I would now like to hand the conference over to Dame Joan Withers , Chair of The Warehouse Group . Please go ahead.
Tēnā koutou and good morning. Welcome to The Warehouse Group's twenty twenty-four full year results. I'm Joan Withers, I'm Chair of the Board, and on the call with me today are John Journee , our Interim Group Chief Executive Officer, and Mark Stirton , our Group Chief Financial Officer. During the presentation today, I'll give my review as Chair of the Board and then hand over to John for his update. Mark will share a more in-depth summary of our financial results. We will also take a few moments to share our forward-looking plan and some of the changes underway across our business. And as always, there will be an opportunity to ask questions at the end. Now to slide four, our year in review, and without a doubt, our 2024 financial year has been one of the most challenging in our 42-year history.
At a macroeconomic level, New Zealand's deteriorating economic conditions have significantly impacted the retail sector in the past year, with New Zealanders tightening their belts and consumer spending falling dramatically. However, it's clear that our trading performance and operational execution have exacerbated the challenges of a difficult environment, and this is evident from the decline in market share that we have experienced in some key categories. I want to acknowledge from the outset that the poor financial performance we've reported this year is not acceptable. Both the board and the executive team are acutely aware of the disappointment shareholders and our teams will be experiencing due to this result, and there is a big job ahead of us to get the company back on track. We are already on that journey.
Earlier this year, it became apparent to the board that we needed to make significant changes to address the issues we were confronted with. We faced the fact that we were not able to fulfill the ambitions that we had for our group ecosystem strategy, and as you're aware, we've sold or closed underperforming parts of the business, including Torpedo7 and TheMarket.com, and the loss incurred on the sale of Torpedo7 has resulted in the first annual loss for The Warehouse Group in our history. We have simplified the leadership team under John Journee as Interim Group CEO and restructured the business around our three core brands, The Warehouse, Warehouse Stationery, and Noel Leeming. Our dedicated teams on each brand have an absolute focus on better products at better prices with the best customer service experience.
Our costs of doing business and capital expenditure have also been too high, and these are under the spotlight to ensure disciplined spend and capital allocation. Turning now to dividend. In March, the board declared an FY 2024 interim dividend of NZD 0.05 per share. That interim dividend that was paid in April represents a 92% payout ratio on the full year adjusted NPAT, which is above the group's dividend policy of 70% of the group's full year adjusted net profit. As a result of the group's financial performance, resulting in a net operating loss in the second half of this financial year, and in line with the group's dividend policy, the board has made the decision not to declare a final dividend.
We remain confident in the underlying strength of our business and our ability to navigate these challenges to return to paying dividends when our profitability improves. There were some other events during this last financial year that I do want to comment on. The first is that we've made some changes to the board this year. We have welcomed Tony Carter, who brings wide-ranging retail, commercial, and governance experience to complement the capability already in place around the board table, and I'd like to thank our outgoing director, Julia Raue, for her leadership during her 7.5-year tenure on the board, particularly as chair of our Health, Safety, and Wellbeing Board Committee.
On taking up the role of Interim Group Chief Executive Officer, John Journee moved to become an executive director rather than a non-executive director, and I thank JJ sincerely for taking up the reins at a time we really need his skills and experience to get the company back on track. Second matter I'd like to cover is the non-binding indicative offer that we received earlier this year from private equity firm Adamantem Capital to acquire the company's shares at a price range of NZD 1.50-NZD 1.70 per share. Under the rules of a scheme of arrangement, critical shareholder backing beyond that of our majority shareholder would be required in order for a takeover to proceed. The proposal did not have that support, so it did not move forward.
So despite the challenging year we've had, we still have huge fight, determination, and belief that we can turn our performance around. With our team of 10,000, we are committed to simplifying our business, reducing our cost of doing business, and sharpening the focus on our core brands to turn that performance around. I want to thank all our shareholders, our customers, our team members, and my fellow directors for their continued support as we navigate these challenges, rebuild our brands, and continue towards helping Kiwis live better every day. I'll now hand over to John and Mark to run through the full year financial results and the plan to turn around performance in more detail. John?
Thank you, Joan, and good morning, all. I'm John Journee, Interim CEO. I want to start by recognizing how incredibly tough this year has been for our shareholders and teams. As Joan said earlier, our FY 2024 financial performance is disappointing and a long way from where we need to be. Our group ecosystem strategy was too ambitious. We persevered with growing the nascent parts of our ecosystem and consequently were held on to Torpedo7 and TheMarket.com for too long. It made our business overly complex. It distracted us from strengthening the customer value propositions of our respective brands in response to rapidly changing market conditions and consumer behaviors.
The ecosystem strategy also required investment into digital platforms, which, coupled with the significant multi-year investment in the modernization of our core systems, has meant our results are materially impacted by the incremental costs of these investments, without yet seeing the benefit that will come from them. It has also become apparent that the agile operating model, introduced to grow the group ecosystem, was not ideally suited to serve the specific needs of our retail brands as they responded to the competitive demands of their respective markets and customer segments. We've made mistakes, and we own that. We acknowledge where we went wrong, and we're already working hard to fix it. Mark will talk to our financials in more detail shortly, but I also wanted to give you an overview of our year in review, which is slide six.
Before I start, it's worth noting that all financials, with the exception of reported net profit after tax, have been reported on a continuing operations basis, excluding Torpedo7, after it was sold in March FY 2024. Sales were down 6.2%, with total group sales at NZD 3 billion. Our sales declined 4.9% in the first half of FY 2024 and deteriorated further in the second half, declining 7.6%. This was led by decline in The Warehouse sales. Group gross profit was down 6.2%, with margin being flat year-on-year at 33.6%. Cost of doing business was down 1.3% in dollar terms, but higher as a percentage of sales, resulting in a 28.9% operating profit, down 65.3%.
The group reported net loss after tax of NZD 54.2 million, including the impact of Torpedo7, compared to a net profit after tax of NZD 29.8 million in the last financial year. This loss was significantly impacted by the loss on disposal of Torpedo7 and the wind up of TheMarket.com in the year, but it is no less than an incredibly disappointing result. Slide seven. Onto our brand performance, which shows sales and operating profit were down across all three core brands. The Warehouse FY 2024 sales were NZD 1.8 billion, down 5.3% year-on-year, and operating profit was NZD 17.7 million. Warehouse gross profit margin held up, increasing 10 basis points on the prior year. Store traffic and same store sales decreased at a slower rate than headline sales, at 2.3% and 2.9%, respectively.
The Warehouse is an iconic New Zealand retailer, known for a bargain, and we should have been the go-to choice for Kiwis navigating a rising cost of living. However, our category strategy was off the mark, our execution was poor, and our customer offer was inconsistent. We had successes with our grocery, audiovisual, home technology, and outdoor leisure categories, but this was offset by declines in the sales of home and apparel. We had a particularly challenging second half. Our winter product range didn't resonate sufficiently with customers, and we needed to heavily discount as a result. This, along with increased promotional activity, caused the gross margin gains achieved in the first half to be eroded in the second half, ultimately delivering a modest gain in margin growth of 10 basis points year-on-year.
Warehouse Stationery sales were down 6.7% to NZD 231.9 million, and operating profit was NZD 12.9 million. Print & Copy Centres continued to perform well in the period. Our Biz Rewards customer base is a valuable asset in engaging with our business customers, but we need to leverage this more. Finally, in Noel Leeming , sales were NZD 1 billion, down 5.3%, and operating profit was NZD 17.3 million. Performance was challenged by tough trading conditions, driven by reduced discretionary spend on high ticket items and an increasingly competitive market. Margin, however, only declined 20 basis points, indicating tight trading disciplines in a competitive market. Combined with a small uptick in the cost of doing business as a percentage of sales, operating profit declined 36.6% to NZD 17.3 million.
Services and Tech Solutions showed year-on-year growth and continues to be a differentiator for Noel Leeming. In October 2023, we opened our brand new Warehouse, Warehouse Stationery, and Noel Leeming stores in Wanaka. We're proud to employ around 30 locals and be better able to serve this growing community. It's pleasing to see that our in-store customer Net Promoter Score has improved across the three brands, indicating that our store teams continue to offer great customer service. Just before I pass to Mark, I want to acknowledge that we released our inaugural climate-related disclosure report today, alongside our 2024 annual report. We're clearly focused on our financial performance today, but sustainability remains very important to us.
We have continued to make solid progress with improvements across our key sustainability measures, which you can read about in more detail in the appendix of the investor presentation and in our annual report. A huge amount of work has gone into this. As it's our first report, we will continue to improve it, but we're very proud of the progress we've made so far. Now, I'll hand over to our new CFO, Mark Stirton, to take you through our financial results in more detail. But before I do so, I want to acknowledge the valuable support that Mark has provided me and the leadership team, and the positive impact he's had since joining in April. Over to you, Mark.
Thank you, Joan and John. Good morning, everyone. My name is Mark Stirton, CFO for The Warehouse Group. I've been five months in the seat, and I've spent this time actively diving into the details that have contributed to our FY 2024 performance, and more importantly, how we turn around our fortunes in FY 2025 and beyond. Our performance is not where it could or should be. However, what encourages me is that this group has all the levers at its disposal to produce strong operating margins and improve capital returns for our shareholders. The New Zealand economy continues to be challenging, so our recovery will need to be self-generated. More than ever, we need to be surprising and delighting our customers with amazing product at bargain prices, while operating a leaner cost base with stricter capital allocation in the year ahead. Group financial performance.
Continuing group revenue for the year was NZD 3 billion, down 6.2% on the prior period. Revenue excluding Torpedo7 and TheMarket.com was down 5.3%. The year was a tale of two halves for both revenue and gross profit, with strict cost control exercised throughout the period. As reported at our interim results, revenue was down 4.9% in the first half. Performance deteriorated further in the second half, declining 7.6% on the comparable period. Escalating costs of living pressures dampened consumer spending. However, important product lines across the three brands did not resonate sufficiently with customers, resulting in lost market share. Despite the pressure on the top line, we managed to hold group gross margin year-on-year at 33.6%.
Cost of doing business decreased 1.3% on the prior year, but not at the pace of the sales decline. Therefore, cost of doing business increased as a percentage of sales by 160 basis points. I'll go into a bit more detail on the breakdown of gross margin, cost of doing business and operating profit shortly. Adjusted net profit after tax on continuing operations, which excludes Torpedo7, declined NZD 38.5 million to NZD 18.9 million on the prior period, which I'll take you through the bridge of what areas contributed to this decline.
Group reported net loss after tax was NZD 54.2 million, with the loss primarily driven by the NZD 60.5 million loss on disposal of Torpedo7, with the change in tax treatment on building depreciation having an adverse impact of NZD 8 million and unusual items, including restructure and asset write-offs of NZD 8.9 million. Earnings and EPS. As Joan mentioned, the board has declared no final dividend. Reported and adjusted earnings per share were in line with profitability figures I've just explained, and no notable weighted average share changes took place. Shared contribution. With a simplified group structure, The Warehouse makes up the lion's share of the group, now contributing 59% of group sales and 61% of group operating profit. Retail selling prices remained robust, declining only 50 basis points year-on-year. However, the group's units declined 4.7%.
This resulted in basket sizes declining 1.3%, mainly brought about by product mix and lower full price sales. Our simplified group will make it easier to double down on core retail fundamentals and focus on improving key retail metrics needed to execute the turnaround. Our online channel has softened to 7.2% of group sales, but it is an important demand driver as customers browse online and come into our 218 stores. We have the customer base and the geographic reach to get us there. Our job is to be more disciplined in execution and transform processes within our retail value chain to improve our competitiveness. Geographical strength. Our geographical reach throughout New Zealand remains unrivaled. We have more reach, particularly in non-urban areas, than many retailers, with 218 stores throughout New Zealand.
The breadth of our store network, our extensive footprint, and our ability to reach nearly 1/3 of Kiwis every week fuels our conviction that we can correct our course and turn the business around. Market share. The group market share of core retail declined 20 basis points. Excluding grocery, it declined 50 basis points on the prior year, mainly due to the underperformance in apparel and home categories. If apparel and home had maintained flat growth on prior year, the group would have gained market share. Hence, these categories are critical to our turnaround in FY 2025. Gross margin. Gross margin held year-on-year at 33.6%. The first half saw the group achieve a strong gross margin lift, gaining 160 basis points, The Warehouse gross profit margin leading up 250 basis points on last year.
While some promotional and markdown activity occurred in H1, category mix was much more favorable. We had strong inflow margins and lower supply chain costs. Moving into the second half, across the brands, promotional and markdown activity increased significantly as consumer demand softened further and competitive activity increased. We promoted and discounted to keep up and clear stock. Category mix moved towards lower margin products across all our brands, aggravated by a winter assortment in The Warehouse that did not resonate with customers. This resulted in gross profit margins declining 180 basis points in the second half, eroding the gains achieved in the first half. In particular, The Warehouse gross profit margin decreased 260 basis points in the second half. For the full year, gross profit declined 6.2%, in line with sales, resulting in gross profit margin remaining flat year-on-year.
Cost of doing business. Cost of doing business decreased 1.3% on the prior period through ongoing efforts to reduce our cost to serve. Employee expenses declined 4.4%, supported by a reduction in headcount and performance incentive paid versus the prior year, while still increasing our wage rates, particularly of our store and distribution center teams. Tight labor hour management in stores aided this result. Due to the group's investment into new systems and platforms, technology running costs increased 18% on the prior year. Depreciation increased 6.5% from increased levels of capital expenditure in recent years. Lease expenses increased 2.6%. While below inflation, landlord negotiations are becoming tougher as they experience rising costs that they seek to pass on. As communicated, the change in accounting standards have meant previously capitalized costs are now expensed.
In FY 2024, NZD 18.6 million, which would have previously been capitalized, has now been expensed. Bringing cost of doing business back down is a huge focus of ours in FY 2025, with the aim to bring this back to historical and sustainable levels of around 31% of sales as a medium-term target. Operating profit. Adjusted operating profit, which excludes Torpedo7 restructure and asset write-offs, decreased 65.3% to NZD 28.9 million in FY 2024. Most of this decline was in The Warehouse, which accounts for 61% of group operated profit, and nearly all of the decrease was incurred in the second half, with The Warehouse operating loss of NZD 21.1 million H2. T he significant impact. The closure of TheMarket.com and the reduction in unallocated support office costs was a positive year-on-year move of NZD 19.6 million. The Warehouse.
The Warehouse, our biggest brand, had a particularly poor result. I've already touched on the movements in sales and gross profit and operating profit, so I'll focus on retail drivers we look at, what went wrong and what we need to fix. Same-store sales decreased 2.9%, slower than overall sales, as marginal store locations were closed on rental renewals. Same-store cost of doing business and improving gross margins will be key focus of ours in FY 2025 through a detailed store profitability assessment. Store foot traffic declined 2.3% on last year, with basket value decreasing 1.1%, with mix playing a big part. But what is encouraging is that those customers coming in through our doors bought, as conversion was up 0.5%.
We didn't have the right mix of product, particularly in the second half, with customers shopping more in low-margin categories like grocery and less in higher-margin categories of homeware and apparel. Our teams are focused on bringing more trend and units into our stores' upcoming ranges, and we are absolutely focused on winning back our customers and market share in these must-win categories. Given the nature of retail buying cycles and current lead times, it will take time for our improvements in our offer to flow in at scale across our full range. However, our teams already started the work, and we are very encouraged by the positive customer reaction as these new ranges land in store. Our online channel has stabilized at around 5% of sales. Our online visits were up on last year, and we know our digital channels are key to driving customer traffic in store.
Click & Collect fulfillment grew and remains strong at 54% of online orders. Warehouse Stationery. Warehouse Stationery saw a 6.7% decline in sales in FY 2024. While the Print & Copy Centres continued to grow and post another record year of sales, it could not offset other key contributing category declines, including print consumables, study equipment, and office furniture. Operating profit decreased 44%, a mix of the decline of gross profit margin of 150 basis points year-on-year and insufficient cost reduction to offset sales and margin declines. Key areas of focus going forward for stationery will include winning back market share in back to school, our SME business, and being the one-stop shop for customers' print and create resources. Noel Leeming.
Noel Leeming saw demand soften and customers switch to low price point items as discretionary income tightened, causing the replacement cycles for the post-COVID demand spark to be further delayed. Sales decreased 5.3% on last year, but pleasingly, gross profit margins held up fairly well, decreasing 20 basis points year-on-year, driven by a favorable change in mix to higher margin categories. Combined with a small uptick in cost of doing business as a percentage of sales, operating profit unfortunately declined 36.6%. Foot traffic into store was disappointing, down 8.5% as customers' disposable income for high-ticket items reduced. A pleasing increase in foot traffic conversion, however, it was up 5.7%, offset by a lower basket value of 1.3%, resulted in same-store sales decline of 4.5%.
Online sales held up okay, driven by our one-hour Click & Collect offering, with 67.2% of our online sales fulfilled through Click & Collect in store. Balance sheet. Rebuilding the balance sheet and improving key ratios is a focus of mine, and I hope to report progress on this in future presentations. Working capital and capital allocation management will receive stricter focus. Inventory declined 4.3% on the prior year, including Torpedo7. Excluding Torpedo7, inventory increased 10.8%. However, aged inventory is under control and well provided for. Aged stock on hand improved to 20.7%, less than the 23.4% of last year. Trade payables closed higher, but a pure timing impact, with this year's payments being made in the days following 28th of July.
Covenants were all met throughout the period and at year-end, with interest cover at 4.4 x and gearing ratio at 11% at year-end. Covenant compliance has been front of mind recently, and we're pleased to confirm we have agreed a short-term change in covenant test to an interest cover on a pre-IFRS 16 EBITDA basis. Net debt increased from NZD 48.1 million to NZD 50.7 million, with headroom available of NZD 419.3 million. Cash flow. Our operating cash flows declined 13.2% from NZD 214.2 million in FY 2023 to NZD 185.9 million in FY 2024. This includes continuing and discontinued operations, with the decline in EBITDA offset by favorable movements in working capital and tax.
Our cash conversion ratio has improved nicely this year to 85%, while free cash flow increased from NZD 99.2 million in FY 2023 to NZD 146.5 million in FY 2024, with our free cash flow yield increasing from 15.9% to 29.7%. Capital projects. Prudent capital allocation is necessary as we build our recovery story. Total project expenditure was NZD 73.4 million in FY 2024, compared to the NZD 154.4 million in FY 2023, and well below our cap guidance of the NZD 80 million . Total capital expenditure in FY 2024 was NZD 39 million, a significant decrease from the NZD 113.2 million in FY 2023. In the last five years, the group has made significant investments into its information systems. This was necessary to modernize its retail platforms.
During this time, we spent NZD 139 million on the replacement of legacy core systems. Fortunately, these big investments happen only every decade or so. These transformations are painful, requiring large financial and human capital commitments, but these are largely complete and will set us up for our future. We will now be slowing down to embed, to stabilize, and to extract the benefits from these systems in FY 2025. We have reduced our annual project spend to NZD 32 million-NZD 39 million for FY 2025. We have a lot of work ahead of us, but we are up for it. I'll now hand back to John to talk you through our next steps.
Thank you, Mark. Our financial results serve as a stark reminder to the challenges we face as a business and of our poor operational execution in the face of those challenges. I will now talk you through some of the work that is underway to turn our performance around. We're now on slide 25. Since stepping into this role, it's clear to me that our group ecosystem strategy was too ambitious and spread us too thin. The distraction of delivering the ecosystem strategy, agile, and the multi-year modernization of our core systems meant we dropped the ball in core retail capabilities. We're changing all that. We have reset the group strategy, divesting unprofitable businesses, and moving away from the ecosystem to focus on trading our core retail brands, The Warehouse, Warehouse Stationery, and Noel Leeming.
The shift to a brand-led strategy is centered on strengthening each brand's specific customer value proposition to enable them to more effectively compete in each of their markets. To support the move to a retail brand-led strategy, we have restructured our senior leadership and changed our operating model from agile to a fit-for-purpose retail operating model. An overview of the structure is on the following slide. The changes to the executive leadership team were made to ensure there is clear accountability for the performance of each of our brands across merchandising, supply chain, store operations, and marketing. We have reestablished a dedicated Warehouse Stationery leadership and retail team within The Warehouse operation to enable us to improve the execution of our offer, particularly to the SME and education sectors.
A dedicated Noel Leeming leadership and retail team will enable them to strengthen the brand's market leadership position more effectively and assertively in a highly competitive and fast-moving market. Our group support functions are now solely focused on supporting our retail brands to deliver greater value to our customers and to drive profitable growth. Slide 27. I have been clear my key role as Interim CEO is to get the company back on track and to set the groundwork for a return to profitable growth. Given its importance to the group results, our primary focus in the short term is turning around The Warehouse's performance and strengthening its value proposition. The key drivers of our turn-around plan are strengthening our everyday low price position across an improved range of products for Kiwi families.
We've reset our category strategy to include more trend and newness, particularly in our higher-margin categories of home and apparel. While building on the success of our grocery offer, including fast-growing Market Kitchen range, we're also optimizing our EDLP pricing strategy, supported by improved cost of goods. Our 86 Red Sheds are at the heart of many communities across New Zealand and remain critical to delivering our value proposition. We're resetting store layouts and key locations to improve our customer experience and highlight the improved product offer. E-commerce and Click & Collect remain important shopping options for our customers, and we have recently increased our network of store-based fulfillment hubs to service this demand more efficiently. We are fortunate to have significant endowments of scale and brand values that support a strong platform to derive, to drive performance improvement.
Several million website and store visits every week, high levels of awareness and consideration, and significant data assets provide opportunity to amplify the improvements we will deliver, especially in relation to new product and improved value. In addition to the work we're doing to get The Warehouse back on track, we have programs of work underway to improve the performance of our other two retail brands. Having dedicated leadership and retail teams for both Warehouse Stationery and Noel Leeming enables them to fine-tune their respective customer value propositions to compete more effectively. Operating in highly competitive markets with well-informed, value-seeking consumers, it's critical that our teams are able to respond quickly and decisively to changing conditions in their respective markets.
We have made significant reductions in both our operating expenses and project spend going into FY 2025, and the pressure on reducing our cost of doing business will continue to be a critical part of us being an everyday low-cost retailer. The multi-year investments we have made to modernize our core systems across the group progressively come on stream over the last year and will be increasingly used to leverage our significant network, inventory, data, and people assets to support decision-making and improve our operational effectiveness and efficiency. The twin challenges of rising cost of living and increasing pressure on our planet's resources mean it's never been more important than we strive to make the products we sell affordable and sustainable. This will continue to be our ambition across all our brands.
Finally, we have a superpower in our large store footprint and a nationwide team of 10,000 who know New Zealand incredibly well because we're an integral part of our communities. You will see us be more relevant, owning our Kiwi heritage more as we better connect with our customers and communities. As you can see, we're already well underway with strengthening the retail fundamentals and the shift back to trading our core brands. Our strategy reset may sound simple, but it is the simplicity and focus that will enable us to better execute the craft and science of retail to deliver great value to our customers, build shareholder value, and reclaim our market leadership. Now on to slide 29.
And as we look ahead, the retail environment in New Zealand remains tough, as recent GDP figures show, and we expect that consumer demand and market conditions will continue to be challenging and unpredictable in the near term. We're under no illusions of the challenges ahead of us. While we've been able to regain market share in our core retail segment in the first six weeks of FY 2025, our sales have still been soft, and our gross profit remains under pressure as we clear the last of our winter stock and continue to reset our product offer in a competitive market. I'm very conscious that words are not what our shareholders and customers or team members want at this time. They want action and improved performance.
With our focus firmly back on trading our retail brands and delivering the bargains our customers expect and deserve from us, the team and I look forward to showing meaningful progress in the year ahead. The group will share an FY 2025 Q1 trading update on the 8th of November, 2024 . Thank you for your time, and I'll hand back to Joan.
Thank you very much, John. So I want to finish today by just taking a moment to acknowledge John properly for stepping in as Interim CEO during what has been an incredibly challenging year, and having someone with his deep retail experience, both with The Warehouse and with Noel Leeming, has been invaluable. You can hear his commitment and passion for turning around the group, and as you can see, he's wasted no time getting to work. So thank you, John. So to conclude, despite our challenges, we have three iconic brands. We have The Warehouse, Warehouse Stationery, and Noel Leeming, each playing a crucial role in our business. These brands have stood the test of time, and we remain deeply committed to their success. We know there's work to be done, and we're fully focused on fixing it and returning value to our shareholders.
With that, we'll now move into Q&A.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Kieran Carling with Craigs Investment Partners. Please go ahead.
Morning, Kieran.
Morning, guys. Morning. Thanks for the presentation. First question is just on the Red Sheds. Saw that that sales run rate has improved from - 8.1% in Q3 to - 3.7% in Q4. Can you just talk us through what drove that improvement? Is that just a function of cycling an easier comp period?
JJ, can you talk to that?
Yeah, there is some past period issues in there, but it is also just particular recall cycles between Q3 and Q4 is probably explaining most of it, and the change of product mixes through that time.
Okay. I guess just as a follow-on question to that, if we think about your strategy with grocery, that's lifted from 18.7% of the Red Shed mix to around 25% this year. And on my calculations, if you strip that out, you know, your Red Shed sales were down over 12.5%. Are you intending to grow the grocery mix further from here? Can you just comment a bit on that strategy and what your plans are?
Sure. Our intent is not to grow the mix. The focus is actually growing the other parts of the business to bring the mix in line or to keep the mix in line. You're right, the customers are seeing value in our fast-moving consumables range, whether it be pet, baby, health and beauty or our pantry range. And that's working really well. That's bringing frequency, which is great. But the misses are in our apparel and home offer, and that's where we're working to improve, and that's where the mix will come back and get more in balance. So those going forward, our big departments outside of grocery will come back into balance, so that as grocery grows, our overall mix gets back into an appropriate balance. So to your point around-
Okay.
Our intention is not to grow grocery ahead of the balance of the mix.
Okay, thank you, and you commented that your winter product range didn't resonate with customers. Can you just elaborate on that point and, you know, touch on what went wrong there, and what your plans are to improve that offering going forward?
Yeah. Probably winter was the tail end of our probably over-focus on continuity product and getting sort of an essentials range. What our customers were telling us that while that was great and they were responding to that, they also wanted newness and freshness in the range, and we didn't have enough of that in our winter range. So we were correcting it. We'd already taken that feedback, but it wasn't showing up in our winter range. So hence we didn't have enough excitement in the range, enough trend and newness, so the balance of our apparel sales was off.
Okay, thank you, and then just the last question from me. Obviously, you've provided some commentary around early FY 2025 trading, sales soft and gross margin under pressure, but can you give us any more of a steer on how sales have been tracking over the last eight weeks compared to Q4, just by brand? And just any sort of read on what your expectations are for the first half, you know, relative to last year?
John, JJ, do you want to take that or...?
Yeah, I probably can't give any more guidance on how the half will turn out, but the last two weeks versus the six, so eight versus six is fairly similar trends. So we're seeing market share come back. That is driven, as you pointed out, by our FMCG products and the frequency. But it's all now also now starting to show up in some of the newer products as they land. Now, they're not coming in at scale yet, but as they come in through summer and Christmas, we're expecting that balance to pick up. But the headline traffic numbers are picking up, and our market share is coming back.
But I guess overall, if we're thinking about operating profit for the first half, just broadly speaking, would your expectations be that it's down on the first half of last year, for those core divisions?
We're not giving any further guidance than what we've already put in the announcement.
Okay. Cool. Thank you.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. The next question comes from Paul Koraua with Forsyth Barr . Please go ahead.
Welcome, Paul.
Hey, good morning, guys. Just a few from me. If I just start with the cost target of less than 31% of sales. Now, that's coming down a bit, and if you just sort of do back of the envelope, and assume sales flat, is that sort of a net NZD 50 million cost out? Is that sort of in line with what you guys are thinking, or are you baking in a little bit of sales growth, in there as well?
Mark, I'll pass that to you.
Yeah, hi, Paul. Yeah, you can see in our historic levels being around 31%, we've actually got down to almost 29% in one of those in our best year. But, yes, so I mean, you've done the math. That's what it would be. Obviously I can't give you guidance on the sales number, but we obviously would be seeing positive sales growth. So there is a level of calibration that would come with the sales number. But, there are elements within our business that there is cost out that we think we can get into. We obviously went from an ecosystem strategy into a more brand-focused strategy, and with that, there will be a cost that are associated with that previous strategy that we will wind out the business.
It's a big focus of ours to make sure that we're leaner and being more value-minded in the way we go about cost.
Yeah, cool. So if I just sort of pick up from there, you know, so you got NZD 50 million of net cost out, give or take, and you say that you're gonna lose a little bit with the change in strategy. But, you know, you have sort of tech costs, which have come online, that are probably not gonna change that much. So it's really gonna have to come through some of those other cost lines. Do you have any color on where you think you're gonna be able to strip that cost out?
Yeah, I can't comment too deeply, Paul, on that, because I think some of the areas are sensitive within the business and things. But needless to say, there are definitely areas that, particularly in how we set up ourselves around licensing costs for certain systems based on certain strategies, those things can definitely come back. Where our online is right now with some of the licensing costs around some of those applications, there's opportunity within those. And so we're working hard on those areas to pull those sort of variable costs back. But we're always looking hard at productivity within stores and square meters and service costs within stores, obviously within the business model envelope.
And a large portion of why we were able to make savings last year was just being a lot more planned in terms of our labor hours in stores, which is a big bucket of cost for us. So yeah, that, those are the, you know, those are gonna be our big areas. We there are rental pressures, 'cause obviously the cost of doing business for our landlords is increasing with rates, and it's well documented. So you know, we're obviously fighting a bit of an uphill battle there, but we are getting some good rent relief on a relative basis to inflation. So we'll continue to lean into that.
But yeah, so those are sort of the big areas, if you look at our income statement, that we'll have to, I have to target.
Yeah, cool. That makes sense. And then maybe just moving on to gross margin. You know, that first half, second half split was a little bit concerning, and you spoke a little bit to the amount of discounting needed. That's continued in aged inventory, sort of at 20%, is down on last year. But you know, can you give us a feel of, you know, if that's elevated versus where you guys would like it to be, or what history says it typically is? And you know, how much longer gross margin pressure continues for through the start of 2025?
Okay, JJ.
Yeah, sure. It is transitionary, Paul. As we move from a product offer that wasn't quite right and move into new products, there's a transition cost. So some of that, we have to calibrate the clearance of that older range as we bring in the new. So some of that is a little elevated, but transitionary. So you'll see us move back to a much better steady rate position once we've completed that transition.
Perfect. Cool. And then maybe just on that transition, you spoke to, you know, it needs to take some time. How long do you think it'll take, you know, to get to a position where you're happy with the sort of stock that you have in Red?
Yeah. It'll vary depending on the retail cycle or the procurement cycle for the products. So some are quite long, so you know, literally from season to season. And sometimes you need double round on that to totally nail the range transition. So some of the seasonal product will take a couple of goes around, but predominantly most of the benefit or that will come from the first round of changes, and that's what we're seeing. Some of the shorter range local product is repositioning faster, and improvements in our cost of goods is a big focus, Paul, so that's coming through based on our purchasing cycle.
So both the time it takes to get the product in and the time it takes to clear the existing product will dictate when the margin mix comes through. But pretty much we expect that to be a continuing calibration throughout the financial year, so each of those different cycles will come and hit the shop floor and hit our results at different stages, but progressively building on each other over the year.
Cool. Thank you. Maybe just a final one from me. Is there any update on how the search for new CEO is going that you can provide today?
I'll take that one, Paul. At the moment, we are focused on just refining exactly what the position description and person specification should be. I'm not encouraging every single executive search agency in New Zealand to get in touch with me as they did in the first few weeks. So, I would reinforce the fact I've got a ball and chain around JJ's leg at the moment, hoping that we can keep him for as long as it takes to sort of get this stage of the change strategy sorted out. We won't be making an appointment before the end of this calendar year, but obviously it's something that we are very focused on at the moment. But we're incredibly lucky to have JJ here, seeing us through this very challenging time.
Thanks, Joan, and thanks, team. I'll leave it there.
Thanks, Paul.
There are no further questions at this time. I'll now hand back to Joan for closing remarks.
Okay. Well, thank you very much, everyone, for your attendance this morning. It has been obviously a very sobering result for us to deliver. We're living in fairly torrid times in terms of the environment that we're operating in, but I think what you've heard from the team is an absolute commitment to change the strategy so that we do maximize the opportunities that are out there. And of course, we are starting to see some green shoots in terms of the economy, so we look forward to that translating, particularly in the lead up to Christmas. But you will get a further update. We're due to release our Q1 sales on Friday, the 8th of November, so JJ and Mark will be updating you at that point. So thank you again for your attendance.