Hello and welcome to the Pepco Q2 trading update call. Please note this call is being recorded, and for the duration your lines will be on listen-only. However, you will have the opportunity to ask questions at the end. This can be done by pressing Star one on your telephone keypad. I will now hand you over to your host, Andy Bond, to begin today's conference. Please go ahead.
Thank you, Saskia, and welcome everyone to this call. Just as a way of sort of getting us into there's 2 agenda items, really. One are people update, and secondly, our quarter two trading update, followed by Q&A. I'm joined by Neil Galloway, who you all know by now, our CFO, who'll help me with the Q&A, and Tej Randhawa, a few of his colleagues in IR with us as well. You'll know that this is really a short trading update. It's only quarter two, and we'll keep it to headlines and store opening commentary in the context of the fact that we'll give a much more thorough update on the whole half one. And that's now set for the 23rd of May, so a date for your diary there. So look, let me dive into what I want to communicate today.
First of all, the announcement of the appointment of our new CFO, CEO, Stephan Borchert, who joins us on the 1st of July. I feel that we went through a very thorough recruitment process, and we have got a fantastic candidate, and I'm delighted that Stephan will be joining us quite shortly now. He brings to us a wealth and depth of experience across a number of consumer categories, retail categories, but equally importantly, a breadth of experience in terms of geography across Europe, having managed multi-country, multi-site businesses previously. Most recently, he was the CEO of GrandVision, a business that in many dynamics is very similar to our own 7,400 shops across 40 countries and a very similar sort of sales and profit dynamic.
I think he brings at a personal level all the skills that we need, and also he referenced having fantastic leadership skills and something that we found through the interview process as well. So look, very pleased to announce Stephan's appointment and to reiterate, he'll be starting on the 1st of July. But for absolute clarity, his first three months will be substantially his induction. And so I will fully step back to Non-Exec C hair only on the 1st of October rather than anytime sooner. So good news for the company there, I believe. Onto the sort of substance of the discussion today, our quarter two trading. I'll give you a few headlines or a few of the sort of detailed performance numbers in a moment. But look, first of all, in terms of sentiment, how do I feel about where we're at?
I think these are a good set of results. I think they show positive progress against the things that we set out to do at the Capital Markets Day. I am increasingly optimistic both about the long-term future of the company, but also even into half two. I see our progress continuing, and I see us having a strong half two performance. Below that headline, the Pepco core business in CEE, sales and profitability continue to show good trends. Poundland, Dealz, the significant change program that we have undertaken is now behind us. And while there's still work to do, we see that improving as we move forward. Our store openings program, we have substantially reoriented as we said we would. And all that will lead to a stronger profit and cash conversion position as we go through to the year-end.
So look, below that headline, a few more details. Total sales growth of 11% in the quarter. At a like-for-like level, as I said, Pepco is still in negative like-for-like territory, but against still very strong comps this time last year. And as we said in our announcement, we saw progressive improvement through the quarter with some of our markets actually seeing positive like-for-like growth towards the end of the quarter. It's also worth noting that I certainly see in our business that when we have the right products at the right price in our stores, we're seeing very strong sales. So the things we said we'd do about repricing products, improving our inventory, as we continue to improve that, I'm very confident we'll see our sales position improve further. I'm not concerned about the market dynamics.
Of course, it is still tough for consumers, but I'm not in the same place as some other retailers commenting on the CEE market. I think the CEE market and our customer offers us the opportunity to deliver sustainable like-for-like growth. We need to just continue to improve our price and our inventory position and our overall retail execution. I see us improving our sales performance in Pepco during the second half of the year. Poundland, Dealz, as I said, we look back at quarter two now as the peak of our change program. That is now behind us. So while there's still work to do, I see our position improving through half two in both of those businesses. Moving further down the P&L, our gross margin, we always said will be our biggest lever for change this year. We are seeing improving gross margin.
So if anything, our rate of improvement is accelerating. So our positive position, we stated before, on gross margin only strengthens both in terms of absolute and year-over-year position. So very confident about delivering a strong gross margin position, particularly in the Pepco business this year. In terms of store openings, we always said we were going to try and focus more on our core markets and reorient both to a smaller overall new store opening program and specifically target our known and high-return markets. And through quarter two, you've seen a very strong reorientation there both in terms of absolute numbers and where we've opened those shops. So very confident about getting to grips with a better focus of our CapEx spend and therefore improving our return on invested capital. And finally, as I say, sort of outlook, I'm optimistic for the second half.
Much of what we need to do to improve our sales and margin are in our control. We know what we need to do, and we're getting on with that. From a Pepco point of view, that is continuing to improve the quality of our inventory, continuing to improve our price position. We have the ability to do that both from the gross margin improvements that we're seeing, but also a better supply chain management. Then from a Poundland and Dealz, it's about now building on the new products that we have in our business from Pepco into the U.K. and the Dealz Poland businesses. Wrapping all that up, I see us being able to not only grow sales well this year, but also see a good profit growth position this year.
But all that aligned with a very much lower CapEx spend this year and good control of inventory means that we'll see, towards the as we move towards the year-end, a very strong free cash flow position, which is what we always promised to do. So look, still a lot of work to do, but I see us making good improvements in the areas we promised to. I see those continuing into half two. So I see the Pepco core business in particular having a very strong second half of the year. And I'm confident in the direction we're setting. So with that, I'll hand it over to Q&A.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question or make a contribution on today's call, please signal by pressing Star one on your telephone keypad. To withdraw your question from the queue, please press Star two. So again, that is Star one for your questions today. We will pause for a brief moment. Our first question today comes from Matt Clements from Barclays. Please go ahead.
Yes, good morning, Neil. Good morning, Andy. Just a quick question. I know you've called out your core Central and Eastern European markets as an area of improvement and strength. Any color on Poland in particular, and perhaps with some reference to the potential impact of the family benefit increase and minimum wage increase coming through? And then kind of any areas of weakness where you can see room for more improvement going forward?
Well, look, thank you, Matt. I'll have a go at answering that. It's Andy. Look, I think that certainly we've said at the headline a number of our CEE markets are starting to see improvement from a sales point of view. And certainly, Poland is one of those markets. Now, whether that is to do specifically with minimum wage increase and the child benefit scheme, clearly, both those things should benefit our core customer. But whether we can attribute our progress we're making in Poland specifically, that is probably too early to say.
What I would say is that the sort of things that we knew we needed to address, poor inventory quality in our business, losing focus on our price position, and generally just losing discipline in our core business from an end-to-end supply chain management because we're focusing on too many things, those things that we said in October, they're relevant to all our markets. And so I think as we get to grips with those things, we should see an improving performance in all our markets. Because as I'm trying to emphasize, a lot of what will improve our like-for-likes and our overall profitability are not fundamentally dependent on macroeconomics of those countries, but to do with self-help that we can do for ourselves. So I think we should see improvements across our business as we continue to focus on those things that we can improve.
I would highlight that I think Poland has seen some incremental improvement this quarter. That may be to do with those things that you've highlighted, but I can't be sure.
Very clear. Thank you. Sorry, just any comment on maybe a market where you think things could improve the way you're not happy as you could be at the moment?
I prefer to focus on the half full view of the world, Matt. I'm not going to answer that question.
Absolutely. Understood.
Thank you. Ladies and gentlemen, as another reminder, that is Star one for your questions today. We will pause for a further moment. We now have a question from Alison Lygo from Numis. Please go ahead.
Hi there. Good morning. Good morning, team. Two quick ones for me, please. Firstly, wondering if you could just comment on the inventory position at the end of the half and how we should be thinking about that, both in terms of then how it's likely to progress through H2. And then secondly, whether you could comment on what you're expecting for the year in terms of phasing of profit throughout the year. Thank you.
Well, look, I'll say a few comments, then I'll hand over to Neil. Look, I think my overall caveat would be, as I said at the top of the call, this is fundamentally due to sales and sort of strategic update discussion. A lot of what you're talking about there, Alison, we'll be very happy to detail, but it won't be until the 23rd of May when we will give much more detail on the half performance across a number of the metrics you described. But also, we now feel confident enough that by then, we should be able to start to give some guidance towards the year-end. So a lot of what you're talking about will answer there. But look, just in general terms, our main focus or one of our main focuses over the last half has been improving the quality of our inventory.
So we're not actually trying to well, in the long- term, of course, we want to improve the absolute level of inventory in our business. But the first focus is on quality of inventory. And we're seeing steady progress on that. That has been slightly impacted, as with all businesses, by what you might describe as a bubble of delay of inventory through the Red Sea impact. So we would have liked to make more progress on the quality of inventory, but that's been somewhat impacted by that, although that's now behind us. But in terms of absolute levels of inventory, I mean, I'll hand over to Neil to see if he wants to say anything. But in general terms, I think we'll cover that much more thoroughly at the half one update in May.
I think you've pretty much said all I was going to say, Andy, in terms of the I think it's look. If there's any additional comment on stock, we'll give it at the half one. Obviously, sales, as Andy said, are improving. But obviously, they're still not where we'd want to see across the whole business. Obviously, that has some reach through on stock. So stock's not where we want it to be. We'll give more detailed color into the late May when we've got the first half. And we're obviously reviewing where we are on sales trajectory as we look at the full- year position. But I think it's not something I'm going to comment on in detail right now.
Okay, great. Thank you. And the second one, I guess you're perhaps going to say something similar just in terms of whether you have any expectations that phasing is going to be different from the sort of usual shape of profit for the year. Sorry.
Yeah, we'll cover that off, Alison, in May.
Okay. Great. Thank you, team.
Thank you. And up next, we have Michał Potyra from UBS. Please go ahead.
Hi, morning, everyone. It's Michał Potyra from UBS. I have two questions, please. The first one, I mean, you commented on the gross margin trends, but could you also please give us some color on the OpEx position? We have seen lots of retailers facing challenges here. So the first question. And the second question, could you comment on your expectations regarding competition in the coming years, especially given one of your competitors announcing a very aggressive store additions plan? Thank you.
Look, on the first question, I'll have a go and then ask Neil to fill in any color or correct me where I go wrong. I mean, first of all, to reiterate, we're seeing we're increasingly confident about the overall target we set ourselves, which is to fully recover our gross margins back to pre-COVID levels. I think we've said previously that we would try and do that by the year-end. And I think we're very much on track to do that. So I think we have a very strong story around gross margin recovery. From an OpEx point of view, again, I think we will give the details at the half one update in May. But in general terms, we have a negative headwind in the headlines from two things. One, it's always tougher to manage your OpEx when you're in negative like-for-like territory.
But also, we have a mixed impact of opening a significant number of stores over the last 18 months in higher-cost markets of Western Europe. So if you look at it at a segmental level rather than at a blended level, I think we're doing a very nice job of managing our OpEx against those headwinds. And certainly, our gross margin improvements significantly outweigh some of the OpEx headwinds we have. But I'm not going to give you any detail, but we will give you those at half one. But they would be the general thrust as I'd see them. But yeah, I'll hand over to Neil. And then I'll come back and answer your question on competition.
No, I think Andy's picked up the main levers. I mean, I think costs are going up year-on-year, obviously, because we opened a lot of stores last year, and particularly back-end weighted , obviously, impacts of that. I think generally, costs are being managed reasonably well. But with the sales weakness we've seen in the first half, OpEx to sales is not at the level we'd like to see it at. But as we see a progression in the second half from a like-for-like perspective, that should improve in the second half. So I think you'll see some more detail. And we'll give a bit more color at the first half as results are released in a few weeks' time.
Look, and then as far as competition is concerned, I mean, of course, at one level, competition is increasing in Eastern Europe as it is in a lot of markets. You've highlighted Sinsay , there we've highlighted ourselves at the Capital Markets Day that there are an increasing number of competitor store openings. I would make the following comments. First of all, the only accurate data about Eastern European market performance is Euromonitor. And the most recent data is for the year 2023. So it's not hugely contemporary. But it's not fundamentally out of date. And that demonstrates that across all of our markets and all of our categories, we continue to grow market share. So we ain't doing bad at all in that sense. And we are coping with increased competition very well.
I'd also say that, again, one of my key themes is there's a hell of a lot of things that we've misfired on over the last two, three years that we're starting to get to grips with. But we've still got so much more we can do to improve our business that I'm not at all worried about our ability to grow sales, grow profit, and become a better business in our core markets. Because there's so many things we can do to become a better retailer. And I'm respectful of the questions about competition. But I think they're overplayed. And I think Sinsay's a great company, Action's a great company. People want to obsess about Shein and Temu. But we're the biggest player in all of these markets and all of our categories and continue to grow market share.
And yet, there's still so many things we could do better. I'm really not anxious about our company's ability to perform well in the future. And I think what I'm hopefully projecting through what we're talking about this morning, we feel confident we're getting to grips with what we need to do. We've still got much more work to do. But we're increasingly confident we know the levers to pull to make our business a great business again. And we're on with those. And through this year and into next year, you'll see those things continuing to improve. And we'll do very well, I think.
Thank you very much.
Thank you. As there are currently no further questions in the queue, I'd like to hand the call back over to you, Andy, for any additional or closing remarks.
Well, look, thank you, everyone, for your time this morning. Short but sweet. Look, I think in terms of what I'd like to say in summary, it was the second quarter continued to demonstrate progress against the things that we wanted to achieve. Still work to do. No one should be happy with negative like-for-likes. But I think we understand those. And I think we're seeing progress in our sales numbers now. I think we're seeing strong progress in our gross margin. And I think as we enter the second half of the year, as I said, we know the levers we need to pull to continue to make improvements. And we'll make those. And I think that we will see good progress again in the second half of the year. And finally, I'm very pleased with the announcement we made this morning about the appointment of our new CEO.
So, look, I think a half of good progress. I'm optimistic for the second half of the year. With that, thank you. Have a good day.