Edited Transcript of ADH.AX earnings conference call or presentation 22-Aug-22 1:30am GMT – Yahoo Finance

Full Year 2022 Adairs Ltd Earnings Call Victoria Aug 22, 2022 (Thomson StreetEvents) -- Edited Transcript of Adairs Ltd earnings conference call or presentation Monday, August 22, 2022 at 1:30:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Ashley John Gardner Adairs Limited - CFO * Mark Ronan Adairs Limited - MD, CEO & Executive Director ================================================================================ Conference Call Participants ================================================================================ * Alexander Mees Morgans Financial Limited, Research Division - Senior Analyst * Apoorv Sehgal UBS Investment Bank, Research Division - Associate Analyst * Aryan Norozi Barrenjoey Markets Pty Limited, Research Division - Analyst * John Hynd Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst * Mark Wade CLSA Limited, Research Division - Research Analyst * Wilson Wong Jarden Limited, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Adairs Limited FY '22 Results Call. (Operator Instructions) I would now like to hand the conference over to Mr. Mark Ronan, Managing Director and CEO. Please go ahead. -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [2] -------------------------------------------------------------------------------- Good morning, everyone, and welcome to the Adairs 2022 Financial Year Results Call. Joining me this morning on the call is Ash Gardner, our CFO; and Jamie Adamson, our Head of Investor Relations. 2022 financial year has been a year of contrasting halves with significant lockdowns impacting results across the first half of the year, whilst the second half saw customers come back to stores in a more normal trading environment. Over the year, the group delivered a record $565 million of sales and EBIT of $76.4 million. Importantly, for the group, each brand has made progress on their strategic priorities that will drive the ongoing growth for the group in the years to come. Adairs has continued to build upon the strength of the loyalty program with more than 1 million paid-up Linen Lovers at the end of the financial year. We know that loyalty will be a key part of the future for retail brands, and we will continue to invest in this to deliver more personalized experiences for the Adairs Linen Lovers. Adairs also profitably grew the store portfolio with the opening of 4 new stores and the upsizing of a further 11 stores. These larger stores support the growth in Adairs product categories, deliver a better shopping experience and are generally more profitable. And finally, ideas completed the transition of its multiple warehouses into the national distribution center. We expect that this will see significant operating efficiencies improving both the customer experience and the distribution costs over FY '23 and beyond. At Mocka, we have spent the year building out the management team to support our growth aspirations for the brand. Whilst the year did not deliver the results we wanted, we have a clear strategy and a team with the bandwidth and capability to deliver the full potential of Mocka over the years to come. The acquisition of Focus on Furniture has added another strong brand to our portfolio, increasing the exposure of the group to the bulky furniture category. With a significant opportunity to grow the store portfolio across Australia and strong sales momentum within the brand, we look forward to seeing Focus become a national furniture retailer over the next 3 to 5 years. As part of the annual report, we have delivered our inaugural sustainability report, outlining the progress made on our commitments to sustainability. When we think about sustainability, we see it as the impact we have on people, product and the planet. Our efforts to date have seen us focus heavily on our supply chain, in particular, auditing it for modern slavery and the reduction of plastic packaging use within the businesses, whilst investing in the development of our people. Across the year, we have also increased our measurement of waste and emissions to set benchmarks upon which we can continue to improve; committed to the 40-40 Vision initiative, which will see the Board and executive leadership team having not less than 40% of each gender by 2027; continue to support the great work of Orange Sky; and have made a commitment to removing plastic bags from our stores in the first half of FY '23. Importantly, the group sees sustainability as a strategic imperative, and we continue to build new ways of working that ensure our people, product and planet initiatives are continually considered as part of our day-to-day actions. If I move to Slide 3 of our investor presentation, you will see that with the addition of Focus during the year, we have built a portfolio of brands specializing in homewares that we are confident can continue to deliver annual sales growth as we have seen over the years prior. Our brands are product-led with each business focusing on delivering great product to customers' homes at a good value price point. Through the strength of our in-house exclusive designed product delivered through our vertically integrated supply chain, continuing to build the awareness of our brands and a commitment to an omnichannel model that allows us to support customers however they choose to shop, we are well placed to double the size of the business to over $1 billion in revenue over the next 5 years. I will now hand over to Ash to walk through the FY '22 financial results in more detail. -------------------------------------------------------------------------------- Ashley John Gardner, Adairs Limited - CFO [3] -------------------------------------------------------------------------------- Thanks, Mark, and good morning, everyone. The group reported an underlying EBIT of $76.4 million, approximately 30% below FY '21. Adairs achieved an EBIT of $55.5 million, down on FY '21, but remaining well ahead of the pre-COVID levels, whilst Mocka's results of $3.7 million was disappointing. Focus on Furniture contributed $17.2 million for the 7 months of ownership by Adairs, which was well out of plan. Total sales for the year of $564.5 million were up 12.9% and included $82 million of sales from Focus on Furniture for the 7 months, whilst 16% or over 10,000 store trading days were lost in the first half due to government-mandated store closures. Like-for-like sales for the group, excluding Focus were down 2% and cycling the record 16.5% like-for-like growth achieved in FY '21. Online sales contributed almost 35% of total sales, reflecting the omnichannel strength of the group. Adairs sales were only 4.8% down on last year despite the lost store trading days with customers continuing to shop across both channels. Mocka delivered total sales of $64 million, up 6.5% on the prior year, albeit sales in the second half were down 7.6% as a result of the local supply chain disruptions and some product issues that led to adverse customer feedback. Focus sales of $82 million were pleasing and well ahead of plan. And the business closed the year in a strong position with an open order book of $18.5 million. Group gross profit group gross margin of 59.6% and was affected by the higher contribution from Mocka and focus, with both businesses operating at lower gross margins than Adairs, whilst all businesses were affected by the higher cost of sea freight. Adairs delivered a gross trading gross margin of 63.2%, 350 basis points down on last year but 170 basis points ahead of FY '20. The result was in line with our objectives of retaining a large portion of the gross margin gains achieved in FY '21, with underlying trading margin well ahead of FY '20, but partially offset by the elevated sea freight costs. Mocka's gross margin of 45.3% was impacted by refunds following the local supply chain disruptions and increased cost of sea freight, which Mocka is more sensitive to given its lower price point and initial margins. In addition, following a view of the Mocka merchandise strategy, high clearance activity was undertaken in the second half and a one-off provision of $1.2 million was recognized against inventory that is not considered a part of the range moving forward. Cost of doing business across the business were affected by risk management decisions taken during the first half to manage COVID uncertainty and our ongoing investment in our teams throughout the year. At Adairs, we continue to support the Adairs store teams during the store closure periods in the first half to ensure they'll be available when the stores reopen for the peak trading period. In addition, the transition to the new national distribution center was slowed down as an existing DC was retained by the Adairs business to reduce the concentration of risk and ensure stock will continue to fly to stores and online customers during this period of uncertainty. This, combined with a slower-than-planned ramp-up of operations at the new DC added considerable cost of the business, which we don't see recurring moving forward. Mocka experienced a substantial increase in cost to address the local supply chain issues and continue to invest in the team to build the capability to realize the potential for the business over time. Our balance sheet at the end of the year is in good shape. Inventory levels remain high across all 3 businesses, reflecting early deliveries of stock to manage supply chain instability. Other than the clearance stock action within Mocka, inventory quality is good and in line with what we need for the start of the year. Previously advised, we don't see a need for inventory to continue to rise. However, the pull forward strategy is likely to remain in place until there are sustained signs of global supply chain stability returning. The group closed the year with net debt of $93.2 million after funding the acquisition of Focus and the final earn-out payments for Mocka in the first half. We continue to operate with manageable levels of leverage and retain significant covenant headroom. A final dividend of $0.10 per share was declared by the Board, which brings the total dividend for FY '22 to $0.18 per share. The dividend reinvestment plan remains active for the final dividend. Back to you, Mark. -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [4] -------------------------------------------------------------------------------- Thanks, Ash. And building on my comments from earlier, we have provided guidance for the FY '23 year. We are confident with where the brands and therefore, the group is positioned to navigate the emerging macro headwinds. By focusing on the middle market with strong value propositions, we are well placed to capture those customers who are looking to make updates or changes to their homes without needing to make a significant investment, as highlighted by a relatively lower average item prices. This is supported by our commitment to omnichannel retailing that enables us to service all customers regardless of how they choose to shop, providing them with a complete customer experience and importantly, providing the group access to the total addressable market. And just as importantly, our large and loyal customer base gives us the ability to directly communicate with our customers as we showcase new ranges and offers, providing them a compelling reason to shop. With the full year contribution from Focus, an improved result from Mocka and the opening and upsizing of Adairs and Focus stores, we expect to continue to grow sales to between $625 million and $665 million, delivering EBIT of between $75 million and $85 million. Over the first 7 weeks of FY '23, we've seen sales growth of 3.9%, excluding Focus, in line with our guidance and plans. Over this period, we have also seen Focus continue to trade well. Across the group, we continue to see strong total sales growth in retail stores and a reduction in online sales against the significant lockdowns of last year. We expect this to be the case for most of the first half with our plans and guidance reflecting this more normal trading environment. Before I finish, I'd like to thank a few people. Firstly, I'd like to thank our large and loyal customer base. Across our group, we get the privilege of being a small part in helping them create a home they love. And our aim every day is to continue to inspire and delight them, and we thank them for their ongoing support. And to our teams across Adairs, Mocka and Focus, I'd like to thank all of the team members across Australia and New Zealand for their hard work and dedication. The last couple of years has seen a number of challenges well managed by the team, and this puts us in a good position to not only manage the current trading conditions, but more importantly, enables us to capitalize on a new and ever evolving retail environment. I will now hand over for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Alexander Mees from Morgans. -------------------------------------------------------------------------------- Alexander Mees, Morgans Financial Limited, Research Division - Senior Analyst [2] -------------------------------------------------------------------------------- Just a couple of questions from me. Starting with the NDC. Just wonder if you could remind us what the quantification of the transitional costs were that you incurred in FY '22 that won't recur into FY '23, please? -------------------------------------------------------------------------------- Ashley John Gardner, Adairs Limited - CFO [3] -------------------------------------------------------------------------------- So there's 2 parts to that, Alex. One is the actual transition costs, which we excluded from underlying earnings. And then the amounts that were included in our underlying earnings that relate to the retention of the old DC and the ramp-up was around -- those were around $6 million. -------------------------------------------------------------------------------- Alexander Mees, Morgans Financial Limited, Research Division - Senior Analyst [4] -------------------------------------------------------------------------------- Excellent. And is it fair to assume that the NDC is now fully ramped up and at its operating efficiency level? -------------------------------------------------------------------------------- Ashley John Gardner, Adairs Limited - CFO [5] -------------------------------------------------------------------------------- So we've got everything in there. It's not fully ramped up yet. So we'll continue to work through that over the next 12 months. I think realistically, we won't see the full efficiency benefits from a cost perspective flow through until FY '24. But from a service perspective, which is our primary focus, we're seeing significant improvements there. -------------------------------------------------------------------------------- Alexander Mees, Morgans Financial Limited, Research Division - Senior Analyst [6] -------------------------------------------------------------------------------- Great. Then just on pricing. Just wondering what you're experiencing out there in terms of are your competitors being aggressive with their promotions and they're discounting I suppose, especially around that end of the financial year sales period, which is so important to Focus in particular. -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [7] -------------------------------------------------------------------------------- Yes. I think we are seeing plenty out there. Funny enough, I think in the case of Focus, we ran a pretty traditional offer over that period and delivered the results that we expected. So we're really happy with the, I guess, the Focus performance over that period. We're probably seeing people go harder in categories that are there to trading in if I'm honest. Most of the competitors out there ran a longer sale period than perhaps in prior years. We, of course, continued with our approach of trying to reduce the number of days on sale, which we lined them up with last year as opposed to continue to run them for a longer period. So I think in the case of Focus, we're seeing the product offering and the -- I guess, the pricing and promotions resonate with customers, perhaps despite the increased discounting that others might be doing out there. And in the case of Adairs, we're comfortable that we continue to play a bit more of a long game and on the margin and working that through depending on what else is going on in the market at the same time. But we're definitely seeing a much higher level of promotions in the Adairs categories versus prior years, in particular, some of the majors out there running some bigger offers. -------------------------------------------------------------------------------- Alexander Mees, Morgans Financial Limited, Research Division - Senior Analyst [8] -------------------------------------------------------------------------------- And then just finally on cost inflation. Just wondering what your assumptions are in coming to your guidance range around cost inflation, labor and rent, et cetera. -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [9] -------------------------------------------------------------------------------- Well, we're factored in circa -- in terms of labor, you run circa 5%. If you think the retail award was up 4.7%, we're using that as that's the bulk of our wages are largely attributed to that. So we expect that to sort of sit at that, call it, circa 5% for the wage inflation for the year. In terms of rents, a lot of our rents are on fixed increases. There's not a lot with CPI on them. So we don't need to factor too much of that in, which sort of sees us more operated at 2.5% to 3% in line with those that are actually on a -- within lease, we've probably got about 50 or 60 stores to renegotiate this year. We're sitting with, I think last time I checked, 48 stores are either in holdover or come out of lease in the next 12 months. So as I said before, I think we'll see a continuing decline in rents in shopping centers with the exception of the guys that are particularly good in those real A-grade centers. For homemakers, we're probably seeing more like a 3% to 5% sort of increase in the rentals, which is largely in line with the leases as they roll out. So overall, I think you can probably talk the sort of 3% into the rental line in terms of inflation over the coming year. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Your next question comes from Aryan Norozi from Barrenjoey. -------------------------------------------------------------------------------- Aryan Norozi, Barrenjoey Markets Pty Limited, Research Division - Analyst [11] -------------------------------------------------------------------------------- Just wondering on your debt and your gearing. Could you please let us and what your covenants are for your facilities? -------------------------------------------------------------------------------- Ashley John Gardner, Adairs Limited - CFO [12] -------------------------------------------------------------------------------- Yes. So covenants is the usual package, fixed charge, leverage and gearing ratio, capital ratio, debt-to-capital ratio. So we've got plenty of headroom leverages, obviously, the one everyone focused on. So on a gross basis, we're sitting on a leverage ratio of around 1.29. And net of cash, it's under 1 -- around 1. And the covenants are well in excess of that. So there's plenty of room. -------------------------------------------------------------------------------- Aryan Norozi, Barrenjoey Markets Pty Limited, Research Division - Analyst [13] -------------------------------------------------------------------------------- All right. So a typical covenants are sort of 2.5, 3x. Is it around that range? -------------------------------------------------------------------------------- Ashley John Gardner, Adairs Limited - CFO [14] -------------------------------------------------------------------------------- No, not that's the covenant. -------------------------------------------------------------------------------- Aryan Norozi, Barrenjoey Markets Pty Limited, Research Division - Analyst [15] -------------------------------------------------------------------------------- Okay. Perfect. And just in terms of -- if you just take the second half fiscal '22 results, can you break down the buckets that were nonrecurring versus sort of recurring in terms of costs? So you've obviously had the DC cost which is [6 months full year]. Can you just break down the second half '22 the extra cost to income, which won't repeat and not repeating in fiscal '23, please? -------------------------------------------------------------------------------- Ashley John Gardner, Adairs Limited - CFO [16] -------------------------------------------------------------------------------- So for Adairs, the main cost is that DC cost, which is around $3.5 million to $4 million in H2. That's about it in terms of material nonrecurring costs within Adairs. And obviously, there's the various events that affected the Mocka more broadly that we would like to think don't repeat, and that sort of runs across sales, margin and costs. -------------------------------------------------------------------------------- Aryan Norozi, Barrenjoey Markets Pty Limited, Research Division - Analyst [17] -------------------------------------------------------------------------------- Okay. And like the distribution costs for both Adairs and Mocka, so that's the online slate as a percentage of sales, increased significantly half-on-half. Do we assume that's the new baseline moving forward for (inaudible)? -------------------------------------------------------------------------------- Ashley John Gardner, Adairs Limited - CFO [18] -------------------------------------------------------------------------------- No. So I think there's a couple of factors that affect that. One is within Mocka particularly, there was a lot of duplicate delivery charges that were incurred to sort of deal with the supply chain disruptions that we experienced as well as the refunds and other things that I mentioned earlier, that affected margin and the stock provisions. For Adairs, I think we'll return to a level that's more sort of the midpoint between FY '21 and FY '22 with the DCs now all product running under one roof, the number of split, consignments to customers and so on will reduce part of that's offset by increased rates from our carrier partners. But we sort of think of those as a normal business cost that we need to manage on a day-to-day basis and less directly measurable unlike the carrying a whole new whole extra DC over the year. But I would expect that Mocka rates will come back. And Adairs will come back. They won't come back to the FY '21 levels. The other thing that affected FY '21 was the number of transactions and the average value transactions are very different than what was in FY '22 with fewer transactions and higher value and then more transactions at lower value in FY '22 as the world returns to normal. -------------------------------------------------------------------------------- Aryan Norozi, Barrenjoey Markets Pty Limited, Research Division - Analyst [19] -------------------------------------------------------------------------------- Yes, perfect. And so if I take Mocka in the second half of '22, obviously, loss-making versus sort of Adairs, I think, 17% to 19% EBIT margin you guys sort of talked to have talked to historically. How do we think about the progression to that in terms of first half '23, fiscal '22 and moving forward? Just in terms of how the margin will progress please to that sort of 17% and 19%, if 17% to 19% is still reasonable? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [20] -------------------------------------------------------------------------------- So I think we'll make a good stride in the first half, but we won't be back to 17%, 19% in the first half as we have obviously made the investment in the team. So we've got a higher CODB flowing through that business. And we have seen significant increase in the delivery costs of Mocka as we move to our partner who will actually deliver it to the customer, which is a net-net positive and I think, deliver a much better service. So we expect that first half will probably remain quite suppressed in terms of the 17% to 19%. But as we hit the second half, we'd like to think that we're pushing that back up towards the middle. We thought somewhere in the 14% to 16%. At the moment, I think the big impact we're seeing there is the sea freight impact on our gross margin percentage is as that starts to unwind a little bit, which we're hopeful of seeing in the second half of the year, we'd expect that can start to head back towards that top end of the range. But if we can get it back into the midpoint, 14% to 16% in the second half, that's our first stop in moving it back towards those levels. And I think at the moment, if we traded at 14% to 16%, and we're growing the top line, we'd be pretty comfortable with that as the business continues to invest in building the capability to reach the levels that we think it's got the opportunity to get to over the coming years. -------------------------------------------------------------------------------- Aryan Norozi, Barrenjoey Markets Pty Limited, Research Division - Analyst [21] -------------------------------------------------------------------------------- Okay. So 14% to 16%, hopefully that by the second half of '23, that doesn't include any benefit from sort of the sea freight costs improving. But if that does improve, then you get to more normalized 17% to 19%, is that right? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [22] -------------------------------------------------------------------------------- Yes. I think if the sea freight improves with the top end of the 14% to 16%. And otherwise, we're more towards the bottom end of that. And then as we move into -- because we have made a significant investment in team in that business and continue to work through building a process and function that allows us to operate at a greater scale. So there's a number of investments we've made, and we've probably still got a few to make that are just holding back that EBIT margin over the next 12 months to 2 years. And then we should be able to see it where the business can go from there, Ari. So we're just -- we're probably more like thinking the bottom end of that range to begin with. And if sea freight gets better, we'll be more towards the top end. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Your next question comes from Apoorv Sehgal from UBS. -------------------------------------------------------------------------------- Apoorv Sehgal, UBS Investment Bank, Research Division - Associate Analyst [24] -------------------------------------------------------------------------------- Mark, Jamie and Ash, first question, just on your FY '23 guidance, specifically on the sales guidance. Is it fair to say that you're assuming that like-for-like or per square meter sales for the core Adairs business to be lower than pre-COVID FY '19 levels? Like are you assuming that the macro environment sort of does get a bit tougher in your assessment of guidance? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [25] -------------------------------------------------------------------------------- Yes, we're assuming that the macro environment gets tougher. I don't think we're assuming that the sales falls to lower in relation to the GLA number. I think we're more thinking that we might -- it's probably more reflected in the EBIT guidance versus the sales guidance and a pullback in online. -------------------------------------------------------------------------------- Apoorv Sehgal, UBS Investment Bank, Research Division - Associate Analyst [26] -------------------------------------------------------------------------------- Got it. Yes. Okay, okay. So online sort of slowing, okay. Maybe then on the gross margin side of things. If I look at the second half results for the core Adairs business, your gross margins are for delivery cost of 58.7%. Is that sort of a fair guide of how we should think of gross margins going forward? Like is that sort of where the natural GMs of this business see it or perhaps does it maybe step back a bit further going forward? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [27] -------------------------------------------------------------------------------- I don't think it steps back further. I think if you think about that number that -- as Ash mentioned before, there's some delivery costs in there that we'd expect to come out. If I thought about, who knows what the trading environment looks like in the second half of the year. But we're factoring in that we probably need to be mindful that we might need to drive the business a bit harder. And if that's the case, that sort of number allows for that. So I wouldn't think you'd step it down further off the back of FY '23. I think we -- I like to think about it, I operate far more at a gross margin level before delivery costs. And at the moment, I think we've retained a bunch of those, and I expect that going into next year, we should see us probably have to be prepared to think about how we give some of that up if given the cost price inflation we're seeing come through from suppliers, sea freight not stepping back and potentially a slightly more challenging environment. But I think if you thought of 58.7% as the margin that you guys are putting in there, I wouldn't be uncomfortable with us about the mark. -------------------------------------------------------------------------------- Apoorv Sehgal, UBS Investment Bank, Research Division - Associate Analyst [28] -------------------------------------------------------------------------------- Okay. That's clear. And just another one. Normally, you split out the trading update by brand and sort of on a 2-year stack or in this case, a 3-year stack sort of basis. But just curious as to why on this occasion, that sort of wasn't disclosed. And if possible, are you able to give some sort of color on how those first half '23 first 7-week numbers so far compare versus first half '20 pre-COVID? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [29] -------------------------------------------------------------------------------- Not off the top of my head, I don't sort of pay that much attention. But if you think about it, the reason we haven't done it is we were more thinking about it versus last year versus first half '20. And we would -- the concept behind that is the first 7 weeks last year is such a different trading environment than the one we're operating in now. As we've said in the commentary there, our online businesses are trading down against first half '22 or the first 7 weeks of '22, which was in line with our plan and our expectations given stores have reopened and come back relatively strongly. So we're seeing, as we mentioned, they're good sales growth out of store and solid results out of our stores, both in Focus and Adairs and the digital sales step back now that customers have the choice and are regularly choosing to go into store. So we'll take it on -- I'll take the question on notice in relation to against first half '20 and think about that one a bit more. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Your next question comes from Mark Wade from CLSA. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [31] -------------------------------------------------------------------------------- Just on the long on the long-term expectations for the Focus brand. I mean, when you acquired that business, last year, I think you thought maybe sales would get to about $125 million. The pro forma results this year were $135 million, so that's getting a bit closer. But your EBIT is -- you've more than doubled those longer-term targets. So the question is are those longer-term targets still the right numbers? Or do you think you can actually hold up a bit stronger than initially expected? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [32] -------------------------------------------------------------------------------- Look, I think I wouldn't move away from the longer-term targets at this point in time. We own the business 7 months, I think a 20% EBIT margin on that business is too high, and we'll hurt us in scaling as we start to roll that out. It's very efficient in the way that it operates today. But as we need -- we will need to put some additional cost in to roll it out more broadly. But -- and we had a terrific gross margin result. The guys have done an amazing job at driving great top line sales and a really good gross margin. So we think there's probably a couple of things in our favor in the first 7 months. But if we thought about a longer-term, more normal trading environment, there's no doubt, I think Focus is winning by having stock available as opposed to long lead times with some other furniture retailers out there. So we're making the most of that environment at the moment. So I think as that starts to perhaps normalize a bit, we probably see that EBIT margin step back a little bit. But we do -- we said we wanted to get it to a $35 million EBIT, $250 million, $300 million of sales. And we think that's still well within our wheelhouse. I think the question for us is how quickly we can open stores given the homemaker space is harder to get those opportunities, and we want to make sure we're doing the right deals in the right centers rather than just rushing to open stores. One of the things we always think about as being really disciplined on our store opening portfolio. So we'll keep working through that. So I wouldn't want to write them up after 7 months. And realistically, we haven't opened a store in that time and opening stores is a big driver of that growth. So start to roll them out, Mark. I'd like to think that perhaps that might be the case, but let's get a bit more time under our belt and start to open some stores and see where that goes. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [33] -------------------------------------------------------------------------------- Understood. And on the Mocka, it's come back a long way on the profitability. The sales are up a bit, though, I suppose some of the clearance activity. Are you still confident in that, that damage to the brand is you can't recover from it, it's not irreparable? I guess it'll come to how many return customers and how the new customers put off by it? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [34] -------------------------------------------------------------------------------- Yes. I think -- it's a good question to own, Mark. We're definitely -- what we wanted to do is solve the underlying operational issues within the business and make sure that we are in a good place before we really step into a brand recovery piece of work. So I expect that we'll be able to roll that out over the first half of '23. So what we're seeing in trade is that customers are prepared to give us another go. And now that we're starting to get the delivery piece right and we've solved a couple of the product issues that we've had, we're starting to see that tick back into actually, this is a pretty good product that's at a pretty good price. And we can actually nail the delivery experience. We start to build the confidence and momentum back into the brand. So that's why we sort of see first half us continue to invest in that process and the second half really should be a place where we start to get that -- get some more runway and some more traction on that. So I remain confident that I think the product we've got is good. I think it serves a real purpose in the Australian market. And I think the team we've got now are really focused, as I said, with a really clear strategy on what matters to our customers, and let's deliver on that. So I'm confident time will tell. Customers always give you the ultimate answer, but I'm happy that we've got a plan in place. And from my perspective, we'll know a lot more in 6 months and in 12 months as to how well we've gone at rebuilding the trust that we've -- with the brand damage that we did over the FY '22 with those -- the supply chain issues that impacted the results. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [35] -------------------------------------------------------------------------------- Okay. And lastly, just across edition NZD, has the view on that market moderated? I mean it sounds like some of the retailers are doing a little bit tough over there. We heard from news this morning, others are doing a little bit better. What's your view on that market and how prospective it is for expansion across the various brands under this table? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [36] -------------------------------------------------------------------------------- Yes. New Zealand stuff, there's no doubt that New Zealand is trading tougher than Australia across Adairs and Mocka. So we've certainly seen the consumer over there step back a bit faster than the Australian consumer has. So I think at the moment, we're actually just in a matter of let's just pick the right deals, we'll still be looking to open stores and do all those sorts of things in terms of Adairs. Mocka will continue to do what it does. And actually trading half okay, in New Zealand, it's not gone up against major lockdowns, so we're getting a better read on how that's trading week to week, but it's definitely a more challenging market, NZ than AU at the current time, which just perhaps slows you down in terms of whether you rush to open that store. There's no big drive to open a bunch of stores in a trading environment that's a bit more challenging in the first half. But equally, we haven't seen a lot of opportunities at the moment. And we're finally able to go back and actually start to walk centers and see the stores and do all those sorts of things. So we'll be a bit more active in that market over the first half '23, but I wouldn't expect to see too many new stores or changes to our portfolio in that half, whilst we look at the trading environment and we look for the opportunities that are out there. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [37] -------------------------------------------------------------------------------- I guess you guys are probably be excited they can travel overseas as well and see some product and pick up some trends from overseas. -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [38] -------------------------------------------------------------------------------- Yes. It is a real positive that we've had a number of the team off in May and June, to your point, getting around the world. Eventually, we'd love to be back into China when working with our suppliers hand-in-hand. There was a lot of samples moving backwards and forwards from Australia to China at the moment. But yes, no, there's no doubt that, that definitely has created a bit of a spark and I expect that we start to see some of that real enthusiasm and look and trend start to hit the business Q2 of this half, so that we start to see some of those changes occur. Because I think our trend has been largely pretty similar for the last 12 to 18 months, and we're certainly starting to see some of that movement now, which is exciting for Adairs in particular with our fashion focus. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Your next question comes from John Hynd from Wilsons. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [40] -------------------------------------------------------------------------------- Staying with Mocka, how badly did delivery failure hit third quarter? Can you give us some color now on with sales count? So did you have to offer material discounts? And then on your comments, Mark, about the customer making the final choice about recovery. Did you start to see a recovery in the fourth quarter and then for the first 7 weeks of '23? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [41] -------------------------------------------------------------------------------- Let me work my way through the 3 questions, John. I think Q3 was definitely impacted by ongoing challenges. I would have said at the February call that we felt like we locked it down, and we were moving in the right direction with a new delivery partner, and we were managing that very tightly and closely. And in the end, we made a subsequent change which we -- which impacted ongoing refunds and discounts provided to customers. So Q3 was definitely impacted by that. Q4, we had some product issues that impacted our ability to be out there really pushing it. So we didn't push it too hard in Q4 generally. But what we did see was we solidified the delivery experience, and we started to get the customer feedback that, that was now getting back on track, which was important. And obviously, in Q1 of FY '23, as I've mentioned before, we're going up against lockdowns in Victoria and New South Wales. So we're trading well off the numbers of the prior year, but that was all part of -- reflected in the planning guidance that we've provided as part of this presentation. So what I'm -- I'm looking forward to Q2 where we get a little more normality back into the market and year-on-year. And equally for Mocka, that will be going up against a period where we could see what the delivery was impacting us in Q2 last year that obviously then flowed through into Q3. So we'll get a much better view as we hit Q2 to the trading performance of the Mocka business over -- and the impact perhaps that the delivery issues of last year have resulted in, in terms of conversion and those sorts of things. But what I do find in that digital space is as you get further along, commentary and all of those things get further down pages, right? So we can get enough positive. What we're really focused on in that business is how do we how do we continue to deliver great customer experiences day in day out now. And as we start to get that is the message coming back through from the customers, that's what people will see in the short term versus where we were, obviously, this time last year. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [42] -------------------------------------------------------------------------------- Yes. And I guess, it's important to note that customer base refreshes every 1 to 3 years as the younger family cycles and new families cycle in. That said and given the shorter term cycle of the customer, have you given us a, like some guidance on where revenue and EBIT might sit for Mocka like you have with Focus on? And -- or did you want to perhaps give us some updated mid-cycle guidance on how you think this business could perform? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [43] -------------------------------------------------------------------------------- Yes. I mean, at the moment, what we're seeing is obviously in the past, we've provided the thought that we should double the size of the Australian business. Given the population of Australia versus New Zealand, we see the business heading towards $150 million of revenue. We don't see that as being unachievable. We don't see that needing to significantly change at the moment. What we need to do is -- and if you think about it, we held the top line relatively well, but we blew costs, which really came back to, as we said, refunding delivery costs, refunding full sales for customers despite them having the inventory. So we went with a customer resolution that was expensive and that impacted the EBIT significantly. So I still don't think that $150 million is not a number that we shouldn't be chasing down in this business over the next 3 to 5 years. And FY '22 was disappointing, FY '23, will start to rebuild that the consumer confidence in the brand. And as we move into FY '24, I expect that we should be able to accelerate that. We talk to -- we've always talked about us being an omnichannel retailer. So at some point along the journey, it won't be in the next 12 months. But we start to think about how does that also play out into our broader strategy, not just pure play online, which obviously helps drive that top line and build customers' ability to interact with the product and the experience and all of those sorts of things. So I think as we look forward, I still see comfortably, we should be hitting $150 million to $200 million in this business as we look forward 3 to 5 years. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [44] -------------------------------------------------------------------------------- Okay. And you both -- I think, you, Ash, actually talked about adding costs, particularly the staff for Mocka. Do you want to give us some color on, I mean, how much of the management team maybe was replaced or what you're comfortable talking if you know what I'm getting at there, like what's being done there, what you're comfortable talking about? And what's top of the list with their KPIs? Are there -- what's on the agendas when you're catching up within every week or month or whatever? -------------------------------------------------------------------------------- Ashley John Gardner, Adairs Limited - CFO [45] -------------------------------------------------------------------------------- Well, there's been a large change to the team, which probably reflects the movement of the center of gravity of that business from New Zealand to Australia more so than anything else. And obviously, there are a number of people within the business that have worked closely with the founders that elected to step away once we made the change. So with -- as I mentioned in my presentation, we're really comfortable with the team that we're putting together there. Lots of people with good experience, digital marketing, and building out the capability of that business. As we know, brand awareness is a big part of it. So how do we keep building that out. We've brought in some people that we think have really good prior experience in that space. And obviously, the leadership is now based out of Brisbane. So we've seen a lot of changes. And realistically, when you start to think about KPIs as the KPIs in every business, how we're going on sales and margin. And in this Mocka more so than even Adairs, given it is a pure play online business, we're looking very heavily at delivered margin and how that plays through. So a range review at Mocka is very different to a range of review in Adairs where I'm talking to the guys in here about gross margin. And at Adairs, I'm thinking about gross margin and I factor in the delivery costs, and I can work that out. Whereas at Mocka, because we are a pure play, we're very much right what is the size of the boxes, how does that knock down, is that the best way we can run it as KD, where does that end up, are we getting the delivered margin we need and can we -- how do we make sure we maximize that. So the real focus for that business at the moment is really on 2 core things. How do we get -- how do we make sure we're delivering great product and continuing to build our product range and being really focused on what that looks like, manage inventory probably a little more tightly than we have in the past, such that we don't end up with things like the range that we've had to take the write-off of -- or the write-down on -- at the end of the financial year. And then how do we make sure we maximize that delivered margin in that space. And with that, the delivery experience for the customer. Like there's no point getting a better delivered margin if we find we lose stock all around Australia and don't get it to the customer. So getting the balance right between a good delivery experience and the price we're prepared to pay for that is crucial. So when I think about the conversations that we have at Mocka, we're not much more on that. And then obviously, the third element of that is traffic. How do we get traffic and conversion. So I mean it's no different to any business really, but we're trying to keep Mocka in particular. It's a pretty simple business. As retailers, we all get good at complicating things, but how do we get good product to get the right margin and then make sure we're putting in front of the right people. All of our KPIs are based on sort of those 3 big rocks. -------------------------------------------------------------------------------- John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [46] -------------------------------------------------------------------------------- Yes. That all makes sense. Last one for me. The order bank with Focus. Does -- how does that work? I thought it was you're going to be holding inventory not taking orders, so to speak? And I mean how many -- can you give me an understanding of how many weeks, volume or sales, this would represent, please? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [47] -------------------------------------------------------------------------------- Yes. So we -- that probably represents circa 4 to 5 weeks of sales in terms of the order book that we've got. A lot of that is working with customers to be fair, John. So a customer says, I'm ready for it in 3 weeks. So you get to the end of the year, we've got stock coming in. We've got to move it around, pick the right day, all of those sorts of things. So we're more running a business where you are selecting a day in the next 3 to 4 weeks. On the large majority of orders, we'll also obviously have containers on the water and look to sell out of those containers. But yes, you should think of that as 4 to 5 weeks sort of trade and that will be about where it probably remains. That's ultimately, as you ride our role at Focus is not a -- we don't take customer orders. We're not trying to change. We take a few of them, which will be reflected in there. But largely, it's looking at when the customer can receive the delivery. And obviously, you want a pretty full order book. So you don't want to be sitting here with no deliveries this week on Monday. So you sort of run that 3- to 4-week sort of window. And if someone needs it urgently, we can probably make those things happen. But compared to a lot of our competitors out there, that sort of 3- to 4-week window for deliveries is pretty good. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- Your next question comes from Wilson Wong from Jarden. -------------------------------------------------------------------------------- Wilson Wong, Jarden Limited, Research Division - Analyst [49] -------------------------------------------------------------------------------- Just a question on the trading update. Can you just provide us a sort of indication of what sales growth was on a like-for-like basis (inaudible) store closures? -------------------------------------------------------------------------------- Ashley John Gardner, Adairs Limited - CFO [50] -------------------------------------------------------------------------------- Sorry, can you please repeat that, you're pretty quiet? -------------------------------------------------------------------------------- Wilson Wong, Jarden Limited, Research Division - Analyst [51] -------------------------------------------------------------------------------- Yes, sure. So just in terms of the trading update for the first 7 weeks, just an indication of what sales growth like-for-like excluding Focus and store closures was? -------------------------------------------------------------------------------- Ashley John Gardner, Adairs Limited - CFO [52] -------------------------------------------------------------------------------- We don't (inaudible) largely irrelevant. It's just not something we're looking at, at the moment, Wilson, given the trading environment last year when you've got for 50% to 60% of stores closed. Online -- as we said, online has come back against that period given the store closures. And therefore, you're left with such a small part of your network that you come back with a number that's largely irrelevant, which is why we think about how we grow it totally and didn't put it in there because we thought it really reflected the way the business is trading. And given our guidance, that's where we wanted to make sure we're operating in line with that guidance. So yes. -------------------------------------------------------------------------------- Wilson Wong, Jarden Limited, Research Division - Analyst [53] -------------------------------------------------------------------------------- Sure, sure. That's a fair response. I guess just on Focus, I just want to get a sense of that store model refinement that you previously mentioned. How do you sort of expect this to sort of, I guess, impact EBIT margins on a store basis and sort of any update in that? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [54] -------------------------------------------------------------------------------- Yes. We'd like to think that we would be improving our EBIT -- our contribution performance as we consider it at a store basis as we start to think about that refinement. We've tried a few things in terms of product and played around with some stuff in the first 6 months. We'd like to think that we get a refurb store done in this next period. We would have liked to have done it faster. However, in the couple of stores that we would have loved to have done it with, we're just working through some lease negotiations to make sure that we've got strong enough lease period that we're comfortable investing a little bit of money to see how that works. And we've had a couple of -- actually over this last half, we had a couple of stores in Melbourne that we would have liked to have done, impacted by some of the storms and rain that came through. So while we're waiting on insurance quotes and the like, that slowed us down as well. So we've got a few stores that we've got earmarked for it, almost ready to go. Just need to lock in these last couple of piece of the puzzle. But we think the investment is -- we probably had an investment of circa $100,000 we thought in the past. I probably think that's more like a couple of hundred because we probably need to operate a bit more in lighting than we once thought. And so we've added that in. But equally, we think we can drive the contribution margin of the stores. And that's what we've seen. Obviously, Adairs, we've been upgrading and upsizing and refurbing stores that we -- it does drive a good sales lift and lets us showcase the product a bit better. So I think we've got an opportunity there, remains an opportunity. I really would have liked to have had it done. So I can point you all in the store that we -- you go have a look at it, but we just want to make sure we get the commercials right before we step ahead with that. -------------------------------------------------------------------------------- Wilson Wong, Jarden Limited, Research Division - Analyst [55] -------------------------------------------------------------------------------- Sure. And just on that order book, that 17 (inaudible) -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [56] -------------------------------------------------------------------------------- Sorry, what was that? I didn't catch that. -------------------------------------------------------------------------------- Wilson Wong, Jarden Limited, Research Division - Analyst [57] -------------------------------------------------------------------------------- Yes. So the order book for Focus, $17.5 million, that's above or below your expectations at this stage? -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [58] -------------------------------------------------------------------------------- So to be honest, it's about where I expect it to be. Coming back to that conversation question from John, we don't see -- we're not aiming to build a big order book. Our aim is to keep stock flowing and make sure we maintain the inventory and not grow inventory. So we only -- we will see growth in inventory in Focus as we put new stores on the ground because we have to have display stock on that element. But our view is how do we keep this business running really efficiently with inventory stocking, stock out but don't look to build a big order book unless the 5 weeks before we come out and talk about it are bigger in sales than in other periods. So it's probably great for you guys (inaudible) 4 to 5-week sales. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- That wraps up our question-and-answer session. I will now hand back to Mr. Ronan for closing remarks. -------------------------------------------------------------------------------- Mark Ronan, Adairs Limited - MD, CEO & Executive Director [60] -------------------------------------------------------------------------------- I just want to say thanks, everyone, for taking the time to join the call this morning. And obviously, here at Adairs and across all the brands, we look forward to the year ahead. Thank you. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect.

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Edited Transcript of ADH.AX earnings conference call or presentation 22-Aug-22 1:30am GMT - Yahoo Finance