Baby Bunting Group Limited (BBN) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Baby Bunting Group Limited FY 2020 Half Year Results. [Operator Instructions] I'd now like to hand over to your first speaker, Mr. Matt Spencer. Thank you. Please go ahead.

Thank you, Rosalind, and good morning, everyone, and welcome to the FY '20 Half Year Results Presentation for the Baby Bunting Group. Joining me today is Darin Hoekman, Baby Bunting's Chief Financial Officer. We will be taking questions at the conclusion of the presentation. I'll be referring to the FY '20 half year results presentation lodged through the ASX earlier this morning. If we could please start on Slide 4. I'm pleased to be presenting today's results. In summary, there reflects continuing profit growth and significant progress on a number of our operational objectives for the year. We grew our store network, delivered sales and market share growth and achieved improved profitability. At the same time, we continued to invest in business transformation to build capability for the future. Numbers presented on this slide are presented on a pro forma basis, and there is a reconciliation to the statutory results on Pages 32 and 33 of the slide pack. Once again, we've had a solid period of growth as sales for the half were up 8.1% to $186.4 million. Comparable store sales growth was 1%, and underlying comparable store sales growth was 4.1%. A key focus has been to continue to grow market share, which includes continuing to open new stores across Australia. Our reported comparable store sales growth of 1% includes some short-term sales redirection occurring in the Sydney and Melbourne markets. I'll expand on this later in the presentation. In conjunction with this market share growth, we have seen a significant and sustained lift in gross margins, which were up 223 basis points from the prior year to 36.9%. Gross profit income was up 15% to pro forma EBITDA for the period is up 21.7% to $14.3 million. EBITDA as measured under the AASB 16 lease accounting standard continues to track towards our long-term goal of 10% and ended the half at 7.7%, so up 90 basis points on the prior half. Pro forma NPAT was up 30.6% to end the half at $7.5 million. The balance sheet is in a sound position with operating cash flow of $7.9 million and a return on funds employed of 25%. In summary, it has been a solid first half in a somewhat unusual trading period. We have felt the impacts of the move to a new web platform that suffered from technical issues, and this, in turn, impacted our online sales growth. There've also been some fairly unique external conditions. In particular, in New South Wales and OPT, the fires and the related smoke meant it was not healthy for pregnant women and young babies to be out and about. Trading was also influenced by the strengthening of the Black Friday, Cyber Monday weekend, and a relatively weak trading performance in December before our Boxing Day promotional period commenced. Noting that both of these events occurred in the first half. Despite some of the challenges, I'm very proud of what our team has achieved, and it was a great honor for Baby Bunting to be named the Large Format Retail Association Retailer of the Year in 2019. I'd like to thank all members of the Baby Bunting team for their contributions in delivering such positive results. Now let's look at the results in a bit more detail, so turning to Slide 6. On Slide 6, we had a clear set of operational objectives for the financial year. Our aim is to further drive market share growth and profitability, while at the same time, investing and executing on a number of significant business transformation projects. We are focusing on 5 clear operational objectives for the financial year. One, to progress our transformation project and strategic investments to plan. We have made significant progress in this area, which I'll speak about -- or Darin will speak about a little more later in the presentation. Two, to grow gross margin to be greater than 36% without compromising our values to consumer. We ended the half with GP percent of 36.9%, and our goal now is to achieve at least 37%. Three, to accelerate our private label and exclusive product program to exceed 35% of sales. We have a long-term goal of Private Label and Exclusive Products sales making up 50% of sales. I'm really excited that we've already exceeded our full year target and are well on track towards our long-term goal. Four, to capitalize on shopping center opportunities that present themselves. During the half, we opened another shopping center store at Westfield in Doncaster, and we'll open a new store at Westfield Knox and we're a long way down the track in securing a significant shopping center opportunity in Sydney, where we hope to execute the handover of this site in the second half of FY '20. And five, to achieve operating leverage through our retail network. We're projecting well towards its objective in the second half of the year. Pleasingly, we have made significant progress towards achieving this operational priority in the first half of the year. I'll now talk about our financial and trading performances during the half. Turning to Slide 8. Our market share improved and headline sales grew by 8.1%. Contributing to the market share and sales growth were underlying comparable store sales growth of 4.1%, with a reported comparable store sales growth number of 1%. Online sales grew 10.5%. Three new stores were opened during the half, and we saw the annualization of the first full year of sales from stores opened in FY '19, which, on a very encouraging note, are trading well ahead of historical averages. I'm now going to elaborate a little further on our reported comparable store sales of number of 1% and the underlying comparable store number of 4.1%. Since June 2018, we have opened 5 new stores in New South Wales, 4 of which have impacted 8 stores in the Sydney market through some sales redirection. I'm very comfortable with this as we have seen sales and market share growth for the period in New South Wales of 15.5%. This is a strong outcome in the largest market where we have our lowest brand recognition. All the new stores we have opened during this period are trading on average above expectations. The other element of this piece is the impact of the opening of our store at Chadstone, Melbourne in December 2018. It has had an impact on 2 stores in the shared catchment, which is something we had anticipated when planning for the store. Once again, the performance of Chadstone in its first 12 months of trade has been very positive. And at the end of the half, we have now cycled the impacts of sales redirection, and we're starting to see positive comparable store sales return to the 2 impacted stores. If you back out the effect of the new stores in those 2 markets, you will see on the right-hand side of the slide that our underlying comparable store sales growth sits at 4.1%. Looking at where we are today, comparable store sales growth for the first 6 weeks is sitting at 5.7% for the second half. This reflects the cycling of stores opened last year and much improved online sales growth. We can see some real momentum coming into the second half. I'll talk about our online sales growth performance later in the presentation, which is also on an improving trend. Turn to Slide 9, please. On Slide 9, gross margin for the half finished strongly at 36.9%, up 223 basis points and is anticipated to reach 37% in FY '20. We've been able to manage the impact of exchange rate variations. However, an important point to note is that our purchases in U.S. dollars are 10% of total purchases. Our entire business is focused on delivering gross margin improvement. This is being achieved through improvements in our supply chain, through better buying, expanding our Private Label and Exclusive Products towards our long-term target of 50% of sales and through better management of stock and shrinkage in our stores. We're also seeing the benefit of our Baby on Board services business contributing to our gross margin improvement. There is a partial impact to the cost of doing business associated with the addition of the Baby on Board team and investing in additional stores. However, on a net basis, we are well ahead. I'm particularly pleased by the sales performance of our private label brands being 4Baby and our latest brand, Bilbi, both of which contribute to gross margin improvement and deliver great value to our customers. We continue to look at gross margin expansion opportunities without compromising our value to our customers every day and every visit. Our investment slate in systems will play an important role in the margin expansion program. Turning to Slide 10. Continuing the theme of delivering value to the consumer, our research shows that value is still the #1 driver to purchase. It is, therefore, incredibly important that we are competitively priced. We also must have the widest range of nursery products, backed by great service and differentiated services for the customer. Our programs to deliver value is underpinned by our Best Buys program, which offers everyday low prices. We have seen a 48% growth in sales from our Best Buy range that now makes up 26.9% of sales in the first half of the year. We monitor market prices to ensure that we maintain -- remain competitive, and we continue to track our range and pricing relative to online pure play and others in the market. This is an important plank in our strategy and commitment to value to the customer. Slide 11. Under the old lease accounting standard, pro forma cost of doing business in 1H FY '20 was 29.3% of total sales. Store expenses are up 50 basis points from the prior comparable store period. This increase reflects the investment in premium store locations, our investment in online fulfillment hubs, which have larger store footprints, and a 3% increase in store wages. Marketing expenses remained in line with the prior comparable period, and we continue to focus more on digital marketing, which is delivering website traffic growth of 13% year-to-date. Pro forma overheads at 6.6% of sales grew by $2.3 million, reflecting our investment to support growth. Overhead growth includes addition of services personnel from the Baby on Board services business purchased in Q4 FY '19. We have also continued to invest in our talents for future growth in the warehouse and in the areas of IT and infrastructure as well as the annualization of new roles. Skipping ahead now to Slide 13. The Baby Bunting market opportunity remains significant, and we continue to grow market share. We're the only national specialty retailer of baby foods. However, there is still a significant number of small single-store operators in the specialty baby retailing market, and that's where we compete. We also continue to compete against the likes of Amazon, Catch, Kogan and other retailers on eBay. We're confident that we can differentiate our offer from the online-only retailers. We focus on our in-store service execution and other services to distinguish us from the department stores, discount department stores and online pure players. Moving here to Slide 15. Our long-term strategy to grow market share remains unchanged, and we focus on the following: first, investing in digital to deliver the best possible customer experience across channels; second, investment to grow sales from our existing store network; third, growth from new markets and new stores; and lastly, EBITDA margin improvement. I would ask you to turn to Slide 16. Our investment in digital is the cornerstone of our growth strategy. We believe that the next generation of customers, regardless of the channel they choose to shop, will engage with us via some form of digital medium. During the first half, our website visits grew 13% to around 10 million visits, although online sales only grew 10.5% in the first half. In early July 2019, we launched a new website platform. The platform promises to deliver greater personalization and engagement with the consumer, coupled with a superior e-commerce functionality. While the site did engage well with the consumer, we experienced technical difficulties around conversion and that would assume customer experience at checkout. The consequence being lower-than-anticipated sales and significant customer concerns about the shopping experience. In November, it became clear that the technical challenges were difficult to address whilst still operating in a live customer environment. We made the difficult, but necessary decision to roll back to our old website while we address the underlying technical and customer experience issues. Since rolling back to our old website, we've been able to reestablish our traffic and conversion. Now sales have been tracking positively and up 20% on the prior year for the last 3 months. We'll continue to work alongside the website vendor to diagnose and remediate the technical and customer experience issues. Looking at the graphs on Slide 16. You can see the impact on performance of the new website relevant to the growth we've seen after rolling back to the old website. It's gone from 7% sales growth in the first 4 months to 21% sales growth in the last 3 months. Turning to Page 17 or Slide 17, sorry. We continue to invest in our existing fleet of stores to drive growth. 29% or almost 1/3 of our store network is less than 3 years old. And on average, stores in our network take 4 years to reach maturity. We, therefore, have a significant part of our store network in their growth phase. We have invested in training and leadership in our store network, and I'm pleased that we continue to see positive momentum in our NPS, our consumer advocacy measure, which now sits at around 80. In the fourth quarter FY '19, we acquired the businesses of some of our third-party car seat fitting stores and consolidated them under the banner Baby on Board. We did this to grow this revenue through our store network and differentiate ourselves from others and to standardize the car seat installation experience for the consumer. We're starting to really see the benefits of this investment flowing through with the car seat fitting up 40% on the prior comparable period. During the period, we launched new booking software to facilitate and integrate the service into our business. Apart from differentiating ourselves from others in the market, the services business is contributing well to the sales and GP percent line. We are anticipating that the services business will continue to grow, especially in the area. As you are aware, we have now launched a shopping center experience -- sorry, launched a shopping center format, and what this has demonstrated is the progression of the in-store experience for the consumer. We are now taking those learnings about the in-store customer journey and applying these learnings to our existing fleet of stores. Over to Slide 18. Through the course of the half, we have opened 3 new stores, and we have another 2 really great opportunities coming up in shopping centers. We expect to open Westfield Knox in the second half and take a handover of another shopping center site late in the second half. We have 56 stores and a store network plan for 80-plus stores. We aim to open between 4 and 8 stores each year, of which around 50% of future new store builds will be in regional locations. We are in the final stages of completing an updated network plan, which takes into consideration our updated market share since the significant changes in the competitive landscape. It also includes shopping center formats as an alternative, our current stand-alone network -- store network trading performance and the increase in market share we have achieved. We have also recruited additional expertise into our property team that will help us formulate our shopping center strategy and format strategy moving forward in a changing market. Once this network plan is complete, our aim is to give an update to the market. I'll pause here and hand you over to Darin, our CFO, who can run through our new store economics and the transformation agenda. Please turn to Slide 19. Thank you, Darin.

Thanks, Matt, and good morning to everyone on the call. The new store economics slide shows the average historical financial performance of our large-format destination stores and our regional stores, that these numbers were last updated in August for FY '19 trading results. What we wanted to note today with regard to new store economics, is the performance of the stores we have opened over the last 18 months, which, as Matt noted, pulled back our reported comp sales growth in the first half. Historically, our new metro stores delivered $4.9 million of sales in year 1 and for our regional stores, around $3 million of sales in their first year. In the first half of this year, we had 3 new stores annualize at average first year sales of $7 million. This of course, includes Chadstone, which in its first year, was our sixth highest revenue store and our #1 in transactions. Our 2 regional stores opened have averaged $4 million in their first year of sales, which is also exceptionally encouraging performance. Finally, Shellharbour, which we opened in May last year, is another store delivering very strong first year sales performance in line with those that annualized in the first half. This has converted into above average profitability relative to what we usually see out of our first year stores. Turning to Slide 20. Our long-term goal is to be a 10% EBITDA business. Our objective is to reach these through a combination of gross margin improvement and operating leverage. I'm certain of the view that there is significant opportunity to improve gross margin even further from today through improvements in our supply chain. As previously highlighted, we are focused on growing our Private Label and Exclusive Products, buying better and leveraging our distribution and logistics assets. Our direct container import program has grown significantly to the point where we will be relocating to a large purpose-built distribution facility in the second half of FY '21. This new facility will reduce reliance on 3PL storage facilities and their associated costs and cater to significant long-term growth of our store network and online. In relation to online, our investment in store-based fulfillment hubs continues, and we expect to be operational in March with our third online fulfillment hub in our consumer store servicing the Sydney metro market with same-day fulfillment. As part of our transformation agenda, we are also introducing automatic ordering and replenishment in stores, which will facilitate a better in-stock position and allow us to reinvest our stores team's time into service. To complement our gross margin improvement program, we continue to focus on cost management and our desire to achieve operating leverage. We will continue to invest ahead of the curve to support the long-term growth of our business. Turning to Slide 22. Over this year and the next, we will continue to invest in a significant transformation agenda. This is a very exciting time for our business, with investments into strategic projects that will support us into the future. As stated at the end of FY '19, over the next 2 years, we expect to invest around $25 million in CapEx and project-related expenses to facilitate this. Also, a $4 million amortization of existing assets will occur as we transition to our new brand livery and move into our new DC. An important point to note, though, is our policy is to pay dividends for pro forma NPAT. So the one-off project expenses and related amortization from our slate of projects will be pro forma-ed out of our profit results for this period and will not compromise dividends to be paid. I would like to provide you with a very brief update on progress of our transformation agenda. During the half, we commenced the rollout of our new brand. The reception by our customers, the team and our suppliers has been extremely positive. This activity will continue through the second half as we complete the rebadging of all our stores. Our services business, Baby on Board, continues to expand; in particular, car seat fitting which has grown 40% in the first half of this year. In relation to our ancillary services program, we're in the process of selecting a technical solution to better facilitate the higher offer. We're also looking to invest further in the team to accelerate this area of our business in the second half. The project to implement a new merchandise forecasting, planning and automated replenishment software has progressed at pace, and our first pilot store is set to go live later this month. The automation of replenishment will create efficiencies in-store and improve stock availability. The development of a new loyalty program is well progressed. We have undertaken significant consumer testing in relation to the proposed program, and the outcomes are very encouraging. We currently are in the process of selecting the best technology to support the new program, and our expectation is that we will transition to the new loyalty program of Q1 next financial year. We expect this to increase life cycle spend of our customers as we offer more relevant and rewarding offers to them. As previously discussed, the launch of the new website has been disappointing and has impacted sales performance and has been a distraction to the business in the first half of the year. We are working hard to get this project back on track. Significantly, we recently finalized the deal to move to a new purpose-built DC in FY '21. The DC will support our expansion plans, reduce reliance on multiple 3PLs and facilitate the expansion of our container and direct import programs. As part of the DC move, we will be relocating the store support center as well, providing us with the necessary office space for the business in the future. I'm really pleased that we are co-locating the office and the DC together, as it will maintain the close bond between our operations and the store support team in a low-cost environment. We are continuing to roll out store-based fulfillment hubs that will facilitate same-day delivery to customers in metro markets across Australia. This will differentiate us from others. And it will improve the overall customer experience for those shopping with Baby Bunting. And finally, we continue to work on our customer care contact center. During the half, we have appointed new leadership and are working to transform the customer care experience and leverage cloud-based system solutions to bring efficiencies into our store network by reducing call volumes. We have leveraged off the experience of a major contact center provider to assist with strategy and direction, and we've also leveraged their services during the half as we experienced significant customer calls in relation to our website replatform. Slide 23 reflects the progress update and the anticipating timing of the transformation agenda. Now we will talk through the financial results in more detail. Slide 25. We are presenting the income statement on a pro forma basis to clearly demonstrate the underlying trading performance of the business. There is a reconciliation explaining the differences between the pro forma profit and the statutory profit on Slide 32, and a further reconciliation reporting the differences between old and new lease accounting on Slide 33. And in summary, the pro forma adjustments made to the current and prior year relate to the exclusion of noncash employee equity expenses and cost incurred in relation to our significant business transformation projects. I should note that when we gave earnings guidance back in August 2019, these were costs excluded from that range. The key call-outs are again: sales growth driven mostly from new and annualizing stores, increasing gross margins of 223 basis points and investment in our cost base to support future growth. In combination, this has delivered 21.7% EBITDA growth in the first half. With a 90 basis point improvement in profitability, with EBITDA as a percent of sales, increasing from 6.8% to 7.7% year-on-year. I think Matt has sufficiently covered the important discussions around sales, gross margin and also cost of doing business. So I might just take a minute here to update you on lease accounting transition impact on the P&L. AASB 16 introduces right-of-use asset depreciation and an interest expense on the associated lease liability, which is now carried on the balance sheet. Removed is the straight-line operating lease expense. The main call-out is: as each lease matures, the accounting expense reduces over time as we have an immature lease portfolio, the changeover in lease accounting increases our cost base currently, but these will moderate as the lease matures. But flowing through these adjustments, our pro forma NPAT growth for the half was 30.6% year-on-year. Slide 26. Looking now to the balance sheet where the clear call-out is the $12.6 million increase in inventory. There were 4 impacts to call out. One, 3 new store additions and we add around $800,000 in inventory for each new store. Two, December inventory is always higher in our business relative to June as in December, we build inventory ahead of the post-Christmas sales period and relative to June, when we report inventory at the end of the promotion. The delta of this is around $5 million or $100,000 per store. Three, as we increase direct imports of inventory, this delivers gross margin benefits, but also results in higher inventory holdings. And finally, four, the Chinese New Year was much earlier this year so it was necessary to build inventory to see us through the factory shutdown that occurs during this time. Moving to the cash flow statement on Slide 27. We had net operating cash flow of $7.9 million, below the prior year due to the change in the timing of our inventory flows as discussed. Capital expenditure of $3.9 million includes 3 new stores and investment in our transformational project slate, which will ramp up in the second half as we start rebranding our existing store network, a project that will see us amortizing existing store signage assets and outlay over $4 million for new signage across the store network. Final dividend of $0.051 was paid during the half in relation to FY '19, with an interim dividend of $0.041 to be paid in March this year, which equates to 70% of first half pro forma NPAT. I'll now hand back to Matt.

We're on Slide 29. Thank you very much, Darin. I'd like to provide you with a trading update and an outlook for the remainder of FY '20. We have experienced solid trading through January and into February and 2H comparable store sales growth is 5.7%. As of 9 February, year-to-date comparable store sales growth has risen to 2%. From an inventory position, we have brought forward January orders to mitigate the impacts of an early Chinese New Year. We're in contact with our suppliers to monitor any potential impact from the coronavirus, and we continue to keep a close eye on developments in this space. We expect pro forma NPAT for FY '20 to be in the range of $20 million to $22 million, unchanged from our earlier guidance. Pro forma EBITDA, as measured under the old lease accounting standard, also remains unchanged and is expected to be in the range of $34 million to $37 million. The guidance assumes comparable store sales growth to be low to mid-single digits for the year and for gross margin to reach 37%. Guidance also assumes of the opening of a further store at Westfield Knox in the second half. This also assumes no impact arising from the coronavirus. A final note of thanks to all our team members who have contributed to the delivery of the positive results and to all members of the Baby Bunting family who assist our customers' needs during the year. It's through the hard work of the team and each individual's passion that sees us moving towards our vision of being the most loved baby retailer for every family everywhere. Thank you all very much for your time today. I'll now open the line for questions.

[Operator Instructions] Our first question comes from the line of Callum Sinclair from Macquarie.

Just in terms of the website issues, what exactly was the issue? And has the vendor made commitments to fix this going forward? Because I think website visits were actually up, but it's offset by lower conversion rates. So just trying to understand what that particular issue was.

Thanks, Callum. This is Matt. Yes, the issues we experienced were technical in nature and also at the, I guess, the customer experience at the checkout process on the website, and we had some issues around how the promotions were working. And what we saw is that it was becoming evident that we couldn't actually fix some of these technical issues in a live customer environment. So we are absolutely working alongside our vendors at the moment to identify those issues and remediate them -- and remediate those issues. And one of the things we have really done is sort of, in the background, have upgraded to the later version of the software. We've been spending significant time with them sort of identifying what those issues are and then working alongside each other, sort of trying to establish what the pathway forward might be. We then need to look at when we can relaunch this website. Once we've actually rectified all the issues that need remediation, we then need to find the appropriate period in our trading window so we're not affecting any promotional issue windows, et cetera, going forward.

Okay. Great. And just in terms of the new store strategy, I think there's an increase in the number of shopping center stores that you're opening. Is this due to the learnings in Chadstone? Or has there been a change in the assessment of the market structure or opportunity there?

Callum, it's Darin here. I think that what we're seeing is we can definitely operate in a shopping center environment. So we're very comfortable with that. And what we see is we're actually getting the benefit of the foot traffic that flows through those stores and flows through those centers. And so we're increasing our penetration of soft goods sales. That, overall, potentially sort of uplifts the average sales performance that we might see relative to a large-format center historically. Having said that, we still need to be absolutely sort of focused on the store economics. And what we see is we -- when we go into a catchment now, we look at the shopping center opportunities side-by-side with the large-format center opportunities. And we should also note that in the first half of this financial year, we did open 2 large-format stores in Wetherill Park and Casula in Sydney because that was the right place to go into.

Yes. Okay. And I think looking at the comp store growth by state, obviously, the states where you didn't open up a shopping center was because of that 5% mark. I guess, when you look forward for these shopping centers, is the higher sales that you see in year 1, year 2 coming through basically offsetting the cannibalization that you see from some stores in and around that catchment?

Absolutely. So we go into each new store with a sort of clear view on what we think cannibalization will be. And so we factor that into our capital feasibility before we open a store. I will note, in terms of that average revenue that we saw for those stores have annualized, Chadstone was one. But the other 2 that we also performed exceptionally well was with Bankstown and Chatswood in their first 12 months and they're again, they're large-format centers.

Great. I want to just ask one final one. Just around the investment in systems and the new DC, is that primarily designed for sort of better cost efficiency or just to allow you to scale as you roll out new stores towards your target?

Systems will deliver cost efficiencies, and the DC will support gross margin growth. We will be bringing more product through our DC and then sort of moving that out into our store network. But it is also a very cost-effective way of sort of setting ourselves up for that future store rollout as well.

Yes. I think also, currently, we run a number of 3PLs in Victoria, that is an inefficient way to run the supply chain. So what we are able to do is eliminate those 3PLs because you can imagine the storage and handling costs, but also transport costs back to our distribution center before then we dispatch it out to our stores. So by centralizing it onto 1 larger DC, we're able to only touch the product once, which is important, and it's also going to serve our Private Label and Exclusive Product expansion, which is important. The other interesting thing is it's also allowing us to reevaluate the actual storage and pick parts within the DC so we get better efficiency and better use of material handling equipment in the design of our new distribution center, which also has efficiency.

Our next question comes from the line of Sam Teeger from Citi.

Just keen to discuss coronavirus implications in a bit more detail. Maybe talk about what proportion of the products you sell come from China? What are your suppliers telling you about how much stock that's sitting on in Australia right now? What capacity of the Chinese factory is running at as they slowly come back online? And assuming you can't get stock out of China, when do you start to run out of stock this half?

Sam, it's Matt here. It's a good question. Look, coronavirus, or COVID-19 as it's now being referred to, obviously, is top of mind for everybody. We're working with our suppliers and actively monitoring the situation. We are in, at this moment in time, in a solid stock position, as that we did actually buy because we knew there was going to be the Chinese New Year period and the associated effects of that manufacturing shutdown. So we are talking to our suppliers at the moment because the majority of stock is actually manufactured over in China. As you know, we do deal with a lot of local suppliers. And therefore, that stock -- there is a lot of stock here already in Australia. We've got some really exciting new product launches that are coming in the next half. And we understand that, that new product is already in Australia, and it's really been landed. And I think, well, like everybody at the moment, it is a case-by-case conversation with each of our major suppliers as to what's happening in their particular circumstance, as in what have they got in terms of finished goods that are ready to be shipped, what the thoughts are of the manufacturer, what is happening from their own internal supply chains. So there's no one set of answer, but certainly, I'd want to give you a comfort level we are in constant contact.

I was going to say based on of the constant contact you're having with suppliers, assuming status quo remains the same, what month do you see or do you think you start to run out of stock?

Just -- Sam, that's a very difficult question to answer, and I just can't answer that question. The issue that I would like to highlight though is in our business, unlike many, many businesses, we do have the facility to take away by -- prioritize stock flows, et cetera. So we can manage that. And we do -- because remember, the buying cycle for parents is one that's known over quite an elongated period. And yes, labor for us is really 20% of sales. So we can actually work through that process as well.

Makes sense. And then the 5.7% like-for-like sales for the first 6 weeks of this half, is that adjusted for cannibalization?

No. That's top line comp. If you adjusted for cannibalization, you're looking at a 7.4%.

Got it. 7.4%. And then final question. Yes, just keen to explore the building block behind your guidance in a bit more detail. So based on your first half sales performance, from calculating, you need around 20% second half sales growth hit consensus forecast, which is a bit of a step change from the 4% you did in the first half. So should we be taking the reiteration of your guidance to mean it's going to be more about margin expansion from the work you're doing around supply chain, Private Label and all that as opposed to top line growth?

Look, we -- look, if we decide we've got a good gross margin base to work off, and if we deliver between 4% and 6%, guidance assumes between 4% and 6% in the second half comp growth. And in the bottom end, holding gross margin in the first half at the top end, we further gross margin improvement. So I think the other thing to think about is that the cost investment in the first half will moderate. And also looking at our retail expenses, that -- we'll actually see leverage in our retail expense line. We're hoping to see it in the first half, but unfortunately, yes, the thing that really held back our sales in the first half was online. And so that's obviously stabilized since November.

Yes. Okay. And then last question, for what quantum of transformation expenses should we be expecting in the second half, just thinking about cash flow?

Yes. Second half, in terms of cash flow, it will be probably about another $1 million, maybe a little bit more than that. Not seeing any more. Potentially the write-off of branding, so the noncash expense, that will potentially be up to $2.7 million in the second half. From a cash flow perspective of CapEx, we'll be investing around $4.5 million in branding. And so excluding new stores, we anticipate potentially investing upwards of $8 million in the second half of this financial year, plus 1, maybe 2 new stores.