REG - Gear4music - Interim results
16 October 2018
Gear4music (Holdings) plc
Interim results for the six months ended 31 August 2018
Continued momentum with strong revenue growth heading into the Christmas period
Gear4music (Holdings) plc, ("Gear4music" or "the Group") (LSE: G4M), the largest UK based online retailer of musical instruments and music equipment, today announces its unaudited financial results for the six months ended 31 August 2018 ("the Period").
Financial and Operational Highlights:
£'000
6-months ended 31 August 2018
6-months ended 31 August 2017
Change
Revenue
42,521
31,219
+36%
Gross profit
9,636
7,811
+23%
Gross margin
22.7%
25.0%
-230bps
EBITDA
652
717
(65)
Net profit
(362)
4
(366)
· Revenues increased by £11.3m driven by strong UK (34%) and International (39%) growth
· Gross margin of 22.7% reflects a strategy to gain market share of branded products during a highly competitive period, early indication of increase in H2
· Own-brand revenue growth of 28%; Other brand growth of 40%
· UK warehouse upgrades and transition into new Swedish distribution centre progressing to plan
· Strong growth in Key KPIs including:
- 40% increase in active customers
- 38bps increase in conversion rate
- 26% increase in own-brand product sales
· Very strong revenue growth in H2 to date, and trading in line to meet full year expectations
Commenting on the results, Andrew Wass, Chief Executive Officer said:
"During the Period we are pleased to have achieved further market share gains, with revenue growth of 36% and strong growth both in the UK and internationally.
As the market for musical instruments and music equipment continues to transform and consolidate, we have strengthened our position as the UK's leading retailer within the market, having invested into our customer proposition, market leading e-commerce platform, and scalable infrastructure.
As we continue to invest and focus on gaining market share, I am pleased to report that we have seen particularly strong revenue growth since 1 September 2018 alongside notable gross margin improvements on the H1 period. As such, we remain confident of delivering another year of strong revenue growth and EBITDA in line with our full year expectations."
Gear4music will issue a trading statement in early January 2019.
Enquiries:
Gear4music
Andrew Wass, Chief Executive Officer
Chris Scott, Chief Financial Officer
+44 20 3865 9668
Panmure Gordon
(Joint Financial Adviser, Joint Broker, and Nominated Adviser)
Adam James - Investment Banking
Erik Anderson - Corporate Broking
+44 20 7886 2500
Peel Hunt
(Joint Financial Adviser and Joint Broker)
Adrian Trimmings
George Sellar
+44 20 7418 8900
Alma PR (Financial PR)
Josh Royston/Rebecca Sanders-Hewett/Helena Bogle
+44 20 3865 9668
Gear4Music@almapr.co.uk
About Gear4music.com
Operating from a Head Office in York, a Software Development office in Manchester, and Distribution Centres and showrooms in York, Sweden and Germany, the Group sells own-brand musical instruments and music equipment alongside premium third-party brands including Fender, Yamaha and Roland, to customers ranging from beginners to musical enthusiasts and professionals, in the UK, Europe and, more recently, into the Rest of the World.
Having developed its own e-commerce platform, with multilingual, multicurrency and fully responsive design websites delivering to over 190 countries, the Group has rapidly expanded its database and continues to build its overseas presence.
This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014.
Business Review
The business reports the Group's results for the six months to 31 August 2018, and updates on the strategic and commercial progress made in the Period.
Strategy
We have made significant strides towards our goal of becoming a leading global retailer of musical instruments and equipment. We know what we need to do to achieve this and in line with this, we continue to invest in our people, our processes, our platform and our products to continually improve our customer experience and competitive position.
The Group continues to deliver strong revenue growth founded on an attractive and continually improving customer proposition based on good product breadth and availability at competitive prices, with excellent delivery options and highly rated pre and post-sales support.
We have made good progress against the four pillars of our progressive e-commerce strategy, and outline developments in each area below:
E-commerce Excellence
H1 FY19
H1 FY18
Change
Revenue
£42.5m
£31.2m
+36%
Total unique website visitors
10.04m
7.10m
+41%
Conversion rate
3.22%
2.84%
+38bps
Average order value
£127.48
£131.66
-3.2%
Active customers *
546,940
390,790
+40%
Proportion of repeat customers **
24.8%
25.8%
-100bps
Email subscriber database
789,160
725,594
+9%
Trustpilot rating
9.5/10
9.6/10
* Active customers are those that have purchased products within the last 12 months
** Repeat customers are those that have made a purchase in the defined period and have historically made at least one purchase
Revenue increased by £11.3m (36%) during the Period to £42.5m, compared to growth of £9.6m in FY18 H1. Revenue growth in our core UK market where our proposition is more mature was especially strong at 34%, compared to 39% International growth that was, as previously communicated, in part limited by slower than anticipated stock build-up in our European distribution centres, and physical limitations in our Swedish distribution centre, that will be addressed with the relocation to a new, larger facility.
Website visitor numbers increased by 41% to 10.04m (FY18 H1: 7.10m), with visitors to the UK website increasing 26% and visitor numbers to the Group's 19 international websites growing by 55%. Conversion rates continue to improve from 3.59% to 4.61% in the UK, and from 2.14% to 2.20% in Europe.
The Group served 261,000 customers in the Period, up 41% on last year. The numbers of new customers increased by 44% as the Group leveraged its marketing strength.
The proportion of repeat customers was 26.6% (FY18 H1: 25.8%), reflecting the high number of new customers. The Group's high average order value means the business achieves immediate payback on new customer recruitment. Active customers increased by 40%, and the number of subscribers on our email database increased by 9% to over 789,000.
Organic and Direct website traffic accounted for 46% of total visitors (FY18 H1: 47%).
Mobile momentum continued with the proportion of visitors accessing Gear4music websites from this channel increasing from 42% in FY17 H1 to 53% last year, to 58% this year. Mobile website development remains an important and ongoing focus.
We continue to invest in our customer proposition and service teams resulting in a positive overall customer experience, reflected in Gear4music.com's Trustpilot score of 9.5 from over 40,000 reviews.
Supply Chain Evolution
H1 FY19
H1 FY18
Change
Own-brand product sales
£8.98m
£7.14m
+26%
Other brand product sales
£31.96m
£22.90m
+40%
Products listed
50,031
40,021
+25%
Brands listed
842
758
+11%
The Group remains committed to leveraging its financial assets and distribution centres to invest in stock and add increasing breadth and depth to the range, to support continuing revenue growth.
The number of SKUs available increased from 40,000 at 31 August 2017 to 44,700 at 28 February 2018 and 50,000 at 31 August 2018, representing a 25% increase over the year.
Own-brand revenue growth of 26% represents continuing good progress in developing our range of high-quality instruments and equipment at affordable prices, and it was pleasing to see the number of own-brand products listed increase from 2,500 at 31 August 2017 to 3,200 at 31 August 2018. New products that have been developed and launched include:
· New Gear4music lighting range
· New 'Hartwood' premium guitar and bass brand and range
· Expanded range of SubZero wireless audio products
International Expansion
In FY17 we committed to setting up European distribution centres in Sweden and Germany to deliver on our European expansion ambitions and improve and localise our customer proposition. We opened our first European distribution centre in Sweden in Autumn 2016, in a 38,000 square foot leased unit near Stockholm to service the Scandinavian market. It became clear that due to sustained growth the current configuration would not be able to meet FY19 peak trading requirements and in May 2018 we announced plans to relocate to a new 78,000 square foot unit. I am pleased to report this project is progressing to plan and we are well-placed to meet peak demand in FY19 H2.
Our German distribution centre has been deliberately scaled-up behind the Swedish operation to spread the cost and resource requirements. Our 72,000 square foot unit in Mulheim is well-positioned to service Central and Southern Europe and the number of orders fulfilled out of this operation increased by 230% in FY19 H1.
Both operations continue to contribute to the Group's profitability.
In October 2017 the Group launched a US$ website (www.gear4music.com/us) to better serve customers around the world wishing to pay in US$, and sales outside of Europe have increased by 60%.
Bespoke Platform Development
The Group invested £1.10m in its e-commerce platform in the period (FY18 H1: £0.77m), and made good progress on a number of key projects including:
· Competitor price tracking upgrade
· Amazon Seller Fulfilled Prime
· Website refresh with new logo and product page design
· Warehouse and distribution upgrades
Current trading and prospects
As ever, trading in the second half of the year is very significant to our results for the year as a whole and given recent revenue growth and improving gross margin, coupled with on-going operational and commercial progress, the Board considers the Group to be well-placed to deliver EBITDA for the full-year in-line with expectations.
The Group will issue a Christmas trading update in early January 2018.
Financial Review
H1 FY19
H1 FY18
Change
Revenue
£42.5m
£31.2m
+36%
Product margin
27.5%
29.8%
-230bps
Gross margin
22.7%
25.0%
-230bps
Operating (loss)/profit
-£331,000
£28,000
-£359,000
Marketing costs
£3.50m
£2.54m
+38%
Marketing costs as % of sales
8.2%
8.1%
+10bps
Total Labour costs
£3.75m
£2.86m
+31%
Total Labour costs as % of sales
8.8%
9.2%
-40bps
Revenue
Revenue in the six-month Period increased by 36%, equating to two-year growth of 96%.
Revenue growth was very strong in our more-established UK market with a £6.1m (34%) increase, to £24.0m in the Period, taking our estimated share of the UK-market to 6.7%.
Revenue into International markets increased by £5.2m (39%) to £18.5m (FY18 H1: £5.5m increase; 70% growth), representing an increasing proportion of our revenue, rising from 36% in FY17 H1 to 43% in FY18 H1, to 45% in FY19 H1. International growth was limited by Swedish distribution capacity constraints that will be removed, and low stock levels in the European distribution centres that is being improved.
Gross Profit
Gross profit increased by £1.8m (+23%) to £9.6m.
Gross margin reduced from 25.0% to 22.7% reflecting a highly competitive other-brand market and the Group focusing on rapidly gaining market share, and growth in higher margin own-brand sales falling behind growth in other-brand sales, with the proportion of product sales decreasing from 23.8% in FY18 H1 to 21.9% in FY19 H1.
Efforts are on-going to improve gross margins including negotiations with certain suppliers, potentially removing very low margin products, and taking advantage of any tactical buying opportunities as and when they arise. Early indications in FY19 H2 are that gross margins are improving.
The Group has started sourcing some products locally in Europe, in Euros and Swedish Krona, but still purchases the majority of its other-branded products in GB pounds.
Operating Profit and Administrative Expenses
An operating loss of £0.33m represents a £0.36m reduction on FY18 H1 principally due to the 230bps reduction in gross margin in addition to increased depreciation and amortisation charges. To illustrate, a 100bps improvement in gross margin in FY19 H1 would have added £0.43m to gross profit and operating profit.
Marketing and people costs continue to be key business drivers and the main component parts of our overhead base, accounting for a combined 73% of total administrative expenses in the Period (FY18 H1: 69%). Marketing costs increased by £0.96m to £3.50m representing a 38% increase that is broadly in line with the revenue increase. Labour costs rose by £0.89m (31%) to £3.75m.
Administrative expenses include a £421,000 credit relating to the release of a rent accrual for the difference between cash paid and the average rent charge as expensed in relation to the leasehold distribution centre at Clifton Moor, York. The signing of a new lease in March 2018 triggered this release.
European distribution centre administrative expenses increased by £0.21m on FY18 H1, to £0.85m.
Depreciation and Amortisation in the period totalled £0.98m which is £0.30m (43%) up on FY18 H1, and includes £0.53m (FY18 H1: £0.37m) of amortisation relating to our bespoke e-commerce platform.
Net Profit
A net loss of £0.37m for the Period represents a £0.37m reduction on last year, principally due to the £0.33m reduction in Operating profit.
Financial expenses include £0.13m of bank interest (FY18 H1: £0.06m) relating to Trade Finance loans and term loans linked to the freehold acquisition in 2017, and a £0.07m foreign exchange loss (FY18 H1: £0.03m).
Cash Flow and Balance Sheet
In common with many retailers, August represents a low point in the annual cash cycle. In May 2017 the Group raised £4.2m growth capital, which was reflected in the cash figure at 31 August 2017 (£4.1m). Cash as at 31 August 2018 cash was £2.7m.
Net debt at 31 August 2018 of £7.6m (31 August 2017, post equity raise: £3.7m) includes £4.3m of long-term debt linked to the freehold property acquisition in 2017, and £5.4m of 180-day Trade Finance loans supporting the investment in stock. The Group has an £8m Trade Finance facility in place.
The Group continues to invest in stock without drawing all available Trade Finance loans to mitigate finance costs, and settles other-brand debts so as to maximise all available settlement discounts. The carrying value of stock at 31 August 2018 was £21.3m (31 August 2017: £13.0m) including £4.3m of inbound stock-in-transit (FY18 H1: £1.3m), being the early shipment of stock for peak season to secure improved margins, and boost stock-on-hand early in our key trading period. Adjusting for stock-in-transit, stock at 31 August 2018 is 46% up on last year.
Trade and other receivables have increased from £2.3m last year to £3.8m, and includes cash lodged with payment providers, Amazon and the Group's consumer finance partners, and trade and education accounts where standard credit terms range from 0-30 days.
Trade and other payables have increased from £8.8m last year to £15.3m and includes the associated liability for the £4.3m of inbound stock-in-transit (FY18 H1: £1.3m).
Capitalised software development costs totalled £1.10m (FY18 H1: £0.77m) in the Period, taking total spend to date to £7.64m. Amortisation in the Period was £0.50m leading to a £0.60m increases in net book value.
Property, plant and equipment capital expenditure in the Period was £0.21m (FY18 H1: £7.05m including £5.63m debt-financed freehold acquisition), with the main additions relating to the new Swedish and the upgraded UK-distribution centres to come in H2.
Dividend Policy
The Group repeats its intention to revisit its shareholder distribution policy at the end of this financial year.
Unaudited consolidated interim statement of profit and loss and other comprehensive income
Note
6 months ended 31 August
2018 (unaudited)
6 months ended 31 August
2017 (unaudited)
Year ended
28 February 2018 (audited)
£000
£000
£000
Revenue
42,521
31,219
80,100
Cost of sales
(32,885)
(23,408)
(59,781)
Gross profit
9,636
7,811
20,319
Administrative expenses
1,2
(9,967)
(7,783)
(18,358)
Operating (loss)/profit
1,2
(331)
28
1,961
Financial expense
4
(214)
(97)
(461)
(Loss)/profit before tax
(545)
(69)
1,500
Taxation
5
177
73
(114)
(Loss)/profit for the period
(368)
4
1,386
Other comprehensive income
Items that will not be reclassified to profit or loss:
Revaluation of property, plant and equipment
-
-
1,716
Deferred tax movements
(48)
-
(203)
Items that are or may be reclassified subsequently to profit or loss:
Foreign currency translation differences - foreign operations
(2)
9
2
_______
_______
_______
Total comprehensive income for the year
(418)
13
2,901
Profit per share attributable to equity shareholders of the company
Basic (loss)/profit per share
3
(1.8p)
0.0p
6.7p
Diluted (loss)/profit per share
3
(1.8p)
0.0p
6.7p
Unaudited consolidated interim statement of financial position
31 August
2018 (unaudited)
31 August
2017 (unaudited)
28 February 2018 (audited)
Note
£000
£000
£000
Non-current assets
Property, plant and equipment
6
9,811
7,550
10,054
Intangible assets
7
6,951
5,910
6,378
16,762
13,460
16,432
Current assets
Inventories
8
21,326
13,001
17,055
Trade and other receivables
9
3,825
2,279
2,704
Cash and cash equivalents
2,655
4,107
3,540
27,806
19,387
23,299
Total assets
44,568
32,847
39,731
Current liabilities
Other interest-bearing loans and borrowings
10
(5,912)
(2,909)
(3,914)
Trade and other payables
11
(14,874)
(7,893)
(10,916)
(20,786)
(10,802)
(14,830)
Non-current liabilities
Other interest-bearing loans and borrowings
10
(4,343)
(4,893)
(4,616)
Other payables
11
(427)
(944)
(751)
Deferred tax liability
5
(516)
(251)
(649)
(5,286)
(6,088)
(6,016)
Total liabilities
(26,072)
(16,890)
(20,846)
Net assets
18,496
15,957
18,885
Equity
Share capital
2,095
2,087
2,087
Share premium
13,152
13,055
13,055
Foreign currency translation reserve
10
19
12
Revaluation reserve
1,424
-
1,424
Retained earnings
1,815
796
2,307
Total equity
18,496
15,957
18,885
Unaudited consolidated interim statement of cash flows
Note
6 months ended
31 August
2018
(unaudited)
6 months ended 31 August
2017 (unaudited)
Year ended
28 February 2018 (audited)
£000
£000
£000
Cash flows from operating activities
Profit for the period:
(368)
4
1,386
Adjustments for:
Depreciation and amortisation
2,6,7
983
688
1,497
Foreign exchange losses
(2)
9
2
Financial expense
4
140
64
196
Loss on sales of property, plant and equipment
-
-
6
Share-based payment charge
12
(76)
29
69
Taxation
5
(177)
(73)
114
500
721
3,270
Increase in trade and other receivables
(1,121)
(931)
(1,356)
Increase in inventories
(4,271)
(1,315)
(5,369)
Increase in trade and other payables
3,823
495
3,602
(1,069)
(1,030)
147
Tax paid
(4)
94
10
Net cash from operating activities
(1,073)
(936)
157
Cash flows from investing activities
Proceeds from sales of property, plant and equipment
-
-
19
Acquisition of property, plant and equipment
6
(209)
(6,278)
(7,443)
Development costs capitalised
7
(1,104)
(768)
(1,693)
Deferred consideration
(200)
(200)
(400)
Net cash from investing activities
(1,513)
(7,246)
(9,517)
Cash flows from financing activities
Proceeds from the issue of share capital
105
4,193
4,193
Proceeds from new borrowings
10
1,746
5,211
5,986
Net interest paid
4
(130)
(62)
(178)
Payment of finance lease liabilities
10
(20)
(54)
(102)
Net cash from financing activities
1,701
9,288
9,899
Net (decrease)/increase in cash and cash equivalents
(885)
1,106
539
Cash and cash equivalents at beginning of period
3,540
3,001
3,001
Cash and cash equivalents at end of period
2,655
4,107
3,540
Unaudited consolidated interim statement of changes in equity
6 months ended 31 August
2018 (unaudited)
6 months ended 31 August
2017 (unaudited)
Year ended
28 February 2018 (audited)
£000
£000
£000
Share Capital
Opening
2,087
2,016
2,016
Issue of shares
8
71
71
2,095
2,087
2,087
Share Premium
Opening
13,055
8,933
8,933
Issue of shares
97
4,278
4,278
Share issue costs
-
(156)
(156)
13,152
13,055
13,055
Foreign currency translation reserve
Opening
12
10
10
Other comprehensive income
(2)
9
2
10
19
12
Revaluation reserve
Opening
1,424
-
-
Freehold property revaluation
-
-
1,716
Deferred tax movement
-
-
(292)
1,424
-
1,424
Retained earnings
Previous periods
2,307
763
763
Share based payment charge
(76)
29
69
Deferred tax prior year adjustment re: share-based payments
(48)
-
89
Profit for the period
(368)
4
1,386
1,815
796
2,307
Total equity
18,496
15,957
18,885
Notes to the Interim Financial Information
General Information
Gear4music (Holdings) plc is a public limited company incorporated and domiciled in the United Kingdom, and is listed on the Alternative Investment Market ('AIM') of the London Stock Exchange.
The group financial information consolidates those of the Company and its subsidiaries (collectively referred to as the "Group"). The Group has 100% owned trading subsidiaries in Sweden ('Gear4music Sweden AB') and Germany ('Gear4music GmbH'). The Group has 100% owned dormant subsidiaries in the UK ('Cagney Limited') and in Norway ('Gear4music Norway').
The principal activity of the Group is the retail of musical instruments and equipment.
The registered office of Gear4music (Holdings) plc (company number: 07786708), Gear4music Limited (company number: 03113256) and Cagney Limited (dormant subsidiary; company number: 04493300) is Kettlestring Lane, Clifton Moor, York, YO30 4XF.
1 Accounting policies
1.1 Basis of preparation
The unaudited consolidated interim financial information for the period ended 31 August 2018 has been prepared in accordance with the AIM rules for Companies, comply with IAS 34 'Interim Financial Reporting' as adopted by the European Union. The condensed consolidated interim financial information does not constitute financial statements within the meaning of Section 434 of the Companies Act 2006 and does not include all of the information and disclosures required for full annual financial statements. It should therefore be read in conjunction with the Group' Annual Report which have been prepared in accordance with International Financial Reporting Standards and is available on the Group's investor website.
The comparative financial information contained in the condensed consolidated financial information in respect of the year ended 28 February 2018 has been extracted from the 2018 Financial Statements. Those financial statements have been reported on by KPMG LLP, and delivered to the Registrar of Companies. The report was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and did not contain a statement under Section 498 of the Companies Act 2006.
Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the last annual consolidated financial statements as at the year ended 28 February 2018.
The Group's accounting policies are set out below. Except as described in section 1.2, the accounting policies applied in this interim financial information are the same as those applied in the Group's consolidated financial statements as at and for the year ended 28 February 2018.
The financial information has been prepared on the historical cost basis.
1.2 Changes in accounting standards
The Group has adopted IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from contracts with customers' from 1 March 2018. Neither have a material impact on the Group's financial statements:
IFRS 9 'Financial instruments'
IFRS 9 sets out requirements for the classification and measurement of financial assets and financial liabilities, and a basis for recognising provisions based on expected credit losses, and simplified hedge accounting. Management has reviewed the Group's business, its debt structure and absence of hedging and determined the new standard does not have a material impact on the Income statement or Balance sheet.
IFRS 15 'Revenue from contracts with customers'
IFRS15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. Management have determined that, given the industry in which the Group operates, the significant majority of the Group's revenue come from products sales made direct to customers at standard prices, and estimates are already made of anticipated returns, the new standard does not have a material impact on the timing or measurement of revenue recognition in comparison to the standard previously applied.
1.3 Going concern
The Group has significant financial resources and has access to further debt funding should it be required. The business continues to trade well and Management considers it to be well positioned going into its critical trading period. The Group operates a rolling monthly reforecast providing trading and financial visibility to the financial year end.
Accordingly, and further to due consideration of all financial and commercial information available, the Directors have concluded that the Group has adequate resources to continue to trade for the foreseeable future and it is therefore appropriate to continue to adopt the going concern basis of accounting in the preparation of this consolidated interim financial information.
1.4 Basis of consolidation
Subsidiaries
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated.
1.5 Foreign currency
International transactions that are denominated in foreign currencies are recorded in the respective foreign currencies, and translated into the functional currency of the Group, Sterling, at the exchange rate ruling at the date of the transaction. Translational accounting gains and losses are recognised in the income statement in the period they arise.
Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to the functional currency at the exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
Functional currency
The consolidated financial information is presented in Sterling which is the Company's functional currency.
1.6 Classification of financial instruments issued by the Group
Following the adoption of IAS 32, financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions:
(a) they include no contractual obligations upon the Company (or Group as the case may be) to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Company (or Group); and
(b) where the instrument will or may be settled in the Company's own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company's own equity instruments or is a derivative that will be settled by the Company exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company's own shares, the amounts presented in this financial information for called up share capital and share premium account exclude amounts in relation to those shares.
1.7 Non-derivative financial instruments
Non-derivative financial instruments comprise investments in trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.
Trade and other receivables
Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses.
Trade and other payables
Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose only of the cash flow statement.
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributed transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost using the effective interest method.
1.8 Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.
Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.
Depreciation is charged to the income statement on either a straight-line basis or a reducing balance basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows:
· Freehold property 50 years straight line
· Plant and equipment 4-5 years' straight line
· Fixtures and fittings 20-25% on reducing balance
· Motor vehicles 25% on reducing balance
· Computer equipment 3-5 years' straight line
Depreciation methods, useful lives and residual values are reviewed at each balance sheet date.
Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Leased assets acquired by way of finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and less accumulated impairment losses. Lease payments are accounted for as described below in 1.15.
1.9 Business combinations
All business combinations are accounted for by applying the acquisition method. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group.
The Group measures goodwill at the acquisition date as:
· the fair value of the consideration transferred; plus
· the fair value of the existing equity interest in the acquiree; less
· the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
Costs related to the acquisition are expensed as incurred.
Any contingent consideration payable is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration are recognised in profit or loss.
Goodwill impairment testing
Goodwill is not amortised but tested annually for impairment. For the purpose of impairment testing, the Goodwill is allocated to cash-generating units, or ("CGU"). Subject to an operating segment ceiling test, for the purposes of Goodwill impairment testing, CGUs to which Goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which Goodwill is monitored for internal reporting purposes.
1.10 Intangible assets
Software platform
Computer software development costs that generate economic benefits beyond one year and meet the development asset recognition criteria as laid out in IAS 38 'Intangible Assets', are capitalised as Intangible assets.
These costs include the payroll costs of employees directly associated with the development, and other direct external material and service costs. Costs are capitalised only where there is an identifiable development that will bring future economic benefit. All other website and maintenance costs are expenses in the statement of comprehensive income.
Capitalised software development costs are amortised over their estimated useful lives and charged to administrative expenses in the statement of comprehensive income.
Other intangible assets
Expenditure on internally generated Goodwill and brands is recognised in the income statement as an expense as incurred.
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and less accumulated impairment losses.
Amortisation
Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life and Goodwill are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows:
· Brand 10 years; and
· Software Platform 3-8 years
1.11 Inventories
Inventories are stated at the lower of cost and net realisable value ("NRV"). Cost is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and other costs in bringing them to their existing location and condition. Stock is neither fashionable nor perishable.
A provision is made in respect of inventories as follows:
· 100% against returns stock found to be faulty that is retained to be used for spare parts on the basis there is no direct NRV value; and
· a provision based on the previous 12-months retail experience for the expected product loss on dealing with returns stock.
1.12 Impairment excluding inventories and deferred tax assets
Financial assets (including receivables)
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.
An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows. The effect of discounting is not material. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
Non-financial assets
The carrying amounts of the Group's non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. For Goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit"). The Goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units, or ("CGU"). Subject to an operating segment ceiling test, for the purposes of Goodwill impairment testing, CGUs to which Goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which Goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination.
An impairment loss would be recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. No impairments have been recognised in the periods presented.
1.13 Employee benefits
Defined contribution plans
A defined contribution plan is a post-employment benefit plan under which the Group pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement in the periods during which services are rendered by employees.
Share-based payments
The Group operates share option plans for qualifying employees of the Group. The fair value of the shares is determined using the Black Scholes option pricing model and is expensed in the statement of comprehensive income on a straight-line basis over the vesting period after allowing for an estimate of the number of shares that are expected to vest. The level of vesting is reviewed annually and the expense adjusted to reflect any changes in estimates.
1.14 Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability.
1.15 Revenue
Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer. Revenue is measured at the fair value of the consideration received, including freight charges and duty where applicable, excluding discounts, rebates, VAT and other sales taxes or duty. Carriage income is recognised on recognition of the associated product sale. Returns are dealt with on receipt of the product into the warehouse, which triggers an automatic credit.
The Group offers retail point of sale credit through an agreement with an external credit provider. The Group does not retain any credit risk and commissions are recognised on recognition of the credit sale.
1.16 Expenses
Operating lease payments
Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense.
Finance lease payments
Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Exceptional items
Items which are significant by virtue of their size or nature and which are considered to be non-recurring are classified as exceptional operating items. Such items are included within the appropriate consolidated income statement category but are highlighted separately in the notes to the financial information. Exceptional operating items are excluded from the profit measures used by the Board to monitor and measure the underlying performance of the Group.
Government and other forms of grant
Government and other grants from third parties are recognised where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognised as a reduction in the costs incurred, on a systematic basis over the periods that the costs, for which it is intended to compensate, are expensed. Where the grant relates to an asset, it is recognised on a systematic basis over the UEL of the related asset.
Financing income and expenses
Financing expenses comprise interest payable and finance leases recognised in profit or loss using the effective interest method, unwinding of the discount on provisions, and net foreign exchange losses that are recognised in the income statement (see foreign currency accounting policy). Financing income comprises interest receivable on funds invested and net foreign exchange gains.
Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method.
1.17 Taxation
Tax on the profit or loss for the year comprises current and deferred tax.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A temporary difference on the initial recognition of goodwill is not provided for. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised.
1.18 Adopted IFRS not yet applied
Various new or revised accounting standards have been issued which are not yet effective. The key standard to affect the Group will be IFRS 16 'Leases', effective for year ending 2020. The Group does intend to early adopt.
IFRS 16 fundamentally changes the accounting for leases by lessees and eliminates the current IAS 17 dual accounting model, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases and, instead, introduces a single, on-balance sheet accounting model that is similar to current finance lease accounting.
The Group has four leased properties (in York, Manchester, Sweden and Germany) and a small number of warehouse equipment items on operating leases scheduled to be repaid in full in the financial year ended February 2019, and as such will only be relevant for comparative purposes.
On the adoption of IFRS 16, lease agreements will give rise to both a right-of-use asset and a lease liability for future lease payables. The right-of-use asset will be depreciated on a straight-line basis over the life of the lease. Interest will be recognised on the lease liability, resulting in a higher interest expense in the earlier years of the lease term. The total expense recognised in the Income Statement over the life of the lease will be unaffected by the new standard. However, IFRS 16 will result in the timing of lease expense recognition being accelerated for leases which would be currently accounted for as operating leases.
There will be no impact on cash flows, although the presentation of the Cash Flow Statement will change significantly, with an increase in cash flows from operating activities being offset by an increase in cash flows from financing activities. The Group is working to ensure that relevant data is collected and key assumptions such as discount rates are duly considered and agreed. The Group will take all necessary steps to comply with the requirements of IFRS 16 and expects to make further disclosure in the next Annual Report.
1.19 Segmental Reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components. The Group's Chief Operating Decision Maker has been identified as the Board of Directors.
2 Expenses
Included in profit/loss are the following:
6 months ended 31 August
2018
6 months ended 31 August
2017
Year ended
28 February 2018
£000
£000
£000
Depreciation of tangible fixed assets
452
293
645
Amortisation of intangible assets
531
395
852
Amortisation of government grants
17
20
31
Loss on disposal of property, plant and equipment
-
-
6
Share based payment charge
(76)
29
69
3 Earnings per share
Basic earnings per share is calculated by dividing the net profit or loss for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
Diluted profit per share is calculated by dividing the net profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares into ordinary shares.
6 months ended
31 August
2018
6 months ended 31 August
2017
Year ended
28 February 2018
(Loss)/profit attributable to equity shareholders of the parent (£'000)
(368)
4
1,386
Basic weighted average number of shares
20,906,055
20,542,973
20,713,281
Dilutive potential ordinary shares
20,733
93,213
88,155
_________
_________
_________
Diluted weighted average number of shares
20,926,788
20,636,186
20,801,436
_________
_________
_________
Basic (loss)/profit per share
(1.8p)
0.0p
6.7p
Diluted (loss)/profit per share
(1.8p)
0.0p
6.7p
4 Finance expense
6 months ended
31 August
2018
6 months ended 31 August
2017
Year ended
28 February 2018
£000
£000
£000
Bank interest
129
60
169
Finance leases
1
2
9
Net foreign exchange loss
74
33
265
Fair value on deferred consideration
10
2
18
Total finance expense
214
97
461
Bank interest comprises £31,400 of Trade finance loan interest and £28,300 of term loan interest.
5 Taxation
6 months ended
31 August
2018
6 months ended 31 August
2017
Year ended
28 February 2018
£000
£000
£000
Current tax expense/(credit)
4
(2)
(10)
Deferred tax (credit)/expense
(181)
(71)
124
Total tax (credit)/expense
(177)
(73)
114
The deferred tax liability has been decreased by £133,000 to £516,000. The £133,000 movement consists of a P&L credit of £181,000 and a charge to other comprehensive income of £48,000. The decrease in the deferred tax liability is due to a deferred tax asset being recognised on tax losses arising in the interim period which will unwind against future taxable profits. The £48,000 charge to other comprehensive income is due to a reversal of a deferred tax asset recognised in relation to share options which were exercised in the interim period.
The corporation tax rate applicable to the company was 19% in the period to 31 August 2018.
6 Property, plant and equipment
Freehold property
Plant and
equipment
Fixtures
and fittings
Motor vehicles
Computer equipment
Total
£000
£000
£000
£000
£000
£000
Cost
Balance at 1 September 2017
5,634
655
2,378
64
520
9,251
Additions
-
132
913
29
91
1,165
Disposals
-
-
-
(31)
-
(31)
Revaluation
1,716
-
-
-
-
1,716
Balance at 28 February 2018
7,350
787
3,291
62
611
12,101
Additions
-
-
156
-
53
209
Balance at 31 August 2018
7,350
787
3,447
62
664
12,310
Depreciation
Balance at 1 September 2017
28
365
985
13
310
1,701
Charge for the period
-
79
245
8
48
380
Disposals
-
-
-
(6)
-
(6)
Revaluation
(28)
-
-
-
-
(28)
Balance at 28 February 2018
-
444
1,230
15
358
2,047
Charge for the period
74
76
243
6
53
452
Balance at 31 August 2018
74
520
1,473
21
411
2,499
Net book value as at 31 August 2018
7,276
267
1,974
41
253
9,811
Net book value as at 1 March 2018
7,350
343
2,061
47
253
10,054
Net book value as at 31 August 2017
5,606
290
1,393
51
210
7,550
7 Intangible assets
Goodwill
Software
platform
Brand
Total
£000
£000
£000
£000
Cost
Balance at 1 September 2017
1,848
5,613
564
8,025
Additions
-
925
-
925
Balance at 28 February 2018
1,848
6,538
564
8,950
Additions
-
1,104
-
1,104
Balance at 31 August 2018
1,848
7,642
564
10,054
Amortisation
Balance at 1 September 2017
-
1,805
310
2,115
Amortisation for the period
-
429
28
457
Balance at 28 February 2018
-
2,234
338
2,572
Amortisation for the period
-
503
28
531
Balance at 31 August 2018
-
2,737
366
3,103
Net book value as at 31 August 2018
1,848
4,905
198
6,951
Net book value as at 1 March 2018
1,848
4,304
226
6,378
Net book value as at 31 August 2017
1,848
3,808
254
5,910
8 Inventories
31 August
2018
31 August
2017
28 February
2018
£000
£000
£000
Finished goods
21,326
13,001
17,055
The cost of inventories recognised as an expense and included in cost of sales in the period ended 31 August 2018 amounted to £30.3m, and in the period ended 31 August 2017 totalled £22.0m.
9 Trade and other receivables
31 August
2018
31 August
2017
28 February 2018
£000
£000
£000
Trade receivables
2,837
1,713
1,645
Prepayments
988
566
1,059
3,825
2,279
2,704
Trade receivables includes cash lodged with payment providers, Amazon and the Group's consumer finance partner, and UK and International education and trade accounts where standard credit terms are 30-days.
10 Other interest-bearing loans and borrowings
31 August
2018
31 August
2017
28 February 2018
£000
£000
£000
Non-current liabilities
Bank loans
4,343
4,889
4,616
Finance lease liabilities
-
4
-
4,343
4,893
4,616
Current liabilities
Bank loans and overdraft
5,909
2,842
3,890
Finance lease liabilities
3
67
23
5,912
2,909
3,913
Total liabilities
Bank loans and overdraft
10,252
7,731
8,506
Finance lease liabilities
3
71
23
10,255
7,802
8,529
Bank loans comprise a Trade Finance facility, and term loans all provided by the Group's bankers, HSBC, and are secured against the by fixed and floating charges over the Group's assets. All borrowings are denominated in Sterling.
The interest rate on 180-day import loans drawn under the Trade Finance agreement is 2.45% per annum over HSBC's Sterling Base Rate, and on an overdraft if drawn, is 3.25% over base. Interest on import loans is paid at the maturity of the relevant loan. Interest on an overdraft would be paid monthly in arrears. Trade finance and overdraft facilities were approved for renewal in May 2018 for a 12-month period.
There are two term loans that were drawn around the time of the freehold property acquisition in June 2017:
· The first loan was for £3,727,500 equating to a 70% LTV against the property valuation and is a five-year loan with capital repayments scheduled over 20-years, and interest is 2.04% over LIBOR; and
· The second loan was for £1,797,500 and is a five-year loan with interest of 2.85% over LIBOR
11 Trade and other payables
31 August
2018
31 August
2017
28 February 2018
£000
£000
£000
Current
Trade payables
11,761
4,934
7,325
Accruals and deferred income
1,301
1,248
1,456
Contingent consideration
393
393
393
Government grants
28
28
35
Other creditors including tax and social security
1,391
1,290
1,707
14,874
7,893
10,916
Non-current
Accruals and deferred income
47
187
169
Contingent consideration
365
740
555
Government grants
15
17
27
427
944
751
Accruals at 28 February 2018 included £446,000 of rent accrued but not paid, being the difference in cash paid and the average rent charge as expensed, as per the commercial agreement reached with the landlord of the leasehold distribution centre at Clifton Moor, York. On 21 March 2018 the Group entered into a new 15-year lease with a 10-year clean break clause and this accrual was released in full resulting in a £421,000 credit that is included in administrative expenses.
Contingent consideration is due in relation to the acquisition of the software development team in January 2017 and comprises ten quarterly instalments of £100,000 payable on 1st of January/April/July/October. These amounts are valued in the accounts at fair value and subsequently amortised. Contingent consideration is valued at fair value.
Government grants are being spread over the useful economic life of the associated asset, relate to Regional Growth Fund and Leeds City Enterprise Partnership grants towards the acquisition of various capital items. Grant conditions exist linked to job creation, and these criteria have been satisfied.
The Directors consider the carrying amount of other 'trade and other payables' to approximate their fair value.
12 Share based payments
The Group operates share option plans for qualifying employees of the Group. Options in the plans are settled in equity in the Company and are subject to vesting conditions.
In May and June 2018 options totalling 78,207 shares vested including 9,978 shares to Gareth Bevan (CCO) and Chris Scott (CFO), taking their shareholdings to 110,360 and 100,440 respectively. Under the Director Cash Plan, Andrew Wass (CEO) exercised his entitlement to an award of £72,041, settled in cash.
In June 2018 awards totalling 7,403 shares were made taking the number of shares under option to 20,733. These shares have an exercise price equal to the nominal value of the shares (10p) that the Group will subsidise by way of a bonus, and subject to certain conditions will be automatically exercised on the third anniversary of the date of grant as prescribed in the scheme rules.
13 Related party transactions
There were no significant related party transactions during the six months to 31 August 2018.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDIR DELFFVBFBFBZ
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