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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Ted Baker Q2 Analyst Call. At this time, I would like to turn the conference over to Rachel Osborne. Please go ahead.
Thank you. Good morning, everyone. Thank you for joining us today for our Q2 trading update call. I'm joined on the call this morning by David Wolffe and Phil Clark. I assume you have all read the RNS this morning, so don't intend on repeating all the information, but I did want to highlight several key points before opening up to Q&A. We're on track with our transformation plan, albeit the pace of recovery is at different speeds across our business. Sales for the quarter are in line with expectations. In the areas with the least COVID impact, we're seeing many signs of recovery. Physical retail has been positive and seen positive trends in North American concessions and shopping mall locations in both North America and U.K. Our occasionwear business has recovered well in North America, where consumers have been more confident in going out. Our Autumn/Winter '21 collections are being well received by customers. And our brand remains healthy. We are particularly proud that has been recently recognized as the second most popular luxury brand in the U.K. by YouGov. However, our numbers are clearly affected by prior year comps and the ongoing impact of COVID. Some of these are being amplified by hard but commercial strategic decisions that we're making as a business. We're making sure our global distribution is right for our brand. On eCommerce, our number is soft against last year because of our trading stance last year ahead of our recapitalization. We are seeing growth on a 2-year basis of 17%. Product mix is still negatively affecting AOV, however, as going-out product has yet to fully recover. We are confident that it will, and our trading margins improved 500 bps with better full price sales as we begin to reestablish our premium lifestyle positioning. Within our own retail channel, store performance is encouraging across our regional locations and more shopping mall-based stores, particularly in the U.S., although it continues to be negatively affected by footfall remaining materially down in metro city centers and travel retail locations, which historically have been strong areas for Ted. But we're opening new stores in new locations to test this changing domestic footfall and are shifting more and more of our store estate to variable rents. Our wholesale partners are continuing to see pressures, but some are no longer appropriate for our brand positioning. We have several important product licenses under transition. Early signs are encouraging, with Next and Baird off to encouraging starts, and core categories such as eyewear are seeing year-on-year growth on a 1- and 2-year basis. Our retail exit rate for the last 4 weeks of the period was better than the quarter. And whilst it's still early days, I'm encouraged by the positive reaction we've received to our Autumn/Winter '21 collections from our customers. So now we're happy to take questions.
[Operator Instructions] We'll take the first question from Alex Estefanous from Singer Capital Markets.
A handful for me, if that's okay? I'll try to keep them short and sweet, so we can get them out the way. Could you give me some -- or could you provide some color as to why there are delays with the website replatforming and any sort of moving parts around that?
Yes. Sorry, Alex, do you want to ask all your questions in one, and then I'll deal with those -- or how do you want to do? I can answer these questions as we go.
Happy to give them all at once so we can pick it up from there. So the first one is that website. The second one is around freight and supply chain. What sort of pressures are you seeing? Are you -- I know that you're sort of -- your factory base is sort of spread across Asia and Europe. And -- so yes, having some color around that provides a great help in sort of the inflationary pressures around that. You mentioned that there's a correlation between confidence and occasionwear sales in North America. Are you also seeing that in the U.K., although you mentioned a return to the office is quite slow and the lack of tourism, but do you see that relationship holding in the U.K.? The rents, is there an update on rent? Could we have a look at sort of -- with a bit more depth on rents? And sort of the net debt position, I know you provided the net liquidity. But yes, it would be nice to have a net debt position to sort of communicate.
Okay. A long one. Right, let's go, Alex. Okay. So on our replatforming, we are taking the agile approach, which means you work in sprint. So you discover as you build. We're very pleased with where we are at the moment in terms of the build, but we did earlier discover more technical complexity that have taken longer to build for. That means what -- because we have a hard cut off over the critical peak trading period, we need sufficient time to do full stability testing and business readiness testing before we go live. We have had that period of time [ concentrated ]. And therefore, we are saying we will not have completed the full stability testing in time, and therefore, it would be unwise for us to go live over peak. Therefore, we will go early 2022 with the switch to the new platform.
Okay.
Freight and supply chain. David, do you want to cover some of those? And I think factory base, you also asked about in there, Alex?
Yes.
Yes. So we talked about at the prelims issue to the year around Brexit and supply chain. And like many of our brands with a similar kind of footprint, we are seeing continuing challenges in both the level of cost in air and sea freights. It's well publicized how those prices have gone up and the reduced reliability on lead times. We've now geared up to managing in this more challenging environment. We've not seen a significant impact on availability of product in store. So we're succeeding in making sure the product is landing when it needs to land in this new environment. There is likely to be continuing pressure on costs for the balance of the year, which we're managing in the margin mix. We signaled the impact of Brexit and supply chain and the margin mix issues are improving. So it does represent a continuing challenge, but we are now getting ahead of the curve, and operation of the impact will be limited in the year.
Can you pick up rent?
On rent, yes. We laid out some clear operational targets to continue the property cost reduction program for the year. We laid out specific KPI of reducing base rents of at least 15% in the year and delivering where renegotiations are taking place at least a 50% reduction over the lease life. And in terms of both of those targets, we are on track for the year, and we've made good progress.
So I pick up, Alex, with your occasionwear and North America, and what are we seeing in the U.K. We are seeing an improvement week on week in footfall. We are seeing an uplift in our dresses mix, knitwear, and outerwear. So we're pleased with that. We were just saying that we can see, in North America, where the stores have been open for quite a long time, for a period, the footfall was very low. We saw it pick up more early in North America as that confidence to go out and shop and to socialize was increasing at a slightly faster pace. But we are seeing it in the U.K. EU, a bit more mixed just because again, the vaccination pace is a bit more mixed in the EU. And we mustn't forget that there are areas of the world, for example, parts of Southeast Asia, where actually there are still COVID cases that are rising, and therefore, it's more difficult for some of our franchise partners. The lack of tourism, as you referred to, is very much across mostly the U.K. because that's -- obviously, we're a London-based brand of origin. But some in the EU, and in the U.S., again, the tourism there, domestic and international, is down. I think PVH talked about that last week, actually, specifically in the U.S. for them. So [Audio Gap] maybe you want to return to going out and socializing. I think it is as we talked a little bit about [Audio Gap] you intend to mitigate them? So you brushed upon sort of the backdrop and what the situation is that you said that the margin won't be impacted too much. What mitigating factors are you taking? Margin remains stable going -- or at least expanding going forwards?
Okay. Let me just start with the margin point and then I'll come to the net debt summary. At the time of prelims and at the interims, we laid out in quite a lot of detail all of the various influences in our gross margin outlook and how, especially over the next 18 months, these instruments are going to move in different directions. We signaled that for this year, the balance of these factors was going to be on -- in overall terms, about an equilibrium, with an improving trend towards the back end of the year and with expectations of net margin improvement into FY '23. So that's the broad shape of it, which is why I say within the balance, I think, the upward pressure on supply chain costs will fall within that overall balance for the year. And what we're seeing is better progress on promotional levels and product mix. You've seen the 500 basis points that we reported in retail in Q2. We clearly have adverse pressures that we call back in Brexit and supply chain. And obviously, those have extended probably slightly longer than we would have hoped because of supply chain disruption. We've got some territory mix issues that, at the moment, are an upside. North America, as we highlighted, in the evolution of the pandemic, seems to be leading the pack, leading the way in uptake in occasionwear as people still not confident going out and leading the way in footfall recovery, especially in malls and concession. So we've got some upside in territory mix and some downside in channel mix, as the wholesale channel is recovering relatively stronger as a percentage of sales from where it was. So within that whole basket of issues, I think where we said we'd be on prelims, which is why I say we can mitigate any prices from supply chain. On net debt, we reported GBP 15.8 million net debt, GBP 105 million...
Net cash.
Sorry, net cash, and GBP 105 million of liquidity at the half year. That is exactly where we wanted it to be. Our stock is clean and balanced with sales because sales are in line with expectations. And therefore, we're feeling confident that the commitment we made to being net cash positive, debt-free, by the end of FY '23 is absolutely where we're going to end up. So I think we're on the right -- absolutely on the right part on net debt.
Apologies for the myriad of questions. I appreciate it.
We will take our next question from Eleonora Dani from Shore Capital.
Two questions from me, please. The first, what do you think is working particularly well with the new product pyramid structure? And secondly, what are the features of the website that you are mostly looking forward to when it goes live in 2022?
Sorry, Eleonora, we are holding in on the mobile because we had a malfunction on one our conferences. What was the first question? I think...
What was the [ working with your ] pyramid.
Okay. Yes. Okay. I'll take the first one, and then we can do the second one. So what we've seen on womenswear, we're particularly pleased, but of course, it's early days with Anthony new ranges, which started in August. August is a bit of a transition month as we move into September and beyond. However, very early, we're very pleased. Historically, Ted has had 80% of its range in core, which is more based on historical bestsellers and moving them forward slightly for the season. With the introduction of the pyramid, we wanted to put more emphasis in the range on trend, which is around more fashion and more newness as we move forward, whilst also being taking care to refresh the core and also move that forward. We are very pleased in womenswear to see that the 80% core have moved to 53%, with trend already taking up 46% of the sales. So very pleased there to see our customers want newness and they want more fashion from us. What's gone well? Dresses and tops and knits all outperforming their stock position. On menswear, interestingly, we've never had a continuity range of any scale within Ted and the part of the pyramid. The core also within it have continuity. That's important because it's all-year-round, never out of stock, and never on sale. That has moved quite quickly to be 40% of our mix in the new ranges from what was only about 5% to 10% before. So we're seeing a nice mix in menswear at 40% on continuity, 35% core, and 25% on trend, which is an uptick versus where it used to be. So we're pleased to see that our customers are receptive to the newness and move on with some of the ranges in the pyramid at the higher levels of fashion and newness and innovation.
Eleonora, can you just repeat your second question? I think we didn't catch that one.
Sure. Just when the new website goes live in 2022, what are the features that you're mostly looking forward to?
Okay. Yes. So it will be the start of a journey to build a fully immersive customer experience on our website. The technology will be there to support that as we move forward. So at the very start, there will be not a huge amount that the customer will see, other than we're moving to a mobile-first website. So you will see initially much faster web pages and a much more frictionless experience in mobile as we go forward. However, then the look and feel and the evolution of the fully immersion takes time to build. So that journey will start from when the platform goes live over the next coming months. But with this new platform, we can change every 2 to 4 weeks versus the current platform, which is much more clunky and expensive, and slow to change. So therefore, we can be responsive as well in a way that we haven't been able to, up until that point.
We will now take the next question from Caroline Gulliver from Stifel.
Just a couple of questions from me to follow up, I think, on some of Alex's questions. In terms of those moving those stores to variable rents, can you tell us at what stage you are in that journey? And what percentage of stores are now on variable rents just sort of an update there?
I'm terribly sorry, Caroline. Could you speak up a little bit? Our volume is somewhat challenged this time.
Hang on. Can you hear me better now? I'll say that again.
Slightly. Yes, go ahead.
Hang on. I'll take it off. Is that any better?
That's much better.
Okay. Sorry, apologies. My first question was just in regard to where you are in the journey to moving stores towards variable rents and what percentage you're at, at the moment. Just a bit of an update there. And my second question was just in terms of eCommerce sales. Obviously, being up on a 2-year basis, but down on a year-on-year basis. I'm just understanding what measures you're taking to reengage customers that might have participated last year but not this year. And trying to understand a little bit about whether they were attracted by the promotions or whether you think they may have moved back to store?
Yes. Good question. David, do you want to take the rent question first?
Yes. I think, firstly, it's important to recognize that our business is already significantly variable in rent terms. Around 70% of our store locations are concessions, which are based on a variable rent model. What we're seeing is that within the stores that are still on a base rent model, as those leases come up for renewal, we're increasingly moving them onto a variable rent basis. So for example, the new short-term lease stores that we're talking about in the U.K., those are on a fully variable basis. And we'd expect that progression to continue over time.
And then on the eCom sales. So last year because of the start of the pandemic, everybody in the market was very, very promotional, and ahead of our recapitalization, we were very promotional to drive full cash over that period of time. On an LY 1 basis, however, I'm very pleased with the performance on our transactions. So we have a strong level of transactions on a 2-year basis. However, our average order value is still negatively impacted on a 2-year basis by the fact that the occasionwear recovery is not yet fully back, plus the market is still more promotional now than it was 2 years ago. So actually, our transaction level is somewhat substantially above the sales, therefore, and I'm very pleased with that on a 2-year basis. In terms of reengagement, of course, with a high level of promotion, you do get a lot of people who are interested in buying Ted on promotion. However, what we're doing to reengage with those customers is improving our product offer, which we've talked about, again, against that pyramid, but also offering more relevance and more versatility, filling in some gaps in the range so that we have a greater assortment that will be more relevant to customers when they come back. And also, in the second half, we are stepping up our marketing. We've actually held back in half 1 this year on marketing because really, we didn't want to stimulate the customers until we have the new product ranges from Anthony in to a greater extent. So we phased our powder for the second half on the marketing, reengage, move forward with a new product and, fingers cross, people coming back to work and going out more. The summer has been a little bit still covered with a few restrictions here and there, and we're looking forward to some of that settling down as we move forward.
We will now take the next question from Tony Shiret from Panmure Gordon.
Just a couple. Rach, you mentioned on the way through about a potentially some wholesale customers not really fitting in with the sort of image that Ted is trying to project. I was just wondering if you could give us a bit more color on that?And secondly, the comments you've made about the sort of various take-up of continuity and trends. Could you give some commentary whether that has been more accentuated in the wholesale business? I know it's early days but I mean in terms of the sort of lead indicators, are you more encouraged by the wholesale business than the retail business at the moment in terms of who's buying what?
Okay. In terms of wholesale partners, I think there's been a lot of change for everybody over the past 18 months. And as we go on our journey to reestablish ourselves in that premium lifestyle place, we are always talking to our wholesale partners about -- especially the larger ones, around their customer focus and how that overlaps with ours. So what -- I'm not going to call out any one in particular. That's just an ongoing review. And as we go forward, we want to make sure that we are establishing that premium positioning. We've had a long, long time of becoming increasingly promotional over the last 5 years, and to turn the corner and move back, you have to make some decisions about where you don't want to be sold as well as where you do want to be sold. So it's an ongoing journey. On continuity and trends, some of our wholesale partners absolutely love the new introduction of continuity. That's the sort of level where -- that's where many of our competitors have strengths, and we haven't necessarily been playing in that space. And so we've seen a strong uptake of continuity but actually also, especially in womenswear, which has kind of tend to be more quick adapters of newness as a customer type. We've seen delight with our wholesale partners on some of the womenswear in that trend part of the pyramid that we talked about a bit earlier.
[Operator Instructions] We'll now take the next question from John Stevenson from Peel Hunt.
A similar sort of question really just looking at the wholesale positioning. I don't know if you can provide -- I know you don't give out the wholesale order book in itself, but if you can give a sort of sense of context of the Spring/Summer wholesale book in terms of, I don't know, the momentum of recovery and also how the next phase of the collections sort of might land as we look to next year and sort of the, I suppose, the runway to get back to previous levels of wholesale sales over the next 18 months or so?
Yes. So yes, we don't give out sensitive information about any of our partners. We are pleased with the response to the new ranges. We don't give our order book. But I think what we have seen is some level of opening up of an open to buy in some of the big wholesale partners where they're being more cautious because many of them have been burned, not with us, but just with COVID. So we're seeing some caution on the OTB, but we fully expect that to be fulfilled through repeats as we go through. So we're really pleased with the response, especially on continuity in men's, as I said, which was a big gap for us. And on that trend, and versatility extension in womenswear, and we look forward to being able to post some strong sales as we go forward with them.
Okay. Brilliant. And just as a follow-up. I missed the start of the call, actually, so apologies if this has been dealt with already. But just in terms of sort of the normalization, if you like, of trading in terms of what consumers are buying at the moment, focused, particularly, I guess, on the exit rate. I mean, as a -- and very difficult to put numbers on it, but in terms of what people are buying, how normal would you say that the sort of current mix is and how normal is the current returns rate as a consequence of that?
I'd say it's not normal. We haven't seen a full listing of restrictions. Of course, we're not just in the U.K. We're in North America. We're across the globe. And it is very -- Europe is much more mixed in terms of recovery. So I'd characterize it as not normal at this stage. There is, however, the greenshoots around dresses coming back up as part of the mix. The going out, the knitwear, we would expect going forward to see some recovery in that as more life is actually outdoors than indoors than it was 12 months ago and indeed, 18 months ago or 2 years. So the normalization of trading is difficult to call when we haven't got the footfall back in how we used to have it and what the new normal is. But our belief is that occasionwear will definitely come back, but also it's the versatility, customers wanting to get more wear out of their clothes. So not just having it in the wardrobe and wearing it once. And that, again, is what Anthony is looking at these ranges, making sure that we can dress up, dress down, wear in the day and wear through to evening. So it is not just a one-off purchase, but actually have more value in it. And that's one of the things that we're looking forward. And I think that we'll see more of that where customers can actually use their clothing in different ways, becoming more of the norm as we move forward.
There are no further questions in the queue. [Operator Instructions] As there are no further questions in the queue, I will hand the call back over to your host for any additional or closing remarks.
Thank you for joining us this morning. I just want to say, have a great day, and speak to you soon. Bye.