I'd now like to hand the conference over to Ms. Joan Withers, Chair of The Warehouse Group. Please go ahead.
Tēnā koutou and good morning. The Warehouse Group FY23 interim results for the six months ended 29th of January 2023. My name is Joan Withers, and I'm Chair of The Warehouse Group. With me on the call today, I have our Group Chief Executive Officer, Nick Grayston, and our Chief Financial Officer, Jonathan Oram. Turning to Slide four, I'll start with my update. As we kick off today, I'd like to begin by acknowledging all of those impacted by the recent catastrophic Auckland floods and Cyclone Gabrielle, and particularly those who've lost loved ones or have seen their homes devastated. We're very proud of our own teams who've stepped up, coming into store to serve our customers and distribute large quantities of goods to those in communities who really need them.
I'll make a special mention to our teams in Napier, Hastings, Tairāwhiti, Northland, Auckland and Coromandel, whose resilience and teamwork has been nothing short of incredible in very difficult circumstances. We'd also like to thank those amazing customers who've donated NZD 200,000 through the Add One Dollar campaign to raise money for families affected by Cyclone Gabrielle, which we've matched from our community funds to raise to a total of NZD 400,000. None of our stores were damaged or were closed during these events, apart from the days immediately at the time of Cyclone Gabrielle in Hawke's Bay. If we go to Slide five. We've had sales growth, but this has been a very tough result.
For the first half of FY23, whilst we're announcing strong first half sales, we have delivered an EBIT result that can only be described as challenging following strong results in the previous two years. This is a testing re-retail environment where our customers are facing cost of living pressures and an uncertain outlook. However, during that half year in review, we saw two very different outcomes between Q1 and Q2. Our Q1 sales were up strongly against the prior corresponding period. In a difficult peak in Christmas trading period, our Q2 results were disappointing, and that would normally be our strongest quarter. In these times of increased cost of living, we strive to continue to deliver value to our customers across all brands by keeping our prices as low as possible despite the cost of goods increasing.
The percentage growth in grocery as our customers respond to our offering, has altered our category mix. This has also impacted our margins in this half year. We did plan for growth in the cost of doing business, some of which is related to our investment in systems and technology infrastructure. That limited our ability to reduce those costs as we started to encounter the decrease in growth margin, which contributed to our EBIT decline. However, we are pleased about the enhancements that we've achieved in our customer offering. Firstly, we've taken great steps in our grocery offering at The Warehouse during this period. We've expanded our ambient and chilled ranges and introduced a trial of fresh fruit and vegetable offering in selected locations across New Zealand.
Secondly, we've grown and increased our MarketClub offers and membership base as we invest in first-party customer data and deliver increased customer value. As a result of what we're seeing and what we're anticipating, we have elected to reprioritize some of our strategic initiatives as we manage cost out and navigate through these trading challenges. Just for the H1 group summary. Nick and Jonathan are obviously gonna go through these in more detail shortly. However, this is a high-level summary of the group's first half performance. Group sales were at NZD 1.8 billion, which was up 4.8%, which is our best ever group first half sales result.
As I said a moment ago, very strong Q1, with sales up 21.2%, followed by a very challenging Q2, with cost of living impacting group sales, which were down 4.6%. Talking about brands, The Warehouse sales were up 13.2% in the half. That was The Warehouse's highest first half sales, with more than NZD 1 billion worth of sales. Within The Warehouse, grocery sales grew 34% in the first half versus the same half in FY22. Grocery now makes up 22% of The Warehouse total sales. Gross profit was NZD 592.4 million, down 1.2%. That's for the group.
That's down NZD 7.2 million, while gross profit margin decreased from 34.7% in the same half FY22 and a high of 36.2% in the first half in 2021 to 32.7% in this year's first half. I mentioned CODB earlier. That increased 3.5% or NZD 19.1 million due to increased costs as we progressed through core system implementation combined with those general inflationary pressures. Reported NPAT was NZD 17.4 million, which is down 60.9% against the NZD 44.4 million in FY22H1. Adjusted NPAT was NZD 19.6 million, which was down 53.4% against the adjusted NPAT result of NZD 42 million in the prior period. Hand you over to our group CEO, Nick Grayston.
Thank you, Joan, and good morning, ladies and gentlemen. As Joan mentioned, our sales constituted a record half-year result, up 4.8% to more than NZD 1.8 billion. These were particularly strong in The Warehouse, with record sales up 13.2% to just over NZD 1 billion, which is also a half year record. We have seen Torpedo7 suffering from the global decline in bike and fitness related products and outdoor apparel, and more locally, the commoditization of water products. Noel Leeming is coming off peaks achieved during COVID-19, which saw customers using disposable income to buy big ticket items and products to enable them to work and study from home. While sales were relatively strong, gross profit margin eroded by 200 basis points in the first half. A few factors contributed to this.
We increased our investment in MarketClub, including increased promotions to grow our membership base with now more than 1 million active members. We continue to grow our grocery offering at The Warehouse, this required investment in our part to grow this category and offer customers great value in an unfavorable product cost environment. Seasonal sales decreased in the peak Q2 period due to adverse weather in the North Island, requiring clearance and discount activity to move stock in order to keep inventory balances at optimal levels and aging under control. Lastly, we incurred about NZD 7.5 million of detention charges as a result of supply chain congestion. CODB was hard to deleverage quickly, increasing 3.5% in the half year, decreasing slightly as a percentage of sales from 31.4% - 31%.
We chose to keep going on core systems renovations that were already in flight, such as enterprise resource planning, WMS, MDM and OMS, which resulted in increased software costs and depreciation. Costs were impacted by minimum wage increases, collective agreements, and with the retention of key employees in a competitive labor market. Continued investment in TheMarket.com at a time of significant decline in online penetration as post COVID-19 normalization occurred. Depreciation and lease expenses also increased as a result of capital expenditure in recent years and increased store rent rates. We are taking decisive action to improve financial performance and operational efficiency across the group, including reprioritizing transformation projects to concentrate on shorter term EBIT delivery. We are rebalancing capital expenditure as some of our core system implementations are coming to an end and delaying some digital initiatives.
We have made some difficult cost cutting decisions across the group. The headcount reduction at our Auckland store support office, combined with the closure of 1-day and bringing TheMarket.com and Torpedo7 into our agile operating structure, will unfortunately see a reduction of up to 340 roles across our support offices. While we are committed to offering customers a range of grocery products at value prices, we have pulled back on some of the more extreme grocery price reductions, still believe our offering is better priced and the challenge to the duopoly in New Zealand. We will be reining in inventory to reduce inventory levels by this financial year end. Finally, we are consciously reducing capital expenditure going forward.
Gross profit margin management will be particularly important in the second half, with a focus on maintaining value for our customers while decreasing some of the investment in margin that was made in the first half. On to Slide nine, it has been a challenging six months as costs increased and margins were compromised. Group sales were up 4.8%, the best ever group first half sales, with The Warehouse leading group brands up 13.2%. Online sales were NZD 198.7 million, down 41.6% compared to FY22H1, making up 11% of total group sales compared to 19.6% in FY22H1. This was expected as we lapped two very strong online sales years as customers were forced to shop online as stores were closed during prior year lockdown periods.
Gross profit was NZD 592.4 million, down 1.2% or NZD 7.2 million, with gross profit margin 32.7%, down from 34.7% in FY22H1, primarily due to category mix and promotional activity, including MarketClub and container detention costs. Reported EBIT was NZD 45.5 million, after cost of doing business increased 3.5% or NZD 19.1 million, combined with unusual items of NZD 6.3 million in relation to restructuring. Reported NPAT was NZD 17.4 million, while adjusted NPAT was NZD 19.6 million, down 53.4% against the result of NZD 42 million in the FY22 first half. I will go through some key areas of the result within our brands, which is quite mixed.
While The Warehouse and Warehouse Stationery both saw sales growth, Noel Leeming and Torpedo7 sales declined compared to last year as they lapped very strong sales during COVID-19 periods, where customers shopped for large ticket items like bikes and outdoor equipment. As well as TVs and items to enable them to work and study from home. The Warehouse gross profit increased in NZD terms, but did experience a decline in gross profit margin due to MarketClub investment and promotions. The change in category mix, including a 34% increase in grocery sales and container detention costs. Jonathan will take you through this in more detail shortly. Likewise, The Warehouse operating profit increased 10.7% in NZD terms, but profit margin decreased. While all other brands experienced operating profit decline as gross margins were challenged and cost of doing business increased, including employee costs, depreciation, and store rental costs.
The loss in TheMarket.com was NZD 16 million. Other group costs and unallocated overheads contributed to overall group operating profit of NZD 30.9 million, down from NZD 57.2 million this time last year. Moving to Slide 11, we are proud of our diversified retail portfolio, providing customers with a wide range of solutions, which will put us in good stead to face the current tough operating environment. Our customers are facing rising inflation, increased cost of living and rising interest rates. When they are shopping, customer disposable income spend is being skewed towards travel, hospitality, and entertainment. We're taking strategic reprioritization actions across the group, pausing on some projects to provide customers with products at great value and to protect the impact on our operations and near-term operating profits.
While all elements of our ecosystem are important and we continue to believe in our long-term strategy, we are focusing on components that will deliver near-term benefits, reduce the cost to serve, and improve operating performance. In particular, we're focused on improving financial performance to increase shareholder value through focusing on operational performance to minimize cost to serve, managing gross profit margin, and reducing working capital. Reducing the CODB, putting initiatives in place to manage labor costs and reduce information system spend, and rebalancing CapEx to align with reprioritization to fit within a reduced envelope. We're also implementing initiatives to improve operational efficiency and customer offering. We've started the journey to integrate TheMarket.com and Torpedo7 into the agile operating structure. TheMarket.com has started this process, and Torpedo7 will begin their agile journey in August, post the implementation of their ERP.
We continue to be ambitious and grow our grocery offering, including our own Market Kitchen brand, as well as a fresh offering to deliver what customers need at a competitive price. Finally, we continue to invest in our group MarketClub membership to build this and our other membership programs to gain competitive advantage. We continue to believe in our strategy of building a modern integrated retail offering powered by an ecosystem with customers at its heart. The ecosystem enables easy and frictionless shopping experiences to create greater customer value. We are focusing our efforts on initiatives that will increase both customer and shareholder value and driving profitability, such as making the shopping experience easy and seamless in-store and online, and the improvement of fulfillment while reducing the cost to serve.
We have made significant progress on our core systems, including the ERP FI system upgrade, which is our most significant of our core system projects. We delivered the finance module in FY 2022, with the inventory module on track for delivery in May 2023. Work on ERP merchandise is commencing. Our cloud-based group order management solution is on track for an expected go live date at the end of this financial year. Master Data Management is fully deployed across all our brands and products, except for Torpedo7, and is integrated into our ERP inventory, WMS, and e-commerce platforms. The last iteration, which will see us integrate supplier data from trade suppliers, is scheduled for completion in FY 2024. Warehouse Management System has been implemented and is in the process of being optimized and transition to a cloud version is in discovery.
Human capital management or HCM had a first release in October 2022, when we deployed it for around 2,400 employees at the store support office and at selected stores. Our final release will be in May, when we roll out HCM to all stores and distribution centers, with integration of our recruitment platform into HCM expected to be completed in June 2023. Development work on the Torpedo7 ERP was completed in December 2022. We're currently working through data migration and testing, with go live scheduled for early 2024. We are bringing TheMarket.com and Torpedo7 into our agile operating structure. TheMarket.com has started this process already. Torpedo7 will have moved by August 2023.
We will drive increased efficiency across the whole group by leveraging group resources across all of our brands, achieving synergies in group operations, including distribution centers and customer care centers, leveraging Torpedo7 expertise and volume in the adventure category space, lowering cost to serve and prioritizing investment in areas that will drive EBIT. Unfortunately, along with this headcount reduction at our Auckland store support office, this will result in up to 340 team member redundancies across the group, particularly in these two brands, as we harness efficiencies and expand our agile ways of working. Since its launch in 2019, TheMarket.com has proved that a scaled marketplace model is a platform that thousands of customers and brands want to engage with. As we move forward, we're taking the best of TheMarket.com and embedding it at the core of our group online strategy.
As part of this, we have closed our 1-day operations and significantly reduced standalone costs for TheMarket.com. In November 2022, we launched Group Marketplace into The Warehouse site and the app, which means that customers can find what they're looking for beyond what we can offer from our own brands. By January 2023, we had over 50,000 third-party SKUs available from over 700 brands on thewarehouse.co.nz website and app, in addition to TheMarket.com. Total group merchandise value was NZD 49.8 million in FY 23 H1, including first and third-party marketplace transactions on TheMarket.com and on Group Marketplace on thewarehouse.co.nz. While Group Marketplace on thewarehouse.co.nz is still in its infancy, we have seen good uptake from customers and suppliers are responding positively to an additional channel for their product. We launched MarketClub and Red in October 2021.
We now have more than 1 million active members across the group. Growing first party data across all of our brands will be a strong competitive advantage. We know that MarketClub members represent our most engaged customers and have the highest lifetime value. Our top MarketClub members grew their average order value in The Warehouse at more than triple the rate of non-members in the 6 months to January, compared to the prior six months. In addition to spending more at each transaction with us, our top MarketClub members shop with us more frequently, growing their average monthly frequency by 13% in the FY23 first half versus the prior six months. This growth in identified customers also supports retail media opportunities.
Over the last 12 to 18 months, we have been building our grocery business, which is focused on core essentials at great everyday prices. Grocery sales grew 34% in FY23 H1 and contributed 22.2% of The Warehouse sales. This support from our customer base has given us the confidence to trial fruit and vegetables, which is the natural progression for our business, building on the strength of our dry grocery office. December 2022 inflation data showed the harsh reality of fruit and veg inflation at record levels and outstripping dry groceries. We want to be able to offer our customers fresh fruit and vegetables at great prices. There's a real need for customers to be able to access competitive prices for fruit and vegetables. Our challenge is to access products at equitable cost prices.
Annual food price changes show an increase of 10.8% across grocery, excluding fruit and vegetables, in 2022, compared to our price increases, which were much lower at 7%. Our fresh model is very simple. We source locally predominantly, we keep the range really tight and offer quality produce at great prices. Ambient chilled products are now nearly 20% of The Warehouse customer shopping baskets, compared to 10% two years ago. The Warehouse now offers 55 individual product lines in our Market Kitchen range, accounting for 24% of sales units within dry groceries. Last but not least, moving to our sustainability journey. A recent survey indicated that sustainability is becoming more important to Kiwis, who don't think that New Zealand is doing enough.
We're choosing to prioritize our sustainability efforts, not just for the planet, but because it is what our customers want from us. Our sustainability journey continues, and we've made some progress in the half across our products, our operations, and making sustainable living easy and affordable for our customers. We carried over 37,000 unique private label products with sustainable materials or sourcing practices, accounting for over NZD 153 million in sales during the 6 months to January 2023, or 28% of total private label sales, up from 22% in FY 22. Additionally, we carried over 10,000 unique private label products, which are sustainably packaged, accounting for over NZD 179 million in sales or 33% of total private label sales, up from 22% in FY 22.
Through helping our customers live more sustainably, we diverted more than 99 tons of post-consumer waste from landfill, including soft plastics, inks and toners, e-waste and other hard-to-recycle items. We expanded our e-waste recycling programs to 33 stores and recycled more than 40 tons of e-waste through the initiative. In FY 23 H1, we diverted 69.5% of operational waste from landfill and decreased our Scope 1 and 2 emissions by 3.5% compared to FY 22 half year. I'll now hand you over to Chief Financial Officer Jonathan Oram to take you through the group financials.
Thank you, Nick, and good morning, everyone. Joan and Nick have been talking to, this has been a tough half year result for the group. I won't go through the details on page Slide 20, but I will just touch on some highlights before going through some of those line items in more detail. Sales were up 4.8%, but this just doesn't translate through to an operating profit increase, which was down 46%. Nick and Joan have talked to, we planned for CODB to be higher, and that was about NZD 19.1 million. The gross profit margin was down 200 basis points, and this translated into gross profit dollars being down NZD 7.2 million. Hence the NZD 26.3 million decline in operating profit. Turning to Slide 21.
This splits the H1 trading result into 2 quarters. It was a tale of 2 quarters. FY23 Q1 saw strong sales compared to FY22 Q1. Lacking a COVID impacted period with sales up 21.2%. In comparison, FY22 Q2 sales surged after the COVID lockdowns were lifted as customers returned to stores, resulting in an FY23 Q2 sales decline of 4.6% compared to this period. We also in Q2 began to see more clearly the impact of the slowing consumer spend on our more discretionary brands. With Noel Leeming sales down 9.9% and Torpedo7 down 6.8%.
Gross profit was also significantly different between the quarters, with gross profit margin down 60 basis points in Q1, largely explained by grocery growth, then 270 basis points down in Q2, where there was the additional impact, particularly of investment in MarketClub promotional activity and container detention, which we'll come onto. Looking at gross profit margin in more detail on Slide 21, 22. Gross profit margin has been one of the most significant drivers of group profitability in recent years. If we looked at the trends since 2018 by brand, excluding The Warehouse Stationery is up 610 basis points. Torpedo7 is up 760 basis points, while Noel Leeming has been relatively flat, earning a consistent 22%.
The dark blue line in the middle graph shows the trends excluding The Warehouse has been positive with most of these margin gains retained. Given The Warehouse is about 60% of gross profit for the group, it has been the main driver of the overall group margin decline recently. In particular, in this half, The Warehouse is down 370 basis points and we'll go into more detail on this on the next Slide. The other brand that has suffered a significant decline in this half is Torpedo7, which is down 440 basis points in gross profit margin. The margin decline here has been driven primarily in the bike category, which after a couple of years of high growth and tight supply, is now seeing a reversal of this dynamic.
Turning to Slide 23, we take a closer look here at what's happened to gross profit margin in The Warehouse over the half. There are five factors I wanna call out. First, we have invested in building the membership base of MarketClub by offering deals only to MarketClub members, now over 1 million in members. That has cost 140 basis points off of the margin. Second, there is incremental promotional activity of 110 basis points related to slower sell through over H 1. Third, category mix, in particular grocery, which has grown at 34% in half and now makes up 22% of The Warehouse sales. This change in mix has reduced margin by 90 basis points.
Fourthly, online sales being down has benefited margin by 30 basis points, as online sales have a lower gross profit margin. Lastly, incremental container detention costs have impacted margin by 40 basis points as we have dealt with unpredictable container flows and congestion in our supply chain. Looking at Slide 24, this gives a further breakdown of CODB. In absolute dollars, CODB in the first half increased NZD 19.1 million, primarily due to what we have classified as other expenses. The major changes in other are two parts. First, increased information system operating costs as we progress through core system implementations and digital build, and I'll come onto that onto the next Slide. Second, just general inflationary pressures across operating expenses.
In relation to the other major components in the bridge that is the top of Slide 24. Total employee expense increased only 0.4%, and store occupancy costs were up 2.6%, so performed relatively well versus inflation over this period. Depreciation was up NZD 4.7 million, or 18% to NZD 31 million, reflecting the increase in capital expenditure over the last two and a half years. The bottom chart shows the cost of doing business as a percentage of sales and a modest improvement here with a drop of 0.4 of a percentage point to 31% of sales. Slide 25 provides a deeper dive on our information systems and digital costs.
In the left-hand chart, you can see the profile of operating costs in relation to our information systems and digital assets, and the split between what is recurring operating costs, recurring SaaS costs, and SaaS project costs. In this half, these costs increased NZD 6.3 million to NZD 41.4 million. In the right-hand chart, we have information system and digital capital expenditure and prepayments in relation to SaaS project costs. This year, we will peak in information system expenditure with our full year estimate at approximately NZD 55 million. Nick has already touched on these projects in more detail on Slide 13. Slide 26.
Looking at the summary balance sheet, there have been some quite large and offsetting impacts in working capital, resulting in a net reduction in working capital of NZD 6.2 million. Inventory increased NZD 55.5 million due to the combination of continued normalization of inventory levels post COVID-19 disruptions, cost of goods inflation, increased ordering to ensure availability for the Q2 period and a week of an inspected trading period, Christmas trading period. There was also an increase in debtors of NZD 13.2 million. Offsetting this has been a greater increase in trade payables by NZD 71 4.4 million, reflecting the buildup of creditors post buying for our Q2 peak quarter.
Fixed assets have increased due to the elevated levels of capital expenditure, with continued systems investment, which Nick has touched on, and store development expenditure with the integration of 4 SWAS stores, store within a stores, and completion of 9 refits in The Warehouse stores. Net debt increased NZD 42.2 million during the half to NZD 83.4 million. Our bank facility headroom remains strong with committed bank facilities of NZD 465 million, up from NZD 420 million at FY 2022 year end, providing the group with total liquidity of NZD 381.6 million half year. An additional NZD 80.2 million of creditors were paid post half year, but pre-31 January. If you adjust for that, liquidity was NZD 301.4 million. Slide 27 gives some further information on inventory levels.
Overall, we have seen a rebuilding of inventory from our FY 20 lows. However, where we are today is higher than we'd expect to be at year-end, which is down below FY 22 levels despite the impact of inflation. Reducing inventory will be a key part of achieving working capital improvements. In terms of inventory quality at these higher levels, we are comfortable with the shape of what we have with aged inventory down 1.2 percentage points since year-end and provisioning up 0.4 of a percentage point to 4% of inventory. Moving on to cash flow on Slide 28. We have touched on most of the key drivers here already.
With a decline in trading profitability in terms of EBITDA and a decrease in working capital, which has increased cash flow, free cash flow was not sufficient to cover all of the first half capital expenditure and prior period dividend, increasing debt from NZD 41.2 million to NZD 83.4 million. Slide 29, looking at capital expenditure for the half year. Capital expenditure increased from NZD 40.5 million in FY22 half one to NZD 63.5 million in FY23 half one. As we increased investment in core systems, digital enablement, and store development, and should be noted that, increase of NZD 6-NZD 63.5 million a couple of years ago, that was what we were spending on average, in capital expenditure for a full year.
Store development made up 27% of spend, and I've touched on the SWAS stores and refits, but we also had a program of modular improvements in our The Warehouse stores, including our garden center refits and store wayfinding improvements. Information system spend, including digital, was 42.9% of spend across core systems, which Nick has touched on in detail. Digital and customer spend includes Group Marketplace, which we have launched on The Warehouse app and website, and continued development of TheMarket.com. Other information systems, which covers continuous improvement, projects in our operating systems, and investment in the MarketClub and membership platform. CapEx for the full year is expected to be NZD 115 million-NZD 125 million, continuing a significant multi-year investment in the business. FY 2024 CapEx is expected to reduce to NZD 60 million-NZD 70 million.
I'll now hand you over to Joan to take you through the FY23 outlook.
Thank you very much, Jonathan. I'm now on Slide 31, the FY23 outlook. We expect the remainder of FY23 to be challenging as our customers continue to face increased cost of living pressures and the economic outlook remains difficult. The group's largest brand, The Warehouse, is trading well, but other brands' financial performance remains challenging. Initiatives are in place focusing on improving operational performance and reducing CODB, working capital, and CapEx to create shareholder value and increase total shareholder return. Although the outlook remains uncertain, the group remains committed to completing existing major programs of work to deliver significant operational efficiencies and value for our customers. Turning to Slide 32, the dividend. The board has made the very difficult decision not to pay an interim dividend for this half year. There are a number of reasons behind this decision.
Firstly, and as previously mentioned, the half year saw very challenging macroeconomic conditions and these continue. Secondly, our net debt was at NZD 83.4 million at the half year end, following which further creditor payments of NZD 80.2 million were paid before the 31st of January. Including those, available liquidity at the half year was NZD 301.4 million. The group has a target liquidity range of between NZD 350 million and NZD 450 million. Thirdly, the group's capital expenditure for the full year is expected to be between NZD 115 million and NZD 125 million, as Jonathan said, and that's continuing a significant multi-year investment in the business. We should note, though, that FY 2024 capital expenditure is expected to reduce to between NZD 70 million and NZD 80 million.
Finally, inventory levels are higher than targeted, and there are several initiatives to significantly reduce this by year end. This is not a decision we took lightly, and the board has reserved the decision to pay a dividend on the full year result. To some closing comments. The first half of the year, as we've all said, was challenging, but we are responding with clear action. The decisions that we've made and the actions we are taking will put us in good stead to manage future trading and economic unpredictability. We are committed to increasing value for our customers and our shareholders and helping Kiwis live better every day. Thank you very much for joining us today and also for your ongoing support of The Warehouse Group. We certainly appreciate it. We're now going to open the line for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up your handset to ask your question. Your first question comes from Kieran Carling from Craigs Investment Partners. Please go ahead.
Hi, guys. Can you hear me okay?
Perfectly.
Great. Thank you. Just the first one from me. You know, in terms of the Red Sheds, how you've talked about the strengths that you're seeing in the grocery offering, you know, now making up 22% of sales for that division. Obviously this is having an erosive effect on margins, not only for that division but also the group. Can you just talk about your thinking there in terms of, you know, what mix shift we can expect to see going forward, whether you're planning to increase the exposure to grocery or potentially dial it back to support those margins?
I mean, it's a good question. Firstly, what I would say is that there is a clear need that's reflected in the uptake for better priced groceries. You know, you've seen the challenge that customers are going through. You might have seen the Canstar report yesterday which highlighted that for Kiwis the cost of groceries is the single most concerning issue for them with 59% living paycheck to paycheck. You know, as a company that seeks to help Kiwis live better and one that delivers value, we see grocery as an important part of delivering that.
I think that if you look at the first half, there were some things that we did, that we chose to do, such as NZD 4 butter, that was extremely accretive in terms of building our portfolio of MarketClub customers, which is now over 1 million. And when you look at it in isolation, it's a great cost per acquisition, for a lot of those customers that signed up for the program to be able to get that deal, along with some other deals. You know, we will be dialing that back in the second half, so I don't think it's gonna be as margin erosive. We've looked at some of the prices on some key essentials. We will hold our prices.
Inevitably, with some of the cost pressures, there will be some increase. I think you'll see similar levels of penetration, but the margin erosion won't be as great in summary.
Great. Thank you. Just on to, you know, the cost of doing business and that run rate. Are you able to provide an indication of, you know, into H2 how that you expect that's gonna be measuring up against the second half of last year? I guess just able to, you know, quantify any of that impact of the staff reduction and some of your initiatives there.
I'll let Jonathan go through the detail. The staff reductions, just for clarity, we are still in consultation on those, the numbers will move around a little. If you think about where we are in terms of the time of year, you know, you're only gonna get about, you know, on everything but the Torpedo7 side of it, about quarter of a year's benefit. For, you know, for next year you can think in terms of sort of NZD 30 million-NZD 35 million of reduction. You know, there are other pressures going on. The increase in minimum wage, for example, will cost about NZD 900,000 this year, NZD 2.7 million full year. There's a lot moving around.
Jonathan, do you want to shed some more, some more light on that?
Yeah. Thanks, Nick. Look, I think, the other big movement, and we've tried to highlight it on Slide 25, is just the general increase in information systems, and digital, I'll call it spend rather than operating costs, because there's a component of recurring spend and one-off spend. I think going, look, going into next year, so for full year, at the moment, half year we've got NZD 41.4. I think full year that number of spend is gonna be about NZD 80 million into the P&L. Next year, that number's probably gonna be another NZD 10 higher. That will offset some of the labor cost, reductions in terms of the heads out.
There's also the ongoing increase in depreciation, and we see that ticking up to peak next year, and call that in the mid-seventies, before it starts going down as we pull back on our CapEx. You know, there's a couple of dynamics here which, you know, net, we should still see the ability to keep our CODB relatively flat if not slightly down on where it is today.
Great. Thank you. Just final question from me. You know, across the divisions, aside from The Warehouse, the Red Sheds, you know, you have seen a pullback in sales. Can you talk to, you know, the volumes versus the price increases you've been putting through there and, you know, what sort of volume declines you've been seeing year-over-year?
Yeah. I mean, it is jumping around a little and continues to do so, as we get into the second half. There's different things going on in different businesses. You know, in Knowles, for example, you know, ticketed prices are very much guided by manufacturers' recommended prices, broadly speaking in line with inflation. Significant, you know, if you take prices up, but sales down, you know, more than just the sales reduction in terms of unit volumes. Similarly with Torpedo7, within Torpedo7, it's some of the big ticket items, discretionary items, especially bikes, which is a large part of the mix, typically a higher part of the margin. That is a global phenomenon. There is becoming something of a commoditization.
Suppliers are offering some discounts to shift the buildup of inventory, which is a global phenomenon. There's been some commoditization of, sort of water product, specifically things like paddle boards, which is a much more localized issue. You know, there is definitely cost inflation going on across the board, from the supplier side. Raw material prices really spiked, you know, at the time that we'd been delivering a lot of this merchandise, you know, six to nine months ago. Some of those have started to come back significantly, so we'll have the benefit going forward. That will be realized as the inventory comes in.
I guess if I may, can I just tack on a, you know, one other question to that? You know, with this commoditization you're seeing with bikes and some of the water sport products, you know, how do you plan to counter that or deal with those trends going forward for that Torpedo7 business?
Yeah. Bikes specifically, you know, we've had an offer in sort of entry price point under the Torpedo7 brand, and we've got a decent supply of Trek and Giant bikes at the high end. What we've been missing is mid-market. We have, and I'm not gonna announce the name here, we have been able to secure a very solid brand, which will provide sort of richer margins at the mid-end, that will start towards the end of this fiscal that'll start delivering. That will help quite significantly on the margin side. Plus, the other thing going on with Torpedo7 is we are gradually increasing our mix of private label, which is more margin rich, and we have seen margin expansion in Torpedo7.
It didn't expand as much as we would've liked because we had to follow the course of promotion in the first half. See that continuing a lot through the second half. You know, over time, we expect to see those trends recover. They're really driven by, you know, what's happened over lockdown. A lot of the categories benefited from from spend up over that disruptive period.
Great. Thanks for that. I'll jump back in the queue.
Thanks, Kieran.
Thank you. Your next question comes from Margaret Bei from Forsyth Barr. Please go ahead.
Good morning, everyone. Thank you for taking my questions. I think the key one for me is, you know, we've talked a lot about Cost of Doing Business reductions and the different breakdowns. Could you maybe just really, really simplify this and let us know kind of what an ongoing level of Cost of Doing Business looks like and what the peak is over the next couple of years, and how quickly you expect to reach sort of a long-term sustainable level?
Yeah.
Look, Margaret Bei, it really goes back to what I said before in answer to Kieran Carling's question. The peak we would see is coming through, really driven by spend on systems, because that is where if you want front-loading some operating expense in the implementation of systems, in particular now in this post-SaaS accounting environment, where we have to now expense more of those projects. The productivity gains that we get off the back of that, both in costs and also there's a revenue element to it in terms of some of the things it enables, like real-time inventory in the warehouse. They also follow. You know, in terms of trying to get a profile for that, what we're saying is we would think that next year, putting aside inflation, that's we're be through a peak.
The peak CapEx in terms of CapEx spend was really about six months ago in terms of information systems. We're gonna be coming off, you know, so it will be this year that we have the highest total number. Then we'll have depreciation up, you know, super NZD 10 million next year. We'll have recurring higher operating costs up NZD 10 million next year, which, you know, as we've said, will partially offset some of the labor cost reductions that we're seeing through heads, head reduction in the SSO. Then there's ongoing work that's also happening in terms of other big line items in our cost of doing business. You know, the bulk of our labor cost actually sits out in stores. We continue just to optimize the way we operate.
Much slower, you know, move there in terms of what we can implement. We've got a number of initiatives in that place, and it also involves how we actually flow inventory, from source to our stores in terms of improving the handling costs in relation to that. Look, I think that the biggest jumps, in CODB really are happening now, into next year, and then it should stabilize after that.
The only comment I have to build on Jonathan's really is if you look at what's happened over the last five years with increases in wage rates driven by sort of the, you know, both the minimum wage and, you know, wage inflation, you know, minimum wage going up causes compression, even though in most cases we pay above the minimum wage. You've seen about 40% increase over the last five years. We've been able to offset most of that with the increased efficiency. That's to the great credit of our, of our store teams. You know, that, without doing anything different, will slow things up. What you're starting to see is sort of a higher level of cross dock, for example, and a lot more store-ready packaging. That's been a trend globally.
We are starting to see quite a lot of transition. Handling costs will be lower. You know, you'll see more bulk displays, for example, shelf-ready packaging and, you know, sort of less singles being put away and then distributed from the DC. You know, that should bring down some costs as well. Plus, as I already mentioned, you'll see the full year benefit of the redundancies next year.
Okay. Brilliant. Thank you. I guess my next question is just on your dividend decision to defer that. Am I correct in thinking that that's a deferral and you'll reevaluate at full year, or are we thinking about it as the interim dividend kind of, sort of canceled and then we're looking at a final dividend in line with last year, pending, you know, your final decision, of course?
Thanks, Margaret, for the question. Yes, we'll definitely evaluate at year-end what our position is on dividend. We'll be looking at the macroeconomic environment, we'll be looking at where our debt levels are, and we'll be looking at the forecast going forward. You know, capital management is something the board takes incredibly seriously. This was, as I said, not a decision that we took lightly, but we're also making sure that we are being prudent in this difficult environment. Of course, at the end of the year it will be dependent on what the full year result looks like.
If you had to say maybe one or two key factors in your decision around the dividend, what might those be to see, you know, a full year dividend that might be in line with the total dividend last year?
I think as we've outlined through the whole presentation, the current macroeconomic environment is unpredictable. I guess The Warehouse Group is at the forefront of what's happening in terms of consumer reaction to reduced discretionary spend. My personal view is that the impact of that is probably going to increase, as we see more fixed rate mortgages roll off and people go into a higher interest rate scenario, basically on a day-to-day basis. We're very conscious of that. We've outlined, through the presentation, our debt levels, were at NZD 83.4 million, as we ended the half on the 29th of January. Then, we paid some creditors after that, so that amount increased. We are committed to having an appropriate liquidity range and we detail what that is. All of those...
Again, as the team has outlined, we've had a couple of years of increased CapEx spend. We're anticipating that will drop, as Jonathan has outlined, by about 50% in FY 2024. We'll be looking at all of those things and taking them into consideration, obviously in tandem with where the financial year ends up.
Okay. Brilliant. Thank you. That's all from me.
Thank you, Margaret.
Thank you. Once again, if you wish to ask a question, please press star one on the telephone and wait for your name to be announced. Your next question comes from Guy Hooper from Jarden. Please go ahead.
Yeah. Good morning, team.
Good morning.
Yeah, first question from me, just I guess on the inventory. Can you give us a bit of a sense on in volume versus price? Also just whether or not the elevated inventory, whether that's across the board or concentrated into any one brand?
I'm sorry. You broke up a little Guy, but I think you were asking about the difference in volume versus price in inventory.
Correct.
That's, yeah, that's hard to get to, but orders of magnitude, cost price inflation in sort of NZD 600 million plus of inventory is gonna be something like NZD 40 million-NZD 45 million, or certainly NZD 40 million-NZD 50 million. The reason why it's so hard to calculate is the pace at which each of those individual cost price increases rolls through. As we deliver our ERPFI system, we'll have much more visibility towards that. So, you know, that is a significant proportion. There are some items that we know that they will cost more to buy next year because of raw material cost price increases that, you know, typically some seasonal items, things like barbecues, that have not sold through as we would've liked, especially in North Island with the poor summer that we've had.
That we have assessed as being more profitable to keep hold of them. They won't change significantly till next year and, you know, they'll cost more to replace next year. We've avoided eliminating them. The other thing is that our aging is broadly in line with last year, and our provisions are roughly in line as well. You know, we've really been at pains to make sure that we dispose of excess seasonal inventory caused by the decline in performance and especially the seasonal effect. You know, we have not carried forward a lot of those problems which we might have done if we were trying to manage the margin more in season. We're fairly clean. Hope that answers the question.
yeah, thanks for that. The second part of it was just whether or not the elevated inventory was across the board or concentrated to any one brand.
The biggest element is in The Warehouse. That should give us some comfort in terms of, you know, obviously the performance of that business and ability to manage that. Otherwise a little bit else in Knowles and Torpedo7.
Yeah. You mentioned earlier.
The aging is in control. Aging is in control across all brands, just to be clear.
Yeah.
That aging comment, it is in control across all brands. There's no sort of, you know, unfortunate area that is looking like it would be a problem.
Okay. Thanks for that. You mentioned earlier, just reducing inventory by year-end, and I think the comment was bringing it below FY22. I mean, you know, like, how do you plan on, I guess, achieving that? Does that involve quite a lot of, I guess, elevated discounting versus last year? Particularly given presumably there's NZD 40 million-NZD 45 million of additional price increases coming through there too. The applied, I guess...
No.
the applied volume decrease would be larger?
No, we're not planning a bonfire of the inventory to get it down. We have been managing in terms of moves and cancellations, those have been fairly significant as performance has degraded. We have been looking also in, particularly in the area of grocery, at tactical SKU reduction. You know, it's been our stated intent not to just simply replicate supermarkets. Our strategy going forward is much more around providing value around key essentials. That process has been underway, and we've been managing those out of the system. No, it's not the plan to have a bonfire of our inventory to grow the margin further.
Yeah. Well, one other thing I'd say, Guy, is one of the phenomenons that we've been dealing with in the last couple of years is the amount of time it takes product to get from source into the country and in through our ports. It's gone literally just from the time on ship, it's gone from being, you know, average of 30 days out of China to 45 days, and now it's coming back. As a consequence, our goods in transit number, you know, at year-end, it's sitting at Half year, I should say. It's sitting at NZD 109 million. It has been as high as NZD 150 million, and it's currently sitting at around NZD 85 million. You know, goods in transit is goods not available for sale.
We've been working through this, and we're now, you know. It may sound surprising 'cause you hear a lot of noises about supply chains normalizing, but we're only really beginning to see that now come through and our inventory that's available for sale, if you wanna call it that, actually come to a more normalized level with less goods in transit.
Yeah. We have planned faster turns. You know, it's been very purposeful with the disruptions that we've seen over the last three years that we haven't put much pressure on the turns because of the lumpy nature of supply. Running that more efficiency, efficiently is part of where we're getting to as well.
Okay, thanks. Just another one from me. Can you just remind me what your expectations are around both TheMarket and Torpedo7 in terms of when those businesses might become operating profit breakeven?
Yeah. We've changed tack on TheMarket.com. You know, as we highlighted, the original intent was to allow TheMarket.com to trade as a standalone business and grow its volume independently. That involved driving its own traffic. A lot of the losses that we've incurred in TheMarket.com have been building GMV through performance marketing. The significance of what we said about Group Marketplace, which is where we put products supplied third party from TheMarket.com, mostly third party, on The Warehouse website, means that The Warehouse website is already trafficked, and that's the majority of where the volume of the traffic is going.
We're able to expose already existing traffic to items in the market, and we've seen good uptake as we built that capability. That's part of why we've taken the decision now to integrate. As you see from the first half, the loss will be is NZD 16 million for the first half. We see that as being another sort of NZD 5 million or NZD 6 million for the second half. Reducing further from that going forward. It will become as a part of an integrated entity, part of how we run our omni-channel retail. We will. This is in line with what's happening with a lot of marketplaces globally, which, you look at Catch in Australia, for example.
You see some of the issues with a lot of the other global marketplaces coming back. Generally speaking, what's happening with online is a normalization back to FY19 levels. I'm surprised it hasn't stayed up higher, with a lot of people having learned how to use and shop online during COVID. Those are the trends. That's why we've taken the decision to cut costs and cut the operating loss. You're looking at an embedded cost. You won't see it as clearly as you do now. Probably around NZD 5 million, maybe NZD 6 million, NZD 7 million going forward. Still supplying the service to customers that are getting what's currently about 4 million items.
That choice is really important to us as an omni-channel retailer. Most of that comes with that inventory as well.
thanks.
Torpedo7.
I have one.
Yeah. Go, go for it.
Yeah. No, no. Torpedo7?
Yeah. Torpedo7, I mean, we're still, as we said before, getting to scale in Torpedo7. The sales slowed down as a result of a lot of trends. We've taken some actions, in terms of, you know, controlling costs and managing margin. You know, ultimately, we still believe in that business. We think there's category expansion opportunities as we achieve scale. Not at scale yet. A higher proportion of Torpedo7 is an exposure to the online business. That's also hurt. Plus we've had, you know, the expense of new stores that haven't fully got to scale yet. You know, we see that coming back, but we are exposed to global trends there. What we can control locally, we have.
Again, this is a more general comment. It's hard to anticipate the current volatility and the tough trading environment, how long it's gonna last. More holistically across the whole group, that's why we've taken the unfortunate decision to reduce costs significantly and manage the margin because, you know, we're prepared for it to be longer term. If you look at the typical cycles globally of inflation, going through to recession, typically the average, if you look at back over last 100 years, is about 19 months from start to finish on the recession part of it is about 13 or 14 months. You know, this challenging environment could go on for another year, and if it is, we're prepared for it.
You know, we've seen a disposable income shift quite significantly. We've taken share in the definition of core retail, which is when you take out things like travel and hospitality. There has been quite a lot, as you know, what's been called revenge travel. You know, so we're prepared for the advent of what Joshua Topolsky called peak misery still to come. We're really battening down the hatches and making sure we run efficiently as we can.
Yeah. Thanks for that. I guess the very last wish for me. Do you have any comments on current trading? Like, has the trends you saw through December and into Jan, have they continued in recent months?
I'll comment broadly on that. We will be making an announcement beginning of May on Q3 trading. We have continued to see quite significant strength in The Warehouse, and better than Q2. Sort of more in line with the overall for the first half. Some improvements against that of margin. There are, you know, there are some factors. There has been a benefit in some of the flood and Cyclone affected areas. We've seen WINZ payments, for example, go up. What we haven't seen yet, and this is gonna be an interesting thing to watch, is a significant amount of insurance payouts coming through. It's hard to model what impact that's gonna have. The other businesses we've seen a something of an improvement from Blue.
Some, some encouraging signs, and it's a bit sporadic and a bit varied in different areas, from Knowles. You know, I think what we're gonna see is the, you know, a lot of what happened over people being home and both homeschooling and work from home, but also the broader sort of nesting where, you know, people spend more time watching TV and so upgraded their TV. That sort of brought forward a normal replacement cycle. That will kick back in. You know, I think that it is gonna remain tough in the electronics business throughout recession, but, you know, ultimately if your refrigerator breaks, you're gonna have to replace it. And we've already talked about Torpedo7. You know, we've seen some encouragement, but it's a really tough volatile environment.
You see that from the consumer. You know, as we know, we're sort of first quarter of 0.6% GDP contraction. And the significant redeployment of spend and people living paycheck to paycheck, as I said earlier.
Yeah. Thanks for that. Thanks for taking all my questions.
You're welcome, Guy. Thanks.
Thanks, Guy.
Thank you. There are no further questions at this time. I'll now hand back for closing remarks.
Thank you very much everyone for your attention this morning, and for the questions that you've asked. As we've outlined, it's been a fairly difficult result. The team will be updating, as Nick said, the Q3 sales in May. In the intervening period, I'll wish all of you a very happy Easter. Make sure you get out to The Warehouse and buy lots of things to enjoy over that break, especially Easter eggs and hot cross buns for the kids. Thank you all again, and we'll close off the call now.
That does conclude our conference call today. Thank you for participating. You may now disconnect.