Hello everyone and welcome to our financial year 2024 interim results presentation. I'm Tim Stacey, the Group CEO, and I'm here with John Fallon as CFO. Today I'll provide a brief overview of our performance and current market conditions before John runs through the financials. I'll then provide a strategic update and run through our profit expectations for the full year before John and I take questions from analysts. By way of introduction, there are three key messages that John and I will build on throughout the presentation as follows. First, and this is a continuation of the trend we saw in financial year 2023, we continue to win but in a very challenging upholstery market. The market has been weaker than we have based our full year guidance on, but we've continued to grow our market share up approximately 0.5 percentage points to a record high of 38.5%.
Second, we're delivering on our cost program announced in September last year. Gross operating costs have reduced by GBP 22 million year-over-year, which more than offset GBP 11 million worth of inflation and interest rate headwinds. Gross margins also continue to increase up 220 basis points year-over-year, and overall our operations are in great shape. The operational performance has helped mitigate both the relatively weak market demand and inflationary cost pressures. Finally, we believe that the longer-term fundamentals for the upholstery market remain positive and that we are well positioned for growth. Given market volumes are currently at record lows and the operational leverage within our business, the profit upside from market recovery is very significant, and we remain confident in achieving our target 8% margin when the market returns. So here are some headline numbers to help illustrate the story of the half.
Year-on-year order intake was down 1.1% in value terms, reflecting the tough trading conditions, but this was well ahead of the market, which is down circa 10% in volume terms. As expected, gross sales or deliveries were down to a greater extent, and this is due to the high opening order bank at the start of the previous financial year, which had built up as a result of the pandemic period. We've made good progress on our cost to operate program, reducing our operating cost by GBP 22 million year-on-year and improving our gross margin rate by 220 basis points. Now, this has helped us deliver year-on-year underlying profit growth of GBP 1.6 million. Finally, both brands Sofology and DFS customer service scores have continued to grow in the half, with the DFS brand's established customer scores up 62% year-on-year.
Overall then, on the factors that we can control, we believe that we've made some really good progress in the half. So onto our best view of the upholstery market, and well, it's fair to say that it's very challenging out there. Now, you may remember this slide from our previous presentation. Now, we entered the year with relatively low levels of market demand in volume terms, approximately 15% below pre-pandemic levels. We expected conditions to worsen in financial year 2024 before eventually starting to recover. Market demand over recent periods has been hard to forecast, but to provide some guidance at the start of the year, we needed to put a stake in the ground, and whilst acknowledging that it would be a key sensitivity for our profit performance, we assumed that market volumes would decline by a further 5% year-on-year.
Actual market volumes in the first half have been weaker than that, though, and are down circa 10% year-on-year and are now over 20% below pre-pandemic levels. We had a reasonable start to the year, but September and October were tough, with very low levels of footfall across all retail parks driven by the record hot weather at that time. The housing market has also been weak, with transactions down 19% year-on-year, and this has had a pretty strong bearing on upholstery demand levels. More on that later. Demand did pick up towards the end of the half but remained weak by historical levels. Our top-line performance has clearly been impacted by these trends, but based on our proprietary Barclaycard data, we've continued to grow our share in the sector.
As I mentioned before, given our market share position, we feel very well placed to capitalize when the market does pick up. Now, it's worth looking at our market drivers to help understand current market demand and the recovery potential. Around 80% of sofa purchases are replacements, with around 20% following house moves. In terms of replacements, historically, there has always been a strong correlation over time between consumer confidence levels and market demand. Now, looking at the top left chart on this slide, the bars represent the upholstery market size in pounds terms, and the dotted line is consumer confidence. Given the significant retail price inflation levels we've seen in the sector, we've split the final bar on this chart to indicate the approximate inflation-adjusted market size. As you can see, market volumes are currently at record lows.
The top right chart here shows general consumer confidence levels and the climate for major purchase confidence measures over the last 6 years. While the major purchaser score is currently 20 points below the pre-pandemic average, there are some green shoots from a slightly improving trend, implying that the upholstery market demand should pick up in the near future. Moving on to property transactions, the bottom left chart shows that property transactions are 14% below pre-pandemic averages and 19% down year-over-year based on ONS data. The subdued property market is clearly proving a drag on upholstery market demand. However, the bottom right chart shows that there's been a pickup in house purchase mortgage approvals in the last few months, which again implies that the upholstery market could pick up in the future.
Typically, house transactions occur three months after approval, and Savills are forecasting a fairly significant year-on-year rise in residential property transactions of around 9% in calendar year 2025. A final source worth mentioning is GlobalData, who are projecting upholstery market growth of around 2.8% in calendar year 2025 and 3% thereafter. So in conclusion, whilst it's hard to be specific as to the timing and pace of a recovery in the upholstery market, the key drivers are indicating that the market could bottom out in calendar year 2024 and then start to recover. In terms of the competitive dynamics in our sector, we've seen some historical trends continue and some new trends emerge. Along with those, we've started to see recently some more general home retailers growing their upholstery share, particularly in the low to mid price points.
Independents, however, continued their downward trend, now representing around 26% of the market, and around 10 years-15 years ago, they represented over 40% of the market. So there are three key takeaways from the pie chart. First of all, independents still make up around a quarter of the market, and we expect them to continue to decline. Secondly, we continue to win share despite the growing strength of the general home retailers. And finally, as I've said before, with our market share position at record levels and the operational leverage within the business, we feel well positioned to capitalize when the market recovers. I'll now pass over to John to run through the financials.
Thanks, Tim. Hello to everyone watching today. I'm going to start with the main financial headlines. Firstly, revenue has declined year-on-year. As expected, that revenue decline is greater than the ordering take decline of 1.1%. As Tim mentioned, that's due to the unwinding of the high opening order bank through the prior year period. Despite revenues declining, our underlying profit before tax and brand amortization increased year-on-year by GBP 1.6 million to GBP 8.7 million, supported by good progress on our cost to operate program, helping us to grow our gross margin rate and reduce our operating costs. Underlying basic earnings per share also grew at a similar rate. Our reported profit before tax of GBP 0.9 million includes GBP 7.1 million of non-underlying charges in the period, of which GBP 4.2 million were cash-related.
This is in line with our expectations and the guidance we gave in September, but more on that shortly. As expected, net bank debt came down slightly compared to the same period last year and is also down from the GBP 140 million that we reported at the last year-end. Leverage has also reduced, and we continue to maintain good levels of headroom against our cash facilities and lending covenants. Moving on to top-line performance then. The group's gross sales declined by 5.6%, with both brands seeing a similar reduction driven by the lower order intake and the order bank benefit in the prior year. Across the period, market demand was volatile and weaker than we had expected.
We did see year-on-year order intake growth in July and August, but this was more than offset by a challenging September and October driven by very low footfall during the unseasonably warm weather, followed then by some improvement in November and December. In the last two months of the half, we also saw a shift in product mix towards models with shorter lead times, which meant that we were able to deliver more orders and gross sales in the period. Group revenue of GBP 505.1 million was 7.2% lower than half one FY23. This is a higher rate of decline than gross sales due to an increase in interest-free credit costs of GBP 7 million year-on-year, primarily as a result of the higher Bank of England base rates. This impact was partially mitigated by changing our everyday interest-free credit offer to a maximum of 36 months.
Looking forward, our interest-free credit costs will start to reduce when reductions in base rates are instigated by the Bank of England. At current participation levels, every 1% movement in the base rate changes the cost by GBP 7-GBP 8 million on an annualized basis. Before I talk about gross margin and operating costs, a brief recap and update on our cost to operate efficiency program that we announced last September. Overall, the objective remains to deliver P&L benefits of around GBP 50 million on an annualized run rate basis by the end of FY26. This will help us to offset future cost inflation and support us in delivering our 8% PBT target. I'm delighted to say we're making good progress. Our gross margin rate, we've now delivered a third half-year period of margin rate growth.
On property costs, we've continued to benefit from further reductions in our retail rent roll, in addition to further savings from consolidating our Sofa Delivery Company warehouses. Across operating costs, we've also started to make good savings through adapting and utilizing more efficient operating models, and we're continuing to develop a future savings pipeline of opportunities. So overall, the key message is that we have made a good, positive start in each area, and we remain on track to deliver the GBP 50 million objective. We'll provide a further update on our progress in September. Moving on to gross margins. In rate terms, H1 FY 2024 was 220 basis points higher than the prior year and 100 basis points higher than the H2 rate in FY 2023. The group's cash gross margin decreased by GBP 10.4 million year-over-year in the period.
That was driven by the lower sales volume, which contributed GBP 14.5 million towards the overall cash reduction, and that was partially offset by the improvement in margin rate. As anticipated, freight rates normalized back to pre-pandemic levels at the start of the half, adding 380 basis points to the margin rate year on year. And that benefit more than offset the adverse movements on FX rates and interest-free credit costs.
Underlying product margins improved by 160 basis points, supported by the cost of goods benefits we started to see towards the end of the half following the closure of our smallest factory and wood mill in October 2023, the associated redistribution of volumes across our supplier base, and the retail price increases that started to be realized in the P&L from May 2023. So overall, we're pleased with the progress we continue to make towards our 58% margin rate target.
Onto operating costs then, and I'm pleased to say that we have reduced our operating costs significantly in the period. Total operating costs, which presented here include depreciation and interest, have reduced by GBP 11.5 million year-over-year. We estimate that inflation added GBP 7 million to the cost base, which is around 3%, and in addition, interest costs were GBP 3.6 million higher year-over-year, primarily as a result of The Bank of England base rate increases. So in total, inflation and interest costs added a year-over-year cost headwind of almost GBP 11 million. However, that was more than offset by cost reductions totaling just over GBP 22 million. Breaking that down, variable volume-related costs reduced by GBP 4 million as a result of the gross sales reduction.
Marketing-related spend was GBP 3.9 million lower year-on-year after we took the decision to optimize our spend in this area given the tough trading environment. This was mainly achieved by temporarily reducing our beds and mattresses marketing spend, and Tim will discuss this further later. The remaining GBP 14.2 million of cost savings was delivered from across the cost base of the group. The majority of the savings came from a combination of more efficient operations in the Sofa Delivery Company and our customer service operations, and other good initial progress on our cost efficiencies program across retail and central overheads. We also continue to benefit from property savings across our retail and distribution center estates. More generally, we've been pleased to see the entire business becoming even more focused on good, disciplined cost management as we respond to the challenges of the current macro environment.
Moving on to net debt and cash, our net bank debt has remained relatively stable in the period. Reported net bank debt reduced from GBP 140.3 million at the previous year-end to GBP 133.9 million at the end of the current period. However, adjusting for the payment timing of our prior year final dividend, net bank debt would have been broadly flat. As we highlighted in September, we recently completed the refinancing of our GBP 250 million debt facilities, providing us with the significant cash headroom that we need for the next three to four years. Our GBP 200 million RCF facility runs to September 2027 with an option to extend to January 2029, and our US Private Placement notes of GBP 50 million mature on an even split between September 28 and 2030.
Operating cash flow of GBP 28 million was delivered net of GBP 4.2 million of non-underlying costs that relate to the closure of one of our factories and wood mills mentioned earlier, as well as costs related to the refinancing. We expect full-year non-underlying cash costs to be around GBP 5 million, consistent with our previous guidance. First half capital expenditure was over GBP 5 million lower year-on-year. We've continued to prioritize investment in our retail estate and digital assets to maintain and improve our customer offer, as well as in the mid and back office functions to drive operating cost efficiencies. The small working capital inflow has been driven by lower stock levels and improvements towards more consistent standard supplier payment terms.
Leverage reduced slightly from 1.9 times at the end of prior year to 1.6 times at the end of the first half, or 1.8 times after adjusting for the timing of that dividend payment, which is well within the covenant limit of 3 times. Over time, as revenues and cash flows recover as expected, we remain committed to reducing leverage to our target range of 0.5-1 times. I'll now hand back over to Tim. Thanks, John. I'll now provide a strategic and operational update starting with our 3 pillars. These are our DFS brand, the Sofology brand, and our home proposition. Now, the market share gains I talked about earlier have been driven by the DFS brand, which is the largest in the group.
The brand benefits from a well-invested retail estate and digital assets that support the customer across their buying journey and with strong exclusive brand partnerships. DFS has performed relatively well in the current market conditions, with strong conversion rates and average order values helping to mitigate the weak retail park footfall levels and online traffic. In the period, DFS launched a partnership with the Ted Baker brand, introducing three new exclusive ranges into our brand portfolio. The image here on the slide is the Highgate range. Initial sales of all models have surpassed expectations. The Sofology brand, which has higher average retail price points, has not been able to match DFS's share gains in this environment, but good operational cost control has ensured that the brand profit contribution levels were maintained year on year.
We are in the process of adapting the brand's product ranging and price proposition to best ensure it's well positioned for this type of market environment. I'm pleased to say that both brands have achieved growth in their net promoter scores to really good levels. DFS's established customer scores have improved by 62% and are now nearly back to pre-pandemic levels. Sofology has also achieved strong levels of improvement with its net promoter established customer score improving to record levels in the last few months. Operationally, both brands are now in a much better position and have fully recovered from the post-pandemic supply chain disruption when customer orders were significantly delayed. In relation to our home strategic initiative, we've developed a dropship solution and new warehouse management systems at the back end of financial year 2023, which provides really solid foundations to support growth in this area.
Due to the weak market demand in upholstery, we took the decision to defer investing in marketing to build awareness of home and drive future sales growth, and instead focus our resources on optimizing the profitability of our core upholstery business in the short term. The profitability of our home offer has, however, increased year-over-year as we've operated with improved gross margins and lower operating costs. We remain committed to driving the sales growth in home in the near future. Moving onto our platforms. Our platforms support our pillar brands and all play a key role in enabling our top-line growth and improving the efficiency of our cost base. I'll cover each briefly now. First, sourcing and manufacturing. As John mentioned earlier, we closed the smallest of our three upholstery factories and one of our wood mills in October 2023.
Now, these types of decisions are never easy, and we understand the impact it can have on our colleagues. Following a consultation with 215 colleagues, we were able to retain 44 of them through providing employment elsewhere within the group, including at our recently formed sewing hub. We supported the remaining workforce through a comprehensive and meaningful outplacement support service. The ranges that were produced by the manufacturing site that's been closed have been redistributed across our existing supplier base, and this has contributed to reducing our cost of goods, supporting the gross margin improvements that we've delivered in the half. We're working on a number of initiatives to further evolve and optimize our global supplier mix and to support the delivery of our 58% gross margin target.
On technology and data, we've used technology to help limit the impact of the high interest rate environment on our profit margins by expanding the capabilities of our intelligent lending platform, which we initially launched within the DFS brand. We've now rolled this out for Sofology, enabling Sofology to work with a wider group of lenders, resulting in cost synergies. We'll continue to obtain and make more use of data to drive insight and improve decision-making across our business, and I'll provide a good example of that when I talk about the Sofa Delivery Company shortly. Our colleagues remain highly engaged, and we've seen positive results from our colleague engagement survey, with the overall NPS engagement score increasing 14 points from March 2023 to September 2023.
We've also made good progress in developing our inclusive culture where everyone is welcome, adding further colleague networks across gender, sexuality, religion, race, and disability. Finally, on sustainability and the environment, I'm pleased to say that we have met our 10% target in absolute reduction of Scope 1 emissions measured against our financial year 2019 baseline. This has been achieved in part due to lower volumes, but also through various initiatives such as moving to gas alternatives across our retail estate and the consolidation of our delivery fleets into the Sofa Delivery Company. AI route planning tools, as well as the investment in our teams with driver efficiency training, have delivered great results, and we're incrementally shifting our company car scheme and service vehicles to hybrid and electric models.
We've made a significant amount of progress in developing our carbon reduction roadmap and remain on track to submit our net zero strategy to the Science Based Targets initiative, the SBTi, for approval in June 2024. So I just wanted to touch briefly on our final-mile two-person logistics business, the Sofa Delivery Company. Now, this is a strong asset for the group, and we're really proud and grateful to the 1,300 sofa delivery colleagues who have worked extremely hard in the last few years to deliver moments that matter for our customers. Having brought together the two discrete delivery arms from DFS and Sofology to form the Sofa Delivery Company, sofa orders for both brands are stored and delivered through the same infrastructure, technology, and resources across the UK.
It wasn't an easy start having to be informed in the pandemic and having to deal with the very wide-ranging challenges that that brought about, but I'm pleased to say that the operation has been firing on all cylinders for well over a year now. We use the latest technology and data to support and drive continuous performance improvements in the operation. For instance, we've used state-of-the-art dynamic AI-based routing software for our vehicles, scheduling, delivery arranging, web-based supplier portals to book in, PDAs, customer real-time tracking solutions, and a group-wide stock management system. We also invest a lot in our colleagues. Our driver school program supports, trains, and invests in colleagues to obtain a HGV license, enabling them to earn a higher salary whilst also addressing a business issue due to the nationwide shortage of qualified 7.5-ton lorry drivers.
We now have over 120 graduates of this scheme, and we're seeing a younger-aged demographic coming through who are incredibly loyal and delivering great customer service. Our data apprenticeship program also helps develop the IT literacy and data skills of our colleagues in Sudelco out in the field. This, in turn, helps the teams utilize the data available, supported by powerful dashboards such as the one shown here, to help better understand their specific operations and drive continuous improvement. Bringing this all together, we are seeing our costs come down through achieving consistently higher van fill rates, greater use of our own fleet drivers, and reducing delivery failures to customers. Overall, after adjusting for inflation, the cost base has reduced by 12% year-on-year, and customer service levels have improved with the post-delivery Net Promoter Score increasing by 16%. Moving on to the outlook for financial year 2024.
Market demand through January and February has been weak, deteriorating a further 6% to -16% in volume terms from the -10% year-on-year that we observed in H1. The group has not been immune to this, and today we are providing an updated guidance set with order intake and delivery lead times, the two key sensitivities to our financial year 2024 profit performance. Our revised guidance is as follows: revenues of GBP 1 billion to GBP 1.015 billion, which is GBP 60 million- GBP 65 million below our initial guidance. Given the good cost management we described earlier, we are reducing our profit before tax range by GBP 10 million to GBP 20-25 million. Now for the key assumptions behind this guidance.
As you can see from the chart on the bottom left, our order intake has continued to be volatile over the past 18 months or so. Now, while this makes forecasting challenging, we are used to this and don't like to read too much into short-term trends. Our revised guidance expects some improvement in market demand such that H2 market order volumes are down between -8% to -10% year-on-year compared to the -10% we observed across half one. We expect this improvement to be partly supported by a weak Q4 in the prior year, as well as some potential for pent-up demand after what was an especially stormy and wet January and February. In addition, we expect an uplift in performance from an improved commercial offer with a number of spring campaign updates landing imminently before the crucial Easter trading period.
Based on these assumptions, the group's year-on-year order intake performance is forecast to be in the range of -2% to -4% for H2 overall, which is below the H1 level of -1.1%. Year-end net bank debt is expected to be around GBP 150-155 million. As previously guided, this will be elevated by GBP 15 million of temporary working capital outflows that occur in the 53rd week of this financial period. As with our guidance at the start of the year, the GBP 20-25 million PBT range assumes no impact from the Red Sea issues. However, if the Red Sea issues do continue through to our year-end, potential delays and delivery lead times could result in up to GBP 4 million of profit being deferred into the following financial year. We're working hard to mitigate as much of this risk as we can.
Finally, the board has approved an interim dividend of GBP 0.011 per share. Stepping back and thinking longer term, I wanted to reiterate what I said in September. We do expect market volumes to recover, and when they do, the group is incredibly well placed to grow profitability significantly given the operational leverage within the business. We believe that the current market challenges are temporary and not structural. According to the ONS, there are more households in the UK than pre-pandemic, and our research suggests that more rooms per house now have upholstery pieces. At the moment, the record-low market volumes are significantly impacting our profitability, with consumer confidence and housing transactions dragging the market volumes down by over 20% compared to pre-pandemic levels. As I showed earlier, the market drivers have been weak, but there are signs of potential recovery.
As we know, this business's high operational leverage works positively as well as negatively. We've included an illustrative scenario here on this slide to show what we expect to happen to the profitability of the group as market volumes recover. Now, while we see no reason why market volumes would not fully recover, if we see market volumes recover by only three-quarters of the approximately 20% reduction relative to pre-pandemic levels, we would expect profits to increase by circa GBP 60 million given the operational leverage, and we'd be operating at around a 7% PBT margin. In addition, further planned gross margin improvements, the home growth opportunity, and additional market volume recovery provide us with a number of reasons to be confident in achieving our medium-term targets of 8% PBT. To conclude, clearly market conditions are very challenging at the moment, and market demand is at record lows.
We can't control that, but we've made good progress on the things that we can control. Firstly, we continue to gain market share to record levels of circa 39%. Secondly, we're making good progress on our cost to operate program. Our gross margin rate continues to improve, and we've taken cost out of the business and have a number of initiatives underway to help us achieve our GBP 50 million cost reduction target. Thirdly, we are well set up to profitably grow our home offering. And finally, we believe that we are very well positioned to capitalize on the market recovery and deliver our 8% PBT target in the medium term.
Given our well-invested asset base, our strong operating leverage, and the negative working capital of the business, we believe that we will see very good levels of free cash flow conversion, and we will generate strong returns for our shareholders. This concludes our presentation. There'll now be a short pause before John and I take questions from analysts.
Well, hi. Hopefully you can hear us okay. We've got questions from the analysts now. So I'll start with Andy. Andy Wade from Jefferies. Do you have any questions for John and I? Can't hear you. Sorry, Andy. Just can't hear on our side at this moment in time. Just bear with us a second. Bear with, Andy. Try again, Andy, please.
Hello. Hello. Can you hear me?
Ha, ha. Yeah, we can hear you. Sorry, Andy. Technical difficulties in Doncaster.
No problem. Good. Okay. Well, some really interesting stuff on the market there and the growth framework as well, so thanks for that. I guess the first one I want to ask, and I've already been asked it this morning, what makes you confident that the data you're looking at is right in terms of the market, that the market is running at -10, and that you're gaining market share? That's my first one.
Yeah. Well, I mean, as you know, and we've discussed before, the data in our market is pretty hard to come by, but we've got three or four different sources. So the first one is our own proprietary Barclaycard data that we look at that covers 50% of the market, 13 retailers in our sector. We get that on a monthly basis, and that's cash transactions. So that's deposits and cash transactions, which we see consistently now for the last couple of years. So that's the first data point, which is external. The second data point is CACI, which is a volume-based data, which we get monthly as well. And then the third and fourth data points are probably more we always talk to suppliers.
We have a global supplier base, and so we're getting a lot of information from them about volumes coming in, obviously anonymized for our competitors, but they're telling us a lot about what's happening in the market. And then we also have brand partnerships with some of our brand partners that you know about. One in particular is a magazine group who have relationships across the whole of furniture. So all of these different data points. And then the final one wrapped up is GlobalData, which is a little bit out of date because that takes into account reported accounts. So we try and corroborate, collaborate, work together to try and get the best possible view. And that's the kind of view that we come up with, Andy, that says the volumes in the market for half one were down about 10%. That's CACI.
We can see that correlate with the Barclaycard data. And certainly H2, we've seen a very similar trend across all the different data points, including supplier feedback and our partners' feedback. So that's the best we think we can do at this moment in time. We're as confident as we can be, and we've got, you know, two or three years' worth of this quantitative data, that gives us the confidence that what we're talking about is in the right direction.
Very, very clear. Thank you. Second one I wanted to ask was around NPS, some strong improvements in DFS there. Just wanted to ask what you see has been the key drivers there and how important Sudelco has been in that.
Yeah. I mean, the Sudelco has been incredibly important. So, the post-delivery scores that we're getting from Sudelco in terms of the quality of deliveries, on-time deliveries, the quality of our teams in people's homes are at record levels. I think one of the biggest drivers is making sure that we deliver on the timescale that we promised to customers. That's a key driver. So, you know, one of the things that happened post-pandemic is that we weren't always delivering to the promised lead time. Now we're well over 90% in terms of on-time to customer, which helps. Our quality scores are also very strong. You know, we work with great partners across the world, but also our own factories have been fantastic in terms of quality scores. So I think it's on-time to customer, quality, and then in terms of our delivery teams through Sudelco, better than ever.
Our store colleagues are always strong at high 90s. So when you put all of those things together, I think, you know, we have actually record scores in Sofology and now getting back to pre-pandemic scores for DFS as well.
Great start. Okay. Very clear. And then the last one from me. Could you run through your position in terms of covenants, please, both before and after Red Sea impact? I mean, you touched on the net debt to EBITDA one in the presentation, but I think the fixed charge one is a bit closer on that. So how much headroom and so on do you have on that?
Yeah. Quite right. I mean, we're obviously continuing to monitor that as well as you'd expect. I mean, we gave some numbers in the presentation in terms of where we finished for the first half. If you look forward to the guidance that we've just updated, then firstly, just to talk about cash, our net debt position will be in a range of GBP 150 million-GBP 155 million based on the middle of that range, the GBP 22.5 million. That still gives us significant cash headroom to the total GBP 250 million facilities. And then in terms of leverage, we've also got good headroom on both the leverage and the fixed charge cover at that level.
If you look at more stress scenarios, whether you take it down to that post-Red Sea scenario or even go deeper than that, which we clearly model forward, then we've still got good headroom to both fixed charge cover and leverage. They're actually quite consistent in terms of how they progress down towards that sort of baseline level or that threshold level, should I say. So yeah, we keep monitoring it. If you look at stressed downside scenarios, we've still got good headroom beyond that Red Sea scenario against both those covenant metrics.
Great start. Very clear. Thanks, guys.
Thanks, Andy. I'll now ask Jonathan Pritchard from Peel Hunt. Any questions, Jonathan?
Yeah. Thanks. Good morning. Just looking ahead, and we're seeing these terrible market volume declines, etc. I don't expect you've seen anything sort of irrational from industry players so far, but they're going to be squeaking a bit, and certainly the independents, as you say, are creaking too. Is there an element that makes you a bit nervous that behavior could get a bit more irrational and actually sort of undermine some of the potential upside in the medium term?
No. I mean, I think we haven't seen anything yet, Jonathan, from any of the kind of anything irrational or out of the norm in terms of competitive behavior. I certainly think what we have seen is some of the more general retailers, the really good retailers Next and Dunelm coming in with shorter lead time products, which we're responding to. We'll have a huge amount of product on the shop floor that's very short lead time, 5 day-7 day delivery in quarter four of our quarter four, that is. But in terms of competitive behavior, I think it's always a very competitive market, and I think we're seeing some good cost of goods benefits coming through from our suppliers, and we're investing that appropriately in good promotional offers, which we'll have a very strong offer over Easter. So yeah, it's always a watching brief.
We keep on a daily and a weekly basis, as you can imagine, but we haven't seen anything yet. It's obviously one to keep an eye on as we go forward in the rest of this calendar year.
Okay, lovely. Just on the Red Sea, just give us another sort of level of granularity on what's sort of happening on a day-to-day basis, and are there any signs of improvement in that situation?
Yeah. Now, all the shipping lines that we work with, we work with 3 or 4 big shipping lines across the world. They're all routing around the Cape now. So that means in real terms of customers, it adds 2 weeks onto lead times from our Far East partners. So typically, lead times from Far East will be 11 week-12 weeks. They're currently running at 13-14. So that's the kind of risk that we call now if that doesn't come back by year-end, which one would assume would be challenging. What we've done to mitigate that is to work with some partners, particularly one of our biggest partners in the Far East, to have a huge amount of stocked product available in the U.K. So that's available on 7 days.
We're hoping that customers will switch as we get into quarter four away from some of the long lead time products into the seven-day model. That's how we're trying to mitigate the Red Sea issues at this moment in time. From a cost perspective, there are some small surcharges being added on just because it's a two-week longer shipping time, but nothing material and shipping rates remain favorable compared to where they were over the last couple of years.
Understood. That's all for me. Thank you.
Thanks, Jonathan. Okay. I'll turn to David from Stifel. Good morning.
Yeah. Good morning. First of all, on volume kind of declines, obviously, we've seen some signs of continued improvement in housing transactions, a bit of green shoot. How much of that is a leading indicator for you, and how much correlation do you have with that kind of housing market?
Yeah. I think we've seen I think the one thing we have seen is mortgage approvals improving in the first couple of months of January/February of this calendar year. So that's a small green shoot to grab hold of, isn't it? And typically, that housing moves drive about 20% of our business. So if we start to see an improvement year-over-year, that will feed through typically three or four months after these mortgage approvals come through and people start to furnish their house, etc. So you'd hope to see a little bit of a tick-up in the next couple of months from that. I'm not necessarily sure, having looked at some of the house builders came out last week, that it's going to be a stellar year in terms of housing. So I think it's probably a minor improvement on a pretty low base, to be fair, David.
Got it. And then secondly, on kind of pricing and ASP in the market, obviously, we talk about volume declines. Inflation numbers for January suggested quite low inflation within kind of the household sector, perhaps with a lot of January sales. Are you seeing a lot of inflation going through or expecting a lot of inflation going through, or are we thinking more flat prices for the rest of the year?
Yeah. We're not seeing cost of goods inflation. In fact, we're starting to see cost of goods coming down slightly. So we're certainly seeing on a retail price level, no planned significant retail price increase. If anything, a bit more investment into promotional pricing and promotions. So I think certainly from a Sofology point of view, I definitely see pricing being flat or slightly coming down with cost of goods coming down as well across the world, actually. So there is still inflation clearly in the operating cost space with wages in the U.K. and utilities, etc. So we have still got to think about that and try and figure out ways to offset that through cost initiatives. But I think on a gross margin level, we're pretty at this moment in time, touch wood, pretty stable on cost of goods.
Got it. Thanks very much.
Okay. Matt from Berenberg, good morning.
Good morning, all. Thanks for taking my participation. I just want to touch on gross margin. It looks as though that's improved throughout the half year. Would you mind quantifying what the exit rate is for gross margin and how you expect that to progress further throughout the second half of the year? The second question I have is in reference to the output volume. You mentioned this Q4 comp is being a factor. Would you mind quantifying the Q4 comp and just talking through how material the lack of that comp is versus your expectation for end market improvement given what looks to be an embedded assumption that there's a fairly significant improvement in end market, volume declines in the first two months of 6%? Or what looks to be back to around a 6% decline again through your market volume decline for the half year?
Just interested in that factor as well.
Yeah. Okay. Remember, give John a bit of time to think about that one. But I think there's a pretty straightforward answer. In terms of the first one about gross margin exit rates, I think we exited the half probably just over 56. I think the overall half was 56%. I think we exited just over 56, and we're currently trading a bit more than that. We'd look to see if we can get that closer to 57 as we exit half two. But I think, as Jonathan alluded to, there is quite a lot of promotional sort of effort going off from our competitors. So I think we'll be probably in the middle of 56.5, 57 as we exit half two.
I think when you actually look at the gross margin bridge that's in the slide deck John went through, if it wasn't for interest-free credit and Forex, I think we'd be pretty close to our historical targets of 58%. So as hopefully the Forex and the interest-free credit abate into FY 2025, we know we're exiting on an underlying basis close to the sort of longer-term target that we've got there. And we're working very closely with our supplier partners who are supporting us with great deals as we can look at our cost of goods benefits. So I think from a margin perspective, hopefully, there's some good signs to come as we get into FY 2025. Do you want to talk about Q4?
Yeah. And I'll probably start, Matt, by putting it in the context of the half for a whole. So within that guidance, we're assuming that half year two order growth is in the range of -2% to -4%. So that compares to the -1.1% that we reported for the first half of the year. As we covered in the presentation, it has been tough in the first 2, 3 months of the second half, and we do assume a recovery in the second half of the half. In terms of what that sort of softer comparative is worth, we estimate anywhere between 5% and 7% at a market level in terms of when you look at 2-year comps.
Or if we go back and we look at comparatives with FY 2019 as well, then we get some confidence that if conditions are more normal, we don't see a repeat of the extreme weather we got in May and June, that that sort of realize an opportunity. Potentially as well, we see pent-up demand coming out of Jan/Feb and early March. That wouldn't be unusual based on history and the volatility that we see in the market as well. There's probably been a little bit of weather that's affected customer shopping patterns in the first half or second half that could well give us an opportunity to come at a market level and for us too. And clearly, we're supporting all of that with our own plans as well. Tim's talked about what we're doing on stocked.
That can help us in second half of this period that we're in now. So definitely good reasons to believe, but as ever, the market remains difficult to forecast.
Okay. Thank you.
Okay. Thanks, Matt. And finally, Saranja, UBS, are you on the line? Good morning.
Good morning. Thanks for taking the question. I have a few questions. The first one is similar to a question earlier. It's on pricing. You mentioned about you're thinking about flat pricing, slightly down. How does this pricing level compare to what you might have done in a normalized environment? So what's the sort of delta that we're looking at? And also, what might the promotional or investment into promotional activity mean for gross margin? That's the first one. The second one is thank you for providing some color on cost. Pardon me. So thinking about sort of cost items like wages, which can or might not be such a big segment depending on how the business works on it, how should we think about that? Obviously, with minimum wage going up, is it something where you have a cushion to not grow wages to the same extent?
Or are there any levers that you can adjust, like bringing on CUS staff during kind of sale periods or something like that? And thirdly, on market share, thank you for sharing the color around market shares. You mentioned that general retailers are strengthening their position. In the medium term, so not sort of right now, but in the medium term, where do you think the biggest competition comes from this space? Obviously, it's the largest player. You might leave a slightly more defensive position in terms of defending your market share but also growing it. But where do you think the biggest competition comes from in this space? Thank you.
Yeah. Okay. Well, if I take the pricing one, you take costs, and then I'll talk about market share. So on pricing, I think, as I said, although there probably will be a bit more promotional activity, we are seeing good support from our suppliers in terms of cost of goods benefits. So I don't see a huge dilution in margin percentage as I was talking about earlier with I think it was Matt asked the question. So I think we are being supported well on that. So don't see a huge pressure at this moment in time in terms of moving from the 56% towards 57% by the end of this financial year. So that's probably the first one. In terms of costs, John?
Yeah. So I mean, I mean, how you approach this, Saranja, on the wage front. And clearly, it's not helpful to have the living wage increases from a P&L perspective, but we're really supportive of it in terms of doing the right thing for the colleagues who are the lowest paid in our business. We aren't hugely exposed to it in relative terms. We've not necessarily got a close proximity on wage rates that we've got to preserve a gap. But at the same time, we'll have to absorb that living wage increase for the colleagues that it applies to. And we're talking around about GBP 3 million for us as an annualized impact from that. More broadly, inflation pressures are generally subsiding. Utilities and energy costs have clearly come back towards us a little bit. Tim's talked about some of the margin costs coming more towards us.
But yeah, there's other inflationary factors generally that we need to continue to work hard to absorb, mitigate. That's clearly where the cost savings program comes into play. I mean, we've updated on that in the presentation today. I think we're really pleased with the progress that we're making, the level of engagement that we've got in the business. And our goals remain unchanged, really. That needs to be the program and will be the program that will, as a minimum, mitigate those cost inflation headwinds over the next couple of years for us.
Yeah. And I think in terms of competition, we drew out a slide there that shows the different aspects of competition. And I think for us, we look at, I'm not going to name names, but the general retailers are strong retailers, multi-category, got strong platforms, and we see those as competition. Clearly, we see the big online platforms as competition, particularly at the entry and the lower end, but increasingly getting into the mid-market as well. But on the other hand, we still see quite a significant independent sector, which has been in structural decline over the last 10 years. And we see that continuing, especially in tough markets like this. It's very challenging.
Part of the reason why we've been developing the DFS brand to broaden the range, particularly at the top end, and it is broadened by introducing Ted Baker and the like, that really steals share from the top end as well, from the independents. So I think we're not really sitting here looking at defending the position. We're looking at growing the position, growing our core business, recognizing that some of the threats from the general retailers on short lead-time products. We're responding very heavily with that with our supplier partners in partnership with them. So I think that's probably how I see it in the medium term surrounding just some really big challenges. But on the other hand, quite still a big sort of donor area that we look at to see if we can grow.
Thank you so much.
Okay. Well, I think that's everybody covered. Thank you very much for your attention and for listening to us. Have a great rest of the day. Thank you.