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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Brown (n) Group Plc | LSE:BWNG | London | Ordinary Share | GB00B1P6ZR11 | ORD 11 1/19P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.10 | 0.71% | 14.15 | 14.15 | 14.95 | 16.00 | 16.00 | 16.00 | 16,709 | 16:46:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Catalog, Mail-order Houses | 677.5M | -51.4M | -0.1116 | -1.43 | 73.68M |
From Apr 2019 to Apr 2024
TIDMBWNG
RNS Number : 8237X
Brown (N.) Group PLC
02 May 2019
2 May 2019
FULL YEAR RESULTS FOR THE 52 WEEKSED 2 MARCH 2019
Digital revenue growth, strong financial services performance and operational efficiency delivers increased adjusted EBITDA growth
Hot Features
Premium
GBPm 52 weeks to 52 weeks to Change
2 March 2019 3 March 2018
Group revenue 914.4 922.2 (0.8)%
-------------------- -------------------- --------
Product revenue 615.8 652.6 (5.6)%
-------------------- -------------------- --------
Financial services revenue 298.6 269.6 +10.8%
-------------------- -------------------- --------
Adjusted EBITDA(1) 128.0 118.6 +7.9%
-------------------- -------------------- --------
Adjusted profit before
tax(2) 83.6 81.6 +2.5%
-------------------- -------------------- --------
Statutory loss / profit
before tax (57.5) 16.2 (454.3)%
-------------------- -------------------- --------
Adjusted EPS(2) 21.38p 23.06p (7.3)%
-------------------- -------------------- --------
Statutory EPS (20.50p) 4.41p (564.9)%
-------------------- -------------------- --------
Full year dividend (p per
share) 7.1 14.23 (50.1)%
-------------------- -------------------- --------
Core net debt(3) 77.7 66.8 +16.3%
-------------------- -------------------- --------
Overall net debt(4) 467.9 346.8 +34.9%
-------------------- -------------------- --------
1 Adjusted EBITDA is defined as operating profit, excluding exceptionals, with depreciation and amortisation added back. The directors believe that adjusted EBITDA represents the most appropriate measure of the Group's underlying trading performance.
2 Defined as excluding exceptionals and fair value movement on financial instruments. 3 Excludes debt securitised against receivables (customer loan book) of GBP390.2m (2018: GBP280.0m). (4) Total liabilities from financing activities less cash.
Results Highlights
Transformation to a digital retailer continues with 80% of product revenue now digital
-- Simply Be digital revenue 93%, Jacamo 93%, JD Williams 76%
Digital revenue growth
-- JD Williams up 8.8%, Simply Be up 8.7%, Jacamo up 5.1%
Growth in adjusted EBITDA
-- Adjusted EBITDA increased 7.9% to GBP128.0m -- Statutory loss before tax reflects exceptional costs, largely relating to legacy issues
Financial services revenue up 10.8%
-- Customer loan book grew by GBP34.6m to GBP682.2m (gross basis)
Stable margin performance in challenging trading environment
-- Product gross margin flat at 52.1% and Financial services gross margin decreased to 59.2%, primarily as a result of impact of IFRS 9
Improved operating efficiency
-- Reflecting targeted, data-driven promotional spend and embedded operational efficiencies
Refocused customer centric strategy to drive profitable, digital growth
Focus on the UK market opportunity
-- Maximise the UK core market before leveraging our international opportunity
Simplify the business to improve the customer experience
-- A crisper, clearer brand proposition for our customers
Deliver better products for our customers
-- Increase the number of customers, purchase frequency and basket size
Trade smarter with data
-- Improve operating efficiency and customer targeting
Inspire our colleagues toward further delighting our customers
-- Better engaged colleagues delivering an improved customer experience
Steve Johnson, Chief Executive, said:
"We're pleased to have delivered a solid trading performance for the year, driving a 7.9% increase in adjusted EBITDA, as we continue our transformation into a digital retailer. Encouragingly, we saw digital revenue growth across JD Williams, Simply Be and Jacamo, as we improve our customer offer whilst managing the decline of our legacy offline business. We also benefited from improved use of our promotional spend, a strong financial services performance and a drive to ensure we are operating as efficiently as possible across the business."
"A re-focusing of our strategy on delighting our customers is now required. We will initially focus on our core UK market, simplifying our approach to ensure our brand and product proposition continues to improve and resonate with customers. We will also look to harness data and technology to offer customers more choice and flexibility when shopping with us."
"All of this aims to return N Brown to sustainable profit growth, through a digital, retail-led, customer-
centric strategy and at this stage in the new financial year our overall expectations are unchanged. We look forward to the future with confidence."
Meeting for analysts and investors:
Management is hosting a presentation for analysts and investors at 9.30am. Please contact Nbrown@mhpc.com for further information. A live webcast of the presentation will be available at: www.nbrown.co.uk.
For further information:
N Brown Group
Will MacLaren, Director of Investor On the day: 07557 014
Relations and Corporate Communications 657
Thereafter: 0161 238
1845
MHP Communications
Andrew Jaques / Simon Hockridge
/ Ollie Hoare 0203 128 8789
About N Brown Group:
N Brown is a top 10 UK clothing & footwear digital retailer. We are size inclusive, focusing on the needs of underserved customer groups - size 20+ and age 50+. We offer an extensive range of products, predominantly clothing, footwear and homewares, and our Financial services proposition allows customers to spread the cost of shopping with us. We are headquartered in Manchester where we design, source and create our product offer and we employ over 2,400 people across the UK.
Next reporting date
The next reporting date is the Q1 trading statement on 20 June 2019.
REVIEW OF THE YEAR
GBPm FY19 FY18 Change
------------------------------------ --------------- ----------- -------------
Revenue
------------------------------------ --------------- ----------- -------------
JD Williams 159.5 163.4 -2.4%
Simply Be(1) 131.5 125.9 4.4%
Jacamo(1) 64.0 61.6 3.9%
------------------------------------ --------------- ----------- -------------
Power Brands(1) 355.0 350.9 1.2%
------------------------------------ --------------- ----------- -------------
Secondary Brands(1) 139.2 145.8 -4.6%
Traditional Segment 114.7 138.6 -17.2%
------------------------------------ --------------- ----------- -------------
Product total(1) 608.9 635.3 -4.2%
------------------------------------ --------------- ----------- -------------
Stores 6.9 17.3 -60.3%
------------------------------------ --------------- ----------- -------------
Product total including
stores 615.8 652.6 -5.6%
------------------------------------ --------------- ----------- -------------
Financial Services 298.6 269.6 +10.8%
------------------------------------ --------------- ----------- -------------
Group 914.4 922.2 -0.8%
------------------------------------ --------------- ----------- -------------
Product gross profit 320.8 340.5 (5.8)%
------------------------------------ --------------- ----------- -------------
Product gross margin % 52.1% 52.2% (0.1)ppts
------------------------------------ --------------- ----------- -------------
Financial services gross
profit 176.9 165.1 +7.1%
------------------------------------ --------------- ----------- -------------
Financial services gross
margin % 59.2% 61.2% (2.0)ppts
------------------------------------ --------------- ----------- -------------
Group gross profit 497.7 505.6 (1.6)%
------------------------------------ --------------- ----------- -------------
Group gross profit margin 54.4% 54.8% (0.4)ppts
------------------------------------ --------------- ----------- -------------
Total operating costs (369.7) (387.0) (4.5)%
------------------------------------ --------------- ----------- -------------
Adjusted EBITDA(2) 128.0 118.6 +7.9% ------------------------------------ --------------- ----------- ------------- Adjusted EBITDA margin % 14.0% 12.9% +1.1ppts ------------------------------------ --------------- ----------- ------------- Deprecation & Amortisation (30.1) (28.1) +7.1% ------------------------------------ --------------- ----------- ------------- Adjusted profit before tax 83.6 81.6 +2.5% ------------------------------------ --------------- ----------- ------------- Exceptional items (145.6) (56.9) +155.9% ------------------------------------ --------------- ----------- ------------- Unrealised FX movement 4.5 (8.5) (152.9)% ------------------------------------ --------------- ----------- ------------- Statutory (loss)/profit before tax (57.5) 16.2 (454.9)% ------------------------------------ --------------- ----------- ------------- Full year dividend 7.1 14.23 (50.1)% ------------------------------------ --------------- ----------- -------------
1 Revenue excluding stores
2Adjusted EBITDA is defined as operating profit, excluding exceptionals, with depreciation and amortisation added back. The directors believe
that adjusted EBITDA represents the most appropriate measure of the Group's underlying trading performance.
Group revenue declined 0.8% to GBP914.4m, with Product revenue down 5.6% and Financial services revenue up 10.8%.
JD Williams revenue was down 2.4% during the year due to the drag from migrated Fifty Plus customers, one of our legacy offline brands. Excluding Fifty Plus, JD Williams revenue increased 6.8%. JD Williams also displayed strong growth in digital sales with an 8.8% increase in digital revenue compared to the previous year. Simply Be delivered another good performance, growing revenue by 4.4% during the period excluding stores. Simply Be also reported an 8.7% growth in digital revenue compared to the prior year. Within the second half of FY19 we increasingly moved to customer lifetime value modelling which will continue to impact Simply Be digital revenue growth in the first half of FY20. Jacamo product revenue was up 3.9% excluding stores. Jacamo digital revenue increased by 5.1% compared to the prior year.
Secondary brands revenue decreased by 4.6% excluding stores, reflecting our continued shift in marketing investment towards profitable, digital growth. Following the success of its Simply Be and JD Williams apps, the Group launched its third app in August, Fashion World. This is targeted at improving the digital experience for our Fashion World customers.
Revenue in the Traditional segment decreased by 17.2% as the Group continued to increase its focus on its digital business and scaled back its unprofitable offline marketing and recruitment. Within the Traditional segment we were pleased with the performance of Ambrose Wilson which delivered digital growth of 7.4% in the year. Given that this segment is more heavily weighted towards offline than the rest of the Group, as it typically serves more mature customers, this segment it is expected to experience the fastest rate of offline revenue decline going forward.
The Group's transformation to a leading digital retailer continues, with digital sales now accounting for 80% of product revenue(1) in the year. In FY19 digital revenue grew by 4.1% and was ahead by 8.0% for our Power Brands. Offline revenue decreased by 29.9% as the Group continued to shift its focus to its growing digital businesses. As the Group focuses more of its resources on growing its digital businesses, going forward it expects a continued double-digit decline in offline revenue.
International revenue declined 6.6% to GBP32.4m. Ireland delivered revenues of GBP18.5m, up 5.9% year on year (up 5.1% in constant currency terms) and continues to perform well. USA revenue was GBP13.9m, down 19.3% year on year (down 18.0% in constant currency terms).
During the year we undertook a review of our store estate. Given the continuation of very disappointing footfall, and despite significant cost efficiencies being achieved, we entered into a consultation with store colleagues to consider closing our 20 stores ahead of lease expiry. Following the consultation, we took the decision to close all 20 stores and at the end of the financial year the Group had no physical stores. In FY19 the Group's stores generated GBP6.9m revenue all within the first half of the financial year (FY18: Revenue of GBP17.3m).
Financial services delivered a strong performance during the year, driven by increased interest revenue and a continued strong management of arrears. Financial services revenue was up 10.8% year on year. Within this, interest payments were up 12.7% reflecting the increased level of receivables and the impact of management initiatives such as risk-based pricing which was implemented in the year. This increase was offset by a 3.6% reduction in other fees and income reflecting general improvements in the early arrears profile.
In a challenging and highly promotional market we delivered a stable product gross margin at 52.1%, down 10bps for the year as a whole. As expected, Financial services gross margin decreased by 200bps to 59.2%. This was driven by the change in accounting methodology to provide for receivables under IFRS 9, which results in a provision being made against every customer account regardless of whether they are in arrears. As a result of this change, the impairment charge for the year was GBP19.5m higher than that charged in FY18 under the previous accounting standard IAS39. The increased level of provision also increased the level of profit generated from the sale of payment arrangement debtors, with total profits on debt sales of GBP10.7m, GBP4.9m higher than the prior year. These two factors contributed to a net GBP14.6m increase in bad debt charges during the year. Compared to the same period last year (restated on an IFRS 9 basis), the provision rate decreased by 370bps due to an underlying improvement in the quality of the loan book and the disposal of some high-risk payment debt which was sold at a better rate than the book value.
Operating expenses excluding exceptional costs continue to be tightly controlled, decreasing by 4.5% for the year. Admin & Payroll and Marketing expenses were the primary drivers. Admin & Payroll expenses as a percentage of Group revenue declined from 14.9% to 14.0%, driven both by the actions taken to close our store estate during FY18 and FY19 as well as increased Head Office efficiencies. Marketing costs improved as a percentage of Group revenue from 17.8% to 17.3% as a result of our continued focus on shifting our marketing expenditure to drive digital growth. Warehouse and fulfilment costs as a ratio of Group revenue declined from 9.3% to 9.2% driven by lower volumes and operational efficiencies.
Depreciation and Amortisation increased by 7.1% to GBP30.1m due to historical and ongoing investment in IT systems.
Adjusted EBITDA increased by 7.9% to GBP128.0m and adjusted EBITDA margin increased from 12.9% to 14.0%. Adjusted profit before tax was GBP83.6m, up 2.5% year on year as a result of a strong financial services performance and the delivery of marketing and other operational efficiencies. The statutory loss for the year of GBP57.5m was wholly driven by exceptional costs of GBP145.6m which in the main relate to legacy issues and our decision to close the store portfolio.
In October, the Board took the decision to rebase the dividend to a more sustainable level from which we will seek to grow as its earnings progress. As a result, we are recommending a final dividend of 7.1p per share.
REFOCUSED CUSTOMER CENTRIC STRATEGY TO DRIVE PROFITABLE, DIGITAL GROWTH
The rapidly changing shopping habits of our customers, coupled with a continually challenging consumer environment, emphasises the need for a retail-led strategy which is robustly focused on profitable digital revenue growth.
To this end, we have assessed the business to ensure that N Brown is well placed to take advantage of the opportunities in its markets and remains resilient to present and future challenges.
N Brown is a business with a clearly differentiated position and areas of market-leading innovation, underpinned by a strong enabler of customer choice and loyalty from our financial services proposition. From this core, we believe that we have a real opportunity to delight our customers more consistently - customers who understandably expect more and demand continued relevance and personalisation in their N Brown shopping experience.
We have a solid foundation from which to build, with 80%, or around GBP500m, of our product revenue now digital, meaning we are a top 10 UK Clothing & Footwear retailer by digital revenue. We also have industry leading expertise in fit, and a financial services business which continues to perform well. Whilst we have made solid progress in growing our online market, we know that there is more to do to improve our digital retail model, and our proposition is not yet well enough developed. A re-focusing of our strategy on delighting our customers is now required.
The past year has seen a marked acceleration in the business's transition as we continue to target profitable, digital growth by focusing on our digital customers and managing the decline of our offline business. We have increased our profitability despite this significant change and against a backdrop of an ongoing challenging retail climate and decline in consumer confidence. This represents the start of a material shift for N Brown as it further strengthens its digital offering.
Our assessment of the business has identified a number of core focus areas around which we are aligning our operational planning and delivery. We will focus on the UK and target a simplification of our customer brand proposition; continue to enhance our product offering; and accelerate our use of data and analytics to enhance operational efficiency. Underpinning all of this will be improvements in our colleague engagement, as we inspire our colleagues to further delight our customers.
Our vision is to be the leading inclusive fashion retailer and we will pursue this vision by executing on
our purpose of responsibly improving people's lives by making our customers look and feel amazing.
1. We will focus on the UK
Strategic Objective: Maximise the UK core market before leveraging our international opportunity
What we are doing: The UK is our core market and we can do much more to enhance our offering to UK customers every day before focusing time and resource elsewhere. In the UK, the online clothing & footwear market is forecast to grow by 7% per year for the next five years. We currently have online
market shares of 4.0% and 3.2% respectively in our addressable womenswear and menswear markets, giving us plenty of headroom to grow in the UK.
We remain confident that the international opportunity continues to exist following a detailed review of the potential for our brands - but the way in which we go to market in the USA will mean an immediate step back from solely driving direct customer business in that market. We will continue to explore international territories through selected, targeted partnerships. To this end, we have recently closed JD Williams in the USA and, for now, will only focus on servicing our existing Simply Be USA customers. Our Irish business, Oxendales, continues to perform well and the strategy there remains unchanged.
2. We will simplify the business to improve the customer experience
Strategic Objective: A crisper, clearer brand proposition for our customers
What we are doing: We will start by simplifying our customer brand proposition. Our brands will be 'fashion' led and there will be an increased focus on the older customer. We currently trade through 11 brands and categorise them under Power Brands, Traditional and Secondary; from FY20 onwards we will not be using these descriptions and will move to 'Womenswear' and 'Menswear'. Within Womenswear our brands will be Simply Be, for fashionable size 12-32 women; JD Williams, for 45-60-year-old women; and Ambrose Wilson for women 60 and over. Menswear will be the Jacamo brand. Our other brands will remain complementary to Womenswear and Menswear while we finalise our plans and we will provide an update in due course.
To support this, we are continuing to invest in our core technology platforms to streamline digital user experience in both our product and financial services areas. At the same time, we expect to accelerate the pace of simplification in our IT estate to increase efficiency but optimise further investment for innovation. This will make us more agile and we will be able to develop new customer propositions more quickly. We anticipate the migration of our brands to an enhanced technology infrastructure in the medium term which will deliver a better customer experience.
We are focused on further improving our customer proposition. Recent improvements include an enhanced Mobile Web experience bridging the gap between desktop and mobile functionality; the launch of Mobile Apps on our in-house Mobile App framework for iOS & Android with a 4.8* rating; and a simplified account registration process which has reduced dropout by a substantive degree. We have also recently opened Europe's largest Hyphen Interactive Live Photo (HILP) technology for our new in- house photo studio, which will transform our ecommerce photography capabilities and deliver cost efficiencies. Our plans incorporate ongoing investment and innovation in our supply chain. These already include the commencement of a new returns automation facility at our distribution centre in Shaw.
Finally, financial services remains an integral part of the N Brown proposition and we will focus on both increasing customer loyalty through our credit offer as well as continuing to improve the experience for those currently using our personal account.
3. We will deliver better products for our customers
Strategic Objective: Increase the number of customers, purchase frequency and basket size
What we are doing: We will drive further innovation through our market-leading body scanning technology and pioneering 3D design & product development to deliver continued fit improvements in quality products at affordable prices. In addition, we will continue to evolve from design influenced by seasonal trends to key product 'shouts' dropped cohesively in three weekly cycles and thus allow substantially reduced lead times. Our experience of recent peak trading periods gives us confidence in our ability to buy more promotional product to complement our core ranges and maintain a freshness in our offering. In our Home and Gift proposition, we anticipate a tightened curation, built on a strong central range with more brand specific product.
The purpose of the Group is to be as customer-inclusive as possible which ensures we remain focused on our product truly resonating with our customers' needs. Here, our fit-focus expertise remains an essential part of our DNA. The strongest customer feedback we receive is the emotional response that a good or poorly fitting piece of clothing elicits. Harnessing this feedback ever more quickly and channeling it into agile product re-orders or improvements in quality is essential.
We will invest further in design and sourcing. All these areas will be underpinned with a renewed and enhanced sustainability and ethical sourcing investment plan to build upon strong foundations in this area.
Finally, we will continue to evolve the way we engage with our customers, improving the quality and breadth of our brand and influencer reach, and substantively better targeted marketing and promotional activity to ensure a more personalised experience.
4. We will trade smarter with Data
Strategic Objective: Improve operating efficiency and customer targeting
What we are doing: Enhanced use of our rich data has already unlocked operational efficiencies and improved customer insight in our business, but our strategy is underpinned by a further step change in how we harness and use this data. Substantive investment in new skills and technology platforms, established partnerships with third-party analytics leaders and a "test-and-learn" data culture embedded throughout the organisation are progressing, and there remains significant opportunity to develop these much further.
Through a mix of tactical quick wins and longer-term initiatives, we will enhance personalisation and use data to optimise fit for our customers to ensure we create the right product for them. We have used Artificial Intelligence modelling, which predicts size profiles and return rates, along with the effectiveness of product attribution and image data in predication. Early results from this have been successful and will be further developed in this financial year.
In addition, specific opportunities have been identified targeting a more optimised product range in terms of breadth, frequency of newness/lifecycle analysis, and price using historical data of product performance, customer journeys and price architecture. Recent positive peak-season success with newly implemented promotional tools in merchandising will now be more widely embedded. This will be complemented by improvements in the targeting of discount codes to each customer, as well as a further unification of all promotional planning in the business to ensure enhanced forecasting of marketing promotions.
Data and analytics initiatives are also driving innovation to ensure we appeal to more customers who value a flexible credit offering. During FY19, we significantly reduced our headline interest rates and launched an introductory six-month interest free offer for new credit accounts. Analytics has also supported a new arrears management strategy which has led to an improved level of balances in arrears at our year end. We will also launch an initiative to enhance new customers' credit assessment in the account opening process.
5. We will inspire colleagues toward further delighting our customers
Strategic Objective: Better engaged colleagues will deliver an improved customer experience
What we are doing: Our people strategy is focused on creating the right culture and environment which attracts, retains and inspires colleagues to thrive and deliver a great experience for our customers. As our customers' shopping habits have rapidly changed, we are supporting colleagues to be more customer focused. Changes to our internal reward and performance management processes will reflect this - notably to ensure a more nimble, real-time feedback and appraisal approach.
We have already made changes to a variety of commercial teams to increase pace and customer ownership, whilst at the same time, we are also investing further in critical skills in data science and user experience. Engaging our colleagues in the new strategy and more closely aligning their roles to delight our customers, we believe fundamentally underpins the business in delivering sustainable profit growth.
Strategy summary
There is a substantial amount of activity already underway at N Brown but a refocusing of our strategy on delighting our customers is fundamental to successful delivery of the Group's potential. Decisions taken in the previous financial year are in the short-term likely to marginally hold back Group revenue growth. Notwithstanding this, our strategy is expected to maintain short-term profitability. Going forward, our strategy is very much focused on driving sustainable digital revenue, profit and free cash flow growth to deliver improved shareholder value.
On behalf of the Board, I would like to thank all of our colleagues for their very significant contributions in what has been a challenging but developmental year for the business. This commitment, together with our recent progress in a number of our focus areas, has embedded momentum for N Brown to now measurably deliver upon its digital retail proposition for customers.
Outlook
We have made solid progress focusing on profitable, digital growth in the second half of the year despite the challenging external environment. Whilst mindful of the continued challenging macro-economic environment and uncertainties surrounding Brexit, we are focused on driving sustainable digital revenue, profit and free cashflow growth to deliver improved shareholder value.
Steve Johnson, CEO 2 May 2019
KPI PERFORMANCE
FY19 FY18 % change
------------------------------------------ ----- ----- ---------
Digital
------------------------------------------ ----- ----- ---------
Digital penetration(1) 80% 73% +7ppts
Digital penetration of new customers 91% 81% +10ppts
Conversion rate 4.9% 5.3% -40bps
% traffic from mobile devices 78% 76% +2ppts
------------------------------------------ ----- ----- ---------
Customers
Customer satisfaction rating* 86.3% 85.8% +50bps
Active customer accounts 3.90m 4.45m -12.4%
Power Brand active customer accounts 2.15m 2.22m -3.2%
% Growth of our most loyal customers** -2.6% -0.2% -240bps
------------------------------------------ ----- ----- ---------
Product
Ladieswear market share, size 16+ 5.8% 5.6% +20bps
Menswear market share, chest 44"+ 2.5% 2.7% -20bps
Group returns rate (rolling 12 months) 28.0% 27.1% +90bps
------------------------------------------ ----- ----- ---------
Financial services
Customer account arrears rate (>28 days) 8.9% 8.7% +20bps
Provision rate*** 14.2% 17.9% -370bps
New credit recruits (Rollers)**** 111k 122k -8.9%
------------------------------------------ ----- ----- ---------
1 Revenue excluding stores
*UK Institute of Customer Service survey (UKICS)
** Defined as customers who have ordered in each of the last four seasons
*** FY18 restated for IFRS 9
**** Rollers are those customers who roll a credit balance. Figures represent last 6 months.
Market shares are estimated using internal and Kantar data, 52 weeks ended 11th February 2019 compared to 52 weeks ended 12th February 2018.
Digital accounted for 80% of our product revenue(1) during the year, up 7ppts and 91% of sales from new customers were generated digitally, up 10ppts. By brand, Ambrose Wilson saw the most significant increase in new customer digital penetration, from 31% to 61%. Mobile devices (smartphones and tablets) accounted for 78% of digital traffic in the year, up 4ppts. Within this, smartphones remain the device of choice for customers, with web sessions here increasing 8ppts to account for 61% of all traffic. The conversion rate declined 40bps in the year. The ongoing increase in mobile devices, both smartphone and tablet, as a proportion of traffic represents a natural drag on overall conversion rates however at 4.9% our conversion rate remains above the industry standard.
Our most recent customer satisfaction score from the UK Institute of Customer Service was 86.3%, an improvement of 50bps on the prior year rating. Our active customer file decreased by 12.4% to 3.90m, primarily driven by a focus on digital growth and a managed decline of our offline recruitment. Our most loyal customers, being those who have ordered in each of the last four seasons, was down 2.6% year on year. This again is as a result of the managed decline of our offline business.
In the 52 weeks to 12 February we gained 20bps of market share in Ladieswear (size 16+) to 5.8%. Menswear (chest 44"+) declined 20bps to 2.5%. We saw a slight increase in our returns rate, up 90bps to 28.0%. As a digital retailer, we expect our returns rate to slightly increase due to the nature of the higher returns rate of a digital customer.
Credit arrears (>28 days) were broadly flat at 8.9% (vs 8.7% LY). In the last 6 months we recruited 111k new credit customers who rolled a balance, down from 122k in the prior year, albeit an improvement from the 90k recruited in the first half of the financial year. The reduction was largely driven by tighter control around lending decisions.
FINANCIAL RESULTS
Revenue
Group revenue declined 0.8% to GBP914.4m with product revenue declining 5.6% offset by a 10.8% increase in Financial services revenue. Product revenue was GBP615.8m, reflecting a continued shift in focus from our legacy offline business to digital growth, the ongoing challenging market conditions for fashion retail and the closure of our store portfolio. Excluding stores, which are all now closed, Product revenue was down 4.2%. Financial services revenue was GBP298.6m as we benefited from increased interest received from the Group's growing customer loan book.
Revenue performance by quarter was as follows:
% yoy growth Q1 (13wks) Q2 (13wks) Q3 (18wks) Q4 (8wks) --------------------- ------------------ ---------- -------------- ------------- Product (2.8)% (4.6)% (8.4)% (4.8)% Financial services +9.0% +16.0% +9.7% +7.5% --------------------- ------------------ ---------- -------------- ------------- Group Revenue +0.4% +1.5% (3.5)% (0.3)%
Revenue by category was as follows:
GBPm FY19 FY18 Change ------------------------- ----- ------------- ------------- Ladieswear 256.5 267.6 (4.1)% Menswear 85.0 89.2 (4.7)% Footwear & Accessories 70.8 74.9 (5.5)% Home & Gift 203.5 220.9 (7.9)% ------------------------- ----- ------------- ------------- Product total 615.8 652.6 (5.6)% ------------------------- ----- ------------- -------------
Product category performance was impacted by the managed decline of the offline business and the closure of stores in the year. Ladieswear declined as a result of lower sales in branded ladies clothing. Both Menswear and Footwear & Accessories declined largely due to Premier Man. Home & Gifts performance was principally due to lower revenue at House of Bath.
Gross margin
The Group's gross margin was 54.4%, down 40bps compared to FY18. This decline was as a result of a 10bps decline in the product gross margin to 52.1% and a 200bps decline in the financial services margin to 59.2%.
The product gross margin represented a solid performance in a highly promotional retail environment. The decline in the financial services gross margin was driven by the requirement under IFRS 9 to make a provision against every new credit customer, including those that are trading normally.
Operating performance
GBPm FY19 FY18 Change ------------------------------ -------------- ------------- -------------- Product revenue 615.8 652.6 (5.6)% Financial services revenue 298.6 269.6 +10.8% ------------------------------ -------------- ------------- -------------- Group revenue 914.4 922.2 (0.8)% ------------------------------ -------------- ------------- -------------- Product gross profit 320.8 340.5 (5.8)% Product gross margin % 52.1% 52.2% (0.1)ppts Financial services gross profit 176.9 165.1 +7.1% Financial services gross margin % 59.2% 61.2% (2.0)ppts ------------------------------ -------------- ------------- -------------- Group Gross Profit 497.7 505.6 (1.6)% Group Gross Profit margin % 54.4% 54.8% (0.4)% ------------------------------ -------------- ------------- -------------- Warehouse & fulfilment (84.0) (85.8) (2.1)% Marketing & production (157.8) (164.0) (3.8)% Admin & payroll (127.9) (137.2) (6.8)% ------------------------------ -------------- ------------- -------------- Total operating costs (369.7) (387.0) (4.5)% ------------------------------ -------------- ------------- -------------- Adjusted EBITDA 128.0 118.6 +7.9% Adjusted EBITDA margin % 14.0% 12.9% +1.1ppts ------------------------------ -------------- ------------- -------------- Depreciation & amortisation (30.1) (28.1) +7.1% ------------------------------ -------------- ------------- -------------- Adjusted Operating Profit 97.9 90.5 +8.2% Adjusted Operating margin % 10.7% 9.8% +0.9ppts ------------------------------ -------------- ------------- -------------- Operating loss / profit (47.7) 33.6 (242.0)% ------------------------------ -------------- ------------- -------------- Net Finance costs (14.3) (8.9) +60.7% Adjusted PBT 83.6 81.6 +2.5%
------------------------------ -------------- ------------- -------------- Exceptional items (145.6) (56.9) +155.9% Unrealised FX movement 4.5 (8.5) (152.9)% Statutory Loss / Profit before Tax (57.5) 16.2 (454.9)% ------------------------------ -------------- ------------- -------------- Core net debt(3) 77.7 66.8 16.3% Overall net debt(4) 467.9 346.8 34.9% ------------------------------ -------------- ------------- --------------
1 Adjusted EBITDA is defined as operating profit, excluding exceptionals, with depreciation and amortisation added back. The directors believe that adjusted EBITDA represents the most appropriate measure of the Group's underlying trading performance.
2 Defined as excluding exceptionals and fair value movement on financial instruments. 3 Excludes debt securitised against receivables (customer loan book) of GBP390.2m (2018: GBP280.0m). (4) Total liabilities from financing activities less cash.
Operating Costs before exceptionals
Warehouse and fulfilment costs decreased by 2.1% to GBP84.0m. This was driven by lower volumes and continued efficiencies. The decrease in Warehouse and fulfilment was greater during the second half, with 3.7%, compared to the first half decrease of 0.3%.
Marketing costs were down 3.8% year on year, as the Group continued to scale back offline marketing and recruitment, consistent with the strategy of focusing on digital growth and improving marketing efficiency.
Admin and payroll costs decreased by 6.8%, driven both by the actions taken to close our store estate during FY18 and FY19 as well as increased Head Office efficiencies.
Adjusted EBITDA increased by 7.9% to GBP128.0m, with Adjusted EBITDA margin increasing by 1.1ppts to 14.0% (FY18: 12.9%). Depreciation and Amortisation increased by 7.1% reflecting historical and ongoing investments in IT systems. Overall, operating profit before exceptional items was GBP97.9m, up 8.2% year on year, with operating margin increasing by 0.9ppts to 10.7%. Adjusted profit before tax was GBP83.6m, up 2.5% year on year as a result of a good margin performance, strong financial services and the delivery of marketing and other operational efficiencies. Statutory loss before tax was (GBP57.5m), as a result of the exceptional costs incurred during the year.
Net finance costs
Net finance costs were GBP14.3m, up 60.7% compared to FY18, due to the increase in net debt driven by growth in our customer loan book.
Financial services and IFRS 9
IFRS 9 has replaced the IAS39 standard and came into effect in FY19, therefore this is the first full year in which we are reporting under IFRS 9. IFRS 9 significantly increases our provision for receivables. Importantly, it has no cash flow impact and neither does it materially change how we operate our Financial services business. As a result of IFRS 9 our gross bad debt charge increased by 19.6% to
GBP119.0m (FY18: GBP99.5m).
Compared to the same period last year (restated on an IFRS 9 basis), the provision rate decreased by 370bps due to an underlying improvement in the quality of the loan book and the disposal of some high- risk payment debt which was sold at a better rate than the book value.
GBPm 2 Mar 2019 3 Mar 2018 Change ------------------------------ ---------- --------------- ----------- Gross customer loan balances 682.2 647.6 5.3% IFRS 9 bad debt provision (97.1) (116.0)* -16.3% IFRS 9 provision ratio 14.2% 17.9%* -370bps Net customer loan balances 585.1 531.6* 10.1% ------------------------------ ---------- --------------- -----------
* restated for IFRS 9. The bad debt provision previously reported under IAS39 was GBP48.8m (provision ratio of 7.5%).
Exceptional items
Exceptional costs of GBP65.4m were incurred during the first half, as previously announced. In the second half we incurred GBP80.2m primarily relating to an impairment charge on the Group's VAT debtor asset, legacy customer redress payments and costs associated with the closure of the store estate. Of the
GBP22.7m additional provision made for customer redress in the second half of the financial year, GBP14.1m has already been paid out in cash.
GBPm FY19 FY18 -------------------------------------------- --------------- ---- Customer redress 45.0 40.0 Closure costs 22.0 13.8 Impairment of tangible, intangible assets and brands 20.0 - VAT Debtor impairment 49.4 - GMP equalisation adjustment 0.3 - Other VAT matters inc associated legal & professional fees 8.9 3.1 -------------------------------------------- --------------- ---- Total exceptional costs 145.6 56.9 -------------------------------------------- --------------- ----
See Note 5 for more details
Taxation
The effective underlying rate of corporation tax is 26.9% (FY18: 23.3%). The overall tax charge is GBP0.8m (FY18: GBP3.7m charge).
VAT partial exemption
The Group has been in a long running dispute with HMRC with respect to the VAT treatment of certain marketing and non-marketing costs and the allocation of those costs between our retail and credit business. The case in respect of marketing costs was heard in a first tier VAT tribunal in May 2018 with a draft decision being issued in November 2018 which was published in March 2019.
The case has two key aspects, those being attribution which is in respect of whether marketing costs can be directly attributed to product revenue or financial services income and secondly apportionment which is surrounding the allocation of marketing costs between the retail and financial services business. With respect to attribution, the judge agreed with HMRC, finding that when the Group is marketing goods it is also in effect marketing financial services, even if there is no reference to this in its marketing materials.
The judge however ruled against HMRC's standard method of apportionment of costs (which is based
upon the proportion of total UK revenue which is generated from product sales).
Whilst discussions are on-going with HMRC and a final outcome not yet achieved, following the ruling management have reviewed the likelihood of recovering the carrying value of the asset held as at
February 2018 of GBP43.8m and as a result of this review have written down the value by GBP37.9m.
As the Group has not yet been assessed by HMRC for the period June 2017 to March 2019 this has also resulted in an additional charge of GBP11.5m. This results in a total exceptional charge of GBP49.4m and a VAT creditor at year end of GBP6.6m (2018: GBP43.8m asset).
Earnings per share
Loss per share from continuing operations was (20.50)p (FY18 earnings per share: 4.41p). Adjusted earnings per share from continuing operations were 21.38p (FY18: 23.06p).
Dividends
In October, the Board took the decision to rebase the dividend to a more sustainable level from which we will seek to grow as earnings progress. As a result, we are recommending a final dividend of 7.1p per share.
Balance Sheet and Cash Flow
Capital expenditure was GBP36.3m (FY18: GBP39.2m). Inventory levels at the period end were down 9.8%, to
GBP99.8m (FY18: GBP110.6m) as a result of tighter stock management.
Gross trade receivables increased by 5.3% to GBP682.2m (FY18: GBP647.6m) as a result of the growth in the loan book.
Net cash used in operations (excluding taxation) was GBP35.0m compared to GBP44.3m generated last year, principally driven by a cash outflow of GBP84.6m related to exceptional items. After funding capital expenditure, finance costs, taxation and dividends, net debt increased from GBP346.8m to GBP467.9m, in line with guidance. The GBP585.1m net customer loan book significantly exceeds this net debt figure.
The Group has an available financing facility totalling GBP625m, made up of a securitisation facility of
GBP500m and an RCF of GBP125m, both secured until 2021.
The Group's balance sheet is underpinned by its customer loan book, which at 2 March 2019 was
GBP682.2m on a gross basis and GBP585.1m on a net basis, calculated under IFRS 9.
Compared to 3 March 2018 the Group's overall net debt increased by GBP121.1m to GBP467.9m, in line with guidance, principally due to exceptional cash outflows of GBP84.6m and the growth in the loan book of
GBP34.6m.
Core debt, which is defined as the amount drawn on the Group's RCF less cash was GBP77.7m. On this
basis, the Group's leverage is 0.6x on a net debt/EBITDA basis.
The group's defined benefit pension scheme has a surplus of GBP23.9m (FY18: GBP19.3m surplus). The
increase in the surplus is as a result of general market changes in asset returns during the year.
FX sensitivity
For FY20 we have hedged 100% of our net purchases at a blended rate of $/GBP1.34. At a rate of $/GBP1.30, and before any mitigating actions or changes in annual requirements, this would result in a c.GBP0.3m PBT tailwind compared to FY19 (hedged rate $/GBP1.33).
For FY21 we have, to date, hedged 60% of our net purchases at a blended rate of $/GBP1.32. At a rate of
$/GBP1.30, and before any mitigating actions or changes in annual requirements, this would result in a c.GBP2.0m PBT headwind compared to FY20. Every 5 cents move from this rate in our unhedged position would result in a PBT sensitivity of c.GBP2m.
FY20 Guidance
We are providing the following guidance for FY20:
-- Product gross margin flat to -100bps -- Financial services gross margin flat to -100bps -- Group operating costs -2.5% to -4.5% -- Depreciation & Amortisation GBP31m to GBP33m -- Net interest GBP17m to GBP18m -- Tax rate 20-21% -- Capex c.GBP 35-40m -- FY20 Year-end net debt GBP440m to GBP460m, although half year net debt will be in the range
GBP475m to GBP500m given continued customer redress and tax settlement payments
Unaudited
consolidated
income
statement for the
52 weeks
ended 2 March 2019 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks 52 weeks
to to to to to to
02-Mar-19 02-Mar-19 02-Mar-19 03-Mar-18 03-Mar-18 03-Mar-18
Before Exceptional Total Before Exceptional
exceptional items GBPm exceptional items
Items (Note Items (Note 5) Total
GBPm 5) GBPm GBPm GBPm GBPm
Note
Revenue 647.2 - 647.2 685.2 - 685.2
Credit account
interest 4 267.2 - 267.2 237.0 - 237.0
-------------------- ----------------- ------------- -------------------- ------------------ -------------
Total revenue
(including credit
account interest) 4 914.4 - 914.4 922.2 - 922.2
Cost of sales (308.4) - (308.4) (322.9) - (322.9)
Impairment losses
on customer
receivables 4 (119.0) - (119.0) (99.5) - (99.5)
Profit on sale of
customer
receivables 4 10.7 - 10.7 5.8 - 5.8
-------------------- ----------------- ------------- -------------------- ------------------ -------------
Gross profit 4 497.7 - 497.7 505.6 - 505.6
-------------------- ----------------- ------------- -------------------- ------------------ -------------
Operating
(loss)/profit 4 97.9 (145.6) (47.7) 90.5 (56.9) 33.6
Finance costs (14.3) - (14.3) (8.9) - (8.9)
-------------------- ----------------- ------------- -------------------- ------------------ -------------
(Loss)/Profit
before fair
value adjustments
to financial
instruments 83.6 (145.6) (62.0) 81.6 (56.9) 24.7
Fair value
adjustments to
financial
instruments 6 4.5 - 4.5 (8.5) - (8.5)
-------------------- ----------------- ------------- -------------------- ------------------ -------------
(Loss)/Profit
before taxation 88.1 (145.6) (57.5) 73.1 (56.9) 16.2
Taxation 7 (23.7) 22.9 (0.8) (14.6) 10.9 (3.7)
-------------------- ----------------- ------------- -------------------- ------------------ -------------
(Loss)/Profit for
the period 64.4 (12.7) (58.3) 58.5 (46.0) 12.5
-------------------- ----------------- ------------- -------------------- ------------------ -------------
(Loss)/Profit
attributable
to equity holders
of the parent 64.4 (122.7) (58.3) 58.5 (46.0) 12.5
-------------------- ----------------- ------------- -------------------- ------------------ -------------
(Loss)/Earnings
per share
from continuing
operations 8
(20.50)
Basic p 4.41 p
(20.50)
Diluted p 4.40 p
Unaudited consolidated statement of comprehensive income
for the 52 weeks ended 2 March 2019
52 weeks 52 weeks
to to
02-Mar-19 03-Mar-18
GBPm GBPm
(Loss)/Profit for the period (58.3) 12.5
Items that will not be reclassified
subsequently to profit or loss
Actuarial gains on defined benefit pension
schemes 3.9 10.5
Tax relating to items not reclassified (4.9) (1.8)
---------- ---------
(1.0) 8.7
---------- ---------
Items that may be reclassified subsequently
to profit or loss
Exchange differences on translation
of foreign operations 0.7 (0.2)
Total comprehensive (expense)/income
for the period attributable
---------- ---------
to equity holders of the parent (58.6) 21.0
---------- ---------
Unaudited consolidated balance sheet
As at 2 March 2019
As at 2 March As at 3
2019 March
2018
Note GBPm GBPm
Non-current assets
Intangible assets 9 145.2 156.0
Property, plant & equipment 10 59.4 67.4
Retirement benefit surplus 23.9 19.3
Deferred tax assets 18.8 2.8
-------- -------
247.3 245.5
-------- -------
Current assets
Inventories 99.8 110.6
Trade and other receivables 11 621.0 652.7
Cash and cash equivalents 43.7 58.2
-------- -------
764.5 821.5
-------
Total assets 1,011.8 1,067.0
-------- -------
Current liabilities
Bank overdraft (11.4) -
Provisions 13 (24.8) (43.8)
Trade and other payables 12 (140.9) (131.7)
Derivative financial instruments 6 (1.5) (6.0)
Current tax liability (7.1) (3.3)
-------- -------
(185.7) (184.8)
-------- -------
Net current assets 578.8 636.7
-------- -------
Non-current liabilities
Bank loans (500.2) (405.0)
Provisions 13 - (5.4)
Deferred tax liabilities (14.5) (12.2)
-------- -------
(514.7) (422.6)
-------
Total liabilities (700.4) (607.4)
-------
Net assets 311.4 459.6
-------- -------
Equity
Share capital 31.4 31.4
Share premium account 11.0 11.0
Own shares (0.3) (0.2)
Foreign currency translation
reserve 2.8 2.1
Retained earnings 266.5 415.3
-------- -------
Total equity 311.4 459.6
-------- -------
Unaudited consolidated cash flow statement
for the 52 weeks ended 2 March 2019
52 weeks 52 weeks
to to
02-Mar-19 03-Mar-18
GBPm GBPm
Net cash (outflow)/inflow from operating activities (37.1) 32.2
Investing activities
Purchases of property, plant and equipment (3.4) (2.6)
Purchases of intangible assets (32.9) (36.6)
---------- ----------
Net cash used in investing activities (36.3) (39.2)
---------- ----------
Financing activities
Interest paid (15.4) (8.6)
Dividends paid (32.2) (40.3)
Increase in bank loans 95.2 50.0
Purchase of shares by ESOT - 0.1
Proceeds on issue of shares held by ESOT (0.1) (0.1)
---------- ----------
Net cash from financing activities 47.5 1.1
---------- ----------
Net decrease in cash and cash equivalents and bank
overdraft (25.9) (5.9)
Opening cash and cash equivalents and bank overdraft 58.2 64.1
---------- ----------
Closing cash and cash equivalents and bank overdrafts 32.3 58.2
---------- ----------
Reconciliation of operating profit to net cash from operating activities
52 weeks 52 weeks
to to
02-Mar-19 03-Mar-18
GBPm GBPm
(Loss)/profit for the year (58.3) 12.5
Adjustments for:
Taxation charge 0.8 3.7
Fair value adjustments to financial instruments (4.5) 8.5
Finance costs 14.3 8.9
Depreciation of property, plant and equipment 4.9 5.7
Loss on disposal of property, plant and equipment 5.0 2.7
Loss on disposal of intangible assets 0.7 -
Impairment of intangible assets 17.8 -
Impairment of property, plant and equipment 1.5 -
Amortisation of intangible assets 25.2 22.4
Share option charge 0.1 0.6
---------- ----------
Operating cash flows before movements in working capital 7.5 65.0
Decrease/(Increase) in inventories 10.8 (5.1)
Increase in trade and other receivables (34.0) (77.6)
Increase in trade and other payables 5.6 33.0
(Decrease)/Increase in provisions (24.4) 29.3
Pension obligation adjustment (0.5) (0.3)
---------- ----------
Cash (used in) / generated by operations (35.0) 44.3
Taxation paid (2.1) (12.1)
---------- ----------
Net cash (outflow)/inflow from operating activities (37.1) 32.2
---------- ----------
Changes in liabilities from financing activities
52 weeks 52 weeks
to to
02-Mar-19 03-Mar-18
GBPm GBPm
Loans & Borrowings
Balance brought forward 405.0 355.0
---------- ----------
Changes from financing cashflows
Net proceeds from loans and borrowings 94.1 50.0
Increase in loans and borrowings due to interest 1.1 -
---------- ----------
Balance carried forward 500.2 405.0
---------- ----------
Unaudited consolidated statement of changes in equity
for the 52 weeks ended 2 March
2019
Foreign
currency
Share Share Own translation Retained
capital premium shares reserve earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm
Changes in equity for the 52 weeks
to 2 March 2019
Balance as at 4 March 2017 31.3 11.0 (0.1) 2.3 433.7 478.2
Total comprehensive income for
the period
Profit for the period - - - - 12.5 12.5
Other items of comprehensive income
for the period - - - (0.2) 8.7 8.5
----------- ------- ------ ----------- -------- ------
Total comprehensive income for
the period - - - (0.2) 21.2 21.0
----------- ------- ------ ----------- -------- ------
Transactions with owners recorded
directly in equity
Equity dividends - - - - (40.3) (40.3)
Issue of ordinary share capital 0.1 - - - - 0.1
Issue of own shares by ESOT - - (0.1) - - (0.1)
Share option charge - - - - 0.6 0.6
Tax on items recognised directly
in equity - - - - 0.1 0.1
----------- ------- ------ ----------- -------- ------
Total contributions by and distributions
to the owners 0.1 - (0.1) - (39.6) (39.6)
------
Balance as at 3 March 2018 31.4 11.0 (0.2) 2.1 415.3 459.6
Adjustment on initial application
of IFRS9 (net of tax) - - - - (55.5) (55.5)
Adjustment on initial application
of IFRS15 (net of tax) - - - - (1.5) (1.5)
----------- ------- ------ ----------- -------- ------
Balance at 3 March 2018 31.4 11.0 (0.2) 2.1 358.3 402.6
Total comprehensive income for
the period
Loss for the period - - - - (58.3) (58.3)
Other items of comprehensive income
for the period - - - 0.7 (1.0) (0.3)
----------- ------- ------ ----------- -------- ------
Total comprehensive loss for the
period - - - 0.7 (59.3) (58.6)
----------- ------- ------ ----------- -------- ------
Transactions with owners recorded
directly in equity
Equity dividends - - - - (32.2) (32.2)
Issue of own shares by ESOT - - (0.1) - - (0.1)
Share option charge - - - - 0.1 0.1
Tax on items recognised directly
in equity - - - - (0.4) (0.4)
----------- ------- ------ ----------- -------- ------
Total contributions by and distributions
to the owners - - (0.1) - (32.5) (32.6)
------
Balance as at 2 March 2019 31.4 11.0 (0.3) 2.8 266.5 311.4
----------- ------- ------ ----------- -------- ------
Notes to the unaudited consolidated financial statements
for the 52 weeks ended 2 March 2019
1. Basis of preparation
The Group's financial statements for the 52 weeks ended 2 March 2019
will be prepared in accordance with International Financial Reporting
Standards (IFRS) as adopted for use in the EU.
Whilst the financial information included in this preliminary announcement
has been prepared in accordance with IFRS, this announcement does not
itself contain sufficient information to comply with IFRS. As such, these
financial statements do not constitute the Group's statutory accounts
and the Group expects to publish full financial statements that comply
with IFRS in May 2019.
The accounting policies and presentation adopted in the preparation of
these consolidated financial statements are consistent with those disclosed
in the published annual report & accounts for the 52 weeks ended 3 March
2018.
There have been no significant new or revised accounting standards applied
in the 52 weeks ended 2 March 2019 except for as follows.
New accounting standards, interpretations and amendments adopted by the
Group
IFRS 15 Revenue from Contracts with Customers
IFRS 15 establishes a comprehensive framework for determining whether,
how much and when revenue is recognised. It replaces IAS 18 Revenue,
IAS 11
Construction Contracts and related interpretations. Under IFRS 15, revenue
is recognised when a customer obtained control of the goods or services.
The standard introduces a new revenue recognition model that recognises
revenue either at a point in time or over time. The model features a
contract-based five step analysis of transactions to determine whether,
how much and when revenue is recognised. The Group have performed a comprehensive
review of all revenue streams, focusing on those most likely to be impacted
by IFRS 15. From this review, it was determined that no changes are required
to our current revenue recognition methods.
Product revenue
Product revenue is for the sale of a product which generally includes
one performance obligation. The Group has concluded that revenue from
product sales should be recognised when a customer obtains control of
the goods, i.e. on delivery of the product. For product sales, this is
recognised upon delivery to the customer premises, as detailed in our
accounting policy. This is the point in time at which the customer accepts
the risks and rewards of ownership transfer and the control passes to
the customer. The impact upon transition to IFRS 15 is immaterial.
Also under IFRS 15, the Group estimates the value of goods that will
be returned. Under the old standard, IAS 8, expected returns were estimated
using a similar approach and therefore no adjustment was required upon
transition to IFRS 15.
Based on its assessment above, the application of IFRS15 has not had
a significant impact on the Group's consolidated financial statements.
The Group has adopted IFRS 15 using the cumulative effect method (without
practical expedients), with the effect of initially applying this standard
recognised at the date of initial application (i.e. 1 January 2018).
As a result, the Group will not apply the requirements of IFRS 15 to
the comparative period presented.
IFRS 16 Leases
The Group is required to adopt IFRS 16 Leases from 1 January 2019, therefore
it will be applicable to the Group for the year ending 29 February 2020
and has not been early adopted by the Group. IFRS 16 will affect the
presentation of the Group consolidated financial statements introducing
a single, on-balance sheet lease accounting model for lessees.
A lessee recognises a right-use asset representing its right to use the
underlying asset and a corresponding lease liability representing its
obligation to make lease payments. There are recognition exemptions available
for short term leases and leases of low-value items, which the Group
plans to adopt.
Through the work performed by the Group to date to assess the impact
on transition, the Group have sought professional advice and held accounting
workshops to evaluate the impact on the Group's results, financial position
and budgets.
This will affect the Balance Sheet, Income Statement and disclosures
to the financial statements, however through the work performed by the
Group to date to assess the impact on transition, the net impact on all
of the above Primary Financial Statements is estimated to be immaterial.
The Group plans to apply IFRS 16 for the year ending 29 February 2020
using the modified retrospective approach.
IFRIC 23 Uncertainty over Income Tax Treatments
The Group is required to adopt IFRIC 23 Uncertainty over Income Tax Treatments
from 1 January 2019, therefore it will be applicable to the Group for
the year ending 29 February 2020. This has not been early adopted by
the Group.
The Group have not yet finalised their assessment of IFRIC 23 and expect
the Group's open uncertain tax treatments to have progressed by the year
ending 29 February 2020. However, through the draft assessment completed
to date, the Group expect the impact on the Group's financial statements
to be immaterial.
IFRS 9 Financial Instruments
The Group has initially applied IFRS9 from 4 March 2018. Due to the transition
methods chosen by the Group in applying this standard, comparative information
throughout these financial statements has not been restated to reflect
the requirements of the new standard. The effect of initially applying
this standard has been an increase in impairment losses recognised in
financial assets.
Transition
Changes in accounting policies resulting from the adoption of IFRS9 have
been applied retrospectively except the group has used an exemption not
to restate comparative information for prior periods with respect to
classification and measurement including impairment requirements. Differences
in the carrying amounts of financial assets and liabilities resulting
from the adoption of IFRS 9 are recognised in retained earnings and reserves
as at 4 March 2018. Accordingly, the information presented for the period
to 3 March 2018 reflects the requirements of IAS 39 rather than IFRS
9.
As a result of the adoption of IFRS 9, the Group has adopted consequential
amendments to IAS1 Presentation of Financial Statements, which require
separate presentation in the Consolidated Income Statement of interest
revenue calculated using the effective interest rate method. Previously,
the Group disclosed this amount in the notes to the financial statements.
i) Classification - financial assets
IFRS 9 contains a new classification and measurement approach for financial
assets that reflects the business model in which assets are managed and
their cash flow characteristics. IFRS 9 contains three principal classification
categories for financial assets: measured at amortised cost, fair value
through other comprehensive income ("FVOCI") and fair value through profit
and loss ("FVTPL"). The standard eliminates the existing IAS 39 categories
of held to maturity, loans and receivables and available for sale. A
financial asset is measured at amortised cost if both the following conditions
are met and it has not been designated as at FVTPL:
* the asset is held within a business model whose
objective is to hold the asset to collect its
contractual cash flows; and
-- the contractual terms of the financial asset give rise to cash flows
on specified dates that represent payments of solely principal and interest
on the outstanding principal amount.
Trade and other receivables that were classified as loans and receivables
under IAS 39 are now classified at amortised cost. An increase of GBP67.2m
in the allowance for impairment over these receivables was recognised
in the opening retained earnings at 4 March 2018 on transition to IFRS
9.
The Group held financial instruments that would be classified as FVTPL
at 2 March 2019. The profit/(loss) on fair value adjustments was GBP4.5m
(FY18: (GBP8.5m)).
ii) Impairment
IFRS 9 replaces the 'incurred loss' model in IAS 39 with a forward-looking
'expected credit loss' (ECL) model. As the Group has determined there
is a significant financing component the ECL model introduces the concept
of staging.
Stage 1 - assets which have not demonstrated any significant increase
in credit risk since origination
Stage 2 - assets which have demonstrated a significant increase in credit
risk since origination
Stage 3 - assets which are credit impaired
Under IFRS 9, loss allowances will be measured on either of the following
bases:
* 12-month ECLs: these are ECLs that result from
possible default events within the 12 months after
the reporting date; and
* Lifetime ECLs: these are ECLs that result from all
possible default events over the expected life of a
financial instrument.
12 month ECLs are calculated for assets in Stage 1 and lifetime ECLs
are calculated for assets in Stages 2 and 3. Assets can move from Stage
1 to Stage 2 if there is evidence of a significant increase in credit
risk since origination.
The ECL is calculated using inputs relating to the Probability of Default
(PD), Exposure at Default (EAD) and Loss Given Default (LGD).
The Probability of Default is an estimate of the likelihood of default
over 12 months and the expected lifetime of the debt.
The Exposure at Default is an estimate of the exposure at the date of
default, taking into account expected changes in the exposure after the
reporting date such as interest accrued.
The Loss Given Default is an estimate of the loss arising on default,
including an estimation of recoveries.
Definition of default
At each reporting date, the Group will assess whether financial assets
carried at amortised cost are in default. Evidence that a financial asset
is in default includes the following observable data: The account has
been placed on a non-interest bearing payment arrangement (as part of
forebearance measures); notification of bereavement has been received;
or the receivable is 56 or more days past due for new customers and 84
days past due for established customers.
Definition of write off
The Group considers that an asset should be written off when it is more
than 124 days past due for new customers and 152 days past due for established
customers and all arrears activity has been exhausted.
Significant increase in credit risk
The credit risk of a financial asset will be considered to have experienced
a significant increase in credit risk since initial recognition where
there has been a significant increase in the remaining lifetime probability
of default of the asset.
As a general indicator, credit risk is deemed to have increased significantly
since initial recognition if based on the Group's quantitative modelling
the remaining lifetime probability of default is determined to have increased
by more than 250% of the corresponding amount estimated on initial recognition.
As a backstop, the Group considers that a significant increase in credit
risk occurs no later than when an asset is more than 28 days past due.
Days past due are determined by counting the number of days since the
earliest elapsed due date in respect of which the minimum payment has
not been received. Due dates are determined without considering any grace
period that might be available to the borrower.
The credit risk of a financial asset may improve such that it is no longer
considered to have experienced a significant increase in credit risk
if there has been a significant decrease in the remaining lifetime probability
of default of the asset.
Incorporation of forward looking data
The Group incorporates forward looking information into its measurement
of expected credit loss. This is achieved by developing a number of potential
economic scenarios and modelling expected credit losses for each scenario.
The outputs from each scenario are combined; using the estimated likelihood
of each scenario occurring to derive a probability weighted expected
credit loss.
Impact of the new impairment model
The Group has determined that the application of IFRS 9's impairment
requirements at 4 March 2018 results in an additional impairment allowance
as set out in note 11. Exposures were segmented based on common credit
risk characteristics such as behavioural score and age of relationship.
2. Key risks and uncertainties
Several potential risks and uncertainties may impact on the Group's performance
over the next twelve months or longer term. The directors routinely monitor
all risks and uncertainties, taking appropriate actions to mitigate where
necessary. Whilst further detail is included in the Group's 2019 Annual Report,
the risks which have been identified as potentially having a material impact
on the performance of the Group are as follows: Consumer Confidence; Business
Change; Regulatory Environment; Cyber-Security; IT Systems; Business Interruption;
Competition, Bad Debt Risk and Brexit.
Consumer confidence in the retail and financial services sectors has been
impacted by the uncertainty of Brexit. The threat of interest rate rises and
increasing consumer debt levels may further squeeze customer spending. To
mitigate this, the Group continues to seek to understand and meet customer
expectations for both product quality and customer service.
The Group continues to drive change and improvements in technology, culture
and business processes as key pillars of the Growth Strategy. The accelerating
pace of competition in digital retail and the headwinds arising from Brexit
mean that stability and adaptability are key focus points for the change program
over the next twelve months.
The Regulatory Environment remains a key consideration for the Group and continued
importance is placed on meeting the expectations of the regulators in key
areas such as GDPR and Financial Services. The introduction of the Senior
Managers Regime in December 2019 is a key focus for the short term as is the
maintenance of the embedded GDPR processes and controls put in place over
the previous year.
Competing effectively across the key areas of Product, Financial Services
and Customer Services remains a key driver of customer recruitment and retention.
Potential consequences of the increasingly competitive market include; loss
of market share, erosion of margins and a fall in customer satisfaction. Given
the uncertain commercial climate as Brexit approaches, remaining competitive
across all three areas is necessary to deliver anticipated growth plans.
Cyber Security remains a key risk area for the Group as it continues to focus
on online growth. The successful completion of the Group's GDPR program has
strengthened the Group's Cyber Security position and the continuous change
improvement programmes ensure greater security over both new and existing
cyber threats.
The Group continues to mitigate the risks associated with the use of remaining
legacy IT systems as well as data security risk through outsourcing IT services
to a specialist IT service provider. The replacement of the Groups legacy
architecture is a key focus of the continuous change program and tactical
solutions continue to be implemented to mitigate risks to agility arising
from older systems.
Business interruption events remain a possibility for the Group and the Crisis
Management Plan has been successfully tested in real world events since being
implemented. Further stress testing through potential impact scenarios ensures
that plans remain relevant and up to date.
Brexit is one of the most significant economic events for the UK and at the
time of this report, its effects are subject to significant levels of uncertainty
as to outcome. The full range of potential economic, regulatory and business
environment impacts are therefore unknown.
The uncertainty around the impact of Brexit and potentially reduced consumer
confidence give rise to the risk of increased bad debts from a potential deterioration
in customer discretionary spending capacity. In addition, the sensitivity
of the Group's IFRS 9 model to adverse shifts in arrears rates increases this
risk. The Group has continued to mitigate this risk through a focus on maintaining
and improving the quality of the debt book.
The retail sector experienced a number of business failures in 2018 and trading
conditions are expected to remain challenging for at least the next 12 months.
The impact of Brexit on the Group remains a key consideration with a wide
range of potential risks including increases in cost prices, impact on our
Irish operations, decreased customer spending power to potential loss of personnel.
Management are proactively planning in respect of Brexit and a Brexit Impact
Steering Committee has been created to identify risks and drive mitigating
actions against Brexit risks, although Brexit is likely to compound challenges
identified in the sector. However, the high level of uncertainty in both the
financial and political implications of Brexit makes the success of mitigation
activities very difficult to predict.
3. Going concern
In determining whether the Group's accounts can be prepared on a going concern
basis, the directors considered the Group's business activities together with
factors likely to affect its future development, performance and financial
position including cash flows, liquidity position, borrowing facilities and
the principal risks and uncertainties relating to its business activities.
The Group has GBP125m RCF and a GBP500m Securitisation which are committed
to September 2021 and GBP27m overdraft facility.
The directors have considered carefully its cash flows and banking covenants
for the next twelve months from the date of approval of the Group's preliminary
results. These have been appraised in light of the current economic climate
by applying a series of stress tests. The stress tests apply a range of sensitivities
to group revenue, cash collections and arrears levels; reflecting the principal
risks of the business, primarily through potential trading restrictions and
penalties arising from the impact of a cyberattack, negative outcomes from
delays to the Group's IT development programme and an adverse outcome in respect
of the legacy tax cases which are ongoing. In addition, the uncertainty around
the impact of Brexit and the reduced consumer confidence has also been incorporated
into these sensitivities.
After making appropriate enquiries, the directors have a reasonable expectation
that the Group has adequate resources to continue in operational existence.
Accordingly, they continue to adopt the going concern basis in the preparation
of these financial statements.
4. Business segment
52 weeks 52 weeks
to to
02-Mar-19 03-Mar-18
GBPm GBPm
Analysis of revenue - Home shopping
Product - total revenue 615.8 652.6
---------- ----------
Other financial services revenue 31.4 32.6
Credit account interest 267.2 237.0
---------- ----------
Financial services - total revenue 298.6 269.6
----------
Revenue - Home Shopping Total 914.4 922.2
---------- ----------
Impairment losses on customer and other receivables
Product - total cost of sales (295.0) (312.1)
---------- ----------
Impairment losses on customer receivables (119.0) (99.5)
Profit on sale of customer receivables 10.7 5.8
Other financial services cost of sales (13.4) (10.8)
---------- ----------
Financial services - total cost of sales (121.7) (104.5)
----------
Cost of sales - Home Shopping Total (416.7) (416.6)
---------- ----------
Gross profit 497.7 505.6
Gross margin - Product 52.1% 52.2%
Gross margin - Financial Services 59.2% 61.2%
Warehouse & fulfilment (84.0) (85.8)
Marketing & production (157.8) (164.0)
Depreciation & amortisation (30.1) (28.1)
Other admin & payroll (127.9) (137.2)
---------- ----------
Segment result & operating profit before exceptional
items 97.9 90.5
Exceptional items (see note 5) (145.6) (56.9)
---------- ----------
Segment result & operating (loss)/profit - Home shopping (47.7) 33.6
Finance costs (14.3) (8.9)
Fair value adjustments to financial instruments 4.5 (8.5)
---------- ----------
(Loss)/profit before taxation (57.5) 16.2
---------- ----------
The Group has one reportable segment in accordance
with IFRS8 - Operating Segments which is the Home Shopping
segment.
The Group's board receives monthly financial information at this level and uses this information to monitor the performance of the Home Shopping segment, allocate resources and make operational decisions. Internal reporting focuses on the Group as a whole and does not identify individual segments.
To increase transparency, the Group has decided to include an additional voluntary disclosure analysing product revenue within the reportable segment, by brand categorisation and product type categorisation.
52 weeks 52 weeks
to 02-Mar-19 to 03-Mar-18
GBPm GBPm
Analysis of product revenue by brand
JD Williams 159.5 163.4
Simply Be 134.2 132.8
Jacamo 66.7 68.6
--------------- --------------
Power brands 360.4 364.8
Traditional segment 114.7 138.6
Secondary brands 140.7 149.2
--------------- --------------
Total product revenue - Home shopping 615.8 652.6
--------------- --------------
Analysis of product revenue by category
Ladieswear 256.5 267.6
Menswear 85.0 89.2
Footwear & accessories 70.8 74.9
Home & gift 203.5 220.9
Total product revenue - Home shopping 615.8 652.6
The Group has one significant geographical segment, which is the United Kingdom.
Revenue derived from international markets amounted to GBP37.1m (FY18, GBP38.8m).
Operating results from international markets amounted to GBP1.9m loss (FY18, GBP1.2m profit). All segment assets are located in the UK, Ireland and US.
5. Exceptional items
52 weeks 52 weeks
to to
02-Mar-19 03-Mar-18
GBPm GBPm
Customer redress 45.0 40.0
Closure costs 22.0 13.8
Impairment of tangible, intangible assets and brands 20.0 -
VAT Debtor Impairment 49.4 -
Other VAT matters including associated legal and professional
fees 8.9 3.1
GMP equalisation adjustment 0.3 -
--------- ---------
Items charged to (loss) / profit before tax 145.6 56.9
--------- ---------
Taxation provision (see note 7, included within exceptional 3.0 -
tax charge of GBP22.9m)
--------- ---------
Customer Redress
Following an industry wide request from the FCA that firms ensure that general
insurance products and add-ons offered value for their customers, during
the previous year the
Group identified flaws in certain insurance products which were provided
by a third party insurance underwriter and following an assessment of the
cost of potential customer
redress an exceptional charge of GBP40.0m was recognised.
During the year, this element of the customer redress programme has been
completed and as a result of upheld rates being materially higher than that
expected the total cost
of redress was GBP56.5m. A charge of GBP16.5m has therefore
been made to reflect this additional expense.
The Plevin court ruling was made in November 2017, which meant that if more
than 50% of a customers PPI payment were paid as commissions and this was
not explained to
them at the time, they could claim back payments plus interest. This, combined
with an increase in marketing activity by the FCA to raise awareness of
the August 2019 deadline
appears to have had the effect of increasing the volume of claims across
the industry. As at 2 March 2019, a charge of GBP28.5m has been recognised
to reflect an updated estimate
following an increase in the volume of claims and the latest assessment
of the expected uphold rate and average redress per claim.
Closure Costs
In line with our strategy of reshaping our retail offering, following a
period of consultation with all staff involved in our store estate, the
decision was made to close all remaining
retail outlets at end of August 2018. This review resulted in an exceptional
cost of GBP22.0m in respect of onerous lease provisions, other related store
closure costs and
asset write offs of GBP5.7m.
Impairment of Tangible, Intangible assets and brands
In accordance with the requirements of IAS36 management have assessed the
carrying value of the intangible and tangible assets held in respect of
Figleaves and following this
review have written down the value of goodwill (GBP7.1m)
and tangible fixed assets (GBP1.5m) in full.
In addition following this review the directors have also written off in
full the remaining deferred tax asset of GBP3m in relation to future unutilised
tax losses. This has been presented
as an exceptional item.
During the period the Group also terminated an agreement with a third-party
IT Financial Services provider, Welcom Digital Limited ("WDL"). Following
a detailed review of
Capitalised Development spend held in respect of this item
a non-cash impairment charge of GBP11.4m was made.
VAT Debtor
The Group has been in a long running dispute with HMRC with respect to the
VAT treatment of certain marketing and non-marketing costs and the allocation
of those costs between
our retail and credit businesses. The case in respect of marketing costs
was heard in a first tier VAT tribunal in May 2018 with a draft decision
being issued in November 2018 which
was made public in March 2019. The case has two key aspects, those being
attribution and apportionment. With respect to attribution, the judge agreed
with HMRC, finding that
when the Group is marketing goods is it is also in effect marketing financial
services, even if there is no reference to this in its marketing materials.
The judge however ruled against
HMRC and directed that in apportioning costs via a turnover ratio, vatable
product turnover should be included in full, but VAT exempt financial services
income should in part be
excluded to the extent that it did not relate to the original
marketing activities.
As at 3 March 2018, the Group had an asset of GBP43.8m which had arisen
as a result of cash payments made under protective assessments raised by
HMRC.
Whilst discussions are on-going with HMRC and a final outcome has not yet
been achieved, following the final ruling management have reviewed the likelihood
of recovering this asset and as a result of this review have written down
the value by GBP37.9m. In addition, a further GBP11.5m has been accrued
in respect of the period June 2017 to
2 March 2019 as protective assessments have not yet been raised in respect
of this period. This results in a total exceptional charge of GBP49.4m.
For further information see note 12.
Other VAT matters including associated legal and professional
fees
The Group is currently in discussions with HMRC regarding historic underestimation
of VAT and has consequently charged GBP3.3m in respect of settlement of
this item, in addition
these costs also relate to on-going legal and professional fees which have
been incurred as a result of the Group's on-going disputes with HMRC regarding
a number of historical
VAT matters and tax positions. Of the amount charged in the period the Group
has made related cash payments of GBP2.8m and accrued costs of GBP1.5m (FY18,
GBP1.2m).
GMP equalisation adjustment
An exceptional pension cost arose in the year as a result of the High Court
ruling in the case of Lloyds Bank in relation to Guaranteed Minimum Pension
("GMP") equalisation. Whilst
this may still be subject to appeal, we have made an exceptional provision
of GBP0.3m for the expected one-off impact of GMP equalisation on the reported
liabilities of the Company's
defined benefit pension scheme.
6. Derivative financial instruments
At the balance sheet date, details of outstanding forward foreign exchange
contracts that the Group has committed to are as follows:
52 weeks 52 weeks
to to
02-Mar-19 03-Mar-18
GBPm GBPm
Notional Amount - Sterling contract value 271.4 113.9
------------ --------------
- -
Fair value of asset recognised
------------ --------------
Fair value of liability recognised (1.5) (6.0)
------------ --------------
The fair value of foreign currency derivatives contracts is their market
value at the balance sheet date. Market values are based on the duration
of the derivative instrument together with the observable market data including
interest rates, foreign exchange rates and market volatility at the
balance sheet date.
The financial instruments that are measured subsequent to initial recognition
at fair value are all grouped into Level 2 (FY18, same).
Level 2 fair value measurements are those derived from inputs other than
quoted prices included within Level 1 that are observable for the asset
or the liability, either directly (i.e. as prices) or indirectly (i.e.
derived from prices). There were no transfers between Level 1 and Level
2 during the
period (FY18, same).
7. Taxation
The taxation charge for the 52 weeks ended 2 March 2019 is based on the
underlying estimated effective tax rate for the full year of 26.9%, which
includes a provision for potential future corporation tax charges in respect
of historic positions. The total statutory effective tax rate for the 12
months period is (1.4)% (FY18, 23.3%). The negative statutory effective
tax rate is a result of additional provisions made in respect of historic
positions, non-deductible exceptional costs and a write off of a deferred
tax asset of GBP3.0m (note 5) relating to tax losses of the Figleaves business.
The write off of the deferred tax asset has been presented as an exceptional
item.
The Group is in on-going discussions with HMRC in respect of a number of
Corporation tax positions. The calculation of the Group's potential liabilities
or assets in respect of these involves a degree of estimation and judgement
in respect of items whose tax treatment cannot be finally determined until
resolution has been reached with HMRC or, as appropriate, through legal
processes. Issues can, and often do, take a number of years to resolve.
In respect of Corporation tax, as at 2 March 2019 the Group has provided
a total of GBP13.9m (FY18: GBP3.8m) for potential corporation tax future
charges based upon the Group's best estimation and judgement.
The inherent uncertainty regarding the outcome of these positions means
the eventual realisation could differ from the accounting estimates and
therefore impact the Group's future results and cash flows. Based upon
the amounts reflected in the balance sheet as at 2 March 2019, the Directors
estimate that the unfavourable settlement of these cases could result in
a net cash tax payment of up to GBP13.9m with no further charge to the
income statement.
The favourable settlement of these cases would result in a repayment of
tax of up to GBP19.8m and an associated credit to the income statement
of GBP27.2m.
8. Earnings per share
The calculation of earnings per ordinary share is based on earnings
after tax and the weighted average number of ordinary
shares in issue during the period.
The adjusted earnings per share figures have also been calculated based
on earnings before items that are one-off in nature,
material by size and are considered to be distortive of the true underlying
performance of the business (see note 5) and certain
other fair value adjustments. These have been incorporated to allow
shareholders to gain an understanding of the underlying
trading performance of the Group. For diluted earnings per share, the
weighted average number of ordinary shares in issue is
adjusted to assume conversion of all dilutive potential
ordinary shares.
Earnings 52 weeks 52 weeks
to to
02-Mar-19 03-Mar-18
GBPm GBPm
Total net (loss)/profit attributable to equity holders of the parent
for the purpose of basic
and diluted earnings per share (58.3) 12.5
---------------- ----------------
Total net (loss)/ profit attributable to equity holders of the parent
for the purpose of basic
and diluted earnings per share (58.3) 12.5
Fair value adjustment to financial instruments (net
of tax) (3.6) 6.9
Exceptional items (net of tax) 122.7 46.0
Total net profit attributable to equity holders of the parent for the
purpose of basic
and diluted adjusted earnings per share 60.8 65.4
---------------- ----------------
Number of shares 52 weeks 52 weeks
to to
02-Mar-19 03-Mar-18
No. ('000s) No. ('000s)
Weighted average number of shares in issue for the
purpose
of basic earnings per share 284,379 283,614
Effect of dilutive potential ordinary shares:
Share options 409 542
Weighted average number of shares in issue for the
purpose
---------------- ----------------
of diluted earnings per share 284,788 284,156
---------------- ----------------
(Loss)/Earnings per share
Basic (20.50) p 4.41 p
Diluted (20.50) p 4.40 p
Adjusted earnings per share
Basic 21.38 p 23.06 p
Diluted 21.35 p 23.02 p
9. Intangible assets
Customer
Brands Software database Total
GBPm GBPm GBPm GBPm
Cost
As at 4 March 2017 16.9 294.4 1.9 313.2
Additions - 36.5 - 36.5
-------------- ------------ ------------ --------
As at 3 March 2018 16.9 330.9 1.9 349.7
Additions - 32.9 - 32.9
Disposals - (2.4) - (2.4)
-------------- ------------ ------------ --------
As at 2 March 2019 16.9 361.4 1.9 380.2
-------------- ------------ ------------ --------
Amortisation
As at 4 March 2017 8.0 161.4 1.9 171.3
Charge for the period - 22.4 - 22.4
-------------- ------------ ------------ --------
As at 3 March 2018 8.0 183.8 1.9 193.7
Charge for the period - 25.2 - 25.2
Impairment 7.1 10.7 - 17.8
Disposals - (1.7) - (1.7)
-------------- ------------ ------------ --------
As at 2 March 2019 15.1 218.0 1.9 235.0
-------------- ------------ ------------ --------
Carrying amounts
As at 2 March 2019 1.8 143.4 - 145.2
-------------- ------------ ------------ --------
As at 3 March 2018 8.9 147.1 - 156.0
-------------- ------------ ------------ --------
As at 4 March 2017 8.9 133.0 - 141.9
-------------- ------------ ------------ --------
Assets in the course of construction included in intangible assets
at the year end total GBP35.4m (FY18, GBP14.6m).
No amortisation is charged on these
assets.
Borrowing costs of GBPnil (FY18, GBP0.1m) have been capitalised
in the period using the weighted average bank loan interest rate
applied to the capitalised spend on technological developments
included within software.
As at 2 March 2019, the Group had entered into contractual commitments
for the further development of intangible assets of GBP4.7m (FY18:
GBP2.0m) of which GBP1.5m (FY18, GBP1.0m) is due to be paid within
1 year.
Impairment testing of software intangible
assets
The Group is undertaking a systems transformation project. Some
elements of the project are not yet available for use and are
not therefore being amortised.
Where intangible assets are not being amortised, management have
tested for impairment with the recoverable amount being determined
from the value in use calculations.
The value in use calculations use cash flows based on budgets
prepared by management covering a three year period. These budgets
have regard to historic performance and knowledge of the current
market, together with managements views on the future achievable
growth and impact of technological developments. Cash flows beyond
this three year period are extrapolated using a long term growth
rate to 5 years at which point a terminal value has been calculated
based upon the long term growth rate and the Group's risk adjusted
pre-tax discount rate.
The Group's 3 year cash flow projections are based upon the Group's
approved 3 year plan. The detailed forecast assumes continued
growth during the course of the next three years, driven by new
media campaigns, exploitation of the Group's data assets and
further investments in the core technology underpinning the Group's
key channels to market.
Other than the detailed budgets, the key assumptions in the value
in use calculations are the long-term growth rate and the risk
adjusted pre-tax discount rate. The long-term growth rate has
been determined with reference to forecast GDP growth which management
believe is the most appropriate indicator of long-term growth
rates that is available. The long-term growth rate used is purely
for the impairment testing of intangible assets and brands under
IAS 36 'Impairment of Assets' and does not reflect long-term
planning assumptions used by the Group for investment proposals
or for any other assessments. The pre-tax discount rate is based
on the Group's weighted average cost of capital, taking into
account the cost of capital and borrowings, to which specific
market-related premium adjustments are made.
The assumptions are as follows:
- Long term growth rate: 1.5% (FY18,
2.0%)
- Pre tax discount rate: 10.7% (FY18,
13.9%)
The analysis performed indicates that no impairment is required
other than the specific impairment of the Welcom asset spend
(see note 5). A sensitivity analysis has been performed on each
of these key assumptions with other variables held constant.
Management have concluded that there are no reasonably possible
changes in these key assumptions that would cause the carrying
value to exceed the value in use.
Impairment testing of brand intangibles
The brand names arising from the acquisitions of High and Mighty,
Slimma, Figleaves, Diva and Dannimac are deemed to have indefinite
lives as there are no foreseeable limits to the periods over
which they are expected to generate cash inflows and are therefore
subject to annual impairment tests with the recoverable amount
being determined from the value in use calculations.
The value in use calculations use cash flows based on budgets
prepared by management covering a three year period and approved
by the Board. These budgets have regard to historic performance
and knowledge of the current market, together with managements
views on the future achievable growth. Cash flows beyond this
three year period are extrapolated using a long term growth rate
into perpetuity.
Other than the detailed budgets, the key assumptions in the value
in use calculations are the long-term growth rate and the risk
adjusted pre-tax discount rate which management have assumed
to be 1.5% (FY18, 2.0%) and 12.9% (FY18, 11.9%) respectively.
The analysis performed indicates that impairment of the full
carrying value of Figleaves (GBP7.1m) is required and has been
disclosed in note 5.
Should there be a downturn in future or forecasted cash flows,
then there is a risk of impairment to the remaining High and
Mighty (GBP1.0m) brand name however our current best estimate
is that there is no material risk of impairment.
Notes to the unaudited consolidated financial statements
for the 52 weeks ended 2 March 2019
10. Property, plant and equipment
Land and Fixtures and
buildings equipment Total
GBPm GBPm GBPm
Cost
As at 4 March 2017 59.1 132.7 191.8
Additions - 2.3 2.3
Disposal - (4.1) (4.1)
--------- ----------------- ------
As at 3 March 2018 59.1 130.9 190.0
Additions - 3.4 3.4
Disposal - (11.6) (11.6)
--------- ----------------- ------
As at 2 March 2019 59.1 122.7 181.8
Accumulated depreciation and impairment
As at 4 March 2017 14.2 104.1 118.3
Charge for the period 1.2 4.5 5.7
Disposal - (1.4) (1.4)
--------- ----------------- ------
As at 3 March 2018 15.4 107.2 122.6
Charge for the period 1.2 3.7 4.9
Impairment - 1.5 1.5
Disposal - (6.6) (6.6)
As at 2 March 2019 16.6 105.8 122.4
Carrying amounts
As at 2 March 2019 42.5 16.9 59.4
As at 3 March 2018 43.7 23.7 67.4
As at 4 March 2017 44.9 28.6 73.5
Assets in the course of construction included in fixtures and equipment
at the yearend total GBP2.3m (FY18, GBP1.6m), and in land and buildings
total GBPnil (FY18, GBPnil). No depreciation is charged on these assets.
Disposals relate to the assets written off as a result of store closures.
A loss of GBP5.0m (FY18 GBP2.7m) was recorded as per note 5.
At 2 March 2019, the Group had not entered into any contractual commitments
for the acquisition of property, plant and equipment (FY18, GBPnil).
Notes to the unaudited consolidated financial statements
for the 52
weeks ended
2 March 2019
11. Trade
and other
receivables
As at 2 As at 3
March March
2019 2018
GBPm GBPm
Amount
receivable
for the
sale of
goods and
services 682.2 647.6
Allowance for
doubtful
debts (97.1) (48.8)
585.1 598.8
Other debtors
and
prepayments 35.9 53.9
621.0 652.7
Trade receivables are measured at amortised cost. A weighted average APR
of 59.2% (2018: 57.9%) is charged on the outstanding balance.
Provision for impairment of receivables is calculated using an 'expected
credit loss' (ECL) model. For customers who find themselves in financial
difficulties, the Group
may offer revised payment terms to support the customer, encouraging customer
rehabilitation and thereby maximising long term returns. These revised
terms
may also include suspension of interest for a period of time.
Before accepting any new customer, the Group uses an external credit scoring
system to assess the potential customer's credit quality and defines credit
limits by
customer. Credit limits and scores attributed to customers are reviewed
every 28 days. The credit quality of trade receivables that are neither
past due nor impaired, with
regard to the historical default
rate, has remained stable.
The following table provides information about the exposure to credit risk
and ECL's for trade receivables and contract assets from individual customers
as at 2 March 2019.
The carrying amount of trade receivables whose terms have been renegotiated
but would otherwise be past due totalled GBP19.9m at 2 March 2019 (2018:
GBP30.8m).
Interest income recognised on trade receivables which were impaired at
2 March 2019 was GBP16.2m (2018: GBP15.2m).
The amounts written off in the period of GBP137.9m (2018: GBP115.4m) include
the sale of impaired assets with a net book value of GBP14.7m (2018: GBP20.5m).
This sale has also been a material driver in the reduction in trade receivables
on payments arrangements, from GBP42.7m to GBP26.8m as at 2 March 2019.
As at 2 As at 3
March 2019 March 2018
Trade Trade receivables
receivables on
Trade on Total trade Trade payment Total trade
Ageing of receivables payment receivables receivables arrangements receivables
trade arrangements
receivables
GBPm GBPm GBPm GBPm GBPm GBPm
Current - not
past due 558.5 19.9 578.4 520.1 30.8 550.9
0 - 28 days -
past due 35.4 3.3 38.7 35.6 4.7 40.3
29 - 56 days
- past due 20.7 1.3 22.0 19.3 1.6 20.9
57 - 84 days
- past due 14.7 0.9 15.6 12.9 2.3 15.2
85 - 112 days
- past due 10.3 0.6 10.9 9.0 1.6 10.6
Over 112 days
- past due 15.8 0.8 16.6 8.0 1.7 9.7
Gross trade
receivables 655.4 26.8 682.2 604.9 42.7 647.6
Allowance for
doubtful
debts (83.5) (13.6) (97.1) (28.2) (20.6) (48.8)
Net trade
receivables 571.9 13.2 585.1 576.7 22.1 598.8
As at 2 As at 3
Movement in March March
the 2019 2018
allowance
for doubtful
debts
Balance at
the
beginning
of the
period 48.8 64.7
IFRS 9
adjustment
to opening
balance 67.2 -
Amounts
charged to
the
income
statement 119.0 99.5
Amounts
written off (137.9) (115.4)
Balance at
the end of
the
period 97.1 48.8
The concentration of credit risk is limited due to the large and diverse
customer base comprising of 1.1 million (2018, 1.1 million) customers.
Other debtors
and
prepayments
'Other debtors and prepayments' last year includes a net VAT debtor, comprising
the VAT liability which arises from day to day trading, together with amounts
in relation to
matters which are in dispute with HMRC. This year the balance comprises
a net creditor see note 12.
Notes to the unaudited consolidated financial statements
for the 52 weeks ended 2 March 2019
12. Trade and other payables
52 weeks 52 weeks
to to
02-Mar-19 03-Mar-18
GBPm GBPm
Trade payables 81.0 89.2
Other creditors 14.0 0.1
Accruals and deferred income 45.9 42.4
140.9 131.7
'Other creditors' include a net VAT creditor, comprising the VAT debtor
which arises from day to day trading together with amounts in relation
to matters which are in dispute with HMRC. The Group has ongoing discussions
with HMRC in respect of a number of VAT positions. The calculation of the
Group's potential liabilities or assets in respect of these involves a
degree of estimation and judgement in respect of items whose tax treatment
cannot be finally determined until resolution has been reached with HMRC
or, as appropriate, through legal processes. Issues can, and often do,
take a number of years to resolve.
In respect of VAT, and excluding the issue mentioned below, the Group has
provided a total of GBP6.6m (2018: GBP3.1m) in respect of future payments
which the Directors have a reasonable expectation of making in settlement
of these historical positions.
In addition, and separate to the above positions, the Group has been in
a long running dispute with HMRC with respect to the VAT treatment of certain
marketing costs and the allocation of those costs between our retail and
credit businesses. The case was heard in a first tier VAT tribunal in May
2018 with a draft decision being issued in November 2018 which was made
public in March 2019.
The case has two key aspects, being attribution which is in respect of
whether marketing costs can be directly attributed to product revenue or
financial services income and secondly apportionment which is surrounding
the allocation of marketing costs between the retail and financial services
business.
With respect to attribution, the judge agreed with HMRC, finding that when
the Group is marketing goods it is also in effect marketing financial services,
even if there is no reference to this in its marketing materials.
The judge however ruled against HMRC's standard method of apportionment
of costs (which is based upon the proportion of total UK revenue which
is generated from product sales).
As at 3 March 2018, the Group had an asset of GBP43.8m which had arisen
as a result of cash payments made under protective assessments raised by
HMRC.
Whilst discussions are on-going with HMRC and a final outcome not yet achieved,
following the final ruling management have reviewed the likelihood of recovering
the carrying value of the asset held as at March 2018 of GBP43.8m and as
a result of this review have written down the value by GBP37.9m.
As the Group has not yet been assessed by HMRC for the period June 2017
to March 2019 this has also resulted in an additional charge of GBP11.5m.
This results in a total exceptional charge of GBP49.4m and a VAT creditor
at year end of GBP6.6m (2018: GBP43.8m asset).
As the judge did not fully conclude on the apportionment issue, inherent
uncertainty regarding the outcome of this position remains which means
the eventual realisation could differ from the accounting estimates and
therefore impact the Group's future results and cash flows. Discussions
with HMRC are ongoing and if no agreement is reached, there will be a second
tribunal hearing on this issue.
Based upon the details of the ruling and further external advice received
by management, the Directors estimate that a favourable outcome could result
in a cash receipt of up to GBP12.1m and an associated credit to the income
statement of GBP18.7m, whilst an unfavourable outcome which would be based
upon HMRC's stated position (which therefore would require HMRC successfully
appealing the ruling) could result in a further cash outflow of GBP18.6m
and an associated charge to the income statement of GBP12.0m.
Notes to the unaudited consolidated financial statements
for the 52 weeks ended 2 March 2019
13. Provisions
Customer Redress Customer Store Closures Total
Redress
GBPm GBPm GBPm
Balance at 3 March 2018 42.8 6.4 49.2
Provisions made during the period 45.0 16.3 61.3
Provisions used during the period (70.4) (15.3) (85.7)
Provisions reversed during period - - -
Balance at 2 March 2019 17.4 7.4 24.8
Non Current - - -
Current 17.4 7.4 24.8
Balance at 2 March 2019 17.4 7.4 24.8
Store Closures
At the end of H1 FY19, the decision was made to close all stores and
these were subsequently closed in August 2018.
The costs have been treated as an exceptional item and detailed separately
on the income statement as per note 5. The provision is made in respect
of onerous lease obligations and other related store closure costs.
The majority of these costs have been settled before the year end other
than the
onerous lease provision which will run to the earlier of the break
clause or lease expiry for all stores. The provision is net of an estimate
of potential
sub- letting income.
Customer redress
The provision relates to the Group's liabilities in respect of costs
expected to be incurred in respect of payments for historic financial
services
customer redress, which represents the best estimate of the known regulatory
obligations, taking into account factors including risk and uncertainty.
As at 2 March 2019 the Group holds a provision of GBP17.4m (FY18, GBP42.8m)
in respect of the anticipated costs of historic financial services
customer redress. Of this amount GBP2.6m relates to certain insurance
products where management have identified flaws in the product design,
the
remaining GBP14.8m relates to historical customer redress. These amounts
include a provision of GBP0.1m (FY18, GBP1.4m) in relation to administration
expenses.
The Plevin court ruling was made in November 2017, which meant that
if more than 50% of a consumer's PPI payments were paid as commission
they could claim back payments plus interest. This, combined with an
increase in marketing activity by the FCA, to raise awareness of the
August
2019 PPI deadline, appears to have had the effect of increasing the
volume of claims across the industry. In the period to 2 March 2019,
a charge
of GBP45.0m has been recognised to reflect the increased cost incurred
in the period and an updated estimate following an increase in the
volume of
claims experienced and the latest assessment of the expected uphold
rate and average redress per claim.
This estimate remains subject to significant uncertainty, in particular
the level of customer claims that may be received in the period to
August 2019.
It is possible the eventual outcome may differ from the current estimate.
The provision is calculated using a number of key assumptions which
continue to involve significant management judgement:
- Customer claims volumes - claims received but not yet processed plus
an estimate of future claims by customers
- Upheld rate - the proportion of claims received which the Group settles
- Average claim redress - the expected average payment to customers
for upheld claims
These assumptions remain subjective, mainly due to the uncertainty
associated with future claims levels, which include complaints driven
by claims
management company activity and the FCA advertising campaign.
The principal sensitivities in the redress calculation are: volumes
of policies affected; claim rate; uphold rate and average redress amount.
52 weeks 52 weeks to
to 2 3
March 2019 March 2018
Customer Customer Redress
Redress
GBPm GBPm
+/- 10% in claims volumes +/- 1.3 +/- 9.9
+/- 10% in uphold rate +/- 1.1 +/- 4.4
+/- 10% in average redress amount +/- 1.3 +/- 9.9
Notes to the unaudited consolidated financial statements
for the 52 weeks ended 3 March 2018
14. Dividends
The final proposed dividend of 7.1 pence per share, subject to approval by shareholders,
will be paid on 2 August 2019 to shareholders on the register at the close of
business on 5 July 2019.
15. Non-statutory financial statements The financial information set out above does not constitute the company's statutory accounts for the 52 weeks ended 2 March 2019 or the 52 weeks ended 3 March 2018. The financial information for the 52 weeks ended 3 March 2018 is derived from the statutory accounts for 3 March 2018 which have been delivered to the Registrar of Companies. The auditor has reported on the 3 March 2018 accounts; their report was i) unqualified, ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and iii) did not contain a statement under s498(2) or (3) of the Companies Act 2006. The statutory accounts for the 52 weeks ended 2 March 2019 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies in due course. This report was approved by the Board of Directors on 30 April 2019.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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