Good morning to everybody, and welcome to the Quarter Three Trading Statement for Pepco. On the call, we also have Neil Galloway, the CFO, who will also join us on the Q&A. As you know, this is a short trading update and therefore is only focused on top line and store openings. What I'll do is I'll give you a quick quarter-three trading overview. Overall, we've delivered a resilient performance against challenging macroeconomic backdrop for quarter three so far. Group revenues are up strongly in the nine months year-to-date, with a growth of 19% year-on-year at a constant currency basis, with Pepco reporting an impressive 29% year-on-year increase. Net new store openings were 159 in quarter three, almost the same number that we opened in the first half.
As described, we always expected openings to be weighted to quarter four, and we remain confident of meeting our target of a minimum of 550 stores for the full year. Quarter three group revenues were up 12.5%, with Pepco up 15% and Poundland Group up 9%. Poundland and Dealz have benefited from the strong demand for FMCG, leading to like-for-like growth of +9% in quarter three, and this momentum has continued into quarter four. Like-for-like sales were impacted for Pepco in quarter three due to a difficult April and May, particularly in Central Europe, as we mentioned in half one update last month. In Pepco and Central Europe, customers are going through a tough time, particularly in Central Europe, dealing with ongoing high levels of inflation.
In addition, trading was boosted in April and May last year as we saw an influx of refugees from the Ukraine war, as well as rescue packages being sent from a number of our countries back into Ukraine. Good news is Pepco has seen a recovery, a like-for-like, in June, and that positive recovery, positive like-for-like, has continued in the start of quarter four. To help offset some of the trading challenges and inflationary challenges, we have further increased our focus on driving further efficiencies in our cost of doing business. We remain absolutely committed to helping our consumers on a budget by offering great range, value, and convenience. We know it's more important than ever of maintaining price leadership, which has enabled us to take market share.
In summary, we're on track to meet our guidance for the full year, and while consumer environment remains challenging, we are well positioned to deliver future success as inflationary pressures ease and we're continuing to deliver on our strategy of becoming bigger, better, simpler, and cheaper. Finally, just a bit of housekeeping. As mentioned at the half one results, we're planning to do a modeling session in October in Warsaw, along with some store visits to Pepco and Dealz. You should have received your invites by now, and if you haven't, please contact the IR team for further details. I now hand over to questions -and -answers, where Neil and I will be happy to answer your questions.
Our first question is from Nicolas Katsapas from BNP Paribas. You can go ahead now. Thank you.
Nicolas Katsapas from BNP Paribas Exane. Thank you for taking my questions. I have three questions on the top line. Just to confirm, because it wasn't explicit in the statement, you have held your guidance for the full year with respect to sales, because you only mentioned EBITDA. Related to that, perhaps you could help us fill in some of the detail for Q4. Q4 has been positive, you say, for both Pepco and Poundland, are you anticipating an acceleration from what it is at the start of Q4 into the rest of Q4 for any of those divisions or perhaps a deceleration with respect to Poundland? Maybe you could help give some color on category performance. FMCG has been quite strong.
It drove a strong performance in Poundland, what's the expectation for the categories over the rest of the year and into the start of next year? Thank you.
Okay. Neil, do you want to take the first two questions?
I think as in the statement, we've confirmed the sort of EBITDA guidance for the full year. As we mentioned, the sales environment's obviously been softer. In terms of the acceleration, deceleration of like-for-like, that we came off sort of negative in April, May, as we've said, sort of turned positive in June. As Trevor said, it's positive in the start of Q4. I don't think at this point we're sort of giving a forecast view on the movement for the rest of the quarter. We're not giving a sort of forward view on where like-for-like will end up for the quarter. I think that's all we would say in terms of the outlook on sales. Trevor, I don't know if you want to pick up the category.
I'd just say, look, in Poundland, the FMCG has been strong, both on a like-for-like basis and a volume basis. The clothing and GM has been softer but still pretty reasonable. In Pepco, if we were looking at the April or May, we saw a softer on clothing as Ukrainians come in and buying basic clothing and sending some rescue packages. I think there probably was a little bit of weather, and that's turned into come back in June and start quarter four into a sort of normalized, like-for-like position. GM was just a small positive, and that is a little bit softer at the moment because I think when the Ukrainians come across, there was, first of all, buying a bit of clothing, and then as they sort of found houses, there was a bit of buying of some GM for their homes.
Again, we're expecting that to sort of normalize again as well.
Thank you. Just maybe a follow-up, because you've held the EBITDA guidance. Does that mean you have room for maneuver on the top line? [inaudible]
Well, maybe.
I presume you don't. Sorry, go ahead. Yeah.
Yeah. Look, I think we said high teens sales growth for the full year.
Yeah.
I think we're not moving away from that.
Okay.
I think the other comment we made at the half one was in relation to the gross margin trajectory, where, as we said, we expected the second half trajectory to improve on the first half, certainly through Q3 gross margins ahead of where it was at half one. Again, obviously we're not, as we said at half one, going to call any exit rates on gross margin given the consumer environment. I think directionally, I would confirm what we said at the half one position on the gross margin trajectory note [inaudible].
Thank you. Thanks for this.
As a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. We'll take our next question now from James Anstead from Barclays. You can go ahead now. Thank you.
Morning, Trevor, Neil. Three questions as well, if that's okay. I'll make them quickish. Firstly, when you look back at 2022 with the benefit of hindsight, do you think the boost from the influx of refugees from Ukraine was very much focused on calendar 2Q, i.e., the third quarter you're now reporting? Or is that something that boosted later quarters just as much? In other words, is this issue around Ukrainian comps something you expect to dissipate quite a lot from this next quarter onwards? That'd be the first question. Secondly, I appreciate it's really hard to get reliable market share statistics on short periods, and of course you're present in lots of different markets. How do you get confident that the sales weakness is a market issue rather than Pepco specific?
The final one would just be, I don't know, are you seeing any signs of changing consumer spending in Western Europe in the way you are seeing in Eastern Europe? Those would be my three, please.
Okay. In terms of the first question, look, I think what we saw was in April and May last year when Ukrainians coming across, quite obviously, lots of emotions, lots of support for the Ukrainians coming across, and lots of support for rescue packages going into Ukraine. In fairness, various governments quickly sorted that out so those rescue packages didn't continue all the way through, or the rescue packages ended up being financial packages rather than product packages. We do expect that impact to dissipate, and I say that with a fair amount of confidence because we can already see that in June and early parts of July, we're back to positive like-for-like. I think the fact that I'm saying we can see it dissipating shows in the numbers.
I think also there was a lot of Ukrainians that come into places like Romania and Slovakia and , obviously, Poland that were quickly moved on to other countries, and a number of the countries in the Western markets that we didn't operate in. That's the first question. I think it's always very difficult because I think the last three years' worth of like-for-like is still very difficult to ever have a period that's clean. I give you the commentary on the dissipating moving on because we can see the numbers now, and we know that people moved on into other countries. In terms of the market, we've got two sets of data that we use. We don't have, certainly on GM and clothing, the kind of data that one might be used to in the U.K. with GfK and Nielsen.
The data that we've got shows that we've been growing market share in all of our countries quite solidly. I think I mentioned half one, which wasn't that long away, that we can see it in Central Europe where we're not having massive openings where you'd expect us to grow market share if we've got massive openings. We're very consolidated in Central Europe, and we're growing market share. That would mean that our products and our prices remain very competitive for our consumers and against our competitors. The other data that we see, which is you have to really look through maybe one or two years' worth of performances when you see your competitors' data. I think when you see the data, you mustn't take comfort or sort of the opposite of comfort too quickly.
You need to look at what happened that time last year to see real market performance against your competitors. We look at the data that we do get, and we look at how our competitors are performing. From what we can see, Pepco remains very relevant for consumers, and the small negative like-for-like is purely because of, as we've described, the Ukrainians and the rescue packages. I probably wouldn't be sounding that confident if we weren't now in a situation where we had positive like-for-like, but we do. In terms of Western Europe, we probably saw in Western Europe, as mortgage rates have gone up and down, you've seen a bit of tightening of consumer and then confidence coming back.
If I gave you an overall view of the landscape, we do a very detailed assessment of Romanian market, Polish market, and Italian market around how are the customers feeling and how are they responding to the different pressures and what they're doing. The good news is that in Poland and Romania, consumers believe that they've now hit the bottom. Some of that is because inflation is starting to go the right way. What we can't see yet is consumers deciding to change their shopping patterns in Romania and Poland as it stands at the moment. They certainly now feel like they've hit the bottom and are more confident going forward. In Italy, they were in the same position. They were losing confidence; they've rebounded back quicker and are starting to be prepared to change their shopping patterns.
When we look at Romania and Poland, through all of the inflation pressures, they lost a bit of confidence and decided to shop differently. They now think they've hit the bottom and starting to become more confident about the future, they're not prepared to change their shopping patterns yet. However, in Italy, the market that we do a deep dive on, they've got quicker to the point of we've hit the trough, and they're already starting to make decisions of changing their shopping pattern to represent a more confident picture for them.
That's a very helpful color. Thank you.
We'll take now our next question from Simon Bowler from Numis. You can go ahead now. Thank you.
Hi, thank you. Three from me as well, if that's okay. I'll go one at a time. First, I was wondering if you can just talk a little bit around inventory levels within the business, whereabouts they're at, and how comfortable you are with the composition of inventory given the slower trading that you've seen over this quarter.
Neil, do you want to start that? Then I'll finish it?
Yeah, look, I think in terms of stock, as we said, I think you saw half one; we've had better stock management generally. Clearly with softer sales, it's something we're looking at a continual basis. I think to remind people, we've obviously got a strong track record of managing stock sales through the business. We're not generally stocking fashion items, so it's basic core lines, and have a good track record of stock markdown as well in terms of manage activity of the business. I think, as you know, for the Pepco business through PGS, we obviously have strong relationships directly with suppliers. There's a number of levers we have to manage stock, but it is something we are continuing to stay abreast of. Trevor, do you want to give some more color?
Yeah. As I look across the whole business, I think going through the Easter period, I think we come out pretty clean across all of the OpCos. I think in the summer period, the high summer, the things that you only sell in summer, we've had actually a good sell-through. I think some of that's helped. We're in a lot more hotter countries of Spain , Italy, and Portugal now. We will have a bit of summer stock left over, but nothing that we need to worry about. This is a white T-shirt, a short-sleeve white T-shirt. We'll have some of that left over, but not anything that we need to worry about. It's not a markdown. We'll just keep it till next year, because it's certainly not a fashion item.
It's a white T-shirt or a pair of shorts; it's not going to cause either a problem with our cash or a problem in the warehouses. To be honest with you, we've got used to this through the last two, three years, where we've been open and close, open and close. We're quite good now at handling what items should we reduce and what items should we keep.
Okay, great. Second one was, obviously within Pepco, you've made a number of end-to-end supply chain changes. I was just wondering, do you think now you're through the other side of that? Does that kind of new supply chain make it easier, harder, faster, slower to react to changes in demand? Kind of no difference from where the business was before those changes were put through?
One of the things that we have done is we've reduced the sort of the overall time from planning all the way to selling to consuming. We've probably taken probably six to eight weeks out of the total time. If I was honest, we were probably an outlier in terms of we had probably the longest sort of plan to sell. I think there's still more to go. Certainly, if you take out sort of six weeks worth of time, it makes things easier. What we have definitely improved is our reaction time from consumer spending in the store versus the stock coming out of the DC.
That has improved considerably; that makes it a lot better that when we do have a slowdown in sales like we did on the normal summer stuff, the stock will be held in the DC, not in the store. It makes it efficient and effective for us to manage it. No, the whole period is less; it makes it overall better. We've got more to go. The thing that we have worked on is how do we actually speed up the sale to the pick to getting the stock back to the store? That's certainly meant the inventories in the store are much more suited to what's not selling and what is selling.
Okay, thank you. Then final one, my modeling on this might be terrible. There's definitely precedent for that. In order to hit your kind of guidance, it looks to me that kind of gross margins need to be up, kind of call it at least 200, probably kind of near 300 basis points in the second half. I know you're not explicitly kind of commenting or guiding on kind of gross margins at this update. Just wondering if, I mean, any comments around whether that's a sensible sort of ballpark or any color on the timing of some of these kind of freight rate benefits coming through in your numbers that can kind of help us bridge the margin gap that looks to be required to get to that kind of full year guidance.
Neil?
Yeah, look, I'm certainly not going to comment on your modeling, Simon, if that's okay. I'm also not going to call an exit rate on gross margin for the fourth quarter or full year other than the sort of comments I've made already. Look, I think there are a couple of things we have referred to, but I want me to refer to again. We had some, I guess, own goals on costs in the first half, we've got some cost initiatives going on at the moment within the business to try and attack the cost of doing business, given we had, as you saw in the first half, some inflationary and other costs, particularly calling out transport that were higher than one would've liked. Those are other factors that also play through to the full year outlook in terms of performance.
Okay. I guess without kind of quantifying anything, can you talk a little bit around the timing over which kind of freight rate benefits start to come through, given, obviously, kind of hedging and other contracts you would've had in place. We can all see what the kind of spot rates have done. Is that something that's kind of already within numbers? Is it something that's sitting on the stock that's on your balance sheet at the moment? Or does that unwind more gradually over the next kind of 12 months?
There is some benefit within what we said, as we said last year, given the sort of calendar buying cycle; obviously, we're lapping some of that, there's some benefit. That will improve, as we said, again at the half one, going into 2024. If you look at the input margins or the buying margin from what we bought, that will improve into 2024. There is some of that in this year. As I kind of said at the half one, we knew it was going to be a low point at that point in half one. There is some of that coming through. Some of it is in stock that's in the business or on the way to business, and it will be improvements going into 2024.
If I could just sort of summarize this a little bit. We can see what we purchased and what the margin was in the first half. We can see what the margin is for the purchase that we've made for the second half. We can actually see what we've purchased and the margin for autumn, winter. We can see what's happening with our initial planning on the orders for spring and summer. It is nicely progressive.
Because we can see it and because a lot of the volatility is taken out in terms of containers, which are improving on each of the buys with commodities improving on each of the buys, which is why we think we're now ready not just to do a modeling session with you guys, but do a modeling session because actually, the whole environment is far more stable and far more clearer around commodities, containers, and therefore the margin. That's why we think it's a good time to do the modeling session in October. When we talk about it, we're not just doing the modeling, but we're talking about it because actually, we can see some real clarity of what's happening with the things that have affected us over or affected all businesses over the last year or two years. What I would say is they're progressive.
What still remains for us to maintain is price leadership is absolutely key. We've held it for the last three years. We're not going to let it go just because containers and commodities have improved. We want to maintain price leadership. We can see what the margin rates are, the input margins, margin rates. One of the things we want to always hold the right of is depending on what happens with consumers, depending what happens with our competitors, we will maintain price leadership. It would be silly of us not to do that, as we can start to see things far more normalizing going forward. We need that final lever to make sure that we maintain price leadership.
Okay. Thank you.
We currently have no questions coming through. As a final reminder, if you would like to ask a question, please press star one now. There are no further questions. I will hand you back to Trevor to conclude today's conference. Thank you.
Look, thank you very much, guys. Hopefully, your sharing is that quarter three so far is a solid performance. We're back onto positive like-for-like in Pepco; we're maintaining our outlook for the 550 stores minimum. I look forward to seeing you at the full-year statement, and hopefully, as many as you can meet us in Warsaw for the modeling session in October. Thank you very much.