forecasts show that we're unlikely to need our sort of facility base over the next 6 months. Thank you. Your next question comes from Mark Waid from CLSA. Please go ahead. Thank you and good morning team. I'm just trying to understand the fall in sales. I mean, it's a little bit at odds with what we've seen elsewhere in the sector. Look, I appreciate you've got the big shift from the customers out of the CBD stores and into suburbia and online. And when I looked at you've mentioned that the MYA-one sales increased as a percent of total sales, but the implied fall is about a 7.6% drop in overall sales that have gone through the Myo One card. So I'm just trying to understand, have you lost customers overall or are they just simply spending less? The Victorian stores were closed for 2 months. And when we look at sort of those big metro stores, the year on year performance was down 49%. So that's primarily where it is. And then across Sydney, Brisbane and the other capitals, as we mentioned sort of in our pre prepared commentary, they were down significantly because people are working from home at the moment and have been encouraged not to go back into the workplace. So until that rebounds, then that's primarily what's going on with the sales lines. Okay. And I mean as a follow-up, the MiWay data, I mean, what's that telling you about the spending by the different customer groups you've got? I mean, have they reacted differently? Or is it fairly uniform across the different groups, however, you segment them? Look, now we've seen an improvement in our Tagrad particularly into Q2 as we've done more direct sort of communication with our customer base and we've put more into direct marketing with them. So we have seen a change in trajectory into that sort of Maya 1 customer base. And also we've been significantly improved sort of our online experience and connecting sort of our online sort of offering into that MYO-one customer base and that's paying dividends as well. And I think as well, Mark, these targeted promotions, we did a cosmetics one the other week and the tag rates were up in the 80s. That's purely because it's a target of those customers. So online, we expect to grow much more rapidly. So if you look at where it was last year compared to this year, from 56, 57 to 66, we expect that to continue, that growth trajectory to continue. I think the angle I was trying to take was, is there a certain segment of your customer base that you've really hung onto really well and maybe they're even spending more than they did a couple of years ago or is there others where you feel like they've weakened? We're doing that analysis piece now. I mean I think I'm not trying to dodge the question, but COVID has impacted quite a lot of spending and who's been spending and we've had a lot of new customers come into the site. So we are doing some work on that and we will keep you informed on that. But underlying in terms of the overall sales, the CBDs, the difference between us and other retailers is you take Melbourne and Sydney alone, they're 20% of our sales. When you add in the other CBDs, you're up towards almost a third. But when you take the CBDs out, the overall company sales are up 6.3% on a comp basis. So I think two parts of the question there. CBDs will take time to recover. We have recovery plans in place for those and we're going to maximize as much as we can in those suburban stores where the CBD customers are now working from home. So hence we've enhanced the product ranges and the offerings in those and I think Tommy Hilfiger was a classic case in point where Miranda took more than Sydney when we did the event last year. And we'll continue to redefine the Myer 1 program over the course of the next 6 months and we will keep you posted and we probably will do a piece at the end of the full year on segmentation as we come through into hopefully a more COVID normal retail world. But the threat of SNAP lockdowns etcetera still remains there. So we remain cautiously optimistic about what we can do over the next 6 to 12 months. And last one, John, I mean it's really pleasing to see that the customer satisfaction with regards to service increase again. You've got your net promoter score figures in there. I haven't seen that before and that's up. So that's looking at the customers responding quite well to the initiatives. Are there other aspects of that customer off the year still not quite happy with it? And how do you get new customers to find out about it? Yes, well, I think that I think MiWayne is a great tool. I think our targeted marketing has been really successful and we'll do more of that. So we've been rifle shot rather than shotgun and we will absolutely do more and more of that. I think the in store experience as well has improved because of the lack of stock which might seem a bit perverse. What it means is that the stock comes in the back door and goes straight onto the floor. So everyone's focused on being on the shop floor. So year on year we have more people serving customers than we did last year because they were out the back trying to find and get rid of old stock. So the benefit of lower inventory, improved merchandise cycle, the quit cycle that allows to have more people on the shop floor. And I do think there was a when we came back from lockdown and I noticed it because I was in stores every time we reopened, there was a real like connectivity to the customer from our team members and vice versa as I welcome back that from our team members and vice versa as I welcome back that human contact piece. So without getting all fluffy, I just think I do think that the technical stuff is, there's more people on the floor, there's less stock for them to mess about with at the back of house. And also what we've done is we've continually localized our approach to our merchandise offer in terms of what are the customers buying, looking at what they're buying from a postcode level online and making sure that the store offer reflects that as well. But there's more work to be done. There's no question about that. And but the good news is the trajectory is going in the right direction. No doubt. Thanks again, guys. Thanks, Mark. Thank you. Your next question comes from Johannes Pfau from Morningstar. Please go ahead. Hi, good morning. I was just trying to get a bit of a better feel going forward on how labor and rental expenses might look like, when I think about slide, I think it was slide 12 on the GOTV line. Those rent waivers, so those are all one offs, those savings? Or is there any of that to be expected to be carrying into the second half or even going forward? Well, I might remind you, Johannes, this waterfall is actually on a post AASB 16 basis. So it actually so those rent waivers that we've shown there are actually one offs that we were allowed to bring into operating expenses under the exception rule for on leases. And so this chart no longer includes any core lease rental expense. Okay, great. And how should we think about that going forward? Were you able to negotiate rent reductions during the period? So we've continued to get sort of some rent reductions during the period. And obviously, some rent savings will come through in future periods because of closures that we've done over the last 12 to 18 months, which will take rental expense down as well. And we're continuing to talk to our landlords about space reduction, etcetera. I think it's fair to say that with COVID and then sort of quickly off the back of that moving into our key trading period, we did have a pause in that in our momentum there, but we're regrouping now and we're sort of actively sort of back in discussion with the landlords around space, etcetera. Okay. And I guess on the labor cost side, thinking about the Net Job Keeper subsidy, obviously that's gone now going forward. And you mentioned that on the store cost reduction front, you're going to, I guess, correlate your labor expenses with sales uplifted. Does that mean wage costs won't increase dramatically going forward? Well, because it's variable. If the CBDs bounce back, then we'll get a relative sort of shift in the store wedges line because we need to maintain that sort of trajectory on customer service metrics, which is a really important thing for Meyer. We've been through many, many years of people sort of saying they can't find someone to serve them or people are stood around chatting and those types of things. So it's a really key focus area for us. So now you potentially will see a re increase in store wages as we see the CBD locations bounce back. And just in terms of the trading after January, I guess, I think you mentioned that online, the strength has continued. How is it looking overall when I think about total sales or comp sales in those stores? Well, I think it's 3 buckets really. There's online, which has continued to be strong as we add more product into it. But as we said, we're going up we're going into the comp period where we were shut last year. So we don't anticipate to be having the same sort of uplifts. There's a suburban and the regional stores which we're putting in new product and maximizing our opportunities there. And there's a CBD recoveries and they're recovering at different rates. So if I look at sort of during COVID, we're looking at 50% to 60% down in some of those CBD stores, particularly Melbourne and closely followed by Sydney. However, if I look now, we're starting we're getting down into the 30s with those stores, but Adelaide is sort of positive, Perth is moving back into positive territory, Brisbane is a little bit off, but not far away. So I think it will take time and there's 3 sort of categories of bookfall around those CBDs for us. There's people returning to work, which in Melbourne is, I'm looking out the window here, an empty NAB building and an empty ANZ building. So there's not a lot of people coming back to work yet in Melbourne. We've got Sydney where they're starting to come back to work. But again, there's no interstate tourism and there's no international tourism. And certainly in Melbourne, only 1 in 7 of foreign students have come back into education. So we're missing a massive chunk of that as well. So I think it's an evolving feast over the next few months. And we don't have a crystal ball. If we did, we'd be crystal ball retailers. But I think for us, it's just a question of managing everything on a local basis and being tactical as we drive through. And in terms of just on your earlier point about labor and sales, this isn't anything new. We've been doing this for quite some time, this Cronos system. So it really just does match labor to increasing sales. So if we increase sales, we will increase the payroll around that. But obviously, we'd expect to see the margin grow as well. Okay, great. And just on the supply chain, are you seeing any difficulties with getting product in the country? I think as with everybody, there was issues around ports, there was issues around factories getting back, which are post COVID last year. We've seen a few minor delays. Some of the global brands have had issues in terms of getting stock, but as we look forward, we're pretty confident that we'll get what we want. And certainly, if you look at the likes of Tommy, with those numbers, I mean, we were taking that product from Europe and elsewhere. Great. Thanks, John. Thanks, Nigel. Thank you. Thank you. There are no further questions at this time. I will now hand back to Mr. King for closing remarks. I just want to say thank you everybody for joining us today. Obviously, we'll be speaking to some of you separately on a one to one basis over the next couple of days. So thanks for listening and stay safe.