REG - Card Factory PLC - Half-year Report
29 September 2020
Card Factory plc
("Card Factory" or the "Company")
Interim results for the six months ended 31 July 2020
ENCOURAGING PERFORMANCE FOLLOWING STORES REOPENING
Card Factory, the UK's leading specialist retailer of greeting cards and complementary products, announces its interim results for the six months ended 31 July 2020 ('HY21').
Business highlights
· Results in line with expectations, reflecting the impact of store closures across the UK and Republic of Ireland from 23 March 2020 until the completion of the phased reopening on 24 July 2020
· Successfully managed costs and working capital commitments as well as reducing capital investment to £3.5m (HY20: £9.8m), to conserve cash during the period; as a result net debt (excluding lease liabilities) was broadly unchanged over the period and £26.4m lower than HY20
· Established funding headroom through access to the Government's Covid Corporate Finance Fund and renegotiated banking covenants; expecting to remain within revised banking covenants for the foreseeable future
· Strong online performance with +64.4% like-for-like revenue growth due to the increased demand during the period of store closures and the positive response following the website relaunch on 2 July 2020
· Partnership sales performance better than expected, with £1.9m in sales as a result of strong Aldi footfall and The Reject Shop's positive performance since reopening following national lockdown
· Search for new Chief Executive progressing to plan
· Refreshed growth strategy launched in July with focused and deliverable growth targets for the period to FY25
Financial summary
Performance Metrics
Note
HY21
HY20
Revenue
£100.5m
£195.6m
Stores (UK & Ireland) like-for-like revenue
(i) (ii)
-4.4%
1.2%
Online & Multichannel like-for-like revenue
(i)
64.4%
-2.0%
Group like-for-like revenue
(i) (ii)
1.6%
1.0%
Underlying (loss) / profit before tax
(i)
(£22.3m)
£22.0m
(Loss)/profit before tax
(£22.2m)
£24.3m
Underlying basic (loss) / earnings per share
(i)
(5.2p)
5.2p
Basic (loss) / earnings per share
(5.2p)
5.7p
Net debt
(i)
£143.9m
£170.3m
Net debt and lease liabilities
(i)
£290.1m
£317.3m
i. See explanatory note 1 "Alternative Performance Measures" for further information and definitions
ii. HY21 adjusted by removing prior period store sales reported in Covid-19 store closure weeks on a store-by-store basis
Christmas 2020 preparations
· Well set up for Christmas 2020 season, subject to further impacts of Covid-19 constraints on social mobility and footfall, including refinements to:
o Ranging of everyday as well as Christmas cards to stores
o Complementary product availability
o Multi-channel fulfilment capacity to maximise in store and online sales
o Store layouts, to minimise disruption and provide an effective and positive Covid-secure shopping experience
Outlook
· Better than expected trading in stores since reopening, with transaction numbers continuing on an improving trend since the period end and material average basket value gains which are holding steady, with LFL down only 6.9% for the 4 weeks to 20 September 2020
· Good early progress against new growth strategy
· Short term retail sector recovery remains sensitive to Covid-19 uncertainties, including the impact of further local restrictions on footfall
· The Board and the management team remain confident in the long term stability of the card market
Paul Moody, Executive Chairman, commented:
"I am extremely proud of all colleagues working across every part of our business for the significant contribution they have made throughout this period of unprecedented disruption. In particular, for their unrelenting focus in driving the very successful phased store-reopening programme. The combination of our unique customer insight, vertically integrated business model and market leading position continues to ensure that we are well positioned to meet the increased online demand, supply our commercial partners and to present the optimum ranges in our stores.
"We are pleased with both the trading performance as our stores have reopened and the positive feedback from customers who are visiting less frequently, but spending more. Recognising the uncertainty of the impact of further Covid-19 measures and changes in consumer behaviour in the short term, we are focused on a flawless execution of Christmas and the implementation of our refreshed strategy."
Preliminary results announcement
There will be an interim results webcast for analysts and investors today, starting at 10.30am, and registration is available via the link here.
Those analysts who wish to attend by telephone are requested to contact Yasemin Balman of Tulchan Communications on the number provided below or by emailing cardfactory@tulchangroup.com.
A copy of the webcast and accompanying presentation will be made available on the day via the Card Factory investor relations website: www.cardfactoryinvestors.com.
Enquiries
Card Factory plc
via Tulchan Communications (below)
Paul Moody, Executive Chairman
Kris Lee, Chief Financial Officer
Tulchan Communications
+44 (0) 207 353 4200
James Macey White / Elizabeth Snow / Amber Ahluwalia
BUSINESS UPDATE
The first half of 2020 was undoubtedly a challenging period for most companies navigating through the uncertainties created by the Covid-19 pandemic. Our priority at all times has been the health and wellbeing of our colleagues and customers.
The closure of 1,018 stores across the UK and Republic of Ireland for a significant proportion of HY21 had a material impact on Group sales for the period, leading to a 48.6% year on year reduction in Group revenue. The uncertainty throughout this financial period spanned important seasons such as Mother's Day, Easter and Father's Day, albeit we saw strong performance in our online business, which provided some offset to the reduction in store sales. As of 29 September 2020, we have 1,017 stores open and operating within national and local Covid-secure guidelines.
As stores have reopened, trading has been better than expected. Compared to an anticipated reduction in the 14-week period from reopening to 20 September 2020 of over 20%, like-for-like sales were down 13.6%. Reduced high street footfall has weighed on transaction volumes, down 30%, but customers are spending more in store with a 24% increase in average basket value. Although transaction volumes are improving - like-for-like sales in the four weeks ended 20 September 2020 were down only 6.9% - trading remains sensitive to local fluctuations in Covid-19 cases and consequent changes to government guidelines.
During the period, we have taken a number of mitigating actions to limit the impact of the significant and unprecedented reduction in Group revenue on the business. Nevertheless, we did, and continue to, invest in areas of the business, which are critical to the delivery of the refreshed five-year growth strategy.
The effects of our actions, together with government support measures, enabled us to maintain free cash flow over the six-month period at a broadly breakeven level. We ended the period with net debt at a similar level to last year-end, and £27m lower than the position at HY20.
Five-year growth strategy
The refreshed growth strategy was communicated to investors and colleagues towards the period end with focused, deliverable growth targets for the period to FY25:
· Revenue of c. £635m, of which c. 20% will be derived from a broadly equal split between Online & Multichannel and Retail Partnerships;
· Underlying PBT of c. £105m;
· c.5,600 Distribution Points (UK and International), of which c.1,100 will be Group operated stores;
· Group market share of c. 45% of UK card volume; and
· Underlying leverage range of 1.2x to 2.6x (defined as Net Debt divided by Underlying PBT)
The UK card market remains large and broadly stable - valued at approximately £1.3bn - but it is evolving. Shoppers are accessing cards in newer, multi-channel ways, while at the same time the increase in average card prices and growth of new and non-standard occasions are offsetting modest year-on-year volume declines in everyday and certain traditional season card giving.
The overall vision and aspiration: "to be recognised as the world's best greeting card retailer: everywhere, and for all occasions, the first choice for greetings cards" has never been more relevant as these trends present opportunities for the business to diversify and expand our customer offer to grow market share. As part of our enhanced performance culture, we are linking all colleagues' incentives to the new strategy; also bringing specific attention to the establishment of 'positive impact' thinking.
We have made good, early progress against the three distinct strategic imperatives.
Winning card-led retail proposition - enabled by sector-leading card shopper insights
Following the success of the new humour range launched at the end of FY20, we have achieved further success with the relaunch of the everyday female card range in during the period and the relaunch of the everyday male range since period end. Both new ranges have performed very well since launch, with LFLs markedly ahead of the overall card offering.
In addition to introducing new cards at different price points, we have continued to trial new prices for existing ranges in order to test price elasticity. After a successful trial that showed no net volume reduction, an increase from our 59p price point to 69p was rolled out across the store estate, affecting c.30m cards per annum at steady state. Price architecture will remain an essential component of our revenue management plan with a number of further increases across a range of price points already or shortly to be in trial before implementing company-wide changes.
Range is a key focus as Covid-19 restrictions have impacted demand for certain categories such as 'Thank You Teacher', Wedding and Children's Party. The Company remains focused on using its wealth of data and insight to ensure that it can maximise transactions in-store and drive average basket value.
Availability in more places, however customers shop - new channels, formats, countries and routes to market
The new store rollout programme in H1 was limited with openings restricted to just seven stores. Eleven stores have been permanently closed, with three not planned to open post lockdown. New format trials are on hold pending analysis of long-term footfall expectations in target location types. As at 29 September 2020, including two new store openings after the period end, the total estate numbered 1,017 stores trading, including 14 stores in the Republic of Ireland.
Our online channel benefitted from the change in customer shopping behaviour during the lockdown period, contributing a higher proportion of Group revenue (HY21: 13.2% vs. HY20: 4.1%), and providing a small offset against the loss of store revenue. We responded well to the change in customer behaviour and quickly mobilised colleagues and resources to meet the sudden and significant increase in new online customers. We experienced a different customer mix and record breaking daily volumes, particularly in the card, balloon and party categories as customers continued to celebrate life moments at home.
We launched the new website on 2 July 2020, with the clear aim of improving our online customer experience, widening our product range and enabling greater multi-channel capabilities that will differentiate Cardfactory.co.uk from "pure play" online-only operators. Boosted by the new website, online sales have continued to perform well since stores reopened. Like-for-like sales in the four weeks ended 20 September 2020 were up 71.6% and 9.4% from cardfactory.co.uk and gettingpersonal.co.uk, respectively.
The task of migrating the gettingpersonal.co.uk business onto the cardfactory.co.uk platform and the integration of the two operations is progressing well and expected to be completed by early 2021. The site will be managed as a complementary brand - presenting a second storefront on the new platform - and will benefit from a shared cost base.
A mobile app is due to be launched before the end of 2020, adding convenience to the digital proposition, and a click and collect trial is underway.
We have continued to successfully supply and support all of our retail partners throughout the period. Aldi, in common with all essential food retailers, experienced strong footfall during lockdown, which benefited our card offer in their stores. Our partnership arrangements are now managed as business as usual, including c.350 The Reject Shop stores across Australia. The 15-store Matalan trial has resumed following the lifting of lockdown restrictions and is continuing well.
We remain focused on pursuing other new growth opportunities and retail partnerships and are currently in discussion with a number of potential partners in the UK and overseas.
Advantaged, robust and scalable central model - underpinned by ingrained, defensible competitive advantages
The vertically integrated business model remains a key competitive advantage. It enables sector-leading margins whilst providing us with agile and flexible manufacturing capacity and capability. Our supply chain has had a transformational six months with more positive change to come over the next twelve.
Our distribution centre consolidation plan has been largely completed, which will enable the exit from all third-party storage. The lease for the new pick and pack consolidation facility ("Gate 5") was taken over in April. Gate 5 will improve daily volumes and generate significant operational cost savings, particularly when we launch new efficient picking methods in the second half.
Online fulfilment investments have been brought forward in order to address the likely capacity challenge in the Christmas peak, which will enable better service and more sales while maintaining social distancing for our colleagues working in fulfilment.
Response to Covid-19
We welcomed the intervention of the government to support businesses, which enabled the Company to preserve jobs, with over 95% of colleagues furloughed under the Coronavirus Job Retention Scheme during the lockdown. The phased reopening of stores allowed us to effectively test and adapt the new Covid-secure social distancing and enhanced hygiene measures before rolling them out across the entire store estate.
We took a number of prompt and effective steps to conserve cash and manage costs to mitigate the impact from the compulsory store closure. Stock intake and supplier terms were amended, the March quarter rent payment was deferred and rent is currently been paid monthly in advance rather than quarterly on the majority of our estate.
In addition to augmenting its funding headroom through access to the Government's Covid Corporate Finance Fund (CCFF), we successfully renegotiated our banking covenants on the existing £200m Revolving Credit Facility. As a result of these actions, the Board is confident that it has access to sufficient liquidity to navigate the business through the uncertain times ahead, but will keep this under review. The Board expects to take a prudent approach, ensuring that the Group has sufficient liquidity available, including in the event of further downturns.
We will continue to review the various Covid support schemes that the UK Government introduces as applicable to the business.
Preparations for Christmas
The senior leadership team has prepared a thorough and detailed execution plan for the Christmas season. We have completed store-by-store analysis to ensure that product ranges are located and displayed in a way that provides our customers with the safest and most effective way for them to shop. We have undertaken a number of simulated shopper trials in order to give us the opportunity to provide customers with the best possible in-store experience whilst giving confidence that our stores will be Covid secure.
Buying activity has been managed carefully to meet predicted demand but, should demand be stronger than expected, we will be able to deliver additional card volume through Printcraft.
Current trading and outlook
The Board is pleased with the trading performance since stores have reopened, and the business has had an encouraging start to the second half of the year. Transaction numbers remain below the prior year, but on an improving trend; material gains in average basket value have been maintained in the second half to date.
We have worked extensively and thoroughly to make sure we are as well prepared as possible for the forthcoming Christmas period.
Looking forward to the long term, the Board is confident that the refreshed growth strategy will deliver sustainable revenue and profit growth, underpinning the reinstatement of the dividend in the medium term and generating value for our shareholders.
However, in the short term, as well publicised, recovery in the retail sector remains sensitive to spikes in Covid-19 cases and potential local or national restrictions, creating uncertainty about customer footfall and shopping habits. It is also too early to determine whether basket mix and average spend patterns, in-store and online, will continue or settle back to pre-Covid-19 levels. Given the level of uncertainty, it is not possible to give guidance as to the expected outturn for the year. A trading update will be given on Thursday 14 January 2021.
CHIEF FINANCIAL OFFICER'S REVIEW
The HY21 accounting period refers to the six months ended 31 July 2020 and the comparative period "HY20" refers to the six months ended 31 July 2019.
The Group has chosen to present underlying profit and earnings measures. Transactions are categorised as non-underlying if the resulting underlying profit and earnings information is believed to assist comparison of year-on-year performance.
Revenue
Total Group revenue during the period decreased by 48.6% to £100.5m (HY20: £195.6m), principally due to the impact of the Covid-19 related mandatory closure of the UK and Ireland store estate.
To reflect the change of business emphasis and the Group's new strategy, divisional presentation comprises the following three channels.
Revenue by channel
HY21
£m
HY20
£m
Increase/
(Decrease)
Stores (UK & Ireland)
85.3
187.0
(54.4%)
Online & Multichannel
13.3
8.1
64.2%
Partnerships (UK & International)
1.9
0.5
280.0%
Group total
100.5
195.6
(48.6%)
Like-for-like ("LFL") sales performance was as follows:
LFL by channel
HY21
HY20
Stores (UK & Ireland) *
-4.4%
1.2%
Online & Multichannel
64.4%
-2.0%
Partnerships (UK & International)
n/a
n/a
Group total *
1.6%
1.0%
* HY21 adjusted by removing prior period store sales reported in Covid-19 store closure weeks on a store-by-store basis
Stores (UK & Ireland)
Like-for-like performance
Given the impacts of Covid-19 and the adjusted nature of the above like-for-like measures, better insight is gained from the consideration of store performance since reopening. In the period from 16 June to 20 September 2020, performance was as follows:
Transaction decline
(30.0%)
Average basket value increase
23.6%
Overall stores LFL
(13.6%)
Cards
(17.0%)
Other categories
(9.6%)
Overall stores LFL
(13.6%)
More recently, in the four weeks ended 20 September 2020, store LFL was down only 6.9% (transaction numbers down 24% with average basket value up 23%), with Cards down 11.7% and other categories down 1.5%.
Store portfolio
The Group's new store roll out programme was limited to pre-closure openings and a small number of openings that were legally committed. In the six months under review, seven new stores were opened (including one in the Republic of Ireland), eleven stores were closed, and three remained unopened after lockdown. This resulted in a net reduction of seven stores, bringing the total estate to 1,015 stores at 31 July 2020, including 14 stores in the Republic of Ireland.
Online & Multichannel revenue grew by 64.2% to £13.3m (HY20: £8.1m) due in large part to an uplift in sales resulting from the widespread closure of non-essential retail outlets across the UK and in Ireland. Online like-for-like sales were up 120% during the period of store closures, from 23 March to 14 June 2020, and in the remaining period to the reporting date, up 60%. The new cardfactory.co.uk website was successfully launched on 2 July 2020. Like-for-like sales from reopening to 20 September 2020 were up 87.7% and 21.2% from cardfactory.co.uk and gettingpersonal.co.uk respectively, with margin dilution in cardfactory.co.uk due to a high proportion of non-personalised card sales and margin improvement in gettingpersonal.co.uk due to better pay-per-click management. In the latter four weeks of this period, like-for-like sales were 71.6% and 9.4% respectively.
Partnerships (UK & International) performed well in HY21. Revenue grew by 280.0% to £1.9m, benefitting from the commencement of The Reject Shop partnership and Aldi's footfall success during lockdown in particular. The Reject Shop partnership is now being run on a business as usual basis and Card Factory products are retailing successfully in c. 350 stores across Australia. Stores were impacted by Covid-19 restrictions and subsequent local lockdowns but strong performance outside of lockdown meant HY21 sales were in line with expectations. Franchise operations in Guernsey, Gibraltar and Jersey were subject to lockdown closures but also performed well outside of that period. Finally, the 15-store Matalan trial has continued successfully.
Distribution points
The average number of distribution points for Card Factory products during HY21 was as follows:
Distribution points by channel
HY21
average
HY20
average
Increase/
(Decrease)
Stores (UK & Ireland)
553
988
-44.0%
Online & Multichannel
2
2
-
Partnerships (UK & International)
853
119
617.1%
Group total
1,409
1,109
27.0%
These average numbers highlight the effect of the Stores (UK & Ireland) channel closures in the period, the roll out of additional Aldi sites in the latter half of the previous year and the full post-trial roll out to c.350 The Reject Shop sites, during January and February 2020.
Underlying operating costs
Underlying cost of sales and operating expenses can be analysed as follows:
Consolidated underlying operating costs
HY21
£m
HY20
£m
(Increase) / Decrease
HY21
% of revenue
HY20
% of revenue
(Increase) / Decrease
Revenue
100.5
195.6
(48.6%)
Cost of goods sold
36.1
63.5
43.1%
35.9%
32.5%
(3.4 ppts)
Store wages (net of CJRS)
23.7
39.9
40.6%
23.6%
20.4%
(3.2 ppts)
Store property costs
6.9
13.2
47.7%
6.9%
6.7%
(0.2 ppts)
Other direct expenses
8.5
10.4
18.3%
8.5%
5.3%
(3.2 ppts)
Underlying cost of sales
75.2
127.0
40.8%
74.9%
64.9%
(10.0 ppts)
Operating expenses*
17.6
17.8
1.1%
17.5%
9.1%
(8.4 ppts)
EBITDA
7.7
50.8
(84.8%)
7.7%
26.0%
(18.3 ppts)
Depreciation, amortisation & impairment
25.6
24.6
(4.1%)
25.5%
12.6%
(12.9 ppts)
Total operating expenses
43.2
42.4
(1.9%)
43.0%
21.7%
(21.3 ppts)
* Excluding depreciation and amortisation
The overall ratio of cost of sales to revenue increased to 74.9% on an underlying basis (HY20: 64.9%). This increase was significantly driven by Covid-19 related mandatory store closures, the resulting reduction in revenue and the semi-variable or fixed nature of certain elements of the store and operating cost base. Further cost category information is provided below.
· Underlying cost of goods sold ("COGS"): principally comprises cost of raw materials, production costs, finished goods purchased from third party suppliers, import duty, freight costs, carriage costs and warehouse wages. The overall adverse movement was due to a change in the margin mix from the growing proportion of Group sales derived from Online and Partnerships; additional supply chain incurred from implementation of Covid-secure arrangements in the supply chain; and additional stock provisioning arising from store estate closure during spring seasons.
· Store wages: includes wages and salaries (including bonuses) for store-based staff, together with national insurance contributions, apprenticeship levy, pension contributions, and overtime, holiday and sick pay. Card Factory was able to protect retail jobs thanks to the Government's Coronavirus Job Retention Scheme ("CJRS"), which provided £15.6m toward the cost of store colleague wages in the period.
· Store property costs: Under IFRS 16 Leases, store rents are not included within cost of sales, leaving only service charges and business rates. Card Factory benefitted from the UK government's decision to provide business rates relief to retailers for the 2020-21 tax year; saving £6.8m in HY21, and the total saving for the financial year is expected to amount to c. £17.1m. We continue to target improvements in our overall rent roll as we reach break points or expiries on existing leases, the effect of which will be seen in the depreciation and finance cost lines of the Income Statement under IFRS 16 Leases. Average term to next lease events is now reduced to 2.3 years.
· Other direct expenses: includes store opening costs, store utility costs, waste disposal, store maintenance, point of sale costs, bank charges and pay per click expenditure. This cost category is largely variable in respect of existing stores and normally increases with new store openings. The ratio of other direct expenses to revenue increased by 3.2ppts due to elements of fixed costs in electricity, insurance and water rates, plus the additional cost of ensuring stores were able to operate safely when they reopened. Since reopening, we have seen a c. 20ppt increase in card payment mix, resulting in higher card processing fees. Online marketing costs in Getting Personal decreased due to a more focused direct marketing strategy. Retail partnership costs grew slightly, reflecting increased activity year-on-year.
· Underlying operating expenses: includes items such as support centre remuneration, the cost of store estate Regional and Area Managers, design studio costs, support centre and distribution centre property costs and business insurance together with other central overheads and administration costs. The CJRS enabled the Group to furlough c. 55% of support centre colleagues during the lockdown period, saving £1.1m in wage costs in the half. Various other year-on-year savings, indirectly related to furlough and homeworking, were achieved but the Group invested further in IT in support of new strategic initiatives. It also began incurring rent and rates for Gate 5, which amounted to c. £0.3m in the half. In addition, infrastructure costs, necessary to support growth in the Retail Partnerships and Online channels, were incurred, including some temporary dual running hosting costs relating to the new web platform. Total operating expenses (excluding depreciation, amortisation & impairment) fell by 1.1% (HY20: increased 9.1%) to £17.6m, representing a percentage-of-revenue increase of 8.4ppts.
Depreciation, amortisation & impairment, which includes depreciation and impairment of right-of-use property lease assets under IFRS 16 Leases, grew by 4.1% to £25.6m (HY20: £24.6m), attributable to increased store lease depreciation.
Underlying net financing expense
The Group's net financing expense, excluding non-underlying items, increased to £4.4m (HY20: £4.2m) due to an increase in interest on bank borrowings, partly offset by reduced IFRS 16 lease interest charges. Increased interest on bank borrowings reflects the decision to draw down in full the RCF funding line at the start of the Covid-19 pandemic and an increase in the effective interest rate on loans of 0.44 ppts versus HY20. This rate increase reflected the impact of the revised facility agreement entered into in response to Covid-19. Lower IFRS 16 lease interest charges reflect the on-going impact of older leases, recognised at higher discount rates.
Consolidated underlying finance expense
HY21
£m
HY20
£m
(Increase) /Decrease
Finance expense
Interest on loans
2.6
1.9
(36.8%)
Loan issue cost amortisation
0.1
0.1
-
Loss on interest rate derivatives
-
0.1
-
IFRS 16 Leases interest
1.7
2.1
19.0%
Total finance expense
4.4
4.2
(4.8%)
Net finance expense
4.4
4.2
(4.8%)
Underlying (loss) / profit before tax
Underlying loss before tax for the period amounted to £22.3m (HY20: profit £22.0m) can be analysed as follows:
Underlying PBT by channel
HY21
£m
HY20
£m
Increase/
(Decrease)
Stores (UK & Ireland)
(23.0)
23.0
(200.0%)
Online & Multichannel
0.5
(1.1)
145.5%
Partnerships (UK & International)
0.2
0.1
100.0%
Group total
(22.3)
22.0
(201.4%)
Underlying PBT margin by channel
HY21
HY20
Increase/
(Decrease)
Stores (UK & Ireland)
(27.0%)
12.3%
(39.3 ppts)
Online & Multichannel
3.8%
(13.6%)
17.4 ppts
Partnerships (UK & International)
10.5%
20.0%
(9.5 ppts)
Group total
(22.2%)
11.2%
(33.4 ppts)
Non-underlying items and reconciliation to reported PBT
The following table outlines the components of the non-underlying items recognised in the period.
HY21
£m
HY20
£m
Increase / (Decrease)
Non-underlying items:
Cost of sales
Gain on foreign currency derivative financial instruments not designated as a hedge
0.1
2.3
Total non-underlying items
0.1
2.3
Underlying (loss) / profit before tax
(22.3)
22.0
(201.4%)
Reported (loss) / profit before tax inc. non-underlying
(22.2)
24.3
(191.4%)
The GBP/USD spot exchange rate was broadly consistent at 31 January 2020 and 31 July 2020, resulting in a minimal non-underlying fair value adjustment on derivative financial instruments that were not hedge accounted. By contrast, there was a significant shift in the exchange rate during HY20, giving rise to a relatively large non-underlying fair value gain in that period.
Tax
The effective tax rate is broadly consistent with the prior period.
(Loss) / earnings per share
Underlying basic and diluted loss per share for the period was 5.2p (HY20: earnings 5.2p). After taking into account the non-underlying items described above, reported basic and diluted loss per share for the period was 5.2p (HY20: earnings 5.7p).
Consolidated (loss) / earnings per share
HY21
HY20
(Increase) /Decrease
Underlying basic and diluted
(5.2p)
5.2p
(200.0%)
Basic and diluted EPS
(5.2p)
5.7p
(190.8%)
Capital expenditure
Total capital expenditure was reduced to £3.5m in the half (HY20: £9.8m) as the business focussed on essential long-term strategic project spend and other committed spend at the point of lock down. Strategic investments totalled £1.6m, including completion of the new cardfactory.co.uk web platform, warehouse consolidation and voice picking technology, and in-store efficiency projects. In addition, new store rollouts and three store relocations amounted to £0.6m and a further £0.6m was spent on Covid-19 related works.
Foreign exchange
With approximately half of its annual cost of goods sold expense relating to products paid for in US dollars, the Group takes a prudent but flexible approach to hedging the risk of exchange rate fluctuations. The Board adopts a policy of combining vanilla forwards and structured options to hedge this exposure. The Group has used structured options and similar instruments to good effect for a number of years and the Board continues to view such instruments as commercially attractive as part of a balanced portfolio approach to exchange rate risk management, even if cash flow hedge accounting may not be permitted in some instances.
During the period, the Group's hedge position was reviewed in light of reduced purchasing requirements owing to Covid-19 related store closures, footfall reduction and cash conservation measures. The resulting re-profiling of existing cover generated a c. £1.0m foreign exchange gain on excess hedging in the half year. At the reporting date, the Group had cover in place for forecast purchasing requirements through to the end of FY22.
The anticipated effective full year P&L rate for FY21 on an underlying basis is c. $1.38 and c. $1.34 for FY22, although this remains subject to any significant shift in the value of sterling, which could impact the structured trades that form part of the hedging portfolio, and possible impacts of Covid-19 on hedged cash flows. Structured trades represent approximately one third of hedges in place.
Cash generation
The Group reported an operating cash flow of £25.2m in HY21, £8.9m lower than the previous half year (HY20: £34.1m). The negative impact of Covid-19 related sales reductions and margin dilution was offset in part by working capital management and the use of Government-backed schemes. In addition, cash flows from investing activities were £6.4m lower, lease liability payments were £8.1m lower, due to rent deferrals, and no cash was distributed to shareholders (HY20: £21.9m). The resulting fall in net debt and lease liabilities was 8.6% (from £317.3m to £290.1m), which was better than expected.
The Group's free cash flow - calculated as net cash flow before movements on borrowings and dividend payments - increased by £8.2m to £1.1m (HY20: out flow 7.1m).
Net Debt & Leverage
As at 31 July 2020, net debt (including debt issue costs of £1.0m) amounted to £290.1m, analysed as follows:
HY21
HY20
Net Debt
Net Debt
£m
£m
Borrowings
Current liabilities
1.5
0.1
Non-current liabilities
173.6
173.8
Total borrowings
175.1
173.9
Lease liabilities
146.2
147.0
Capitalised debt costs
1.4
1.2
Gross debt
322.7
322.1
Less cash
-32.6
-4.8
Net debt and lease liabilities
290.1
317.3
Remove lease liabilities
-146.2
-147.0
Net debt
143.9
170.3
Leverage (net debt / LTM Underlying PBT)
6.3x
2.3x
As previously announced, the Group entered into a revised agreement with its banking partners during the period. This enables it to utilise not only the full Revolving Credit Facility ("RCF") of £200m but, also secured funding from the Bank of England Covid Corporate Financing Facility ("CCFF"). As part of this agreement, the Group's previous covenant requirements have lapsed and have been replaced by three new covenant tests relating to total net debt; cash burn; and last twelve months EBITDA. These tests are applied monthly until June 2021, after which it is envisaged that the business will have a phased return back to its pre-Covid six-monthly covenant tests of EBITDA to net debt and interest cover.
Until the business returns to those pre-Covid covenant tests, while adjusted leverage is less than 2.0x (i.e. pre-IFRS 16) and it has no outstanding commercial papers issued under the CCFF, there will be a prohibition of any payment to shareholders by way of dividend or share buy-back, with the same tests applying to acquisitions. Furthermore, the Group must use best efforts to raise equity if leverage is above 3.0x before the later of January 2021 or 3 months before the redemption of the final commercial paper issuance. The Board expects to take a prudent approach, ensuring that the Group has sufficient liquidity available, including in the event of further downturns.
Dividends and capital structure
Dividends
Historically, the Board has adopted a progressive ordinary dividend policy for the Company, reflecting its strong earnings potential and cash flow characteristics, while allowing it to retain sufficient capital to fund ongoing operating requirements and to invest in the Company's long-term growth and profitability. Following the outbreak of the Covid-19 pandemic, the Board decided not to declare a final ordinary dividend for the year ended 31 January 2020. The Company's dividend policy remains unchanged over the medium term, and it will be regularly reviewed for appropriate action in the shorter term; however, we do not expect to pay any dividends in relation to FY21.
Total dividends for HY20 and HY21 can be summarised as follows:
HY21
HY20
Final dividend paid - FY20
-
n/a
Final dividend paid - FY19
n/a
6.4p
Total ordinary dividend paid
-
6.4p
Special dividend declared
-
5.0p
Interim dividend declared
-
2.9p
Total dividend
-
14.3p
Capital structure
The Board is focused on maintaining a capital structure that is conservative yet efficient in terms of providing long-term returns to shareholders. Over the medium term, the Board expects to maintain leverage broadly in the range of 1.0 to 2.0 times net debt to pre-IFRS 16 Underlying EBITDA. However, due to the impact of Covid-19, the Board expects that leverage will peak above this range in FY21, which will impact the distribution of cash to shareholders, as reflected above. Looking further forward, the new strategy targets leverage in the range of 1.2 to 2.6 net debt to Underlying PBT. It should be noted that net debt at the half and full year period ends is normally lower than intra-year peaks, reflecting usual trading patterns and working capital movements.
Going Concern and the impact of Covid-19
Availability of funding
Due to the impact of Covid-19, the Group entered into an agreement with its banks to enable it to utilise in full its RCF of £200m and to utilise the arranged funding from the CCFF, to ensure the business has sufficient liquidity in this uncertain period, if required. This was predicated on the Group agreeing to three new covenant tests; total net debt, cash burn and last twelve months EBITDA until June 2021, after which it is envisaged that the business will have a phased return back to its previous covenant tests (EBITDA leverage and interest cover). At the date of this report, the Group has not drawn any funds under the CCFF. The Board is confident that it has access to sufficient liquidity to navigate the business through the uncertain times ahead, and will keep this under review. The Board expects to take a prudent approach, ensuring that the Group has sufficient liquidity available, including in the event of further downturns.
Covid-19 and cash flow forecasts
The Board has prepared cash flow forecasts for a period of 16 months from the date of approval of this interim report. This base case scenario includes the benefits of actions already taken by management to mitigate the trading downsides brought by Covid-19, e.g. cancellation of dividends, significant reduction in capital investment, cancellation and rescheduling of stock orders, renegotiating property rents, and participating in available government support measures amongst other actions within their control. At the date of this report, the Group had re-commenced trading in all but three of its pre-closure store portfolio. The base case forecast reflects the impact of reduced footfall expectations, partly offset by improved average basket values. Actual revenue trends since re-opening continue to track closely to our initial expectations. The forecast anticipates a slow but steady continued recovery, albeit with peak Christmas trade subject to an element of expected Covid capacity constraint. Under this base case scenario, the Group is expected to continue to have significant headroom relative to the funding available to it and to comply with its banking covenants.
The Board has also considered various other severe but plausible downside scenarios, including the possibility that the recovery of trade is much more sluggish than assumed in the base case. Taking into account further mitigating actions reasonably available to management, the Board has determined that the Group could continue to comply with all its banking covenants if store revenue, on average, was up to 16% lower than FY20 levels across all of the next 16 months. The Board considers such a persistent store revenue shortfall to be very unlikely except in the event of significant further widespread restrictions to trade from Covid-19. In such a circumstance, the Group would be at risk of breaching its covenants and would seek to agree a waiver or variation of terms with its banks, who have been consistently supportive of the business but the Board cannot predict with certainty how the banks would respond.
The above situation gives rise to a material uncertainty, as defined in auditing and accounting standards, related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern. In such circumstances, it may therefore be unable to realise its assets and discharge its liabilities in the normal course of business. Reflecting the Board's confidence, the Group continues to adopt the going concern basis in preparing its financial statements. The financial statements do not include any adjustments that would result from the basis of preparation being inappropriate.
Kris Lee
Chief Financial Officer
29 September 2020
Explanatory notes
1. Alternative Performance Measures ("APMs") and other explanatory information
"Stores (UK & Ireland) like-for-like revenue" comprises:
· Like-for-like revenue performance of group's UK and Ireland store estate for stores that have been opened for a full year; this is calculated on a calendar week basis
· HY21 like-for-like revenue has been adjusted by removing prior period store sales reported in Covid-19 store closure weeks on a store-by-store basis
"Online & Multichannel like-for-like revenue" comprises year-on-year growth in revenue from the group's online channel and is calculated on a calendar week basis
"Group like-for-like revenue" comprises both Stores (UK & Ireland) like-for-like revenue and Online & Multichannel like-for-like revenue
"Point of distribution" equates to the number of web brands and individual retail outlets, owned or partnered, in which Card Factory products are available
"EBITDA" is defined as earnings before interest, tax, depreciation and amortisation and represents profit for the period before net finance expense, taxation, depreciation, amortisation and impairments.
"Free cash flow" is equal to the net increase in cash and cash equivalents but excluding proceeds from bank borrowing and dividend payments, as detailed in Condensed Consolidated Cash Flow Statement
"Net debt" comprises total borrowings, overdrafts and the value of capitalised debt issues costs less cash
"Net debt and lease liabilities" comprises net debt and lease liabilities reported under IFRS 16 Leases, as detailed in the Condensed Consolidated Statement of Financial Position
"Underlying" The Group has chosen to present underlying profit and earnings measures. Transactions are categorised as non-underlying if the resulting underlying profit and earnings information is believed to assist comparison of year-on-year performance.
Percentage movements have been calculated before figures were rounded to £0.1m.
2. Cautionary Statement
This announcement contains certain forward-looking statements with respect to the financial condition, results of operations, and businesses of Card Factory plc. These statements and forecasts involve risk, uncertainty and assumptions because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements are made only as at the date of this announcement. Nothing in this announcement should be construed as a profit forecast. Except as required by law, Card Factory plc has no obligation to update the forward-looking statements or to correct any inaccuracies therein.
Condensed consolidated income statement
For the six months ended 31 July 2020
Six months ended 31 July 2020
Six months ended 31 July 2019
Year ended 31 January 2020
Underlying
Non-underlying (note 6)
Total
Underlying
Non-underlying (note 6)
Total
Underlying
Non-underlying (note 6)
Total
Note
£'m
£'m
£'m
£'m
£'m
£'m
£'m
£'m
£'m
Revenue
100.5
-
100.5
195.6
-
195.6
451.5
-
451.5
Cost of sales
(75.2)
0.1
(75.1)
(127.0)
2.3
(124.7)
(289.8)
0.5
(289.3)
Gross profit
25.3
0.1
25.4
68.6
2.3
70.9
161.7
0.5
162.2
Operating expenses
(43.2)
-
(43.2)
(42.4)
-
(42.4)
(86.1)
(2.5)
(88.6)
Operating (loss)/profit
(17.9)
0.1
(17.8)
26.2
2.3
28.5
75.6
(2.0)
73.6
Finance income
7
-
-
-
-
-
-
-
-
-
Finance expense
7
(4.4)
-
(4.4)
(4.2)
-
(4.2)
(8.4)
-
(8.4)
Net finance expense
(4.4)
-
(4.4)
(4.2)
-
(4.2)
(8.4)
-
(8.4)
(Loss)/profit before tax
(22.3)
0.1
(22.2)
22.0
2.3
24.3
67.2
(2.0)
65.2
Taxation
8
4.5
-
4.5
(4.4)
(0.4)
(4.8)
(13.5)
(0.1)
(13.6)
(Loss)/profit for the period
(17.8)
0.1
(17.7)
17.6
1.9
19.5
53.7
(2.1)
51.6
Earnings per share
pence
pence
pence
pence
pence
pence
- Basic
9
(5.2)
(5.2)
5.2
5.7
15.7
15.1
- Diluted
9
(5.2)
(5.2)
5.2
5.7
15.7
15.1
All activities relate to continuing operations.
Condensed consolidated statement of comprehensive income
For the six months ended 31 July 2020
Six months ended 31 July 2020
Six months ended 31 July 2019
Year ended 31 January 2020
£'m
£'m
£'m
(Loss)/profit for the period
(17.7)
19.5
51.6
Items that are or may be recycled subsequently into profit or loss:
Cash flow hedges - changes in fair value
(0.6)
4.5
0.6
Cost of hedging reserve - changes in fair value
0.2
0.9
1.7
Cost of hedging reserve - reclassified to profit or loss
-
(0.1)
(0.1)
Tax relating to components of other comprehensive income
0.1
(1.0)
(0.4)
Other comprehensive (expense)/income for the period, net of income tax
(0.3)
4.3
1.8
Total comprehensive (expense)/income for the period attributable to equity shareholders of the parent
(18.0)
23.8
53.4
Condensed consolidated statement of financial position
As at 31 July 2020
Note
31 July 2020
31 July 2019
31 January 2020
£'m
£'m
£'m
Non-current assets
Intangible assets
11
319.5
321.2
319.8
Property, plant and equipment
12
39.1
43.6
41.6
Right of use assets
13
124.9
132.8
132.4
Deferred tax assets
2.6
1.7
2.7
Derivative financial instruments
15
0.5
2.6
0.5
486.6
501.9
497.0
Current assets
Inventories
57.6
70.2
54.4
Trade and other receivables
7.2
19.4
10.8
Tax receivable
4.4
-
-
Derivative financial instruments
15
0.8
6.7
1.1
Cash and cash equivalents
32.6
4.8
5.5
102.6
101.1
71.8
Total assets
589.2
603.0
568.8
Current liabilities
Borrowings
(1.5)
(0.1)
(3.6)
Lease liabilities
13
(41.1)
(39.3)
(40.7)
Trade and other payables
(61.5)
(54.2)
(45.0)
Tax payable
-
(5.0)
(6.5)
Derivative financial instruments
15
(1.2)
(0.4)
(1.0)
(105.3)
(99.0)
(96.8)
Non-current liabilities
Borrowings
(173.6)
(173.8)
(144.0)
Lease liabilities
13
(105.1)
(107.7)
(105.2)
Derivative financial instruments
15
(1.4)
(0.6)
(1.3)
(280.1)
(282.1)
(250.5)
Total liabilities
(385.4)
(381.1)
(347.3)
Net assets
203.8
221.9
221.5
Equity
Share capital
3.4
3.4
3.4
Share premium
202.2
202.2
202.2
Hedging reserve
(2.1)
4.5
(1.6)
Cost of hedging reserve
1.1
0.8
1.1
Reverse acquisition reserve
(0.5)
(0.5)
(0.5)
Merger reserve
2.7
2.7
2.7
Retained earnings
(3.0)
8.8
14.2
Equity attributable to equity holders of the parent
203.8
221.9
221.5
Condensed consolidated statement of changes in equity
For the six months ended 31 July 2020
Share capital
Share premium
Hedging reserve
Cost of hedging reserve
Reverse acquisition reserve
Merger reserve
Retained earnings
Total equity
£'m
£'m
£'m
£'m
£'m
£'m
£'m
£'m
Six months ended 31 July 2020
At 31 January 2020
3.4
202.2
(1.6)
1.1
(0.5)
2.7
14.2
221.5
Total comprehensive expense for the period
Profit or loss
-
-
-
-
-
-
(17.7)
(17.7)
Other comprehensive expense
-
-
(0.5)
0.2
-
-
-
(0.3)
-
-
(0.5)
0.2
-
-
(17.7)
(18.0)
Hedging gains and losses and costs of hedging transferred to the cost of inventory
-
-
-
(0.3)
-
-
-
(0.3)
Deferred tax on transfers to inventory
-
-
-
0.1
-
-
-
0.1
Transactions with owners, recorded directly in equity
Share-based payment charges
-
-
-
-
-
-
0.5
0.5
Total contributions by and distributions to owners
-
-
-
-
-
-
0.5
0.5
At 31 July 2020
3.4
202.2
(2.1)
1.1
(0.5)
2.7
(3.0)
203.8
Six months ended 31 July 2019
At 31 January 2019
3.4
202.2
0.9
0.4
(0.5)
2.7
11.0
220.1
Total comprehensive income for the period
Profit or loss
-
-
-
-
-
-
19.5
19.5
Other comprehensive income
-
-
3.6
0.7
-
-
-
4.3
-
-
3.6
0.7
-
-
19.5
23.8
Hedging gains and losses and costs of hedging transferred to the cost of inventory
-
-
-
(0.3)
-
-
-
(0.3)
Transactions with owners, recorded directly in equity
Share-based payment charges
-
-
-
-
-
-
0.1
0.1
Dividends (note 10)
-
-
-
-
-
-
(21.8)
(21.8)
Total contributions by and distributions to owners
-
-
-
-
-
-
(21.7)
(21.7)
At 31 July 2019
3.4
202.2
4.5
0.8
(0.5)
2.7
8.8
221.9
Year ended 31 January 2020
At 31 January 2019
3.4
202.2
0.9
0.4
(0.5)
2.7
11.0
220.1
Total comprehensive income for the period
Profit or loss
-
-
-
-
-
-
51.6
51.6
Other comprehensive income
-
-
0.5
1.3
-
-
-
1.8
-
-
0.5
1.3
-
-
51.6
53.4
Hedging gains and losses and costs of hedging transferred to the cost of inventory
-
-
(3.6)
(0.8)
-
-
-
(4.4)
Deferred tax on transfers to inventory
-
-
0.6
0.2
-
-
-
0.8
Transactions with owners, recorded directly in equity
Share-based payment charges
-
-
-
-
-
-
0.5
0.5
Dividends (note 10)
-
-
-
-
-
-
(48.9)
(48.9)
Total contributions by and distributions to owners
-
-
-
-
-
-
(48.4)
(48.4)
At 31 January 2020
3.4
202.2
(1.6)
1.1
(0.5)
2.7
14.2
221.5
Condensed consolidated cash flow statement
For the six months ended 31 July 2020
Note
Six months ended 31 July 2020
Six months ended 31 July 2019
Year ended 31 January 2020
£'m
£'m
£'m
Cash inflow from operating activities
16
25.2
34.1
124.8
Corporation tax paid
(6.2)
(7.7)
(14.6)
Net cash inflow from operating activities
19.0
26.4
110.2
Cash flows from investing activities
Purchase of property, plant and equipment
12
(2.6)
(8.1)
(11.0)
Purchase of intangible assets
11
(0.9)
(1.7)
(3.5)
Proceeds (less costs) from disposal of fixed assets
0.5
0.4
0.4
Net cash outflow from investing activities
(3.0)
(9.4)
(14.1)
Cash flows from financing activities
Proceeds from bank borrowings
29.5
30.0
-
Interest paid
(2.9)
(4.0)
(8.0)
Payment of lease liabilities
(12.0)
(20.1)
(41.0)
Dividends paid
10
-
(21.9)
(48.9)
Net cash outflow from financing activities
14.6
(16.0)
(97.9)
Net increase in cash and cash equivalents
30.6
1.0
(1.8)
Cash and cash equivalents at the beginning of the period
2.0
3.8
3.8
Closing cash and cash equivalents
32.6
4.8
2.0
Notes to the interim financial statement
1 General information
Card Factory plc (the 'Company') is a public limited company incorporated in the United Kingdom. The Company is domiciled in the United Kingdom and its registered office is Century House, Brunel Road, 41 Industrial Estate, Wakefield WF2 0XG.
2 Basis of preparation
These unaudited condensed consolidated interim financial statements ('interim financial statements') for the six months ended 31 July 2020 comprise the Company and its subsidiaries (together referred to as the 'Group'). The interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and the requirements of IAS 34 Interim Financial Reporting as adopted by the European Union. The interim report was approved by the Board of Directors on 29 September 2020.
These condensed interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The interim financial statements should be read in conjunction with the annual financial statements for the year ended 31 January 2020 ('Annual Report') which have been prepared in accordance with IFRSs as adopted by the European Union ('EU IFRS'). The comparative figures for the financial year ended 31 January 2020 are an extract from the Annual Report and are not the Group's statutory accounts for that financial year within the meaning of section 435 of the Companies Act 2006. Those accounts have been reported on by the Company's auditor and delivered to the registrar of companies. The report was unqualified and did not contain any statement under section 498 of the Companies Act 2006. The report included a material uncertainty relating to going concern in the event of a severe but plausible downside scenario arising from further restrictions to trade as a result of the Covid-19 pandemic. The statutory accounts for the year ended 31 January 2020 were approved by the Board of Directors on 1 June 2020 and delivered to the Registrar of Companies. The auditor's review report for the six month period ended 31 July 2020 is attached.
Significant judgements and estimates
The preparation of the interim financial statements requires the use of judgements, estimates and assumptions that affect the application of the Group's accounting policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. The significant judgements and key sources of estimation uncertainty were consistent with those applied to the consolidated financial statements for the year ended 31 January 2020.
Going concern
Due to the impact of COVID-19, the Group entered into an agreement with its banks to enable it to utilise the full Revolving Credit Facility ("RCF") of £200m and utilise the arranged funding from the Bank of England Covid Corporate Financing Facility ("CCFF") to ensure the business has sufficient liquidity in this uncertain period, if required. This was predicated on the Group agreeing to three new covenant tests; total net debt, cash burn and last twelve months EBITDA until June 2021, after which it is envisaged that the business will have a phased return back to its previous covenant tests (EBITDA leverage and interest cover). At the date of this report the Group has not drawn any funds under the CCFF.
The Board has prepared cash flow forecasts for a period of 16 months from the date of approval of this interim report. This base case scenario includes the benefits of actions already taken by management to mitigate the trading downsides brought by Covid-19, e.g. cancellation of dividends, significant reduction in capital investment, cancellation and rescheduling of stock orders, renegotiating property rents, and available government support measures amongst other actions within their control. At the date of this report the Group had re-commenced trading in almost all of its pre-Covid store portfolio. The base case forecast reflects the impact of reduced footfall expectations, partly offset by improved average basket values. Actual revenue trends since re-opening continue to track closely to our initial expectations. The forecast anticipates a slow but steady continued recovery, albeit with peak Christmas trade subject to an element of Covid capacity constraints. Under this base case scenario, the Group is expected to continue to have very significant headroom relative to the funding available to it and to comply with its banking covenants.
The Board has also considered various other severe but plausible downside scenarios, including the possibility that the recovery of trade is much more sluggish than assumed in the base case. Taking into account further mitigating actions reasonably available to management, the Board has determined that the Group could continue to comply with all its banking covenants if store revenue, on average, was up to 16% lower than FY20 levels across all of the next 16 months. The Board considers such a persistent store revenue shortfall to be very unlikely except in the event of significant further widespread restrictions to trade from COVID-19. In such a circumstance the Group would be at risk of breaching its covenants and would seek to agree a waiver or variation of terms with the banks, who have been consistently supportive of the business but, the Board cannot predict with certainty how the banks would respond.
The above situation gives rise to a material uncertainty, as defined in auditing and accounting standards, related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern. In such circumstances, it may therefore be unable to realise its assets and discharge its liabilities in the normal course of business. Reflecting the Board's confidence, the Group continues to adopt the going concern basis in preparing its financial statements. The financial statements do not include any adjustments that would result from the basis of preparation being inappropriate.
3 Principal accounting policies
The financial statements have been prepared under the historical cost convention except for derivative financial instruments which are stated at their fair value. The accounting policies are consistent with those applied in the consolidated financial statements for the year ended 31 January 2020.
Amended standards and interpretations effective in the year do not have a material effect on the Group's financial statements.
4 Segmental reporting and revenue
The Group has two operating segments trading under the names Card Factory and Getting Personal. Card Factory retails greeting cards, dressing and gifts principally through an extensive UK store network. Getting Personal is an online retailer of personalised cards and gifts. Getting Personal does not meet the quantitative thresholds of a reportable segment as defined in IFRS 8. Consequently the results of the Group are presented as a single reportable segment.
Group revenue is almost entirely derived from retail customers. Average transaction value is low and products are transferred at the point of sale. Group revenue is presented as a single category subject to substantially the same economic factors that impact the nature, amount, timing and uncertainty of revenue and cash flows. Revenue from non-retail customers and revenue from outside the UK currently represent less than 1% of annual Group Revenues.
5 Underlying EBITDA
Underlying earnings before interest, tax, depreciation and amortisation ("Underlying EBITDA") represents underlying profit for the period before net finance expense, taxation, depreciation, amortisation and impairment of assets.
Six months ended 31 July 2020
Six months ended 31 July 2019
Year ended 31 January 2020
£'m
£'m
£'m
Operating (loss)/profit
(17.8)
28.5
73.6
Non-underlying items
0.1
(2.3)
2.0
Underlying operating profit
(17.9)
26.2
75.6
Depreciation, amortisation and impairment
25.6
24.6
52.8
Non-underlying impairment
-
-
(2.5)
Underlying EBITDA
7.7
50.8
125.9
6 Non-underlying items
Six months ended 31 July 2020
Six months ended 31 July 2019
Year ended 31 January 2020
£'m
£'m
£'m
Cost of sales
Profit on foreign currency derivative financial instruments not designated as a hedge
0.1
2.3
0.5
Operating expenses
Impairment of goodwill
-
-
(2.5)
The Group has chosen to present an underlying profit and earnings measure. Transactions are categorised as non-underlying if the resulting underlying profit and earnings information provides a more meaningful comparison of performance year-on-year. Underlying earnings is not a recognised profit measure under EU IFRS and may not be directly comparable with 'adjusted' profit measures reported by other companies. The reported non-underlying adjustments are as follows:
Net fair value remeasurement gains and losses on derivative financial instruments
The Group utilises foreign currency derivative contracts to manage the foreign exchange risk on US dollar denominated purchases and interest rate derivative contracts to manage the risk on floating interest rate bank borrowings. Fair value gains and losses on such instruments are recognised in the income statement to the extent they are not hedge accounted under IFRS 9. Such gains and losses relate to future cash flows. In accordance with the commercial reasoning for entering into the agreements, these gains/losses are deemed not representative of the underlying financial performance in the year and presented as non-underlying items. Any gains or losses on maturity of such instruments are presented within underlying profit to the extent the gain or loss is not recognised in the hedging reserve or cost of hedging reserve.
Impairment of goodwill
During the prior year goodwill attributable to the Getting Personal cash generating unit ('CGU') was impaired to nil. The impairment was a non-cash charge to the income statement reflecting a reduction in future performance expectations of Getting Personal and is presented as a non-underlying item in the prior year.
7 Finance expense
Six months ended 31 July 2020
Six months ended 31 July 2019
Year ended 31 January 2020
£'m
£'m
£'m
Finance expense
Interest on bank loans and overdrafts
2.6
1.9
4.0
Amortisation of loan issue costs
0.1
0.1
0.3
Lease interest
1.7
2.1
4.0
Loss on interest rate derivative contracts
-
0.1
0.1
4.4
4.2
8.4
8 Taxation
The reduction in anticipated profit before tax and the increased uncertainties in forecasting gives rise to a wide range of possible forecast effective tax rates for the year ending 31 January 2021. Therefore the tax charge on underlying profit before tax for the interim period has been calculated at the underlying effective rate for the year ending 31 January 2020 of 20.1%.
9 Earnings per share
Basic earnings per share is calculated by dividing the profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period.
Diluted earnings per share is based on the weighted average number of shares in issue for the period, adjusted for the dilutive effect of potential ordinary shares. Potential ordinary shares represent share incentive awards and save as you earn share options.
The Group has chosen to present an alternative earnings per share measure, with profit adjusted for non-underlying items to reflect the Group's underlying profit for the year. Underlying earnings is not a recognised profit measure under EU IFRS and may not be directly comparable with 'adjusted' profit measures used by other companies.
Six months ended 31 July 2020
Six months ended 31 July 2019
Year ended 31
January 2020
(Number)
(Number)
(Number)
Weighted average number of shares in issue
341,626,396
341,549,306
341,575,284
Weighted average number of dilutive share options
-
-
-
Weighted average number of shares for diluted earnings per share
341,626,396
341,549,306
341,575,284
£'m
£'m
£'m
Profit for the financial period
(17.7)
19.5
51.6
Non-underlying items
(0.1)
(1.9)
2.1
Total underlying profit for underlying earnings per share
(17.8)
17.6
53.7
pence
pence
pence
Basic earnings per share
(5.2)
5.7
15.1
Diluted earnings per share
(5.2)
5.7
15.1
Underlying basic earnings per share
(5.2)
5.2
15.7
Underlying diluted earnings per share
(5.2)
5.2
15.7
10 Dividends
The Directors have not declared an interim dividend for the period ended 31 July 2020.
Six months ended 31 July 2020
Six months ended 31 July 2019
Year ended 31 January 2020
Pence per share
Pence per share
Pence per share
Dividends declared not yet paid at 31 July:
Special dividend
-
5.0p
-
Interim dividend
-
2.9p
-
-
7.9p
-
Dividends paid:
Final dividend for the year ended 31 January 2020
-
6.4p
-
Special dividend for the year ended 31 January 2020
-
-
5.0p
Interim dividend for the year ended 31 January 2020
-
-
2.9p
Final dividend for the year ended 31 January 2019
-
-
6.4p
-
6.4p
14.3p
Total dividends
-
14.3p
14.3p
11 Intangible assets
Goodwill
Software
Total
£'m
£'m
£'m
Cost
At 1 February 2020
328.2
14.1
342.3
Additions
-
0.9
0.9
Disposals
-
(2.7)
(2.7)
At 31 July 2020
328.2
12.3
340.5
Amortisation and impairment
At 1 February 2020
14.4
8.1
22.5
Amortisation in the period
-
0.8
0.8
Amortisation on disposals
-
(2.3)
(2.3)
At 31 July 2020
14.4
6.6
21.0
Net book value
At 31 July 2020
313.8
5.7
319.5
At 31 January 2020
313.8
6.0
319.8
12 Property, plant and equipment
Freehold property
Leasehold improvements
Plant, equipment, fixtures & vehicles
Total
£'m
£'m
£'m
£'m
Cost
At 1 February 2020
17.5
40.3
66.4
124.2
Additions
0.3
0.4
1.9
2.6
Disposals
-
(0.5)
(2.4)
(2.9)
At 31 July 2020
17.8
40.2
65.9
123.9
Depreciation and impairment
At 1 February 2020
3.5
32.4
46.7
82.6
Depreciation in the period
0.2
1.6
2.9
4.7
Depreciation on disposals
-
(0.4)
(2.1)
(2.5)
At 31 July 2020
3.7
33.6
47.5
84.8
Net book value
At 31 July 2020
14.1
6.6
18.4
39.1
At 31 January 2020
14.0
7.9
19.7
41.6
13 Leases
The Group has lease contracts, within the definition of IFRS 16 leases, in relation to its entire store lease portfolio, some warehousing locations and motor vehicles. Other contracts, including distribution contracts and IT equipment, are deemed not to be a lease within the definition of IFRS 16 or are subject to the election not to apply the requirements of IFRS 16 to short-term or low value leases.
Right of use assets
Buildings
Motor Vehicles
Total
£'m
£'m
£'m
Cost
At 1 February 2020
324.5
1.3
325.8
Additions
13.1
0.6
13.7
Disposals
(17.6)
(0.1)
(17.7)
At 31 July 2020
320.0
1.8
321.8
Depreciation and impairment
At 1 February 2020
192.7
0.7
193.4
Depreciation in the period
19.7
0.2
19.9
Impairment in the period
0.2
0.0
0.2
Depreciation on disposals
(16.3)
(0.1)
(16.4)
Impairment on disposals
(0.2)
0.0
(0.2)
At 31 July 2020
196.1
0.8
196.9
Net book value
At 31 July 2020
123.9
1.0
124.9
At 31 January 2020
131.8
0.6
132.4
Disposals and depreciation on disposals include fully depreciated right of use assets in respect of expired leases where the asset remained in use whilst a lease renewal was negotiated.
Lease liabilities
Six months ended 31 July 2020
Six months ended 31 July 2019
Year ended 31 January 2020
£'m
£'m
£'m
Current lease liabilities
(41.1)
(39.3)
(40.7)
Non-current lease liabilities
(105.1)
(107.7)
(105.2)
Total lease liabilities
(146.2)
(147.0)
(145.9)
Rent concessions agreed in response to Covid-19 are principally in respect of the timing of payments and do not significantly impact the total consideration payable in respect of the lease. Lease liabilities have not been re-measured in respect of changes in payment profiles. Rent concessions agreed as part of a lease renewal or extension have been included in the measurement of the lease liability. Total lease liabilities remain consistent with prior periods as deferral of lease payments in response to COVID-19 is offset by a reduction in new leases following the Group's decision to significantly reduce new store openings in the current year.
Lease expense
Six months ended 31 July 2020
Six months ended 31 July 2019
Year ended 31 January 2020
£'m
£'m
£'m
Depreciation expense on right of use assets
19.9
19.1
38.9
Impairment of right of use assets (note 13)
0.2
-
0.4
Profit on disposal of right of use assets
(0.2)
(0.2)
(0.1)
Lease interest
1.7
2.1
4.0
Expense relating to short term and low value leases
0.2
0.2
0.5
Expense relating to variable lease payments
-
(0.2)
(0.3)
Total lease related income statement expense
21.8
21.0
43.4
14 Analysis of net debt
Six months ended 31 July 2020
At 1 February 2020
Cash flow
Non-cash changes
At 31 July 2020
£'m
£'m
£'m
£'m
Unsecured bank loans and accrued interest
(144.1)
(29.5)
(1.5)
(175.1)
Lease liabilities
(145.9)
12.0
(12.3)
(146.2)
Debt costs capitalised
(1.0)
(0.5)
0.1
(1.4)
Gross debt
(291.0)
(18.0)
(13.7)
(322.7)
Cash and cash equivalents
2.0
30.6
-
32.6
Net debt and lease liabilities
(289.0)
12.6
(13.7)
(290.1)
Lease liabilities
145.9
(12.0)
12.3
146.2
Net debt
(143.1)
0.6
(1.4)
(143.9)
Six months ended 31 July 2019
At 1 February 2019
Cash flow
Non-cash changes
At 31 July 2019
£'m
£'m
£'m
£'m
Unsecured bank loans and accrued interest
(143.8)
(30.0)
(0.1)
(173.9)
Lease liabilities
(151.2)
20.1
(15.9)
(147.0)
Debt costs capitalised
(1.3)
-
0.1
(1.2)
Gross debt
(296.3)
(9.9)
(15.9)
(322.1)
Cash and cash equivalents
3.8
1.0
-
4.8
Net debt and lease liabilities
(292.5)
(8.9)
(15.9)
(317.3)
Lease liabilities
151.2
(20.1)
15.9
147.0
Net debt
(141.3)
(29.0)
-
(170.3)
Year ended 31 January 2020
At 1 February 2019
Cash flow
Non-cash changes
At 31 January 2020
£'m
£'m
£'m
£'m
Unsecured bank loans and accrued interest
(143.8)
-
(0.3)
(144.1)
Lease liabilities
(151.2)
41.0
(35.7)
(145.9)
Debt costs capitalised
(1.3)
-
0.3
(1.0)
Gross debt
(296.3)
41.0
(35.7)
(291.0)
Cash and cash equivalents
3.8
(1.8)
-
2.0
Net debt and lease liabilities
(292.5)
39.2
(35.7)
(289.0)
Lease liabilities
151.2
(41.0)
35.7
145.9
Net debt
(141.3)
(1.8)
-
(143.1)
Group borrowing facilities consist of a £200 million revolving credit facility ('RCF') terminating 31 October 2023 with an additional £100 million accordion. Borrowings under the facility attract interest at LIBOR plus a margin in the range 1.0% to 2.5%, subject to a leverage ratchet. Under the agreement detailed below the maximum margin of 2.5% will apply until the pre COVID-19 covenants are re-instated.
COVID-19
As announce on 6 May 2020, the Group has entered into an agreement with our banks to enable us to utilise the full Revolving Credit Facility ("RCF") of £200m and utilise the arranged funding from the Bank of England Covid Corporate Financing Facility ("CCFF") to ensure the business has sufficient liquidity in this uncertain period, if required. In order to do this, the Group has agreed three main covenant tests around; total net debt, cash burn and last twelve months EBITDA until June 2021, after which it is envisaged that the business will have a phased return back to existing covenant tests of EBITDA to Leverage and EBITDA to interest cover.
15 Financial instruments
Financial instruments carried at fair value are measured by reference to the following fair value hierarchy:
- Level 1: quoted prices in active markets for identical assets or liabilities
- Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
- Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Derivative financial instruments are carried at fair value and measured under a level 2 valuation method. Valuations are provided by the instrument counterparty.
31 July 2020
31 July 2019
31 January 2020
£'m
£'m
£'m
Derivative assets
Non-current
Foreign exchange contracts
0.5
2.6
0.5
0.5
2.6
0.5
Current
Foreign exchange contracts
0.8
6.7
1.1
Derivative liabilities
Current
Interest rate contracts
(0.9)
(0.3)
(0.4)
Foreign exchange contracts
(0.3)
(0.1)
(0.6)
(1.2)
(0.4)
(1.0)
Non-current
Interest rate contracts
(1.0)
(0.6)
(0.5)
Foreign exchange contracts
(0.4)
-
(0.8)
(1.4)
(0.6)
(1.3)
Net derivative financial instruments
Interest rate contracts
(1.9)
(0.9)
(0.9)
Foreign exchange contracts
0.6
9.2
0.2
(1.3)
8.3
(0.7)
16 Notes to the cash flow statement
Reconciliation of operating profit to cash generated from operations:
31 July 2020
31 July 2019
31 January 2020
£'m
£'m
£'m
Profit before tax
(22.2)
24.3
65.2
Net finance expense
4.4
4.2
8.4
Operating profit
(17.8)
28.5
73.6
Adjusted for:
Depreciation and amortisation
25.4
24.6
49.9
Impairment of right of use assets
0.2
-
0.4
Goodwill impairment
-
-
2.5
Loss/(profit) on disposal of fixed assets
0.1
(0.4)
(0.3)
Cash flow hedging foreign currency movements
-
-
0.2
Share-based payments charge
0.5
0.1
0.5
Operating cash flows before changes in working capital
8.4
52.8
126.8
Decrease/(increase) in receivables
3.8
(12.6)
(2.9)
(Increase)/decrease in inventories
(3.2)
(1.6)
14.2
Increase/(decrease) in payables
16.2
(4.5)
(13.3)
Cash inflow from operating activities
25.2
34.1
124.8
17 Principal risks and uncertainties
The Board and the senior management team are collectively responsible for managing risks and uncertainties across the Group. In determining the Group's risk appetite and how risks are managed, the Board, Audit and Risk 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 Group's Audit and Risk Committee is responsible for reviewing the Group's risk management framework and ensuring that it enables the Committee and the Board to carry out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.
The principal risks and uncertainties facing the Group have been reassessed since the Annual Report and are set out below from highest risk to lowest.
- Covid-19
- ERP Implementation
- IT Infrastructure requirements
- Investor Relations
- IT Security / disruption
- Geopolitical Instability
- Brexit
- Employment Compliance
- Loss of Key Personnel / Organisational Culture
- Environmental and Social Governance
- Supplier compliance breach
- Cash Management
- Adapting to customer preferences
- Brand protection / customer experience
- Printcraft / online fulfilment service disruption
- Regulatory Compliance
- Theft/Fraud
- Exposure to Retail Partner
- Intellectual Property protection
- Supplier capacity
- Health & safety
- Design Studio disruption.
Responsibility statement of the Directors in respect of the half-yearly financial report
We confirm that to the best of our knowledge:
• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;
• the interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.
By order of the Board
Paul Moody Kris Lee
Executive Chairman Chief Financial Officer
29 September 2020
Independent review report to Card Factory plc
Conclusion
We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 July 2020 which comprises the consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of financial position, the condensed consolidated statement of changes in equity, the condensed consolidated cash flow statement and the related explanatory notes.
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 July 2020 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").
Material uncertainty related to going concern
We draw attention to note 2 to the condensed set of financial statements which indicates that, in a severe but plausible downside scenario of significant further widespread restrictions to trade from Covid-19, the ability of the Group to continue as a going concern is dependent on the external lender not calling in the debt owing to it in the event of the Group breaching its covenants. These events and conditions, along with the other matters explained in note 2, constitute a material uncertainty that may cast significant doubt on the group's ability to continue as a going concern.
Our conclusion is not modified in respect of this matter.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.
As disclosed in note 2, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.
Nick Plumb (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
1 Sovereign Square
Sovereign Street
Leeds
LS1 4DW
29 September 2020
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