Hello, and welcome to Pepco Group's results presentation. Following today's presentation, there will be a Q&A session. I would now like to hand over the call to Stephan Borchert, Pepco Group CEO. Please go ahead.
Thank you, Christina. Good morning, everyone, and welcome to our financial year 2026 half year results presentation. I'm pleased to announce a very strong set of results this morning, as we have continued to make huge strides in line with our strategic plan. Joining me on the call this morning are Willem Eelman, Pepco Group CFO, who I'm sure you're all very familiar with by now, and Hugo van Santen, our Pepco CFO. I'll first run you through a couple of highlights, followed by a detailed look at the progress we've made in the first six months of this financial year against each of our strategic pillars, before handing over to Willem and Hugo for the financial review. I'll provide a quick summary at the end, as well as an overview of current trading before we open up for discussions and questions.
With that, let's begin, and turning to slide 3, please. There are many achievements worth highlighting from this half, but a clear milestone is the consistent like-for-like performance we have delivered in Pepco, now onto our sixth consecutive quarter of positive growth. To deliver this in the face of such an uncertain macro and geopolitical environment is a real testament to our strategy and the hard work of our team in stores and headquarters. This, in turn, has enabled strong financial delivery, with revenue up 5% and EBITDA up 17.5%, driven by our strong gross margin expansion of 250 basis points, and even stronger profit after tax performance of +52%. Our stores in Western Europe continue to outperform, delivering double-digit like-for-like growth, excluding FMCG.
In Iberia, our converted Pepco Plus stores have delivered strong like-for-like and store EBITDA margin improvements, which I will touch on in more detail later in the slides. This positive development after 12 months of hard work has, for us now, created an inflection point, which provides us with the confidence to accelerate our rollout in Western Europe. We now expect to double our store count by financial year 2030, which we are really excited about. The launch of our mobile app and Pepco Club loyalty program in Poland was a big success, with results tracking ahead of our initial expectations. We have made good progress in line with our 250 net new store opening guidance, opening 62 net new stores in H1, though it's worth remembering this figure is inhibited by our 28 store closures in Germany.
As previously announced, we are opening Pepco stores in North Macedonia, our 19th market, for the first time in June this year. What's more, we have today announced a pilot entry of Pepco into Ukraine. This is a huge market with vast potential for Pepco. I look forward to talking to you more about this later. Lastly, we made quick progress with our planned EUR 200 million share buyback, which we completed last week, 12-18 months ahead of our schedule. Today, we announced an additional one-off pro rata tender buyback of up to EUR 400 million, which we intend to complete in H2, delivering further returns to shareholders. Turning now to the next slide. I am sure you all have seen before our five strategic pillars, which built the framework for our business progress.
With the first pillar of our strategic framework nearly complete, we are focused on the remaining four pillars to drive the growth of our business. Therefore, I wanted to share with you a little more insight on how we internally think about and categorize the future growth potential of Pepco. The easiest way to distill it down is into three core regional growth engines, North CEE, South CEE, and Western Europe, each of which has their own specific attributes and role to play in our future growth. I'll touch on the dynamics of each region in the next slide. These growth engines are supported by the work we have done and continue to do on our success levers regarding customer proposition and operating model that are allowing us to grow sustainably and profitably. On to slide 5.
Here you can see a quick overview of our three regions, which given this is the first time we are talking about our geographic split this way, I hope you will find helpful in contextualizing the profile of each. For North CEE, this is clearly a region we are well established in. We have a very high penetration in some of the key markets in this region, like Poland. You can think of North CEE as a steady profit center, delivering low-single-digit like-for-likes and roughly 65 net new stores this year. For South CEE, you can expect higher store growth, but also profit growth, resulting in mid-single-digit like-for-like growth and roughly 110 net new stores in FY 2026. Lastly, Western Europe, which now presents a sizable growth opportunity for Pepco, particularly in light of the beneficial market condition in the region.
Here, we expect to be able to deliver mid-high single-digit like-for-like growth and approximately 75 net new stores this financial year, which will predominantly be in Iberia and Italy. With that in mind, let me now turn back to our 5 strategic pillars and update you on our progress against each one. We start on slide 7. Pillar 1 of our strategy is all about simplification and streamlining the group portfolio. With Poundland sold and the FMCG exit in Pepco successfully completed, the only remaining piece of this pillar is Dealz. Dealz experienced challenging trading in H1 of this year, with like-for-like revenue growth down by 8.3%.
This weaker trading in part reflects a strong comparative quarter in the prior year, as well as the impact from the current transition period Dealz is in. We remain firmly focused on its separation, and I'm pleased to report we are in discussion with several interested parties at the moment. We remain on confidence to separate Dealz by the end of this financial year. On to slide 8. As we near the completion of the Dealz investment, I wanted to take a moment to draw attention to the differing financial profiles of Pepco and Dealz and highlight the benefit this divestment will bring to the group. As you can see, Dealz is only a small portion of group revenue, less than 7%, and has delivered consistently weak like-for-likes. In addition, as a result of its FMCG focus, it has naturally low margins, which have continued to deteriorate.
Although the Dealz exit will slightly impact our top-line revenue figure, it will significantly improve our profitability, as well as enabling greater strategic focus with the full attention of the group on Pepco. We will provide more detailed disclosure, similar to the pro forma disclosure we provided on Poundland in September last year at the appropriate time, but I hope in the meantime this helps to contextualize the exit and provides more clarity on the upside opportunity for the group. Go to slide nine. Onto pillar two, top line growth through measured expansion in CEE over on slide ten. Now on slide ten. First, let us look at North CEE, which covers Poland, Czechia, Hungary, Estonia, Lithuania, Latvia, Slovakia.
Versus H1 financial year 2024, North CEE has delivered roughly 7% revenue growth despite a period of strong like-for-like underperformance during financial year 2024 and early 2025. In H1 financial year 2026, North CEE delivered 2.5% like-for-like revenue growth, including FMCG. The significant majority of North CEE revenue is driven by Poland, which continued to perform well this half, with like-for-like growth of 2.9%, including FMCG, and revenue growth of 4.5%. Profitability in Poland also continues to improve with its store EBITDA margin up 110 bps versus H1 2025. Poland is now showing positive like-for-like performance for four consecutive quarters. We are very pleased with the outcome of our turnaround efforts. We will continue investing further into our Poland business, amongst others, in store renovations and relocations. Let's have a look at an example of this on the next slide.
On slide 11, in Poland, we have a number of undersized stores with roughly 250 sq m of sales space, which are significantly below our Pepco average of 450 to 500 sq m. These stores also tend to be in locations with reduced footfall, poor transport links, or mismatched co-located stores, all of which impacts like-for-like performance. In H1, we completed 19 store relocations in Poland, and by relocating the store to a larger site in a more modern retail environment, as shown in the image on the right, we are now able to display the full strength of the Pepco customer value proposition. On average, our relocated stores in Poland are delivering a 9% sales uplift. We continue to accelerate our store renovation and relocation activities in Poland as we speak. Now turning to slide 12.
Another driver of stronger engagement in our Poland and North CEE markets is our upgraded marketing campaigns. This year, for the first time, we started running marketing campaigns featuring influential celebrities. Our first campaign was with Małgorzata Socha, who many of our Polish analysts and investors may be familiar with. She's a popular Polish actress and model with a strong social media following. We have revamped significant parts of our ladieswear range, and through this campaign, we are seeking to strengthen the reputation of Pepco as a go-to destination for desirable womenswear at market leading prices. The campaign initially ran in Poland and then went live in stores across all CEE markets. We have seen great results with a sell-through rate of 73%. On the back of these strong results, we have just recently launched our second campaign and will continue to run the celebrity-led campaigns throughout the year.
Next on slide 13, we have South CEE, which as a reminder is Romania, Serbia, Bulgaria, Croatia, Bosnia and Herzegovina, North Macedonia and Slovenia. South CEE has delivered strong revenue growth of 25%, with H1 FY 2024 and H1 FY 2026, as well as strong like-for-like performance of +4.3%, excluding FMCG this half. As with North CEE, one country, in this case, Romania, delivers the bulk of South CEE revenue. This is diluting over time with the growth of other regions and the addition of new geographies like North Macedonia, where we will open our first Pepco store in June this year. If you look at slide 14, as I mentioned at the start of this presentation, we are very excited to announce our plans to enter Ukraine this year.
Ukraine presents a great opportunity for Pepco with many complementary attributes that will support our success in the region. Firstly, we already have excellent brand awareness in Ukraine as a result of the 4 million plus Ukrainian people who took refuge in Poland, as well as the customers from Ukraine who regularly shop in Poland and at Pepco. There is also relatively limited competition for Pepco in the region. Our internal market assessments have created good first conviction that our value proposition will resonate well with Ukrainian customers. The teams have been working hard to get us ready, and we plan to go live with an initial couple of stores, up to 10 later this year.
These stores will be largely located in cities closer to the Polish border, like Lviv and Kyiv. It is, of course, too early to say, given the size of the Ukrainian market and the potential for the Pepco offering, it may open up a huge opportunity for our business. Given its scale, Ukraine has the potential to be a fourth growth engine alongside North CEE, South CEE, and Western Europe over time. We will, of course, carefully evaluate our performance in light of the continued conflict, as well as ensure we prioritize the safety and well-being of our colleagues at all times. On to Western Europe on slide 16. In H1, we delivered like-for-like revenue growth of 13.5%, excluding FMCG, in Western Europe, with clothing and GM, general merchandise, both performing strongly.
This like-for-like growth has been supported by the success of our converted Pepco Plus stores, which are performing extremely well. I will touch on this more shortly. Our H1 reported net store opening number is impacted by the closure of 28 of our 64 stores in Germany, as previously guided. It's important to remark that the remaining 36 stores in Germany are performing very well, delivering double-digit like-for-like growth. This development makes us cautiously but increasingly confident that our concept resonates well also with the German consumer, and that there may be a strong opportunity for further growth of Pepco also in this market. Given we have successfully achieved our proof of concept in Iberia and Italy, we have today announced that we will be accelerating our store openings in Western Europe from financial year 2027 onwards by at least 600 new stores over a period of four years.
This will enable us to double our current store count in the region by financial year 2030. More on that later. Turning now to slide 17. When we presented the financial year 2025 results, we provided you with detailed information on our converted Pepco Plus stores, their performance, and the improvement we expect in the future. I wanted to provide you with a further update on these stores today. As a quick reminder, we converted 117 Pepco Plus stores to regular Pepco stores to facilitate Pepco's exit of FMCG, largely completed between March and August 2025. We now have like-for-like data on how the earliest converted stores are performing after lapping their one-year conversion date. We have 5 stores that were converted earlier in January 2025, which gives us roughly 11 clean weeks of like-for-like trading before the end of H1.
We are strongly encouraged by the fact that these wave 1 stores delivered like-for-like performance of +12.2%, ahead of our regular stores, which delivered like-for-like growth of +10.7%. What's more, since the half-year end, we have lapped the conversion date of many more stores. Like-for-like data for the first 38 stores that have now lapped their conversion date was +17.8% to the beginning of May. The improved performance gives us confidence in our full-year revenue growth guidance, which was, of course, impacted more severely in H1 due to the lingering FMCG impact. This effect unwinds during H2. Now, looking at slide 18. Equally encouraging, and as we discussed that previously very often, is the improvement in store EBITDA margin for these converted stores, which you can see here on slide 18.
At the end of financial year 2025, the store EBITDA margin for the 117 converted stores was 7.4%, a drag on Western Europe performance. With a full half of 0 FMCG impact, this has now improved to 19.7%, in line with our regular stores in Iberia and well ahead of our prior target of 14.4%. What's more, strategic initiatives we have run in the region, combined with strong focus on cost reduction, has seen the store EBITDA margin in our regular stores increase by 12.7% points versus financial year 2024. On to slide 19. These are charts you may remember from our full year 2025 results presentation. Here you can see that all our converted stores are now profitable and delivering a material improvement versus financial year 2025 and 2024.
On the right-hand side, you can see that store EBITDA in both Iberia and Italy continues to trend closer towards group levels. On slide 20. Here we will discuss our new store performance. We opened 22 new stores in Iberia and Italy in the first half of this year. As well as the strong performance from these openings, I really want to draw your attention to the improvement with the stores opened in financial year 2025 across all metrics. This is a testament to our ongoing work across the business to improve our customer proposition, strategy, and also operating model. On to slide 21. The closure of 28 of our stores in Germany has significantly improved our performance in the region. The remaining 36 stores are delivering double-digit like-for-like growth, and the store EBITDA margin in Germany is up 510 BPS versus H1 2025.
We continue to believe there is a sizable opportunity in Germany with the potential for over 2,000 Pepco stores. Given the performance of our current stores, we have decided to trial several more new stores in H2 of this year. Remember, the stores we previously closed were poorly chosen locations that had been selected in a rushed rollout under prior management. It was no reflection of the true potential of our concept in this market. We will be disciplined in our approach to new locations. As with Iberia and Italy, we have set ourselves internal targets for a proof of concept. Upon successful achievements of these targets, we will review our next steps. Lastly, on slide 22, I'm excited to share with you the more concrete outline of our expansion plans for Western Europe.
I've been convinced of the opportunity for Pepco in Western Europe since very early into my role as Pepco Group CEO. However, aware of historic missteps and improvement work needed across the business, we decided to take some time and a structured approach to fully prove the economics in Western Europe were viable before accelerating our expansion to take advantage of the significant growth opportunities that the region represents. There is an at least 1,000 store white space opportunity in Iberia and Italy alone, without considering other European geographies. Having been through the last few slides, I hope you will agree with me that the economics here are proven, and as a result, Pepco now has the justification to move forward with an accelerated store expansion in the region.
We now plan to double our store count in Western Europe by FY 2030 from 586 stores today, by adding at least 600 new stores during this period. These stores will be focused on locations in Spain, Portugal, and Italy. Also in some of our other existing Western Europe markets, depending on opportunity. Please note that this accelerated expansion is planned to commence from FY 2027 and will not have an impact on our FY 2026 guidance. Any possible impact on our midterm guidance will be updated at our full year 2026 results announcement. Turning now to pillar 4. This is slide 23. Going on directly to slide 24. I wanted to start with a quick reminder of the Pepco customer proposition, as I think there are several aspects that are often easily overlooked.
A key attribute of the Pepco proposition is our close proximity store estate, making it easy and convenient for customers to shop with us. We remain focused on maintaining market-leading prices, which I will cover more shortly, and hold number 1 price positions in all our core markets. However, a common misperception is that leading prices means reduced quality. That is not the case for Pepco. We are focused on providing strong value to customers with our in-house designs and curated product sets. This half, we have taken additional efforts to improve our product lines, particularly in baby and kids wear, and improved product fashion to drive newness in stores. This has been particularly effective in categories like toys, where we are seeing strong traction as a result of increasing the refresh rate of the category.
Supporting all of these areas is our effort in Digital, which is enabling a very different level of customer understanding as well as targeted and personalized engagement with them, leading to increased footfall and sales growth in store. Turning over to slide 25. The team recently completed a price analysis of roughly 2,500 products, comparing similar items that are crucially of comparable quality across our relevant competitors. This piece of work has clearly confirmed that Pepco is a price leader and remained a price leader across all our markets. Pepco has been indexed to 100 for comparative purposes. The two indexes are average of peer prices. Our market leading prices are a key part of our customer value proposition. We remain highly focused on maintaining this position across all of our markets.
On slide 26, you see that as well as price, we are equally focused on product quality. As a clearly differentiating element versus many of our competitors, our customers expect great value items from Pepco, meaning best quality at lowest prices. Our internal quality and garment technology team recently conducted GSM analysis, where GSM stands for grams per square meter for cotton and is the most impartial method of measuring the quality of clothing items. I'm pleased to say that against two of our local Polish peers, Pepco's results showed a 10% high quality level in both kids and baby wear. In adult wear, our quality levels are more comparable to peers, but we are also working to improve this. The focus on good quality paired with unbeatable prices is key to driving further brand trust, customer loyalty, and ultimately revenue. If you now turn to slide 27, mobile app.
We were very excited to launch our mobile loyalty app in February this year. In the first week since launch, we attracted 1.1 million app downloads and 530,000 Pepco Club customers. What's really great to see is that Pepco Club customers are spending on average twice as much with us as non-club customers. By using different types of offers and promotion mechanisms in the app, we were able to drive engagement as well as incremental store visits and purchases. Since the end of the half, the level of app download has continued strongly, and as of the 15th of May, we reached almost 2 million downloads and just over 1 million club customers. Encouragingly, conversion from registration to club customers is improving over time. If you now look at slide 28.
In H1, we began using AI to assist in our marketing efforts, in particular with the production of our photography assets. As a result, this enabled us to produce nine times more photos than we produced in H1 last year, which is especially valuable having launched our new Pepco customer website and new mobile app, which houses many more of our products than we have ever shown online before. We began initially with single product shots and are now confidently using AI to generate complex images featuring multiple Pepco products as well as AI-generated models wearing our clothing, many of which are used throughout this slide deck as well as on this site. This slide, apologies. This, combined with broader changes to our product photography production, has enabled us to already realize a EUR 1 million savings in our photography costs in H1 FY 2026.
Turning now to pillar 5 and the progress we have made on upgrading our operating platform. With some highlights on slide 30. Just after the half year end, we announced the completion of our DC partnership with DHL. We had previously moved the management of 4 out of 5 of our DCs over to DHL, and in April, we moved over our Bucharest DC. DHL are an expert in this field, and their management will enable us and our DCs to run more effectively and efficiently. We are not currently accounting for any financial benefit, but we do expect there will be some recognizable cost savings delivered over time. As we continue to grow our store base in Iberia and expand the utilization of our Spanish DC, we are achieving further cost savings. In H1, distribution costs in Iberia were down 240 basis points.
The DC is also supporting like-for-like in the region with improved, faster, and more accurate access to stock. Across Pepco, we have continued to optimize our processes and implement technology upgrades, particularly in our supply chain, which is allowing us to keep better track of our stock and manage volumes more effectively. Lastly, our data lake is now up and running, which empowers and integrates our CRM. Overall, our operating platform is in much stronger position, which is further illustrated on slide 31. Over on slide 31, we show that the improvements we are making to our operating platform not only put us in a stronger position for growth, but they also build greater resilience into our business model and supply chain.
PGS, our Asian sourcing entity, is now fully integrated with Pepco, and having our own direct sourcing arm is a key strategic advantage for our business. We source 92% of our own label products through PGS, enabling us to avoid expensive third-party agents and be in full control of our high product quality levels. The quality of our supplier relationships, coupled with long-term shipping contracts and our integrated supply chain, puts us in a strong position, which has been well demonstrated through the recent supply chain disruptions caused by the Iran war. I'm very pleased to say that thanks to earlier steps we have taken to modify our shipping routes and negotiated competitive rates with a diverse supplier base, we are very largely unaffected by the crisis.
95% of our goods, thankfully, are already traveling around the Cape of Good Hope, and other than a small impact from increased fuel prices, we remained in a very robust position throughout with almost 0 delays. Lastly, we have taken significant steps to improve stock freshness and reduce our aged inventory, as you can see in the charts on the right-hand side of the slide. Aged inventory is down 15 percentage points versus financial year 2024, and both freshness and inventory are on track to be at our best levels since financial year 2022 by year end. I hope this has given you a good overview of the strategic progress we've made in the first half of this year.
I will now hand over to Willem and Hugo for the financial review before coming back at the end to provide an update on our current trading and outlook before we take your questions. Now, Willem, over to you.
Thank you. On slide 32, please. Thank you, Stefan, and good morning, everyone. I'm looking forward to taking you through the strong set of results we've delivered in the first half of FY 2026. As Stefan mentioned, joining us in the call today is Hugo van Santen, who is the CFO of Pepco, our core banner and core of the business. I'll begin by covering a few quick highlights and then over to Hugo, who will take you through some of the specifics on Pepco's performance. I'll then cover the remainder of our first half financials, as well as details on our refinancing, capital allocation framework and FY 2026 guidance before handing back to Stefan. Turning to slide 33. I won't go through each of these in turn. There are a few highlights I would like to call out.
We delivered 250 basis points of gross margin improvement versus H1 2025, which was driven by a very strong performance in Pepco, offset slightly by a weakening margin in Dealz. Hugo will provide more details on this later with a focus on new Pepco, the relevant entity going forward. This gross margin improvement translated into underlying EBITDA growth of 17.5% to €516 million. We delivered even stronger EBIT growth of 53%, which reflects our top-line growth and gross margin expansion, combined with a change to our depreciation policy to better reflect our actual store lease lengths, which had a beneficial impact. Again, later I will go into more details on this change. Our profit after tax growth was equally strong at 52%, taking us to €198 million.
We finished the first half with unlevered free cash flow of EUR 181 million, which was up over 250% on H1 fiscal 2025, driven by strong operating cash conversion of 78%, combined with a significant improvement in working capital outflow. Lastly, underlying EPS growth was up 56.6% at the end of H1, obviously reflecting the strong PAT performance, profit after tax, but also reflecting the impact on the share count of the share buyback program, which was ongoing during the half. At the end of H1 fiscal 2026, we were still executing the final tranches of the EUR 200 million share buyback program, but this was completed last week. Over to slide 34. Here you see the breakdown of our like-for-likes by banner and by Pepco region. We're showing these today in line with Stephan's earlier explanation of how we think about the growth profile of the business.
You will see North and South CEE, rather than Poland and rest of CEE. The details for Polish like-for-likes are available in our release published earlier this morning. We delivered group like-for-like growth, excluding FMCG, of 3.6%, which was driven by the strong 4.6% growth in Pepco's like-for-likes, offset by 8.3% like-for-like decline in Dealz, which experienced a challenging trading period, while also annualizing a tough comparative period. We achieved strong like-for-like growth in both North and South CEE of 2.4% and 4.3% respectively, and even stronger like-for-like growth in Western Europe of 13.5%, all these excluding FMCG. These like-for-likes are a testament to the strategic initiatives we're running across the business to ensure we offer quality products across our categories that customers love at great value prices, and that encourage them to visit our stores again and again.
I will now hand over to Hugo, who has been in charge of Pepco since the start of 2025, and he will take you through Pepco's performance in a little more detail. Let me remind you that he will focus on Pepco excluding Dealz, unless it is called out specifically as group, which would include Dealz. Hugo, over to you.
Thank you, Willem. Good morning, everyone. By way of quick introduction, I'm Hugo van Santen, the CFO of Pepco. I joined Pepco almost 18 months ago. It's been a very exciting period to join the business. I've been really impressed with the strategic delivery the team has achieved in such a short time. That progress really shows through in today's results. Let me now turn to slide 36 for more detail on Pepco's revenue growth. Pepco generated revenue growth of 6% in the first half of FY 2026, driven by solid volume growth of 3.7% and a continued rollout of our new store opening program. We opened 113 new stores in the half.
However, as mentioned earlier in the presentation, we closed 28 stores in Germany to optimize our portfolio in the region, which resulted in a higher level of closures and 62 net new stores overall. Of the 62 net new stores, approximately half were in Spain, Italy, Portugal and Greece. This is in line with our plan for the year, and we remain on track for 250 net new stores by the end of FY 2026. We remain focused on maintaining our market-leading pricing. I just want to flag here that the 1% increase in average unit price you see is predominantly driven by sales mixing into higher value products. For instance, within home and everyday home, higher value products like candles and bedding, each in double-digit growth, were drivers of the average unit price increase.
Lastly, I want to highlight that revenue growth in H1 was impacted by our FMCG exit, which created a growth headwind in the first half of over 3%. However, this will ease into the second half of the year, standing at 1.2% headwind in the third quarter and only a 0.1% headwind in Q4, as we cycle the period where we exited FMCG last year. Turning now to slide 37. Here you can see a quick segmental breakdown of Pepco revenue, which has remained relatively stable half on half. By geography, Pepco revenue is split 54% in North CEE, of which 32% is Poland, 29% South CEE and 17% Western Europe. We delivered strong reported revenue growth across each region at 5.1% in North CEE, 7.6% in South CEE and 5.9% in Western Europe.
The revenue growth in Western Europe is driven by 11.8% like-for-like growth contribution, minus 12.4% from the exit of FMCG and a positive 6.5% from net new stores. Specifically, when it comes to the like-for-like growth in Iberia, 133 stores were not converted from Pepco Plus and are therefore not impacted by the impact of an FMCG exit. The like-for-like growth in those stores was 10.7% in H1. Like-for-like sales growth for Poland, excluding FMCG, was 3%. Our category split remained relatively stable year-on-year, with a slight increase in general merchandise sales. Overall, we roughly maintained a 50/50 mix of clothing and GM. Turning now to our like-for-like performance on slide 38. This top chart sets out the turnaround journey we have been on in Pepco.
As a result of the strategic efforts taken across the business, we delivered our sixth consecutive quarter of positive like-for-like growth in Pepco at the end of H1. Looking at this half in particular, we faced a slightly more challenging Q1 with a heavy promotional environment and issues on stock freshness. However, we can share that Pepco ended the autumn/winter season with a significantly lower remaining stock level of that season compared to last year. This means that the upcoming autumn and winter season will start with a more healthy level of stock freshness compared to this year.
As we entered Q2, trading momentum improved with the launch of new product lines, which also increased freshness, as well as targeted initiatives on some of our weaker categories, like baby. And as you can see from the bottom chart, this growth has been primarily driven by volume, as we focused on maintaining our price leadership position across our markets. As I flagged earlier, the increase in price you can see in Q2 2026 is the average unit price increase, which predominantly results from the mix of items we sold during the quarter.
Turning to slide 39, where you can see our two-year like-for-like performance from the start of financial year 2025, which has been steadily building quarter on quarter to 9.7% in the second quarter of FY 2026. This gives you a clear look through our underlying growth trajectory, the traction we are building with customers, and our improving momentum.
Slide 40. This slide shows group gross margin expansion of 250 basis points. The improvement was driven in part by mix, showing the benefit of exiting low, circa 30% margin FMCG products and growing the sales of our higher, circa 50% margin clothing and general merchandise products, as well as improvements in product margin, which includes the positive impact to cost prices, including, for instance, from our never-out-of-stock continuity products with long-term contracts, from production efficiencies delivered by our engineering team, and from volatility in the market due to the tariff war, where Pepco benefited, as we are a loyal customer with long-term relationships with our suppliers. We also experienced favorable movements in FX for stock purchases in the period. This was slightly offset by an increased level of markdown as we worked to improve stock freshness and inventory clearance.
As said on the previous slide, we ended half 1 with significantly lower remaining stock of old seasons, which should benefit us for the next autumn and winter season. The improvement in group gross margin was driven by Pepco, which delivered gross margin expansion of 310 basis points, slightly offset by Dealz, which experienced higher levels of markdown in the period to drive footfall after an ERP-related supply chain disruption in November and a one-off EUR 8 million stock write-off. Heading towards the full year, we have increased our full year 2026 margin guidance slightly from 48.4%, of which 40 basis points relates to our FMCG exits, to 49.4%, reflecting the strong performance we have achieved to date. With that, let me now hand back to Willem to continue through the rest of the financial review.
Thank you, Hugo. Turning now to slide 42. Here you can see the movements driving our underlying EBITDA, which was up by 17.5% to EUR 516 million. This was driven primarily by our strong gross profit improvement that Hugo already commented on, somewhat offset by store costs, which were up year-over-year, largely driven due to inflationary pressure on our cost base as well as our increased store count. I will cover this more on the next slide. Our underlying EBITDA margin grew by 230 bps to 20.9% as we focus on improving EBITDA conversion. We remain focused on our cost base and prioritizing efficiency across our business. Over the coming years, we strongly believe that there is more we can deliver to further reduce costs, particularly in our supply chain. On to slide 43, please. Total operating costs were up 5.8% to EUR 710 million.
This was largely driven by store operating costs, which were up by 6.9%, primarily reflecting a 4.5 increase in our store count and store labor inflation, as well as a small increase in SG&A costs, where we benefited from a one-off credit of EUR 12 million relating to an insurance claim payout relating to the Blue Yonder outage of quarter one FY 2025, which we had reported on at the time. As a % of revenue, store operating costs were up just 40 bps to 20.7%, driven by our inflationary pressure in store labor cost, partly offset by efficiencies in our distribution cost, which were down 20% half on half. On to slide 44. SG&A costs were up EUR 6.5 million to EUR 199 million. I already flagged that this includes a EUR 12 million benefit from the insurance payout we received relating to the Blue Yonder incident.
Excluding this benefit, SG&A costs were up EUR 18 million half on half. On a percentage of sales basis, SG&A was down 10 basis points to 8.1% reported. However, removing the Blue Yonder benefit, SG&A costs were up 30 basis points to 8.5% of sales. The increase relates to the higher spend on transformation initiatives, such as accelerating our data and digital capabilities, enhancing our IT platform, as well as driving efficiencies in our operating, finance, and supply chain processes, which we've guided on for the year. Stefan highlighted in his section already the concrete business benefits that we are accruing from these investments. Turning to page 45.
In H1 fiscal 2026, we took the decision to extend our depreciation policy and amend the accounting estimates for the useful economic lives of our leases from 5 years to 10 years, which reflects our intention to remain in stores for longer periods and more accurately reflects the true average lease length of our stores. This decision was made following the sharpening business strategy with a focus on the Pepco banner and improving store profitability in fiscal 2026. As part of the new strategy, Pepco has consequently revised store opening assumptions, including the continued use of stores beyond the initial breakpoints, extended refurbishment cycles, and aligned capital investment decisions with longer lifespans. Also, with the closure in H1 fiscal 2026 of 75 loss-making stores, our store portfolio is very healthy, with circa 1% being loss-making remaining.
As of April 26, the weighted average lease period of the Pepco portfolio across 18 countries was nearly nine years, and this includes some 1,700 stores opened since 2022, reducing the average. In the table on the left, we're providing a breakout of the impact to our financials pre and post the UEL change for H1 2026, which we hope will help in adjusting your models. The change in accounting estimate has been applied from the 1st of October 2025, the start of our fiscal 2026 year. The right of use assets have been recalculated based on a 10-year useful life. This has resulted in an increase in the net liability position and an increase in the right of use of assets under IFRS 16, a net impact of EUR 21 million.
There is also a modest reduction of IFRS 16 right of use depreciation, but an increase in IFRS 16 interest of EUR 13 million, which I will comment on later in the interest section. When combined with the EUR 34 million reduction in depreciation, made up of a EUR 30 million reduction in PPE depreciation and a EUR 4 million reduction in the right of use of assets, this leads to a net positive profit before tax impact of EUR 21 million in the H1 fiscal year 2026 accounts. There is no impact on cash flow. Similarly, no impact on our 0.5-1.5 leverage target, as this is a pre IFRS 16 target, and therefore excludes leases.
On to page 46. This is a slide you will already have seen at the full year results. I won't spend too much time there on this, but remind you of a few key points.
The refinancing we completed in November 2025, so fiscal year 2026 start, put us in a much stronger position with maturity extending by over three years, a significant reduced average coupon, and an annualized interest cost saving of EUR 14 million. Since the year end, we've also extended our RCF, a revolving credit facility, from EUR 300 million to EUR 330 million. At the end of H1, our pre IFRS 16 leverage stood at 0.2x, below our target of 0.5x-1.5x range. Today we announced our intention to undertake a one-time leveraging of our balance sheet, which will bring our leverage back to circa 1.0x, back within the target range. Alongside existing cash reserves, we intend to raise some additional financing to fund up the EUR 400 million one-time capital return in H2 this year. We're currently in discussion with our banking partners and will provide a further update as appropriate.
Turning to slide 47. As a result of the refinancing, we reduced our average coupon from 6.4% to 4%, which, combined with an increase in interest income and offset by a reduction in Forex gains, resulted in a EUR 9 million interest cost saving on our external loans in H1 2026. This improvement is offset by a one-off refinancing cost of EUR 12 million. Without this, the pre IFRS 16 interest cost would have been EUR 12 million, and our total net interest EUR 46. From fiscal 2027 onwards, the true benefit of the refinancing will show through in our financing cost as we will have absorbed the refinancing cost in 2026. As briefly mentioned, the EUR 30 million increase in IFRS 16 interest is a result of the change in our UEL policy from 5 to 10 years. On to slide 48.
We delivered a significant net profit growth in H1 FY 2026, up 52% on H1 FY 2025. This was first and foremost, and I want to stress that, driven by strong operational earnings growth of EUR 72 million, supported by a positive impact from our UEL change, EUR 16 million, and a EUR 12 million one-off benefit from insurance payment relating to the Blue Yonder outage in Q1 FY 2025, offsetting the EUR 12 million refinancing cost and a EUR 21 million increase in tax. Despite a headwind from underperformance in Dealz, group underlying effective tax rate was down 60 basis points, driven by Pepco, which experienced a further 140 basis points reduction in its underlying effective tax rate during the period, continuing the positive trend we've seen in FY 2025. On to slide 49, please.
Here you can see the movement in our cash position over the half, which both started and ended, but that's coincidence, at EUR 464 million. We generated unlevered free cash flow of EUR 181 million, which was up EUR 130 million on H1 FY 2025, driven by strong EBITDA growth and a significant reduction in our working capital outflow, standing at just EUR 12 million in H1 2026 versus EUR 146 million in H1 2025. This improvement was driven largely by a reduction in inventory as we increased markdowns during the half to clear older stock and increased freshness across our product range. Free cash flow conversion in H1 2026 was 91% of underlying profit after tax, a significant improvement on H1 FY 2025 of 39%.
Please remember that although CapEx was just EUR 48 million in our H1, our guidance for the full year remains EUR 160 million-EUR 180 million, and we expect to be towards the top end of the range as we ramp up our investment in IT and digital and accelerate the store openings in H2 fiscal 2026. Despite that, we remain on track to meet our upgraded guidance and deliver unlevered free cash flow of at least EUR 250 million for the fiscal year 2026. On to slide 50. CapEx in H1 was EUR 148 million, as already commented on, just under 2% of revenue and broadly in line with H1 2025.
We invested EUR 28 million in opening 138 gross new stores, slightly down on the 104 gross new stores in H1 2025, and EUR 6 million on store maintenance, including EUR 36 million for the new look program approved in December.
We also increased our IT spend from roughly EUR 3 million in H1 2025 to circa EUR 40 million in H1 fiscal 2026, as we began to increase investment in enhancing our IT systems and digitizing our operations. Despite just EUR 48 million CapEx invested in the first half, we reiterate our full year guidance of EUR 160 million-EUR 180 million, you can expect to see a jump in spend in H2 as we ramp up our digital transformation and store openings. Over to slide 51. We have slightly revised our overview of our capital allocation framework, which is sharpening of our capital allocation framework that we announced at the Capital Markets Day in 2025. Our priorities remain the same, to invest in organic growth, including new stores, technology initiatives, and our supply chain, to maintain a strong balance sheet and to deliver returns to our shareholders.
These returns are by way of ordinary dividend with a payout ratio of at least 25%, and the return of excess levered free cash flow via buybacks or special dividends. Here I can reference page 49 for you to look back to. So far in fiscal 2026, we have returned EUR 150 million to shareholders via buybacks, which includes two traditional EUR 50 million open market buybacks, one we just finished last week, and an additional EUR 50 million participation in the IBEX placement of our shares. In addition, we paid out the fiscal 2025 dividend of EUR 53 million in April. I'd like to share a little more detail relating our leverage and returns to shareholders over on the next slides. At our Capital Markets Day in March 2025, we provided a target leverage range of between 0.5-1.5 times pre IFRS 16 net debt to EBITDA.
As you can see from this chart on the left, we have been operating either at the bottom end or well below that range in recent years, despite returning over EUR 200 million of capital to shareholders so far in FY 2026. This morning, we announced our intention to take action to move our leverage closer to 1.0 into FY 2026 to ensure an efficient balance sheet and a lower cost of capital while also retaining financial flexibility. On the right-hand side of the slide, you can see the percentage of unlevered free cash flow we have returned to shareholders in FY 2025 and so far in FY 2026 via both dividends and buybacks.
We remain committed to returning all excess cash after investments in growth to our shareholders. In line with this, we've today announced our intention to provide an additional capital return to shareholders of up to EUR 400 million by way of a tender offer. This tender will be funded from a mix of existing cash reserves and external debt financing and will include pro rata participation from IBEX, our main majority shareholder. In addition, we've clarified our midterm capital returns policy. From FY 2027, we plan to return all unlevered free cash flow via dividends and share buybacks and have announced that over time we will be increasing our dividend payout ratio from the 25% paid in FY 2025 towards 40% over time. Slide 53, please.
I wanted to take a moment to highlight the changes to our share count over the past 6 to 12 months, given the importance of our share buyback program. Our 200 million share buyback program, which concluded last week, has resulted in a significant reduction of the Pepco Group outstanding share count on both a basic and diluted basis since the start of the financial year. Our weighted average shares outstanding for H1 fiscal 2026 to be used for basic EPS calculations is 559 million shares versus our shares in issue of 577 million. The dilutive potential share count has been restated to reflect the fact that the vast majority of the previous 17 million dilutive shares had not met the relevant performance criteria as of the 31st of March 2026, and therefore should not have been included in the dilutive potential share count.
The weighted share count for diluted EPS is therefore 564 million for H1 2026. As at the end of the H1 fiscal 2026, the number of shares in treasury was just over 26 million, which resulted in a share outstanding figure of circa 551 million at the period end. I would like to encourage all to reflect this into their models as combined with the intended tender, this will have a material impact on our share count and therefore EPS. Slide 54. I hope you've all seen the announcement on the 22nd of April. It's just we upgraded our EBITDA guidance from at least 9% growth to low teens percent growth, and our net earnings guidance from at least 25% to at least 50%.
For consistency, we're also today announcing an increase to our full year gross margin guidance from at least 48.4% to at least 49.4%. Note that this includes the 40 basis points contribution from FMCG exit, which we had flagged previously. We announced an increase to our unlevered free cash flow guidance from over EUR 200 million to over EUR 250 million, reflecting the strong H1 and our plans for the remainder of the year.
Our revenue guidance remains unchanged at 6%-8%, as does our capital CapEx guidance of EUR 160 million-EUR 180 million. As mentioned earlier, we expect CapEx this year to be towards the top end of this range. With that, let me hand back to you, Stephan.
Yes. Thank you, Willem. Thank you, Hugo. Let me now quickly summarize before turning to our current trading and outlook. If you look at slide 56, look, we have delivered a very strong set of financial results this half. In particular, our 250 basis points gross margin improvement and 52% improvement in profit after tax. We have announced the acceleration of our Western Europe rollout from fiscal year 2027 onwards, with our store count in the region set to double by fiscal year 2030. What's more, we are trialing small numbers of new stores in both Germany and Ukraine this year, which both represents a potentially large market opportunity for Pepco. Our geographic expansion extends further, with new stores set to open in North Macedonia next month. Our growth is not just fueled by new store openings, but by strategic initiatives across our business.
A key one of these is the Pepco loyalty app. We are really pleased with the progress in downloads and Club member numbers, and even more so in the increased engagement we are seeing from Pepco Club customers. Lastly, importantly, we have announced some key challenges to our capital allocation framework today. Later this year, we plan to return up to EUR 400 million via a pro rata tender buyback, as outlined by Willem already. From FY 2027 onwards, we are committing to returning all excess levered free cash flow to shareholders via dividends and share buybacks. In addition, we aim to increase our dividend payout ratio from 25% in FY 2025 to 40% over time as we remain focused on delivering strong returns to our shareholders. Lastly, onto current trading and outlook over on slide 57.
In the 6 weeks to 16th of May, Pepco delivered +1.5% like-for-like growth, including FMCG. April trading was impacted by unreasonably cold weather in some of our core CEE markets, with North CEE particularly affected. This delayed the normal transition into summer closing ranges and weights and volumes. Adding to this, Easter was earlier this year than the prior year, so some of the benefit fell into Q2. Looking at the combined March and April, due to neutralize the timing of Easter, Pepco delivered like-for-like growth of 2.1%. Western Europe continued to perform strongly, delivering double-digit like-for-like growth in the 6 weeks to 16th of May. Since the start of May, we have seen significantly improved momentum in Pepco overall, which generated +11.6% like-for-like growth in the 2 weeks to 16th of May, driven by both closing and general merchandise with a positive like-for-like contribution across all countries.
Looking forward in H2, as I have mentioned already, we tend to launch an up to EUR 400 million pro rata tender buyback. For the fiscal year, we are on track to meet the guidance Willem outlined for you earlier, including low teens EBITDA growth and at least 50% net earnings growth. For our midterm guidance, we will provide an update on this with our full year 2026 results in December. With that, I would now like to hand over to your questions.
Thank you very much, sir. Ladies and gentlemen, if you'd like to ask an audio question, please press star one on your telephone keypad and just make sure your line is not muted to allow your question to reach our statement. You can also submit your questions through webcast. Star one for audio questions. We'll pause for just a moment. Our first question today is coming from Mr. Michael Pociara of UBS. Please go ahead. Your line is open. Thank you.
Hi. Morning, everyone, thank you for a comprehensive overview. I have three questions, if I may. The first one is about the gross margin, in particular the gross margin sustainability. We've noticed that the gross margin have been strong across the sector. Definitely FX was supportive. If you could perhaps comment, how sustainable do you think those levels are and what factors could lead to a potential normalization from those levels? Should we expect any inflection, any impact from higher oil prices, et cetera? That's the first question. Thank you.
Let me take the question. Good morning. First, it's important to say that we have upgraded our guidance from 48% to 49%, plus 40 basis points coming from FMCG. That reflects our view that we believe that the gross margin is sustainable. If we look at the drivers, it's important to also note that, on FX, we continue to see tailwinds for the balance of the year. We are hedged into FY 2027. When it comes to other drivers, like our cost prices that have been negotiated, these also have been locked in for the balance of the year. On that basis, we believe that this for FY 2026 is a sustainable delivery.
Thank you. Another question on Western Europe. You really showed solid improvement on those markets, especially on EBIT level. Could you perhaps provide more color what has really changed in those stores, in that business that suddenly, from a drag, that region starts looking promising? Thank you.
Thanks, Michael. I will take that one. We have actually spent a lot of time explaining that, I think already in the past, but let me just summarize. It's a mix of many levers that we've pulled, but as we've grown volume in GM and clothing over the last year and a half now, our warehouse that was recently opened has allowed us to reduce distribution cost. That's one lever. Also importantly, the distribution center opening in Iberia as such has helped us tremendously drive product availability and product freshness in our stores, being an underpinning driver of our like-for-likes. We've also implemented measures to drive store efficiency, as our new leader, Jorge Gervasi, has strongly focused on that as well, driving store efficiencies, a further leg into the improvement of store EBITDAs.
Underlying gross margin also benefited clearly from the improvements that we've seen elsewhere across the group. All in all, these combined effects help explain the material step-up of EBITDA that we've seen both in regular stores and then notably in the Pepco Plus stores as we exited the low-margin FMCG product and replaced and enriched with much higher margin clothing and GM. That's underpinning, and we believe this is a very sustainable trend. As you could see, we're approaching group levels now for these two key markets for us.
Thank you. Maybe the last bit on Ukraine. You highlighted Ukraine as a potential growth opportunity. I understand it's early stages, but maybe you could help us size this opportunity a little bit more in terms of store count, revenue, profitability, and what are the first kind of milestones you're looking at on those markets? Thank you.
I will take that one. Thank you very much. It's very early stage, as you just said, we will not really guide on store count potential and so on. What we said is, let's look at a couple of facts. First of all, we believe we have a very strong brand awareness and brand strength already in the country. More than 4 to 5 million Ukrainians have lived in Poland for a large part of time, and we have a large customer base already coming back and forth, also shopping with us. We have, in addition, conducted a lot of market assessments there. We are very convinced now that our value proposition would resonate very significantly with Ukraine. It's a large country, 35 million-plus inhabitants and also consumers in there. I believe the current situation also drives customers into strong value-seeking offers.
We are very convinced on this. Second, operational efficiency. As you know, we do have infrastructure around the whole country, whether that's Hungary, Poland, or Romania. We will operate from there. This is already set up from our side without massive pre-investments. We believe that this will be quite efficient and, at the end, ultimately, a highly profitable operation for us. To the pilot, we don't want to disclose too much. As we said, we will be very cautious as we have been with Western Europe. We go in, test, set up a couple of stores, up to 10 max maybe in the first round, and see how it goes, and look at whether we can achieve our internally set targets, review, and then decide on the pace of acceleration. That is really it.
Of course, on top of that, we monitor very closely the current and forward situation in the country, and it will be no surprise that we start the pilots more in the western region of the Ukraine. We will report on that and discuss that much more in probably the end of the full year fiscal 2026 meeting.
Yeah. If I may, Michael, we will both on Western Europe, which clearly is in an advanced stage compared to Ukraine, disclose more on impact on our guidance at the end of the year for fiscal 2027 guidance. On Ukraine, we are announcing a test. We have proven that we are disciplined as a management team. We will do a number of stores, we will evaluate, then we'll make a decision, and that will be in 2027 that we will be clarifying that further. On Italy, more details to provide. Sorry. On Western Europe, more details to be provided in year-end December announcement. The same is true for Germany, I would like to stress. 5 stores, proof now with new stores, the potential, only then will we make a decision, if not, or if, to accelerate. Discipline is the keyword in this team.
Makes sense. Thank you. Maybe just one follow-up, like a very technical one. Do you see any scope to further reduce your effective tax rate in the coming years? Thank you.
Let me take that question. We are very pleased with the progress we've achieved with our effective tax rate. I highlight it. It's all in the detailed notes to the accounts. We've had really good further progress in Pepco, new Pepco, slightly offset by the losses at Dealz, which of course then depresses our reported effective tax rate. You have to reflect that we are expanding now more aggressively into territories with a slightly higher underlying effective tax rate than our average in Central Eastern Europe, notably Italy and Spain. We also have historical losses to help us offset partly that.
There will be a complex mix on our effective tax rate, but we do expect to be landing in that indicated 21%-22% range, which we indicated over time as our stable effective tax rate for the company, which is a significant reduction from where we were in 2023 and 2024. Was that helpful?
Thank you.
Okay.
Yes, very much. Thanks, and have a great day.
Thank you. Thanks.
Thank you. Those are your questions, sir. Ladies and gentlemen, once again, if you have any questions, please press star one. We'll now move to Matthew Clements, calling for Barclays. Please go ahead.
Morning, all. Thank you very much for taking my questions, congratulations on a very impressive turnaround and good to see these results coming through. Three questions, if I may. The first on external, pricing environment into late 2026 and early 2027. Obviously amid the cost inflation we're seeing, any view on what you might see in terms of spring/summer pricing next year? Related to that, can you also talk a bit about what you're seeing in terms of sourcing capacity in some of your key sourcing markets? Putting input cost inflation aside for a moment, how have terms kind of evolved with your supplier base, both in terms of your scale, but also supply capacity in those markets? That's the first question. I'll come back for the other two.
Okay. Thanks, Matt. Tom? Yeah.
I think it's important to say that when it comes to the sustainability of the gross margin, which is what you're alluding to, also when it comes to the question on potential cost inflation to spring/summer 2027. We are not guiding here on the '27 margin, but we have upgraded our gross margin for this year. Yeah. We are now saying we are going from 48% to 49%, plus 40 basis points on FMCG. When it comes to costs, we are a very reliable customer to our supplier. We have deep integration with the suppliers. We predominantly source direct, and not via agents. We have relatively low markdown levels as we are not a fast fashion retailer. We have lots of potential to manage our gross margin also going forward.
I think to add to this, because you also asked about sourcing and input cost, Hugo just alluded on this. We do have a very well-established, since many, many years, sourcing structure in Asia, across all of Asia. At the moment, we said that we don't see an impact on sourcing and input costs. As you know, with long lead times, we are contracting far out already. That goes far into next year. We will, of course, monitor closely. Nobody can predict, but definitely we feel that far beyond H1 next year already, we are well contracted, and therefore to be seen what's happening. At the moment, we would not see this as a bigger issue.
Very clear. Thank you. Second question is on Germany. Obviously widely perceived as a very competitive discount market. You put quite a punchy potential white space opportunity out there. Obviously, you're talking about tentative trials at the beginning. Can you just remind us on how you perceive Pepco's relative positioning in that market? How you think about the current concept and its resonation and also as well, site availability, given that was an issue, or the quality of the sites was an issue in the last phase of expansion. Thanks.
Yeah. Good one. Let me start with the latter, site availability. Look, I think the situation we were in, it was no real representation of the true potential of Pepco in Germany. It was a very unstructured site acquisition done by previous management. We decided to cut down those stores we have guides on. The remaining stores are performing extremely well. We are seeing strong double-digit like-for-like and a strong customer acceptance. We know now, and as we've done in Italy and Spain, we've identified the 2 to 3 segments in a market which we really want to have and which works for us. Over time, we believe there is ample of sites available for us. Particularly, you also see a strong consolidation in the German market.
There's a lot of insolvencies there, and that makes space for us. Positioning-wise, as I said before, we believe we will fine tune a bit more. We believe, as in many, many other also Western European mature markets
Our almost unbeatable value proposition to customers resonates as well. I've personally traveled many stores in Berlin and others. It's visible. You have in currently subdued consumer sentiment environments, you see customers stronger looking at value. The value-seeking segments are becoming bigger, but customers in this segment are also more selective. You need to have a strongly curated, spot-on value proposition product offering, which we believe we have. It's this combination of GM and apparel that we have now for many years created, and particularly over the past two years, strongly improved in baby and kidswear, in toys, and in many other categories that I think makes us very attractive. We strongly believe there is a space for us in Germany.
However, as Willem alluded on, also there, based on our current base, we will now slowly and cautiously add more stores to test basically our segmental structure in the market and see whether our internal targets are achievable. We believe there is a strong opportunity for us in there, absolutely.
Great, thank you. The final question on your digital initiatives, clearly calling out positive reception to that work in Poland, what's the next major step in your development of the digital proposition for Pepco? Key learnings from the initial rollout, and also, how would you plan on leveraging, I'm presuming, the much better data you're going to be getting on customer behavior? How are you going to leverage that going forward? Thank you.
Yeah. First of all, as I said, we are very pleased with our current development. It's ahead of our expectations. It shows us the need our customers had. They wanted to have a better engagement tool, almost like a window to Pepco in the pocket. That's what we have now with our loyalty app. What are the next steps? First of all, we will further accelerate the app downloads and the app penetration in Poland. We continue to now learn, and also increase our marketing activities around that. Your question on what is the objective really is the DISS, so digitally influenced store sales. We will, first of all, understand customers much better. It's important to understand that we not only create the app, but we also set up a totally new digital environment behind, with an integrated data lake, BI systems, and so on.
We understand customers better, we can communicate with them much more targeted, and we use smart couponing to also really, almost on a personal level, drive them into our stores and make them obviously buy one or two product more in the basket. That is now a large opportunity for Poland. We are now at 2 million downloads, roughly 1 million Pepco Club members. The potential is high in Poland. We are, as we speak, working on rollout country, it's a very replicable, new, very state-of-the-art technology, we have not yet guided which country we want to go next. We will take this probably in the next year. We'll probably guide on this in the full year as our results, where we go next. Just think about the potential. The current Pepco Club customers basically on average buy 2 times more than the non-club members.
This is huge. We know that once we get customers into our shop, we convert, and therefore, we will take decision on which country next in the course of this year.
Brilliant. Thank you very much for your time.
Very welcome. Thanks, Matt, for your question.
That's it. Thank you. That's your questions, sir. As we have no further audio questions, Christina, returning the call over to you for any questions submitted through webcast. Thank you.
Thanks, George. Yes, we do have a few questions from the webcast. Our first one is, how has the Iranian war crisis impacted the supply chain of Pepco, including freight costs on imports from Asia?
Christina, do you know who asked the question?
This is from Maciej Wojtacki at PCU.
Okay. Thank you.
I can take the question. I think it is important to say, as I believe we have communicated before, that predominantly the ships that sail for Pepco from Asia into Europe sail around Africa. Yeah, our ships do not pass Iran, and only very limited, 5% or less of our ships go through the Suez Canal. That means that we are very resilient to the war when it comes to oil prices and sailing. Therefore, also what you have seen in the gross margin that has been presented to you is that there is very limited impact or to zero impact from this in our margin. It did not deteriorate as a result of this.
Our distribution costs on land, which of course, have been impacted a little bit by the higher fuel prices, but it's not to the materiality that we've had to call out today.
Thank you very much. Another question from Maciej. We saw on one of your first slides that you are looking to increase share buyback by another EUR 400 million. Why is that, and how is it going to be financed?
I will take that question. Why is that? Well, we are well outside of our range of our guided leverage ratio. We have guided consistently in the past also on 0.5 to 1.5 times EBITDA multiple pre-IFRS. We are today at 0.2 times. That's an inefficient balance sheet, driving up cost of capital, which is negative to our shareholders and share price. Therefore, we believe that with this one-off EUR 400 million share buyback through a tender mechanism, we will bring us back into a more healthy and competitive balance sheet structure. We will use internally generated funds, a significant portion of it. We will then seek a small increase on gross debt to fund the balance, which is again, helping us then achieve at that 1.0 times ratio, as we indicated in the press release.
We are discussing with our partner banks and have seen a good response to that already, but more details will follow when we announce details on the tender as such.
Thank you very much. We have a couple of questions on the Dealz sale from Casper Gregorich and AZERO. Could you elaborate on the Dealz sale, what is expected schedule and cash flows? Do you expect any additional costs related to disposal? Also, is it planned to distribute any potential proceeds from the sale of Dealz to shareholders as a special dividend?
Let me take that question. We made it very clear that we did not expect a material impact of the Dealz transaction on our balance sheet. Let's be very clear. At the moment, we are in a process where we still have several potential buyers in the final stages of the process. You will appreciate I cannot comment on financial terms and conditions because that would be sensitive in the process. When we have clarity on the Dealz, we will also announce further details on the terms and conditions on the transaction. We've been clear that the Dealz transaction is very similar in nature to the transaction that we did on Poundland.
Thank you very much. Our next set of question is from Fabian Niemeyer. Could M&A become part of Pepco's growth strategy, or is the focus firmly on organic expansion and returning excess cash to shareholders?
Yeah. Thank you. I will take this. As you have seen from the outline we again also have provided today, we strongly believe now in the recalibrated Pepco Group as such. Pepco, as you said, is I think a new European growth champion going forward. We know we have ample of opportunity in white space. We have a very efficient store format and standardized store format system that we want to roll out. We, as Willem also alluded on, we see that all our new store openings perform very well. Having said that, we strongly believe in organic growth going forward and to, at the moment, not see M&A as an opportunity or necessity for us. In that respect, we have updated our capital returns framework, where basically all excess leverage free cash flow will be returned to our shareholders.
Thank you. Another one from Fabian. Have you received any indication from IBEX regarding whether it intends to participate in the planned pro rata tender buyback?
As we disclosed in the announcement, we say that IBEX will participate pro rata. We have clear backing from IBEX for this plan. It is a managed reduction of share count overhang, and it's a very fair mechanism as a result to all shareholders who will have equal opportunity to participate in this tender. Details on the tender will be announced in due course, and then we will be clear on the mechanisms and the follow-up with Polish banks to execute this tender. This will be later in H2.
Thank you. Another question from Maria Kolesnikova from Millennium. Could you please talk us through the current trends separately in Poland and in South CEE markets? Polish consumers seem to remain strong and happy to spend more. Is that a true assessment? While other CEE markets might see consumers under increased pressure, how is it reflected in your sales and pricing volume, mix sales and strategy?
Let me maybe start on the strategic level, if Hugo wants to add some of the facts. Look, I think overall, as I said before, we as Pepco feel perfectly positioned in various of those market dynamics. On Poland, we absolutely agree with the statement that in Poland there is a strong consumer segment. As a strong consumer, there is plenty of, let's say, disposable income for consumption, consumers are selective. Also in Poland, consumers are selective. They're value-seeking, they are looking for best value for the price. This is exactly where we are in the sweet spot. After our operational improvement, particularly last year, we see now a nice 3% like-for-like increase in Poland in the first half. South CEE cannot be generalized.
As we all know, Romania has gone through and is still going through some political trouble with VAT increases and also increases of various other charges that impact consumer spending power. What we at Pepco do is we, of course, adjust pricing and promotion mix accordingly. Also in Romania, we have seen slightly reduced but still positive like-for-like revenue growth. Therefore, I don't think it's a generalization. The rest of South CEE is performing really well for us. It's one country that has probably slightly more macro headwinds. I hand over to maybe Hugo, if you want to add something to that.
I think it's important to say that the business is growing in its core market, Poland, that we have spent a lot of time and energy on that, and the growth is 3% ex FMCG, which reflects the interest from customers in our value proposition. I think that's mostly to underline the comments made by Stephan.
Thank you very much. These are all the questions we have time for, so I'll hand back over for closing remarks.
Yeah. Thank you very much. It was a rather rich announcement for this half. I hope you agree with me. We have a couple of really good messages to the market, but also to all stakeholders. We are very pleased with the result of this half year, and we'll update you more with the full year results announcement in December on the various topics around mid-term guidance and Western Europe expansion and so on. For now, I'd like to thank you for your attention and for your interest, and wish you a good day.