Adairs Limited (ADH) Earnings Call Transcript

Thank you for standing by, and welcome to the Adairs Limited FY '21 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Ronan, Managing Director and CEO. Please go ahead.

Good morning, everyone, and welcome to the Adairs 2021 financial year results call. Joining me this morning on the call is Ash Gardner, our CFO; and Jamie Adamson, our Head of Investor Relations. The 2021 financial year has been an exceptional year for the group. The results achieved by Adairs and Mocka continue to highlight the strength of our brands, the hard work of our teams and our culture that sees us look to delight customers every day, providing us with the ability to adapt to the ongoing challenges from COVID-19. The group achieved exceptional sales and profitability growth across both Adairs and Mocka. Group sales were up 28.5% to nearly $500 million, with online sales representing more than 37% of total sales, driven by great results across both Adairs and Mocka with all channels delivering strong sales results. The exceptional sales and gross margin results, combined with disciplined cost management, delivered strong operating leverage, allowing both brands and the group to achieve a record profit result with underlying EBIT of $109.1 million, up 97.3% on the prior year. FY '21 also saw the group invest in distribution facilities to support the future growth of both Adairs and Mocka. At Mocka, we doubled the size of our Brisbane distribution facility, while Adairs continued to work on moving to the national distribution center in Melbourne in partnership with DHL. The FY '21 year result came on the back of a trading environment that was supported by consumers' additional focus on their home as a result of the COVID-19 pandemic. However, the ongoing focus on our underlying strategies helped deliver this growth. Some of the key drivers of the Adairs sales growth over the year included the growth in retail floor space with gross lettable area growing 8%. The store sales result continues to be highly correlated to increasing our GLA. Over the course of FY '21, Adairs delivered strong sales growth through a combination of opening new stores in areas where we were not well represented and the continuation of our upsizing program. Both our new stores and the store upsizing program delivered great results as our largest stores provide us with the opportunity to showcase more products and categories and deliver a higher store contribution margin. Importantly, the new stores delivered strong sales and profit growth, but also drove an increase in online sales in those catchment areas. The Linen Lover membership base increased by approximately 14% across the financial year. Linen Lovers, who shop with us, spend on average 10% more than they did in FY '20 and grew to represent more than 80% of Adairs sales. The team was highly focused throughout FY '21 on signing up Linen Lovers, as we know this gives us the opportunity to build a relationship with our customer and increases the chance of them returning to shop with us in the future. An increased omnichannel conversion. More customers were comfortable shopping across channels than ever before. While store closures were one driver of this, we saw customers happy to shop both in store or online, depending on the circumstances at the time. Ultimately, we know the most important driver in creating a multichannel customer is building their trust and loyalty to the brand. We saw strong sales growth driven by the increase in multichannel shoppers as they, on average, spend more, which is driven by their engagement with the brand and their comfort in shopping with us, how they want, when they want and where they want. The Mocka sales growth was driven by continuing to build out our product offering, enhancing the customer experience through initiatives such as the introduction of augmented reality to help customers visualize the product in their home and continuing to build brand awareness as highlighted by the 35% increase in website sessions. At Mocka, we also continued our focus on building up our customer database with us now having more than 550,000 email subscribers available for us to both showcase our new products and promotions to. FY '21 was a terrific year, and I'll now hand over to Ash to walk through the financial results in a little more detail.

Thanks, Mark, and good morning, everyone. Yes, FY '21 was certainly an exceptional year with many highlights. Total sales for the group of almost $500 million were 28.5% up from last year, despite 1/3 of trading days being affected in some way by COVID-related store closures, most notably in Victoria in the first half. Online sales of $187 million across Adairs and Mocka now represents 37% of total sales. Both businesses were able to grow their customers and achieve higher average selling prices and like-for-like transaction growth, which converted to strong like-for-like sales growth and an expansion in contribution margins across all channels. Adairs stores achieved like-for-like sales growth of 7.4%. Online sales were up 33% to $127 million. And Mocka sales grew 31% to $60 million. Despite the sporadic and at times lengthy disruptions caused by COVID, our customers demonstrated a willingness to shop across both channels, with total sales now more than 30% up on the pre-COVID-19 levels of FY '19. This strong like-for-like sales growth, combined with a focus on gross margin and cost control, delivered the record EBIT result for the growth of $109.1 million, up 97% on last year and delivered an EBIT margin of 21.8%, an increase of 760 basis points on the prior year. Adairs reported a record underlying EBIT of $96.7 million, up 98% on last year, with an EBIT margin of 22%, driven by the strong like-for-like sales growth across both channels and margin expansion. Mocka contributed $12.4 million for the year, up $6 million and ahead of the business plan that we put together when we acquired the business in 2019. It should be noted that Mocka was only owned by Adairs for 30 weeks in FY '20. Costs continued to be carefully managed throughout the year with improved labor productivity -- sorry, with improved labor productivity across our stores and distribution centers and an ongoing focus on achieving high returns on investment for key marketing and digital initiatives. As we announced in February, the company repaid its JobKeeper wage subsidy benefit and has not been eligible for any other government support. We've continued to work collaboratively with our landlords to share the impact of the store closures with rent rebates received in FY '21 related to COVID store closures since the pandemic began amounting to $3.2 million, an increase of $2.5 million over the prior year. Throughout the last 18 months, we have adapted our operating model and cost base to be able to respond quickly to unplanned disruptions caused by COVID or other issues that are beyond our control, and we continue to employ these measures today as we do with the current lockdowns across Victoria and New South Wales. It is a credit to our team for the way they've adapted to the different situations throughout the year. Their resilience and commitment to servicing our customers has been the critical ingredient to achieving this result for our shareholders. Our reported net profit after tax of $75.4 million was double last year and includes the effects of AASB 16 as well as the one-off transition costs for the new national DC of $1.7 million after tax and the true-up of the Mocka deferred consideration following the agreement to settle the deferred payment in September of 2021. The record operating result achieved has enabled us to finish the year with a strong balance sheet. Our inventory levels have improved, and we have chosen to carry more stock than we would normally to allow for the production and shipping delays being experienced across the supply chain globally. We closed the year with cash on hand of $26 million and no bank debt and declared a final dividend of $0.10 per share, which brings the total dividend for FY '21 to a record $0.23 per share. Back to you, Mark.

Thanks, Ash. On Slide 10, we look at the continued drivers of our future growth, which are largely based around our omni model. The Adairs model aims to deliver exclusive designed and developed product through our vertical supply chain. The total addressable market is large with management estimating the market to be over $13 billion in Australia. By offering our exclusive product across multiple channels, it allows us to maximize and fully leverage the benefits that come from our Linen Lover program, back-end infrastructure and highly capable team. This provides Adairs with the opportunity to offer a seamless, inspirational customer experience across channels, resulting in high levels of customer acquisition, retention and preference. Given the size of the market, our opportunity to continue to grow market share by focusing on our strategic pillars is high, enabling us to deliver strong EBIT growth and margins for shareholders over the medium term. With this in mind, you can see how our 5 key drivers of future growth highlighted in the presentation continue to build upon this model to enable us to capitalize on the growth opportunities for both Adairs and Mocka. If I start with our proven and resilient business model, the strong brands that we own, our vertical supply chain philosophy and our direct-to-consumer store and digital channels allows us to develop and control the expansion of our product offering and customer base. This enables us to be more agile and responsive to changing customer needs through the delivery of exclusive on-trend product at higher margins. Our strong brands, combined with our large and loyal customer base, delivers a lower cost of customer acquisition and provides significant opportunity to enhance and build upon our relationships with our customers. We see the combination of omnichannel retail with loyalty is a key growth driver. Adairs is focused on continuing to grow its market share, and the best way to do this is to grow our customer base while increasing our share of spend from our existing customers. Linen Lovers is the program through which we provide value to our members, allowing us to achieve this. The Linen Lover program today accounts for more than 80% of Adairs' sales, and we have started our investment in data analytics capability to enhance our ability to build upon the value of this program for our customers and deliver ongoing returns for shareholders. At Mocka, we continue to review the opportunity to create a loyalty program that is relevant to our customers. We are focused on growing our email subscribers and have added more than 30% of the database over the FY '21 year. This provides us with the opportunity to remarket to these engaged customers at significantly less cost than general digital marketing allows. Our focus on becoming an omnichannel leader is supported by our digital transformation strategy. We are investing in enhancing our digital platform and team to deliver an improved customer experience, driving customer acquisition and increased customer conversion. We're starting from a strong position and have seen significant growth in both businesses in customer shopping online. We continue to think about how we deliver customers a superior and more flexible shopping experience and are actively exploring and trialing new technologies. At Adairs, these include in-store devices to showcase range, customer traffic measurement and analytics, both in-store and online, together with online chat. Adairs will continue to build upon its digital capabilities by upgrading the online platform in 2022. This will help enable a more seamless omnichannel customer experience and see us introduce additional personalization and basic items such as click and collect and express delivery. Mocka is continuing to build upon its digital capabilities after successfully upgrading their online platform in FY '21. This gives us both a solid foundation upon which to grow over the coming years and enables us to trial new technologies such as augmented reality in the short term. We will continue to trial different technologies to ensure that any significant investment delivers an enhanced customer experience. The combination of Adairs and Mocka allows us to capitalize on 2 great brands with well-developed digital platforms. With strong online sales growth achieved by both brands and 37% of total group sales now coming from online, we are well positioned to win share as traditional store-only customers transition to become omnichannel shoppers. The addition of Mocka to the group increases our exposure to the fast-growing online segment of the market with the significant benefits of vertical integration. Based on Mocka achieving the same penetration in Australia as it has in New Zealand, there is a potential for Mocka Australia to exceed $100 million in sales revenue simply based on population size. Mocka provides the group with greater exposure to the furniture segment and provides the opportunity to reach a different customer through design-led, value-for-money differentiated product. With a significant market to grow into, we continue to invest in product category expansion. While this has been more challenging due to travel restrictions, the team have adapted to these conditions and continue to work on enhancing our width and depth of offer at Mocka. This will enable us to provide customers with a more compelling offer and, in time, allow customers to fit out their entire house with Mocka product. We are also investing in additional talent to supplement the Mocka management team and are excited to announce the appointment of Vanessa Brennan for the role of Mocka's CEO. Vanessa brings a wealth of retail and e-commerce experience to Mocka, and her appointment, combined with ongoing investment in additional talent, will ensure we are well placed to execute on our strategy of building market share by delivering differentiated, stylish and functional product, convenience and value for money to our customers. Our digital channels are enhanced by our store network. All of our stores are profitable, and our store formats deliver strong contribution margins. Larger stores are more profitable, and there is a strong pipeline of new store and upsized store opportunities for us to capitalize on. As I mentioned earlier, these larger stores give us the opportunity to showcase more products and categories and enhance the customer experience. With a highly profitable store portfolio, we remain focused on deliberately creating flexibility within our store leases through relatively short lease terms, allowing us to strategically manage our store portfolio through opening new stores, upsizing existing stores, obtaining more favorable terms on renewals or closing stores that simply do not meet our return requirements. And finally, our omnichannel business model needs to be supported by an omnichannel supply chain. Construction of the national distribution center in Melbourne for Adairs is now final, and we are currently transitioning stock into this facility. While this project has experienced some delays as a result of a variety of COVID-19 restrictions, we expect to be fully operational in Q2. The consolidation of our multiple distribution center operations into a single national facility will improve stock flow and online fulfillment, increase stock availability and improve service levels for both our customers and stores during peak trading periods at a lower cost. We expect to realize $3.5 million in annual savings over our existing operations once we are fully operational. The national distribution center is the foundation for Adairs' integrated omnichannel supply chain strategy to better enable customers to shop Adairs how, where and when they choose and has the capacity and flexibility to support Adairs' growth well into the future across all channels. Over the first 7 weeks of FY '22, the group has achieved like-for-like sales growth of 5.2% against FY '21 and 50.5% against FY '20 after adjusting for the impact of closed stores. Total Adairs sales are down 16.1% on FY '21, but up 5.5% on FY '20. This has obviously been significantly impacted by stores closed due to government-mandated lockdowns, with Adairs store sales down 27% on FY '21 despite losing 40% of the available store trading days. All states and territories, with the exception of New South Wales, have experienced strong sales growth over FY '20, with the customer responding well to our new ranges. While stores have been impacted, the Adairs online business and Mocka continue to grow. Adairs online sales are up 12.9% on FY '21 or 131% on FY '20 and Mocka sales are up 16.1% on FY '21 or 74% on FY '20. These are clearly strong results on the back of strong trading periods last year. The gross margin for the group over this period has moderated against FY '21, however, remains well up on FY '20. If I move to the outlook and I start with consumers. While stores being closed as a result of lockdowns will impact the FY '22 result, we believe the underlying consumer conditions remain positive for the home category. Household savings remain elevated with households accumulating circa $137 billion of incremental savings over the last 18 months, which is almost equal to one year's worth of discretionary retail spend. Housing market continues to grow strongly with churn returning to this market, delivering a tailwind for household goods, and ongoing travel restrictions continue to support customers transferring a portion of this travel spend towards household improvement further supporting the home category. Given Adairs and Mocka's positioning, we expect to continue to benefit from the current environment, which sees customers having an increased focus on their homes as a sanctuary and increasingly a place of work, entertainment and education. Our buoyant home category market continues to provide Adairs and Mocka with a significant opportunity to continue to grow market share and build brand awareness. We note in the outlook slide that we expect the gross margin will be impacted by supplier cost price increases caused by increased global demand and the increased cost of sea freight. We expect that these will be offset somewhat by the stronger AUD and our ongoing focus on managing price and depth of discount. Global supply chains have been significantly impacted by COVID and both Adairs and Mocka see ongoing challenges in production capacity and shipping availability resulting in longer lead times. As a group, we have attempted to insulate ourselves from some of this risk by carrying additional stock over the first half of the year to allow for these longer lead times. Adairs expects to open 2 to 4 new stores and upsize 8 to 10 stores over the coming year with a strong pipeline of opportunities available. CapEx for the year is expected to be in the range of $10 million to $15 million, reflecting the expenditure on these new and upsized stores as well as supporting the ongoing investment in our digital initiatives. Given the inherent uncertainty in the market today as a result of store closures, the Board did not consider it appropriate to provide further guidance at this time. Before I finish, I'd like to thank a few people. I'd like to start with the Mocka founders, Emma and Cameron, and Rachel and Jeremy. We have got to know them well over the last 18 months or so, and I'm thankful for the way they have helped transition the Mocka business to independent management over this time. They have done an exceptional job in building the Mocka brand into the business it is today, and we look forward to making them proud of the brand they created as we continue to build and grow it over the coming years. I'd like to thank the Adairs and Mocka customers. We get the privilege of being a small part in helping them create a home they love. Our aim every day is to continue to inspire and delight them, and we thank them for their ongoing support. And finally, to the Adairs and Mocka teams. The last 12 months have seen us come through some very different times. And unfortunately, many of the team are back in lockdown as we give this presentation today. Our teams are passionate about our businesses, and this continues to shine through in the way they go about delivering for our customers despite ongoing challenges and changes as a result of COVID-19. I'd like to thank all team members across Australia and New Zealand for their hard work and dedication. I remain confident that with this great team, we are well placed to not only manage the current conditions but put ourselves in a position to capitalize on the new and evolving retail environment, delivering shareholders' ongoing profitable growth. I'll now hand over for questions.

[Operator Instructions] Your first question comes from Aryan Norozi from Barrenjoey.

Just first one for me around Mocka. So the second half EBIT margins, I think, were about 17%. I mean I don't think you guys have historically said that 20% plus mark is a good sort of indicator for balancing growth and profitability. So what's driving that? Is it front-loaded cost investment? And do you expect the fruits to bear over the next 12 months? Or is it a change in thinking around profitability, please?

I think it's a combination of things, Aryan. There's an element of additional investment. Doubling the size of the warehouse is obviously investing ahead of the curve to enable us to manage the future growth. We've added team into that business, which we knew will add value over a longer period of time. And over the second half, we probably had a quite lumpy inventory supply chain piece. We had a lot of stock on the water as we gave these results in February, and we probably ran a bit feast and famine, which meant that we had to play around with inventory and promotions. So we didn't quite extract the gross margin that we expect we can deliver over the longer term. And equally, we invested a little more in marketing and some of the things that we trialed didn't work quite as well as others. But I think that's the nature of a growth business such as this. We continue to remain pretty committed. That range of 18% to 20%, we think, which was what we came out with when we started and we first acquired Mocka is sort of the range that we think we should be able to operate in. So obviously, the second half was a little bit below that. But I think that's the approach we take going forward. And obviously, as we continue to grow the business and learn what works and what doesn't. We'll continue to adjust that EBIT margin accordingly, but we continue to focus on that sort of range as being how we'd like to think we can deliver over the medium term. I think in the -- in relation to Mocka as we look forward, particularly the shipping costs, they're probably a bigger component of our cost of goods sold in Mocka as compared to Adairs. So we've probably got a little more gross margin pressure in that business over the short term, but we expect over the medium term, they'll moderate to a more reasonable level. They might not go back to where they were, but we're going to end up with a more reasonable level. And we also think that given that market, price increases are probably likely to go through that larger, bulkier goods in terms of homewares given everyone is having to deal with the same thing. So as I said, it's a little bit disappointing where we ended up, but that was largely based on some investments we made and that lumpy stock coming through in that second half.

Perfect. And just on the inventory piece, Adairs' inventory is up 16% on 2019, Mocka is up 70%. What -- and then you obviously flagged that you're holding some safety stock given all the sort of disruption in supply chain. What assumptions have been made for sort of the key second quarter trading period? I mean -- and what's the risk you [ take ] to start clearing product to sort of clean up the inventory position, please?

Yes. I think -- I mean, we've assumed that in most instances, stores will be open to a large degree. We're expecting to have ongoing lockdowns. Obviously, that's the environment we're in. But equally, I think it's important to note, in relation to inventory, a lot of the extra inventory we're holding is largely based on core ranges. So we don't expect that we'd have to clear those core ranges should that not be the environment we're trading in. They have a longer shelf life. So you think about white sheets, towels. And in the Mocka examples, a lot of our cot ranges are quite their ongoing ranges that is where we're putting a lot of that inventory. That doesn't say there won't be some clearance that we need to move through should conditions not be there. We've got Christmas. We've got beach towels. We've got those seasonal type products. But overall, we've tried to maintain a balance on that inventory piece to ensure that we're well positioned to capitalize on the sales opportunities but not betting the farm that we need to invest heavily in the fashion element of the business. So we've -- as always, it's always a balancing act. Inventory is not easy to predict and harder in a world where you're not quite sure how many days stores are going to be open between now and Christmas. But we think we've struck the balance and made sure that we're focused on taking that safety stock in areas where it's less risky.

Perfect. And the gross margin commentary, it sounds like it's obviously down year-on-year but up on 2 years ago. I mean last year -- since on last year, you are up circa 700 basis points, which is quite phenomenal, what's the view around how much of that you can give back versus retain? I think pre-COVID in Jan and Feb, your margins were up sort of 300 basis points. So should we be thinking sort of half of that goes away and the other half continues?

Yes. We spoke at the half that we'd like to retain circa 2/3 of it, but I think the current environment we're trading in probably sees us give a little bit more back. So as we think about it today, about half of it, we think, we look to put into -- back into price. And equally, we've got those, obviously, ongoing challenges. We think we can manage the price and depth of promo piece of the puzzle quite well. We're not expecting to have to significantly reinvest in that area, but we think the cost price pressures are going to be slightly harder to see those -- all of those pass through to consumers in the current market just given the uncertainty that's out there today. So I think if you think about us retaining 50% -- somewhere between 50% and 2/3 is what our aim will be. And obviously, we'll see how the season trades out. It's 7 weeks -- smallest 7 weeks of the year, it's pretty hard to tell, and there's a lot of moving parts this year more so than other years.

And last one around the dividends. Do you interpret -- I mean the payout ratio is well below your target or your historical range. Do you interpret that as your future -- an indication of your future confidence? Or is that just being conservative during the lockdown?

Yes. I think everyone knows that the Adairs management team tends to take a conservative approach to these. So I think you can take that as being conservative and that was our approach. There's plenty of time to think about how those dividends roll out in the future once we get a little more clarity on the trading environment we're operating in. So we adopted a lower ratio on a conservative basis to make sure that we balanced both rewarding shareholders in a terrific year but equally just maintaining the strength of our balance sheet to trade through uncertain times and still consider what other opportunities might be out there on the other side of these uncertain times.

Your next question comes from Mark Wade at CLSA.

Brilliant results. Just playing devil's advocate. What should give us the confidence that this is not as good as it gets? I mean you said something unique there in the number of customers you've attracted new to the brand, something in the behavior of the shoppers, which means they're more likely to stay in the home categories for longer since the onset of COVID. So is there more to it? Or is this as good as it gets?

I think there's always more to it. I think if you think about the size of the market, we're still a relatively small player in relation to the size of the market. I think when we look at it, the beauty of the Linen Lover program is that we continue to grow that year-on-year, and those customers continue to come back. So every year that we keep investing in halting on more Linen Lovers. And when we talk about investing in attracting Linen Lovers, it's not done with a high marketing spend or anything like that. A lot of it is actually converting those customers in or to become Linen Lovers using the assets that we have such as our store team. And that approach enables us to build the relationship with the customer. So I think in that regard, we do have an element of a unique consumer proposition in relation to continuing to build that Linen Lover program. I think unlike potentially other databases and the like that are thrown around as statistics, you've got to remember that every one of those Linen Lovers on that program had to sign up in the last 2 years and pay the $20. So that says they are more highly engaged. They're looking to extract value from that -- the program they've joined. So I do think we're well positioned there. And equally, it comes back a bit to also creating products for them. We are one of the few businesses in Australia that's trying to drive that fashion and trend element in this space at this sort of scale, and the product team have done an amazing job again at continuing to meet customer needs and interpret the trends, and I say that in a more challenging environment, given our inability to travel. So we've adapted to different ways of doing that. So I think we've got good customer engagement today, and we think the market is -- there's still many more Linen Lovers that we can add into that. We've obviously got the stores and continue to upsize and roll out the larger stores in areas where we're not. And I think the exciting thing from there is as we roll out those stores, we do see more customers shop with us both in store and online in that catchment area. So that does build an advertising or a brand awareness piece as we build that out. And as we continue to invest in creating a more seamless experience, I think we've got a lot of work to do in that space. So I think we've got lots of levers. I think FY '22 in the short term is going to be challenging given the lockdowns and all the rest of it. But as I said in my presentation there, I think our strategic pillars and the growth levers we've got put us in a good position over the medium term to ensure this isn't as good as it gets. And we'll continue to focus on customers and product because I think that is what delivers it over the longer term and there's lots of levers within those 2 areas for us to continue to pull.

No, that's a really comprehensive reply. And just on that matter of the lockdowns, I mean, you've seen it in the past when -- as you come out of them, and you feel like you haven't had a lot of demand destruction as people have just delayed their purchasing behavior. Is that still the current thinking? You haven't terminally lost those sales and you can still call them back?

I think you lose some, to be fair. I think there are some that moment in time, you lose the impulse, right? Someone walks past the store window, sees an amazing product on the bed, buys it, didn't think they were going to buy it, but -- and didn't necessarily go looking for it. So I think you lose an element of the impulse buy. I don't think you lose them all, and we expect that like we've seen as -- when other states have come out of lockdown, we do see it revert pretty strongly back into store, in particular. So I think we will -- the longer they go, what we also see is we get a bigger transference to online, so short sharp lockdowns. We tend not to see an immediate response to online. People think it's going to be 3, 4, 5, 7 days. So we tend to get a deferral in the first week, then after that week gets extended, which seems to be the way lockdowns are just going at the moment, we then start to see online pick up its share. And then when we come out of it, we see customers come back to store. I mean I can't remember whether I gave the example on this call at the half, but we regularly see customers come in, and they love to see the store team again. We have people deliver cakes to the store team last time we reopened. So our stores are missed and are well loved by our customers. So we expect to see good growth come back when they do reopen, and we probably have little windows there where you get a bit of a bubble as those stores reopen over the half. So I think for us, it's -- we're in a good position, and we expect that we will see some of that return, but equally, Mark, it's fair to say that the longer they go on, the harder it is to pick up those -- particularly those impulse sort of components of those sales that you would normally get just with customers walking around shopping centers?

Your next question comes from Apoorv Sehgal from UBS.

Just my first question on the stat that store sales for the first 7 weeks are down 27% versus 40% of store trading days closed. Do you think you've potentially won further market share in these last 7 weeks?

Potentially. I mean it's hard to work out. It's really hard to work out. You haven't got a lot of direct competitors providing similar sorts of numbers in that sort of trading window when you think so much of this categories still shopped in department stores and, obviously, there's a bunch of private players out there. I think we've done a reasonably good job of things like call and collect helping to ensure that we maximize the opportunity. So I think that continues to be what we aim to do. Whether we've grown market share, anyone's guess. To be honest, I'm probably more focused at the moment on just thinking about how we continue to manage this trading conditions to the very best of our ability within our own circle rather than think too much about, is that -- are we winning or losing share just given the number of moving parts that we are obviously dealing with on an unfortunately week-to-week basis.

Yes. Sure. That's clear. And how are you seeing the competitive environment over the last couple of months in terms of promotional activity, discounting and overall marketing intensity?

Yes. Well, I think the marketing intensity is there. We're definitely seeing strength in increasing costs in that digital marketing space. We've seen a lot of the retailers go back to a more traditional style of depth of promo, length of promo and those elements. And we've certainly continued our approach that that's not what we want to do. We want to balance that out, and we've been reducing that and continued to stay strong to that strategy probably despite the trading conditions that we're seeing. It means that we play around with it a little bit, but we think that's still the right long-term decision for the brand. So we've seen the department stores ran a far more traditional mid-season sale and that ran through the normal period, if not slightly longer in some instances. Our friends at Bed Bath N' Table have pretty much done what they normally do. So I would say that we've returned to a more normal trading -- retail trading environment in relation to depth of promo and length of promo. And we have endeavored to maintain our approach to trying to both reduce the length of time we're on full store promos and equally keep managing that depth of discount. And as I said, previously, we've definitely learned some elements around which categories need that stronger discount and which are a bit more commodity. And therefore, we've had to give a bit back in those areas but equally capitalizing on uniqueness of our designs and ensuring we maximize the opportunity in that space has been something that we've retained focus on. So yes, the competitive environment is -- it's probably back to normal and just like we've seen in the past. So it just gives us -- it's no different, I would argue. Perhaps it's a little more expensive in that digital space.

Just one final question for me. Any color on recent rental negotiations and how you see the environment for that and, therefore, the outlook for occupancy costs into FY '22?

Well, we continue to see ongoing -- it depends on the store. I've always said that stores fall into 3 categories. You have great stores. And if you've got a great store, you are unlikely to get significant rent reduction or change in that space. We're seeing some good deals in and around shopping center and potentially some of those more B-grade shopping center stores and working through those. So that comes through the numbers, but it takes time, right? It's not going to see -- you're not going to see a significant change in the rental expense in the short term just given the nature of how many stores are there and the way these reductions sort of flow through. So I wouldn't sit there suggesting that you start modeling a significant reduction in occupancy costs in FY '22. Obviously, there's ongoing thoughts and discussions going on at the moment around rental rebates and COVID-related lockdowns and all the rest of that, that have got a lot of water to go under the bridge. And I think what we're going to see actually over this half is a deferral and a delaying of some of those renewals while landlords have to deal with, obviously, the impact of these lockdowns. So what we find is we -- most landlords have to -- we all go back to managing the day-to-day and what's happening in the market today and some of the longer-term stuff gets kicked down the road a bit. But there are rental reductions out there, but I wouldn't be expecting significant changes to our occupancy costs in the short term.

Your next question comes from Jo Little at Morgans.

Most questions have been asked. But just you make a point that you continue to assess potential acquisition opportunities in the slide deck. What does the, like, perfect or the right acquisition look like for you, a start-up that is established, online-only core products, specifically profitable, et cetera?

That's a big question, Jo. When I think about it, I mean, it will be home. It will have enough scale and size about it to move the needle over the medium to long term. It needs to have great growth prospects. It needs to be -- it can either be online-only with a thought that how might we turn it into an omnichannel business or an existing omnichannel business. You think about what we think about when we look at our, I guess, proven and resilient business model as we call it. We think about they need to develop and design their own product, vertically source. We think all of those things are key strengths in a retail business, direct-to-consumer. So as you start to play that out, there's probably plenty of brands out there that potentially fall into that bucket. Equally, I think, some of the challenge is in the businesses that we've obviously -- I said last time, I think every homewares business in Australia was for sale somewhere between February and June of last year, but trying to work out what the sustainable earnings of a lot of those businesses is quite challenging. And therefore, given our conservative nature, we tend to pull away pretty quickly from a lot of them if the expectations are too high. So it needs to be -- I think that gives us some element of it needs to be well priced and on traditional sort of metrics given our love of EBIT and cash flow.

Okay. Great. And just in terms of that $7 million impact short term, I should -- should we just run that through the gross margin? I mean are you actually paying rent in your stores that are closed today and that deferral conversation happens down the track?