Kathmandu : ADDRESS: KMD: KMD 1H FY15 results conference call transcript

KMD 26/03/2015 10:33 ADDRESS NOT PRICE SENSITIVE REL: 1033 HRS Kathmandu Holdings Limited ADDRESS: KMD: KMD 1H FY15 results conference call transcript Time & Date of Recording: 24 March 2015 08:30 AEDT Subject/Title: Kathmandu Half Year Results Analyst Call Length of Conference (minutes): 40 Company Name: Kathmandu Ltd Moderator Name/Client ID: Mark Todd / 1216220 Other notes: Start of Transcript Operator: This is PGi. Please stand by, we're about to begin. Good day everyone and welcome to the Kathmandu half year result analyst call. Today's call is being recorded. At this time for opening remarks I'd like to turn the conference over to your moderator today, Mr Mark Todd, please go ahead. Mark Todd: Thank you very much. Good morning everyone. Welcome to our investor call. As introduced, I'm Mark Todd, Kathmandu's Acting CEO. I've got with me Reuben Casey, our Chief Financial Officer, and we'll be discussing the results of the six months ended 31 January 2015. We've already released the results on the NZX and ASX and hopefully most of you have the call content - the result presentation with you that we'll be talking through. As always, the results are reported in New Zealand dollars, the Group reporting currency. The presentation will be 20 to 30 minutes long and then we'll have time for questions, we'll aim to finish the call around quarter past 11 New Zealand time or quarter past nine Australian time. Reuben will be presenting a number of the slides as well. He'll take up the presentation when it's his turn to cover, but I'll start by overviewing the results and giving you the detail on some of the key line items. The numbers that are on the results overview slide are pretty much in line with the briefing we gave to the market in early February about our expected result for the year. An EBITDA result unfortunately for the year $6.8 million compared to $22.6 million last year, a small EBIT earnings of $0.6 million and a loss after tax of $1.8 million. In other points to note in relation that, it was a very disappointing trading period for us in December and January which was weaker than the previous year and overall our first half gross margin was impacted by the result of the weighting of clearance sales that were undertaken in the first quarter of the year to clear excess stock. It's pleasing to see we've got reduced inventory levels come the end of the year and that has helped us improve operating cash flow in the half. Sales overall grew at 9.3% at constant exchange rates and same store sales growth all achieved in the first quarter was up 2.7%. As previously mentioned, gross margin for the year was down 4.6 percentage points to 59.3%. Overall operating costs for the half were in line with our forecast that we planned for at the start of the year, but as a percentage of sales, they increased to 55.5% for the half which was primarily due to the sales results specifically being below expectation. I'll pass you to Reuben to talk you through the overview in a bit more detail. Reuben Casey: Okay thanks Mark. So our EBITDA result of $6.8 million was within our guidance as Mark said and there's no significant exchange rate impact year-on-year versus last year and it does include a $1.6 million incremental UK growth investment that we signalled at the end of FY14. If we move through to sales. So you can see that sales growth is positive for the first half, but it was weighted to quarter one and online sales continue to grow strongly, 33% up year-on-year which now comprises 5.8% of total sales. When you look at same store sales growth, it was reasonable in New Zealand but again, it was weighted towards quarter one with our clearance campaign that happened in August and September. You can see in Australia it's well below expectations. As per our December trading update, we did have negative same store sales comps through December and January. I'll pass to Mark to talk about gross margin. Mark Todd: Clearly gross margin for the first half was disappointing overall. We've called out on the slide presentation the four major reasons why gross margins overall reduced by over 4.5 percentage points and they are pretty much listed in order of priority. Clearance units sold in the first half were up 30% year-on-year as we dealt with excess stock in the business carried over from FY14. We didn't find it very easy to sell through to targets our products - our key summer product categories such as active wear t-shirts, travel shirts and lightweight fleece through Christmas period. Those sales results in those product groups were disappointing and they're generally amongst our higher margin groups. We found product substitution to lower price points within our range has been a common behaviour from consumers. Kathmandu generally offers a good, better, best ranging in its product and certainly where that's been the case, customers are gravitating, especially in Australia, towards the good end as opposed to the best end. That impact as well as having to maintain consistent key price points on some of our hero items, another reason why there was some pressure on gross margin. Finally, the weakening of the US dollar against the Australian dollar in particular had some impact on overall margin. Certainly cost of goods increased and we weren't generally able to recover those cost increases with price increases. Overall we give some guidance now that we expect that our gross margin target range for the year probably sits within the 61% to 63% range as opposed to the previous guidance of 62% to 64%. So a number of things that has affected gross margin, but clearance was the primary impact and some of the other aspects, we will be able to address in trading periods ahead. Reuben Casey: Okay when we look at the cost of doing business, you can see operating expenses have increased year-on-year. Now it's important to note that we were operating 18 additional stores in this half versus last - the half in FY14. So 10 stores were opened in the second half of FY14 and eight were opened in the first half of FY15, which accounts for approximately 50% of the increase in operating costs. It also includes a UK growth investment, primarily advertising at $1.6 million and we have continued to invest in our systems capability and team capability. The primary reason that operating expenses are higher as a percentage of sales is due to the sales shortfall. If we move through to country results starting with Australia, as I mentioned we have - did open eight new stores in the first half of FY15 and when you look at the 18 stores that have been opened in the last 12 months, 13 of those stores are in mall locations and quality locations which do attract a higher rent expense but are in what we regard as top tier locations in Australia. The big impact on earnings in Australia is the gross margin reduction, which is primarily from currency weakening and also over weighting of clearance sales. When you look at New Zealand, again there's been a gross margin reduction but this is primarily - the over weighting of clearance sales and the mix of products has been slightly different year-on-year. There's been no real currency impact going on there. As we move through to the UK, the key thing to note here is that we did run our advertising campaign and we've had encouraging results from that in the first half so we'll continue to invest in the UK. Okay, if we look at cash flow. So new store CapEx, we completed eight new stores and one relocation as opposed to six last year, so that's the reason for the increase in the new store CapEx and IT CapEx was the second year of a three-year program. The primary focus for this year is CRM and product life cycle management which will be completed or in progress during FY15. When we look at the balance sheet, there is a big increase in our foreign currency hedging, which is just the fair value of our hedges as at balance date. Also importantly, we have renegotiated a new debt facility, same banking partners as we had previously. It's a three-year tenure and it's a $25 million higher than the previous facility. Mark Todd: Talking to inventory levels, as we've talked about previously, we've managed to reduce inventory levels substantially at a store-by-store level through effective buying policies and moving out excess clearance stock in the business. The scope for doing this is easier in summer rather than winter because we've got a greater breadth of seasonal SKUs in apparel in summer such as wovens and t-shirts and the like. Where as opposed to winter where the core product such as insulation and rain wear is bought in much bigger quantities to support a bigger seasonal - the bigger sales target in that period of the year. So whilst this is a really good result for the half year, you wouldn't see a similar reduction to be expected in the second half. Look, and also to talk about where we're at in terms of the inventory and ranging overall, in FY12 and FY13 we substantially increased our option counts generally speaking with weighting towards sort of seasonal summer apparel, wovens and the like. Generally speaking, a number of those product categories have not been as successful as we've liked and we recognise our option count was probably too broad and some of those product offerings haven't been as effective as we'd like them to be and smaller format, more stores in Australia. So we will be reducing option counts in inventory coming through into FY16 so that may drive the further reduction in the inventory per store in the year ahead. Reuben Casey: When we look at the dividend, we are going to pay out $0.03 per share interim dividend. It will be fully franked and fully imputed and the payment date for that dividend is 19 June 2015. With our foreign currency hedging, you can see there is a clear depreciation of the New Zealand dollar and the Australian dollar versus the US dollar. We think this is likely to reduce - as Mark mentioned earlier - likely to reduce our gross margin target range but to between 61% to 63% down from previously advised 62% to 64%. Mark Todd: Talking to our growth strategies and in terms of first of all store rollout, we will open 11 stores in FY15. We know what those 11 stores are. Nine of them are open already and the other two we target to have open for winter sale or during winter sale. We have two flagship stores that are going to be opening in the first quarter of FY16 but we don't anticipate at this stage opening any more stores prior to Christmas in FY16 at the earliest. We'll continue to look at store rollout particularly in Australia on an individual case-by-case basis as long as the return on investment justifies it, but we want to have greater confidence in the trading performance in Australia before we come back to accelerating store rollout. So it will be a case-by-case scenario for the first - for the next six months at least. Looking at our Summit Club and the core to our business which is our 1.2 million active Summit Club members, they are two thirds of our business we're really focused on making sure that we deliver them value and retain their loyalty. We will as you've already seen prioritise pricing for Summit Club members during our Easter sale and ongoing so that we have best pricing for Summit Club members year round. That's not a structure we've previously had in the business. We are in the second stage of implementation of our Dynamics AX CRM platform that will enable us to much better support customer service and segmentation for our Summit Club members. We'll be able to basically analyse and link to all of their history whether they trade in store or online and directly communicate with members so that we can segment key comms like welcome vouchers, incentives to buy when they get close to aggregate spends, targeted birthday and anniversary communication, targeted offers around their product preferences and a number of incentives like that that reward particularly the top 15% of members who are strong active shoppers and the middle third to a half of members who are discretionary shoppers who come and go a little bit over time. There's an awful lot of opportunity for us to cement Summit Club members to be the core of our business in Australia as much as they already are in New Zealand. With respect to the product offering and range optimisation, I've already alluded to the fact that we're looking to reduce our option count in FY15 and part of that decision-making already comes from the information and analytics we're receiving out of JustEnough, our forecasting and planning system, which we went end to end with in October last year. We're going to have much clarity on sales performance between current and clearance, gross profit contribution by option, store grade and store type performance by sales product group and the geographic separation and differences that you see between Australia and New Zealand. All of those things are helping us to better make this - make better decisions on range choices for the future. Product life cycle management at the [fronted] end of our business is our next major systems project under way and it's all about delivering an effective and shorter critical path for our product development cycle, life cycle, and enable greater transparency and oversight of the management of product design and development. Moving on into online growth strategies, we've continued as we've said to have strong growth in online year-on-year. Our emphasis is most definitely on improving and enhancing our own websites, whether they be in the UK, NZ or Australia. We've had an improved functionality in the last six months and we continue to have a strong development program on our websites. We launched additional international market place sites with eBay in Australia and in Trade Me in New Zealand and we'll be launching Otto in Germany in the first half of next financial year. With regards to the store network and the actual - and the existing network and management of it, we've now got a very clearly defined role for every store in the network in terms of whether it be brand, core, flagship store or the like. We're very focused on using that role definition to drive our decisions our capital expenditure in the future with clear return on investment hurdles to determine when such capital expenditure is undertaken. I think it's fair to say that we've done a fair amount of CapEx in the last couple of years in this space which hasn't been as well structured as it could be in terms of targeting the right stores to refurbish or relocate. We've got a much better structure in place to make that decision-making in the future and we want to implement as soon as is practicable, consistency in our fixturing and merchandising standards across the network so we can measure all store performance on a like-for-like basis. We have a number of stores in network with legacy merchandising arrangements that we haven't done the refurbishment work on that we should have in recent years. Flagship stores in Adelaide and Melbourne, we've referred to those. They'll be opening in the first half of FY16, replacing existing sites there and we now have an ability to assess and amend option counts for all three seasons of the year across all of our stores grades which is based on store sizing, but also traded for principle - for [functional] areas that may be affected by factors such as climatic conditions and the like. We range our space with benchmark stores in each grade to consider them against. Okay, looking further on to the UK, Europe and international, you will be aware we undertook a brand campaign, a significant brand campaign in the first half of the year and spent approximately $1.5 million on that campaign. It was quite positive and we achieved a solid set of same store sales growth in both our stores and online sales growth on our own website of over 90%. We're doing another brand campaign of a similar sort through spring and summer in the northern hemisphere. That is, like it is down here, a more challenging season for us so the outcome for us will continue to be educational for us and we continue to target an annual spend in that program through FY16 and FY17 of up to $5 million per annum. We will look at additional key wholesale partnership arrangements in the UK in the first instance as opportunities to further grow the brand offer around the UK market. Then finally looking at the outlook for the second half of the year, and just some of the background to the decision-making being made around second half trading and beyond, we have a structural challenge regarding our sales promotional model, where over the last couple of years, in particular the number of days when Kathmandu has been on promotion has increased. There's been longer periods of further reductions at the end of our sales campaign followed by clearance activity in response to what has been an identifiable trend of slowing sales at the start of our sales campaign. So there's customer - the customer pattern has been to shop with us later in a campaign and await further discounts. Some of the material I've already talked to in terms of how we're dealing with the approach to pricing for Summit Club members is endeavouring to address this. It's not something that can be changed overnight but it is something that we need to recognise needs work on. It won't change the emphasis that we have on three major sales campaigns in the year, but it will cause some shifts in our promotional calendar through the year and more flexibility so that we align our campaigns better with the strongest periods of consumer spending. Within those three campaigns, we definitely are going to prioritise pricing for Summit Club members. There hadn't been a previous advantage of being a Summit Club member in the periods when two thirds of our annual sales were made. The member price and the public prices were the same and members were being acquired in very big numbers through the year but not being retained, and that was particularly a challenge for us in Australia. So we are endeavouring to address that through both the pricing hierarchy across the year for Summit Club members and the investment we're making in CRM. These changes will come through over a period of time and they will be modified and adjusted as we see how they work through but they will give us greater flexibility and responsiveness in our overall ability to price and promote so that we can actually deal with trading upside and downside with more flexibility around our pricing than our current sales model gives us within a blanket 60% off type message and effectively nowhere to go at the end of that campaign except further reducing price if the sales is not successful. It's obvious to us that our Summit Club members should get the best deal across the whole year on our best product. Certainly get priority for it anyway. Maximisation of gross profit for us continues to be a focus, but we do accept that we are going to have to see - where we will be seeing a small reduction of gross profit in this year and trading conditions in that regard remain challenging. It was - we didn't achieve same store sales growth leading up to the first week of the Easter sale and trading in the first week of Easter sale was soft in Australia, although it was okay in New Zealand. So Australia remains a market of considerable focus for us. It has to be at this point in time. It's become a much tougher market for us in the last six months. So we'll continue to tightly control inventory levels as we had in the period and we'll manage operating costs that don't impact on future investment for growth with considerable diligence. Our option counts for stock are coming down in FY16. We expect the rest of FY15 to be a tough year, but it's a necessary one for us to reinforce the foundations for our ongoing growth, particularly in Australia. Thank you to everybody. I'm happy to pass back to our moderator for questions. Operator: Thank you. We will now begin the question and answer session. If you wish to ask a question, please press the star key followed by the number one on your telephone keypad and wait for your name to be announced. Your first question comes from the line of Sam Teeger from Commonwealth Bank of Australia. Your line is open, please go ahead. Sam Teeger: (Commonwealth Bank of Australia, Analyst) Hi Mark, hi Reuben. Just going forward in terms of the New Zealand market, are you expecting it to get a bit less competitive now that Mountain Designs and Snowgum have gone and also that FCO have announced plans that they're going to leave as well? Mark Todd: Not really because in the context of apparel there's still a considerable degree of competition from general apparel, sports apparel groups that are moving into our space. It will have some beneficial impact, probably particularly in the Auckland market because that's where the majority of the FCO stores were but at the same time, we're seeing Torpedo7 growing their presence in that same market. So the market will probably remain just as competitive as it has been. Reuben Casey: Yes and over the short term, FCO do have to exit New Zealand so there will be some price pressure from them clearing stocks. Sam Teeger: (Commonwealth Bank of Australia, Analyst) Okay and then in terms of the Australian store network, are you able to provide any insight as to the relative performance between the metro and regional stores and also maybe the stores in the southern cooler states versus the northern states? Mark Todd: The answer to that is that we always do better, regardless of where we are in Australia, when the weather is cooler. So to that point, if the weather moves around in Australia quite a lot, if there's a lot of rain or it's cooler then we're going to do better. There's no one absolute that says north versus south in that regard. It has been - if you talk about Australia generally, we've opened a number of new stores in states like WA and it's been a bit tougher in a state like WA for instance, but it's also been pretty difficult in Victoria so I'm not going to call out any one state or region as being different to another. Sam Teeger: (Commonwealth Bank of Australia, Analyst) Okay and then just finally, the Kathmandu brand, it's sitting in your accounts for roughly $150 million. Are you able to provide any comments as to if you think the market value in this brand materially differs from what's in the accounts? Testing at the end of each half? Mark Todd: Yes so we do that testing and the review in each half and the answer is it doesn't materially different from the value in the accounts as at the half year. Sam Teeger: (Commonwealth Bank of Australia, Analyst) Okay and then just one final quick one... Mark Todd: alright Sam Teeger: (Commonwealth Bank of Australia, Analyst) What are you expecting on CapEx at the end of this year given the slowdown in store openings? Mark Todd: Probably a similar level overall to... Reuben Casey: To last year, yes. Maybe slightly increased. Sam Teeger: (Commonwealth Bank of Australia, Analyst) All right. Thanks guys. Operator: Your next question comes from the line of Chelsea Leadbetter from Forsyth Barr. Your line is open, please go ahead. Chelsea Leadbetter: (Forsyth Barr, Analyst) Thanks moderator. Morning guys. Just a couple of quick questions. First of all, some of these new IT systems that you're implementing, could you just talk through sort of some of the key benefits you've seen - are they meeting expectations or exceeding them? Mark Todd: Well they're certainly meeting expectations to date. It takes people to drive them and understand what to use the data for and get everybody aligned on what they're telling us, but I alluded to some of those when I started talking about range planning and performance at a category level by store grade and the dissection of that sort of information between current sales and clearance sales. That's all metrics when we get down to store performance and grouping of store performance that we haven't had previously. That all drives that expectation around inventory performance overall. It just simply means that the business - and there's another - and then if we talk about the operational management of inventory, we're actually able to better manage inventory out of our warehouses into our store network so that we don't put the same volume of stock out on the floor in anticipation of demand that we're not quite certain what it actually will be. I mean our demand forecasting is a lot better than what it was previously. Chelsea Leadbetter: (Forsyth Barr, Analyst) Okay and there's still I assume a fair bit of upside to come, particularly in sort of FY16 and FY17? Mark Todd: Yes I would be very confident about that, around arranging our small format stores in particular. It doesn't matter quite so much in New Zealand where most stores carry most of the Kathmandu range but it does have a lot of significance to our management of inventory in Australia where most stores don't carry the full Kathmandu range. Chelsea Leadbetter: (Forsyth Barr, Analyst) Okay, no sure, thanks for that. Then if I think about sort of your promotional campaign and you've talked about an increased focus on Summit Club and sort of tweaking the promotion for the second half, does that cost additional money or is there expected to be a [lift] in advertising expenditure in the second half? Mark Todd: No we're targeting leaving advertising expenditures at similar levels to last year. Chelsea Leadbetter: (Forsyth Barr, Analyst) Okay. Thanks for that. Just one last question. If I think about that sort of UK and international marketplace, what is your sort of strategy and what do you think is Kathmandu's competitive advantage in that market? Mark Todd: Well that's a very general question. I think we've kind of identified clearly what the strategy is in previous presentations which is all around growing brand awareness, growing Summit Club members and growing sales in that order. We've done our first set of measurements on brand awareness and Summit Club and we've been satisfied with those results. We've been satisfied with sales results. So the point of the campaign was to obviously identify which - also to some degree, which product groups and which offers resonated with the public more and so over time, we're going to probably focus on different product groups in the UK than we would in Australia and New Zealand and probably be tighter on those. Kathmandu is a brand that's going to be like any other brand in the outdoor space up there and we've got to build awareness of the brand. Chelsea Leadbetter: (Forsyth Barr, Analyst) Okay, so we will see a different product mix to what we do see in Australasia. Mark Todd: We - that already exists. The market up there does have a strong affinity with equipment, for instance. Our equipment as opposed to some categories of apparel which we wouldn't even try to offer. Reuben Casey: So there's no new products for the UK but it's just different mix. Chelsea Leadbetter: (Forsyth Barr, Analyst) Okay, no thank you very much guys. Operator: Your next question comes from the line of Rohan Koreman-Smit from Goldman Sachs. Your line is open, please go ahead. Rohan Koreman-Smit: (Goldman Sachs, Analyst) Thanks. Hi guys. Just a couple of questions. Firstly on the sales side, are you able to give a bit of colour around what percentage of your sales are exposed to the more general apparel retailers and then whether there is a higher margin categories as well? Then on the gross profit, are you able to give a bit of detail around how you arrived at your 61% to 63% revised range? Is that based on your, I guess, current hedging or is that the current spot rates for the currency? Then you also made a comment on the gross profit. I just wanted a bit of clarification whether that's a lower gross profit percentage this year or a lower gross profit dollars this year. Mark Todd: We're going backwards because it's a lower gross profit - gross margin this year, 61% to 63%, gross profit dollars will be determined by sales. The margin reflects the points that I identified on the slide and the ongoing points in particular price point challenges, product substitution and the impact of exchange rates - they all have an impact and they are - the exchange rate is more an Australian thing than a New Zealand thing. So that's an attempt to answer the second of the questions. What was the first one? Reuben Casey: The percentage of sales [I suppose, to] general apparel. Mark Todd: Well that's probably a matter of everybody's individual judgment in that we'd say that the categories like base layer and fleece are all completely up for grabs against the general public, but a category like rainwear is very much not. So you know... Reuben Casey: And down jackets is probably mixed. Mark Todd: Down jackets is mixed. So the absolute number varies, to be fair, both depending on the geography you're in and your view on some of those categories. Rohan Koreman-Smit: (Goldman Sachs, Analyst) Cool, thanks guys. Operator: Your next question comes from the line of John Stavliotis from Morgan Stanley. Your line is open, please go ahead. John Stavliotis: (Morgan Stanley, Analyst) Hi guys, John Stavliotis here. Sorry just to clarify on that gross margin, so that's your target for the next six months even with the currency headwinds and the performance that you sort of just had? Is that the way we should look at it? Mark Todd: Yes, correct and probably ongoing into FY16. John Stavliotis: (Morgan Stanley, Analyst) Okay so what gives you confidence that you can get it back up into that range in the next six months? Is that just reflecting that a lot of the problem was around clearance activity in the last half that you don't expect to happen again? Mark Todd: Yes well so if you look at the bullet points I gave before, again I'll make the point that they were pretty much written in order of relevance to the overall outcome in our minds. So that is the reason, but look I can give no surety on that because effectively that will be determined in the last six, seven weeks of the year, but that's our target. John Stavliotis: (Morgan Stanley, Analyst) Okay. Store openings, so you've sort of flagged that you're going to slow that down a little bit. Just interested in the target of 180 still and what you've sort of looked at to get confidence that that still is the target? Mark Todd: Well 180 was always a target we were very comfortable with all the way through until we've seen recent trading and we could have seen a number of other stores that would have even been better than - bettered that number too, but we aren't confident at this stage that the sales performance in Australia necessarily just cyclical. We need to be confident that Australian sales performance starts to come back and when we see that coming back, then we'd be looking at store openings in line with that network plan again. In that regard, only trading in the next three to six months tells us that. John Stavliotis: (Morgan Stanley, Analyst) Yes, okay. So I guess at this point we should just expect that store openings lower to like I guess low single digits until you get that clarification. Mark Todd: Yes, that's reasonable. John Stavliotis: (Morgan Stanley, Analyst) Just last question. On the UK you sort of mentioned those things like brand awareness, Summit Club. Can you give us any numbers around that, on what you've achieved in the last six months? Mark Todd: No, sorry John. John Stavliotis: (Morgan Stanley, Analyst) Okay. Thank you. Operator: Your next question comes from the line of Sarndra Ulrich from First NZ Capital. Your line is open, please go ahead. Sarndra Ulrich: (First NZ Capital, Analyst) Good morning everyone. Just - most of my questions have been asked. Just one other thing, do you - in terms of the Australian consumer behaviour, I mean certainly it hasn't just been the last six months that economy has been safe - soft, sorry. Do you actually in clearance activity and sales and promotional activity, that's not a new phenomenon either, but do you survey your customers and say why are you spending less now? Mark Todd: Every quarter. Sarndra Ulrich: (First NZ Capital, Analyst) What would the response be? Just that they know that it's going to be - that towards the end it's going to be discounted more? I mean again it doesn't seem to me to be a new - something new in the consumer's mind. Mark Todd: There's no one answer to that, Sarndra. There's obviously a variety of things going on with the individual consumer's behaviour and what they see and don't see. I mean clearly if we come back to the execution - let's talk about the things that we control. Our product and our product offer in some categories needs addressing. The structure of the - the value proposition and the sale is something we have already talked about and that's something that's relevant. The relevance of some product categories and the competitive nature of some product categories versus other and what's Kathmandu's point of difference - that's another reason... Sarndra Ulrich: (First NZ Capital, Analyst) Yes. Mark Todd: ...and sentiment is a major reason. They're all factors. There's no one answer. Sarndra Ulrich: (First NZ Capital, Analyst) So no one - nothing that you can... Mark Todd: No one answer and when you survey customers in certain parts of Australia versus other parts of Australia, understandably you'll get a different answer to that in Hobart to what you will in Perth. Sarndra Ulrich: (First NZ Capital, Analyst) Yes okay. My next question is more around merchandising and it's a bit of a silly question, but it actually goes to - I've been looking at your catalogues for Easter sale. Do you actually look - I always look to the children's clothing and merchandising and how cute children's clothing looks and you can bring an adult in and they look - they like - they think that's cute and they like their kids to look cute and next thing you know, they're buying something else. Do you focus - and I notice that there's more patterns on some of the merchandise that you have. Are you putting extra focus into that? I mean I'm not going down the line of putting Frozen merchandise on a puffer jacket for god sake, but are you looking to make things look a bit cuter for children to bring adults in? Mark Todd: That's been a pattern of the nature of merchandise that we offer for kids for several years and [the colour wise] and styling on kids wear has been of that ilk for a couple of years. It's a limited range though, kids but it needs to stand out in a mall in particular. Sarndra Ulrich: (First NZ Capital, Analyst) No, just something that occurs to me, that everyone's got the black puffer jacket and apart from struggling to find it in the lost box at school, I just look at it and think that's one area that you guys could really focus on and bring something in that's a point of differentiation, but that's just my two cents worth. I'll leave it at that. Thanks. Operator: Your next question comes from the line of Adam Simpson from Macquarie. Your line is open, please go ahead. Adam Simpson: (Macquarie, Analyst) Yes g'day guys. Just a clarification. Your 61% to 63% gross margin target, is that for the second half or for the full year? Mark Todd: For the second half. Reuben Casey: And ongoing. Adam Simpson: (Macquarie, Analyst) Yes, that's fine. It was always going to be a fair ask to make up after the first half. Then just in terms of the store performance in Australia, I mean you went through a bit about the geography before. What about the mix - are you seeing the mall stores underperform relative to I guess your strip...? Mark Todd: Yes a little bit Adam. One of the things that is fair to say is that some of the - this is a question, the product offering and what resonates and doesn't resonate with the customer. We don't have points of difference in some of the malls with some of the product categories we're talking about so some of - and in that regard, when you've moved - come to this point. In the last two years, we grew the range out into a number of areas that would be called more casual urban apparel type stuff. You put that product - a greater product range and you try to give it space in a mall environment in a smaller store and it doesn't necessarily work because Kathmandu isn't necessarily the shopper's choice for some of that product. So you've kind of got to come back to being more technical and holding your technical credential on some of that stuff. In the mall stores, there's a little bit less interest in that from customers as a generic rule as opposed to destinational stores where customers are going to you because they want to shop with you. Adam Simpson: (Macquarie, Analyst) Yes and can you just refresh us, how many of your stores are currently in malls in Australia? Mark Todd: About 45 I think, something like that. Adam Simpson: (Macquarie, Analyst) Okay and sorry, and last question. Just on your new debt facilities that you just renegotiated. Can you give us a feel I guess, I mean with the lower profitability in this half, I guess your covenant headroom, how are you sort of seeing that? Reuben Casey: We're very comfortable with our covenant headroom. Yes, there's no risk of breaching that at all. Mark Todd: We've got great - we've got three year terms on better terms than what we had before with the same banking syndicate. Reuben Casey: Yes. Adam Simpson: (Macquarie, Analyst) All right, very good, thanks guys. Operator: Your final question comes from the line of Wassim Kisirwani from Deutsche Bank. Your line is open, please go ahead. Wassim Kisirwani: (Deutsche Bank, Analyst) Thank you, good morning. Again, most of the questions have been asked and answered, but perhaps just on the response that you've outlined on the final slide in terms of the response to the challenges with the current sales promotion. Could you perhaps elaborate on how that will play out over this coming Easter sale? You've already called out that the first week in Australia is soft. Is there a plan to change tact [unclear] some parts through the sale if some of these initiatives aren't working or is there again a risk that you see it through to the final few weeks with that [unclear] period? Mark Todd: The answer in general Wassim is that this is a medium exercise, not a short-term exercise. So that if we talk about - go back to the point about what's gone on in Kathmandu's sales in the last two years, you can't turn around a trend in two years overnight and we're not going to try to. So this is definitely about ensuring the value proposition in our sales is re-established and the sales themselves are basically seen as a real tight genuine event. So that's what we're focusing on doing and no, we wouldn't change that tact halfway through just in response to trading performance one way or the other. We've got other - the fact of the matter is the other thing we've learned is that we aggressively price clearance in the first quarter of this year and we don't think that did us any favours in the medium term. It's not as if most of what Kathmandu sells is not saleable stock that we can sell at a satisfactory gross margin even if it's not as good a gross margin as we may have previously achieved. So note, it's a medium to long-term gain, not a short-term one. Wassim Kisirwani: (Deutsche Bank, Analyst) Cool and on that point, did you have any evidence through your customer surveys that would suggest that maybe some of this damage could be longer lasting in terms of the brand perception and the perception of the brand being one that's a discount brand or [warrants] discount more often? Mark Todd: Well there's some sentiment to that but it's interesting enough if I go back in history. We've had those scenarios in the past in the business anyway. It comes back down to making good product and selling it at a good price. So the fact of the matter is you can - because it is our own product, our own brand, you can bring - you can resurrect or retrieve the customer who didn't like you, right, or thinks you've just sold off cheaply, if you basically continue to offer them the right product, but you've got to keep engaging the customer and keep them involved with the brand and that's why Summit Club matters. Wassim Kisirwani: (Deutsche Bank, Analyst) Cool and just finally on that gross margin target that's for the second half and beyond, again maybe just some comments on the confidence around that with respect to this strategy that you're also now implementing to take a tighter line on discounting. Obviously a strategy that better support the brand but does carry earnings risk in the short term but you seem fairly confident that you can hold that gross margin throughout this period? Mark Todd: Yes we're reasonably confident with that. Yes, again unfortunately I can only say that outcome will probably be determined in the last six or seven weeks of the year. Wassim Kisirwani: (Deutsche Bank, Analyst) Okay, thanks. Operator: Once again, to queue for a question, please press star one on your telephone keypad. There appears to be no questions in the queue at this time. Mr Todd, please continue. Mark Todd: Okay, well thank you very much for attending the call today and we'll catch up with a number of you individually in the days ahead. Thank you for your time. Operator: That does conclude our conference for today. Thank you for participating, you may all disconnect.