Now I'll hand the conference over to Dame Joan Withers, Chair of the Warehouse Group Board. Please go ahead.
Tēnā koutou and good morning. Welcome to The Warehouse Group's 2025 Interim Results Presentation. 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 this morning's call, I'm going to give my update as Chair and then hand over to John for his review of the half-year. Mark will then share a more in-depth summary of our financial results. Over the next 20 minutes or so, we'll provide insights into the Group's turnaround progress and our outlook for the remainder of the financial year. As always, there will be an opportunity to ask questions at the end. First are the Chair updates, slide four.
As the Group shared in our trading update to the market on the 3rd of March, our financial performance has not yet recovered. New Zealand is still facing uncertain economic conditions, and consumer demand remains subdued. However, while retail remains under the sustained pressure, we are not relying on macroeconomic changes to restore the Group's financial performance to where it needs to be. The Group continues to take decisive action to strengthen its position, improve performance, drive long-term profitability, and return value to our shareholders. The team is making meaningful progress and focusing on the fundamentals, and the Group's turnaround is starting to gain momentum and impact results. Despite the challenging environment with restrained customer spending, sales are showing an improving trend. Costs are being cut, and capital expenditure has reduced significantly.
The team has brought new and exciting ranges to market and core categories, and efficiencies are being found under the new brand-led operating model. There is no quick fix to improve financial performance, and the Group has much more work to do to scale our progress. Given this result and our full-year outlook, the Board has made the difficult but prudent decision not to pay an interim dividend. Notwithstanding the challenging market conditions, we are committed to growing shareholder value over the long term and return to paying dividends when it's commercially prudent. Despite our current performance, our disciplined approach to turning around the business, along with our positive cash position and liquidity, gives us confidence that we will emerge stronger. I'll now hand over to John for his Group update. John.
Thank you, Joan, and good morning, everyone. I want to begin today by making two points. The first is that these results are under our new brand-led strategy that took effect in Q2, and they reflect our business and transition. We've been busy resetting our retail fundamentals, reducing our cost of doing business, working through legacy challenges, and embedding a sharper customer focus across each of our brands. It's still a work in progress, but we're starting to gain momentum, and we're clear on what our priorities are. The second point is that we know our turnaround plan is working. As Joan said in her opening remarks, the Group's turnaround plan is delivering early improvements in a number of key areas. While it will take time to fully work through the business, the signs are encouraging. We're delivering new, fresher product ranges and sharpening our value proposition.
However, we are conscious that market conditions and our legacy challenges continue to hamper our progress. Consumers are being cautious with their spending, and competition is intense. Holding market share relatively steady in this situation is no small feat, and it's a huge testament to the hard work our teams are doing across the country. Our job is to keep fighting to ensure Kiwis continue to see value in shopping with us. Now to our performance. Our sales were down 1.6%, but that's a clear improvement from the steeper declines we saw last year. Importantly, the trend is improving. While Q1 was down 2.5%, Q2 was down just 0.9%, and we returned to year-on-year sales growth in January, and that momentum has continued into the first month of the second half.
The reality is we're still working through legacy challenges, including clearing old ranges and resetting our pricing strategies and positioning, particularly in Red and Blue. That, combined with the changes in category mix and increased promotional activity across all our retail brands, has put pressure on margins, which fell 180 basis points in the half. We've continued to run the business with fiscal discipline. I'm pleased to report cost of doing business was down 2.8%. We've tightly managed capital expenditure, focusing only on the areas that will deliver the biggest impact. Despite this work, EBIT was NZD 19.5 million, down from NZD 43 million last year. We know we still have work to do. The challenge ahead is clear. We need to build on our improving sales trajectory, rebuild our product offer and our margins, and continue driving efficiency across the business.
We know our performance is not yet where we need to be, but we're in a stronger position than we were a year ago and are embedding the operational and structural changes needed to set the business up for long-term success. Brand performance. Across our brands, we've seen a number of challenges, but we're also seeing positive shifts in our customer engagement, conversion, and a better performance in key categories. Talking firstly to The Warehouse. Sales declined 2.2% to NZD 944.7 million, the same store sales down only 0.5%. While foot traffic remained flat, conversion was up 2.1%, showing that when customers come in, they're finding what they need and following through with a purchase. Categories such as toys, furniture, audio, and grocery all performed well, but homeware and apparel were more challenged.
While home and apparel units sold were up, these departments saw lower dollar sales and margin compression as a result of softer demand, resetting our everyday low prices and clearing slow-moving and aged inventory. Overall, gross margin declined 210 basis points, reflecting changes in our category mix and our response to a competitive and highly promotional market. The red shed is holding its ground, and we are starting to see indications of an improving sales trend. We anticipate this momentum will continue to build with our upcoming winter and summer ranges. These include the first ranges fully delivered under our new strategy with sharper pricing, a more focused product mix, and a clearer customer value proposition. We have stationery. Stationery continues to be the go-to for small business, students, and home office, but like our other brands, it's facing a tough market.
While overall foot traffic and basket size were down, customers who did shop were more intentional, with conversion up 6.4%. Our core customer base of 30,000 BizR ewards customers is feeling the pressure. Our print and create centers were a standout, though, growing 7.3% and delivering strong margins. Gross profit as a percentage of sales declined 270 basis points due to promotional and clearance activity across a number of categories. Cost of doing business was well controlled in the half, down 3% year on year. Focus is now on rebuilding and refining our offer for each of our core customer segments. This means making sure we have the right mix of essential and specialist products and the appropriate value proposition for each of these segments. Noel Leeming. Noel Leeming has traded well in a tough market, delivering sales growth and increasing market share. Sales were up 0.8% to NZD 548.9 million.
Despite a highly competitive market, margins were relatively steady, with only a 70 basis points decline, predominantly from a change mix towards lower margin categories. Operating profit declined to NZD 8.5 million from NZD 14.3 million, in part due to a higher allocation of Group overheads. Customers are shopping with purpose, reflecting a 7.1% lift in conversion. Small appliances, audio, smart home tech, and gaming were the standout categories that drove growth. Our focus remains on delivering expert advice, leading technology offers, and great value to keep our customers choosing Noel Leeming first. Sustainability remains a priority, and we continue to make steady progress. 40% of our private label sales now come from products with sustainable attributes, and 60% have sustainable packaging. 83% of our sites are now powered by solar through our Lodestone Energy partnership.
We've diverted a massive 80% of operational waste from landfill and have diverted more than 122 tons of post-consumer waste from our customers through our take-back programs. There is more to do, but we're committed to making better choices for our business and customers. Before I hand over to Mark, I want to acknowledge our teams across New Zealand. Delivering an improved sales trend and holding our market share relatively steady in challenging economic conditions and a competitive market is no small deal, and it reflects the resilience of our business and our people. While we're not where we want to be yet, we're in better shape than we were a year ago, and we're moving in the right direction. Mark, over to you.
Thank you, John, and good morning, all. I'll start off with our Group financial performance. I'll expand on each section of this income statement in later slides, so I will make headline comments to set the scene prior to these deeper dives. As mentioned, sales for the half were NZD 1.6 billion, down 1.6% on the prior period. A resilient performance in one considered as a turnaround is underway amidst the challenging retail environment. Group gross profit margin was compressed due to several factors, declining 180 basis points to 32.5% as the market became highly promotional to capture a very subdued peak season, and we made a conscious choice to reset price points across key categories within The Warehouse and Warehouse Stationery. Strict cost control saw CODB pleasingly reduced by 2.8%, down to 31.3% of Group sales.
Anecdotally, if we had held top-line sales, this reduction in CODB would have resulted in CODB being 30.8% of sales, which is heading towards previous guidance of 30% target over the medium term. Despite these cost savings, a combination of lower sales and lower gross profit margin saw operating profit decline to NZD 19.5 million. A quarterly sales summary. Pleasingly, we are seeing an improving sales trend, with Q1 sales reporting a decline of 2.5% and Q2 a decline of 0.9%, up from Q3 and Q4 FY2024, which saw declines of 9.2% and 5.9%, respectively. As noted by other market commentaries, peak trade was underwhelming, despite improving consumer confidence, as noted by ANZ. We have grouped November and December in the monthly view below due to the movement of Black Friday year on year, which together saw sales disappointingly down 2.5% in these key contributing months.
Since then, we have seen positive sales growth in January, up 4.5%, and this improving trend has continued into the second half. For the half-year, same store sales outperformed the Group performance, declining only 1.1%, with the Warehouse decline of only 0.5%. As noted, we delivered better value to customers through the resetting of price points in key categories. This, combined with additional promotional activities required to stimulate demand, resulted in average retail selling prices declining 4.9% across the Group. These prices supported stronger unit sales growth of 3.9%, with promising sell-throughs in all-important home and apparel ranges. Gross profit. As mentioned, gross margins were down on the prior period, impacted primarily by the strategic intention to lower key price points within the Warehouse and the Warehouse Stationery brands, but was impacted by the highly promotional trading environment needed to stimulate demand.
Our price rollbacks were done to reinforce our everyday low-price positioning, which we had identified was not clear or compelling enough in prior seasons. The largest influence on gross profit margin performance came from the Warehouse and the Warehouse Stationery businesses, whose margins decreased 210 basis points and 270 basis points, respectively. Noel Leeming margins held up well despite the merchandise being more discretionary in nature, with margins declining only 70 basis points on the prior period. This change in brand gross margin mix, combined with a change in product margin mix across these brands, heavily influenced the 180 basis points decrease on the prior year. Cost of doing business. As communicated previously, we are responsibly but swiftly shaping the cost base through rigorous cost control initiatives. This has resulted in cost of doing business reducing by 2.8% on the prior period.
We continue to target cost reduction initiatives with CODB to be less than 31% in the near term. Of particular noting is that our two largest cost lines, by nature being employment and lease costs, have been well contained. Employment costs were flat year on year despite wage rate increases and redundancy costs incurred. These costs were offset by organizational redesign work, basically management, and improved employee leave balances. These expenses were well controlled in the half, with rent renewals held below inflation. Our other expense category decreased 7.4%, driven through savings made, particularly across technology and travel. Credit card transaction fees increased by more than 20% year on year as customers shifted to more expensive buy now pay later payment options at checkout, an indicator that some customers are still trying to manage their cost of living pressures. Excluding these rising costs, other expenses decreased 9.5%.
With big software projects transitioning into run state, depreciation decreased 11%, with less capital expenditure required in the period. Through reorganization, the unwind of Agile and pausing of non-essential projects, head office support center costs prior to allocation to individual brands decreased 12.8% on the prior period. Slide 16 demonstrates the important contribution The Warehouse has to operating profit of the Group and is central to the turnaround, contributing 59% of sales and 64% of operating profit. Other corporate costs reduced due to the reallocation of NZD 5.7 million of costs to brands, impacting their individual performance versus prior year and NZD 2 million in savings. Balance sheet. Our balance sheet position closed strongly at the half, with positive net cash of NZD 19 million. This was realized to improve working capital generation and lower CapEx, which exceeded the changes in operating cash flows from our lower EBIT performance.
Available liquidity was strong at NZD 469 million, comprising of NZD 450 million available bank facilities and NZD 19 million net cash. All the covenant criteria were met over the half. Looking at inventory in more detail on slide 18, we as a Group are carrying higher levels of inventory than desired. Inventory increased 13% since FY2024 year-end, 8.2% compared to the same time last year, but there are no material risks due to the nature being largely continuity product. Our return on our inventory investment remains consistent at 192%, but is expected to rise as we target improvements in our margin profile and reach our stock turn targets. Aged inventory greater than six months old has improved, now at 15% compared to 16% last year. We have a strong focus on inventory management. While inventory on hand increased 17%, goods in transit decreased 16% through improved supplier and logistics management.
Cash flow and working capital. Operating cash flow for the period was NZD 122.9 million, down NZD 14.6 million on FY2024 H1, as a result of lower sales and profitability performance, as noted. Positive cash generation from working capital of NZD 14.4 million and the curtailment of capital expenditure to NZD 5 million compared to NZD 28.7 million last year resulted in cash conversion of 106.1%. The Group's free cash flow yield has almost doubled on last year to 33.3%. Lastly, project and capital expenditure. At our FY2024 annual results, we said we would reduce our annual project spend to NZD 32 million-39 million for FY2025 compared to the NZD 73.4 million in FY2024. [TAS] investment criteria ensured we spent capital and project dollars in the right places.
This, combined with core system projects, which have taken up the lion's share of spend in the last couple of years, is coming to an end, and in the stabilization phase, is placing less demand on capital. Store development initiatives were limited to minor works over the period. The total project spend, which includes capital expenditure, prepayments, SaaS expenditure, and project operating expenditure, was NZD 8.9 million in the half, compared to NZD 50.2 million in FY2024 first half. We are therefore taking an opportunity to update our FY2025 full-year project spend guidance to be between NZD 23 million and NZD 28 million. With that, I'll hand back to John, who will take you through progress on the Group's turnaround plan and what's next. Thank you.
Thanks, Mark. As I've said before, this is a business in transition, but we're making real progress and starting to gain momentum. I'd like now to talk you through some examples of this progress. The performance of our Red Sheds is critical to our turnaround. At the FY2024 annual results, I shared our high-level fighting-fit plan focused on delivering everyday low prices with the right range of products, winning key family shopping missions and moments, being an everyday low-cost retailer and engaging with our customers and communities. Our fighting-fit turnaround plan is well underway, and we're starting to fight our way back. The challenge has been working through a number of legacy issues while we're rebuilding our value proposition, but we are seeing positive shifts across all four areas. A big part of our strategy is ensuring that when Kiwis come to The Warehouse, they get a bargain.
We've lowered our prices across 1,300 product lines, with our average selling price across all categories, excluding promo and clearance, down 8.8%. We're not just cutting prices; we're addressing our cost of goods to protect margins, to enable us to remain competitive while improving profitability. At the same time, we're refreshing our product offering. We've launched on-trend and differentiated product ranges and new brands across health and beauty, homewares, and small appliances, and these are resonating well with customers. We're supporting our strength in everyday essentials with more seasonal and trend-led products to keep our ranges fresh and exciting. We're seeing the impact with improving sell-through and positive customer reaction to our new ranges. Price is important, but we're focused on making the shopping experience better and more engaging as well. We've invested in making stores brighter and more inviting, with new lighting and displays improving the experience.
We've also expanded key categories like our beauty zone concept, which has launched in selected stores and will expand further in the second half. In terms of footprint, we're continuing to optimize our store network with our new Noel Leeming store in Blenheim opening in February and a new Warehouse Stationery store coming to Central Wellington later in the second half. We're seeing the benefit of all these initiatives with sales showing an improving trend in January, which is continuing into the second half. Being a leaner, more efficient business remains a priority. We've taken a disciplined approach to cost control. As we touched on earlier, we're seeing great progress in reducing our cost of doing business across the company.
Our store support office costs have reduced by 12.8%, and project expenditure has been cut to NZD 8.9 million, ensuring the investment is focused where it counts on some experience and core business improvements. Beyond price and efficiency, we're strengthening our brand relevance, and Kiwis are loving what we're doing. Recent brand collaborations and in-store activations have been extremely well received. This includes our Kia Kaha apparel range with the Maori Language Commission, which has been one of our fastest-selling ranges to date. We partner with Basketball New Zealand to create their first-ever supporters range that's available nationwide. We've also launched in-store activations with key brands like MCo Beauty and Mattel, and local Kiwi icons like Barkers Bread.
Our sustainability initiatives also continue to have strong customer engagement in our e-waste, ink and toner, and soft plastics recycling programs, alongside our iconic Red Bag, which raises millions for community charities across New Zealand. At our core, The Warehouse Group has deep, unmatched reach that sets us apart in New Zealand's retail landscape. We are one of the most accessible and trusted retailers in the country. 85% of Kiwis live within 20 minutes of a store, giving us unrivaled ability to serve customers where and when they need us. We continue to grow our digital presence with The Warehouse app consistently ranked in the top 10 shopping apps used in New Zealand, with a positive app NPS of 76.
As a major New Zealand employer with more than 10,000 team members nationwide, we remain deeply connected with communities we serve, ensuring that we deliver value not just through our products, but through our employment and career support. Customer confidence in our brands remains strong, with both our Net Promoter Score and perfect shopping trip scores having risen, proving that we continue to deliver better experiences across our stores. We're not just another retailer. We're a deeply embedded part of Kiwi life, and we're committed to delivering great value, great service, and a great Kiwi shopping experience. As we look ahead, significant uncertainty remains both around the broader economic recovery and our FY2025 second half performance. At this stage, we expect H2 EBIT to be broadly in line with FY2024 H2 loss of around NZD 14 million.
That said, our turnaround is gaining momentum, and we're in better shape to respond to the uncertainty ahead. Our focus remains on driving improved performance, maintaining financial discipline, and keeping costs and expenditure under control. While we expect the economy to recover towards the end of 2025, as inflation and interest rate pressures ease, we're not waiting for an economic uplift to fix our business. The turnaround is in our hands, and we remain focused on the long-term profitability of the company and delivering value to our shareholders. We'll provide a Q3 trading update on Thursday, the 8th of May, and report our full-year FY2025 results on Thursday, the 2nd of October.
Thank you, John. I do want to acknowledge John's fantastic leadership and clear focus on executing our turnaround and delivering for our customers. As I've said before, he does want his life back. The board is making progress in the search for a permanent Chief Executive Officer, with a strong pool of candidates currently under consideration. The board's key priority is to secure the right leader with the skills, experience, and vision to build on our momentum and deliver the results our shareholders, our customers, and our team members expect. A further update will be shared with the market once a successful candidate selection is finalized. I'll conclude this morning's presentation by reiterating that there is much work still to be done, but we have made meaningful progress.
The board and I are confident in the direction, the discipline, and action the team is taking to turn around the group's financial performance, build the foundations for long-term growth, and return value to our shareholders. I want to conclude by thanking our shareholders for their patience as we continue to work through these challenges. We will now move to Q&A. Thank you.
Thank you. If you would like to ask a question, please press Star 1 on your telephone and wait for your name to be announced. If you would like to cancel your request, please press Star 2. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Kieran Carling from Craigs Investment Partners. Please go ahead.
Morning, Kieran.
Morning, Joan. Morning, guys. Thanks for the presentation. Just in terms of your guidance for the second half, you obviously laid that out ahead of the results, and you've maintained it. You've got improving sales trends. You're obviously making some good progress, taking cost out of the business. Can you just help us to understand what the key assumptions are that are feeding into that guidance? How are you thinking about gross margin through the second half?
I'll pass over to Mark for that, Kieran.
Hi there, Kieran. Yes, Kieran, we have seen in February was actually a really good month. March has come off a little bit in terms of the trend. The key assumption is really around that gross margin compression. We're still dealing with some legacy stock that we're needing to flush through the business, which is coming at the expense of margin. Also, the economy is still not really where we need it to be from a tailwind perspective. What that's doing is that we're obviously still having to promote, and some of that is not necessarily coming through quite yet. That's putting pressure on margin. That's a big assumption. We did a good job in the first half on costs, but obviously, the second half might be a little bit more challenging.
We have been a little bit conservative in what we are putting in from a cost growth perspective in the second half, and that is sort of getting us to that guidance that we gave the market.
Are you expecting sales to be up in the second half at this stage?
We haven't got the second half of last year i n the market yet, yeah.
Okay. No, that's helpful. In terms of the Red Sheds, grocery sales are now close to 27% of those sales, up from about 20% in the first half of 2024. Please correct me if I'm wrong, but stripping grocery Red Shed sales are off about 10% year on year. This is a trend that's been occurring for some time in that division. Just wondering where you Red Shed gross margin settling in the next couple of years, putting the current macro situation and promotional activity aside.
Yeah. We're basically working to bring back the two parts of the business which have been hit the hardest, and that's home and apparel. Our FMCG parts of the business are performing well, and our customers are basically responding to the offers in there. Our job to do in the second half and going forward is to bring back that offer in home and apparel. That is where our product development and the resetting of ranges, all that work is going into those areas. That's basically just starting to come through now, and will increasingly come through in the balance of winter and into summer Christmas. That's where the rebalancing will come from. Basically, those customers are looking for those products, and that's what will bring them back into store.
Can you give any sort of steer of where you Red Shed margins settling in the future when those categories come back?
Kieran, I'll sort of take that as with the resetting of the prices as well as just the promotion, we're having to put a lot of money into clearances. If you just add back some of the normalized clearances on home and apparel, we believe that the margin for Red Shed, I would say, is the 37%-plus sort of range for Red Shed. I think it can get higher depending on how quickly the apparel and home wear division can move upwards.
Great. That's helpful. Final question is just on the online sales piece. For the Red Sheds, online sales are off 22%. That sort of echoes the commentary in the latest New Zealand Post data for Q4, where for your key categories, online sales were up 5%, but that was driven by a 23% increase for offshore operators, and domestic operators were down 11%. Are you concerned that maybe you're a bit behind the curve on these online sales, and actually, it hasn't been enough of a priority for you, kind of given where the trends are going?
Ask JJ to answer that, Kieran.
Yeah, Kieran, we're not concerned because actually, it's our customers that are choosing the channel at the moment. Our conversion stats and things like our app performance and stuff are basically healthy from an engagement point of view. Broadly, because of our large store network and footprint, it is actually very convenient for our customers to drop into store. For a lot of our categories, that is the preferred channel for our customers. We see it more of leaning into the strengths that we have. That does not mean that the online channels are not important. They are, and we are continuing to work on that and improving our engagement. We are following the customer as far as where they want to see the merchandise and making sure the customer experience is right for them in each of those channels.
Okay. Thanks, guys. That's all from me.
Thanks, Kieran.
Thank you. Your next question comes from Guy Hooper from Jarden. Please go ahead.
Morning, Guy.
Yeah. Good morning, team. Maybe just to start around talking about Red Sheds and that store network. I mean, you shut three stores in this period, and possibly enough have become on red. I mean, how should we think about store count, but also, I guess, the total store footprint, particularly as you're looking to make some of the changes around layout and engagement with customers in store?
JJ?
Yeah. Thanks, Guy. Yeah. Two of those three were basically redevelopments of the centers that basically we did not fit into the mix going forward. It was our choice to rearrange. One was a small store on the North Shore, and the other was a center in Auckland that is actually probably transitioning away from retail over time. That is certainly not our intention to contract our network. We believe our network is our strength. You mentioned reshaping the categories and the mix and the flow. Yeah, absolutely an opportunity for us. Our store experience will need to adapt to the way that we are reshaping our offer, and our teams are starting to work on those plans for how that will show up in our physical store networks over time.
Okay. I guess, on the inventory, as you say, it's too high, but the aged inventory has improved, and it's sort of talking largely continuity products. At the same time, there's this other inventory which doesn't necessarily suit where the business is trying to go, and you're trying to, I suppose, wash that through over the next few months. I mean, how much of that exists on top of the aged inventory, or does that sit within that? I can't remember the exact number, the 14-something percent of aged.
JJ?
Yeah. Basically, the advantage we've got is that the majority of our stock build is in the continuity merchandise, and that is a result of the over-investment in that part of our assortment in the previous strategy. That is not where our customers were wanting us to go. We have got an inventory profile that is obviously landing still based on the previous strategy. That is not where we are directing the range going forward. It is good continuity product. It is just that the volume that the customers did not need in that sort of level. It is just a balancing act of working us through that, which is not bad stock. It is just, in some cases, literally just too much of our essentials product.
In other cases, we see the opportunity to replace some of those essential lines with refreshed ranges, more exciting, better value points, but still at that value essential area. There is quite a lot of transition in that place. Broadly, I suppose we have not got necessarily the time pressure to resolve that, so we can be very considerate in the way that we work through that shape of merchandise over time. Broadly, the clearance and sell-through stuff is in line with what you would see with seasonal changeovers and various product assortments. That will always be part of our mix around up and down around how we are managing our sell-through. The big chunk of our inventory change is going to come through that reshaping of our essentials or continuity product.
Okay. Just in terms of discussions with suppliers, I mean, I guess we're getting some feedback that some of the major brands, particularly around appliances, are starting to push through some FX-related price increases. Can you talk a little bit about what sort of pressure you expect to get from FX and whether or not you're seeing some of those brands, like I say, push through price increases to you?
JJ?
Yeah. Obviously, FX is something that affects all the market. At the moment, it's still uncertain whether FX is going to settle. There is still quite a bit of volatility in the forward view. Like most retailers, you have mechanisms to protect yourself from that volatility. Broadly, we're dealing with a market that's dealing with the same issues. It's probably too early to see where that's going to land, but we're currently aware at the moment there is some volatility in FX rates.
Okay. Just one last one for me. I mean, you've closed or sold other businesses over the last sort of 12-18 months. I mean, Noel Leeming is performing pretty well, particularly within the context of the group. As you sort of realign to a brand-led strategy and sort of reallocate some of these group costs to the brand, does it still make sense for Noel Leeming to sit within the same business with the wider Warehouse Group?
Yeah, thanks. It certainly does. Now we've got the brand-led focus. Each of those brands have their own mission to do. They have their own investment thesis and their own markets to access. Literally, they all stand on their own merits. At the moment, Noel Leeming is performing very strongly for us in a tough market. It deserves to be part of our offer as a Kiwi retailer.
Okay. Thank you for taking my questions. Cheers, guys.
Thanks, Guy.
Thank you. Once again, if you would like to ask a question, please press star one and wait for your name to be announced. Your next question comes from Paul Koraua from Forsyth Barr. Please go ahead.
Good morning, Paul.
Morning, Joan. And good morning, guys. Maybe just a few from me. If we could start on costs, maybe. Done a pretty good job through the first half, keeping a lid on that, particularly through the lease expenses and the employee expense line. I think you mentioned, Mark, that second half is going to be a little bit more challenging in terms of cost out. How much in that sort of other expense, IT cost bucket, can be pulled out, not even over the next year, but sort of medium term?
Paul, I think there's quite a lot. It really depends on we obviously had a particular focus in the past strategy that obviously led us to invest in certain areas, and then we licensed and put our sort of shop together to promote that strategy. Some of our contracts are obviously multi-year contracts, which we're trying to get out of or just re-engineer in many cases. We are seeing every time we renegotiate a contract, we are seeing considerable savings come out. That's also a mindset change. We were potentially overspeccing a lot of what we were doing. I mean, we as an investment committee level are seeing every time we go on an IT spend, we're seeing significant between up to, in some cases, over NZD 1 million, in some cases, NZD 500,000. Very infrequently do we get less than NZD 100,000 out of those contracts.
What I'm basically saying is that every single time we dig into a contract, there's always an opportunity to re-engineer. We don't necessarily have a specific target yet because we've invested in these big technology projects. They're taking a bit of time to stabilize. We would actually be in a much better cost-saving perspective had we not had to stabilize some of these projects, which is normal in the course of when you're doing a massive SAP or Oracle project. Ingesting it into your business and its business processes is a costly thing post. Those costs aren't transitory. We believe those costs can come out, and that will shape the IT profile.
We're also looking at some co-sourcing arrangements, particularly with Offshore, around various different parts of the business, just not in technology, which will help us just share some of the cost load on that perspective. There are multiple levers that we're trying to pull. I can't give you an exact number, but there is space within that number to bring it down.
No, thanks. That's helpful. Maybe just on some of that contracted IT spend stuff, is there a read you can sort of give us on the typical tenor or the weighted average contract IT term on some of those contracts, just to get a read of how long some of the stuff might take to unwind?
Yeah. Some of the big ones have probably got about another year to go, a year, a year and a half.
Yeah. Okay. Cool. Maybe just going back to sort of the inventory question that Guy was talking to, there's a lot of talk on sort of refreshing the product line through home and apparel. How long does it take for some of that old stock to wash out? Because obviously, that's putting a bit of pressure on red margins at the moment. Just getting a read on how long that takes would be good.
JJ?
Yeah. It's probably too much of a nuanced situation. We're basically managing that both at a product and category level, and it varies across it. Probably not an easy one to give you a pithy, concise answer on, other than to say that we will be in transition for the balance of this year and probably into the beginning of FY2025 before we've probably got that shape in a place where we'd like it to be.
FY26.
Yeah. Sorry.
Yeah. Yeah. All good. Maybe just the last one for me. It sort of comes back to the sort of fight-and-fit strategy, lowering prices across key items in red and other key businesses. It sounds like gross margins generally probably do not, maybe they are not under pressure, but they do not move up materially from here. You talk to cost of doing business over the near term at sort of 31%. That does not leave much in terms of an operating margin sort of near to medium term. Where is that going to move? Because essentially, you look at 33%-32% gross margin for the group and a 31% cost of doing business as a percentage of sales. It does not leave you much room.
Mark?
Yeah. I mean, obviously, Paul, our aspiration is not to live at the gross margin level that we are at the moment. That's a key lever. Whilst the 31's in the near term, we've got to get into that low 30's. That's going to be a subject of getting our top line moving in a more considered way. That's as a result of when the economy comes back online, we're not having—I think the environment will naturally be less promotional because every retailer right now, and you guys are well aware of this, are giving away margin in order to stimulate demand. Most retailers will not want to live there. I think that will naturally give us back some margin. We're burning through a lot of margin through clearance activity, like we're saying that John spoke about, clearing this old stock.
There is also a price architecture and mix change that, as we enter these new ranges, if home and apparel—sorry, home and apparel within red, but also the blue business runs at like 46% odd margins. If that business starts to come, when it starts to come right, that business particularly has a very strong furniture focus, which is not just where the market is right now. Furniture is highly discretionary. Those types of categories, when those come online, it is very dependent on that small, medium business. That segment of the market we know is struggling. When those things come back, we will not have to stimulate as much demand. We feel that those are just good contributing factors to the GP. We are not going to leave it all up to the economy to change.
There's some cost of goods sold opportunities within our DC, for instance, in our supply chain right into our sourcing that's going to help us. Some of that, it's product engineering work that, like John said, that takes a bit of mindset change as well as a different positioning. We've repositioned the price points to be everyday low price, but now we've got to re-engineer how we put the assortment together to get a better blend of margins across the business. I hope that answers it. We'll continue to get that CODB. My target is below 30, but I'm stating 30 to be conservative.
Yeah. All good. Thank you very much, guys.
Thanks, Paul.
Thank you. Once again, if you'd like to ask a question, please press star one on your telephone and wait for your name to be announced. As there are no further questions at this time, I'll now hand back to Joan for any closing remarks.
Thank you very much. I'd like to thank you all for attending the call this morning. As JJ said, the next company update will be the third quarter sales, which we're going to release on the 8th of May. I'll be speaking to you again with the full year results announcement, which is in early October. Obviously, when there's an update with the permanent CEO, we'll be coming back to you with that. Thank you all for your attention this morning.