City Chic Collective Ltd

ASX:CCX

Earnings Call Transcript 2023-Q2

[Operator]

Thank you for standing by, and welcome to the City Chic Collective Limited H1 FY 2023 Results. [Operator Instructions]I would now like to hand the conference over to Mr. Phil Ryan, Managing Director and CEO. Please go ahead.

[Philip Ryan, executive]

Good morning, everyone, and thanks for joining us. I'm Phil Ryan, CEO of City Chic Collective. I'm joined today by Peter McClelland, our CFO. This morning, I'm going to talk you through what's been a challenging half and outline our pathway to sustainable and profitable growth. Peter will then talk to the financials, and I'll come back and discuss current trade and outlook, before opening up to questions.Moving to Slide 4; sales were $168.6 million, 8% below last year, with a pleasing 38% up on the first half of FY '21. This highlights the strength of demand in the prior corresponding period, where we had almost 50% growth in the half. The connection we have with our loyal customers is as strong as ever, and our returning customer numbers are up in all of our regions, which is very pleasing. Our traffic increased 7% in the last 12 months and our e-mail engagement remains strong globally.The fact that traffic, e-mail and our loyal customer numbers are maintaining, means she's not leaving us, she's just a little more cautious around her discretionary spend. Our range has global appeal and we've learned a lot about what she wants, in what volumes and more importantly in what region, and we're adjusting our forward purchases to match that.Market-driven promotional activity was prevalent all half through the USA and EMEA, with Australia escalating around the Black Friday period. Combined with input cost increases and period-end adjustments, this all led to an 8 basis points margin decrease and fulfillment was 5 basis points above last year. I'll talk more to these on Slide 6.As part of the half year and seasonal inventory review process, we provided additional $19.6 million for inventory, focused in EMEA, predominantly due to the duplicated logistics costs and duty costs, as we reposition the inventory, warehouse consolidation and EMEA excess holding. I'll talk more to all of this on Slide 7.Operating EBITDA pre-AASB 16 and before the additional provision was a loss of $3.4 million and in line with guidance. And after the provision, it was a loss of 23.1%. Recognizing this position, the C-suite has elected not to receive our incentives for FY '23, and the Board has reduced director's fees effective in February. We've taken action on our controllable costs, with marketing down 34%, in line with demand, which we managed to our ROI expectations, as we saw conversion decrease. The increase in wages on the prior period is majoritively due to the store openings through July to October, with some inflation, obviously, with headcount below our budgeted numbers in the [ support offers ].CapEx at $2.4 million was 54% down. Store rollouts or refurbs has slowed, as the store network is predominantly in the new format now, which is very pleasing. Our IT spend remained as it needed to, for the business to continue its journey. Inventory reduction remains on track, and net debt was $13.4 million, with $500,000 of buy-now-pay-later reclassified into receivables after the January announcement.And lastly, with the support of our bankers, we've amended our debt facility to have covenants focused on liquidity, that have been extended through the year-end of FY '24 to better suit our capital needs.Moving to Slide 5; this shows demand was impacted in all regions, as shoppers returned to stores after a strong online performance in FY '22. The USA. saw the largest decline, with sales down 14% on what was a strong 60% growth half in FY '22. On the first half of '21, we're up 36%, which highlights our strong mid-term growth.Avenue had the largest impact from weak consumer demand, given the customer demographic, with Ciy Chic performing well early in the half, however, it had a challenging Black Friday period as the better dressing category slowed.In the half, we saw a drop in the marginal onetime customer. However, in the U.S., our loyal and returning customer base is growing, which is very, very exciting. EMEA was up 2% on a constant currency basis. However, was well below expectations in all channels. Evans website grew, again, well below expectations as demand was materially impacted in all of EMEA by what was a challenging economic environment.Australia had a good start to the half, shifting in November with disappointing Black Friday and Christmas period to end down 3% for the half. We saw a return to stores with store revenue up 27% and online down 19%. Partner growth at 133% shows the opportunity globally, even in an uncertain environment.Moving to Slide 6; this slide outlines the 2 key factors which impacted our results, the decrease in margin and the increase in fulfillment costs. On Slide 10, I'll outline actions we're taking to remedy this. Margin reduced 8 basis points in the half, before the additional inventory provision, with 5 basis points due to trading margin decrease and 3 basis points due to business as usual provision movements, are all occurring in December. The trading margin decline was due to 3 key areas: firstly, responding to the heightened levels of competitive promotional activity that we needed to drive demand, focused in USA and EMEA. Second, the higher shipping costs in the current stock base, driven by the complexity of our origins and destinations that we were shipping to at a time, when shipping costs were materially elevated. And again, this is focused in the Northern Hemisphere. And lastly, a higher mix of partnership revenue, that we said before is a lower GM percent.The movement in ordinary course provisions in December was due to 2 key areas. Firstly, the higher inventory levels in this half led to increased operational provisions that will unwind, as the inventory reduces. And secondly, in the prior corresponding period, there are favorable adjustments relating to EMEA acquisitions, as we sold through Evans and Navabi legacy inventory through the half, that had been provided for.Fulfillment costs increased 5 basis points as guided to, primarily due to, firstly, the lower basket size, which drove up the cost per unit as a percentage of revenue. Second, the inflationary pressures increased our rate cards from our 3PLs. Third, we had elevated inventory levels, especially in EMEA, that led to higher storage costs that unwind, as the inventory sells through or we move it around the world. And our multiple warehouses require double handling, which, of course, increases the cost; and lastly, higher return rates focused in EMEA.Moving to Slide 7; our inventory reduction remains on track to deliver the full year targets, which have been reduced by the amount of the additional provision to be $105 million to $115 million. We reduced operating inventory by $32.7 million in the first half, as expected, and we have product in market ready for the second half, meaning limited purchases are required. EMEA is the focus of our excess inventory position, due to the lower-than-anticipated demand.Evans is the Premier Plus size brand in the UK, and it has a huge database and brand heritage. We anticipate that this would show a similar trajectory to Avenue after the acquisition, and that didn't eventuate into what became a downturn.To compound this, in the first 2.5 in EMEA, we had logistical issues, meaning a material portion of the inventory, as had been outlined, was not available to sell as it had been planned. The inventory remains commercially appropriate for higher demand markets and accordingly, we've been repositioning this inventory to Australia and the U.S., where seasonally and market appropriate. This move and the excess inventory are the main drivers of the additional provision.The provision has 3 components. Firstly, as I said, the duplicated logistics and duty costs to distribute the product from EMEA around the world. Second, on allowance for stock loss and fragmentation as we closed all of our warehouses globally in the second half. And lastly, slow-moving categories were electing to leave in EMEA.The balance of the stock in the USA and Australia remains healthy, and as previously discussed, can sell-through seasons if required. EMEA with these actions, will be better placed in FY '24. It will take longer to sell through all of the inventory than we originally planned, and this has been reflected in the provisioning. However, I am confident in the value of the inventory.Moving to Slide 9, a pathway to sustainable profitable growth. Our strategy to lead a world of curves through delivering our product range into global, digital partner and storefronts to the huge global plus size market, has been consistent and very successful over many years, and I know this will return. There are 5 key focus areas we have been and will continue to target, and I'll talk through them all starting on Slide 10.The first is targeting a return to historical gross margins through increasing sell price and reducing cost price. Our actions to increase sell prices are; tightening our range of volumes in line with demand. With multiple seasons now of history in all of the markets, we have a better idea of what she buys, at what volumes and what price. It has been hard to learn through COVID and what's happened in the last 6 months with the economic headwinds. However, we are consistently adjusting our buy from what we've learned and reducing our volumes in low demand categories or lifestyles in each market.We'll move away from low-priced commodity items and focus our customer towards a more emotive purchase that she's prepared to buy into at a higher price and is less competitive. And this is really where our expertise is fit and quality of more of a unique selling position. And if you look at all of our partner business around the world, this is where we're driving the growth.We'll return to an agile supply chain and follow demand. COVID supply issues and the volume of inventory restricted our ability to react to our customers, as these are both unwinding, we'll be able to get back to that, following her demand and being nimble. It was this operational agility and following demand that's underpinned our long history of success.As the market conditions normalize and obviously in line with the market, we'll reduce our promotional cadence. And lastly, we'll finalize the retail price increases globally in line with our competitors.Our actions on the cost price side are focusing on a core factory base in 3 key regions: simplifying to 3 and 3 destination ports, meaning volume shipped in each lane increase and the complexity that adds costs -- decreases and that will materially reduce our cost to ship the garments. And compound this, the global shipping costs have already started to reduce and reliability is improving. With a new freight forward partner that comes onboard very soon, we'll be able to reduce both reduced costs, sorry, and also reduce our lead time.The second key focus is to return fulfillment costs to historical levels through building long-term scalable facing logistics operations. Our actions to reduce these, include removing complexity in our warehouse network by rationalizing 3PL facilities from 12 to 4. This will reduce double handling costs and mean more inventories for sale, increasing our efficiency. In the next few weeks, we are launching our automated facility in the U.S. to better serve customers and our new partner there also has materially reduced last-mile freight rates.We're serving emerging markets from larger regions rather than having pools of stock in market, and we're doing this to reduce the fixed costs, while increasing the assortment to customer. With the closure of the EU warehouse, we are now serving all of the EU from the U.K., and it's working. As the inventory unwinds, the cost of storage and rehandling will decrease, and we are reviewing our returns process and customer experience, while not sending our product categories in market that we've observed high return rates in. Lastly, as we increase sell price and basket size to historical levels to initiatives outlined above, fulfillment costs as a percentage of sales will decrease.The third focus for the business is on reducing operating costs and CapEx, in line with demand. To illustrate what we've achieved, we managed the marketing spend down 34%, in line with demand in the first half. This was done, as we are not seeing the required ROI, as customers were just not converting. When conditions normalize and conversion improves, we'll increase our marketing spend to drive acquisition, which has been historically very successful for us.Moving to Slide 11; our fourth point on the pathway to profitability is that the international business is set up for growth. The hard work is done, and we have a global footprint. It's difficult to build a brand and a customer base in new markets, and we've achieved this, and it's not always smooth sailing. To service this, we have scalable operating structures, that when demand turns will be ready to grow.In FY '22, the USA and EMEA both contributed to the EBITDA growth. In this half, they're impacted by lower demand and the competitive environment, and they will return to profitability, as conditions improve. I'm very confident in the future of these great heritage brands, Evans and Avenue.Our geographic diversity reduces concentration risk, as demonstrated in the last 2 years when the Australian stores were closed, the U.S. business delivered our profitable growth. We have a product range that has global appeal and well-recognized brands in all markets, and we are constantly learning and editing that assortment for each market, after what she tells us.The fifth focus is our partner business, and this has shown exceptional growth, and is a huge opportunity. Although they're at lower GM percent, that provide leverage on our cost base and contribute strongly at the EBITDA line. But most importantly, they deliver eyes for our existing brands and product ranges in all markets and support our omnichannel approach.Turning to Slide 12; ethical trade is woven into our operations at CCX. We continue to build on our ethical sourcing policies and practices. Our goal is to work together with our global partners for a more positive impact to People & Planet. The key achievement here for the half, we completed our first cotton DNA test and trace it all the way back to region. We achieved a nice rating from Oxfam, and we continue to develop more sustainable packaging options.Peter will now talk to the financials. I'll throw it to you, Peter.

[Peter McClelland, executive]

Thanks, Phil, and good morning, everybody. On Slide 14, as Phil has indicated, our revenue was impacted during the period by lower demand across our markets, in particular, the Northern Hemisphere over the key trading period of Black Friday, Cyber Monday and the Christmas New Year period, as we've reported.Total revenue for the 6 months was 8% below last year. The importance of our diversified geographic and channel mix is shown by the fact, that while the online channel was down 21%, stores grew 27% post reopenings, and the partner channel grew 111%, contributing an additional $9 million of revenue to the half.The gross margin before the additional inventory provision was 51.7%, which was 8.3% of revenue lower than last year. As Phil has outlined, of the decrease, circa 5% relates to the trading margin, with higher promotional activity to drive demand and respond to competitor activity, and also due to the higher logistics costs related to the disruption of global supply chains. Of the balance, circa 3% related to the provisions raised prior to the seasonal review and the prior year benefiting from acquisition-related provision releases that happened late in that half.Regarding the additional inventory provision of $19.6 million, the review of inventory was undertaken as part of our half year and the usual year-end review processes. As a reminder, the season traded below our expectations and inventory which is reviewed in this slide. With the higher levels of inventory in EMEA and the lower sales in that region, the decision to redistribute the inventory across the business has been taken, and we have provided for the duplicated freight and duty costs impacting on the net realizable value, as well as additional provisions for slow-moving lines in EMEA.Also, given that the warehouse consolidations are in the process of implementation, decisions were taken to provide against inventory risk and the inventory that won't be moved.The management of cost is an ongoing focus of the business, with a combination of both structural changes and tactical cost management programs underway. The increase in the fulfillment costs in the half were a result of inflation-driven rate card increases by our 3PL providers, and the inventory holding costs. This is being addressed by the consolidation and closure of warehouses in the Northern Hemisphere and other efficiency measures, and will see us moving in time from 12 facilities to 4.Beyond fulfillment, the total of all other costs was below last year. Our advertising and marketing costs reduced in line with demand, and with a focus on higher return on the investment promotional channels. While the resultant spend as a percentage of revenue is lower than last year, it was in fact in line or slightly above the H1 financial year of 2021.In respect to other costs, the business maintains tight cost management disciplines, noting that the prior year benefited from lower store labor and rental costs of $2.6 million due to the COVID-related store closures.Underlying EBITDA before the additional inventory write-down was a small loss of $3.4 million, and after the write-down, is a loss of $23.1 million on a pre-AASB 16 basis. On a post-AASB 16 basis, the loss was $17.8 million, including the additional provisions. Note that we are transitioning to post-AASB 16 reporting, and have included both in this report for comparative purposes, and there is a slide in the appendix that will assist in the reconciliation.Moving to Slide 15, where I'll talk about the balance sheet. Pleasingly, the reduction of inventory is on track, despite the tough market trading conditions. We've spoken about reductions in inventory in the provision, so I won't go into this further. From a working capital perspective, the reduction in inventory in H1 was offset by the unwind of trade payables. This, with other trading and nonoperating expenses and capital spend, has resulted in the net debt increasing from $4 million at the end of last financial year to $13.4 million this half, in line with expectations.In respect to the working capital movements during the half, trade payout also has come down by $34 million to a more normalized level, whereas inventory is still in the process of normalizing, as we work towards the full year inventory targets. In respect of the second half working capital, as we now have the majority of next season stock in markets, there will be significantly reduced levels of intake during the half, which will result in more favorable working capital movements. That is to say, we expect strong cash flow conversion in the second half, and that is why we expect to be in a positive net cash position by the financial year-end.As we've noted in our January update, we've amended our debt facility in line with current business requirements and to reduce line fee costs. The overall facility size was reduced to $46.5 million. However, the amount available to working capital was increased. This steps down to $36.5 million post the financial year-end. As part of these and subsequent amendments, the current net leverage ratio and fixed cover ratio covenants are replaced by a liquidity covenant from now through to the end of the 2024 financial year, to give the business flexibility in the current trading environment.I'll now hand back to Phil.

[Philip Ryan, executive]

Thanks, Peter. Moving to Slide 17. The first 7 weeks have seen an improvement from the November, December trading patterns, with sales down 17% in a continued challenging operating environment. Compared to the November-December trends, stores have been much stronger, cycling Omicron last year, ANZ and USA Online have improved and EMEA remains at the November and December levels.Our competitors' discounting moved to heavy clearance in Jan-Feb in both the USA and EMEA as they work through inventory issues. Following this, and with all of the warehouse moves globally, we have been trading clearance and outlet to sell all the fragmented end of lines and seasonal product, that will not go to a new warehouse. We are changing this with the transition of season in the next week or so, and expect this will drive a normal promotional cadence.Our logistic simplification programs are on track and the warehouse closures are doing well. We've adjusted the half 2 buyers to reflect the market demand, and we're following our customer wherever we can.Moving to Slide 18; this will show how we plan to navigate the economic headwinds in the next few periods. The benefit of actions in marginal logistics are expected to materialize into the second half, focused in quarter 4 and into FY '24. For the second half, we have seasonally appropriate inventory in market and a moving stock globally to limit purchases and are on track for the inventory to be at $105 million to $115 million at year-end. Our reduced inventory position into FY '24 will allow us to be more agile and follow demand and get back to what made us a successful business.From all of this, we have strong free cash flows and expect to be in a net cash position at year-end. And we will continue to manage our controllable costs in line with demand. Look, I've been involved in a lot of product ranging over the last few months, and I'm just really excited to see the learnings we've taken and what we're giving here. And I know that we've brought into what is going to be a better customer experience for her, because we're using all these learnings and then getting back to what we're good at, to make sure we're delivering a better experience for her in all of our global channels.I want to wrap up on Page 19, by reminding you of the enormous opportunity we have ahead of us. We have strong fundamentals and a significant growth runway as a market leader in the huge and growing global plus-size market. We have strong brands in all markets and are still early on our journey. Our simplified, more agile operating model will allow us to leverage customer-centric approach, as we focus on her and the insight she gives us. I'm very optimistic about the future for City Chic, and have the right team around me to make sure we execute on the key focus areas I've outlined today, which will set us on a path to sustainable profitable growth.Thank you all for listening, and I'll now open up to questions.

[Sam Teeger, analyst]

[Operator Instructions] Your first question comes from Marni Lysaght from Macquarie.

[Marni Lysaght, analyst]

Just to make a start, can you give us any color on the depth of promo going into the second half versus, say, what it was over the first half of '23 and trying to compare your debt relative to some of your peers?

[Philip Ryan, executive]

Look, it differs very much by region, Marni, is the first thing I'll say. I'll move into the U.S. The U.S. was heavy clearance. I think for us, it has been a big warehouse move, as I've said many times and where we're really trying to make sure the fragmentation and any end of lines aren't in that warehouse move. And I think I'm buoyed by the fact that both Ashley Stewart and Lane Bryant had similar outlet style activities over the last few weeks. I think there's been -- it's been a really heavy market in America, and I don't feel that we have been actually -- even though we've been excessive, I'd say the whole market in the U.S. has been really, as I said in my speech, January and February has been very much clearance. I think a lot of people are dealing with their excess inventory positions.The U.K. has been different. I think it's just driving for demand. I think it's a challenging market over there. And into Australia, we've been probably not materially different to what we had in previous years, I would say as a whole, it has just really been America was driven very hard.

[Marni Lysaght, analyst]

Okay. So we can take away from that as the -- sort of the depth of primary has been more accelerated in January, February compared to say what it was pre-Christmas in the United States?

[Philip Ryan, executive]

Yes. And in EMEA as well. And all of that, yes.

[Marni Lysaght, analyst]

Okay. Higher promo. And you haven't seen any alleviation from EMEA being more seasonably warm, same with the United States? Talking about Arctic Chills and things like that?

[Philip Ryan, executive]

Yes. Look, the U.K. definitely wants to move on to season. If you go and look at our website Evans today, they've moved on. I think she's over the winter period now and is moving into summer. I think the U.S. has -- we expect to transition in the next few weeks, as we move into the season. And Australia, I mean, winter is going live as we speak now, regardless of what happens outside.I think it's amazing Marni, what you see with the behaviors of some -- she wants a coat leading into winter and it's a good coat and the style is desired, she buys it. And same with the dress in the summer, in the Northern Hemisphere.

[Marni Lysaght, analyst]

And on early calendar year '23 trading, if you go back 12 months ago at your update [ then ], Avenue started to really slow. So how much is Avenue's when you talk about Avenue being up? Is it is comp versus like...

[Philip Ryan, executive]

We didn't say Avenues was up. What we said, Marni, was it's better than it was in November and December -- like it's gotten better. I think we said publicly Avenues towards sort of the end of half 1, '23 in middle was more challenging last year, with the commentary we've given so far.

[Marni Lysaght, analyst]

Yes. Okay. That's clear. Okay. And then when you think about the primary, that gives you a bit of a color. But of an idea of what's going on. My other question just relates to about your, I guess, you're trying to play around with improving your gross margins over time. So when you talk about changing the diversification of origins, just how should we be thinking about that, given that like -- with the onset of COVID, you guys rush to change sourcing and diversify away from China?

[Philip Ryan, executive]

The 3 key regions we've been able to -- we're operating now are China, Bangladesh and India. And we can pretty much do all categories if need be, in the event of something happening that renders one source not well. We are sort of diversified enough, to make sure we have categories covered. It's not going to be easy if that happens, but I'm confident with where we've gone. I think it's about being meaningful to a few factories and suppliers. We went out over the last 12, 18 months and really tried a lot, and I think we brought a lot of our volumes through seasons that we won't be repeating those behaviors. I think we've learnt the kind of factories that can really do our product well, and we'll be focusing on them to make sure that we're meaningful to them.

[Marni Lysaght, analyst]

Okay. So just to make that clear now, the new plan will just be China, Bangladesh and India, because I remember, you did have sort of Vietnam?

[Sam Teeger, analyst]

Yes. Vietnam has been a little more challenging. The volumes required are high at this stage. We have -- we're still trying and talking to people there, to see what they can do. But there is other complexities that come with multiple origins, if the volumes out of that origin aren't sufficient to fill containers, et cetera, Marni. So we have to be measured. I think a lot of that -- the inefficiencies I talked about, shipping related to all these origins having volumes that necessarily weren't -- especially into EMEA, that weren't the most efficient way to ship it, and that was done when shipping costs were very high.

[Marni Lysaght, analyst]

And just a final one for me, of the provision recognized of $19.6 million and you say it's largely relating to EMEA, like how much of that is EMEA, as you say being slow to clean, versus some of the shift of the stock to the other regions?

[Peter McClelland, executive]

Look, what we've said, Marni, when you stand back and look at the entire provision, we're very comfortable with the amount it is. It really focuses on EMEA because that's where we've seen the challenging period and where we overestimated where demand was. We're sort of looking at the 3 key components of the duty logistics and handling move, plus the warehouse closures and some slow-moving stuff we're leaving in EMEA. They are the big 3 components. As I said, it's predominantly in those 3 areas, as I said in my speech.

[Operator]

[Operator Instructions] The next question comes from Sophie Carran from Goldman Sachs.

[Sophie Carran, analyst]

Just one around the inventory, could you give us a little bit more color around sort of the newness of that inventory? I mean how much of what's sitting there now is sort of old product that still needs to be cleared versus new products ready for new seasons? And then to sort of follow on to that, I mean, how are you thinking about sort of what you need to see in the market before you can sort of look to increase pricing, I guess, given sort of not only the inventory clearance that's impacting margins, but also the weaker consumer environment? I mean, are you comfortable that you can increase prices in this environment, or do you need to sort of wait until things improve?

[Philip Ryan, executive]

I'll answer the first question. I'm very confident the predominant purchases into the second half around Australia and the stores to make sure there is enough newness and consistent newness on a weekly basis into our stores. In America, we had a lot of inventory that never went to our customer, and we sort of sorted the range towards the May, June, July period, as demand tailed away to the end of quarter 4 FY '22. And we've got more than enough inventory in that, that hasn't been seen that will be derived as newness, and the team are very excited about.In EMEA, it will all be new for them this year, because there was a lot that didn't go live. But yes, so really, it's Australian stores on making sure we are getting that newness in, and then there's more than enough in the main market of the U.S. and EMEA is going -- as I said in the speech, has a lot of product that never saw light of day. So there's a lot of newness to the market.We've had a good history of managing through those processes and bringing new back over the last 2 or 3 years and making sure we position the flow of inventory and the look, flow and lifestyles in to meet what she's buying. And I think when I said in my speech, that's what I'm excited about, we're really getting back to monitoring that on a tactical basis, to make sure the newness is in line with what she wants. And I'll be really excited over FY '24, as we can more react to her and do those kind of things that I think made us strong and get back into chasing demand, rather than buying for long periods in supply chain risk and political risk, et cetera, that's sort of been the story for the last sort of 2 years.The next one, you're talking about the retail price increases. Really, we've done a lot of the work already leading into it. Somewhere in America, most of the prices are done. It's really the stores as they're ticketed, we've got to work through and that will happen in winter on why that hasn't happened. We have seen, especially in America, the intake price being the first retail has gone up materially in most of our competitors. I spend a lot of time on this, so I could talk about it forever, but the headline is, most of the market are already doing that, especially in America.EMEA, I'm not as sure. But Australia, we're definitely -- as I said last time, we haven't increased our prices for many, many years, and I'm confident and that's happening here in the second half. I think what it means, Sophie, is we need to think about the kind of promotional cadence and then get you to an end price. And what I've said before is, what we're doing with the retail, is trying to start a little bit more, to give her some more back through the promotions, and achieve the same sale price is the goal.

[Operator]

Your next question comes from Craig Woolford from MST Marquee.

[Craig Woolford, analyst]

Just wanted to ask about the inventory target that you've given us a level for the end of the year, which has obviously reduced, given the provision. But how are you thinking fundamentally about how much inventory you now hold? On my calcs, it's still around a 2x stock turn that you'll be on, exiting fiscal '23?

[Philip Ryan, executive]

Yes. Look, I think first thing we have to do, Craig, is get through the targeted journey, and that's my first hurdle, and I want to sort of talk through that, and then we're going to assess where that's at and what we're going to do, and make sure that the right inventory is there and it's clean in each market and we get to there, that's sort of top of mind right now, and then making sure we're buying into getting good, strong stock turns and not having -- just losing a week -- losing a month in your lead times through shipping, means a month less stock grade, and we're working towards a lot of areas to bring that down in all of our business, and all of our regions over the next sort of 12 months. But right now, it's getting it to that $105 million to $115 million for the June number and focusing on that.

[Operator]

Your next question comes from Shaun Cousins from UBS.

[Shaun Cousins, analyst]

Maybe a question just on fulfillment. Given the ongoing challenges in Europe, have returns continued as they were in the first half '23? And then maybe EMEA, can you just discuss the pipeline of savings from the DC consolidation, in terms of the U.K. and U.S., just how we should see those savings come through, any in the second half '23, more fiscal '24 related, please?

[Philip Ryan, executive]

I'll take the first question, and then I'll throw it to Peter on the logistics one, Shaun, if that's okay. EMEA has continued the return rates Sean. The U.K. has actually gotten a little bit better. But we're assorting our range now for things that don't sell and we're moving out of there, the product that she's returning on more than others. A lot of styling our dresses hasn't worked as well in the market, as we thought it would have -- demanded well and then returned. So what we're doing is trying to edit the assortment, to make sure what we're putting to market has -- is the most likely not to be returned. And that's an iterative process, where we're learning on a weekly, monthly and quarterly basis. But EMEA hasn't changed. The U.K. has gotten a bit better. The U.S. never really got materially worse and neither did Australia.And on the pipeline, I'll throw it to Peter.

[Peter McClelland, executive]

Yes. And in terms of the fulfillment activities, as you know Shaun, these sort of programs, where you're restructuring warehouses and supply chains take some time to implement, and we've been working on them for quite a while, knowing that sort of the structural changes in terms of inflationary costs were sort of coming through. But they're all well and truly on train at the moment, in terms of the warehouses. We've finalized the closure of the Canadian warehouse that's consolidating into the U.S. There's another fulfillment center that was a storage center in the U.S. that's been closed and the stock being consolidated. And we're in the final stages now of the go-live into moving to a new 3PL operator in the U.S. So they are all programs that are underway just as they are in the EMEA market. We've closed one warehouse already, and we're in the final stages of closing the German warehouse.So those programs are all well and truly underway, the structural reforms and other efficiency programs. We will start to see the financial benefit of those flowing into Q4 and certainly into FY '24, where we'd be expecting -- our target is to get back to -- closer to some of those historical levels we're at when you're -- you've got the mix of online business. So our view is we will start to see those costs reduce as a percentage of revenue into Q4, but then mainly into 2024. But all those programs are well and truly on track.

[Shaun Cousins, analyst]

Yes great. Go on Phil.

[Peter McClelland, executive]

Yes, no. I am just agreeing.

[Operator]

Your next question comes from Sam Haddad from Petra Capital.

[Sam Haddad, analyst]

Just on [indiscernible] investments, if you bring anything to the table so far? Has it been active in the business? How much can you leverage off this context?

[Philip Ryan, executive]

Look, as I wouldn't with any investor, I can't sort of talk openly about what they say. I've Michael Kay and Brett, I have a relationship through them with [indiscernible] I've known Brett well, and I look forward to him being on the register. He's a great strategic investor in retail and an astute eye for what is value, I would say. And we're very lucky to have someone like that on the register.

[Sam Haddad, analyst]

Has he been active in the business yet? Or is it still...

[Philip Ryan, executive]

No. Can't comment on that, Sam. I can't comment on things on things like that. He is an investor.

[Operator]

Your next question comes from Wilson Wong from Jarden.

[Wilson Wong, analyst]

Just my first question is just around, can you just provide a breakdown of the sales trend in the second half to date, more specifically, like how City Chic U.S. and Avenue have been performing and also for Evans and Navabi?

[Philip Ryan, executive]

Look, what we've said is 17% down at a total level. Wilson and we -- I think that, we haven't historically given the number at this time of the year, and we really thought long and hard about it and thought it was the right thing to do, given the environment. What we've said is, that the stores were much stronger. And obviously, I think everyone that has an Australian store business, really understands that. The USA and Australian online were continuing those -- the trends from November, December and EMEA was -- sorry, U.S. and Australian online are better than the trends and EMEA is continuing. But it's only really been 7 weeks. So there's not a lot.I think when you look at our Avenue and CC, as we've been really trying to prepare ourselves for what is a huge structural efficiency move in the warehouse. And obviously, that has a big impact in the market, and that's almost done right now, as we said, which is very, very exciting. But yes, that -- and Evans, as we said, is continuing the trend in EMEA.

[Wilson Wong, analyst]

Sure. If I can just squeeze in one more. Can you just clarify what the graph -- the gross enrollment has been to-date?

[Philip Ryan, executive]

Certainly, I'll throw to Pete for that one.

[Peter McClelland, executive]

We use McGrathNicol across a number of their consulting divisions. And we received -- we use them to get some debt advisors. We discussed more recently with the changes in the amendments facility, but we also use them across a number of other consultancy areas as well, like cyber, et cetera. So it's just the consultants we chose to use.

[Operator]

Your next question comes from Chami Ratnapala from Bell Potter Securities.

[Chamithri Ratnapala, analyst]

Just wanted to explore with the inventory provision. Can we talk about sort of at a broad level, what sort of assumption for market weakness in EMEA have you considered sort of going into the second half and considering the risk?

[Philip Ryan, executive]

Yes. Look, I think what we're trying to do is rebalance the inventory around the world. I think your question, Chami, was how do we see EMEA into the second half? If I can just clarify that. Is that what you're asking?

[Chamithri Ratnapala, analyst]

Yes. So EMEA into the second half versus the current provision that you have taken? What are you accounting for as further risk in the region?

[Philip Ryan, executive]

Well, look, I think the risk is -- the reasons, sorry, as we said, is the 3 items I won't outline again. But EMEA has been the focus of it, because demand has been challenging in that region. And I'm not -- you pick up a newspaper on that one, I'm not the only person saying that. There's many of the online traders in the U.S. such as ASOS and Boohoo very, very challenging areas, and we're looking to reposition the inventory into the right commercial market for it.

[Peter McClelland, executive]

Chami, just going back a little bit on that one with the inventory -- the excess inventory that was in EMEA. Part of it is certainly demand. Remember, when we were buying into that business, we were buying for the growth that Phil had identified, and we had seen in other channels. And unfortunately, we hit this macroeconomic headwind.There was also some supply chain issues, which we've outlined in the past, which, again, more macroeconomic around supply chain disruption in the U.K., which is why we saw this buildup of inventory. So to the first part of the question, we're using that inventory to rebalance it or reposition it across the globe because of that. That has an underlying -- there's an underlying assumption that we are still expecting. It's an uncertain market in the EMEA, in the European marketplace. So we're making changes to consolidate the warehouses to take that cost structure out, and we're rebalancing the inventory across the globe to where it can be better utilized.

[Philip Ryan, executive]

And we're very lucky as a global business to have the ability to do that within market -- that the product will still be commercially viable. If we only had one region, we only had one area, you can't take the opportunity to grow and the risk that's needed, and we have repositioned and done what we think is the right thing with the inventory to do it, and that is then reflected in the provision.

[Chamithri Ratnapala, analyst]

Perfect. And probably the second question from me would be, I mean, you talked about more sort of a historic level of GP margin that you sort of consider in getting back to, thinking about probably the next 6, 12 or 18 months, what sort of a GP margin would you like to think about for the...

[Philip Ryan, executive]

Yes, what we've said is we're targeting where we've been historically. I think there's a lot of caveats on the next 6 to 12 and 18 months around what happens. What we've done well is all the controllable parts of shipping costs and input costs and factory costs and I'm very confident in what we've done there in relation to our controllables and that we've got a hand around them. And then it's -- the next question is how long does the market reply, and what she is prepared to pay. And as we learn about -- more about our range, get the right product, it will only improve.

[Operator]

Your next question comes from Aryan Norozi from Barrenjoey.

[Aryan Norozi, analyst]

Can I just make a few clarification questions first? Just on when you're [Technical Difficulty] the trading update with an improvement in ANZ and U.S. versus what you reported? Are you talking relative to November, December or the first half of '23?

[Philip Ryan, executive]

November, December. We did call that...

[Aryan Norozi, analyst]

Yes. And in terms of the gross margin returns to historical levels, obviously, your mix of your business has changed because there's lower gross margins in the partner brand. So if I just look at the -- first of all, how do you account for that? How do we look at the -- what time period do you define as historical? And also, if I just look at your EBITDA margins, you're loss-making at the moment, you've done -- you were doing 16% EBITDA margins pre-COVID. How do we think about the return to that margin, given your commentary? Is that -- should we be expecting that in the first half of '24, as your gross margins normalize? Can you just give us some color around that, please?

[Philip Ryan, executive]

Yes. Look, there's a lot of uncertainty in the next 6 to 12 months, Aryan, you've done a great job of outlining exactly where our business has been and what it's done and why I'm so confident we can get back there. I think if we focus on the right product, not just for us, but for partners, I think we can get back to some level of where margin was. You can see it's gone from sort of 62 and 21, to 60 -- 59-60 and right down to 51.8, excluding the additional provision this year. Some of those parts are very controllable by us, that we'll be able to get back very quickly. But it's really going to depend how the market fares over the next 6 to 12 months. And our logistics is more in a controllable state. And we expect that's what Peter outlined into '24, we expect to see them.

[Aryan Norozi, analyst]

So gross margin back to the reference point is the 59% to 60% gross trading margin?

[Philip Ryan, executive]

We're saying historical levels Aryan, and then we're targeting them to get back to something where we were before.

[Aryan Norozi, analyst]

And fulfillment cost as a percentage of sales, historical levels or as a percentage of online sales because, again, the mix of the business has changed for the...

[Philip Ryan, executive]

Yes. And stores closed for 6 months and then open for 6 months, where do you grab your point? But yes, online is a reference point for us.

[Aryan Norozi, analyst]

As a percentage of online sales -- total online sales.

[Philip Ryan, executive]

And look, a big part of that Aryan-- a large component of that is your sell price and your basket size, because if you sell -- if your basket size increases, fixed logistics cost per item becomes less of a percent. So they're very intertwined. But what we are doing well, is taking all the controllable things around logistics and warehouse closures and efficiencies and complexity, and where by '24 we will have them more removed.

[Aryan Norozi, analyst]

When you're saying online sales, do you mean wholesale and marketplace included, or are you just saying digital sales through your website, as the fulfillment costs have changed in online sales? What are you referring to -- including marketplace and wholesale?

[Philip Ryan, executive]

You have to, because they have to be picked and packed through the same way and...

[Operator]

Your next question comes from John Hynd from Wilsons.

[John Hynd, analyst]

Notwithstanding Avenue and Evans, and I guess how they were acquired -- and the position they were in when you acquired them. Is there -- are you confident there hasn't been brand damage done here with the, I guess, continued aggressive discounting and promotional activity that's happening across the businesses at the moment? And I guess, how do you think about the business trading out of this and being able to put through the right sort of price increases in FY '24 to get back to these gross margins that we're asking questions around?

[Philip Ryan, executive]

There's a lot of questions in there, John. I'll start with the Australian brand. It's probably the first one. Look, I mean, firstly, I think it's been very market driven. I would say we're not the only ones in that spot. And I watch what she buys at an item level and the changes of that have not been material. And we just -- I know that our lady has been so strong to us. And our loyal customer numbers are increasing in both America, U.K. and Australia. I think when we -- that marginal customer, we were chasing with marketing and getting them into our funnels, is where we've had challenges. So I'm very confident of the strength of the brand in Australia.Avenue and Evans are similar. I think they've suffered in a more competitive marketplace. And I mean, the database alone on what she is buying, the traffic have maintained. And again, the fact that loyal customers have grown -- has been very, very positive, and that's what -- that's really the driver. If my key ladies are spending, I know she's coming back to us and picking up that one that's moving out NIM is then the job of growth. Does that answer the questions, John?

[John Hynd, analyst]

It's sort of halfway through. It's just more, I think what we're concerned about is that -- it's great that the customer is coming through the database and transacting, but they're transacting like through November, December, there were $4 bras on the website. So they're transacting at those levels. Are you going to be able to get the customer -- the core customer come back when that bra is back at $16 or $19?

[Philip Ryan, executive]

Look, I have had no problem in transitioning into a new season and moving that on. I'd like to see the $4 bra, you must have picked up a day in Australia that you saw those kind of levels. And we know we need to get back into our normal seasonal buy and that the first half of FY '23 was market-driven exceptionally promotional. And who knows what the next 6 months is going to hold, John. But I'm very -- like if our lady is staying with us since she's spending, as I said in my speech, he's not leaving us. She's just a little cautious around the discretionary spend, and we're trying to move with her now. I'm happy she's with us. That is the important part.

[Operator]

Your next question comes from Joseph Michael from Morgan Stanley.

[Joseph Michael, analyst]

Just, I guess, a straightforward one. Just on the balance sheet. Can you confirm, are you back to net cash position already as of sort of the end of February, just as that inventory comes down?

[Philip Ryan, executive]

We haven't given that as an indication as a read. What we are targeting to be, is a net cash position by the end of the financial year. We haven't given [ a term rate ].

[Joseph Michael, analyst]

Okay. And just so I can make sure I understand the mechanics of how it works. I guess inventory, you've given guidance that it's coming down $35 million. Should we expect payables will be flat, and then I guess the plug is, what we think EBITDA will be? Is that a fair way of thinking about, I guess, some sort of bridge to get back to net cash?

[Philip Ryan, executive]

Yes, that's the right way to be thinking about working capital. As we said, we've got -- there will be some intake into the second half, but that's significantly lower than what it would have been in the first half, because we've got stock located in each of the key markets for the second half. So you'll see the inventory come down. And as I noted, payables are back to a more normalized -- more normalized level. There will be timing around where orders have come in, et cetera. But clearly, payables were a lot higher in June of last year, based on when inventory orders have been made and getting product in place, given all the disruption that was happening to the supply chain.So payables have sort of normalized in the first half, inventory will normalize across the second half, which is why you'll see that favorable working capital movement.

[Operator]

Your next question comes from Craig Woolford from MST Marquee.

[Craig Woolford, analyst]

Just a follow-up on your decisions around marketing investment. You mentioned it's down 34% in the first half, always a tricky one to try and measure an ROI on. How do you know that there won't be a consequence or a follow-on impact to sales from reduced advertising and marketing?

[Philip Ryan, executive]

I think what it should show is our reactivity to what she's doing in the market, Craig, and how that's happening in a live level. Like what -- as I said, conversion has been the hard part around it. And the last thing you want to -- first thing, you don't want to drive people to your site, to give them an expectation, especially new people of heavy promotional activity. So in some ways, you do pay for your sales through your promotion. But we have pretty strong disciplines around our marketing, and we're not in there to just drive sales. We've got to make sure that the customer experience when she comes on, is strong.Now this has not been a long period and we can turn this on fast, as outlined. I think the marketing is about what it was in the first half of '21 or around that level, Craig, and we're able to ramp that up and get back to an acquisition very quickly. And I think I said that in my speech that, when we see the conversion increasing, we will turn back on the marketing, to make sure we can put some new customers into the pot, so to speak.

[Craig Woolford, analyst]

Yes. I would guess then, I mean, your first half '21 sales was about $123 million. So the...

[Philip Ryan, executive]

I was talking percent, I think not necessarily...

[Craig Woolford, analyst]

Marketing...

[Philip Ryan, executive]

Yes. We also had -- given the inventory position, we had a lot of operational marketing in that, that wasn't spread as well, Craig, around photoshoots and model rights, which are very -- which in a digital business, are obviously costly.

[Operator]

Your next question comes from Sam Teeger from Citi.

[Sam Teeger, analyst]

Can you please talk to us a bit about just how you're managing the supplier relationships at the moment, given your orders will be down in the second half and presumably they were down in the first half. I guess from a supply perspective, is it fair to say they would prefer more frequent regular consistent ordering patterns, and when things normalize on the other side, do you still expect to get the same pricing in terms from suppliers?

[Philip Ryan, executive]

I think the good thing that's happened around sourcing around the world, is there was a huge influx of orders from America to every destination through like the last 18 months, and that really slowed down. And what we've seen -- we've worked with our -- we know the capacity of our strong core factories, and we make sure that they are okay, is my comment and make sure that we are working with them to understand their needs. But in relation to orders, at this stage, there has been a big drop in what has been ordered around the world, and we're not the only ones that have done that, and we're just going to make sure that people that are important to us, we're working with well, to make sure we can get what we need.

[Sam Teeger, analyst]

All right. And just in terms of the 17% of the trading update, what proportion is driven by the price discounting versus underlying volumes?

[Philip Ryan, executive]

Yes, you say what percent of the 17% down is, Sam? I mean, we don't sort of go into that level of detail. What I will say is, we've moved really in January to clearance rather than promotion, as I'm sure many of you would have seen through our websites. And you can see on both Evans in Australia and CC USA, we've turned back to a now seasonally right summer now, but it has been much more clearance than normal to promotional cadence.

[Operator]

I'll now hand back to Mr. Ryan for closing remarks.

[Philip Ryan, executive]

Look, I want to say thank you to everyone for listening. I hope I answered all the questions well. And I'm really excited about what's to come into FY '24 and beyond, as we keep growing our vision, a leader [indiscernible] with our global distribution setup and a real key focus and a great team. And I want to say thank you to all my team for everything they've done this year, and thank you to shareholders who support us. Thank you.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.