Super Retail Group Ltd

ASX:SUL

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Super Retail Group 2018 Full Year Results. [Operator Instructions] I would now like to hand the call over to your first speaker today, Peter Birtles, Group Managing Director and Chief Executive Officer. Thank you, sir. Please go ahead.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. Thank you, Charlie. Hello, everyone. Thanks for joining us this morning. I'm joined this morning by David Burns, our CFO.

[David J. Burns, Chief Financial Officer]

Good morning, everyone.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

I'm also joined by Orla Keegan, who's providing support to us from Investor Relations.

[Orla Keegan]

Good morning.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

So turning to the slide pack that we posted on the ASX this morning, as usual, we'll use that as the basis for our presentation. And I'll start off by referring to the group highlights page, which is Page 3 of the presentation. Our overall results, group sales up by 4%, overall, EBIT up at just under 6% and normalized net profit after tax up by 7%. Certainly, a good set of overall results, and I think very pleasingly, when we look at the performance of the second half, we've seen strong growth in the second half with our normalized net profit after tax increasing by just under 15% in that period. A really important feature of our results is the continued performance in cash flow management across the group, and we've been pleased with our cash flow performance now over the last few years and again this year, operating cash flows at $308 million, up by $74 million on the prior year. And as a consequence, we have declared a final dividend, which puts us in a position with a full year dividend at $0.49 per share, which is up by 5% on the prior year.When we look at what sits behind those results, just talking to Page 4, and our overall trajectory is strong. Our businesses are all growing at a rate ahead of general retail sales. And importantly, the work that we've been doing in transforming the group, particularly in the Sports and Outdoor areas, is starting to deliver good benefits. The transition of the Amart brand into Rebel in the year was a significant project, and we are very pleased that through that transition, we've been able to grow our customer net promoter score. So our customers are -- have responded well to that transition, and we've seen a lot of sales growth as a consequence starting to build the momentum as we have gone through the year, and like-for-like sales growth in the Rebel business ran at around 4% in the final quarter. We've delivered on the cost synergy benefits in terms of support cost that we expected in the integration, and we have a plan to continue to work on the margin synergies that we expected, and we expect to have those delivered by the end of the current financial year. And we are working now on a new format for Rebel. We have a test store at the Macquarie Centre at North Ryde, and that will be an indication of the way in which we are looking to take the Rebel brand forward going forward. So very pleased with how that's all progressing. And then in terms of Outdoor -- and just to note at this point that we have renamed our Leisure division as Outdoor as we think that is a better reflection of the 2 businesses that we have now in that division. Macpac, we acquired effective from the end of March, and the trading in that business to date has been very strong. The business delivered 10% like-for-like sales growth in the final quarter of the year, which allowed the business to post an EBIT contribution of $7.8 million, which was certainly ahead of our expectations. The 9 continuing Rays stores delivering also good growth, and those 9 stores will be converted to Macpac in the fourth quarter of the -- this financial year, which will then mean that going forward from that point, the Rays losses we've been experiencing through the trial will be eliminated.Turning to Page 5, I think another key important feature of the result was the growth in online, with all businesses delivering very strong online growth and particularly, in terms of gaining more market share in that online market. So in terms of the categories that we operate in and looking at our key competitors operating in those markets, we've been able to take an increased slice of the online market, which is reflective for the work we've been doing in that area. I've talked to the cash flow performance, but just to highlight that our cash conversion from normalized EBITDA was 114% in the year. And you can certainly see over the last 4 years how we have managed cash flow really very effectively. Page 6 gives more of a balanced perspective to our performance, and we think it's always important to not only focus on the financial metrics but also to highlight the work that we're doing in our team area and customer area. And again, our performance in those areas has been very strong and certainly very pleased with the work we have been doing in terms of growing membership of our club programs and also the net promoter scores that we've been achieving from those club members.So I'll now turn to Page 8 of the pack, which provides a little bit more detail on the group financial results. So the overall sales growth at 4.2% included the contribution of Macpac. So if we exclude the contribution of Macpac, sales grew at 3%. The EBIT grew at 5.9%, and with the contribution of Macpac being excluded, the EBIT growth was at 2.2%. The normalized net profit after tax reflects the work that we've been doing in terms of managing our cash flow with good management of our interest cost and also more favorable tax rates. So that has led to that improvement in the net profit after tax. At this point, I wanted to highlight a particular issue for which we've made a provision in our accounts, and that is within our accounts, we've recognized the total amounts of $7.4 million, which -- after tax, which is associated with additional costs that we will incur, associated with making additional payments to team members who worked on store set up projects. We undertook a review of set up projects, and what we found was that the team who were working on those set of projects were not being paid in accordance with the correct modern award, and in particular, in terms of an inconsistent approach to how we were applying overtime payments and allowances and time off in lieu. This was a mistake that was discovered through an internal review. We had a genuine belief that the process that we were following was the right approach, but the review identified we were -- we have made a mistake, and that's a mistake that we deeply regret. For those of you that follow the company, you'll know that we put the team at the heart of the organization. Everything starts with the team and so we've let the team down in this situation. And I'm personally very sorry that we've done that and fallen short of the standards we set ourselves. It should be remembered that our core team are paid in accordance with our enterprise agreements, and this relates to a -- to around 10% of our team, who have worked on setups over an 8-year period since July 2010. In the accounts, we have recognized an after-tax amount of $7.4 million, $1.4 million of that has been taken in terms of our segment and total EBIT and $6 million has been included in items not included in normalized impact, which relates to amounts due from prior years. The cash flow performance, as I mentioned, was strong, and that has resulted in net debt at $423 million, being $42 million up on the prior year despite the acquisition of Macpac, with an outflow there of $134 million. So I think that demonstrates the strong cash flow performance of the business.I'll now turn to Page 11 of the results pack. We have, as requested, continued to provide information in our results pack on some of the trends and metrics of the business. Just in the interest of time, I don't have time this morning to talk through all of those, but we have made that information available on all of our businesses for you. So I'm just going to talk to the key headline financial numbers for each business. And starting off with the Auto business on Page 11, increasingly again, a really good solid performance from the auto business. We saw solid like-for-like sales growth that's at 3.6% and delivering EBIT growth that's at 4.9%. And again, a business that saw its margins improved in the second half. So the first half margins were below the prior year, but by the full year, we were in line with the prior year. And that's reflective of the investments that we've made in the first half, associated with our work on our omni-retail capability and also building our services. And both of those investments delivering good outcomes, coming through in the second half, maintaining good sales growth. And certainly, we continue to see our online business and our services businesses as an engine of growth going forward. When we look at the overall spending on automotive products across the key competitors in that area, Supercheap Auto again increased its market share, growing by just under 1 percentage point in terms of market share. So the business continues -- it is the leader, and it continues to lead and grow at a faster rate than the competition. So we feel very pleased with its performance and confident in terms of its trajectory.Turning to the Outdoor Retailing division. On Page 12, we've given an overview of the overall result, but what I'm going to do is turn to Page 14 and 15, where we'll talk in more detail about the individual businesses. So BCF delivered overall sales growth at 3.7%, which included like-for-like sales growth that's at 1.1%. The business has continued to invest in competitive pricing and promotions, and we have seen that as a consequence of that activity, gross margin declined in the period. And we've also seen an increase in our operating costs, largely as a consequence of the lower level of like-for-like sales growth trajectory, which has limited our ability to fractionalize our operating costs, particularly in terms of our commitment to wages and to rent. Online sales in this business increased by 76%. And BCF was the first of our businesses to go live with our new web platform, and we've learned a lot through that, which we've then applied to Supercheap and to Rebel, and we can continue to invest in that online platform going forward and we expect continued strong growth in that area in the future. Going on to the Macpac and Rays business, what we have done on Page 15 is provided information. Looking at those 2 businesses, Macpac as I mentioned, off to a great start in terms of its contribution to the group, with a contribution of $7.8 million worth of EBIT in the 3 months that it's been part of the organization, and that being driven by the 10% like-for-like sales growth during that time. Over the full year, when we look at it on a pro forma basis over the 52 weeks, Macpac's like-for-like sales growth was around 8%. And the full year pro forma sales contribution just under $95 million, with a full year EBIT contribution of $15 million. So certainly compared to our business case for acquisition, we're trading ahead of that, and we feel very confident about the opportunity that we have to price leading business there, particularly given that the Rays stores that have been a trial for the larger format Outdoor business have also continued to perform well. And they've delivered like-for-like sales growth through the 52 weeks of 8.2%. What we have seen in those stores is being that apparel and equipment have performed very well. We feel there's still more of an opportunity to drive footwear sales a bit harder, and we'll be focused on that in the next few months as we gear the stores up to converting them to Macpac, which will happen in that fourth quarter of this year. There are 6 Rays stores that we are closing, which are stores that are not in the right catchment areas for the business going forward, and those stores closed in June.So turning to Page 17 of the pack, the key feature of the Rebel results was the work that we did through the year to integrate the Amart brand into Rebel. That was a significant project converting 68 Amart stores into the Rebel brand. It all happened over a 68-day period in the first half of the year. As a consequence of that, we did see the sales momentum of the business slow during that transition period. And as we work our way through fully integrating the product range in all stores so that we have a consistent offer for customers, that has limited our ability to fully market and promote the business in the most effective manner. But as we can see from the momentum of the business, you know, we are working our way through that, and we feel that we're coming into the new financial year with the business pretty much fully integrated, the inventory aligned across all stores, and we can start to be more targeted with our promotional activity, which will help to build the margins in the business. We did see an investment in gross margin to drive the business in that prior year. And as we become more targeted, we will not need to have the same investment in promotional activity going forward. The operating expenses improved significantly, which was reflected through the synergy benefits that we've pulled out through the conversion of the Amart business and savings that we've made in areas, such as marketing costs and some of the support administration areas. Very strong like-for-like growth, 150% -- sorry, strong growth in online sales like-for-like with 152% growth over the prior year, reflective of the turning on of the click-and-click capability, which was turned on in October 2017. And Rebel, as I mentioned, went live with the new website platform at the start of this financial year, and we are continuing to see really good growth in online. So we certainly see online as the major driver of this business going forward. At this point, I'll turn to David, and David will talk to the group and unallocated and cash flow and balance sheet pages.

[David J. Burns, Chief Financial Officer]

Thank you, Peter. As we normally do, we've held our group and unallocated costs with costs that we don't allocate to the divisions, which -- and they include both commercial operations and some of our investment in omni-retail and unutilized distribution incentive costs. The result is $17.7 million. It's $2.5 million comparable to the prior year. The 2 key areas to call out would be the Auto Guru business, which had undertaken a capital raising in the period where the group has reduced its ownership position from 63% to 49%, resulting in a gain on that activity. We've chosen to reflect Auto Guru outside of normalized earnings as we've taken a $6.9 million benefit from that change of ownership position and felt it didn't reflect the performance of the business in the period, recognizing now that we have been bearing the cost of Auto Guru in the operating results over the last number of years. The second component just to call out would be the reduction in digital investment linked to Auto Guru, which is -- which I mentioned earlier, and the increase in investment in developing our omni-retailing capabilities, which we are starting to see some of the benefits in the group's results. Turning the page to cash flow, the operating cash flow performance, as Peter had outlined earlier, is very strong and with very positive cash conversion. Our operating cash flow pre-store investment is $322 million, an increase of $57 million. Included in that is $17 million of timing benefits to do with rental prepayments that were related to the prior year. So we would call out an underlying improvement of $40 million in that line item. Capital expenditure was circa $107 million and reflected an increase in investment in omni-retailing, nonstore activities and the reduction in store-based activities of only $46 million this period compared to $64 million in the prior period. The other caveat, obviously, is the funding of the acquisition of Macpac, $133.8 million in the period, which was partially offset by the investment of -- it's funded by debt but partially offset by the strong operating cash flow.Moving to the balance sheet. Inventory values have increased across the group, reflecting a group-wide increased focus on improving in-stock positions in store and an increase in private brand mix. The increase in investment has been partially offset -- mostly offset by an increase in payables, trade payables due to the improvements in both trade partner terms and also a supply chain efficiency. And net debt has increased by $42 million. That's due to the funding of the acquisition of Macpac at $133.8 million, which was the cash funding cost of Macpac, and that was partially obviously offset by the strong operating cash flow position.Moving to returns and capital ratios. Our normalized EPS has improved by 7% compared to PCP. Our return on capital has also improved to 13.1% and remains well above our WACC. Through the year, our average net debt improved by circa $32 million prior to the acquisition of Macpac, which was representative in the strong interest cost that you saw in the P&L, and secondly, the improvements in underlying working capital. Our capital metrics was down, which are in -- we're targeting to improve over the next few years, with a strong amount of cash flow expected to continue to be delivered from the business and our ability to therefore reduce our debt profile. Thank you, Peter.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Thank you, David. So we'll finish by looking at the trading update, which is on Page 23, and we have provided an update as at 6 weeks. We took a decision because we had a couple of promotional activities in Week 7, which we feel distorted the results for 2 of our businesses. One would have been presenting, I think, an overly upward trend and one, where we've delayed a promotion. It would have been a bit of an understatement. So we've used Week 6, which we think is the better indication of the underlying performance so far this financial year. And we'd say we're off to a pretty good start, with like-for-like sales growth in the Supercheap Auto business at 5%; BCF growing at 3%; Macpac growing at 7%; and Rebel growing at 3%. So we're certainly pleased with the momentum. There's nothing unusual that we've done there in terms of promotional activity or investment in marginal pricing, and so I think a good start for the year. You can see that in terms of our store development plans, we continue to look to grow the network of stores where we feel it's appropriate to do so, so slightly a more moderated number. We're not investing the same in refurbs in this year as we'll continue to focus our investment on the underlying platform.So thank you, everyone, for listening this morning, and what we'll do at this point is to open up for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Bryan Raymond from Citi.

[Bryan Raymond, VP & Analyst]

My first question is on the Sports Division. I'm interested to hear how that like-for-like performance might have [ differed ] between the legacy Rebel stores and the Amart converted stores in the fourth quarter. Was there a big divergence? You mentioned 4% overall for the Sports Division, but I can't understand if there was an outperformance for one of the two in that period.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. I would call out that we've seen strong performance across each of the states. So we've slightly continued to see a slight lower level of performance in Queensland. We would call that out as being partially attributable to the high concentration of Amart stores. I think we've got to be careful of the Amart brand in, certainly, Victoria and New South Wales was relatively new, and we've seen less of the impact of the Amart brand in those states. But we've seen a strong -- probably a stronger impact of the Amart brand being such a long-term brand in the Queensland market. So overall, a slightly lower performance we're seeing in Queensland, which could be attributable to that.

[Bryan Raymond, VP & Analyst]

Right. But overall, Amart, nationally, would still be below Rebel in the fourth quarter?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

As a consequence of those Queensland stores, yes.

[Bryan Raymond, VP & Analyst]

Yes, yes. And then just to continue on sports, the inventory build that you've seen in BCF and Rebel, I'm just interested to know if that is -- if Rebel has a higher average inventory per store than Amart traditionally? And is that lift in inventory per store in Sports really a reflection of having a lot more Rebel stores and now Amart is just a mix of stores? Or is it that you've taken a decision to increase inventory in Rebel like-for-like compared to last year where there were still Rebel stores?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. I think it is more of the latter. I mean, we felt that part of our competitive position here in market needs to be that we're in stock. I think that when we're looking at the retail market in the way that it's evolving, with competition that's coming in, one of the key things that customers will demand of retail is just that when they've made the decision to come to stores to purchase an item, that it's available. And so we have made a decision across the whole group that being in stock is an increased priority. And we felt that historically, at this time of year, the Rebel business had probably pulled its stock levels down too fast. So we've made the decision now that particularly we are very comfortable with our funding arrangements and the relationships we have with our trade partners that we can invest in that together.

[Bryan Raymond, VP & Analyst]

Would you care to say that the lift in inventory levels has been a case of 4 -- to the 4% like-for-like in the fourth quarter and then the 3% trading update in the first 6 weeks? Would you put that -- like the timing of that lift in inventory, does that coincide with that lift in sales?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

So I think -- I mean, it's partly a factor of that, but also I think that we have got the inventory better aligned now. We're able to go with more targeted messaging. And I just think the business is in a better position, having transitioned its way through that integration. So yes, I think it's partly a factor, but it's certainly not the whole story.

[Bryan Raymond, VP & Analyst]

Okay. Great. And then just my last question is on Macpac. And I'm just interested in how much you put down to favorable weather conditions -- I know Kathmandu had a good trading period as well, and how much of that is changes you've made since you've bought it or -- and really just trying to get a feel for is that $7.8 million EBIT number in the fourth quarter, how does that compare to PCP just to get a feel for the -- just for the fourth quarter specifically, just trying to get a feel for how that profile looks.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. So I think, again, a number of factors in this. I think that if you look at the business over the full year, like-for-like sales growth was around 8%. So yes, outside of the final quarter, around 7%. And yes, we've -- as we've updated plus how we've started the new financial year, that's a 7% growth level. So I think that there was a couple of things in that final quarter. And what we did with the team, we talked about some things just in terms of store layouts and promotions and so on. But also we need to give credit to the team for the work that they've been doing. And as a team, they were certainly occupied by the sale process for a period of time. So they're now able to really concentrate 100% on the business and running the business. So they're doing a great job.

[Bryan Raymond, VP & Analyst]

Okay. So I mean, promotional intensity has been falling across that industry, generally. Have you seen gross margins in the fourth quarter improve in that business relative to what it was before you owned it in fourth quarter '17? I'm just trying to get a feel for what's driving that EBIT, that EBIT [ number ].

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. So I mean, first, margin performance has been healthy and certainly, not have to invest in margin. I think what we see there is the Macpac quality price equation means that certainly the customer is getting a high-quality product for the same price as they might get in some of the competition. And so typically, the business runs with slightly lower gross margins than the competitors that are out there. But we think that's the right positioning, and we're very comfortable with the gross margin structure there.

[Operator]

Our next question comes from the line of Ben Gilbert from UBS.

[Ben Gilbert, Executive Director and Analyst]

Just first question from me. Just around some of these FY '21 targets, the 3-year revenue and EBIT targets that you've put out a bit on Page 32 of the slide pack. Just interested in a couple of things, but firstly, I noticed that the margin expectations have come back a little bit for Rebel and BCF. I just wondered if you could talk to that. And then secondly, also just what you're assuming around market growth and I suppose focused around what you're implying within that 4% to 6% per annum target for top line around share gains.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. I mean, I think that -- I think it's -- we believe that the targets that we built out, the 10 to 30 basis points, is for the group as a whole. So it's not to say that each individual business that we're looking to 10 to 30 basis points. So there will be a different mix there. I mean, obviously, Supercheap is closer to our aspiration of what we think it's going to achieve. We still talk around the 12% expectation for Supercheap. And currently, operating at 11.5%, 11.6%, so pretty close to that number. So there will be elastic growth in Supercheap and certainly, a much higher level growth in BCF that we're anticipating. And then Rebel also is pretty solid and so a more modest growth there. But certainly, stronger growth in BCF. I'm sorry, Ben, the second part of your question was around market...

[Ben Gilbert, Executive Director and Analyst]

Just -- yes, just around the top line because you guys obviously had done a great job around taking share over the last sort of 3, 5 -- longer. But obviously, the market share is probably getting more consolidated. And now you've got more build coming in within online, just what you're assuming your market growth versus share gains within that 4% to 6%?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. So I think, I mean, what we've called out there is the market value growth being around that 1% to 2%. So yes, and our market share growth growing 1% to 2% again, which is I suppose what we've largely been seeing around that, I mean, albeit acknowledging BCF hasn't delivered that this period. But we're looking for that and then space growth on top, contributing around 2%.

[Ben Gilbert, Executive Director and Analyst]

Okay. And just a follow on from me. Just around CapEx because you guys are probably spending a lot more than your peer set domestically as a percentage of sales. Just interested if you could give us a bit more color in some of the bigger projects you're doing, ex the stores around the omnichannel, et cetera, some of the bigger buckets, and I suppose how confident you are you're getting an adequate return on that. And I suppose maybe within that, I'm interested in just if you're seeing your online becoming more profitable. Is it dilutive to growth? Just getting a bit more color as to why you think you're spending more than your peer set and why are you comfortable that you're getting a decent return or you're going to a longer term.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Ben, one of the key pieces for us is to ensure that our underpinning foundational IT systems are going to support what is going to be a significant growth in online business. So it's not just the online systems itself, it's also things like the network and the sort of core underpinning service and so on. Plus, we've been looking at enhancing the capability of the business. So within the slide pack on Page 29, on the right-hand side at the bottom, there's a list of sort of the key focus areas, that sort of key significant investment. So investing in improving the speed and reliability of our network across the group, introducing a new product information management system, which will help us because we see that product data is going to be so critical to a good customer experience and the ability for the customer to search quickly through our websites, find the products that they're looking for. So the way in which we manage our data to support that is key, so that's an investment in the new product information management system. As we -- what we would say is we're quite pleased with our progress in terms of managing the demand side of online. We've got more work to do in terms of the fulfillment side, and that's, in particular, the order management. So as an order comes in from a customer, how do we process that order as efficiently as possible, where do we fulfill that order from, does it come from a store, DC, et cetera, and doing that in an efficient way requires a fair bit of smart technology. So the order management system is that. We -- as part of the opportunities for the group, we see the opportunity to look at things like subscription management from members of our loyalty programs, booking systems and with our services and so on and so we want to enhance our customer management systems to support that. And then there is, I'd say, for all of us a focus on cyber. I mean, it's an emerging area, and we've been investing to ensure that our systems are appropriately secure across the group. So those would be the key areas.

[Ben Gilbert, Executive Director and Analyst]

Great. And is online still dilutive to margin on a group level yet? Or you're approaching a sort of a net neutral type outcome there?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

So in terms of dilutive to -- what we would say is that if you look at the click and collect components of online, which is roughly 70% for the Auto and BCF business, the margin is not dilutive on that, just a touch under a half of the Sports business. The other parts of online at this stage are margin dilutive, but that is particularly associated with the fulfillment side of online. And that's why we're investing in that area to improve the efficiencies there.

[Operator]

Our next question comes from the line of Grant Saligari from Crédit Suisse.

[Grant Saligari]

Peter, just wondered whether you could talk about BCF a little more specifically. I mean, it looks like the profit declined in the second half. It sort of had a fairly patchy track record. What are the actual specific initiatives that are going to stabilize and improve that business? Because you have got some fairly aggressive 3-year targets out there across all of the businesses, I think.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes, we have, Grant. And we're certainly looking for a significant lift in performance from BCF. I think that one of the core components of the work that the BCF business is doing is working on a much stronger year-round offer for the business. If we look at the sales pattern of BCF, we generate the vast majority of our annualized profit between the months of November and March. And now that we have -- or now that we're in the course of exiting the Rays business, we are starting to introduce a number of additional product categories into the BCF business, which will grow the sales performance of the business in the winter period. So through that period from, say, April through to October, looking to significantly grow sales in that period with the introduction of extended apparel ranges, with it moving into areas, such as increased caravaning, 4-wheel driving and those types of things. As a consequence of that as well, we are being more efficient with our allocation of space to some of our existing product ranges, which will start to improve the net profit per square meter that we see, particularly in the boating areas and a bit of tidying up in fishing as well. So we'll become more productive with our space. And I think the other key area for us is just in terms of the competitive pricing and promotions within the business. We've probably been a little bit reactive in that area around getting on the front foot, breaking with our trade partners more to ensure that we are being as competitive as we need to be ahead of the game, not reacting to others.

[Grant Saligari]

Okay. So it's a [ wind ] arranging and price, that are sort of the levers that you will focus on, is that sort of a fair summary?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Space productivity.

[Grant Saligari]

Space productivity, okay. Just quickly, just also on Sports, the second half EBIT for Sports, I think, if my math is correct, was either flat or slightly down year-on-year. I think you took all the restructuring costs associated with Amart sort of as abnormal items. So was there anything else in there? Or what was the recourse, the underlying weakness in the second half in Sports?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. So just to be clear, we took the cost of the team working to build the set up activity and all of that work that was taken in the operating costs, so not below the line. What we took below the line was the closure cost of the Rebel Fit stores where there were 8 stand-alone Rebel Fit stores that was taken below the line. So I mean, yes, there's an impact. But I think the key, let's say, operating issue in there is, I suppose as I called out, the increased level of it, of category-wide promotions that we have to run with because we had an inconsistent product range across the 168 stores. So the former Amart stores had a different product range to the Rebel stores and although we were not same still as Rebel in that we weren't able to be as targeted with our promotions because if we had have been, we would have found that only some stores would have had the inventory that we were referring to in those promotions. And as a consequence, we had to run more category-wide promotions. So yes, rather than if you say -- take footwear, from promoting some specific product lines, we had to promote the whole of footwear. And our promotional discounting was at a much higher level or the impact of operation discounting and margin was at a higher level than prior year. So that was the key factor.

[Grant Saligari]

And so will you have the range harmonized as we go through the first half? Or when will the range be harmonized across those stores?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

At the time of the announcement, we said that we would have the range harmonized through the -- into the first quarter, largely done by July. And that's where we are. So if you go through the stores now, that -- with some minor exceptions, we are pretty much in a consistent. So the vast majority of the business is now fully integrated and consistent.

[Grant Saligari]

Okay. Just a quick clarification if I could, just on the cash flow. You did call out the prepayments obviously was favorable to the cash flow. What was interesting I thought was the accounts payable moving sort of more favorably than the inventory increase. I'm just curious as to whether that move is sustainable or whether there's some timing in that, if you could perhaps clarify that, please.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. So I think if you look back over time, we've been very transparent with the timing benefits that we've achieved in cash flow. And if there had been a timing benefit, we would have absolutely called it out. This is an underlying change that we've been working with our trade partners, recognizing the significant investment that we make as a business in bringing products to the customer and working with the payment terms associated with that. We are actually physically locating that inventory on behalf of trade partners, and we're working with them to jointly fund that.

[Operator]

Our next question comes from the line of Peter Bell from Bellmont Securities.

[Peter Bell, Co]

Look, you mentioned in the period you've got 5.2 million active club members. Can you tell me how you actually define an active club member? And a little bit about what you're doing in order to engage and sort of drive extra business from those club members?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. So first, an active club member is somebody who has transacted within the last 12 months. So that's our definition. And it is a really key focal point for us across the group. Each of the businesses has their own specific strategies underway and the mechanisms that they use to engage the customers are different. But what we would generally be looking for -- and I think as I mentioned, one of the areas of investment for the business is to look at the ability to support subscriptions because what we are looking for is that for each of our businesses to be seen as the leader in market and the first place that customers turn to for any kind of solution in those areas. So if we take Supercheap, as an example, Supercheap is not only providing services to customers themselves through their own stores but also connecting customers with third-party service providers. And we also see for our customers the opportunity to attend club events and potentially, get access to other experiences, such as with our association with V8 Supercars, the customers to get exposure to those types of events. So it's also products -- product exclusives, first opportunity to get offers. And as we build our fulfillment capability, we can see that, potentially, we will look at bench beneficial delivery arrangements for customers that are part of our club schemes.

[Peter Bell, Co]

Okay. And are you doing any sort of tailored offers to those clients based on previous purchase history and that sort of thing as well?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes, absolutely. Yes. It's been something we've been doing for a while here.

[Operator]

Our next question comes from the line of Richard Barwick from CLSA.

[Richard Barwick, Research Analyst]

You've talked a lot, I think, in response to Ben's question around your activities or plans for online. I just note that in your description of the 3 revenue targets, you talked to online -- or digital being sort of the biggest component of market growth. Just very interested to hear what you're seeing from a competitive viewpoint. So this is a question, in part, about Amazon but not only about Amazon, in terms of who is just actually leading the way in that area? Or do you feel like that what you're offering consumers in that space is best-in-class at this point?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

So I think if we look at it through the lens of the traditional -- our competitors, we would be confident to say that we feel that our offer is the strongest in market across a number of features, website features and what we're doing in terms of delivery and so on. I think that where we need to be cognizant though is that it's not just about Amazon. We are seeing the emergence of some online specialist businesses that are domestic, that may focus on particular categories and subcategories and just do that very well. So there are some online auto parts businesses that have developed. Or there might be somebody who is just focused on the camping area or that kind of thing. And these businesses are taking advantage of the digital features to run a small business from one particular location but access the whole market. And they do that very well. So we need to be mindful of those guys and compete with them as well. And of course, Amazon is going to change the market. We can say that the impact to date hasn't been significant, but we've got our eyes very wide open. We've done a lot of work on the U.S. market and the European markets about Amazon's tactics and approaches. And that's why we've been investing as we have been investing in building the capability that we have. So what we've seen in a number of these other markets is that typically, there is a bit of a consolidation, and one traditional player tends to come through and continue to lead the market. And we're in a fortunate position that our businesses are the leaders at the moment. And so that's our focus is to make sure that we continue to gain market share, both in the physical market but also in that digital market.

[Richard Barwick, Research Analyst]

And in terms of your actual space growth, do you think about that as just literally, you're filling in gaps in the market or opportunity to consolidate the more traditional market? Or are you thinking more that you need -- that more sites, for instance, obviously will help pad out the click and collect offering?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. Certainly, our store portfolio will evolve. And we are, for example, changing some of our stores to what we're calling gray stores, which are stores that both trade as retail stores but also have more of the space allocated to fulfillment from online orders. And I think as we've reviewed our strategies and noted successful strategies elsewhere, we feel that fulfilling from stores is an important part of our solution. So in each of the major capital centers, we will have some fulfillment, having some stores as well as from DC. The space growth that we talked about is, I think -- I mean, it is organic, and it is largely through filling in gaps. And if you look still today and David who lives on the North Shore of Sydney, he talks about having to go a long way to get to a Supercheap store, so there's still plenty of opportunities for us to fill out, particularly in that Supercheap business because it's a business in which even with a stronger digital presence, we still feel that click and collect will be the major way in which customers fulfill their orders.

[Operator]

Our next question comes from the line of Tom Kierath from Morgan Stanley.

[Thomas Kierath, Executive Director]

That was close. I've just got a couple of questions on the wage and the payment. Has that review now concluded across all the groups? Or just whereabouts are you at with that?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

So we have been working with an external firm of accountants to go through all of our records over an 8-year period to determine what the -- any -- what the value of any back payment should be. That work hasn't yet completed, but we feel that we have put together a prudent estimate of those persons in this account -- in the accounts.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

And this provision is below the line or above the line?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

So we -- because we've gone back over an 8-year period, what we have recognized is in the current year, there's $2 million that have been recognized above the line, which essentially, reflects our estimate of current year costs plus remedying costs associated with interest and so on for the payments. And then there's a figure of $6 million post-tax, which has been recognized below the line, which recognizes these amounts that gave back over the previous 7 years.

[Thomas Kierath, Executive Director]

Right. And is it pretty evenly split like it all relates to 1 or 2 years or anything it's -- should we just kind of -- yes, straight line. Okay, great.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes.

[Thomas Kierath, Executive Director]

And then just a second one, I never know whether weather is favorable or not in a period, and also the impact of the World Cup. Can you just talk through maybe how you saw those couple of factors in the results just reported?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. So if you look at the Sports business, what we would say is that there's a little bit of a boost with World Cup, but certainly, because a number of the major teams, and of course, Australia didn't progress as far as we would've liked. We didn't quite get the same sell-through of certainly the South Korea's jerseys. So there was a -- things like the World Cup soccer ball sold well but not of a level that we would need to call it out as a significant driver.

[Thomas Kierath, Executive Director]

And sorry, and weather?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes, look -- I mean, I think we would acknowledge that -- I mean, what we saw it was interesting in that as we went through April and early May, we actually saw a bit of a slow period in terms of the start to winter sales. And certainly, in the Sports business, the things like track pants and sweatshirts and that sort of stuff got off to a bit of a slow start. But the cold weather sort of hit halfway through May, and then that really started to be strong from there onwards.

[Operator]

Our next question comes from the line of Shaun Cousins from JPMorgan.

[Shaun Robert Cousins, Senior Analyst]

Just a question, a little bit about Macpac. It appears as though given what you've highlighted at the time of acquisition, Kiwi, $16 million of EBITDA, which sort of looks like once you get down to an $8 EBIT, it was around sort of $13 million. And now you're saying, obviously, there has been an improvement in the -- in terms of the end of June at a $15 million level. Maybe just a few questions around that, are you sort of expecting the seasonality to just over 50% of your business in the fourth quarter? Should that continue? And are you having any different views in terms of how you think about the earnings capability or the earnings opportunity out of that business? I think you've identified early on $16 million of Kiwi EBITDA, whereas I think the vendor was possibly a little more optimistic in terms of what you could get there. So can you maybe just talk a little bit about that on Macpac to start, please?

[David J. Burns, Chief Financial Officer]

Yes, I'll take that. So Shaun, the split that you should expect going forward would be circa 40% Page 1 and circa 60% Page 2. Obviously, with a higher concentration in quarter 4 in that sort of mix, in terms of earnings profile, and obviously, a slightly -- probably more 45%, 55% in terms of revenue. The business has performed, as Peter mentioned, slightly above our expectations. It's that 10% like-for-like performance was certainly above our pro forma. And obviously, the growth that the business has been able to achieve compared to last year is strong. I wouldn't say that there's been a significant shift in profitability. It's operated slightly favorable in terms of the margin performance on a Q4-to-Q4 basis. But what we're reflecting is a normalized expectation for the business. And so the way they were accounting for things were different in terms of the way they're recognizing currency or other things. And so the figure that we gave you at the time of acquisition of -- when we announced $16 million normalized is correct for that period to 31st of March. Obviously, we'll expect that on an EBITDA measure typically. I would expect an improvement in this business. And yes, that growth should be, as we've outlined on the guidance, over 3 years. And we should see that business get some top line growth and ideally, will also get some -- a slight improvement in margin but mostly from top line growth.

[Shaun Robert Cousins, Senior Analyst]

And -- all right. That's helpful. And so what do you sort of -- when can you influence the product there? I'm particularly interested in how you're thinking about adding other brands to the business, potentially in a more fulsome manner and also adding footwear? When can you have an impact on what is being sold?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Okay. Well, I think -- I mean, in terms of -- I mean, first of all, we would say that in terms of the core Macpac offer, the management team of the business are the best guys to actually make that decision. We wouldn't say that in terms of the product selection for Macpac stand-alone stores that we will be impacting that. So I think the guys do a tremendous job there. And as I talked about, potentially, we see the team in New Zealand being a bit of a design hub for the broader group in time, so they will be designing and developing product for BCF and potentially, Rebel as well. So we see very strong capability that we've acquired through this acquisition. I think the question though is more specific in the large-format stores, which are the 9 stores that we'll be converting from Rays. And that's where the team who have been working on the Rays trial are going to be integrated into Macpac. And they are working through and have largely worked through the product offer for those large-format stores. You'll see that coming and come alive as we convert the stores in the final quarter of this year.

[Shaun Robert Cousins, Senior Analyst]

Got you. And maybe just a question regarding, I guess, corporate and the Auto Guru business, can you sort of highlight in addition to the digital cost, were there other costs that you were incurring in that business that wasn't profitable? It appeared on your commentary it may not have been. But just sort of what that business going with your shareholding reducing, what does that mean for corporate costs going forward?

[David J. Burns, Chief Financial Officer]

Yes. So Auto Guru's trialed at a $2.2 million loss in the year, and that have been aggregated with the $6.9 million gain to reflect the $4.7 million net position. And obviously, that gain is so large we chose to reflect that below the line. Obviously, with our reduced ownership below 50%, that business is -- our share of its trading losses will be at that sort of proportion as that -- the business continues to perform, and we'll participate at that level. I'll get Peter to speak to what the future plans of that business are. I'll just -- I'll turn it to him now.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. I mean, I think it's important to recognize what that business is, and the P&L reflects the investment that's being made in building capability. So it's investment in systems and investment. What we're seeing now is in Queensland, we're starting to run a trial of marketing. So the business is running a TV campaign, it's running a radio campaign and so the cost of building the brand, building awareness, investing in systems, that's what's driving the performance of the financial outcomes as with any digital startup in that phase. Depending on the outcomes from that activity, yes, we'll then make a decision as to the next stage of evolution with the business and potentially, there'll be a further capital raising. There's a lot of interest in this business. It's performing. It's attracting a lot of customers, good strong growth in web visits. And so the industry is very interested in supporting it because it will become a portal in the service for wider auto industry.

[Shaun Robert Cousins, Senior Analyst]

And idea of any sort of indication of where the corporate costs could be? Generally, it painted around $20 million. You were a little lower this year. Is that -- where do you expect those?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes, that's correct. $20 million would be a good figure to work on a pro forma.

[Operator]

Our next question comes from the line of Ashwini Chandra from Goldman Sachs.

[Ashwini Z. Chandra, Equity Analyst]

Just a couple of quick questions. Firstly, on Macpac, I guess you'll be exiting fiscal '19 with a store footprint that will be 25% higher than it is today or a little bit more than. Can you just sort of talk us through how long it takes for Macpac stores to mature and return hurdles on new store investments to be achieved, just to give us a sense of the kind of runway of growth from that particular part of the business?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. I mean, the business has ramped up its presence in Australia over the last 2 or 3 years quite a bit. And it's getting very good growth out of the majority of those stores today. So I still think probably because the brand isn't that well established over certainly a 3-year period. From what we've seen, there appears to be a pretty good, healthy growth as a store launches. So yes, David, you wanted to...

[David J. Burns, Chief Financial Officer]

Yes. So obviously, the 6 new stores that will be opened by Macpac that are in its traditional format, so those 54 stores will move to 60 stores. The 9 Rays stores are existing stores, which are already growing at 8% like-for-like, and we'd expect that growth to be fairly moderate this year. And as we transition the brand from Rays to Macpac and then obviously, once we've then been able to bring the Macpac product into the business, we're expecting good solid growth, particularly in apparel, backpacks, footwear and the like with that much stronger product offering.

[Ashwini Z. Chandra, Equity Analyst]

And how quickly do you sort of start to hit your return hurdles on Macpac stores?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. So we've built a business case that was based on a 3-year type life for getting to that -- to those 15% post-tax returns. So that's still on -- we're on track to that.

[Ashwini Z. Chandra, Equity Analyst]

Okay. And just one more question if I could, please, just very quickly. Obviously, a lot of wheeling and dealing going on within your portfolio in terms of closures and a handful of openings and relocations. Can you give us a flavor of how conversations with landlords are these days versus where it might have been 12 months ago in terms of your ability to negotiate and get terms that are economic for you?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. I would say that as a general statement, the position has shifted in the retailer's favor from over the last 12 months. So I think as a whole, we are getting more favorable outcomes than we were 12 months ago. And so we're pleased with that. That being said, I think that there's still -- for the very best retail locations, there's still high demand and where the landlords have those really A grade centers here, they are still expecting improved returns out of them. And there's a demand there for that. So there's quite a polarization, I think, in terms of the retail landscape and very much, it's location by location.

[Operator]

And our last question comes from the line of Shaun Weick from Macquarie.

[Shaun Weick, Analyst]

Just a couple of quick ones. Just in terms of Auto, just wanted to get your thoughts regarding balancing the in-store and omnichannel investments that you're making with the gross margin issues that you have ongoing and how that plays into margins in FY '19.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Sure. Well, I think, I mean, if you look at the Auto business over the full year, gross margins improved on the prior year, and our operating costs increased. So investment in the -- on [ capital ] so investment in the services presence and the customer service that we provide for our customers, that growth had increased in operating costs. We would say that out of all of our businesses, Supercheap is least exposed to any online pricing competition. When we've done all our benchmarks, we were already, already very well positioned from a pricing standpoint. So yes, we wouldn't anticipate a need to invest in gross margin for online. So with our private fund programs and supply chain program, we'll be looking to continue to lift gross margins, and that will offset the investment we continue to make in operating costs.

[Shaun Weick, Analyst]

Okay. Got it. And then just in terms of the growth you're seeing in sales across online investments in stores, I know at the half-year, you thought the bulk of the growth was coming out of online, but could you just provide any comment there in terms of what you saw across the full year?

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Yes. I mean, I think it would be fair to say that, that continues to be the overall pattern. We would say that the physical markets are fairly flat across all of our categories. I mean, when we looked at the market growth, it's tended to be less than 1% coming out of physical stores and obviously, a much stronger growth out of online, and then we're getting more than our share of it.

[Operator]

There are no further questions at this time, sir. Please proceed.

[Peter Alan Birtles, Group MD, CEO & Executive Director]

Okay. Well, thank you, everyone. Thanks for listening to the call and for your interest, and we look forward to seeing a number of you over the next few days. Thank you.

[Operator]

Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may all disconnect.