GXL investment thesis, page-37

The results were ok - not great, and not poor.

The big story for mine was the gross margin contraction on the Aus retail side - that is clearly a big deal. It went from 47.7% in 1HFY17 (on $256m of sales), to FY17 of 47.2% on $505m of sales. That implies 2HFY17 gross margin of 46.7% (or a whole 1.0% slip from 1HFY17).

Compare that to FY16: 1HFY16 retail gross margin was 47.5% on $228m of sales, to FY16 of 47.3% on $458m sales, which implies 2HFY16 gross margin of 47.1% (0.4% slip from 1HFY16).

A not insignificant reason for me owning GXL was my view that gross margins would gently tick up over time due to: 1) increased private label penetration, and 2) scale to reduce per unit distribution/logistics costs to leverage the big supply chain investment undertaken from FY13-15.

It's too hard to say at this point whether the 2HFY17 retail gross margin story is temporary (i.e. discounting to win back sales), or more permanent. I'll hold for another half but that is the line i'll be most closely watching. The LFL trends through the first two months (5.0% on retail) of FY18 seem encouraging, but it's no good growing LFL if you just give it back on gross margin.