TIDMWRKS
RNS Number : 2606X
TheWorks.co.uk PLC
27 August 2020
27 August 2020
TheWorks.co.uk plc
("The Works", the "Company" or the "Group")
Preliminary results for the 52 weeks ended 26 April 2020
"Our performance this year demonstrates the resilience of our
business and we are pleased to have delivered a creditable
performance despite the challenging backdrop."
TheWorks.co.uk plc the multi-channel value retailer of gifts,
arts, crafts, toys, books and stationery, announces today its
preliminary results for the 52 weeks ended 26 April 2020 (the
"Period" or "FY20").
Financial highlights
-- Revenues grew 3.5% to GBP225.0 million (FY19: GBP217.5
million), with growth both online and in stores, despite the
significant impact of COVID-19 in the latter weeks of the financial
year.
-- Pre IFRS 16 adjusted EBITDA for the year was GBP10.8m (FY19:
GBP13.9m), albeit with the adverse trading impact of COVID-19 in
the period estimated to be approximately GBP3.0m.
-- Reported loss before tax for the period includes non-cash
impairment charges resulting from COVID-19 of GBP19.5m, relating to
goodwill and store assets, which have been treated as adjusting
items.
-- Despite a very positive performance since the reopening of
stores in mid-June 2020, given the continued uncertainty presented
by COVID-19, it is not yet possible to provide specific guidance
for the financial year ahead and the Board will not be proposing
payment of a final dividend for FY20.
FY20 FY19
GBPm GBPm Restated(1)
------------------------------------------- ------- ------------------
Revenue 225.0 217.5
Revenue growth 3.5% 13.2%
LFL sales growth(3) 0.7% 3.0%
Pre IFRS 16 adjusted(2) EBITDA 10.8 13.9(1)
Reported (loss)/profit before tax (18.0) 2.3
Adjusted(2) profit before tax 2.4 6.9 (1)
Reported basic earnings per share (pence) (28.3) 1.9
Adjusted(2) basic earnings per share
(pence) 3.0 9.2
Net bank ( debt )/cash (7.1) 3.7
IFRS 16 impact on profit before tax (3.7) 0.0
Adjusting items before tax excluded
from adjusted(2) results (20.4) (4.5)
Operational highlights
-- Positive LFL sales growth, driven by new and constantly
evolving product ranges, our ninth successive record Christmas and
new merchandising initiatives for core stationery and art ranges,
despite the absence of a Mega Trend(4) , which was present in the
comparative period.
-- A net 37 new stores opened in the year taking the total
estate to 534 stores. Refocused strategy at the turn of the
calendar year with fewer new stores openings planned and an
increased focus on driving improvement and profitability across the
existing estate.
-- Further development of our multi-channel proposition through
development of a new customer website (successfully launched in
July 2020) and product proposition changes to increase average
product price and drive profitable growth.
-- Increased online capacity to meet very strong demand during
the lockdown period (sales increased over three times on the
equivalent period last year) and reduced marketing and promotional
activity, step-changing the profitability of our online
channel.
-- At the turn of the calendar year, we took decisive action to
reduce costs and maximise efficiencies by limiting discretionary
spending, reducing administrative costs and unlocking savings in
distribution costs as part of the refocussed strategy.
-- COVID-19 outbreak intensified management of cost base and
cashflows, working with suppliers to review stock intake plans,
negotiating with landlords to reduce rent payments and further
careful management of all discretionary spend.
Trading update for the 17 weeks to 23 August 2020
-- As anticipated, primarily reflecting the impact of the
closure of all stores for the first 7 weeks of the financial year,
total sales were down 26.0%.
-- Stores reopened in a phased manner following the lifting of
Government restrictions in the UK and Ireland from 15 June
2020.
-- Performance since the reopening of stores has been well ahead
of the Boards expectations with overall LFL sales increasing by
0.7% in the 10 weeks to Sunday 23 August.
o Store LFLs are currently tracking at a high single digit
decline with growth in average transaction value partially
offsetting lower transaction volumes.
o Online performance remains strong with sales levels more than
double last year's in the same 10 weeks.
-- Further investment made to increase online capacity to
support sales over the peak Christmas trading period.
-- Profit impact from lower sales partially mitigated through
the successful execution of our refocused strategy; including
higher product margins (reflecting reduced promotional activity)
and careful cost management. Support from various Government
schemes (furlough scheme and business rates relief) have also
provided mitigation.
-- Net debt position significantly better than initial
expectations following the stronger trading performance and careful
cost and cash management.
-- Improved liquidity through GBP7.5m of funding via the
Government's CLBILS scheme and an extension of our RCF expiry date
to September 2022.
Gavin Peck, Chief Executive Officer of The Works, commented:
"Our performance this year demonstrates the resilience of our
business and we are pleased to have delivered a creditable
performance despite the challenging backdrop. I am incredibly proud
of all colleagues for their relentless hard work over the last year
and for their commitment and the can-do attitude they have shown
during this challenging period.
"Christmas was a turning point and this positive momentum
continued in the following months supported by new products and
merchandising initiatives launched during the year driving LFL
sales growth. The improved trading performance was supported by the
increased focus on cost management.
"The closure of our entire store estate in March had a
significant impact on our business, however we responded to the
crisis with agility and were ready to bounce back once safe to do
so. Our decisive action in response to the COVID-19 pandemic
enabled us to protect colleagues and customers, meet the
significant increase in online demand, and minimise the financial
impact. We are encouraged by the trading performance since lockdown
lifted and will continue to focus on improving our online capacity
and customer experience in stores under social distancing as we
head into peak Christmas trading.
"The current uncertainty means that we are unable to provide
specific guidance. We will continue to monitor the situation
closely and remain agile ahead of our key trading period. Our
performance during the COVID-19 pandemic shows our customer
proposition is more relevant than ever and, despite the significant
uncertainty that remains, the Board continues to believe that we
have many exciting opportunities ahead of us that will enable us to
deliver value for all of our stakeholders in the long-term."
Preliminary results presentation
A presentation for analysts will be held today at 9.30am via
video conference call. If you would like to attend, please contact
theworks@teneo.com. A copy of the presentation will shortly be made
available on the Company's website
(www.theworksplc.co.uk/investors).
Enquiries:
TheWorks.co.uk plc via Teneo
Gavin Peck, CEO
Steve Alldridge, Interim
CFO
Teneo
Ben Foster +44 7776 240806 |
Haya Herbert-Burns +44 7342 031051 | theworks@teneo.com
Rachel Miller +44 7850 656713 |
Footnotes to table on page 1:
([1]) As a result of the COVID-19 pandemic and subsequent UK
government restrictions introduced on 23 March 2020 that has
resulted in significant and unprecedented market and business
disruption, the Group has classified store impairments as adjusting
items for the first time. The prior year's adjusted profit measures
have increased by GBP0.1 million, being the net store impairment
charge and onerous lease provision charge not treated as an
adjusting item in 2019. Please refer to note 1 (c) and note 6 of
the extracts from the financial statements .
([2]) Adjusted profit figures exclude adjusting items. See Note
1 (c) of the attached extracts from the financial statements for
further details.
([3]) LFL sales are defined as the year-on-year growth in gross
sales from stores which have been opened for a full 63 weeks (but
excluding sales from stores closed for all or part of the relevant
period or prior year comparable period), and from the Company's
online store, calculated on a calendar week basis. LFL sales for
FY20 are for the year to 22 March 2020 (the day before all stores
were closed due to the COVID-19 outbreak). No adjustments have been
made for prior year Mega Trend (4) .
([4]) Mega Trends are defined as any individual product, or
collection of products, for which sales exceed 3 per cent. of
weekly sales for a temporary period and for which management deem
to be material in terms of impacting on the underlying performance
of the Company.
The financial information set out in this statement does not
constitute the Company's statutory accounts for the periods ended
26 April 2020 or 28 April 2019, but is derived from those accounts.
Statutory accounts for FY19 have been delivered to the Registrar of
Companies and those for FY20 will be delivered in due course. The
auditor has reported on those accounts: their reports were (i)
unqualified, (ii) included a reference to a material uncertainty
that may cast significant doubt on the Group's and the parent
company's ability to continue as a going concern as referred to in
note 1(b) to the financial statements, and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act 2006.
The audit of the statutory accounts for the period ended 26 April
2020 is now complete. Whilst the financial information included in
this announcement has been computed in accordance with
International Financial Reporting Standards ("IFRS") this
announcement does not itself contain sufficient information to
comply with IFRS.
Chairman's statement
Although much of this report is about the results for the
financial year ended April 2020, these now seem to relate to a
previous age. The COVID-19 pandemic has since overtaken our lives
and has had a significant impact on our business.
The financial year to 26 April 2020 has seen TheWorks.co.uk plc
deliver a creditable performance, with sales up 3.5 per cent.
compared to the prior year despite the significant impact on our
trading performance in the latter weeks of the financial year as a
result of COVID-19 and the closure of all our retail stores due to
the UK lockdown.
The COVID-19 pandemic has adversely affected the results we
report, and may continue to do so in the short to medium term. It
is also possible that consumer confidence will once again be
impacted by Brexit as the deadline for the UK's departure
approaches. Our accounting policies require these external factors
to be reflected as non-cash charges in the FY20 accounts, resulting
in a GBP19.5m write down in the carrying values of goodwill and our
store assets.
Prior to the onset of COVID-19, the financial year was not
without its challenges, with uncertainty brought about by Brexit
and its associated impact on consumer confidence, along with the
absence of a Mega Trend for us this year resulting in a
disappointing first half of the year. We took corrective action, as
announced at the turn of the calendar year, to refocus our strategy
by opening fewer new stores, with a view to driving improved
performance in our existing estate and increasing our focus on cost
savings. This action was taken to improve short-term performance
but also ensure that we are well-placed to deliver profitable
growth in the medium-term.
It was pleasing to see the company return to LFL sales growth in
the second half of the year and deliver another record Christmas,
our peak trading period, across stores and online. This positive
trading momentum continued into the new calendar year and our 4(th)
quarter trading period, supported by other initiatives launched
during the year, including new ranges, improved merchandising of
our core art and stationery ranges in stores and development of our
online proposition. The improved trading performance and the
proactive action taken at the turn of the calendar year meant that
the business was moving back in the right direction prior to the
COVID-19 outbreak.
Since then, the whole country has been facing an unprecedented
challenge as it responds to the COVID-19 pandemic and I am
incredibly proud of how the management team have navigated through
this period of great uncertainty and how our colleagues have pulled
together during it. The health and wellbeing of our colleagues and
customers has always been our key priority and it will continue to
be so as we trade through a period of extended social distancing
and beyond.
Despite the circumstances and restrictions, our colleagues have
delivered the very best in customer service, supporting the
continued strong demand that we have seen online since the lockdown
and in our stores since they reopened. I am very proud of the
unique culture that has seen the company recognised for the second
consecutive year in The Sunday Times' 25 Best Big Companies to work
for. I would like to take this opportunity to thank all colleagues
across the business for their continued support and dedication this
year, particularly through the recent unprecedented period of
uncertainty.
Board changes
In January, we were very pleased to appoint Gavin Peck as Chief
Executive following a successful period as Chief Financial Officer.
Using his deep industry knowledge and financial insights, Gavin has
already made a strong mark on the business and the Board has every
confidence in his steadfast leadership during this unprecedented
period.
Gavin replaced Kevin Keaney who, after nine years in the role,
decided to step down as Chief Executive. We thank Kevin for his
contribution to the business and in helping establish
TheWorks.co.uk plc as a leading multi-channel value retailer. In
the year, we also appointed Stephen Alldridge as Interim CFO.
Stephen's experience will be an invaluable support to Gavin and the
business as we trade through the uncertain times ahead.
Dividend and outlook
Considering the uncertain consumer outlook, including the impact
of social distancing on trading in stores, the Board has taken the
prudent decision of not declaring a final dividend for the year. I
am pleased that our bank has supported us in refinancing our debt
facility, extending our GBP25m RCF to September 2022, providing
additional covenant headroom, and access to a further GBP7.5m of
funding via the Government's CLBILS scheme. This refinancing will
help support the business through these uncertain times.
We have performed well since the reopening of our stores in
June, with their initial sales well ahead of the Board's
expectations and our online performance remaining strong. However,
there remains much uncertainty due to COVID-19, in particular how
this will impact on peak Christmas trading and the longer-term
impact on the retail landscape. Notwithstanding this, the Board
remains confident that the Company's differentiated multi-channel
value proposition, in particular its focus on children's
educational products, arts and crafts, games, activities puzzles
and books will continue to resonate with customers in the current
environment and position the Company well for the long term.
Chief Executive's Report
Introduction
In my first annual review, I would like to start by saying how
delighted I am to have been appointed as the Chief Executive of
TheWorks.co.uk. It has been clear to me since joining the business
in 2018 that TheWorks.co.uk has both a special culture and a clear
purpose; to provide customers with a variety of good quality, great
value products in its specialist categories through a truly
multi-channel shopping experience. My first months as CEO have
clearly been challenging, as they have for the whole retail sector,
given the impact of COVID-19. However, I strongly believe that our
proposition is more relevant than ever and that, despite the
challenges presented by COVID-19, we have many exciting
opportunities ahead of us that will enable us to deliver value for
all of our stakeholders.
Trading
Our trading performance over the last year demonstrates the
resilience of our business. I am pleased to report that our
revenues grew 3.5 per cent. in the year, with growth both online
and in stores, despite the significant impact of COVID-19 on our
trading performance in the latter weeks of the financial year with
the closure of all our stores as part of the UK lockdown. The first
half of the year was challenging, impacted by dampened consumer
sentiment and the absence of a Mega Trend whilst trading against
the Squishies Mega Trend in the first half of the previous year.
Christmas was a turning point in the year as customers once again
reacted well to our core Christmas ranges, complemented by a new 2
for GBP20 gifts offering and our products linked to the Frozen 2
movie release, resulting in our ninth record Christmas. The
momentum from improved Christmas trading continued through to March
as we began to see the benefits of new product ranges and
merchandising initiatives launched in the first half of the year
and our comparators eased as we no longer traded against the
Squishies Mega Trend in the prior year. This resulted in overall
like--for--like ("LFL") sales growth of 0.7 per cent. in the year
to 22 March 2020 (the day before all stores were closed due to the
COVID--19 outbreak) with both stores and online delivering positive
growth.
We saw a significant increase in sales, both in stores and
online, prior to the COVID-19 enforced store closures on 23 March.
This reflected strong customer demand for our products to support
childrens' ongoing education, mindfulness materials to support
mental health and products to "beat the boredom" during the period
of lockdown. The strong demand online continued during the lockdown
period, with sales up more than three times the equivalent period
last year. We reopened our stores in a phased manner from 15 June
2020, as permitted by Government guidelines. Our sales performance
since stores reopened has been well ahead of the Board's
expectations with overall LFL sales in the 10 weeks to Sunday 23
August of 0.7 per cent. After strong initial sales, store LFLs are
currently tracking at a high single digit decline with strong
growth in average transaction value partially offsetting
significantly lower transaction volumes (reflecting reduced retail
footfall). Online performance has remained strong post stores
reopening, with sales levels more than double last year's in the
same 10 weeks. This robust performance further demonstrates the
resilience of our business model and highlights that our
proposition is playing an important part in the lives of our
customers during these challenging times.
Profit performance
The pre IFRS 16 adjusted EBITDA for the year was GBP10.8m (FY19:
GBP13.9m), a GBP3.1m or 22.3 per cent. decline compared to the FY19
result. However, we estimate the adverse trading impact of COVID-19
on this figure to be approximately GBP3.0m, comprising the net
effect of sales lost due to the closure of stores, less the cost
savings flowing from actions taken within the business, and from
Government support via business rates relief and payroll furlough
receipts. As such, in the absence of COVID-19, we would have
expected adjusted EBITDA to have been broadly in line with the
prior year, reflecting a much stronger performance in the second
half of the year as the improved trading performance was supported
by the increased focus on cost management.
As noted above, our trading performance was affected by the
stores being closed for a period from 23 March. Furthermore, whilst
the short to medium term effects of the COVID-19 pandemic are
difficult to predict, it seems likely that it will take some time
to return to previous levels of trading. It is also possible that
consumer confidence will once again be impacted by Brexit, as the
deadline for the UK's departure approaches. This has been reflected
in non-cash charges being included in the FY20 accounts totalling
GBP19.5m, to write down the carrying values of goodwill and our
store assets.
Strategy
We have continued to deliver on our strategy for sustainable
growth, based on four pillars. At the turn of the calendar year,
and following the disappointing performance in the first half, I
announced a refocus of this strategy, reducing the number of new
store openings with a view to driving improved performance in our
existing estate and increasing our focus on cost control whilst
continuing to develop our digital channel. This action was
important to ensure the business was well-placed to deliver
profitable growth in the medium term. COVID-19 has clearly had a
significant impact on the business and the wider retail sector and,
once the true extent of this is clearer, we will reflect on our
strategy and adapt it as necessary. For now, our refocused four
pillar strategy remains, albeit with accelerating development of
our online proposition and capacity and cost control being more
important than ever. An update on progress and initiatives in each
area is set out below:
1. New store rollout
At its heart, our business has been rooted in bricks and mortar
retail, and an important driver of growth in recent years has been
the rollout of new stores. We opened a net 37 new stores last year,
including our 500(th) store, located in Winchester. This was an
important milestone for our business and our store openings in the
year take the total number in our estate to 534 at the end of the
financial year. Our disciplined approach to assessing new store
opportunities ensured that stores opened in the year were on track
to deliver a strong payback of around one year, prior to the impact
of COVID-19.
Whilst we continue to believe in the opportunity to make our
unique proposition accessible to many more catchments, as noted
above, at the beginning of this calendar year we took the decision
to refocus our strategy by opening fewer new stores to ensure that
the business could focus on driving improvement and profitability
through the existing estate.
In the near term, we will continue to undertake selective new
store openings but on a much smaller scale than in recent years.
These openings will primarily be part of an active portfolio
management approach (e.g. taking the opportunity to relocate to a
better location or to save property costs) but we will also
continue to consider sites on our priority target list where the
landlord is willing to fund our upfront capital expenditure.
2. LFL sales growth
Notwithstanding the challenging first half, TheWorks.co.uk has a
good track record of delivering LFL sales growth both in store and
online, as demonstrated once again by the return to positive LFLs
for the full year (prior to the enforced closure of our entire
store estate in response to the COVID-19 outbreak). Our strongest
point of differentiation remains our ability to offer customers the
experience of discovery, driven by a constantly evolving product
range and seasonal offerings complementing our core everyday
ranges. This element of "discovery" coupled with providing good
availability of our "core" lines encourages regular, repeat
customer visits.
We launched hundreds of new products across all of our
categories in the year and, in the first half of the year, we also
introduced new ranges including helium balloons and kids jigsaws
that proved popular with our customers. Towards the end of the
first half of the year we launched a new merchandising initiative
for our core stationery and art ranges, improving product display
consistency and availability to aid customers' shopping of these
ranges, delivering strong, double digit, sales growth in these
categories. We delivered our ninth successive record Christmas with
strong LFL sales growth over this key trading period driven by
continued improvements in our Christmas ranges, supported by the
launch of a range of products related to the Frozen 2 film and a
new 2 for GBP20 gifting offer.
There was no Mega Trend this year and, as mentioned above, this
pulled our LFLs lower in the first half of the year as we traded
against the Squishies Mega Trend in the prior year. Whilst we
continue to seek, and to be first to market with, the next Mega
Trend, as has always been the case, there can be no guarantee that
one will materialise each year and therefore we remain focused on
driving LFL sales growth through the ongoing improvement of our
proposition across all of our product categories. The ongoing
improvements to our proposition continue to drive increased average
transaction values in stores, offsetting transactional declines
from lower retail footfall.
Looking ahead to the current financial year, whilst the trading
environment remains uncertain and although we expect our LFL sales
to continue to be impacted during this extended period of social
distancing, we believe that our unique value proposition will
continue to resonate well with customers. We have invested in a new
data warehouse and analysis tool that will enable us to better
understand our customers and to tailor our product offering and
promotions to drive sales growth. We also plan to roll out our new
merchandising initiative across other categories, including our
craft, kids art and craft and key seasonal ranges and will further
refine our approach to space management to enhance our customer
offering and drive further improvement in sales densities in our
stores.
3. Multi-channel strategy
Our multi-channel offering remains one of our key
differentiators in the value retail sector, with our digital
channel providing customers with an extended range of products and
more flexibility in the way they choose to shop.
We took the decision to make some changes to our online
proposition at the start of the year, with a renewed focus on
increasing the average ticket price to support profitability. This
was achieved through reducing the mix of lines sold at lower price
points, with these lines either being dropped from the site or
pre--bundled for a multi--buy. This held back online sales growth
in the first half of the year but positive momentum began to build
again over the peak Christmas trading period and continued through
the second half of the year.
Working closely with our third party warehousing and fulfilment
partner, we improved productivity, drove cost efficiencies and
traded well through the peak Christmas period. Since the COVID-19
outbreak we have successfully increased our capacity to meet the
significant increase in customer demand, with online sales post
lockdown to the week ended 26 April 2020, up more than three times
on the equivalent period last year. We continue to work closely
with our partners to plan for increased capacity through peak
Christmas 2020 trading.
Our loyalty scheme remains unique to our segment of the market,
helping to drive repeat visits and customer engagement. As part of
the continuing evolution of the loyalty scheme, we shifted our
focus to nurturing our most loyal customers, rather than merely
driving high levels of new customer sign ups. We still signed up
over 750k new members to our loyalty scheme, and the total number
of active members at the year-end was 1.2m. The investment in our
customer insights capability, noted above, will ensure that we are
able to better access the data that this scheme provides helping us
to better understand our customers and to tailor our product
offering and promotions to drive sales growth. Prior to the
lockdown and store closures our click and collect channel continued
to be our fastest growing channel, driving additional footfall to,
and sales in, stores.
We plan to continue to invest in our online proposition and
in-store technology. We successfully launched, as planned, our new
customer website in July 2020, which provides enhanced
functionality and an improved customer experience. Our investment
in Wi-Fi in stores also opens up further exciting opportunities in
the future, for example, enabling access to our expanded ranges and
online ordering through terminals within stores.
Historically we have relied on heavy promotional offers and high
marketing spend to attract customers and drive our online sales.
However, with the increased demand since the onset of COVID-19, and
as we sought to manage sales levels within our fulfilment capacity,
we have been able to move away from this model resulting in a step
change to our online profitability. Online sales have remained
materially higher since the reopening of our stores and are likely
to continue at these levels in the future, reflecting an
acceleration of the ongoing channel shift. Digital growth will
therefore become an increasingly important part of our future
growth. Our new web platform, the product proposition changes, the
investment in increasing our fulfilment capacity and the step
change in our approach to promotions and marketing spend mean we
now have a significantly more stable and profitable base to build
on.
4. Product margin and cost control
As a value retailer, TheWorks.co.uk has always kept a close
control of costs, striving to provide customers with great value
products, whilst also delivering returns for shareholders. Ensuring
progress against this pillar was of even greater importance this
year, due to the challenging consumer backdrop, lower LFL sales in
the first half (due, in part, to the prior year Mega Trend), the
continued headwind of national living and minimum wage increases
and the enforced closure of all stores towards the end of the
period.
In light of these challenges, we took action to identify cost
savings early in the financial year to maximise further
efficiencies, limit discretionary spending, reduce administrative
costs and unlock savings in distribution costs. Part of the
rationale for reducing new store openings was to enable the
property team to focus on maximising the rent savings on the 100
plus renewals in 2020 and we began to see the benefit of that
starting to come through towards the end of the financial year. We
also took action to grow product margins through a range of levers,
including direct sourcing from Asia, helping to partially mitigate
the adverse impact of foreign exchange rate movements and
promotional activity used to drive sales in the first half of the
year.
Although our main priority was to ensure the health and safety
of colleagues and customers, the COVID-19 outbreak, and subsequent
closure of all stores, meant that we took further swift action to
manage our cost base and cashflows. This included reviewing all
capital expenditure plans, negotiating with landlords to reduce
rents, working with suppliers to review stock intake plans and
careful management of all discretionary spend, including a
significant reduction in both marketing and promotional
activity.
Some cost reductions were temporary, for example, income
received via the government's furlough scheme, and business rates
relief, Director salary and fee reductions, and online marketing
expenditure. Store occupancy costs such as energy and consumables
also naturally reduced during the period when the stores were
closed.
Once we are through the COVID-19 pandemic, further reducing the
product cost of goods sold, driving productivity improvements and
cost savings in our store estate and through our supply chain and
careful control of all central costs, will continue to be a
significant focus for the business in the medium-term. The
flexibility of our store estate with, on average, less than 3 years
to the next exit point, means we remain well-positioned to adapt to
the changing retail landscape.
Colleagues
Our strong culture and the "can-do" attitude of our colleagues
are the foundations of our business. Every time I visit a store I
am blown away by the enthusiasm that our colleagues exude, creating
a fun and safe workplace environment and providing customer service
which is differentiated from many in the value retail space.
I am incredibly proud that this strong, family, culture was
recognised in The Sunday Times "Top 25 Best Big Companies" to work
for, for the second year running. It was clear from listening to
feedback from our colleagues as part of this survey that they
wanted a new set of core values and behaviours that better captured
what it means to be part of The Works Family, something that they
could better relate to and be passionate about. We will shortly be
launching a new Employer Brand Promise with a set of values and
behaviours that capture the sense of the work ethic that we value,
the spirit we value, and the core ability of the people we
value.
We also launched our Save as You Earn ("SAYE") scheme to
encourage share ownership across our workforce. It has been
pleasing to see the level of interest from colleagues, with a 10
per cent. uptake. We have also welcomed 1,386 new colleagues this
year and have promoted over 400.
Our business has faced unprecedented challenges in recent months
and I have been touched by the level of support provided by
colleagues across the business and the understanding displayed in
response to the difficult decisions we have had to make since the
onset of the COVID-19 pandemic. We have made it our priority to
keep colleagues informed about each business development and
ensured that all furloughed colleagues continued to feel like a
valued part of TheWorks family. A Facebook group was launched to
keep colleagues connected during this period of uncertainty and
their engagement with it has continued post-lockdown, with over
1,500 members.
I would like to take this opportunity to thank our fantastic
colleagues across the business for their relentless hard work and
commitment over the last year, in particular for how they have come
together in recent months to help ensure the future of our
business.
During the year we continued to build the management team to
drive the business through its next phase of growth, welcoming new
directors to lead our Property, Retail Stores and IT teams.
Corporate social responsibility
We view each of our stores as playing an important role at the
heart of communities; serving customers in a welcoming store
environment, providing employment and contributing to the fabric of
local life.
As a responsible business, we recognise the importance of
reducing our impact on those we interact with and the environment
and communities we operate in. A key part of this includes our
commitment to reducing waste packaging which we continue to focus
on under our "Keen to be Green" initiative which includes the use
of our "ReWorked" logo on products where we have reviewed our
packaging to reduce waste. As an example, by reworking the 2020
Christmas card packaging, we saved over 3 tonnes of single use
plastic. Other initiatives and changes to packaging this year as
part of our re-worked strategy saved a further 4.5 tonnes of
single-use plastic waste.
This year we have further developed our partnership with Cancer
Research UK. Through the support of both our colleagues and
customers we continued to make significant contributions to this
worthy cause, and I am incredibly proud that, through the sale of
branded products and specific fund-raising activities, we raised
GBP360k this year, taking our total donation to GBP888k since our
partnership began.
Summary and outlook
Despite the challenges our business has faced over the last
year, I am pleased that we gained momentum during the second half
of the year, with a return to positive LFL growth, before lockdown.
We took decisive action at the turn of the calendar year to refocus
our strategy, and the initiatives launched to drive further
profitable growth will help us navigate these uncertain times.
I am proud of the way we have navigated through the COVID-19
pandemic to date. During this period there have been two key
considerations in all the decisions we have taken and will continue
to take.
The first is the wellbeing of our colleagues. This is the reason
we chose to shut stores before the Government enforced mandatory
closures, has been our priority whilst enabling our online sales
capacity to increase and was our primary consideration when
planning the reopening of stores. We want our colleagues to feel
safe whilst at work and will therefore continually review our
social distancing measures to ensure they remain effective and
appropriate.
The second consideration is the financial viability of our
company. We welcome the support provided by the Government to
businesses through the coronavirus pandemic, particularly the
Coronavirus Job Retention Scheme and the business rates holiday. We
have taken costs out of the business wherever possible, carefully
managed cash and have agreed a refinancing with our banks which has
provided access to a further GBP7.5m of funding via the
Government's CLBILS scheme and extended our GBP25m RCF expiry date
to September 2022.
We look ahead acknowledging that life and consumer behaviours
will be different for some time. With an extended period of social
distancing being likely, it is hard to predict the timing and
extent to which store sales will return to previous levels. The
four pillars of our strategy remain unchanged, however, we have
refocused our short term priorities to reflect the current
environment and our business performance, in particular
accelerating our digital growth and focusing on cost control. Once
the impact of COVID-19 on the business and the wider retail sector
is clearer, and we have greater visibility of what the new normal
looks like, we will reflect on our strategy and adapt it as
necessary to ensure that it remains appropriate. Despite the
challenges ahead, the Board and I remain confident in our
multi-channel proposition and believe that, in the current
environment, our product offering is more relevant than ever as
supported by our performance since the reopening of our stores.
Financial Review
Overview & Covid-19 impact
The "FY20" accounting period relates to the 52 weeks ended 26
April 2020 and the comparative "FY19" accounting period relates to
the 52 week period ended 28 April 2019.
The Group tracks a number of alternative performance measures,
as it believes that these provide stakeholders with additional
helpful information. Alternative performance measures used in this
report include EBITDA, adjusted EBITDA and like for like ("LFL")
sales. These are described more fully in note 2 of the extracts
from the financial statements included within this report.
The statutory profit before tax ("PBT") for the year was a loss
of GBP18.0m (FY19: profit of GBP2.3m) and the Adjusted PBT was
GBP2.4m (FY19: GBP6.9m). Costs of GBP20.4m have been presented on
the face of the Consolidated Income Statement as Adjusting Items
(note 3), of which, GBP19.5m relates to non cash impairment
charges. The pre IFRS 16 adjusted EBITDA was GBP10.8m (FY19:
GBP13.9m), a GBP3.1m or 22.3 per cent. decline compared to the FY19
result.
FY20's financial performance was characterised by a
disappointing first half of the year, followed by a much stronger
performance over the key Christmas trading period, continuing into
a good start to the new calendar year, before ours and the UK
Government's response to the COVID-19 situation required the
closure of all stores in March.
The closure of the stores for over a month of the financial year
had a material impact on the year's trading financial performance,
but the financial effects of COVID-19 were broader, requiring
revisions to internal forecasts which resulted in impairment
charges against the carrying values of goodwill and fixed
assets
-- We estimate that the adverse trading impact of COVID-19 on
the pre IFRS 16 adjusted EBITDA was approximately GBP3.0m,
comprising the net effect of sales lost due to the closure of
stores, less the cost savings flowing from actions taken within the
business, and from Government support via business rates relief and
payroll furlough receipts.
-- The impact of COVID-19 also resulted in the impairment of
store assets and goodwill, of GBP3.3m and GBP16.2m, respectively,
which have been treated as adjusting items. These items are
described in more detail in notes 5 and 6 of the extracts from the
financial statements.
The implementation during the year of IFRS 16 also had a
material impact on the shape of the financial statements. Note 8 of
the extracts from the financial statements includes detail of the
transition. Notably, transitioning to accounting under IFRS 16
results in an initial reduction to net assets of GBP6.1m. The
implementation of IFRS 16 does not impact the cash position or cash
flows of the Group.
Due to rounding, numbers presented throughout this document may
not add up precisely to the totals provided and percentages may not
precisely reflect the absolute figures.
Revenue analysis
Total revenue during the year increased by 3.5 per cent. to
GBP225.0 million (FY19: GBP217.5 million). LFL sales for the period
from 29 April 2019 until 22 March 2020, the day before all stores
were closed due to the COVID -- 19 outbreak, increased by 0.7 per
cent. compared with the prior year, with growth both in stores and
online.
The table on the following page shows the quarterly LFL results,
highlighting the return to positive growth during the second half
of the year, prior to the closure of the stores. As noted in
January's interim results statement, LFLs in the first half of the
financial year did not benefit in the same way as in FY19 from a
"mega trend".
FY20 LFL FY19 LFL LFL sales
sales inc. sales inc. growth
VAT GBPm VAT GBPm %
--------------------- --------------------- ----------
Q1 41.5 42.6 (2.5)%
Q2 53.6 56.1 (4.4)%
H1 95.2 98.7 (3.6)%
--------------------- --------------------- ----------
Q3 91.1 89.9 1.3%
Q4* 32.3 28.4 13.7%
H2 123.4 118.3 4.3%
--------------------- --------------------- ----------
Full Year 218.6 217.0 0.7%
===================== ===================== ==========
* Stores and online up until lockdown.
Sales growth of GBP19.5m was generated from the net effect of 37
new stores opened during the financial year (51 opened and 14
closed), the full year sales effect of stores opened during FY19
prior to being classified as "like for like", less the reduction in
sales from stores closed during the year which traded for a full
year during FY19.
The table below shows LFL and non LFL sales growth, with a
reconciliation of sales used to calculate the LFL, with
revenue.
FY20 FY19 Variance Variance
GBPm GBPm GBPm %
------- ------- --------- ---------
LFL sales pre lockdown (per
the preceding table) 218.6 217.0 1.5 0.7%
LFL sales during lockdown 4.9 17.7 (12.8) (72.4)%
Total LFL sales for period 223.5 234.7 (11.3) (4.8)%
Sales from new/closed stores 31.2 11.7 19.5 167.5%
Total Gross Sales 254.6 246.4 8.3 3.4%
VAT (27.9) (26.9) (1.1) (3.9)%
Loyalty Points (1.7) (2.0) 0.4 18.0%
Turnover per statutory accounts 225.0 217.5 7.6 3.5%
======= ======= ========= =========
The cost of loyalty points issued declined as a result of an
increased focus during the year on the most loyal customers, as
part of the continuing evolution of the loyalty scheme. Previously,
a greater emphasis had been placed on growing the absolute number
of members, which entailed issuing more points.
Product gross margin and adjusted cost of sales
Product gross margin
Product gross margin is the difference between revenue and the
cost of goods sold. The product gross margin declined by 90bps to
61.8 per cent. (FY19: 62.6 per cent.).
FY20 FY19 Variance Variance
GBPm GBPm GBPm %
------ ------ --------- ---------
Revenue 225.0 217.5 7.6 3.5%
Cost of goods
sold 86.1 81.2 4.8 6.0%
--------- ---------
Product gross
margin 139.0 136.2 2.7 2.0%
====== ====== ========= =========
Product gross
margin % 61.8% 62.6% (0.9%)
Adjusted cost of sales
FY20 FY19
Pre-IFRS 16 cost of GBPm % of GBPm % of GBPm % Increase
sales analysis revenue revenue Increase
------ --------- ------ --------- --------------- ----------------
Cost of goods sold 86.1 38.2 81.2 37.4 4.8 6.0
Store payroll 42.1 18.7 37.2 17.1 4.9 13.2
Store property costs 45.3 20.1 42.2 19.4 3.1 7.4
Other direct costs 14.5 6.5 14.3 6.6 0.3 1.9
Cost of sales (per internal reporting) 188.0 83.5 174.9 80.4 13.1 7.5
====== ========= ====== ========= =============== ================
Depreciation within cost of sales 5.2 2.3 4.1 1.9 1.2 28.7
IFRS16 impact (non adjusting element) (2.7) (1.2) 0.0 0.0 (2.7) 100.0
Adjusting items 4.1 1.8 0.1 0.0 4.0 >100.0
Cost of sales per statutory accounts 194.7 86.5 179.0 82.3 15.6 8.7
====== ========= ====== ========= =============== ================
Cost of goods sold
This comprises the cost of finished goods and other related
costs including import duty and freight/carriage costs.
The cost of goods sold increased by GBP4.8m compared with FY19;
GBP2.8m of this increase was due to the increase in revenue. In
relation to the increase which was not volume related:
-- There were underlying margin improvements as a result of
initiatives to improve the bought in margin, for example increasing
the proportion of purchases made directly from overseas suppliers
rather than via importers and increasing the mix of product sourced
from overseas, and increasing the mix of own brand product which
carries a higher margin.
-- The gains in bought in margin were more than offset by a
higher level of discounting during the first half of the year, and
unfavourable exchange rate movements compared to FY19, affecting
dollar denominated stock purchases throughout the year.
Store payroll
Store payroll costs increased by GBP4.9m compared with FY19.
-- GBP3.6m or 73 per cent., of the increase was a result of
opening new stores; at the end of FY20, the group traded from 534
stores, compared with 497 at the end of FY19.
-- The remainder was due to:
o The 4.9 per cent. statutory increase in national living and
minimum wages, which affects the majority of store colleagues and,
under normal operations, due to the characteristics of small
stores, there is limited scope to mitigate against this.
o A GBP0.3m increase in the provision for holiday pay due to
colleagues being unable to take holiday during the final quarter of
the year due to the COVID-19 lockdown.
Store property costs
This heading includes store rents, business rates and service
charges; store utility and maintenance costs are classified within
"Other direct costs", as described below.
Store property costs increased by GBP3.1m compared with FY19.
The increase in store numbers resulted in property costs increasing
by GBP4.0m, which was partially mitigated by like for like rent
reductions through negotiations with landlords.
Other direct costs of sale
This classification includes card payment transaction fees,
store utility costs, store maintenance costs, online marketing
costs, online fulfilment labour costs and store point of sale
material costs (window graphics, in-store promotional signage
etc.).
This cost category is largely variable in relation to the number
of stores and to growth in online sales, and would therefore have
been expected to increase by approximately GBP0.8m due to the
opening of additional stores and from increased online sales. In
FY19, costs were higher than normal, due to challenges faced
fulfilling online sales during the first peak trading period with a
new third-party logistics provider; these issues did not recur in
FY20, resulting in a year on year saving and there were also other
efficiency savings achieved in FY20.
Operating income and expenses (pre. IFRS 16 and adjusting
items)
Other operating income
Other operating income was GBP4.7m (FY19: GBP0.0m). During the
period from the beginning of lockdown in March until the year-end,
the Group received GBP3.6m via the Government's Corona Virus Job
Retention Scheme in relation to staff who had been furloughed
following the reduction in operations in its distribution centre,
and the closure of the Group's retail stores and head office. It
also received GBP1.0m during this period in COVID-19 business rates
relief.
Expenses
Expense comparison: FY20 FY19
GBPm % of GBPm % of GBPm % Increase
revenue revenue Increase
------ --------- ------ --------- ---------- -----------
Adjusted distribution
costs 12.4 5.5 11.8 5.4 0.6 5.5
Depreciation 0.2 0.1 0.2 0.1 (0.0) (8.1)
Adjusting items 0.0 0.0 0.5 0.2 (0.5) (100.0)
Distribution costs per
statutory accounts 12.7 5.6 12.5 5.8 0.1 1.1
====== ========= ====== ========= ========== ===========
Pre-IFRS 16, adjusted
administration costs 18.5 8.2 17.0 7.8 1.4 8.5
Depreciation 1.6 0.7 1.6 0.7 (0.1) (4.1)
IFRS 16 impact (non adjusting
element) (0.4) (0.2) (0.0) (0.0) (0.4) 933.5
Adjusting items 16.3 7.2 4.1 1.9 12.1 292.8
Administration costs
per statutory accounts 35.9 16.0 22.8 10.5 13.1 57.7
====== ========= ====== ========= ========== ===========
Distribution costs
Distribution costs include the cost of picking and delivery of
stock, with the exception of direct labour costs incurred in
fulfilling online orders, which are included in "Other direct
costs" as described above. Distribution costs increased by GBP0.6m,
5.5 per cent. compared with FY19.
-- A third-party provided online fulfilment services throughout
the whole of FY20 whereas this applied only to part of FY19.
-- Payroll costs increased due to inflation (statutory
increases) and the increased volumes processed.
-- Cost savings were achieved as a result of various internal
initiatives to improve efficiency.
Administration costs
Administration costs include rent and rates for the Group's head
office and distribution centre and the payroll and overhead cost of
the head office and retail field support teams. Administration
costs increased by GBP1.4m, 8.5 per cent. compared to the prior
year.
-- Head office payroll costs increased by GBP0.6m, principally
due to the full year effect of an FY19 investment in supply chain
capability, and pay increases in line with inflation.
-- The most notable other variances were savings in travel
costs, and increases in IT costs and professional fees.
Professional fees included advice in connection with maximising the
use of capital allowances, supply chain capacity during the peak
trading period, and the full year effect of certain plc costs
including company secretarial services.
Adoption of IFRS 16 - Leases
During the period, the Group adopted IFRS 16 'Leases' for the
first time. IFRS 16 specifies how to recognise, measure, present
and disclose leases and replaces IAS17 'Leases'.
The Group adopted IFRS 16 from 29 April 2019 using the modified
retrospective approach, under which the cumulative effect of
initial application is recognised as an adjustment to the opening
balance of retained earnings at 29 April 2019 with no restatement
of comparative information. Comparative information continues to be
reported under IAS 17 and related interpretations.
The net impact on profit before tax for the period was an
expense of GBP3.7m, which includes additional impairment charges
relating to IFRS 16 of GBP2.8m. Before the additional impairment
charge, the impact of the transition would have been an expense of
GBP0.9m. Further information is provided in notes 1(b) (ii), 2 and
8 of the extracts from the financial statements. The net impact on
Adjusted EBITDA was a credit of GBP23.4m, principally because IFRS
16 does not recognise the concept of rental charges.
Adjusting items
Adjusting items before tax in the period amounted to GBP20.4m
(2019: GBP4.5m), analysed below. GBP19.5m relates to impairment of
store property, plant and equipment, and goodwill to reflect the
uncertainties associated with the current environment. Refer also
to note 3 of the extracts from the financial statements.
FY20 FY19
GBPm GBPm
----- ------
Within cost of sales
Impairment charges (net) 3.3 0.0
Provision for previously underpaid
duty 0.8 0.0
Other 0.0 0.1
4.1 0.1
===== ======
Within distribution expenses
FY19 E-commerce fulfilment
upgrade 0.0 0.5
0.0 0.5
===== ======
Within administration expenses
Impairment of goodwill 16.2 0.0
FY19 Financing costs and IPO 0.0 4.1
Other 0.1 0.0
16.3 4.1
===== ======
Within finance expenses
FY19 accrual release arising
on IPO refinance 0.0 (0.2)
0.0 (0.2)
===== ======
Total adjusting items (before
tax) 20.4 4.5
===== ======
Net financing expense
Net financing costs in the year were GBP4.5m (FY19: GBP0.8m),
including GBP4.0m relating to interest on lease liabilities as a
result of introducing IFRS 16. FY19's comparative included costs
relating to the 2018 IPO, and part of FY19's net financing expense
reflected the pre-IPO capital structure, which had higher levels of
debt.
Bank interest payable was GBP0.4m (FY19: GBP0.2m), reflecting
greater use of the Group's bank facilities during the year.
Foreign exchange
Over one-third of the Group's stock purchases are made in US
dollars. The Group takes a prudent but flexible approach to hedging
the risk of exchange rate fluctuations.
Adverse FX movements compared to FY19 increased the cost of
sales in FY20 by GBP1.3m. FY20's average hedged rate was c.
$1.27.
For FY21, most of the anticipated dollar requirements have been
hedged via forward contracts, at an average rate of c. $1.30.
Hedge accounting is used to account for FX hedging contracts, to
minimise unnecessary volatility in earnings.
Profit/loss before tax
The statutory loss before tax was GBP18.0 million in the year
(FY19: GBP2.3 million profit).
Adjusted profit before tax
Adjusted profit before tax was GBP2.4 million in the year (FY19:
GBP6.9 million). The adjusted profit before tax margin of the Group
decreased from 3.2 per cent. to 1.1 per cent.
Tax
The Group's total income tax credit in respect of FY20 was
GBP0.3m (FY19: charge of GBP1.2m). The effective tax rate on the
total loss before tax was 1.5 per cent. (28 April 2019: 51.80 per
cent.) whilst the adjusted tax rate was 21.7 per cent. (28 April
2019: 21.6 per cent.).
The difference between the total effective tax rate and the
adjusted tax rate for FY20 relates to goodwill impairment within
adjusting items (notes 3 and 5) being non-deductible for tax
purposes (FY19: related to certain non-recurring costs associated
with the listing being non-deductible for tax purposes).
A provision of GBP0.8m has been included in connection with a
review of duty rates paid on goods imported during the previous
three years, which has been treated as an adjusting item. The rates
of duty vary by product category, and judgements are required in
the application of rates to individual products. The Company has
been working with HMRC to quantify the underpayment, and the
provision reflects the Company's best estimate of the average
applicable rate, based on samples reviewed.
Earnings per share
The basic and diluted loss per share for the year were 28.3
pence (FY19: earnings of 1.9 pence).
Before adjusting items, basic and diluted underlying earnings
per share for the year were 3.0 pence (FY19: 9.2 pence).
Capital expenditure
Gross capital expenditure amounted to GBP8.7 million in the year
(FY19: GBP8.5m), of which GBP4.8 million related to new stores.
Other capex included GBP1.4 million development costs of the new
web platform (which was subsequently launched in July 2020) and
GBP0.6 million to install Wi-Fi in stores and replace hand held
product scanning devices to improve efficiency.
FY20 FY19 Variance
GBP'm GBP'm GBPm
------ ------ ---------
New stores and relocations 4.8 5.0 0.2
Store refits and rebrands 0.4 0.7 0.3
IT hardware and software 0.8 1.0 0.2
Web development 1.4 0.4 (1.0)
Other 1.3 1.3 0.0
Total capital expenditure
(per additions) 8.7 8.5 (0.2)
Capital expenditure on finance
lease 0.0 (0.3) (0.3)
Net capital expenditure
(per cashflow) 8.7 8.2 (0.5)
====== ====== =========
As a consequence of both the decision to open fewer new stores
(taken pre COVID-19), and of the decision to reduce capital
expenditure to preserve liquidity in light of COVID-19, capital
expenditure during FY21 is expected to be approximately
GBP3.0m.
A small number of new stores will open, where the Company was
legally committed prior to the decision to reduce the opening
programme; in addition, the Board will consider, on a case by case
basis, opportunities to open stores in strategically important
locations, where the landlord is prepared to fund fit out costs,
such that the store is cash generative immediately following
opening.
With the transition to IFRS 16, the separate analysis of fixed
asset additions funded via a finance lease is no longer applicable,
but the comparative is retained for FY19 to allow the totals in the
table above to be linked to the financial statements.
Inventory
Inventory levels were GBP26.6m at the end of FY20 (FY19:
GBP25.2m), an increase of 5.5 per cent. Given that the stores were
closed during April, we are satisfied with this level of
increase.
The loss of sales due to the store closures during lockdown has
not created a heightened risk with regard to stock levels during
FY21. This is a result of careful management of orders and working
with suppliers to reduce or delay the intake of stock, and of
higher than expected online sales since the beginning of the
crisis, as well as store sales since re-opening.
Cashflow
The table on the following page shows an abbreviated summarised
cashflow presentation to aid the description of the significant
cashflow movements during the period. "Cashflow pre-working
capital" in the table below is derived from management reports; the
financial statements include a statutory consolidated cashflow
statement.
FY20 FY19 Variance
GBPm GBPm GBPm
-------- ------ ---------
Cashflow pre-working capital 9.2 10.6 (1.4)
Working capital (8.1) (0.3) (7.8)
Capex (8.7) (8.2) (0.5)
Tax paid (1.0) (1.2) 0.2
Interest (0.2) (1.4) 1.1
IPO financing cashflows 0.0 (2.7) 2.7
Dividends (2.3) (0.8) (1.5)
Cashflow before drawdown of
RCF (11.1) (3.8) (7.3)
Drawdown of RCF 10.0 0.0 10.0
Net decrease in cash and
cash equivalents(1) (1.1) (3.8) 2.7
======== ====== =========
(1) Note that this total is cash and cash equivalents
and excludes exchange rate movements.
During the year the Group drew down GBP10.0m of its GBP25.0m
revolving credit facility ("RCF"). Prior to taking account of this
the net cash outflow for the year was GBP11.1m (FY19: GBP3.8m).
Working capital outflows of GBP8.1m include a year-end debtor of
GBP3.7m in relation to furlough receipts (received post year-end),
an inventory increase of GBP1.4m and a GBP3.0m reduction in
creditors which was timing related.
Borrowing, bank facilities and financial position
The Group's net drawing on its bank facilities as at 26 April
2020 was GBP7.1m (FY19: cash in hand of GBP3.7m). Please refer to
note 7 of the extracts from the financial statements.
At the time of the Group's IPO in 2018, new bank facilities were
put in place, principally comprising a GBP25m revolving credit
facility, with a term of three years, expiring in July 2021.
On 13 August 2020, the Group completed an agreement with its
lending bank to enhance and extend the facilities, as follows:
-- The term of the RCF is extended, to expire in September 2022,
with step downs from the initial GBP25.0m facility, of GBP2.5m in
January 2021 and GBP2.5m in January 2022, to reflect the profile of
the expected facility requirement.
-- Provision of an additional GBP7.5m term facility, under the
Government's CLBILS scheme, which also expires in September 2022.
No repayments are due until the expiry date.
-- The facility includes financial covenants in relation to the
level of EBITDA, net debt and capital expenditure
These enhancements to the facility provide useful additional
headroom, and greater certainty as to the availability of funding,
and indicate continued support for the business from its bank.
As a result of the COVID-19 pandemic, the Board has taken steps
to reduce costs and increase liquidity. It has also produced
scenarios to quantify the possible impacts on liquidity of applying
differing assumptions about how the pandemic might affect future
trading. Further details are included in note 1 (b) of the extracts
from the financial statements.
Dividends
At the time of IPO, the Board stated an intention to adopt a
progressive Dividend Policy. A final dividend of 2.4 pence per
share in respect of FY19 was paid in September 2019 and an interim
dividend of 1.2 pence per share in respect of FY20 was paid in
March 2020.
As noted above, the Group has emerged from the spring 2020
COVID-19 lockdown period with adequate liquidity. Notwithstanding
this, the outlook remains uncertain, and continuing to maximise
liquidity will remain a top priority until the Board has sufficient
certainty about the future to take a different stance or, the
liquidity buffer reaches a level where maintaining a higher level
of liquidity would be deemed unnecessary. Consequently, the Board
will not be proposing payment of a final dividend in relation to
FY20.
Gavin Peck
Director
27 August 2020
Consolidated Income Statement
For the year ended 26 April 2020
52 weeks to 26 April 52 weeks to 28 April
2020 2019
(Restated - Note 1c)
-------------------------------- --------------------------------
Result Adjusting Total Result Adjusting Total
before items before items
adjusting adjusting
Note items items
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------- ---- ---------- --------- --------- ---------- --------- ---------
Revenue 225,042 - 225,042 217,469 - 217,469
Cost of sales (190,557) (4,110) (194,667) (178,882) (130) (179,012)
---------------------- ---- ---------- --------- --------- ---------- --------- ---------
Gross profit 34,485 (4,110) 30,375 38,587 (130) 38,457
---------------------- ---- ---------- --------- --------- ---------- --------- ---------
Other operating
income 4,677 - 4,677 8 - 8
Distribution expenses (12,656) - (12,656) (12,025) (495) (12,520)
Administrative
expenses (19,619) (16,295) (35,914) (18,668) (4,148) (22,816)
Operating profit
/ (loss) 4 6,887 (20,405) (13,518) 7,902 (4,773) 3,129
---------------------- ---- ---------- ----------
Finance income 12 - 12 20 - 20
Finance expenses (4,466) - (4,466) (1,064) 240 (824)
Net financing expense (4,454) - (4,454) (1,044) 240 (804)
---------------------- ---- ---------- ----------
Profit / (loss)
before tax 2,433 (20,405) (17,972) 6,858 (4,533) 2,325
---------------------- ---- ---------- --------- --------- ---------- --------- ---------
Taxation (529) 799 270 (1,481) 276 (1,205)
Profit / (loss)
for the period 1,904 (19,606) (17,702) 5,377 (4,257) 1,120
---------------------- ---- ---------- --------- --------- ---------- --------- ---------
Profit before tax
and IFRS 16 2,3 3,338 (17,560) (14,222) 6,858 (4,533) 2,325
---------------------- ---- ---------- --------- --------- ---------- --------- ---------
Basic earnings
per share (pence) 3.0 (28.3) 9.2 1.9
---------------------- ---- ---------- --------- --------- ---------- --------- ---------
Diluted earnings
per share (pence) 3.0 (28.3) 9.2 1.9
---------------------- ---- ---------- --------- --------- ---------- --------- ---------
Profit for the period is attributable to equity holders of the
Parent.
Consolidated Statement of Comprehensive Income
For the year ended 26 April 2020
2020 2019
GBP000 GBP000
(Loss)/Profit for the year (17,702) 1,120
Items that may be recycled subsequently into
profit and loss
Cash flow hedges - changes in fair value 932 96
Cash flow hedges - reclassified to profit and
loss (91) 2
Cost of hedging reserve - changes in fair value 312 37
Cost of hedging reserve - reclassified to profit
and loss (197) (17)
Tax relating to components of other comprehensive
income (248) -
Other comprehensive income for the period, net
of income tax 708 118
Total comprehensive loss/income for the period
attributable to equity shareholders of the Parent (16,994) 1,238
--------------------------------------------------- -------- ------
Consolidated Statement of Financial Position
As at 26 April 2020
Note 2020 2019
GBP000 GBP000
---------------------------------------------------- ---- -------- ------
Non-current assets
Intangible assets 5 3.194 18,494
Property, plant and equipment 6 21,061 20,786
Right of use assets 8 116,763 -
Deferred tax assets 1,802 351
---------------------------------------------------- ---- -------- ------
142,820 39,631
Current assets
Inventories 26,594 25,157
Trade and other receivables 8,130 17,589
Derivative financial asset 1,531 158
Current tax asset 687 -
Cash and cash equivalents 7 6,546 3,687
---------------------------------------------------- ---- -------- ------
43,488 46,591
---------------------------------------------------- ---- -------- ------
Total assets 186,308 86,222
Current liabilities
Bank overdraft 7 3,605 -
Interest-bearing loans and borrowings 7 9,938 (45)
Lease liabilities 7 22,002 275
Trade and other payables 26,189 46,646
Provisions 979 218
Derivative financial liability - 25
Current tax liabilities - 300
---------------------------------------------------- ---- -------- ------
62,713 47,419
Non-current liabilities
Interest-bearing loans and borrowings 7 (11) (91)
Lease liabilities 7 110,200 494
Provisions - 63
---------------------------------------------------- ---- -------- ------
110,189 466
---------------------------------------------------- ---- -------- ------
Total liabilities 172,902 47,885
---------------------------------------------------- ---- -------- ------
Net assets 13,406 38,337
Equity attributable to equity holders of the parent
Share capital 625 625
Share premium 28,322 28,322
Merger reserve (54) (54)
Share-based payment reserve 1,506 1,373
Hedging reserve 1,171 144
Retained earnings (18,164) 7,927
---------------------------------------------------- ---- -------- ------
Total equity 13,406 38,337
---------------------------------------------------- ---- -------- ------
Consolidated Statement of Changes in Equity
Attributable to equity holders of the Company
--------------------------------------------------------------------------------------
Share-
based
Share Share Merger payment Hedging Retained Total
capital premium reserve reserve reserve(1) earnings equity
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Balance at 29
April 2018 - 51,500 (51,500) - - 7,950 7,950
Total
comprehensive
income
for the period
Profit for the
period - - - - - 1,120 1,120
Other
comprehensive
expense - - - - 118 - 118
Total
comprehensive
income
for the period - - - - 118 1,120 1,238
Hedging gains
and losses
and costs of
hedging
transferred
to the cost of
inventory
(note 24) - - - - 26 - 26
Transactions
with owners
of the Company
Effect of group
reconstruction
Bonus issue of
shares 54 (54) - - - - -
Capital
reduction - (51,446) 51,446 - - - -
Second bonus
issue 393 - - - - (393) -
Issue of
shares on IPO 178 28,322 - - - - 28,500
Share based
payment charges - - - 1,373 - - 1,373
Dividend (note
11) - - - - - (750) (750)
---------------- ---------------- -------- --------- ------------ ------------ --------- --------
Total
transactions
with
owners 625 (23,178) 51,446 1,373 - (1,143) 29,123
Balance at 28
April 2019 625 28,322 (54) 1,373 144 7,927 38,337
Transition to
IFRS 16 - - - - - (6,139) (6,139)
---------------- ---------------- -------- --------- ------------ ------------ --------- --------
Restated Balance
at 29
April 2019 625 28,322 (54) 1,373 144 1,788 32,198
---------------- ---------------- -------- --------- ------------ ------------ --------- --------
Total
comprehensive
income
for the period
(Loss)/Profit
for the
period - - - - - (17,702) (17,702)
Other
comprehensive
income - - - 13 695 - 708
Total
comprehensive
income
for the period - - - 13 695 (17,702) (16,994)
Hedging gains
and losses
and costs of
hedging
transferred
to the cost of
inventory
(note 24) - - - - 332 - 332
Transactions
with owners
of the Company
Share based
payment charges - - - 120 - - 120
Dividend (note
11) - - - - - (2,250) (2,250)
---------------- ---------------- -------- --------- ------------ ------------ --------- --------
Total
transactions
with
owners - - - 120 - (2,250) (2,130)
Balance at 26
April 2020 625 28,322 (54) 1,506 1,171 (18,164) 13,406
(1) Hedging reserve includes GBP137,387 (2019: GBP19,090) in
relation to changes in forward points which are recognised in
other comprehensive income and accumulated as a cost of hedging
within the hedging reserve.
Consolidated Cash Flow Statement
For year ended 26 April 2020
2020 2019
GBP000 GBP000
---------------------------------------------------------- --------- ---------
(Loss) / Profit for the year (including adjusting items) (17,702) 1,120
Adjustments for:
Depreciation of property, plant and equipment 5,261 4,912
Impairment of property, plant and equipment 509 176
Reversal of impairment of property, plant and equipment (176) (135)
Depreciation of right of use assets 20,611 -
Impairment of right of use assets 2,991 -
Amortisation of intangible assets 1,170 1,049
Impairment of intangible assets 16,180 -
Derivative exchange loss / (gain) (290) (16)
Financial income (12) (20)
Financial expense 425 801
Interest on lease liabilities 4,041 23
Loss on disposal of property, plant and equipment 299 403
Loss on disposal of right of use asset 795 -
Profit on disposal of lease liability (870) -
Share based payment charges 120 1,351
Taxation (270) 1,205
---------------------------------------------------------- --------- ---------
Operating cash flows before changes in working capital 33,082 10,869
Decrease / (Increase) in trade and other receivables 6,336 (365)
Increase in inventories (1,410) (3,635)
(Decrease) / Increase in trade and other payables (13,822) 3,643
Increase in provisions 792 102
---------------------------------------------------------- --------- ---------
Cash flows from operating activities 24,978 10,614
Corporation tax paid (1,039) (1,221)
---------------------------------------------------------- --------- ---------
Net cash inflow from operating activities 23,939 9,393
Cash flows from investing activities
Acquisition of property, plant and equipment (6,625) (7,120)
Acquisition of intangible assets (2,050) (1,044)
Interest received 12 20
---------------------------------------------------------- --------- ---------
Net cash outflow from investing activities (8,663) (8,144)
Cash flows from financing activities
Payment of lease liabilities (capital) (19,829) (241)
Payment of lease liabilities (interest) (4,041) (23)
Other interest paid (230) (1,357)
Proceeds from share issue - 28,500
Dividends paid (2,250) (750)
Repayment of bank borrowings - (31,200)
Issue of bank loan 10,000 -
---------------------------------------------------------- --------- ---------
Net cash outflow from financing activities (16,350) (5,071)
Net decrease in cash and cash equivalents (1,074) (3,822)
Exchange rate movements 328 89
Cash and cash equivalents at beginning of year 3,687 7,420
---------------------------------------------------------- --------- ---------
Cash and cash equivalents at end of year 2,941 3,687
---------------------------------------------------------- --------- ---------
Notes
1. Accounting policies
(a) General information
TheWorks.co.uk plc (the Company) is a public limited company
(11325534) domiciled in the United Kingdom and its registered
office is Boldmere House, Faraday Avenue, Hams Hall Distribution
Park, Coleshill, Birmingham, B46 1AL. These consolidated financial
statements for the year ended 26 April 2020 comprise the Company
and its subsidiaries (together referred to as 'the Group').
TheWorks.co.uk plc is one of the UK's leading multi-channel
value retailers of; gifts, arts & crafts, stationery, toys, and
books offering customers a differentiated proposition as a value
alternative to full price specialist retailers. The Works sells its
quality products at affordable prices across four specialist
categories comprising; Kids; Arts, Crafts & Hobbies, Stationery
and Family Gifts, which are supplemented by both seasonal and
regional offerings.
The Group operates a network of over 500 stores in the UK &
Ireland. Stores can be found on high-streets, in retail parks,
shopping centres, factory outlets and as concessions in various
locations. The Works also has a significant and growing online
presence that enables customers to shop any time of the day, with
an extended range of products not available in stores. This
multi-channel offering is one of the first of its kind in the value
retail sector and includes a popular Click & Collect service,
driving additional footfall and sales in store.
These extracts from the consolidated financial statements are
presented in pounds sterling and all values are rounded to the
nearest thousand (GBP000), except when otherwise indicated.
(b) Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) and IFRS
Interpretations Committee (IFRS IC) interpretations, as adopted by
the European Union, and with those parts of the Companies Act 2006
applicable to companies reporting under IFRS.
The preparation of financial statements in conformity with
Adopted IFRSs requires management to make judgements, estimates and
assumptions that affect the application of policies and reported
amounts of assets and liabilities, income and expenses. The
estimates and associated assumptions are based on historical
experience, future budgets and forecasts, and various other factors
that are believed to be reasonable under the circumstances, the
results of which form the basis of making the judgements about
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates.
The estimates and assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in
which the estimate is revised if the revision affects only that
period, or in the period of the revision and future periods if the
revision affects both current and future periods. The Group's
significant judgements and estimates relate to the classification
of adjusting items, hedge accounting, and impairment of property,
plant and equipment, right of use assets and intangibles, and are
described in Note 1(v).
(i) Going concern
The financial statements have been prepared on a going concern
basis, which the directors consider appropriate for the reasons set
out below.
The Directors have assessed the prospects of the Group, taking
into account the Group's current position and the potential impact
of the principal risks documented on pages 44 to 50.
The Group operates a plan, within which, scenario planning and
stress testing has been carried out.
In assessing the basis of preparation the Directors have
considered:
-- The external environment.
-- The Group's financial position and bank facilities.
-- Measures taken to increase and maintain liquidity.
-- The potential impact on the financial performance of the
business of the risks described in the Strategic Report.
-- The output of a "Base Case" scenario financial model, which
includes the impact on the Group's three year plan of the recent
COVID-19 lockdown, and an estimate of the most likely continued
effect on trading.
-- The resilience of the Group to the manifestation of a more
severe impact of these risks, evaluated via a revised model
referred to as the "Reasonable Worst Case" ("RWC") scenario
financial model.
-- The availability and expected effectiveness of any mitigating
actions that would be taken in response to circumstances arising
such as those modelled under the RWC.
-- The Board has considered the impact on the Group's cash flows, headroom and covenants.
These factors are described below.
The Base Case and RWC scenario models cover a period of three
years. The outputs of the models for the first eighteen months of
this period (the "Going Concern Period") have been used to make a
judgement regarding using the Going Concern basis of preparation of
the financial statements.
External environment
There continues to be significant uncertainty as to the future
impact on the Group of the COVID-19 global pandemic; the potential
effects of this have been considered as part of the Group's
viability assessment and its confirmation of the adoption of the
going concern basis. In March 2020, all of the Group's retail
stores closed to protect its employees and customers, in accordance
with various national government requirements.
The online channel traded successfully throughout the period of
lockdown; certain retail concession stores reopened in May 2020,
with the majority of stores opening during June when the easing of
government restrictions permitted. Sales from the online channel,
during lockdown, and store sales since the end of lockdown, have
been better than the Board's initial expectations. Despite this,
there remains uncertainty, for example, over how long social
distancing measures will be required to be in place and the
possible effects on the level of consumer demand.
The lack of clarity arising from the UK leaving the European
Union also creates increased levels of economic and consumer
uncertainty and, consequently, the longer-term impact this may have
on the Group also remains uncertain.
Financial position and bank facilities
The cash and borrowings of the Group at the period end are shown
in note 7 (Borrowings) of the extracts from the financial
statements.
The Group's net debt balance drawn from its principal lending
bank at 26 April 2020 was GBP7.1m (2019: net cash of GBP3.7m),
which comprised a draw-down of GBP10.0m against its revolving
credit facility ("RCF") and cash balances of GBP2.9m.
At the time of the Group's IPO in 2018, new bank facilities were
put in place, principally comprising a GBP25m revolving credit
facility, with a term of three years, expiring in July 2021.
On 13 August 2020, the Group completed an agreement with HSBC to
enhance and extend the facilities, as follows:
-- The term of the RCF is extended, to expire in September 2022,
with step downs from the initial GBP25.0m facility, of GBP2.5m in
January 2021 and GBP2.5m in January 2022, to reflect the profile of
the expected facility requirement.
-- Provision of an additional GBP7.5m term facility, under the
Government's CLBILS scheme, which also expires in September 2022.
No repayments are due until the expiry date.
-- The facility includes financial covenants in relation to the
level of EBITDA, net debt and capital expenditure.
-- The EBITDA and net debt covenants are based on limits set and
measured every month. The EBITDA covenant is measured with
reference to EBITDA over the last twelve months (LTM). The group's
ability to meet the EBITDA covenant is heavily influenced by
trading during the peak months of November and December.
Measures to maintain liquidity
The Directors have implemented a number of measures to maintain
or improve liquidity including cutting costs, temporarily
suspending dividends, scaling back capital expenditure, agreeing
rent reductions and/or deferrals with landlords, cancelling or
deferring stock purchases and agreeing revised payment terms with
suppliers.
The Group will also benefit from approximately GBP13m of
business rates relief between the beginning of lockdown and the end
of FY21. In addition, the government's job retention scheme to help
meet the cost of furloughed roles contributed cash savings of
approximately GBP8m, between the beginning of lockdown, and the end
of July 2020.
As a result of the steps taken by the Board and the support
received from the Government schemes, the Group's cost base was
significantly lower than normal during the lockdown period.
Although the reopening of stores has inevitably resulted in
expenditure increasing from lockdown levels, operating and overhead
cost savings will be maintained to the fullest extent possible.
Given the foregoing, and as noted above, to assist the Board in
confirming the continued appropriateness of using the going concern
basis in the preparation of the financial statements, and in making
its assessment of the Group's viability, two financial scenarios
have been prepared to quantify the possible impacts on liquidity of
applying differing assumptions. These scenarios cover the FY21 to
FY23 financial years (the "Projection Period"). It is emphasised
that these are not forecasts, but models used to assist the Board
in connection with viability and going concern considerations.
Potential impact of risks on financial scenarios
The "Principal risks and uncertainties" section on pages 44 to
50, sets out the risks that the Board considers could threaten its
business model, future performance, solvency or liquidity.
It is considered unlikely that all risks would manifest
themselves simultaneously and/or all in a direction that would
adversely affect the business. The Directors have estimated what a
reasonably likely combination of risks might be that could
materialise within the next three years and how the business might
be affected. The most prominent risks in the near term would appear
to be connected with COVID-19, which could affect sales, costs and
liquidity. Other risks, such as market and economic environment
could have similar manifestations to COVID-19, and Brexit could
impact these areas as well as supply chain.
Taking these factors into consideration, the Directors have
prepared scenarios which seek to show how these risks might affect
the business, in a Base Case and RWC scenario, as described
below.
The Base Case incorporates the Board's estimate of the most
likely level of risk impact arising from the factors noted above.
The RWC assumes that the effects are more severe, particularly in
relation to COVID-19.
Base case scenario
The Base Case scenario has been modelled using the following key
assumptions/incorporating the following information:
1 The closure of the Group's retail stores during lockdown, with
the majority of stores remaining closed until mid-June 2020.
2 Continuing social distancing measures and a potential downturn
in the economy have been assumed to have an adverse impact on store
sales throughout the Projection Period. Sales during the peak
pre-Christmas 2020 trading season have been assumed to be 10% lower
than in FY20 and sales throughout FY21 are modelled as being below
FY20 levels. Only a partial recovery has been assumed in FY22, such
that sales in the model are still lower than in FY20.
3 Online revenue as a proportion of total revenue is higher than
previously, reflecting the strong growth experienced during
lockdown, albeit sales are not expected to continue to grow at the
same rate.
4 An improved gross margin rate reflecting the expected benefits
of implementing improved sourcing strategies.
5 The impact of cost saving measures implemented or identified.
6 Significantly reduced capital expenditure, of approximately
GBP3.0m in FY21 and GBP3.5 million per annum in FY22 and FY23.
7 Initiatives to preserve cashflow, for example, revised
supplier and landlord payment terms already agreed, and the
suspension of dividend payments.
Under the Base Case scenario, the Group expects to have
sufficient financial resources to continue to be viable and the
Going Concern basis of preparation of the financial statements is
appropriate.
Reasonable Worst Case scenario
Under the RWC scenario, store revenues are 10% and 7% lower than
in the Base Case in FY21 and FY22 respectively, and 20% and 30%
below FY20 levels on a like-for-like basis during November and
December 2020 respectively, illustrating a situation whereby
trading is affected more severely by social distancing measures and
the potential consequences of a more severe and sustained economic
downturn. Note that the Base Case model for FY21 already
incorporates an assumption of lower sales post lockdown than in
FY20, and only a partial recovery in FY22.
This scenario does not build in the benefit of additional
mitigation that, in practice, would be implemented in these
circumstances. These may include, further reducing stock purchases,
stock liquidation, and further reductions in capital expenditure.
In addition, other than to the extent that they are directly
variable with revenue, the company's forecast cost base has not
been significantly reduced in this RWC scenario.
Actual trading results since the beginning of the FY21 financial
year have been better than factored into the Base Case and RWC
assumptions. This, together with the opportunity to take mitigating
actions as described above, and the assumption that the Group would
continue to be able to access the liquidity from its bank
facilities, in the opinion of the Board, provides sufficient
financial resources for the Group to continue to be viable under
the RWC, albeit with limited headroom.
Conclusion regarding basis of preparation
In addition to the foregoing, in considering the appropriateness
of adopting the going concern basis of preparation, the Directors
also took account of the fact that it is difficult to predict with
confidence the overall impact of COVID-19 on the Group's
profitability in the next financial year.
As there remains considerable uncertainty over the potential
development of the COVID 19 pandemic, any future Government
response and the economic impact of those developments on the cash
flow forecasts of the Group, it is difficult to rule out the
potential for further increases in local social distancing measures
or even the possibility of a further national lockdown and the
effect that that will have on the forecast cash flows. Whilst the
RWC referred to above, after mitigating actions, shows headroom, as
the level of headroom is relatively small, a further decline over
and above the 20% and 30% sales declines in November and December
2020, could result in a potential breach of the EBITDA covenant
later in 2021. Whilst the Group believes that it would have time
before a potential breach to mitigate further, there is no
certainty as to the size of the potential breach and, therefore,
whether the mitigating actions could resolve this in time.
In light of this level of uncertainty over the duration and
severity of any disruption, there are scenarios under which the
Group could breach its EBITDA covenant, which represents a material
uncertainty that may cast significant doubt on the Group's and the
Company's ability to continue as a going concern.
Based on all of the above considerations, and having carefully
considered the material uncertainty and mitigating actions
available, the Directors believe that it remains appropriate to
prepare the financial statements on a going concern basis.
(ii) New accounting standards
The Group has applied the following new standards and
interpretations for the first time for the annual reporting period
commencing 29 April 2019:
- IFRS 16 Leases.
- IFRIC 23 Uncertainty over Income Tax Treatments.
- Amendments to IFRS 9 Prepayment Features with Negative Compensation.
- Amendments to IAS 28 Long-term Interests in Associates and Joint Ventures.
- Amendments to IAS 19 Plan Amendment, Curtailment or Settlement.
- Annual Improvements to IFRS Standards 2015-2017 Cycle
(Amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23).
The nature and effect of the changes to the Group's accounting
policies as a result of the adoption of IFRS 16 is set out below.
Details of the impact of the adoption to IFRS 16 are given in note
6 (property, plant and equipment), note 7 (borrowings) and note 8
(impact on transition).
The adoption of the other standards and interpretations listed
above has not led to any changes to the Group's accounting policies
or had any other material impact on the financial position or
performance of the Group.
IFRS 16
In the current period, the Group has applied IFRS 16 (as issued
by the IASB in January 2016) that is effective for annual periods
that begin on or after 1 January 2019. The date of initial
application of IFRS 16 for the Group is 29 April 2019.
IFRS 16 provides a single model for lessees which recognises a
right-of-use asset ("RoUA") and a lease liability for all leases,
with exceptions available for short-term and low-value leases. The
impact of IFRS 16 is to recognise a lease liability and a
corresponding asset in the Group Balance Sheet for leases
previously classified as operating leases.
The most significant impact has been that the Group's retail
store operating leases are now recognised on the Group Balance
Sheet as right-of-use assets representing the economic benefits of
the Group's right to use the underlying leased assets, together
with the associated future lease liabilities. Previously lease
rentals payable under operating leases were not recognised in the
Consolidated Balance Sheet and were charged to the Consolidated
Income Statement on a straight-line basis over the term of the
relevant lease.
The Group adopted IFRS 16 from 29 April 2019 using the modified
retrospective transition approach as described in paragraph C5 (b)
of the standard. The comparative information presented for the 52
weeks ended 28 April 2019 has not been restated and therefore
continues to be shown under IAS 17 'Leases.'
(c) Alternative Performance Measures
In reporting financial information, the Group presents
alternative performance measures (APMs). These are not defined or
specified under the requirements of IFRS because they exclude
amounts that are included in, or include amounts that are excluded
from, the most directly comparable measure calculated and presented
in accordance with IFRS, or are calculated using financial measures
that are not calculated in accordance with IFRS.
The following items were included in Adjusting Items in the 52
weeks ended 26 April 2020:
-- Impairment charges, including those resulting from the
COVID-19 pandemic. As a result of the COVID-19 pandemic and
subsequent UK government restrictions introduced on 23 March 2020
that has resulted in significant and unprecedented market and
business disruption, the Group has classified store impairments as
adjusting items for the first time. The impact of the COVID-19
pandemic on the Group's operations is discussed within the
principal risks and uncertainties on pages 44 to 50 as well as set
out within the basis of preparation in note 1 (b) above.
The prior year has been restated on a consistent basis. The
restatement of the prior year has no impact on the prior year's
statutory measures of reported profit or on the Group's cash flows
or financial position for the year ended 28 April 2019. The prior
year's adjusted profit measures have increased by GBP0.1 million,
being the net store impairment charge and onerous lease provision
charge not treated as an adjusting item in 2019.
-- Under-declared duty and penalties for late payment associated
with the misclassification of certain imported goods in prior
years.
Refer to note 3 below for a summary of the adjusting items.
(d) Critical accounting judgements and key sources of estimation
uncertainty
The preparation of consolidated financial statements requires
the Group to make estimates and judgements that affect the
application of policies and reported amounts.
Critical judgements represent key decisions made by management
in the application of the Group accounting policies. Where a
significant risk of materially different outcomes exists due to
management assumptions or sources of estimation uncertainty, this
will represent a key source of estimation uncertainty. Estimates
and judgements are continually evaluated and are based on
historical experience and other factors, including expectations of
future events that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates.
The estimates which have a significant risk of causing a
material adjustment to the carrying amount of assets and
liabilities within the next 12 months are discussed below.
Critical accounting judgements
Adjusting items
The directors believe that the adjusted profit and earnings per
share measures provide additional useful information to
shareholders on the performance of the business. These measures are
consistent with how business performance is measured internally by
the Board and Operating Committee. The profit before tax and
adjusting items measure is not a recognised profit measure under
IFRS and may not be directly comparable with adjusted profit
measures used by other companies. The classification of adjusting
items requires significant management judgement after considering
the nature and intentions of a transaction. The Group's definitions
of adjusting items are outlined within both the Group accounting
policies and Note 6. These definitions have been applied
consistently year on year, with additional items included this year
relating to store impairments, including those resulting from the
COVID-19 pandemic.
Note 3 provides further details on current year adjusting items
and their adherence to Group policy.
Hedge accounting
The Group is exposed to foreign currency risk, most
significantly to the US dollar as a result of sourcing certain
products from Asia which are paid for predominantly in US dollars.
The Group hedges these exposures using forward foreign exchange
contracts and hedge accounting is applied when the requirements of
IFRS 9 are met, which include that a forecast transaction must be
"highly probable".
The Group has applied judgement in assessing whether the
forecast purchases remain "highly probable", particularly in light
of the decline in expected sales resulting from the COVID-19
pandemic and the related temporary store closures.
The Group's policy is that approximately 50% of the forecast
purchase requirements are initially hedged, approximately 12 months
prior, with incremental hedges taken out over time, as the buying
period approaches and therefore as certainty increases over the
forecast purchases. As a result of this progressive strategy,
reducing the supply pipeline of inventory, should this occur, does
not immediately lead to over-hedging and the disqualification of
"highly probable". If the forecast transactions were no longer
expected to occur, any accumulated gain or loss on the hedging
instruments would be immediately reclassified to profit or
loss.
Key sources of estimation uncertainty
Impairment of property, plant and equipment, right of use assets
and intangibles
Property, plant and equipment, right-of-use assets and
intangible assets are reviewed for impairment if events or changes
in circumstances indicate that the carrying amount may not be
recoverable. The Directors consider an individual retail store to
be a cash-generating unit ('CGU'). The UK government trade
restrictions implemented on 23 March 2020 as a result of the
COVID-19 pandemic are considered an impairment trigger and as a
result all stores have been tested for impairment.
Management performs an impairment review for each CGU that has
indicators of impairment. When a review for impairment is
conducted, the recoverable amount of an asset or CGU is determined
based on value-in-use calculations using the Group's latest
forecast cash flows, covering a three-year period to April 2023
(the "three-year Plan") and are discounted using the Group's
pre-tax discount rate.
The three-year plan has regard to historic performance and
knowledge of the current market, together with the Group's views on
the future achievable growth and the impact of committed cash
flows. The cash flows reflect the Board's current best estimate of
the range of possible impacts arising from COVID-19, which
anticipates a significant reduction in sales and profits in the
short to medium-term compared to previous estimates. Cash flows
beyond this three-year period are extrapolated using a long-term
growth rate based on management's future expectations.
Pre-tax discount rates are derived from the Group's weighted
average cost of capital, which has been calculated using the
capital asset pricing model, the inputs of which include a country
risk-free rate, equity risk premium, Group size premium, a
forecasting risk premium and a risk adjustment (beta).
Goodwill is reviewed for impairment annually on the same basis
as described above for the period covered by the three-year plan
together with a terminal value based on an assumed long-term growth
rate.
The value in use method requires the Group to determine
appropriate assumptions (which are key sources of estimation
uncertainty) in relation to the growth rates of sales and cash
margins, operating costs, long-term growth rates and the post-tax
discount rate used to discount the assumed cash flows to present
value. Future events could cause the forecasts and assumptions used
in impairment reviews to change with a consequential adverse impact
on the results and net position of the Group as actual cash flows
may differ from forecasts and could result in further material
impairments in future years.
See notes 5 and 6 below for further details on the Group's
assumptions and associated sensitivities.
2. Alternative Performance Measures ("APM")
The Group tracks a number of alternative performance measures in
managing its business, which are not defined or specified under the
requirements of IFRS because they exclude amounts that are included
in, or include amounts that are excluded from, the most directly
comparable measure calculated and presented in accordance with
IFRS, or are calculated using financial measures that are not
calculated in accordance with IFRS.
The Group believes that these alternative performance measures,
which are not considered to be a substitute for or superior to IFRS
measures, provide stakeholders with additional helpful information
on the performance of the business. These alternative performance
measures are consistent with how the business performance is
planned and reported within the internal management reporting to
the Board. Some of these alternative performance measures are also
used for the purpose of setting remuneration targets.
These alternative performance measures should be viewed as
supplemental to, but not as a substitute for, measures presented in
the consolidated financial statements relating to the Group, which
are prepared in accordance with IFRS. The Group believes that these
alternative performance measures are useful indicators of its
performance. However, they may not be comparable with
similarly-titled measures reported by other companies due to
possible differences in the way they are calculated.
Like-for-like sales
These are defined as the year-on-year growth in gross sales from
stores which have been opened for a full 63 weeks (but excluding
sales from stores closed for all or part of the relevant period or
prior year comparable period), and from its e-commerce platform,
calculated on a calendar week basis. The measure is used widely in
the retail industry as an indicator of sales performance. A
reconciliation of revenue to revenue on a like-for-like basis is
set out below. Like-for-like sales include a full 52 weeks of
trading for the year ended 28 April 2019, as such the
reconciliation below shows LFL sales pre lockdown and post
lockdown:
2020 2019
GBP000 GBP000
------------------------------------------- -------- --------
LFL sales pre lockdown 218,583 217,037
LFL sales during lockdown 4,873 17,677
--------------------------------------------- -------- --------
Total Like-for-like sales 223,456 234,714
--------------------------------------------- -------- --------
FY19 and FY20 New Stores 30,950 6,374
Closed Stores 98 4,686
Temporary Closures 130 593
--------------------------------------------- -------- --------
Total gross sales 254,634 246,367
--------------------------------------------- -------- --------
VAT (27,931) (26,872)
Loyalty points (1,661) (2,026)
--------------------------------------------- -------- --------
Turnover per consolidated income statement 225,042 217,469
--------------------------------------------- -------- --------
EBITDA, Adjusted EBIDTA and Adjusted profit after tax
EBITDA is defined by the Group as earnings before interest, tax,
depreciation, amortisation and profit/loss on the disposal of fixed
assets. Adjusted EBITDA is calculated by adding back or deducting
Adjusting Items to EBITDA. See note 1 for a description of
Adjusting Items.
As consequence of the adoption of IFRS 16 during the year, the
Group has shown another measure of Adjusted EBITDA, which removes
the impact of IFRS 16 to allow the reader to compare against the
prior year. The following table provides a reconciliation of
Adjusted EBITDA to profit after tax, and shows the impact of IFRS
16 on adjusted EBITDA:
52 weeks ended 26 April 2020 52 weeks ended 28 April 2019
(Restated - Note 1c)
GBP000 GBP000
------------------------------------------------------ ---------------------------- ----------------------------
Non IFRS 16 Adjusted EBITDA 10,809 13,872
------------------------------------------------------ ---------------------------- ----------------------------
IAS 17 income statement charges not recognised under
IFRS 16 (see note 28) 23,433 -
Foreign exchange difference on euro leases (89) -
Loss on disposal of RoUA recognised under IFRS 16 (795) -
Profit on disposal of lease liability recognised under
IFRS 16 870 -
Post IFRS 16 Adjusted EBITDA 34,228 13,872
------------------------------------------------------ ---------------------------- ----------------------------
Loss on disposals of property, plant and equipment (299) (9)
Depreciation (25,872) (4,912)
Amortisation (1,170) (1,049)
Finance expenses (4,466) (1,064)
Finance income 12 20
Tax charge (529) (1,481)
------------------------------------------------------ ---------------------------- ----------------------------
Adjusted profit / (loss) after tax 1,904 5,377
------------------------------------------------------ ---------------------------- ----------------------------
Adjusting items (including impairment charges and
reversals) (20,405) (4,533)
Tax charge 799 276
------------------------------------------------------ ---------------------------- ----------------------------
Profit / (loss) after tax (17,702) 1,120
------------------------------------------------------ ---------------------------- ----------------------------
Profit before tax and IFRS 16
The following tables provides a reconciliation of profit /
(loss) before tax and IFRS 16 adjustments to profit / (loss) before
tax.
52 weeks ended 26 April 2020
--------------------------------------
Adjusted Adjusting Items Total
GBP000 GBP000 GBP000
------------------------------------------------------- --------- ---------------- ---------
Profit / (loss) before tax before IFRS 16 adjustments 3,338 (17,560) (14,222)
-------------------------------------------------------- --------- ---------------- ---------
Remove IAS 17 rental charge 23,292 - 23,292
Remove hire costs from hire of equipment 141 - 141
Remove depreciation charged on the existing assets 298 - 298
Remove interest charged on the existing liability 30 - 30
Depreciation charge on Right of Use Asset (20,611) - (20,611)
Interest cost on lease liability (4,041) - (4,041)
Loss on disposal of RoUA (795) - (795)
Profit on disposal of lease liability 870 - 870
Foreign exchange difference on euro leases (89) - (89)
Additional impairment charge under IAS 36 - (2,991) (2,991)
Onerous lease provision not applicable under IFRS 16 - 146 146
-------------------------------------------------------- --------- ---------------- ---------
Net Impact on profit / (loss) (905) (2,845) (3,750)
-------------------------------------------------------- --------- ---------------- ---------
Profit / (loss) before tax 2,433 (20,405) (17,972)
-------------------------------------------------------- --------- ---------------- ---------
Adjusted profit metrics
Key profit measures include operating profit, profit before tax,
profit for the period and earnings per share are calculated on an
adjusted basis by adding back or deducting Adjusting Items. See
note 1 for a description of Adjusting Items. These adjusted metrics
are included within the consolidated income statement and statement
of other comprehensive income, with further details of adjusting
items included in Note 3 below.
3. Adjusting items
During the period, the items analysed below have been classified
as adjusting:
2020 2019
(Restated - Note 1c)
GBP000 GBP000
----------------------------------------------------------------------------------- ------ ---------------------
Cost of sales
Onerous lease provision charges(1) - 89
Impairment charges(2) 3,500 176
Impairment reversals(2) (176) (135)
HMRC duty provision(3) 786 -
Total Cost of sales 4,110 130
----------------------------------------------------------------------------------- ------ ---------------------
Distribution expenses
Relocation of e-commerce(4) - 495
Total distribution expenses - 495
----------------------------------------------------------------------------------- ------ ---------------------
Administrative expenses
Goodwill impairment(5) 16,180 -
Salary costs(6) 115 -
Professional fees - one off non-operational activities(7) - 2,936
Staff incentives on IPO(8) - 1,212
Total administrative expenses 16,295 4,148
----------------------------------------------------------------------------------- ------ ---------------------
Finance expenses
Write off capitalised costs, interest and fees associated with loan repaid on
IPO(9) - (240)
Total finance expenses - (240)
----------------------------------------------------------------------------------- ------ ---------------------
Total adjusting items 20,405 4,533
----------------------------------------------------------------------------------- ------ ---------------------
(1) This relates to onerous lease provision charges for loss
making stores in the prior year.
(2) These relate to fixed asset impairment charges and reversals
of prior year impairment charges.
(3) This relates to a provision recognised regarding an ongoing
HMRC review of the Group's Duty rates
(4) This includes the loss on disposal of the fixed assets
associated with the e-commerce picking tower at the Group's
distribution centre in Coleshill, Birmingham, which was disposed in
the prior year following completion of the transition to the third
party logistics provider for the e-commerce warehouse and order
fulfilment.
(5) This relates to the impairment of goodwill during the year.
Refer to note 5 below for further detail.
(6) Salary costs relate to payments to past Directors.
(7) Professional fees relate to IPO and refinancing costs
incurred in the prior year.
(8) Staff incentive on IPO represents nil cost share options
awarded to an employee in preparation of the IPO.
(9) This includes GBP386,000 in relation to capitalised loan
costs written off in the prior year on the loan repaid on IPO,
offset with a release of GBP626,000 of interest and fees in
relation to the borrowing facilities repaid on IPO.
4. Operating profit
Operating profit (before adjusting items) is stated after
charging / (crediting) the following items:
2020 2019
GBP000 GBP000
-------------------------------------------------- ------ ------
Loss on disposal of property, plant and equipment 299 9
Loss on disposal of RoUA 795 -
Profit on disposal of lease liability (870) -
Depreciation 25,872 4,912
Amortisation 1,170 1,049
Adjusting items (see note 6) 20,405 4,533
Operating lease payments:
* Hire of plant and machinery(1) 345 509
* Other operating leases(1) 4,730 26,138
Net foreign exchange losses 208 84
Cost of inventories recognised as an expense 86,398 81,369
Staff costs 54,401 48,213
(1) For the year ended 26 April 2020 these balances relates to
non IFRS 16 operating lease rentals during the year, please refer
to note 8 for further details of these balances
5. Intangible assets
Goodwill Software Total
GBP000 GBP000 GBP000
--------------------------------- -------- -------- ------
Cost
Balance at 29 April 2019 16,180 6,365 22,545
Additions - 2,050 2,050
--------------------------------- -------- -------- ------
Balance at 26 April 2020 16,180 8,415 24,595
--------------------------------- -------- -------- ------
Amortisation and impairment
Balance at 29 April 2019 - 4,051 4,051
Amortisation charge for the year - 1,170 1,170
Impairment charges 16,180 - 16,180
--------------------------------- -------- -------- ------
Balance at 26 April 2020 16,180 5,221 21,401
--------------------------------- -------- -------- ------
Net Book Value
--------------------------------- -------- -------- ------
At 29 April 2019 16,180 2,314 18,494
--------------------------------- -------- -------- ------
At 26 April 2020 - 3,194 3,194
--------------------------------- -------- -------- ------
Goodwill Software Total
GBP000 GBP000 GBP000
--------------------------------- -------- -------- ------
Cost
Balance at 29 April 2018 16,180 5,321 21,501
Additions - 1,044 1,044
--------------------------------- -------- -------- ------
Balance at 28 April 2019 16,180 6,365 22,545
--------------------------------- -------- -------- ------
Amortisation
Balance at 29 April 2018 - 3,002 3,002
Amortisation charge for the year - 1,049 1,049
Balance at 28 April 2019 - 4,051 4,051
--------------------------------- -------- -------- ------
Net Book Value
--------------------------------- -------- -------- ------
At 29 April 2018 16,180 2,319 18,499
--------------------------------- -------- -------- ------
At 28 April 2019 16,180 2,314 18,494
--------------------------------- -------- -------- ------
Goodwill impairment testing
Goodwill of GBP16.2 million arose in 2015 when The Works
Investments Limited acquired The Works Stores Limited (TWSL) in a
share for share transaction. As such, all of the goodwill has been
allocated to one cash generating unit (CGU) being TWSL.
Goodwill is not amortised but is tested annually for impairment
with the recoverable amount being determined from value in use
calculations. Goodwill is monitored by management at a country
level and has been tested for impairment on that basis.
The annual impairment test has resulted in an impairment charge
of GBP16.2 million, reflecting the adverse impact of COVID-19 on
the business' short to medium prospects. The basis on which the
value in use has been determined is described below.
The key assumptions for the value in use calculation are those
regarding the discount rate, long-term growth rates and expected
trading performance (sales, cash margin and operating costs).
The post-tax cash flows used for impairment testing are based on
the Group's latest forecast cash flows, covering a three-year
period to April 2023 (the "Three-year Plan"), which have regard to
historical performance and knowledge of the current market,
together with the Group's views on the future achievable growth and
the impact of committed cash flows. The cash flows include
estimates of ongoing capital expenditure required to maintain the
store network, but exclude any significant growth capital
initiatives not committed. The Three-Year Plan reflect the Board's
current best estimate of the range of possible impacts arising from
COVID-19, which anticipate a significant reduction in sales and
profits in the short to medium term compared to previous
estimates.
Cash flows beyond this three-year period are extrapolated using
a long-term growth rate based on the Group's current view of
achievable long-term growth. The Group's current view of its
achievable long-term growth is 2%, reflecting its best
estimate.
Management estimates discount rates that reflect the current
market assessment of the time value of money and the risks specific
to the Group. The post-tax discount rate is derived from the
Group's post-tax weighted average cost of capital (WACC) which has
been calculated using the capital asset pricing model, the inputs
of which include a country risk-free rate, equity risk premium,
Group size premium, a forecasting risk premium and a risk
adjustment (beta). The rate used to discount the forecast cash
flows is 14.0% (last year: 10.26%), which reflects the additional
risks presented by COVID-19 as at 26 April 2020.
As a result of this analysis, the goodwill balance has been
impaired to nil. No further downside sensitivities have therefore
been performed by management.
6. Property, plant and equipment
RoUA - Fixtures
RoUA - plant and Land and Plant and and
property equipment buildings equipment Fittings Total
------------- ----------- ---------- ----------- ---------- ---------- -------
Cost
Balance at 29
April 2019 - - 9,253 2,529 21,457 33,239
Adoption of
IFRS 16 103,086 841 - - - 103,927
Adoption of
IFRS 16 -
Transfer to
RoUA - 457 - (457) - -
Additions 36,350 426 1,366 503 4,756 43,401
Disposals (966) - (28) (36) (475) (1,505)
------------- ----------- ---------- ----------- ---------- ---------- -------
Balance at 26
April 2020 138,470 1,724 10,591 2,539 25,738 179,062
------------- ----------- ---------- ----------- ---------- ---------- -------
Depreciation
and
impairment
Balance at 29
April 2019 - - 3,329 1,756 7,368 12,453
Depreciation
charge for
the year 20,152 459 1,092 609 3,560 25,872
Impairment
charge 2,991 - 152 17 340 3,500
Impairment
reversals - - - (176) - (176)
Disposals (171) - 13 (21) (232) (411)
------------- ----------- ---------- ----------- ---------- ---------- -------
Balance at 26
April 2020 22,972 459 4,586 2,185 11,036 41,238
------------- ----------- ---------- ----------- ---------- ---------- -------
Net Book
Value
------------- ----------- ---------- ----------- ---------- ---------- -------
At 29 April
2019 - - 5,924 773 14,089 20,786
------------- ----------- ---------- ----------- ---------- ---------- -------
At 26 April
2020 115,498 1,265 6,005 354 14,702 137,824
------------- ----------- ---------- ----------- ---------- ---------- -------
RoUA - Fixtures
RoUA - plant and Land and Plant and and
property equipment buildings equipment Fittings Total
------------- ----------- ---------- ----------- ---------- ---------- -------
Cost
Balance at 29
April 2018 - - 7,214 1,696 17,534 26,444
Additions - - 2,178 863 4,408 7,449
Disposals - - (139) (30) (485) (654)
------------- ----------- ---------- ----------- ---------- ---------- -------
Balance at 28
April 2019 - - 9,253 2,529 21,457 33,239
------------- ----------- ---------- ----------- ---------- ---------- -------
Depreciation
and
impairment
Balance at 29
April 2018 - - 2,358 753 4,640 7,751
Depreciation
charge for
the year - - 1,078 990 2,844 4,912
Impairment
charge - - - 176 - 176
Impairment
reversals - - - (135) - (135)
Disposals - - (107) (28) (116) (251)
------------- ----------- ---------- ----------- ---------- ---------- -------
Balance at 28
April 2019 - - 3,329 1,756 7,368 12,453
------------- ----------- ---------- ----------- ---------- ---------- -------
Net Book
Value
------------- ----------- ---------- ----------- ---------- ---------- -------
At 29 April
2018 - - 4,856 943 12,894 18,693
------------- ----------- ---------- ----------- ---------- ---------- -------
At 28 April
2019 - - 5,924 773 14,089 20,786
------------- ----------- ---------- ----------- ---------- ---------- -------
Right-of-use assets
From 29 April 2019, the Group has adopted IFRS 16 Leases. Refer
to notes 1 (b) ii and 8 for the accounting policy and restatements
respectively. As shown above, there are two separate right-of-use
asset classes recognised on adoption of the new leasing standard:
property and plant and equipment.
Impairment losses
For impairment testing purposes, the Group has determined that
each store is a separate CGU. Each CGU is tested for impairment at
the balance sheet date if any indicators of impairment have been
identified. The UK government trade restrictions implemented on 23
March 2020 as a result of the COVID-19 pandemic are considered an
impairment trigger for all stores and as a result all stores have
been tested for impairment.
The key assumptions for the value in use calculation are those
regarding the discount rate, long-term growth rates and expected
trading performance (sales, cash margin and operating costs).
The value in use of each CGU is calculated based on the Group's
latest forecast cash flows, covering a three-year period to April
2023 (the "Three-year Plan"), which has regard to historic
performance and knowledge of the current market, together with the
Group's views on the future achievable growth and the impact of
committed cash flows. The cash flows include estimates of ongoing
capital expenditure required to maintain the store network, but
exclude any significant growth capital initiatives not committed.
The Three-year Plan reflects the Board's current best estimate of
the range of possible impacts arising from COVID-19, which
anticipate a significant reduction in sales and profits in the
short to medium-term compared to previous estimates.
Cash flows beyond the three-year period are extrapolated using
an estimated average long-term growth rate of 2.0% across all CGUs,
which is based on inflation forecasts by recognised bodies.
Management estimates discount rates that reflect the current
market assessment of the time value of money and the risks specific
to the Group. The post-tax discount rate is derived from the
Group's post-tax weighted average cost of capital (WACC) which has
been calculated using the capital asset pricing model, the inputs
of which include a country risk-free rate, equity risk premium,
Group size premium, a forecasting risk premium and a risk
adjustment (beta). The post-tax WACC is subsequently adjusted to
reflect the specific amount and timing of the future tax cashflows
to obtain the pre-tax rate of 16.3% (last year: 10.26%), which
reflects the additional risks presented by COVID-19 as at 26 April
2020.
During the year, the Group has recognised an impairment charge
against property, plant and equipment of GBP3.5m. The stores
subject to an impairment charge were impaired to their 'value in
use' recoverable amount of GBP121.3m, which is their carrying value
at the period end. These impairments have been recognised within
adjusting items (see note 6). Furthermore there were prior year
impairment reversals of GBP0.2m.
As disclosed in the accounting policies (note 1), the impairment
charge represents a significant accounting judgement due to
assumptions used in calculating the pre-tax WACC in addition to
assumptions used within the forecast cash flows. Cash flows used
within the impairment model are based on assumptions which are
sources of estimation uncertainty and movements in these
assumptions could lead to further impairments. Management has
performed sensitivity analysis on the key assumptions in the
impairment model using reasonably possible changes in these key
assumptions across the store portfolio. The impairment charge
relates to 100 stores which continue to have a residual book value.
Their carrying value is sensitive to any change in the underlying
assumptions and reasonably possible changes could result in an
additional impairment or a reversal of the impairment, but not a
material one at an individual store level.
A total reduction in sales of 5% from the three-year plan to
reflect a potential downside scenario would result in an increase
in the impairment charge of GBP1,750k. A reduction in the long-term
growth rate to 0% would result in an increase in the impairment
charge of GBP402k. A 1% reduction in cash margin or a 3% increase
in operating costs would increase the impairment charge by GBP265k
and GBP853k respectively. Reasonably possible changes of other key
assumptions, including a 20 basis point increase in the pre-tax
discount rate across all stores, would not result in a significant
increase to the impairment charge, either individually or in
combination.
7. Borrowings
2020 2019
GBP000 GBP000
Non-current liabilities
Lease liabilities 110,200 494
Unamortised debt issue
costs (11) (91)
Non-current liabilities 110,189 403
Current liabilities
Bank overdraft 3,605 -
Secured bank loans 10,000 -
Lease liabilities 22,002 275
Unamortised debt issue
costs (62) (45)
-------------------------- ------- ------
Current liabilities 35,545 230
-------------------------- ------- ------
At the time of the Group's IPO in 2018, new bank facilities were
put in place, principally comprising a GBP25m revolving credit
facility provided by HSBC, with a term of three years, expiring in
July 2021.
On 13 August 2020, the Group completed an agreement with HSBC to
enhance and extend the facilities, as follows:
-- The term of the RCF is extended, to expire in September 2022,
with step downs from the initial GBP25.0m facility, of GBP2.5m in
January 2021 and GBP2.5m in January 2022, to reflect the profile of
the expected facility requirement.
-- Provision of an additional GBP7.5m facility, under the
Government's CLBILS scheme, which also expires in September 2022.
No repayments are due until the expiry date.
-- The facility includes financial covenants in relation to the
level of EBITDA, net debt and capital expenditure.
Reconciliation of borrowings to cashflows arising from financing
activities
2020 2019
GBP000 GBP000
Borrowings at start of year (excluding
overdraft(1) ) 633 31,458
Additional lease liabilities
recognised on adoption of IFRS
16 115,314 -
---------------------------------------- -------- --------
Restated borrowings at start
of year (excluding overdrafts(1)
) 115,947 31,458
---------------------------------------- -------- --------
Changes from financing cashflows
Payment of lease liabilities
(capital) (19,829) (241)
Payment of lease liabilities
(interest) (4,041) (23)
Proceeds from loans and borrowings 10,000 -
Repayment of bank borrowings - (31,200)
Total changes from financing
cashflows (13,870) (31,464)
Other changes
Lease liability additions 36,729 307
Disposal of lease liabilities (870) -
The effect of changes in foreign
exchange rates 89 -
Interest expense 4,104 332
---------------------------------------- -------- --------
Total other changes 40,052 639
---------------------------------------- -------- --------
Borrowings at end of year (excluding
overdrafts(1) ) 142,129 633
---------------------------------------- -------- --------
(1) The bank overdraft has been excluded in this reconciliation
as it is included within the net cash and cash equivalents balance
reconciled within the consolidated cash flow statement. There was
no overdraft as at 28 April 2019.
Net debt reconciliation
2020 2019
GBP000 GBP000
--------------------------------- ------- -------
Net debt (excluding unamortised
debt costs)
RCF 10,000 -
Bank overdraft 3,605 -
Cash and cash equivalents (6,546) (3,687)
Net debt / (cash) from bank 7,059 (3,687)
Non IFRS 16 lease liabilities 952 769
---------------------------------- ------- -------
Non IFRS 16 net debt / (cash) 8,011 (2,918)
---------------------------------- ------- -------
IFRS 16 lease liabilities 131,250 -
---------------------------------- ------- -------
Net debt / (cash) including IFRS
16 lease liabilities 139,261 (2,918)
---------------------------------- ------- -------
8. Transition to IFRS 16 - Leases
The Group has applied IFRS 16 using the modified retrospective
approach, under which the cumulative effect of initial application
is recognised as an adjustment to the opening balance of retained
earnings at 29 April 2019 with no restatement of comparative
information. Comparative information continues to be reported under
IAS 17 and related interpretations.
IFRS 16 introduced a single, on Balance Sheet accounting model
for leases. As a result, the Group, as a lessee has recognised
right of use assets (RoUA) (representing its right to use the
underlying assets) and lease liabilities representing its
obligation to make lease payments. Lessor accounting remains
similar to previous accounting policies.
Definition of a lease
The Group now assesses whether a contract is or contains a lease
based on the new definition of a lease. Under IFRS 16 a contract
is, or contains, a lease if the contract conveys a right to control
the use of an identified asset for a period of time in exchange for
consideration.
On transition to IFRS 16, the Group elected to apply the
practical expedient to grandfather the assessment of which
transactions are leases. It applied IFRS 16 only to contracts that
were previously identified as leases. Contracts that were not
identified as leases under IAS 17 were not reassessed. Therefore,
the definition of a lease under IFRS 16 has been applied only to
contracts entered into or changed on or after 29 April 2019.
At inception or on reassessment of a contract that contains a
lease component, the Group allocates the consideration in the
contract to each lease and non-lease component on the basis of
their relative stand-alone prices. However, for leases of
properties in which it is a lessee, the Group has elected not to
separate non-lease components where the lease does not stipulate an
amount and will instead account for the lease and non-lease
components as a single lease component.
As a lessee
The Group leases many assets, including properties, IT
equipment, motor vehicles and warehouse equipment. As a lessee, the
Group previously classified leases as operating or finance leases
based on its assessment of whether the lease transferred
substantially all of the risks and rewards of ownership. Under IFRS
16, the Group recognises right-of-use assets and lease liabilities
for most leases.
The Group has elected not to recognise right-of-use assets and
lease liabilities for motor vehicle leases and leases of low-value
assets. The Group continues to recognise the lease payments
associated with these leases as an expense on a straight line basis
over the lease term.
The Group recognises a right-of-use asset and a lease liability
at the lease commencement date. The right-of-use asset is initially
measured at cost, and subsequently at cost less any accumulated
depreciation (straight-line) and impairment losses, and adjusted
for certain re-measurements of the lease liability.
Lease Liability
The lease liability is initially measured at the present value
of the lease payments that are not paid at the commencement date,
discounted using the Group's incremental borrowing rate. These
include the following elements:
-- Future fixed lease rental payments;
-- Variable lease payments that depend on an index or a rate
(these are initially measured at the index or rate as at the
commencement date);
-- Amounts expected to be payable by the Group under residual value guarantees;
-- The exercise price of a purchase option if there is
reasonable certainty that the Group will exercise that option;
-- Payments of penalties for terminating the lease earlier, if
the conditions reflect the Group exercising an option to terminate
the lease;
-- Estimate of costs to be incurred in dismantling and removing
the asset where specifically stipulated in the lease agreement
assessed under the IAS 37 requirements.
The lease liability is subsequently increased by the interest
cost on the lease liability and decreased by lease payments made.
It is re-measured when there is a change in one of the
following:
-- A lease extension has been agreed prior to the term expiry
-- Change in future lease payments as a result of re-negotiation of terms
-- Change in future lease payments as a result of a change in the index rate
-- Change in the Groups estimate of the amount expected to be
payable under a residual value guarantee
-- The Group changes its assessment of whether it will exercise
a purchase, extension or termination option.
The Group's incremental borrowing rates used to discount future
lease payments at adoption on 29 April 2019 range between 1.195%
and 3.926%. These have been determined based on comparable bond
yields and are lease specific varying by lease length.
The Group has applied judgement to determine the lease term for
some lease contracts that include renewal options. The assessment
of whether the Group is reasonably certain to exercise such options
impacts the lease term, which significantly affects the amount of
lease liabilities and right-of-use assets recognised.
Transition
Previously, the Group classified property leases and equipment
leases as operating leases under IAS 17. Leases are typically made
for fixed periods of time. Lease terms are negotiated on an
individual basis and contain a wide range of different terms and
conditions. Some leases provide for additional rent payments that
are based on changes in local price indices which are not yet
known.
At transition, for leases classified as operating leases under
IAS 17, lease liabilities were measured at the present value of the
remaining lease payments, discounted at the Group's incremental
borrowing rate as at 29 April 2019. Right-of-use assets are
measured at their carrying amount as if IFRS 16 had been applied
since the lease commencement date, discounted using the lessee's
incremental borrowing rate as at 30 April 2019, adjusted by the
amount of any prepaid or accrued lease payments and lease
incentives.
In applying IFRS 16 - Leases for the first time, the Group has
used the following practical expedients permitted by the
standard:
(i) the use of a single discount rate for portfolios of leases
with reasonably similar characteristics
(ii) reliance on previous assessments of whether leases are
onerous instead of performing an impairment review
(iii) accounting for low-value operating leases and operating
leases with a remaining lease term of less than 12 months as at 29
April 2020 on straight-line basis as an expense without recognising
a right-of-use asset or a lease liability
(iv) the use of hindsight in determining the lease term where
the contract contains options to extend or terminate the lease.
The Group has also elected not to reassess whether a contract
is, or contains, a lease at the date of initial application.
Instead, for contracts entered into before the transition date the
Group relied on its assessment made applying IAS 17 - Leases and
IFRIC 4 - Determining whether an Arrangement contains a Lease.
The Group leases a number of items of IT equipment. These leases
were classified as finance leases under IAS 17. For these finance
leases, the carrying amount of the right-of-use asset and the lease
liability at 29 April 2019 were determined by discounting the
future cashflow payments due to interest not being included in the
liability as at 29 April 2019.
Impact on transition
On transition to IFRS 16, the Group recognised right--of--use
assets and lease liabilities, recognising the difference in
retained earnings. The impact on transition is summarised
below:
GBP000
Right of use assets 104,384
Lease liabilities (116,083)
Property, plant and equipment (458)
Deferred tax asset 1,378
Accruals and prepayments (1,889)
Rent free creditor 6,529
------------------------------------------------------------------------------ ---------
Net impact on retained earnings (6,139)
------------------------------------------------------------------------------ ---------
GBP000
----------------------------------------------------------------------------- ---------
Operating lease commitments disclosed at 28 April 2019 135,057
Additional lease commitments not included in 2019 Annual Report 1,248
------------------------------------------------------------------------------ ---------
Restated operating lease commitments 136,305
------------------------------------------------------------------------------ ---------
Discounted under the lessee's incremental borrowing rate as at 29 April 2019 (17,334)
Exempt under IFRS 16 (3,656)
Finance lease liabilities as at 28 April 2019 768
------------------------------------------------------------------------------ ---------
Lease liability recognised as at 29 April 2019 116,083
------------------------------------------------------------------------------ ---------
Comprising:
Current lease liabilities 18,944
Non-current liabilities 97,139
------------------------------------------------------------------------------ ---------
Right of use assets
The Group presents right--of--use assets that do not meet the
definition of investment property as a separate line item in the
Consolidated Statement of Financial Position. The carrying amount
of right--of--use assets are as detailed below. An impairment
adjustment to the right-of-use assets of GBP94k in relation to
previous onerous lease provisions was recognised at the date of
initial application
Right of Use Assets
------------------------------------------
Property Plant and equipment
Total
------------------------------- ----------- ------------------- --------
Cost
At 28 April 2019 - - -
Restatement for IFRS 16 103,086 1,298 104,384
------------------------------- ----------- ------------------- --------
At 29 April 2019 103,086 1,298 104,384
Additions 36,350 426 36,776
Disposals (966) - (966)
------------------------------- ----------- ------------------- --------
At 26 April 2020 138,470 1,724 140,194
------------------------------- ----------- ------------------- --------
Depreciation and impairment
At 28 April 2019 - - -
Depreciation charge 20,152 459 20,611
Impairment charge 2,991 - 2,991
Disposals (171) - (171)
------------------------------- ----------- ------------------- --------
At 26 April 2020 22,972 459 23,431
------------------------------- ----------- ------------------- --------
Net Book Value
------------------------------- ----------- ------------------- --------
At 26 April 2020 115,498 1,265 116,763
------------------------------- ----------- ------------------- --------
Lease Liabilities
Lease liabilities included in the statement of financial
position are as follows (2019 figures represent the finance lease
liability):
2020 2019
GBP000 GBP000
----------------------------------- ------- ------
Current 22,002 275
Non Current 110,200 494
------------------------------------- ------- ------
Total discounted lease liabilities 132,202 769
------------------------------------- ------- ------
Please refer to note 19 for a detailed reconciliation of lease
liabilities to cash flows arising from financing activities.
Maturity analysis - contractual discounted cash flows
2020
GBP000
----------------------------------- -------
Less than 1 year 22,002
2 to 5 years 76,835
More than 5 years 33,365
----------------------------------- -------
Total discounted lease liabilities 132,202
----------------------------------- -------
Impact in the period
As a result of initially applying IFRS 16, in relation to the
leases that were previously classified as operating leases, the
Group recognised GBP116,763k right--of--use assets and GBP132,202k
of lease liabilities as at 26 April 2020. Also, in relation to
those leases under IFRS 16, the Group has recognised depreciation,
impairment and interest costs, instead of operating lease expenses.
During the 52--week period ended 26 April 2020, the Group
recognised GBP20,611k of depreciation charges, GBP2,845k of
impairment charges and GBP4,011k of interest costs from these
leases.
The impact on the profit / (loss) for the period is summarised
below:
GBP000
------------------------------------------------------- ---------
Profit / (loss) before tax before IFRS 16 adjustments (14,222)
-------------------------------------------------------- ---------
Remove IAS 17 rental charge 23,292
Remove hire costs from hire of equipment 141
Remove depreciation charged on the existing assets 298
Remove interest charged on the existing liability 30
Depreciation charge on Right of Use Asset (20,611)
Interest cost on lease liability (4,041)
Loss on disposal of RoUA (795)
Profit on disposal of lease liability 870
Foreign exchange difference on euro leases (89)
Additional impairment charge under IAS 36 (2,991)
Onerous lease provision not applicable under IFRS 16 146
-------------------------------------------------------- ---------
Net Impact on profit / (loss) (3,750)
-------------------------------------------------------- ---------
Profit / (loss) before tax (17,972)
-------------------------------------------------------- ---------
Rental expense in the period
During the period ended 26 April 2020 the rental charge
recognised in the consolidated statement of comprehensive income
was GBP5,075k as disclosed in note 7. These operating lease
payments are split out as follows (table on following page):
2020
GBP000
----------------------------------------------------------------- ------
Operating lease rentals - hire of plant and equipment
Motor vehicle lease payments 326
Low value leases 19
----------------------------------------------------------------- ------
Total plant and equipment operating lease rentals 345
Operating lease rentals - store leases
Stores included within IFRS 16 RoUA and lease liabilities
as at 26 April 2020(1) 2,769
Stores leases excluded from IFRS 16 assessment due
to:
* Concession leases, the landlord has substantial
substitution rights 1,347
* Low value leases 1
* Lease has rolling break clauses 228
* Lease has expired and the premises is occupied on a
flexible, rolling basis(1) 385
----------------------------------------------------------------- ------
Total store operating lease rentals 4,730
----------------------------------------------------------------- ------
Total operating lease rentals 5,075
----------------------------------------------------------------- ------
(1) Relate to temporary or rolling lease agreements. Inclusion
of leases where initial agreed term has expired with no new agreed
terms is considered as follows:
- Where the intention is to renew and continue to occupy,
balances relating to the lease are included within RoUA and lease
liabilities as at 26 April 2020. Assumptions are made re: lease
term and rent based on average agreed lease terms and annual
rentals agreed during the financial year
- For all remaining stores, the Groups intention is to occupy
the property on a rolling month to month basis, and there is no
obligation to remain in the property. As such, these leases are
excluded from the IFRS 16 balances as at 26 April 2020.
Principal risks and uncertainties
The Board and the senior management team are collectively
responsible for managing The Group's exposure to risks and
uncertainties. In determining the Group's risk appetite and how
risks are managed, the Board, Audit Committee and the senior
management team look to ensure an appropriate balance is achieved
which enables the Group to achieve its strategic and operational
objectives and facilitates the long-term success of the Group.
The Board has assessed the principal risks facing the Group,
including those that would threaten its business model, future
performance, solvency or liquidity and reviews the Group's most
significant risks at least twice a year.
Risks and uncertainties in addition to those detailed below, not
presently known to management, or deemed less material currently,
may also have an adverse effect on the business. Further, the
exposure to each risk will evolve as mitigating actions are taken
or as new risks emerge. The principal risks and uncertainties
facing the Group as at the date of the Annual Report are set out
below, together with details of how these are currently
mitigated.
Risk Description Mitigation Change in
level of
risk
from prior
year
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
COVID-19 COVID-19 has created an unprecedented challenge. We The health and wellbeing of colleagues, customers and wider New risk
believe the risks to the Group posed by communities is the Board's overriding
the COVID-19 pandemic are as follows: priority.
* Potential for significant and prolonged impact on Events are closely monitored by the Board which evaluates
economic conditions the potential impacts and designs
appropriate response strategies.
The Group maintains a prudent approach to costs, however a
* The potential for further government restrictions on number of additional temporary
trading and social distancing following the initial measures were also taken to reduce costs and/or conserve
easing of lockdown restrictions may adversely affect cash, including;
operations (including the ability to trade, the * Utilised government support including rates relief
ability of the third party logistics provider and and job retention scheme.
parcel delivery provider to service online
fulfilment)
* Worked with landlords to reduce store rent payments
whilst stores were closed;
* Potential increase in employee absenteeism
* Careful management of stock intake;
* Supply chain disruption, including disruption to
stock availability and potential cost inflation
* Suspended non-essential capital investment, including
new store rollout programme (with the exception of a
* Liquidity risk: the risks listed above could small number of stores which were legally committed);
adversely impact liquidity.
* Minimised discretionary operational expenditure;
* Increased pressure on IT systems through remote
working.
* Not proposing a final dividend for FY20.
The Group has worked with the third party logistics partner
to increase capacity safely to
meet increased online sales demand particularly in the
upcoming peak season.
The Group has implemented changes to stores, the
distribution centre and store support centre
(including hygiene and social distancing measures and
enabling the majority of head office
colleagues to be able to work remotely where practical to
do so).
The mitigations implemented for the initial period of
lockdown will, where appropriate, be
continued following the lifting of lockdown. In the event
of escalations from the current
state of alert, locally or nationally, further mitigation
steps along the lines described
above will, as appropriate, be re-introduced.
Bank facilities have been extended and increased.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
Finance Insufficient finance available and/or insufficient Covenant headroom monitored on an ongoing basis and New risk
headroom in banking facilities leading forecast covenants calculated on a monthly
to a lack of liquidity. Potential for breach of banking basis and included in Board report.
covenants if financial performance Bank facilities have been extended and increased, with
is significantly worse than planned. increased covenant headroom.
Stakeholder management undertaken, with bi-annual
Availability of credit insurance to suppliers may be meetings now in place with key credit insurers.
reduced or removed resulting in an increased Refocus of strategy to reduce costs and manage capex to
cash requirement. minimise credit insurer risk
Maintain constructive dialogue with suppliers, for
example, to discuss extending credit terms
if required in the event that additional liquidity is
needed.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
Market The Group generates most of its revenue from the sale of Ongoing focus on 'product discovery' and development of Same risk
books, toys, art and craft and stationery "own brand" offering, helps differentiate level
products. Although the Group has a proven track record of The Works, bringing unique, quality, products to market
understanding customers' needs within at great prices.
these categories, these markets are highly competitive, Experienced trading team monitors emerging trends and
with increasing competition from 'hard has a track record of responding to
discounters' and customers' tastes and shopping habits can changing consumer tastes.
change quickly. Competitor pricing and product offering closely
Failure to effectively predict and respond to these monitored, with key developments discussed
changes could affect the Group's sales, at weekly trading meetings and at Board level on a
performance and reputation. regular basis.
Most of the Group's sales are derived from physical shops. A Customer research project to understand customer
The challenges facing the high perceptions of the proposition was undertaken
street could significantly impact on the Group's future during the year. The output of this project will inform
strategy and growth plans. decisions taken to ensure proposition
remains relevant.
Customer feedback is monitored and reported against
regularly.
Sales data, insight from Loyalty card database and
various online feedback channels are used
to drive purchasing and marketing decisions. During the
year we have invested in a new data
warehouse and analysis tool to better analyse sales and
customer data to drive improved decision
making.
We continue to invest in online capability. A new web
platform was launched in July 2020 to
support the development of the multi-channel offer.
Plans for further online product ranges
are developing, including broadening partnerships with
"drop ship" vendors.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
Economic The Group's business is sensitive to general economic, The Group's proposition as an alternative to full price Increased
environment consumer spending and business conditions. specialist retailers, offering quality risk level
A general decline in economic conditions or a reduction in good value products, positions it well for customers
consumer confidence could impact looking to trade-down in times of economic
upon customer spending and subsequently have an adverse uncertainty.
effect on the Group's revenue and Sales trends are monitored at weekly trading meetings,
profitability. attended by senior management, with
This risk is currently heightened due to COVID-19 and mitigating actions agreed to drive sales and/or reduce
potential concerns regarding Brexit. costs accordingly.
The senior management team has significant relevant
experience.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
Brand and 'TheWorks.co.uk' is the Group's key brand asset. Values of the business are well communicated to Same risk
reputation Protecting and enhancing the Group's brand colleagues and the senior management team level
and reputation is vital to the success of the Group. leads by example.
Failure to protect the brand, in particular regarding Intellectual property guidance and education is provided
product quality and safety, could result to design and sourcing teams.
in the Group's reputation, sales and future prospects Customer and market research focuses on understanding
being adversely affected. brand perception.
Customer product reviews are monitored closely, with
swift action taken to remove products
from sale where quality issues are identified.
The Group has established an in-house product quality
assurance team to work with suppliers
to ensure product quality, safety and ethical production.
Third-party facilitated technical and ethical audits are
in place and all suppliers are required
to deliver a valid product safety test certificate ahead
of an order being fulfilled.
Launched 'keen to be green' and 'reworked' logos last
year - see Corporate Social Responsibility
Report for further details.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
Supply The Group uses third parties, including many in Asia, for An experienced buying team is responsible for the Increased
chain the supply of products. This creates sourcing of our products. risk level
a number of potential areas of risk, including the Strong relationships are maintained with key suppliers.
potential for supplier failures and the The supplier base is continually reviewed. Supply
risks of manufacturing and importing of goods from options are diversified and/or changed where
overseas and potential disruption at various needed, providing greater flexibility and reducing
stages of the supply chain. reliance on individual suppliers.
Tighter controls have been introduced throughout the
This disruption risk may be heightened due to COVID-19, import process, supported by the freight
although to date, the operations of forwarder. We maintain relationships with other freight
the business have not been materially affected. forwarders to mitigate the risk of
over-reliance on one provider.
Brexit uncertainty also continues to heighten this risk,
in particular the uncertainty over We conduct business fairly, ethically and with respect
the UK's trading relationship, and terms, with other to human rights. We are committed to
countries and the possible risk of imports the prevention of slavery, forced labour or servitude,
being delayed at UK ports. child labour and human-trafficking,
in our business and supply chain. We have an established
Suppliers may fail to act or operate in an ethically Ethical Trading Code of Conduct and
appropriate manner. Human Rights Policy for our partners, manufacturers and
suppliers.
All suppliers must sign our Terms and Conditions of
Purchase which state the supplier has
read, understood and agrees to conform to our Ethical
Trading Code of Conduct.
Independent monitoring of suppliers is undertaken using
third-party auditors having local
country knowledge and an understanding of social and
ethical requirements. The audits take
place directly in the factories and monitor workplace
conditions, interview workers and evaluate
operating conditions. These are based on the
internationally recognised Ethical Trade Initiative
('ETI') Base Code. We also conduct independent product
testing as part of our Product Surveillance
Test Programme.
We continue to develop our supply chain management
procedures and supplier audit programme.
Suppliers have direct contact with our in-house Quality
Assurance function.
We have updated and published our Modern Slavery Act
Statement on the Group's corporate website
and have registered the statement with the Modern
Slavery Registry and TISC (Transparency
in the Supply Chain).
The Group is adopting a "wait and see" approach to
Brexit planning. For example, measures
which might be taken, such as building stock levels in
anticipation of potential disruption
to imports, could be counterproductive if, for example,
demand is subsequently adversely affected
by further restrictions related to COVID-19, and the
action taken to mitigate the potential
risks of Brexit create other problems.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
Loss of key The Group's strategy and long-term success is heavily Succession plans continue to be developed for each Same risk
personnel dependent on the quality of the Board member of the senior management team and level
and senior management team. are discussed at Nomination Committee meetings.
There is a risk that a lack of succession planning for the Objectives and development programmes are currently
senior management team and development being put in place to support future leaders.
of key colleagues, could harm future prospects and result High-calibre candidates want to join a successful and
in increased costs. growing retail business, evidenced by
recent recruitment experience.
The Group's remuneration policy (set out in the
Directors' Remuneration Report) is designed
to ensure management incentives support the long-term
success of the Group for the benefit
of all stakeholders.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
Business Significant disruption to key parts of the operation, in A disaster recovery plan and strategy is in place. Same risk
continuity particular, internal IT systems, Disaster recovery dry run exercises are undertaken level
the store support centre or a distribution centre, could throughout the year.
severely impact The Group's ability The Group maintains appropriate business interruption
to supply stores or fulfil online sales resulting in insurance cover.
significant financial or reputational Investment in an emergency generator at the store
damage. support centre insulates it from the effect
of power cuts.
System recovery is captured as part of the Business
Continuity plan and any part of that could
be invoked depending on the nature of the issue with the
system. An in-house development team
maintains the internal systems and can be deployed
immediately a problem arises.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
Regulation The Group is exposed to a growing number of legal and The Group's CFO and Company Secretary oversee regulatory Same risk
and regulatory compliance requirements including: compliance with support from external level
compliance the Bribery Act, the Modern Slavery Act, tax evasion advisers.
rules, GDPR, Gender Pay Gap reporting, Senior management team members are aware of the key
National Living and Minimum Wage, Environmental and compliance requirements within their business
Listing Rules. units and liaise with the CFO and external advisers to
Failure to comply with these regulations could lead to identify and manage issues.
financial claims, penalties, damages, The Group has a number of policies and procedures
fines or reputational damage which, in some cases, could governing behaviours in all key areas, some
be material and could significantly addressing mandatory requirements (e.g. anti-bribery and
impact the financial performance of the business. corruption, adherence to national
living wage requirements) and others adopted voluntarily.
A whistle-blowing policy and procedure is in place,
allowing colleagues to confidentially
report any concerns or inappropriate behaviour.
The Group has a GDPR policy, a data supervisor and an
established monthly GDPR governance
meeting, with minutes and actions from this meeting
circulated to the senior management team.
An out-sourced internal audit function is used.- See
Report of the Audit Committee for further
details.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
IT systems The Group is reliant on the efficiency, reliability and Recovery of key business systems is captured as part of Increased
and cyber resilience of key IT systems. Failure the Business Continuity Plan with risk level
security to develop and maintain these systems, or any prolonged enhanced working from home capabilities deployed in Q4. due to
system performance problems or cyber-attack, Support contracts, with appropriate SLAs, are in place perception
could seriously affect the Group's ability to trade and/or for all third-party systems with in-house of external
could lead to significant fines systems supported by an experienced in-house development environment
and reputational damage. team.
Operational practices for maintaining security have been
reviewed with revised and more frequent
patching cycles adopted.
More frequent vulnerability scans and penetration tests
are used to validate the robustness
of security.
A Design Review Group meets weekly to assess changes and
design security into new systems
and changes.
An audit of Cyber Security was completed by our third
party internal audit provider in the
latter part of the year and all recommendations are being
adopted.
The IT investment strategy is reviewed regularly with the
Operating Board including security
and infrastructure investment programmes.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
Cost Increases in costs, such as raw materials, commodity and Same risk
inflation wage costs, could adversely impact Budgets and forecasts prepared by the Group include the level
the Group's ability to deliver its forecast profit growth. expected impact of the national living
This risk is currently heightened due to: wage and other known cost inflation (e.g. in
* COVID-19 pandemic uncertainty and potentially electricity prices) and, therefore, the Board's
increased costs to mitigate health and safety risks, strategic planning takes these into account.
along with unknown impacts on imports and supply Cost control remains central to the culture and
chain costs. philosophy of the business with 'margin enhancement'
being a key growth pillar of our strategy.
Cost mitigation strategies are in place to offset,
* Brexit uncertainty and its potential impact on the where possible, increases in national minimum
value of sterling and uncertainty over duty rates and living wages (e.g. through productivity
post-Brexit potentially impacting the cost of improvements in the distribution centre).
products sourced from Asia. Hedging policy is in place to manage exposure to
foreign exchange rate fluctuations in the
short term.
* The current political focus on raising national Flexible nature of the Group's product offering means
living and minimum wages given most of the Group's it has the ability to adapt or change
colleagues are paid the national minimum or living products to meet margin targets, supported by the
wage. continued growth in own brand offering.
The flexible nature of our property leases, with less
than three years on average to the next
exit point, ensures we are able to lower property costs
through reduced rents.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
Stock Ineffective controls over the management of stock could Stock cover levels are set as part of the annual budget Same risk
management impact on the achievement of gross process with stock cover by product level
margin objectives, whilst lack of sufficient product group, and at a total level, reviewed on a weekly basis
availability could impact on sales. against these budgeted levels.
Perpetual Inventory counts are undertaken in stores and
at distribution centres to monitor
stock losses.
'Aged stock' is monitored closely with regular markdown
action on slow-moving product lines.
An action plan is being generated following an
end-to-end stock process review finalised in
the year with a view to implement key improvements in
the coming year.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
Store New store rollout has been de-emphasised as a pillar of A store location modelling tool supports the new store Reduced
expansion the strategy. The ability to identify assessment and sign-off process. risk level
a set number of suitably profitable new store locations is UK retail vacancy rates continue to run at high levels,
therefore less critical than in providing opportunities which will
previous years. be pursued selectively.
Each new store opening is approved by the CEO and CFO
and will be subject to particularly
close scrutiny in light of tighter capex constraints.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
Seasonality The Group historically makes all of its profit in the We continue to explore opportunities to reduce Increased
of sales second half of the financial year, with seasonality by growing the year-round appeal risk level
the peak Christmas trading period contributing of the proposition. due to
substantially all of this profit. Weekly trading meetings, attended by all members of potential
Interruptions to supply, adverse weather or a significant senior management, ensure action is taken effect of
downturn in consumer confidence to maximise sales based on current and expected trading COVID-19
around this peak trading period could have a significant conditions. during
impact on the sales and profitability The Group has invested in increased capacity in its November
of the Group. online fulfilment operation for the peak and
season of FY21. December
2020.
----------- ---------------------------------------------------------- -------------------------------------------------------------- ------------
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FR PPUPPRUPUGRQ
(END) Dow Jones Newswires
August 27, 2020 02:00 ET (06:00 GMT)
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