Operating profit halved to $19.5m as gross margin slid 110bps

Gross margin compressed 110 basis points to 32.5%, more than offsetting a 2.8% reduction in cost of doing business. Reported NPAT of $11.8m flipped positive from a $23.7m HY24 loss, but the swing reflects a smaller discontinued-operations loss ($55.5m versus $60.3m for the Torpedo7-related operations) rather than continuing-operations strength.

Inventories rose $61.2m (13.0%) to $533.3m against the FY24 year-end balance, lengthening inventory days materially. Gross borrowings fell $134.0m to $25.4m and the group ended the half in a small net cash position of $19.0m, versus net debt of $127.1m at FY24 year-end.

The 110bp margin contraction takes roughly $18m off gross profit at HY25 sales levels — almost the entire gap to HY24 operating profit. Cost-of-doing-business reductions have not been deep enough to absorb the margin shift, leaving continuing-operations profitability exposed unless promotional intensity eases.

Inventory has run ahead of trading. Stock is up 13.0% versus the FY24 balance with sales down 1.6%, and the implied inventory-days build is significant. This matters because it raises the probability of further markdown activity into the peak trading period, which would prolong gross-margin pressure rather than relieve it.

The discontinued operation is still bleeding. A $55.5m post-tax loss from Torpedo7-related activities in a single half is large relative to continuing-operations profit of $12.0m, and means reported NPAT is not yet a clean read on the retained business. Until the discontinued-operations tail is closed out, headline earnings will continue to under-represent the retail platform.

The Warehouse, Warehouse Stationery and Noel Leeming are structurally second-half-weighted around Christmas, so a broadly flat first-half sales line and an inventory build are not by themselves directional for the full year. What this release does support is that gross-margin defence and inventory clearance — not top-line growth — are the operating issues management has to evidence progress on at FY25. The absence of an interim dividend (5.0 cents was declared at HY24) signals capital is being preserved while those issues play out.

Continuing-operations PBT of $16.9m generated $12.0m of continuing-operations profit at a more normal 29.0% effective tax rate (versus 68.2% in the prior reference period), and the swing to a positive reported NPAT is driven almost entirely by the smaller Torpedo7 discontinued-operations loss. The retail business itself is less profitable than at HY24.

Cash flow looks strong on first read — operating cash flow of $122.9m, capex of just $5.1m and FCF before lease payments of $117.8m supported the $134.0m gross-borrowings reduction. But capex is down 87% on the comparable run-rate (capex/revenue of just 0.3%) and the inventory build has not yet been absorbed by peak trading. The cleaner durable signal is the balance-sheet improvement to a small net cash position; underlying cash conversion needs to be re-tested at the full year before the half's apparent cash strength can be relied on.

This briefing cannot assess full-year cash conversion or whether gross-margin recovery has begun in the peak trading period on this half-year disclosure alone.