Okay, good morning, everyone. It's Andy Bond, Executive Chair of Pepco here. Welcome, and also welcome to Neil Galloway, our CFO, who's joining separately from me, who will be here to help answer any questions. This will be a short commentary from myself, focusing primarily on sales in quarter one. We don't tend to report down to profit on a quarterly basis, but we'll give you a few comments on things like gross margins, and then we'll take Q&A after I've made my comments. Look, perhaps slightly out of the norm, I'm not gonna immediately dive into the, the detail of the numbers. I'd just like to reflect back on what we said at the Capital Markets Day, was the focus for the business, going forward. And so I'll just make a few comments there.
A reminder of the things that we thought were challenges within the business when we spoke in October. We felt we'd lost focus on the core business, expanding too rapidly, doing too much, and executing poorly, both across our core estate and our growth areas. And what we said we'd do, we said we'd do significantly less activity, hence why this focus on our core business, and particularly on our four wall economics and improving our EBITDA, and being more disciplined and focusing on higher return on invested capital growth plans. In this context, what have we done? We have significantly reduced our activity program, eradicating quite a lot of peripheral activity and also reducing our CapEx on both store renewal and new stores. And we've started to successfully change the dynamics of four wall economics.
We've arrested or started to arrest the decline in like-for-like growth, and we've made good progress on gross margin expansion, as well as good control of costs. And equally, we are spending significantly less on CapEx, hence all that means that we will, this year, produce significantly more free cash flow. Whilst that's what we said we'd do and we started that, there's still much more to do. I won't go into future plans too much, but to say there is still a lot of work to do. Four -W all economics will continue to improve by improving our sales as we move forward. In the next quarter, we'll look at our price investment activity, improving the quality of our inventory and our range architecture, and you will continue to see us improve our gross margins.
So look, with that in mind, a little bit more detail about quarter one trading, and this is very much repeating some of the headlines of the trading statement we've already seen. So we think we've had a good, solid quarter of progress. As I said, record sales at GBP 1.9 billion in total, which represents 11% growth year-on-year. On a like-for-like basis, as we've projected at our December update, like-for-likes remain negative, both across the group and each of the banners. However, we have seen each month an improving trend in our like-for-likes, and it should be noted, particularly in Pepco, that the like-for-like number of -3.7% was against over 20% growth last year.
Poundland had a very solid quarter, headline like-for-like of 0.9%, which was driven, substantiated by FMCG, and it's worthwhile noting that we saw very good volume as well as value growth, unlike some of our mainstream grocery competitors. And then moving on to gross margin improvements, very pleased with the work that we're doing there and the progress we're making. We saw a 200 basis points improvement year-over-year, and we see that gross margin improvement continuing through the year, notwithstanding what is yet unforecastable dynamics around the Red Sea. But underlying, we see a very strong improvement in gross margins, whilst still allowing us within our capacity to improve our price position and improve our inventory quality. So we will not be seeing that gross margin improvement eroded by those other activities.
Adding all that together, and also the fact that we're going to do a much lower level of activity both in new stores and in renewals, then we will see a very strong free cash flow we think this year. From a new store and renewal program, we will open less stores this year. We did open a lot in this quarter, but that was both a residual impact of already committed activity and the one-off effect of the Wilko stores, but you'll see the numbers slow as we go through the rest of the year. And we still forecast just around, maybe slightly above 400 net new stores, excluding the one-off effect of the Wilko activity.
So again, you know, we think it was a quarter of good progress. Really at the heart of our business is the need to rehabilitate our four wall economics in our core stores. That's well underway. But that really gives us the fuel to grow our business, whether it be into Western Europe, rehabilitate the Poundland business or the Dealz business. So the four wall economics of our core Pepco business are fundamental, and we're making good progress there. The performance of the quarter itself was strong, and improving during the quarter. And we will continue, as I said at the start, to iterate around that same agenda. And more work to do in the four wall economics of our core business, but we're well underway with that and see continuous improvement.
We will have a much more disciplined approach to CapEx, spend less, do less, and achieve more as time goes on. So I think it was a quarter of good progress, good financial performance, but still much more to do, in terms of getting the business back to full health. With that, I'll pause and hand over for questions.
If anybody on the line would like to ask a question, please can you press star one on your telephone keypad and wait to be put through.
Ladies and gentlemen, once again, please press star six if you have a question. Our first question today is coming from Henrik Herbst, calling from Morgan Stanley. Please go ahead.
Hello. Hi, thanks very much. I just had a question on the disruptions in the Red Sea. If you could maybe talk about what type of surcharges you're seeing and to what extent you're... I guess you're contracting, starting or at some point will need to contract prices for shipping for beyond Q3. But what type of rates compared to what you're seeing now, would you need to do that at? Thank you.
Well, the latter question, I mean, who knows? We're not in the game of sort of guessing what the numbers will be. I mean, it should be a sign of reassurance that we contract to quarter three. You know, we will not need to contract further than that for any time, particularly soon. So, I mean, in general terms, I think we'll see that this will be somewhat a blip in terms of spot rates, and I think it'll calm down a bit. But, you know, I really can't say in terms of where we'll be contracting going quarter three.
In terms of the rates we're contracting at now, I mean, we are already contracted, but we are having to incur certain surcharges for the extended vessel times, et cetera, which are pretty much $1,000-$1,500 per container incremental charges. But again, at the moment, at least, we're not flagging that as a risk to the overall shape that we're describing. You know, we can still see our gross margin improvement coming through, and we can absorb that in the short term, but I can't predict, no one can predict how long this will last, but the longer it lasts, the more pressure it will put on both our P&L and our operational capability.
But, right now, you know, the experience we've had to date should not be seen as a risk to the overall shape we've described.
Got it. Thanks very much.
Thank you, sir. Ladies and gentlemen, once again, as a reminder, please press star one if you have any questions. We do have another question coming in now. It's coming from Thomas Sheridan, calling from RBC . Please go ahead. Your line is open.
Hello, good morning. Thank you for, thank you for taking my question. Can you comment on like-for-like in January, do you see positive like-for-like in Pepco, in Poland and CEE? Thank you.
I have no intention of commenting on trading since the quarter end, so I apologize, but I'm not going to comment on that.
Thanks, sir. We now move to Oleksiy Soroka, calling from ING Bank. Please go ahead. Oleksiy, your line is open, sir. Please, just make sure your line is unmuted. Okay, Oleksiy has withdrawn his question. We now move to James Sheridan of Barclays. Please go ahead, sir.
Yeah. Good morning, Andy. Just,
Hi, James.
I just have some questions. Firstly, I think in the press release, you highlight performance in Poundland clothing, which I think, as I understand, it's partly due to some changes as a result of, you know, the sourcing, and yeah, some disruption at Dealz general merchandise, because of the change in sourcing there. I mean, how quickly do you think those issues will be remedied is one question. And then just as a follow-up on Poland, and appreciating you're not going to comment on current trading, but for the people sitting a bit further away than Poland, can you just remind us what has happened since the start of the year in terms of child benefit, et cetera, and how quick do you think that might feed through to sales trends?
Yeah, good, good question, James. Thank you. I'm not saying the others weren't, by the way, but they're good questions. And look, on the disruption, on the change, I'll go back to sort of elevate the sort of discussion to the strategy that we set out. I mean, by far, the most important thing for the health of the company, both in terms of its strategy and its economics, is our four-wall EBITDA and our core Pepco stores. We lost 600 basis points of margin, pre to post COVID, and we're doing a very nice job of recovering that, and I see that recovery continuing.
As I say, that gives us not only a very significant fuel for profit production, but it also defines the change program for the future, because the heartbeat and health of our business is the product offering, the customer appeal of that core business. And that's exactly why we set out on the strategy of changing the Poundland and Dealz clothing and GM ranges to Pepco ranges. I think, as we said on a call last time, and your counterpart in JP Morgan sort of suggested she'd never seen anyone having challenges and disruption with change programs. I at the time commented that I'd never seen a change program that didn't have challenges. These are very significant change programs.
Changing out the whole of your clothing offer from one's product offer and sourcing strategy to another has inevitably led to quite a lot of operational disruption. And so the clothing numbers in Poundland have been impacted by that, and will probably continue to do so in the next three months. But we're very clear that we have a correction of errors which are around you know management controllables. You know, the planning of the range, the execution of the supply chain strategy, and we will both improve the Poundland clothing offer and learn those lessons for future transformation programs, whether it be GM in Poundland or GM in Dealz. And, you know, we will do a better job going forward.
But I would also, perhaps slightly defensively say, these are big change programs which inevitably lead to some disruption. The great news back to where I started, by far the most important thing for investors, in my view, is to get their head around, is if you can be confident we can sort out the four wall economics of our core CE business, we will produce significantly more profit year on year, both this year and into the future, whilst in the long term, delivering a much healthier UK business through that change program, and a much healthier Dealz business.
The last thing I'd say on that point is that we've also got to recognize that while the offer, in our view, is significantly stronger by putting the Pepco offer in, we will need to communicate the virtues of that to our customers, and it's only this quarter we're now in, that we're going to start doing above the line marketing in the UK of the Pepco offer, which itself will improve performance. So I see clothing performance improving, because we know what we did less than perfectly. We'll correct those things, and we'll communicate to customers.
So I see further disruption inevitably, because you never do any of these change programs perfectly, but I think we'll get better and better at this, and I, I'm very confident that it's still the right direction we're moving in, and I don't see it as fundamentally disruptive to our year-on-year profit improvement program. With regard to Poland, a good prompt. It is worthwhile recognizing that the initiatives that the government are putting in place to support families won't actually impact wallets until, for the first time, the end of this month. And there are really two major programs. One is the extension of Five Hundred Plus program, which for those not particularly familiar, the government, I think it was in 2016, implemented a program where every child was...
The family of every child was awarded PLN 500 a month for each and every child as a child support grant. That will be extended to now be PLN 800 per month. Now, families are significantly wealthier now than they were in 2016, so who knows what will happen with the use of that money, but certainly in 2016, that had a very positive impact both on our company, but the clothing and homewares markets generally in Poland. And the second thing to note, which is sort of a government initiative, is the very significant increase in minimum wage, which the first pay packet that that will impact is January as well, and that's a 20%, wage increase, which for families on a budget, which is our target customer, will have a very significant impact on their net disposable income.
I think the last thing I'd say on this, let's remind ourselves that all of our performance we're describing now in the rearview mirror in calendar year 2023, was, again, the backdrop of a market that, as we said at the Capital Markets Day, has been in double-digit decline on periods during the last 12, 18 months. So these initiatives that you're prompting me to talk about, James, shouldn't have a particularly profound impact on the markets we trade because they are discretionary, and therefore, they're the parts of the spend that will be most compressed while families have budgetary problems. As soon as those budgetary problems ease at all, you could argue that the reverse effect should happen very quickly.
So, you know, early days in this year, obviously, but we are cautiously optimistic, as we say, about the trend, the macro trends that should help us during this year.
That's very helpful. Just one quick clarification on the first point about the Poundland clothing. So just to be 100% clear, I mean, clearly, you need to make sure people kind of get the new range, and like it and et cetera. But my impression from the statement was that there was an element of, let's say, operational disruption as well, in the first-
Oh, yeah, I mean, yeah, totally. Absolutely. Look, I don't want to shy away when we can do a better job. You know, we... It was a very big task that we undertook. We didn't do it perfectly, and there were absolutely quite a number of operational issues that we now know what we need to do, and we will correct them. Absolutely, yeah. Absolutely.
Yeah. Yeah.
... No. Okay, that's very helpful. Thank you.
Thank you, sir. We'll now go back to Oleksiy Soroka of ING. Please go ahead.
Yes, apologies. I hope you can hear me now.
Yeah, we can.
Apologies, if I missed the comment. I was going to ask about, you know, the current trade-in, which you didn't comment previously with regards to January, but perhaps you can talk about December, how it played out in your formats.
Well, I think, you know, I don't wanna set precedent for the future, but also I don't think, frankly, it's helpful to be, you know, managing a business day by day, week by week. So I'm not gonna get drawn into an ongoing conversation about weekly, monthly trade. What I will say is to reiterate what we said in the announcement, which is we saw progressively improving performance. You know, we entered quarter one financial year with a double-digit like-for-like decline in Pepco. So, you know, we were addressing a quite tough situation, and we've done a nice job in each month, our like-for-like was better than the previous month.
So I'll allow you to sort of fill in the gaps between those comments, but I think December overall was a reasonable month. And the product that was specifically Christmas, whether it was in Poundland or in Pepco, did pretty well, actually. So I think Christmas will be seen as pretty good, and certainly better than the overall headline like-for-likes. But you know, I'm not gonna comment on each month's like-for-like other than to say what I've said, which is it got better each month.
Okay. All right. Thank you.
Thank you very much. Thank you, Mr. Soroka. As we have no further questions at this time, I'll turn the call back over to Andy for any additional or closing remarks. Thank you.
No, look, I just sort of reiterate, I think, against our strategic framework we set out at the Capital Markets Day, I think we're making good progress. It's super important we get our core Pepco business firing on all cylinders, and I think we're making good progress. We've more to do. We are being much more disciplined in how we grow as well. Add those points together, I think we'll see good free cash flow this year against a very disciplined CapEx spend. I'm very hopeful that by the end of this year, we'll look backwards with a core business that has recovered the ground it lost during COVID, which is the key point that we've said is our key objective this year.
So look, progress in the quarter, but much more to do, and we look forward to updating you again soon. Thank you.