Lovisa Holdings Ltd

ASX:LOV

Thank you for standing by, and welcome to the Lovisa Holdings Limited FY '19 Half-year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Shane Fallscheer, Managing Director. Please go ahead.

Good morning, everyone, and thanks for taking the time to dial in. On the call today, you have myself, Shane Fallscheer, Managing Director; and Chris Lauder, our CFO. As you are aware, we published our half-year results to the ASX this morning, and we would like to talk you through them. I'll now do a page turn through the presentation, and we're happy to take any questions at the end.If we now turn to Page 5, we'll talk through some of the details. We've had a solid result in a more difficult trading period than we have experienced in recent times with EBIT up 5.1% to $36.5 million. Total sales were 12.3% as a result of the continued new store rollout and with the same-store sales growth continued to be challenging, finishing the half at minus 1.8%, impacted by cycling comparable store sales from the previous year of positive 7.4% for the first half of FY '18 and particularly strong comps through last year's Christmas and Boxing Day trading periods. Our gross margin increased 81% as a result of the benefits of a higher USD hedge rates continuing through the period combined with disciplined inventory management. We continued our global rollout strategy with a net 40 store openings. And I'm very pleased to announce today that following successful trading between the U.S.A. and France in recent months, we now have the confidence to move to full rollout in these territories, with the U.S. rollout to move outside of California in the near future. We continue to invest in the structure of the business to support our global growth profile as we roll out new territories, including investment into global support structures and expansion of the Global Property team in overseas markets as well as the upfront investment into e-commerce, which we launched in October. When combined with negative comp store sales for the period, this resulted in an increase in cost of doing business percentage compared to prior year. Pleasingly, cash flow from operations was again strong, rising 9.4% to $49.1 million for the period, with operating cash conversion of 121%. And with that, the board has declared a fully franked interim dividend of $0.18 being a lift of $0.05 on the prior year.If we turn to the financial overview on Page 6, revenue for the year is up 12.3% with comparable store sales down 1.8%. Just to talk to that for a moment, whilst we're generally happy with our execution on meeting our customers' product needs, we're not seeing the same major trends in the fashion jewelry sector as we've seen in recent years. That said, we are happy that we have been able to deliver strong growth for the new stores and are well positioned to react and deliver to whichever trends prevail in the market. We've continued to make important investments into both people and process to drive the growth of the store network and has taught what is increasingly a globalized business, which then combined with negative comp store sales has resulted in a CODB percentage being higher than last year. Our EBIT increased 5% to $36.5 million with earnings of $0.242 per share and our continued strong balance sheet and cash flow generation has resulted in an increased interim dividend of $0.18 per share.If we turn to Page 7, we've spoken to the increase in sales of 12.3% to $133.2 million and the factors behind it. This chart shows the progression of the company's sales over the past 5 years. It's very pleasing to be able to present a sales growth chart showing such consistent increase. Importantly, we remain focused during the half on preserving our strong gross margins and have not chased sales at the expense of margin.On Page 8, you'll see that we have had growth in total sales across all regions while still delivering top line growth in the Australia and New Zealand market. Australia, in particular, was impacted by generally softer trading conditions. And as this market has historically outperformed over a number of years, it has led to a result of negative comps for the half. Asia was again solid with another strong sales performance in Malaysia offsetting 4 store closures in Singapore. The growth in the European and U.S. markets accelerated in the period with 12 new stores in the U.K., 8 stores now in Spain, 7 in France and 8 in the U.S. South Africa again performed well with sales up 10.5% for the period aided by both strong comp sales growth and the benefit of additional stores opened.Turning to Page 9. Gross profit of $107.8 million was up 13% at an 81% margin, a 60 basis point improvement from last year as we continued to benefit from higher USD hedge rates in this period. We have maintained our focus on margin while chasing sales with continued focus on inventory management and promotional effectiveness resulting in a small improvement in margin on a constant currency basis in spite of the more challenging trading conditions. Whilst we have again been able to deliver a strong margin, as you can see from the chart at the bottom of the page, we're a fashion business and therefore our margins can experience some degree of volatility.If we turn to Page 10, we'll talk to our CODB. As we've said previously, we have continued to reinvest in the growth trajectory of our business, which has put pressure on our CODB percentage throughout the year. We've invested in our senior executive teams to ensure we have the capability to execute in growing our new markets, invested for the future and the relocation of our Asian logistic function from Hong Kong to Qingdao and have also had the impact of the launch of e-comm in October. The rollout of stores in new regions has also had an impact on our CODB with opening costs and higher than normal wage -- wage costs throughout the opening period having an impact on the overall cost of operating in new markets. We continue to invest ahead of the growth curve to lay the foundation for future growth while still remain focused on keeping tight control of the underlying cost structure of the business.I'll now hand over to Chris Lauder, our CFO, to talk through cash flow and the balance sheet.

Thanks, Shane. Turning to Page 11, you will see that the company's cash flow was again strong with cash from operations before interest and tax of $49.1 million supported by operating cash conversion of 121% as we continue to manage our working capital well in the face of the ongoing investment into stocking out new stores.Capital expenditure for the half is $12.5 million predominantly from new store fit-outs and refurbishments on existing stores upon lease renewal. Overall, this represents a $5 million increase on the prior year as we build scale and grow the store network in new markets. Cash dividend in the period was $7 million higher than the prior year at $14.8 million as a result of the increased final dividend from FY '18 leaving us with net cash flow for the period of $10 million and closing cash on hand of $32 million.Turning to the balance sheet on Page 12. You can see that the cash generated for the period has further strengthened what was already a strong balance sheet position. Our inventories are up on the same time last year growing in line with the new store rollout, e-commerce launch and in preparation for coming store openings, with disciplined inventory management, an important part of our business model. As of June 2018, we finished the period with no debt, significant headroom in our covenants and $25 million of undrawn financing facilities available to fund the future growth of the business, which is opened [indiscernible] to allow us to increase the interim dividend by $0.05 per share to $0.18 to distribute cash with the currently surplus to requirements and more closely aligned dividend payments with the profit and cash generation profile of the business. As we accelerate the store rollout in our growth territories, we'll continue to assess on an ongoing basis the cash flow requirements of the store opening schedule and make future decisions on both dividends and capital structure of the business as required, reminding everyone that we do not target a specific dividend payout ratio.I'll now hand back to Shane.

Thanks, Chris. If we turn to Page 13, a quick update on store numbers. Lovisa finished the half with 366 stores trading with a net 40 stores opening during the period, which comprised 51 new stores opened and 11 closed as we continually optimize the store network. We now have 58% of the store network offshore. The U.K. store rollout has continued with 12 new stores added in the region for the period to take the total to 36 stores. The pilot programs in France, the U.S. and Spain continued in the half with the business trading 7 stores in France, 8 in the U.S. and 8 in Spain through Christmas. The U.S. and French markets in particular performed pleasingly through this period, and we'll now move to full rollout in these territories, which I'll discuss later in the presentation.As we have said previously, growth in quality sites is key, and we will take a measured and diligent approach to moving forward in any market we enter. As we enter large and new markets, the key learning has been to get leasing people on the ground in those markets right from the start to build a pipeline of sites as quickly as possible. We are pleased that now that we have these resources in place we've been able to drive more momentum into the rollout through quarter 2.We've listed our view of each market estimated store capacity on the right-hand side of the table. As you can see in Australia and South Africa, we are already ahead of our estimated store capacity. This is because these stores may ebb and flow based on renewals. However, this does not mean we will stop considering new store opportunities in these markets. We'll take them on their merit. Again, taking back to our investment metrics. These estimates are a general guide only. You will also note that we have not provided a guide in relation to where we see the store capacity of the U.S. and French market as we feel it is still too early to determine this with any degree of accuracy.Turning to Page 14. I'll now talk in more detail in relation to the opportunity in the U.S. We've now traded in the U.S. since November 2017. And with the pleasing performance of the 8 stores trading in the California market, we are now confident to continue our store rollout with the knowledge that Lovisa -- that the Lovisa offer is resonating with the American consumer. Whilst operating costs in these markets have been higher than some of our other markets so far, in particular, new store build costs, we're confident that with scale and more experienced teams on the ground that this market will over time deliver returns consistent with what we're used to from our existing markets. Whilst we have started our journey in the U.S. in California, we have now expanded our attention to other states and expect to be additionally trading from at least Texas and Florida by the end of the financial year. We've also recently appointed a second leasing manager for the U.S. who will service the East Coast market. We obviously see the U.S. as a significant opportunity and continue to invest in the structures to support this. However, the eventual size and timing of the store rollout is dependent as always on being able to deliver quality stores that meet our internal criteria without impeding ambitious store monthly targets.Turning now to Page 15. I'll talk to the European market and, in particular, the France and Spain pilots. We're now trading in France since 2018, February, and whilst the delivery of stores has been slower than we would have liked, we were able to go through the Christmas trading period with 7 stores trading. Consistent with the U.S., performance of these stores has been pleasing. And whilst we still have a lot to learn to optimize our operations in this market, we have enough confidence to move this region out of pilot and progress the store rollout. As with the U.S., experience in this market to date has been that operating costs have been higher than our average. The store rollout is slower than we're used to, again, however, we expect that with increased sales we'll be able to deliver returns more in line with our existing mature markets. We now have a leasing manager in place in France to support the growth of this market and again we'll not sacrifice quality of stores via our operating metrics to deliver on our store monthly target.In relation to Spain, we went through the Christmas period trading from 8 stores, having opened our first store in June 2017. Our performance in this region has been inconsistent to date and, as a result, we have elected to slow any further store opening until we can deliver on the key metrics required to expand in this market. As a result, we will continue to take a cautious approach on taking on any new sites in Spain and we'll continue to focus on the stores we're already trading in.Turning to Page 16. Operationally, we continue to focus on improving the structure of the business and the way each department operates to best support our growth strategy. The 2 areas we've invested in during the period are supply chain and IT system, including some of the following: we've moved our third-party logistics hub from Hong Kong to Qingdao, China to fund economies in the picking and packing of orders and to be closer to our suppliers; we've changed our logistics provider in order to deliver a more efficient supply chain; we have upgraded our in-store point-of-sale hardware and software to ensure that we can cater to the global languages and integrate as part of banking facilities in all regions; and we've changed our global store labor management and rostering systems to ensure that we can effectively manage the growing workforce we have across our 9 company-owned territories in 3 different languages. In addition to the project I've just noted, we've launched the lovisa.com e-commerce website in October in the Australia and New Zealand markets and continue to refine our omnichannel operating model before launching globally.Turning to Page 17. On the people front, we've made some significant senior appointments during the period to drive the growth of the business with the appointment in November of Mark Cripsey as Chief Operating Officer, James Shepherd to lead our European and African businesses and [ Pete ] to lead the U.S. Each of these appointments brings with them significant long-term retail experience and quality global companies and are already adding a lot of value. As I've already mentioned, we have also made some key changes in our leasing team with the appointment of leasing manager for France and a second leasing manager in the U.S. to support the East Coast market as well as the relocation of Tony Frzop, our global property director from Australia to London to bring him closer to our growth market.It's also very pleasing to announce today the appointment of Sei Jin Alt to our Board of Directors as an independent non-Executive Director. Sei Jin has spent her career in product and merchandising roles across the fashion retail industry, in particular, fashion jewelry and some very large U.S. retailers and will be a fantastic addition to the board. We also announced today the appointment of Nico Van Der Merwe to the board as an alternate director to Brett Blundy. Nico has been Chief Financial Officer of BBRC for the past 12 years and brings significant retail, investment and financial management experience to the board.On Page 18, we'll talk to the trading outlook for the new financial year. We continue to cycle for you the particularly strong comparable store sales, as in recent years, we've had some strong tailwinds in the fashion jewelry sector that we have discussed previously. Trading since the end of the half has seen an improvement across all markets with positive comp sales for the period. However, we still believe -- however, they're still below our target comparable store sales range of 3% to 5%. We continue to focus on ensuring that our strong gross margins are maintained and costs remain well controlled as we invest in the future growth of the business. We do expect currency headwinds to begin and will have impact later in the financial year and into FY '20 as our average USD hedge rates reduces. We continue our focus on expanding our store network and expect the increase in number of stores for the second half of FY '19 to be higher than FY '18. We'll continue to invest in our support structures ahead of the growth curve to drive store network expansion and support the larger business.Turn to summary on Page 19. We've achieved an EBIT of $36.5 million for the half year at an 81% growth margin, being a solid result driven primarily from continued new store rollouts offset by declining comparable store sales of 1.8% for the period. We have again been able to deliver increased margins. We've invested in resources to support our global expansion and disciplined approach to working capital management has resulted in strong cash conversion of 121%. We've opened net 40 stores and closed the half year with 366 stores trading across 15 countries. 58% of our stores are now trading outside of Australia. The U.K. rollout is continuing and we are now moving into the rollout phase in the U.S. and France. The business has continued to generate cash and we are pleased that we're able to again return some of this to the shareholders by increasing our fully franked interim dividend to $0.18 per share.Well, thank you, everyone, for dialing in. And we're now available to take any questions.

[Operator Instructions] The first question comes from Sam Teeger with Citi.

Congratulations on managing profits in a tough sales environment. I'll turn to the first question, just on gross margins. In terms of your comments, likely currency headwinds to impact later in FY '19, can you talk about what you can do to offset these pressures? And also just conscious about how much gross margin has swung around as you can see on Slide 9 of the presentation. How low could gross margin actually fall assuming the dollar doesn't get much worse from here?

Okay. So to combat margin, I think we've spoken in previous trading periods when we come to market that our margins in the sort of high 70s into the 80s is where it's going to sit with sort of flagged that there is going to be some volatility in that due to the sort of fashionability and ranges. I think what you've seen through this period, because we haven't sort of cycled with any big fashion trends, we're really just allowing our core ranges to drive our sales. And there's probably a high level of predictability in the margins from our core ranges, which is why you've seen the margin land where it is. As we -- obviously, the drive into Europe and the U.S. will have a larger drive in the future where our margins will land. And part of our pilot program is obviously, ensuring all of the metrics, all of the input gains for new markets sort of tick the box. The benefit of having people like James and [indiscernible] in new markets respectively is that we can probably get a more winning site and better quality intelligence about where our prices can land. So where I'm going with that is we are in the process of doing this body of work as we've got through Christmas and got a more tenured people on the ground to sort of really drill down on our price point in the market. And it's at the right price point being that typically when we enter a market we'll have a good look at what we think we can achieve. But as a general rule of thumb, we basically, see what currency can go to our retail prices and if they look and feel right, actually we enter the market. But to answer your question, moving forward, we are doing a body of work about whether we're too cheap, too expensive or just right. Yet to make any decisions there but that -- as we expand those markets, that -- those 2 pieces I suppose will tell our margin in the future. At the moment, what we're seeing is we're holding our margins consistently across those regions and they're not having a negative pull on our margins from the market we're trading in. So assuming if all remains equal then we'll be able to expand at that similar margin, and hopefully, it's in that 5% but probably a bit early to tell. And getting through Christmas, obviously, in America especially the opening sort of leading to Christmas, through Black Friday, then Christmas and then Boxing Day sales so we're sort of trying to get into some sort of normalized trading patterns to ensure that we can get a clear view of our retail pricing. Besides currency, I'll just maybe get Chris to talk to that.

Thanks, Shane. So as we've said, we expect for our hedge rates drops off here in the second half towards the back end. So year-on-year, second half will probably be pretty flat in terms of hedge rates, so we're around 75 level last year in the second half. So we probably look to be around that level this year and might be dropping off a little in the back end at the half. And then into FY '20, we start getting down towards where the current spot rate is, in that 72 region. Obviously, you can see what the impact has been on margin when you look at the constant currency numbers we put in the pack. So we have a $0.02 improvement in the hedge rate in the first half and that was about 50 basis points to the margin. So we expect in the absence of all things that Shane was just talking about, we'll see a similar sort of impact.

And second question, just in terms of like-for-like sales. To what extent is Australia dragging on the group like-for-likes? And can this be resolved with just a few closures of underperforming stores? Or is it more difficult for that -- is it more difficult than that? I mean is there a big difference in state by state performance in Australia?

Look, because -- I mean, we do -- if we talk at a global scale, we do customize our ranges to each market. But as a general rule, I mean part of Lovisa's success is we've been able to take a concept around the world. Global trends are just that big global trend and typically when you get a tailwind, which we had over the last few years with trading above the norm then we do drive those around the world together. In Australia, Australia has always been one of our strongest markets for a long time. But it's really range-related and product-related more than store-related. So our store operational standards, I would like to think, are high. So therefore, it's not a case that we walk into a store or a market that's trading badly from operational standards. It's really product-driven and offer-driven. So basically when we win, we all win. When we lose, we all lose. And there's usually quite a narrow band between the half to outperformers. We're after markets that are still going through strong growth. We highlighted the fact that there's been good growth. So there are markets that are at the top end of the curve. But it's not a case of we've got 5 stores that are trading down 20% and close those and the average comes back. Probably in my mind pleasingly is this constant trend which if we move the trend longer, then one comes up to trend line.

Got it. And then, do you think that like-for-like should improve as we move into the fourth quarter given comps become easier to cycle? Or are you concerned about things like the upcoming election in Australia and the macro being weak?

We've got uptick before, but I don't think our customer base is largely affected by the sort of macroeconomics. Obviously, if put forth that shopping centers decline then obviously, that's going to have an impact. But things like elections haven't been -- historically don't really think have an impact on our customer and market. As far as our view moving forward on like-for-likes, I can tell you we're working very hard to ensure we get positive like-for-likes back on track. Probably don't want to pass judgment of where we think like-for-likes are going to land.

Your next question comes from Jo Little with Morgans.

A couple of questions. Just following on from Sam's just FX question there. Do you envisage putting through price increases to combat this at all or is it not the right environment to be doing that?

Yes, look in simple terms, Jo, unless we see opportunities in the new markets that we've entered markets at the wrong price point, which we're not seeing, we might be able to tweak a few things, but we don't intend to chase -- we don't think we're in the right market to chase up, to dull prices just to support margin. I can't see this. Again, there might be some little tweaks and consciously followed us from the start but there's been opportunities from 2 to 3 years ago where we were probably undercooked in maximizing our outcomes there. But we're not seeing any sort of material move in our pricing that will combat that FX.

Okay, great. And just looking at the U.S. a bit, I know you're not giving rollout targets for obvious reasons with landlords, et cetera. I mean, can you give us a bit of feel on, I guess, the ease at which you're getting sites perhaps versus other markets or just any other general observations just to hold on to?

Sure. Look it's a bigger market. So the benefit -- if you look at the U.K. where the guidance we've given you in the past which we believe is 100 store business there. I think whatever number -- we're actually in the U.K. now in the 30s, but theoretically, it's sort of fishing for it in a smaller pond, I suppose, is the simplest way of looking at it. In the U.S., we've now got a leasing manager on the East Coast, a leasing manager on the West Coast. And that's simply because the market's too big to sort of pound the pavement in every shopping mall and look for opportunities. One of the upsides in America is that it's quite -- you can try and move over 4 to 6 landlords, but basically see the crux -- the bulk of them all across the U.S. So from a relationship point of view, it's probably easier just to go in 1 place and sort of work through a number of opportunities. And the American malls are physically larger and therefore, it's probably easier than we've found in say the U.K. to come across opportunity. For us again it's just the stringent criteria that we have internally to ensure that we hit our internal metrics. And we don't sort of shotgun approach in America and sort of end up with ones and twos across -- right across America, making them very hard to manage. So the next step, we have got deals agreed in Texas and we've got deals agreed in Florida and that's just a natural sort of right along the bottom part of the sum, and go to some of the big states with big economies and larger saturation of stores. And then the work continues -- as we said in the call, Tony, our head of leasing, has moved to Europe rather than the U.S. That's really just a location base but at least he's only 6 or 8 hours away rather than 24 from most of the action. So to answer your question, Jo, because the -- it can be opportunities and more as long as we don't sort of spread ourselves too thin all over the states, then it's fair to say that apart from the stores, it should be larger.

Yes, great. And it looks like you're advertising to staff in a further 11-odd locations. So I guess, depending on timing chance, we have kind of 20 by the year-end, giving us your initial first year kind of run rate?

Yes, look, I don't want to end up in a conversation on core numbers because it is -- again because we're dealing with a small group of landlords with opportunities, it really just comes down to what rolls through. But yes, job ads and all that sort of stuff is going to be a reasonable guide. The leading to get stores down there, yes, the learnings are America, which we've touched on, is that the stores are costing us more than we'd like them to cost to build. They're taking longer to get open. It's just the bureaucracy over there to get through. So yes, we're probably not going to settle. We've sort of grouped the store openings in a very short window whereas in Australia and in Asia in particular, we can do deals and get open 6 weeks later. But the red tape to get stores open over there probably slows us down. And therefore, there's probably going to be less surprises that aren't sort of accessible by people sort of farming around what we're up to.

Understood. And Chris, I guess, just to try and understand the operating cost base going forward, now you're going to have to support these offshore operations for probably a couple of years yet. Is it reasonable to suggest we probably won't see any OpEx leverage for a couple of years just as you build this scale in 2 very big markets?

Yes, obviously, we'd like to deliver some operating leverage coming through there. But in reality, we'll continue to invest as we grow. And as Shane just said, some of these markets are more expensive for us at the moment, so until we get to some scale. So definitely, over the next couple of years, it will be a challenge.

So Jo, the way to look at it is we've got -- we've just dialed in theoretically a COO, Head of Europe, Head of America. And a lot of these guys sort of started in October, November, December. So the full weight is seeing these guys sort of roll in, in the first half, so to speak. So the full weight of that will trickle through in the second half. And leasing teams still building. So there is a structure that -- it's a chicken and egg situation. In the past, we've been, I think, pretty good at managing reasonably partly the structure to get going. But there's an inevitable tipping point, especially in places like France and the U.S., where there are high levels of bureaucracy. You really just need to dial in, otherwise the stores will sort of -- the key for us is to open cleanly and keep moving and not have us playing catch-up, I suppose. So yes, I'd like to see if that leverage is going to come down. But I think the full weight of it will roll into the half that we're in now, which will give us a clear view of what it looks like going forward. And the key for us is that the smaller stuff of managing the day-to-day costs of running more markets. Again, if we can get some saturation of stores trading well, then that's going to be the start of seeing it all sort of collect that back.

Great. Just lastly, sorry, conscious of time -- just on your pay, but you still have a level of paybacks in U.S. and France, is there anything you can share with us in the early stages? Obviously, it's costing a bit more, et cetera. But compared to probably your best markets in Malaysia, et cetera, doing a 6-month on payback.

Probably too early to talk on paybacks.

Your next question comes from Shaun Weick with Macquarie.

First one will just be around current trading. Can you just talk about the extent on which the improvement has been driven by, I guess, a bit softer comps versus the improved product trend? And also as a sub to that, can you just talk about the performance in Australia versus the offshore markets?

Look, Australia is still from a like-for-like -- Australia is 42% of trade, still, probably around 50% kind of like-for-like performance, give or take. So of course, if Australia is up, then it helps to lever it up. If Australia is down, it sort of gets harder to start below numbers. So again, because product is driven globally, trends are driven globally and our product base is distributed and developed from one place and distributed, typically you can [ find ] it over the comps. There's not a great variance between -- you don't have outliers of plus 20% and then minus 30% or anything like that. It is pretty -- usually pleased how we're managing our comps. As far as January, I mean, we don't like giving sort of month-to-month sales results. But history says if we could get enough data of where we stand when come to market in February. So we're typically seeing, obviously Boxing Day sale, January trade, even before where Chinese New Year's is, all of those things can have a factor on trading patterns. So typically, yes, we had a very strong -- for those of you that were following us through last year, we came into Christmas -- into the last few weeks of Christmas and when we, I think, last spoke to the market a year ago at the AGM and then came out with a stronger result. We had a very strong final week of Christmas and so on. So we've cycled back. So we'd like to think we're back into some sort of consistent trading pattern, to guide on where we want to go.

Yes. And then I mean, you're adding about 80 stores this year or a minimum of 80. Now at what level do you think it becomes more difficult or challenging for the business to manage the store rollout?

Say again, where did the 80 stores come from?

After just thinking about you've added 40 stores in the first half, now you're looking to add more in the second half. So that's implying a fairly material uplift in the pace of the rollout. I'm just trying to -- I was just interested, I suppose, in getting your thoughts in terms of what level do you think it becomes more difficult to manage and scale the rollout?

Yes. So just for clarity, the guidance we've given is we'll open more stores in this half than we did the same time last year in this half. So we're not saying that we'll -- we're not saying second half will be bigger than the first half. We're saying second half will be bigger than last year's second half. So yes, we're not saying 80 stores. So to answer question, if there's another question there about what can we manage...

Yes.

We can -- we've got -- again, the downside from sort of -- so from a financial point of view, the downside is higher CODBs, it's higher CODB and therefore, it affects your profitability. The upside is getting the structure right if you can move at reasonable pace. So again, if you just sort of look at Europe, we've got James Shepherd. James' background is he's one of the former executives at Swarovski, had a couple of retail stores across Europe. So he's clearly got the capability to design as many stores as we try adding. And then we've got quality teams that build out leasing and so on. In America, it's physically a bigger market. As I've said earlier, we've got senior executives leading the way, leasing executives on both coasts, still build guys on both coasts, recruitment teams, HR team. So we've got that resource backed in. And then we opened 50 stores in [indiscernible] Lovisa with a team of about 6. So I wish we could do it with 6, it would be a lot cheaper for everyone. But as I've said, we had to pull that off. To answer your question, I don't think there will be a capacity issue of operational ability. I think the capacity issue will be about how stringent we are on ensuring that the right view is presented and signed off, meaning our metrics will be the determining criteria on how many we open.

Okay, great. And maybe I'll just squeeze in one more. Just your thoughts on trading through the e-commerce or online stores to date, then also just on the men's range in total.

Sure. So e-comm -- I mean, we said in the past, e-comm is a pillar of our business moving forward. Mark Cripsey comes out of that space as COO, so he's adding a lot of value there. At the same time, our flags at fashion jewelry as a category online due to the low transaction value, high freight costs and so on, we're not seeing it being a material driver in our business in the short- to mid-term. So that's e-comm. So what was the second part of your question again?

Just on the men's range.

Men's. So look, we trial stuff. Men's, we've put into a group of stores to see whether that would move the dial. And largely, our research to date shows that the girls are still buying it to wear for themselves and so we still make the more masculine range that some of you like wearing. But it's pleasingly doing its numbers. But again, at any one time, we do do sort of test positive maybe a certain range in 20 stores. And obviously, if it performs well, it rolls out tomorrow. And if it doesn't perform well, we sort of flush it out of the business and keep moving.

Your next question comes from Julian Mulcahy with Evans & Partners.

Just a question on France. And why do you think it's not really working yet? And what sort of metrics are you looking to see before you get more confident in that market?

So thinking of Spain, so France is working, therefore, we're rolling out. But Spain -- yes, look, we've been in Spain for 1.5 years now. And look, we're a high margin business, so typically, if you get your sales line right, then typically most of the costs fall into line. So if you look at the Spanish market, it's not really a rental issue, it's really just a sales to other cost issue. But by the time you roll in the cost of opening the store, trading the store, wages, if we can't get the sales line right, then it's clear to say that the store gets hard. We use the word inconsistent in our presentation wisely because we get great juice in good stores and then we get other stores that just don't seem to hit their numbers. James -- again, James is on the ground as a senior exec, leading into Christmas. The discussion we've had with James is get closer to it, figure out what we're doing right or wrong so as not -- to be giving us the confidence to roll out as we are in other markets. So over time, I think we'll just chip away at that and we'll figure out the ingredients. Again, I've communicated in the past that typically when we open in a new market, we sort of -- we have ranges catered for the -- more in the next year and some in this year. We typically choose the range that we think will fit the market the best and we roll that through. And then once that range hits the ground, we sort of manipulate and change the range to maximize our sales density. And we're continuing that body of work in planning. We think we're very pleasingly sort of we're off and running in 2 of the bigger markets with these opportunities. So we'll still focus on Spain, we haven't given up on Spain. But we're also not ready to start rolling out at pace. So again, to answer your question at a top line level, it's really about sales levels and getting some consistency of top line sales to give us the confidence to roll out.

And just on the U.S., I mean, just doing a sort of simple calc, the average sales, sort of rounding it to sort of $350,000 in the half, which is still well below Australia yet the stores are much larger. Do you see that average revenue per store jumping above Australia in the near future?

Again, they're your sum and not mine. But I don't want to talk to average sales per store and that sort of stuff. But again, I think the guidance we've given is we're happy with where America is at. We're choosing our metrics. As time goes on, we'll learn more. But again, I suppose the positive sign is we've been going at that location for over a year, then we will be able to still look into the last sort of half. And we're happy with where they're at. Long-term sales entities sort of yet to be sort of rationalized as far as where we think that will end up. Historically, with the sheer volume of shopping malls across America, historically it's been harder to achieve the same sales density as some of the other markets. And that's just my general market overview, less about Lovisa. But historically, when you research the American malls, the average sales per foot is typically lower than some of the other markets in the world just because of the sheer massive shopping centers and the huge sizes of the shops.

Your next question comes from Sam Haddad with Bell Potter Securities.

Previously, Shane, you've sort of given sort of a mid-term outlook as what to see in fashion trends. I think you've previously said that you see a window of 3 to 6 months as to what you've seen. And you've mentioned a normalization over the last 6 to 12 months. Is that still more -- much of the same? Or is there anything interesting in the mix to look forward to in terms of sales mix to gross margin and so forth?

Yes, sure. So there is nothing on the horizon that we're sort of jumping on. We'd love it to be there. Many things can pop up pretty quickly. But at the moment, I think we are still in that normalized trade pattern, so to speak. So it's about trialing -- it's about trial and error basically and creating ranges and putting them in and maximizing the ones that perform and moving past the ones that don't perform. So we're sort of keeping an eye on the horizon but at the same time, doing the bulk of our work sort of working on what we think what we can control within our 4 walls.

Okay. I guess, back on Spain, it sounds like it's more of a function of location of stores rather than the general appetite of the consumer for the [indiscernible]? Is that a fair conclusion?

Now look, we're in good shopping centers and good locations, we're just -- the sales densities and then rolling that through, how that affects some of the key metrics to the stores, just again we've sort of been just inconsistent in getting a clear outcome. So we like consistency because if one store opens, then pretty quickly you can start predicting where it's going to land. Then that gives us the confidence that we know enough about the market to keep moving. If we get that inconsistency, it sort of shows us that we don't know enough about the market to sort of -- to achieve that market, which is what we're still working on. So we may have gone into some of the wrong shopping centers. I don't think that's the case. Largely, it's just about sales density more than anything.

And will you -- do you still have the pilot countries, given Spain's position at the moment or you've got enough on your plate?

Yes, we're still -- so what we are acutely aware of is it probably takes anything up to about 2 years to research the market, get the first deal done, get ahead until a deal is done so we can learn about the market. So as we stand today, we're not -- we don't have anyone out there sort of knocking on doors in new markets. But we're also not afraid of -- to keep moving, so to speak, so as much as -- if it's a question of is America or France enough for now? The answer is in the short term yes, but in the mid-term, no. And we'll sort of keep pursuing other pilot opportunities. Because again, reminding everyone the cost of a pilot -- the cost of putting a few stores on the ground and someone there to run them versus the potential upside of getting those right is huge. So we'll continue to pilot. But we'll let the dust settle and get some traction on what we're doing before we sort of go back to that.

Yes. Just back in Australia, given the soft trading environment in the second quarter, did you notice any change in competitive behavior in the market? Because my observation is one of your largest competitors had a sort of promotion they extended for almost 2 months. And I just wondered if that was any different than prior years and probably how you responded to that. Obviously, you did a great job in withstanding that.

Yes. If I talk wider than our industry, typically when you walk the malls in the middle of December, people are going on sale earlier than -- there's a lot of sort of, "When do you go on sale?" And so it backfired that weekend at the end of November now, sort of -- so we changed the trading pattern slightly. So look, the retailers can sort of go early for whatever their reasons. But we try and hold on to that period and maintain margin again because sort of -- sometimes it can just end up as wooden dollars that you're swapping out promotions for margin and chasing sales and so on. But we believe for our long-term brand integrity that we need to deliver the customer a consistent offer, not confuse them with 1 day that we're 30% off, the next day that we're back at full price and so on. I think that just sort of causes long-term damage and confuses the customer.

[Operator Instructions] The next question comes from Angie Ellis with 8020Investment.

Well done on managing the global expansion so well, and congratulations on an excellent result. And I understand that it's not a material driver of the business at the moment, but I wish you'd add some color to the e-commerce sales, particularly at looking at offering online sales outside of Australia and New Zealand.

Yes, look -- so we're not going to talk to actual sales in that, other than to say that it's not -- we're not planning for it to be a material driver of our top line or profit in the coming years. Probably before I answer that question, obviously the COO, Mark Cripsey, comes from that space. And this is what he does. He's been a part of some large rollouts in the e-comm space. The next step for us is to get some sort of representation in the European and U.S. markets for obvious reasons. But we don't have a time frame on that. But the focus is getting our offer -- at the moment, our focus is on trading outside. We're finding our offer within the markets that we're best known and then looking for opportunities of how we get our product in a cost-effective manner to our customers around a lot of the key markets. So that's sort of one of the key drivers of where we are at the moment.

And so you're not -- you don't have a time frame for U.S. customers being able to buy online?

No.

No? Okay. That's fine. And I just wanted to say that I've been doing my best with my own purchases to get the Australian sales up, so I have to continue that for the next year.

Thank you.

Your next question comes from David Vial with Grahger Capital Securities.

I see at the end of December 2018, you had about -- not about, 15% more stores than at the end of PCP. But your inventory was up around 30%. Can you just explain why?

So back-of-the-envelope math, we're saying, what, stock is up by x percent per store?

Well, just looking at the end of this half, the '19 half to the '18 half, the stock is up 30%, understand there's some timing differences with store openings. But the store numbers were up about 15%. So I'm just looking at the increase in stock versus the increase in stores, yes.

Yes. So there's a little bit of an impact there. So it's Chris here. A bit of an impact there with the timing when stores are opening and how much stock is sitting in the supply chain to be able to do that also holding a little bit more stock in the warehouse to support e-commerce and they're probably the key things. Currency is obviously having an impact on it as well. Yes, I mean, that's really just mainly around timing of when stocks hitting the warehouses, so we're not concerned about the level of stock that we've got in the business at the end of the half.

Okay. And the one-off relocation cost of your logistics to Qingdao, have you got a number around that you can talk to?

What was it?

I mean, again, being [indiscernible] we don't sort of stick that out and say, "Well, it the cost is x." But ballpark you get AUD 300,000 just sort of one-off cost because we basically -- there's a point in time where you've got to uplift everything. You're sort of replenishing out of Hong Kong, and then over the weekend, you get the stock to -- over a 5-day period, get the stock to another warehouse and establish it, so you still are looking in the ballpark of $300,000.

There are no further questions at this time. I'll now hand back to Mr. Fallscheer for closing remarks.

Well, thanks, everyone. I know it's a busy day, still announcement time, so look forward to meeting the rest of you in the next few days, and thanks again.