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Reckon it’s worth a recap on the CFO’s comments below
In affect Covid for all the reasons explained by the BoD slashed 6.4% off the EBITDA and Boo are focused on capturing deflation, think we will all be disappointed if they don’t improve after the statement below
Just on our forecast - for a bit of fun
Hex suggests 3.5% to 4% , FCF negative £50M +
T4G. 4.1% positive £3M
Oke 1.9% increase to 5.5% FCF Neutral to negative £10M
One more trading day until we find out
Have a good weekend all, logging off
‘Question
Adam Cochrane (Analysts)
And so to get to that number, you're saying it could be some gross margin increase, but it could not be. It could be some OpEx increase as a percentage of sales. Is it sales really the driver here of that margin recovery?
Answer
Shaun McCabe (Executives)
No. The key driver -- so sales volume obviously helps. I'll take it. But the key driver is the capturing of the deflation because that was a -- if you look at the -- if you think about the bridge that took us from FY '21, shaving the 10% EBITDA margin to 3.6% EBITDA margin for FY '23. If you look at that bridge, the biggest component of that bridge was a gross margin headwind as we saw those cost prices go up. What we could have done is we could have taken those cost price increases that we got and we could have pushed them all through to retail prices, and we didn't want to do that, right? We wanted to stay as competitive as we could on retail prices. And so we took that haircut on margin as a result’
Smeg must be happy with Debenhams?
https://www.instagram.com/reel/CxxManzI6r1/?igshid=MTc4MmM1YmI2Ng==
In effect the 6.4% difference in margin from 21 to 23 is due to Boo taking on board the inflation and not passing it on ?
But now the head winds become tail winds how much of that 6.4% do they capture if anything ?
We find out Tuesday
Question
Adam Cochrane (Analysts)
And so to get to that number, you're saying it could be some gross margin increase, but it could not be. It could be some OpEx increase as a percentage of sales. Is it sales really the driver here of that margin recovery?
Answer
Shaun McCabe (Executives)
No. The key driver -- so sales volume obviously helps. I'll take it. But the key driver is the capturing of the deflation because that was a -- if you look at the -- if you think about the bridge that took us from FY '21, shaving the 10% EBITDA margin to 3.6% EBITDA margin for FY '23. If you look at that bridge, the biggest component of that bridge was a gross margin headwind as we saw those cost prices go up. What we could have done is we could have taken those cost price increases that we got and we could have pushed them all through to retail prices, and we didn't want to do that, right? We wanted to stay as competitive as we could on retail prices. And so we took that haircut on margin as a result.
And also, there was investment in making sure we came out with clean inventory, and so we were marking down product to come out clean. I think it's important that we're in a position that once demand starts to turn, and it will, that we are able to pivot straight back to growth. And so it's that agility, I think, is important.
And so it's a particular focus for us to make sure that our inventory position is clean, that we're able to bring product in. Our lead times are shorter. We're able to bring product in faster. We're able to repeat the winners, all of those things that make our model a great model that we're able to operate those effectively as we segue into this financial year into the second half, in particular.
You get the gist the of the conversation as they run through the USA Q& A, I guess we can say it’s not an exact science
We know Boo has £400M revenue last year in the USA so they are not going in completely cold and it looks like they will ship some stock direct to USA and by pass Sheffield and other items service from Sheffield whilst they bed in ?
Question
Nicolas Katsapas (Analysts)
So the question was on the neutral impact that you spoke to in the medium term for the U.S. distribution, but how does that work between gross margin and fulfillment?
Answer
Shaun McCabe (Executives)
So yes, there's some puts and takes, of course. So as we move into the U.S., what we'll definitely expect to see straight out of the gate is inefficiency. I mean, we've got a big shed and we're going to start with one brand and maybe we'll get the second brand up and running pre-peak, but it's a lot of capacity for one brand, and we're not at scale. So the cost per unit is going to be a drag for this year until we get to scale and get the rest of those brands launched.
There's going to be a higher import duty and a higher inbound cost of freight as well, moving product indirectly into the U.S. but offset against that is the benefit that we get to outbound shipping. So instead of shipping from Sheffield to the U.S., as John spoke about earlier, we'll be shipping from Pennsylvania to the U.S..
And so we get the -- so on a cost basis, as we scale, we expect the costs overall to be broadly neutral. But of course, the win here is that we get the opportunity for local fulfillment in a much better proposition. And John spoke to 95% of U.S. households within 3 days, it just gives us the opportunity to compete in the U.S..
And we talked about how, for us, this isn't really optional. If we are serious about growing our business in the U.S., and we absolutely are, then we have to have a local fulfillment and local proposition. And this is the step. And so I'd rather make that step and then work to optimize the cost base and optimize the speed and the delivery times and all of those things and just get out the gate and get going with that.
Question
Simon Bowler (Analysts)
It's Simon Bowler from Numis. I've got a couple. I'll go one at a time in terms of theme. First around the U.S., how long a period of time do you expect to be doing split shipping in the U.S.? And whilst you're doing split shipping, I assume you're not going to be able to present kind of next day through to consumer, given some of the items may be coming from the U.K.. So how do you plan to kind of communicate that through the consumer out to the point of basket or before?
Answer
John Lyttle (Executives)
So the consumer when they come on to PrettyLittleThing, do their order, they'll be -- it will be very clear in terms of what's going to be within 3 days and then what's going to come from the U.K. that will be 8 to 10 days. So that will be a very clear message in terms of -- as part of that process.
In terms of split shipping, look, clearly, we want it as short as possible. You don't really want to be running it very long. So it's a temporary while we get up and running. But the shortest period we can make that effective, the better for us. So the teams will be working. It's good because the consumer can get their full order, but equally, it could be a little bit frustrating because something may take 8 to 10 days and something takes 3 days. So it's a temporary is what I would say, in the initial stages. And we'd like it to be weeks and to months rather than any longer than that.
Question
Simon Irwin (Analysts)
It's Simon William from Credit Suisse. Three questions for you. Following up on your guidance for next year, can you just tell us how much exceptional cost then there is going to be next year, either or both P&L and on a cash flow basis, it's clearly going to be quite a large number that you're going to be declaring to be exceptional.
Shaun McCabe (Executives)
So I would say expect mid-20s order of magnitude on exceptionals. It will almost all be to do with the U.S. distribution center launch. And it is things like the building of the team prelaunch. It is the split shipping cost, which is probably the largest single cost. And if you think about that, what we're trying to do there is we'll put as much inventory as makes sense into the U.S. for launch.
And so that will be all of the continuity lines, all of the best sellers, all the new stuff from a moment in time. So we'll split our inbound and newness will go into the U.S. and also into Sheffield.
But what we won't do is we won't move end-of-range products, products in markdown into the U.S.. So there will be a period of time where we service a proportion of U.S. demand from both Pennsylvania and from Sheffield. And so we'll create those split shipments, and it will be for a period of time. And so that creates some exceptional launch costs.
Just on FCF
Assume the 5.5% - you can work back if you don’t think Boo can squeeze £15M out of costs as per post below
£41M EBITDA
Less £50M capex - loaded more for H1
£10M finance / legals Rev B
£13M exceptionals USA ? Could be higher
£73M above, FCF shortfall of £32M
Add back working cap savings? Too long a calculation to show on here but with a straight line reduction in sales of 15% and swop air freight for shipping and test / repeat there will be reduction here, will it be £30M for H1 ?It was £100M for full Year, gut feel they may not be that far away from FCF neutral
Anyone else got an EBITDA forecast for next week?
We can look back and see who is the closest?
Gives the Bears a chance to show their calcs
Anyone doesn’t like £numbers look away
For what its worth, my shout, lot of guess work btw I could be well out but I’ve added my reasoning
Revenue £750M - taking their forecast reduction and one eye on ASOS numbers this week showing same but Jefferies being bullish on Debenhams revenue, I’ve discounted this to zero, gone for a straight line from last year / guidance
EBITDA. 5.5% is my call, appreciate it’s a tricky one because Boo guided to 4.5% for full year, however since May we know they slashed in transit suppliers invoices quite aggressively from 10% to 35%
if we take the low end that’s £37M off COGS on a straight line basis and Boo keep some of this ? No idea how much they retain ?It won’t be all of it
Marketing at 10.8% cost of sales, pure punt but it looks they trimmed marketing for H1, have they spent £75M?
Am not sure they have, we could see £15M saving as a guess here, marketing was definitely curtailed H1 and then Sept 1st it kicked in
Distribution, after COGS it’s a big variable percentage, can they nick something here ? Looks doable with containers down 90% but will they pass on and spend the saving on air fright and test / repeat ? This of course has a positive affect on working cap as they don’t need to carry as much stock plus they can adjust manufacturing sizing issues in almost real time and reduce returns which is included in distribution costs ? I’ve put nothing in for this one as we have no idea at all and they may well surprise us to some margin saving, let’s see next week
Administrations/ people / other , has a couple of percent to get back to Pre Covid levels, maybe £7.5M (1%) due to identifying with analysts there will be savings
They said on the analyst call the £50M people / others savings
mentioned in the RNS would run into this year
So if we work on 3.5% EBITDA from last year and add back Can they generate £15M total from the categories above ?Make your own call
I think there is enough bunce to get there, tried to be prudent happy to be challenged / corrected
Nb non of us little guys move the share price, gives the Bears a chance to put some numbers down as well, interested to see the counter argument
Hi Doug
Yeah Debenhams adding multiple brands weekly.
It appears that Debenhams Middle East secures the parent brand and then sub brands of the parent get added over time, once bedded in Debenhams UK them access the brand and so it goes on
As we know our franchise partner Alshaya Group is a big hitter in MENA region with 60,000 staff, Next have 40,000 as an example, they work with over 2000 brands, since Boo took Debenhams in 2021 they have grown from 9 stores to 23 encompassing 1.25M sq/ft, it’s impressive
Tbh I only picked up on this via buying Brokers reports who have had access to the Bod, Debenhams is going to surprise the market to the upside I think , plus the wholesale contracts which are mentioned but no access to numbers on that one.
We should get a bit more info next week hopefully
Debenhams don’t handle the goods, they come via the supplier, I guess when brands place their products on Debenhams ( marketplace ) there must be teething problems at time ?
They must make it work in the end -for all parties - as Brands are adding more products weekly from their stable
Disney store
https://www.instagram.com/p/Cxp7N6Bte-o/?igshid=MTc4MmM1YmI2Ng==
This one ….
Next on the Debenham market place
https://www.instagram.com/p/Cxp7N_dNZXQ/?igshid=MTc4MmM1YmI2Ng==