Welcome to the Currys Peak Trading Update Webcast and Conference Call. This meeting is being recorded. At this time, I would like to turn the conference over to Alex Baldock, Group Chief Executive. Please go ahead.
Thanks, Sergei. Good morning, everybody. I'll run through peak trading and what's behind it before Bruce and I take your questions. This peak Currys U.K. performance continued to strengthen, but international had a tough time and faces intense, but we still believe not permanent pressures that have substantially disrupted that market. Where that leaves us overall is confident to stand by our guidance for this year and also confident in our medium-term ambitions. Let's turn to the top line first. Peak like-for-likes in the UK were down 5%, an improvement on the first half trend, but international were down 7, with Nordics down 10, a market-driven deterioration on the first half, the first half sales with market share staying pretty stable. Whereas Greece, by contrast, grew by 12.
On categories, happy to give more color in Q&A if you want it, but the short version is that computing and CE were softer, whereas appliances and mobile were strong. Let's turn to the U.K. and I, and market share, first of all. Well, the first thing to say about market share is that we're not chasing less profitable sales. Still, the trends are improved from the first half to peak, with share loss about half of the first half, with increasing share in appliances and TV set against a declining share in computing.
Gross margins, meanwhile, well, the first half, as you'll remember, they were up strongly, fully 160 basis points year-on-year, and in peak they were up even more strongly, contributing to a trend of increasing gross margins that's so central to the improvements we're seeing in U.K. profitability. At this peak, we continued our progress on the drivers of that improving gross margin. First, growing services. Credit adoption was a big success story, up 430 basis points year-on-year. Warranty was another, up 240 basis points year-on-year. Those services, as we know, so important, not just for improving gross margins, but for customers for life, stickier and more valuable customer relationships.
As the customer experience continues to improve, and it has, as we've seen in our customer satisfaction and NPS, so does our ability to charge for it, while still offering customers good value for money. We told you at the half year that we'd started charging for all major domestic appliances deliveries. In peak, we're now charging for large screen TV delivery as well. More to come on that. I said that we're less inclined to chase less profitable sales, now we have better tools so that we don't have to, notably our much better understanding of end-to-end profitability. Fourth, we continue to drive down supply chain and service operations costs. These four drivers have all contributed to growing gross margins, and there is more to come from all of them.
I mentioned supply chain and service operations costs, and there's good progress on cost savings overall. We've realized, as you see at bottom right here, GBP 113 million of cost savings at the end of the first half. We're confident that we'll get to at least GBP 170 million by the year end, and also confident that we'll do at least the GBP 300 million of mature annualized cost savings by the end of next financial year, FY 2024. Finally, stock is in decent shape. We're coming out of peak pretty clean in the UK with stock down 9% year-on-year.
International is a less happy story, as we outlined only a few weeks ago, we continue to face intense, though we do not believe permanent market disruption, with all the pressures we saw during the first half, some of them intensifying during peak. Aggressive competitors continued to heavily discount excess stock. The Nordics profit pool in technology retail went to near zero. You may have seen this week, Verkkokauppa's profit warning, which leaves Elkjøp as the only technology retailer that's gonna make any money in the second half of this financial year. All of these pressures that we talked about before have more recently been compounded by further declines in market demand.
Our sales are lower even with stable market shares, and we can't point yet to any improving gross margin trend in the Nordics over peak. We're not sitting idly by and waiting for this market to improve, of course. We've energetically stepped up our self-help actions on margin cost and cash. On margin, we've raised prices. We're passing more of those COGS increases to consumers. We're leading more boldly on price rises, and we're charging for services more now as well. We are doing fewer promotions. The promotional intensity significantly declined, and we're especially doing none of the less profitable ones. We've upped our focus on margin boosting accessories and services, and we're ensuring we get full value from our supplier relationships.
On costs, we've cut marketing, we've gone harder on overheads, 10%-15% back office headcount reductions announced in the Nordics last week. We've shown all consultants and contractors the door. We've closed a few unprofitable stores, and we've made further savings in supply chain and service operations costs. Important to say in all of this, we don't believe that we're taking excessive risks with the business' long-term health, but nor are we just sitting, waiting for markets to improve. Finally, and importantly, we're in decent shape in stock in the Nordics too. International, as you see here, stock is down 5%, year-on-year during peak. The Nordics were down 9%. During peak. Greece, to feed its sales growth was up 19%. We are exiting peak in the Nordics as in the U.K. in a pretty clean position on stock.
What does all this mean for the second half? U.K. profits will rise year-on-year in the second half and are ahead of our forecasts. By contrast, international profits are very challenged. Even though we will make a second half profit in the Nordics, that leaves overall a group that we're very happy and very confident in sticking to the profit guidance that we gave last time of GBP 100 million-GBP 125 million, and the group will be cash generative overall.
When you take that GBP 100 million-GBP 125 million of profit, as I say, we'll be cash generative, particularly with CapEx at about GBP 120 million and exceptionals at about GBP 40 million for the year, which means that the net debt will be lower than GBP 100 million at the year-end, we expect. Looking further ahead, we now see our 3% EBIT margin as an absolute minimum target, and we will achieve that by following the strategy that's producing improving results in the U.K. A strategy founded, as you'll recall, on happier colleagues and customers on better retail fundamentals, and making more of the two big things that make Currys distinctive omnichannel and services. Let's start by making most of being a market leader in a market that is still, even now, double-digits larger than it was pre-pandemic.
Of course, the market and our sales have come under much pressure during this cost of living squeeze, but we really don't believe that tech can be seen now as a purely discretionary category. On colleagues and customers, our success in this market obviously depends on them being happier, and they are. Colleague engagement and customer satisfaction are sharply up in recent years. Just as we continue to improve on the other, or what you might call retail fundamentals. A bigger range, better availability, being on the money on price, an easier customer experience, for example, on delivery. One example of these improvements in action is dealing with the challenges to delivery that came this peak through the Royal Mail strikes. We were able to switch volume quickly at scale without drama to DPD.
When DPD itself came under pressure, we again were able to react pretty fast. We altered our proposition, we redirected returns and order and collect. We ensured we got priority treatment from DPD as the number one as befits us, and we were able to restore full service levels by Christmas. We just wouldn't have had this flexibility and agility in our supply chain a few years ago, which is a credit to Lindsay Haselhurst and her team. Better retail fundamentals then, and good progress on our big differentiators too. On omnichannel, this peak, omnichannel continued to prove itself as the winning model for customers with stable stores share of business year-on-year. Also it's not just working for customers, it's increasingly we're showing that it works for us as our increased gross margin shows.
One example of how we've been doing this in action over peak is bundling. Bundling by which I mean, not selling a laptop, for example, on its own, but selling it together with the bought with products, accessories, and services that get the most out of that laptop. The right bundle is good for customers because they get everything they need, and they get money off as well, and it's good for us. We make a lot more money from a bundle than just selling the tin on its own. How we're selling more, well, we've made significant improvements to bundles themselves, made them more tailored to customers' needs and have a much simplified menu of them. We've trained colleagues on how to sell them, and we're supporting them to do so as well with improved journeys and point of sale.
The results have been strong and bundles adoption levels have been up by 580 basis points year-on-year this peak, which is good progress, but there is much, much further to go here. The opportunity is in the annualization of a full year benefit of taking bundles to more categories. Whereas the focus has been largely on computing so far, and there's much more potential in mobile and TVs, for example. Taking bundles online where bundling is much lower, and we now have the platform to do much better, and adding more services to bundles. Speaking of services, that's the second big differentiator for us, of course, where we've again enjoyed record peak adoption levels. Again, so important to boost gross margins and to build stickier and more valuable customer relationships. Notably, credit grew very strongly.
Credit sales up by over a quarter, customer numbers up 17%, adoption levels up by over 400 basis points to over 18% of our sales on credit. With online adoption especially strong at over 20%. Protection is another service that enjoyed a strong peak, and that's an important profit driver for us. Adoption of our care and repair warranties were up 240 basis points year- on- year with stores, again, doing really well at 270 basis points. The opportunity here is online. As you see on the right-hand side here, online adoption is trending in the right direction, but from a very low base. After the success with credit online, this now becomes our next area of focus to exploit the potential of our new platform.
Finally, we've made good strides with connectivity this peak. I mean, the mobile business is back into growth and share gain. Now, we've been through the pain with that, and we've got good new contracts with Vodafone and Three that we're happy with. We've made good progress on our own MVNO, iD, with subscriber growth up handily to over 1.2 million at a pretty low churn. All of that strategy, the whole thing that I've just been talking about, you could summarize and give it as an example, our experience in domestic appliances this peak. A year ago, we had issues here in availability and delivery. We've taken action in the supply chain behind the scenes to have more space with an improved partnership with GXO, better process, right first time.
That's given us the foundation to get really behind the energy efficiency trend with customers. In omni-channel, we've been able to sell higher priced product, higher priced washing machines, especially with the support of credit, because the customer can see the lower total cost of ownership over time. We benefit from selling a more expensive product. The customer benefits, they feel good about sustainability, and it costs them less over the life of the washing machine. The results of all this have been share gain over 1.6 percentage points, better availability 14 points up, a bit more satisfied customers. Customers are 26 points more satisfied versus 5 years ago in this space. Now we're able to monetize all of these customer experience improvements. The customer experience has improved, so we can charge more for it.
The average delivery installation and recycling revenue per order is up 77% year-on-year or over GBP 10 per order, which on over 3 million, 2 FTE deliveries a year, you can do the math. This is a big reason why profit in MDA was significantly up year-on-year. All of this progress now rests, as you know, on a stronger balance sheet, with average total indebtedness down by over GBP 900 million year on three. That leaves us with strong liquidity headroom of over GBP 500 million, with facilities of nearly or of over GBP 670 million and net debt expected to come down to less than GBP 100 million by the year-end.
This allows us to look ahead, as I mentioned before, with some confidence to at least the 3% EBIT margin target and GBP 150 million of sustainable free cash flow. To wrap up, not the easiest environment in any markets, but in that environment, the U.K. has continued its upward trajectory, offsetting a weaker international performance. We're gonna continue with a strategy that's seeing such improved U.K. performance, making the most of being number one in a bigger, more essential market with ever happier colleagues and customers, better retail fundamentals, making much more of omni-channel and services in a financially stronger business. We're confident that we will keep our financial promises both this year and longer term. With that, I'll pause, and we can go to your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. If you wish to cancel your request, please press star two. Again, please press star one to ask a question. I will pause for just a moment to assemble the queue. We will now take our first question from Ben Hunt from Investec. Please go ahead.
Morning there. Apologies, I've sort of been going through different presentations here. I think I've been on the news presentation, but it seems that there's been a slight improvement in the market share or less deterioration over peak. On the other hand, there's been an improvement in the gross margin performance over peak versus H1. I was just trying to get a sort of grip of what the levers are. Obviously there's a relationship between market share and gross margin. Whether you think the gross margin improvements or the delta, if you like, is more a function of the structural improvements from service and credit adoption, or is it the competitive environment, and how does that interlink with the market share improvement as well? That's the first question.
I mean, as you say, these are interrelated, which is why, even though we're not solving for sales alone, I mean, clearly what we're solving for here is sustainable cash flows. We do pay attention to market share because we enjoy the benefits of scale, we enjoy the benefits of being number one, and we intend to keep it that way. That said, and as you rightly observed, the market share trends have improved peak versus the first half. When you get under the bonnet, Ben, I mean, there's. I'll give you one example.
About half of the market share decline is attributable to one category, which is TVs. A big chunk of that is Sky Glass, a new product being introduced into that category which we don't yet sell. That's one driver. Other drivers are, we're not chasing unprofitable sales. We have, as I say, better tools so that we don't have to. That we're. The market share has ended up where we expected. We're pretty comfortable with it. We like, we're comfortable with having about a quarter of the market. We like the benefits of market leadership. We particularly like the gross margin improvements. To your question, they are the results overwhelmingly of self-help. I mean, when you look at the drivers, they're things that we've done.
Whether it's growing services, credit, and care and repair by such healthy proportions, whether it's the improvements in the customer experience and being able to charge for them, whether it's not chasing the less profitable sales or whether it's reducing our own supply chain and service operations costs, those are all things that we've done.
Okay, forgive me for my ignorance, but when you use this expression, not chasing unprofitable sales, are you referring to specific lines of or categories, or is it types of customer or channel or any color you can give on that?
Well, one of the things that Bruce has driven here is a much better understanding of what we call end-to-end profitability, which is basically a really good variable contribution model that allows us to look at how much money we really make end-to-end in a given product, category, supplier. Over time, we'll expand that to bundle, to services, to customer segments and the like. Whichever way you cut it, we'll be able to understand is this profitable or is this not? We're going to be less and less tolerant of doing anything that isn't profitable end-to-end. There are a couple of examples of where this has already bitten. We've significantly improved our PPC marketing efficiency already. We've also discontinued some unprofitable lines.
This then serves as a bit of a encouragement, you might say, to in our supplier negotiations, because we can, we can point with more transparency to your competitor is more profitable to us than you in such and such a line. Everything else being equal, we're gonna focus more on that unless you improve your terms. It is already bearing through. That's what I mean by not chasing unprofitable sales then.
Okay. Final question, related to that. You talk about your supplier negotiations. Is there a risk at all of, or rather, how much are you, how much are you beholden to volume rebates at the end of Q4, given that your volumes are likely, you know, down quite materially, given the inflation aspect within the like-for-like too?
Well, the simplest answer I can give to that is that we're very confident in sticking to the profit guidance of GBP 100-GBP 125, and that's all on the mix.
Okay, great. Many thanks.
Thank you.
Our next question comes from Adam Tomlinson from Liberum. Please go ahead.
Hi, Adam.
Morning, everyone. Three or four questions from me, please. Just a follow-up on the market share point. You mentioned just in terms of the categories that you're really looking to dominate in, I know you mentioned a specific example there around TVs, but anything else, any detail you can share in those categories and your market shares in those would be useful. That's the first question. The second question is around stock. Thanks for the detail around the level of stock coming down in the presentation. Just wondering if you can give any color in terms of your views on the quality of that stock and the composition where that now sits. Finally, just two quick questions on services.
Noting the record credit penetration there, just any comments around the quality of the customer or any changes in the default rates that you're seeing. A final, just a quick question on some of your competitors, I think have mentioned smaller competitors, installations of around 3,000 a year. Just, can you just remind us on how many you do just to give an idea of the scale there, please? Thanks.
Great. I'll pick those up, Adam, but I'll let Bruce start on the stock.
Yes. Good morning, Adam. As Alex reflected, we have seen success in both the U.K. and the Nordic business, taking total stock at the end of peak down by 9%-10% in both markets. The absolute value of stock has reduced significantly, which sets us up really well for the future. In terms of the quality of stock that underpins that, actually, we're in good shape. I think the best proxy I can give you for that is our stock provision. Our stock provision levels have actually improved year-on-year, and that's on a consistent basis. Therefore, from an aging perspective, the quality of our stock is better.
To pick up on some of your other questions, Adam, on the category front, over peak, our share of TVs actually increased. Our share of MDA significantly increased by 1.6 percentage points, as we talked about, with the success of our focus on energy efficiency and success in trading customers up to higher ASP product in MDA. Mobile did well, and we continued, albeit off a much smaller base our growth in sales profitability and market share in mobile. I mean, the one to suffer notably in the U.K. was computing. That maybe a good example of we're not chasing less profitable sales.
The market in computing shifted heavily in mix towards low, lower value entry-level products that we're less interested in and less strong in. Therefore our market share declined over peak in computing quite significantly. That's kind of the category mix. As you, and it's been pointed out, overall, the market share ended up where we expected it to, and, we're very attentive to it, but it's not what we're primarily solving for. What we're solving for is sustainable free cash flow in this business. Bruce has picked up the point on stock. You asked about services. It's the right question to ask about credit, because in this environment, it's the natural question to ask. We're not seeing signs of stress in the book.
We're not seeing signs of accelerating customer repayment difficulties. Now two points to make about this. First, of course, we don't take any credit or fraud risk ourselves. That all sits with our partner bank, BNPP, who are suitably sober and suitably prudent in their outlook, and that's why we like them as a partner. I think the why we're not seeing signs of stress in the book when perhaps others might be, is because we've been super cautious in who we lent to and how much we lent in the years we've been building this credit business up to over 18% of our sales.
We could have grown it much faster, we've been very careful, not just because we're nice people, but because we want to stay a mile away from any reputational risk of being associated in the customer's eyes with us lending them money that they can't afford to pay back. That wouldn't be any good at all. The fact that we're able to keep offering really compelling customer propositions in credit, and we're able to keep posting these levels of growth, is because we've got our partner bank solidly behind us, because they don't see signs of stress in the book. Finally, you asked about installations. I think, did you say a competitor does 3,000 of these a year?
We do 800,000 installations a year, in the U.K., out of over 3 billion deliveries and installations, and obviously that's just a U.K. number.
Great. Thank you. That's very helpful on all those. Thanks.
We'll now take our next question from Richard Chamberlain from RBC Capital Markets. Please go ahead.
Hi, Richard.
Thank you. Morning, Alex. A couple of questions from me, please. First one is, are you seeing a narrowing of the gap between in-store and online margins in the light of changes you've made to the online offer? You know, in particular I guess, delivery charges for changing the delivery charges for online orders. Just second, what are your thoughts on the labor cost outlook now for Currys or colleagues cost in the light of the almost 10% rise in the minimum wage coming up in springtime? Those are my two. Thanks.
Let me start with the first of those. Bruce may choose to build on a couple of points here. The short answer, we're not guiding to a specific number. Yes, we are seeing a narrowing of the gap between in-store and online profitability. I notice, Richard, you don't use our phrase leveling up. It's not to everyone's taste, but that's what we're doing. We're leveling up profitability between the channels. You rightly observed there's some charging on things like delivery that's very helpful in that. It's not just that. It's also margin boosting services like credit, where we've seen a standout success over peak.
Our, our credit adoption online is at over 20% now, which is up 710 basis points year-on-year, and it's 400 basis points higher than our stores adoption. That, that's been a standout success of using the, what the new platform offers in order to be able to do a better job of selling the gross margin accretive services that are so important to our overall gross margins, but of course, also to narrowing the profitability gap. Bruce, I'll let you pick up on the labor cost point.
Yeah. Well, if I just maybe just add one extra point. There, there has been an interesting by-product which has come from starting to charge for delivery of MDA and more recently for TV. It is causing customers to choose to come into store more partly because we have stock that's available, which means that customers can get their product same day, but of course, it also allows them to avoid that delivery charge. As Alex reflected, if you then put that in the context of some of the other work we're doing on Sold With, so the ability to sell accessories, consumables, services with those, that gives us an extra benefit as well. There is a subtle shift within our channel mix.
In terms of cost, as we look ahead, clearly cost inflation within our business is something that we're very attentive to. The two key drivers, as we discussed at the half year, are around energy and payroll. Energy, we're expecting our energy costs to be broadly flat, through the balance of this year. Within payroll, we will continue to invest, obviously, to make sure that our valued colleagues are paid a good wage within the market.
Okay, great. Thank you.
Richard, I think it's probably just one final word on that. It's worth reminding ourselves that the cost increases that Bruce has spoken to, whether it's the energy costs or whether it's the colleague costs, are more than covered by our progress against the GBP 300 million of cost out, and we're on track, I think now to realize GBP 170 million of cost benefit in this financial year. We'll get up to at least the GBP 300 million by the end of FY 2024.
Yeah. Okay, great. Thank you.
Thank you.
Warwick Okines from BNP Paribas. Please go ahead.
Hi, Warwick.
Thanks. Thanks. Good morning, Alex. Good morning, Bruce. Three quick questions if I may. firstly, we've talked a bit about the share improvement in the U.K. The three-year like-for-like has deteriorated on the first half. I was just wondering how you sort of reflect on the consumer heading into what's perhaps a bit less discretionary e-environment in the months ahead, now that you're through peak. The second question is on the Nordics, are there any particular categories or countries that you're seeing the biggest areas of pressure competitively? Thirdly, just interested in whether you've you can share anything about what your suppliers are saying to you about the situation in the Nordics. Thank you.
Yeah. A few questions there, and I think the decline year on three years that you referred to is 100% attributable to channel shift. If you go back, if you go back three years, versus three years ago, where our store, our market share in stores are stable and we gained market share in online. It's just that the shift towards online has resulted in us a share decline overall. That's kind of... It's 100% attributable to channel shift, is the simple answer there. You asked-
Sorry, Alex, just before you move on, but I really mean it's gone from +2% in the first half year on three years to -4% in over peak, which suggests it's the consumer that's dropped off in the past few months now?
I see what you mean. I was answering the wrong question. Bruce, what are the right questions?
You're right. The overall level of demand has fallen compared to pre-pandemic. When you consider that across the market, I think we'd reflect that from a television perspective, we've seen some level of drop-off with a weaker market. Some of that potentially is pull forward. I think there's also a reflection of a clearly discretionary spend on high value products is going to be more challenging at this point in the cycle. Yeah, those, I think would be our key picture in terms of consumer trends.
If you're asking for a look forward, Warwick, on the consumer, that's obviously hard to do. What we're planning on is being very prudent. We're expecting the U.K. and the Nordics for that matter, consumer, to have a tough time of it in the next 12 months. Obviously, we've shown in the U.K. that we don't depend on a rosier outlook in order to improve performance. Of course, you know, everything else being equal, it helps. I say we're planning on a pretty gloomy outlook, but it's worth saying it could be better. You might take the view that, you know, U.K. inflationary pressures have now peaked.
You know, half of U.K. inflation, I think is energy and food. That's already appears to have peaked. As long as we avoid an inflationary wage price spiral, then as I said, the inflationary pressures may have peaked. Interest rates may be near their peak. The U.K. consumer is still sitting on quite a lot of savings. We appear to have now a measure of stable policymaking and assuming no big new geopolitical shock, then, you know, up to 12 months from now things could look better and significantly rosier for the consumer, but we're not counting on it. You had another question, didn't you, about in the Nordics, is there a country that's particularly suffering? The short answer is Sweden.
It's not easy anywhere in the Nordics at the moment. Sweden is the hardest hit. The consumer there has been hit by the highest rises in energy costs and has had the minimal government support, at least up to now. We expect some to be coming through in the months ahead. Of course, the Swedish consumers got a large proportion of Swedish consumers have got variable rate mortgages, and interest rates have spiked there. They've been hardest hit. I think we're calling a difficult environment right the way across the Nordics. Finally, on the suppliers.
Look, we continue to have very constructive engagement with all of our suppliers, and of course we engage with them as a group, and that's one of the, one of the benefits of being a group. We matter a lot to them. The U.K. performance, continuing to strengthen, is very heartening to them. Of course, we're not slow to make the most of our scale when it comes to friendly negotiations with them. No, we find our supplier base supportive as they would be, given our importance to them as well as vice versa.
That's great. Thanks very much.
Thank you.
Thank you. The next question comes from Simon Bowler from Numis. Please go ahead.
Hi, Simon.
Hello. Good morning. Just two for myself, on a similar theme, actually. First one, you've obviously for a while now been very explicit on your kind of cost saving hopes and expectations in the U.K. It sounds like there's now quite a lot of action being taking place in the Nordics. Are you able to put a number or kind of rough sense on what you think the cumulative cost action in the Nordic markets may look like? Secondly, just noting you've left your exceptional cost guidance unchanged for this year, but it sounds like similar action in the Nordics, redundancy rounds, et cetera, may have costs associated with it.
Is it that some of those costs are kind of falling into next fiscal year, or have you kind of managed to offset those costs elsewhere within the exceptionals that you were previously expecting?
Okay. Good morning, Simon. Let me take both of those points. In terms of the cost savings in the Nordic, I'm afraid we're not gonna put a number on it. I'm sure by the time we get to year-end, we'll be able to break that out and share. From a cash cost of the exceptionals, you're right, there are going to be cash, one-off costs that are incurred through that. We need to step through. I mean, clearly, we need to step through the accounting to determine whether they will be treated as exceptional. From a phasing perspective, we do expect the majority of them to fall into the start of next year.
The one.
Great.
As Bruce says, Simon, we're not gonna put a number on the Nordics cost out, but maybe to help you a bit. I mean, the U.K., as I say, we're on track for GBP 170 out and for GBP 300 by the end of the next financial year. When it comes to the Nordics and some of the things that I spoke about before, we're cutting marketing very significantly. You should assume that discretionary and brand building marketing can wait. It's only sales driving marketing that we're going to go for. We've made 10%-15% central overhead headcount reductions. Painful but necessary across all of the Nordics markets as well as the Nordic Center.
We had a significant number of contractors and consultants in for discretionary IT projects. They've all gone. There's a few single digit unprofitable stores that have gone. The supply chain service operations costs, we've been assured that we've got every bit as high standards on the cost reductions there as we do in the U.K. But no, I'm afraid we won't put a number on all that just yet.
Okay. Thank you. That was a useful color, though.
Thank you. As a reminder, to ask a question, please signal by pressing star one. Our next question comes from Michael Benedict from Berenberg. Please go ahead.
Morning, all. Thanks very much.
Hi, Michael.
Questions I have three, I think. Just firstly, on the 3% margin target by FY 2025, just directionally, is there a level of sales you're targeting alongside that, i.e., in line with FY 2023, up from FY 2023, down from FY 2023? Secondly, I guess on a three-year basis, the Nordics is still outperforming the U.K. What gives confidence this isn't just a post-COVID normalization rather than a macro driven issue? Lastly, you mentioned Nordic price increases. Are you able to give any color of where your pricing is relative to the market now, please?
Michael, can you just say your second question again? I didn't quite understand what you meant by post-COVID normalization.
Yeah, sure. Obviously the Nordics has been weaker than expected over the last quarter or two. I guess, what gives you confidence this isn't a post-COVID normalization?
rather than an ongoing issue? Given it's outperforming the U.K. really.
Understood. What gives us confidence that this isn't a permanent and structural thing? I think if.
Exactly right. Yeah.
Right. Let me answer that one first. In a couple of ways. Well, first of all, you break down what the problem actually is. At the moment, demand is unusually depressed by any measure because the Nordics consumer is distressed to an unprecedented or very hard to recall extent. Fundamentally, these are healthy, wealthy markets. All the whichever measure you choose to adopt on GDP per capita or spending power, these are fundamentally healthy markets, which will get through these inflationary pressures, just as the U.K. will get through these inflationary pressures. That's kind of the first thing. I mean, demand will come back to a sensible level at some point.
That's not the main driver. The main driver is the excess stock that's in the market from competitors who've overbought, and that will wash through because it always does, and it is washing through now. It's very hard to see how competitors would want to or even could sustain the levels of unprofitable clearance and promotion that we've seen from them in the first half and over peak. I mean, I say own only Elkjøp will be making any money in this market in the second half of this financial year. I mean, Verkkokauppa who were over 3% EBIT margins not so long ago are now guiding to zero right now. Nor are we just sitting back and waiting for this, these markets to normalize is the third and important point.
That's where I've talked through the self-help actions that we've taken on margin and on cost and on stock.
Yeah. Let me just build on that by saying if you looked at the underlying economics of our Nordic business, fundamentally the issue that we faced into is that we've seen significant COGS inflation, low double-digit COGS inflation. A big chunk of that has been caused by FX and the way that the Nordic business buys product, both through euros and dollars. Very large proportion of their purchases are through that mechanism, and we simply haven't been able to push prices onto consumers. All of the factors, all the economics have got nothing to do with normalization. This is an extraordinary situation where we simply haven't been able to pass those COGS increases on to consumers for all the reasons Alex described.
To go into your other questions just quickly, we haven't guided to an explicit sales number for FY 2025. What we have said is that we'll make at least GBP 150 million of sustainable free cash flow, and that we enjoy the benefits of market leadership and intend to keep them. We're not solving for a particular level of vanity induced sales or market share. We certainly care about being market leaders, and we care about having enough top-line scale in order to flow through to at least that GBP 150 a year of sustainable free cash flow. Michael, have I missed any of your questions?
Just on the relative pricing in the Nordics versus peers now, I think was the only one. Feel free to weigh in, Alex. Thank you.
What we've what we have done in the first half is consciously sacrifice gross margin in order to maintain our market leadership in the Nordics to a greater degree than has been necessary in the U.K. That's why our market share only dipped by 50 basis points to 28% in the first half, whereas the gross margins obviously went down by fully 200 basis points in the first half. We haven't seen, but obviously it's only a few weeks ago that we updated on all of that, and we haven't seen a change in either of those trends, either the market share or the gross margin over the peak.
What I will say, though, is just to repeat what we said about the first of the self-help actions on margin. We are being bolder now about passing through some of that, a greater proportion of that COGS inflation that Bruce referred to consumers to seek to lead the market up to a more sensible level on prices. Nor are we're reducing our promotional intensity. Important to note that point about stock, that we're coming out of peak pretty clean on stock in the Nordics with stock levels 9% down year-over-year. It means that we're not sitting on a bunch of aged stock that we have to clear and discount.
We're not obliged to, and we won't. Which is one of the reasons that we're confident that we'll make a profit in the Nordics in the second half.
Thanks so much.
Thank you.
Thank you. Our next question comes from Nick Coulter from Citi. Please go ahead.
Morning.
Morning, Nick.
Two quick ones, if I may please. Firstly, could you talk about the timing of some of the gross margin initiatives in the U.K., I guess to help us get a sense of the trajectory and how those initiatives might wrap around, please. Then secondly, a very qualitative question, but are you more or less confident in your medium-term margin target, as you stand here today?
I fear I'm gonna give you quantitative answers to both of your questions. We're not, we're not gonna be guiding to explicit timing on the gross margin improvements, except that we're happy with the trajectory we're on, and we don't see ourselves as close to full potential. I think, we've talked about some of the reasons why. I mean, some of the services that are at the heart of margin improvement have got a long way to go, for example, in online adoption, and online is getting on for half of our sales. We know, we know what to do about that, and we're underway with leveling up our services adoption between channels. There's still a fair way to go, just as there is still further to go on credit.
One of the stats that I've shared this morning is that we've got GBP 5.8 billion of approved credit limits, only 4.9 of which is utilized. We and the bank are happy to have a big chunk of approved credit limits out there, which we'll obviously encourage customers to make use of. There's further to go on services, just as there's further to go on improving the customer experience. I mean, we're happy with the NPS and the CSAT trends. I mean, I mentioned that, you know, CSAT on delivering MDA, for example, is 26 points higher than it was five years ago. The customers are clearly seeing the difference in all of the work that we're doing. Am I happy with the score?
Absolutely not any more than I'm happy with any of these absolute financial results. We're not saying that the current levels of gross margin are good. They're simply better, and we intend to make them better still by carrying on doing the things that are driving them up, whether it's improving services further, whether it's continuing to make improvements to the customer experience, whether it's really weaponizing this end-to-end understanding of variable contribution to be more attentive to different customer segments and how profitable they are and different bundles of products and services and how profitable they are. We'll get ever more precise about that just as we will continue to bear down on supply chain and service operations costs.
We don't see ourselves anywhere near full potential on gross margin any more than we do on EBIT. I suppose to answer the second part of your question, we are very confident in achieving the FY 2025 EBIT margin target. I mean, you might challenge back, but we've given ourselves an extra year to do it, so we should be. Yeah, we'll take that, and we're gonna work very hard to do better than that.
That's very helpful. I was more thinking on the first question around things that you've introduced recently, say, delivery charges, and the like, and I guess, how they've probably got an annualization impact to come through. I'm just thinking about some of the initiatives-
Yeah.
The timing of those initiatives in the second half.
I mean, there's an annualization impact on a bunch of these things. I mean, as you've seen with just credit, for example, I mean, it's continuing growth, accelerating growth year-on-year during peak. The charging on delivery for MDA took place, you know, during the 1st half. We haven't had a full year's benefit of that and the extension to LSTV, large screen TVs, relatively recent. You know, we'll continue to drive down the supply chain and service operations costs. I understand what you're asking, but we're confident in continuing this trajectory. Let me put it that way.
Brilliant. Thank you.
Thank you.
Thank you. We have a follow-up question from Simon Bowler from Numis. Please go ahead. Your line is open.
Hi. Actually, I'm gonna start this question with two apologies. One being, 'cause I might have missed the color 'cause I was a little bit late onto the call. Second being, I think I've literally just worked out the answer for myself, but I will ask it nonetheless. I was just looking at your guidance on U.K. stock levels, and just looking at the -22% on the year on three-year. Just some color around that. I think does it reflect the fact that mobile was a much bigger part of the business three years ago, and so that would account for part of it.
If so, have you got a, kind of, a like-for-like or an electricals stock level, that we can relate back to three years ago?
We don't have a three-year position on pure electricals, but I would say that overall in the first half, our total stock position was down 22% compared to three years ago. That compares to sales being down by 19%. It gives you some sort of feel for the overall.
Yeah.
overall shape.
Great. Got it. Thank you, Bruce.
Thank you.
Thank you. As there are no further questions in the queue, I would like to hand the call back over to Alex for any additional closing remarks. Over to you, sir.
Thanks, all. Very brief. Just to reiterate that we're pleased with the trajectory in the U.K. There's much further to go, but we're happy that we can see the effects of our transformation bearing fruit financially now. International is obviously disappointing, but we're on with it. We're on with the self-help actions, just as none of the, none of the pressures on margins in the market we see as permanent. Once we put those two things together, international business back on its long-term trajectory of growing sales and profits with the U.K. Performance improving, it gives us a lot of confidence in that medium-term target.
As just as much as it gives us confidence in the near term that we're gonna do at least as well as we're gonna hit our guidance on profits and on cash this year. With that, many thanks, and I wish you all a very good day.