REG - Findel PLC - Final Results <Origin Href="QuoteRef">FDL.L</Origin> <Origin Href="QuoteRef">SAFE.L</Origin> - Part 2
16/07/2015 11:29
- Part 2: For the preceding part double click ID:nRSR4953Qa
- - 861 861
At 27 March 2015 126,442 403 92,954 760 (42) (137,807) 82,710
The total equity is attributable to the equity shareholders of the parent
company Findel plc.
Findel plc
Notes to the Group Financial Information
1 Basis of preparation of consolidated financial information
The financial information set out herein does not constitute the Company's
statutory financial statements for the periods ended 27 March 2015 or 28 March
2014, but is derived from those financial statements. Statutory financial
statements for 2014 have been delivered to the Registrar of Companies, and
those for 2015 will be delivered in due course. The financial statements were
approved by the Board of directors on 17 June 2015. The auditors have reported
on those financial statements; their reports were (i) unqualified, (ii) did
not include a reference to any matters to which the auditors drew attention by
way of emphasis without qualifying their report and (iii) did not contain a
statement under Section 498 (2) or (3) of the Companies Act 2006.
Copies of the Company's statutory financial statements will be available on
the Group's corporate website. Additional copies will be available upon
request from Findel plc, 2 Gregory Street, Hyde, Cheshire, SK14 4TH.
The Group financial information has been prepared in accordance with
International Financial Reporting Standards ("IFRS") as adopted for use within
the European Union and in accordance with the accounting policies included in
the Annual Report for the period ended 28 March 2014 except as stated below.
Impact of accounting standards adopted
IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of Interests
in Other Entities have been adopted in the Group's consolidated financial
statements in the current period. There is no impact on the consolidated
financial statements in either the current or prior periods as a result of
this adoption, other than certain disclosure requirements.
Discontinued operations
Kleeneze Limited
The Group completed the disposal of its network marketing Company, Kleeneze
Limited on 24 March 2015. Consequently it met the criteria to be accounted for
as a discontinued operation as defined in IFRS 5, "Non-current assets held for
sale and discontinued operations". Results from this discontinued operation
have therefore been separated out in the consolidated income statement in both
the current and prior periods to enhance the comparability of the ongoing
businesses.
Going concern
In determining whether the Group's financial statements for the period ended
27 March 2015 can be prepared on a going concern basis, the directors
considered all factors likely to affect its future development, performance
and its financial position, including cash flows, liquidity position and
borrowing facilities and the risks and uncertainties relating to its business
activities in the current challenging economic climate.
The directors have reviewed the trading and cash flow forecasts as part of
their going concern assessment, including reasonable downside sensitivities
which take into account the uncertainties in the current operating environment
including amongst other matters demand for the Group's products, its available
financing facilities, and movements in interest rates. Although at certain
times the level of headroom reduces to a level which is less than the
directors would regard as desirable in the long term, the directors believe it
to be sufficient and have identified controllable mitigating actions that
could be implemented if required. The Group's banking facilities mature on 31
December 2016 and therefore management will seek to refinance these facilities
in the coming year.
Taking into account the above uncertainties and circumstances, the directors
formed a judgement that there is a reasonable expectation that the Company and
the Group have adequate resources to continue in operational existence for the
foreseeable future.
Accordingly, they continue to adopt the going concern basis in preparing the
Group's annual consolidated financial statements
2 Segmental analysis
2015
Loss after tax
Continuing operations Discontinued operation Group
Express Gifts Findel Education Kitbag Overseas Sourcing Total Kleeneze Total
£000 £000 £000 £000 £000 £000 £000
Reportable segment results 33,452 4,199 (1,200) 145 36,596 (142) 36,454
Exceptional items (3,335) (23,701) (1,046) - (28,082) (19,127) (47,209)
Operating profit/(loss) after exceptional items 30,117 (19,502) (2,246) 145 8,514 (19,269) (10,755)
Finance costs (includes £136,000 exceptional finance costs) (10,233) - (10,233)
Loss before tax (1,719) (19,269) (20,988)
Tax (4,413) 140 (4,273)
Loss after tax (6,132) (19,129) (25,261)
2014
Profit after tax
Continuing operations Discontinued operations Group
Express Gifts Findel Education Kitbag Overseas Sourcing Total Kleeneze Healthcare Total Total
£000 £000 £000 £000 £000 £000 £000 £000 £000
Reportable segment results 30,679 4,092 (4,106) (93) 30,572 1,306 45 1,351 31,923
Exceptional items (2,756) (1,020) (10,799) - (14,575) (3,700) (239) (3,939) (18,514)
Operating profit/(loss) after exceptional items 27,923 3,072 (14,905) (93) 15,997 (2,394) (194) (2,588) 13,409
Finance costs (includes £472,000 exceptional finance costs) (10,348) - - - (10,348)
Profit/(loss) before tax 5,649 (2,394) (194) (2,588) 3,061
Tax (1,857) (738) - (738) (2,595)
Profit/(loss) after tax 3,792 (3,132) (194) (3,326) 466
3 Exceptional items
The following is an analysis of the exceptional items arising during the
period.
2015 2014
£000 £000
Continuing operations
Exceptional trading costs
Restructuring costs 1,725 2,839
Onerous contracts 1,138 2,768
Onerous lease provisions 967 798
Express Gifts financial services redress 3,738 2,000
Legacy VAT issues (1,026) -
Pension scheme service costs 1,640 -
Impairment of goodwill 19,900 -
Impairment of intangible assets - 6,170
28,082 14,575
Exceptional financing costs
Debt refinancing costs 136 472
28,218 15,047
Tax credit in respect of exceptional items (1,462) (2,080)
Total 26,756 12,967
Discontinued operations
Excess of proceeds over assets disposed of (641) (261)
Pension settlement cost - 500
(Gain)/loss on disposal (641) 239
Restructuring costs - (100)
Stock write down in respect of disposal 476 -
Legacy VAT issues 247 -
Impairment of other intangible assets 19,045 3,800
19,127 3,939
Tax credit in respect of exceptional items (152) (737)
Total 18,975 3,202
Group total 45,731 16,169
Restructuring costs in the current period of £1,725,000 (2014: £2,739,000), of
which £nil (2014: £100,000 credit relating to the release of redundancy
accruals) related to discontinued operations, relate to management changes,
redundancies and costs associated with remedying legacy poor systems and
controls, as well as organisational changes made in relation to compliance
with new FCA requirements.
Costs of £1,138,000 (2014: £2,768,000), which includes £485,000 (2014:
£110,000) in respect of impairment of property, plant and equipment, have been
incurred in the current period in relation to contracts that have become loss
making.
Costs of £967,000 (2014: £798,000) have been provided in the current period in
respect of onerous lease provisions.
As part of its enhanced oversight work, Express Gifts has recently identified
circumstances where we may redress certain customers as a result of flaws in
some legacy processes. Charges of £3,738,000 (2014: £2,000,000) have been
recognised during the period in respect of this activity which includes
£738,000 (2014: £2,000,000) for any remaining elements of PPI.
A credit of £1,026,000 has been recorded in relation to the settlement of an
historic VAT claim with HMRC which was settled during the period.
A past service cost of service cost of £2,340,000 has been recorded in the
current period in respect of additional liabilities arising from the
equalisation of normal retirement ages for members in the Findel Education
section of the Findel Group Pension Fund. This has been partially offset by a
settlement gain of £700,000 in respect of a Total Pension Increase Exchange
('TPIE') exercise carried out during the year.
Impairment of goodwill relates to a write down of goodwill allocated to the
Findel Education cash generating unit ('CGU').
Costs of £136,000 (2014: £472,000) have been incurred the period in respect of
the extension to the Group's lending facilities.
Impairment of other intangible assets relates to a £6,170,000 write down of
indefinite lived brand names allocated to Kitbag CGU recognised in the prior
period.
Items specifically related to discontinued operations
A gain of £641,000 has been recorded in the current period in respect of the
disposal of Kleeneze Limited, which completed on 24 March 2015.This gain is
shown net of a credit of £2,404,000 in respect of deferred tax liabilities
released as a result of the disposal. In the prior period a loss of £239,000
was recorded in respect of the disposal of Nottingham Rehab Limited, which
completed on 19 April 2013.
A loss of £476,000 has been recorded in the current period in respect of the
write down of stock held by Kleeneze immediately prior to its disposal.
Costs of £247,000 have been recorded in respect of the write down of amounts
previously recognised in respect of various legacy VAT issues in Kleeneze
which are no longer considered recoverable.
Impairment of other intangible assets relates to a £19,045,000 (2014:
£3,800,000) write down of indefinite lived brand names allocated to Kleeneze
CGU.
4 Discontinued operations
Kleeneze Limited ('Kleeneze')
The Group completed the sale of its network marketing company, Kleeneze to
Trillium Pond A.G. (a subsidiary of CVSL Inc.) on 24 March 2015 for gross
consideration of £3.4m. Management are of the belief that the disposal of
Kleeneze will enable the Group to reduce its indebtedness and focus on core
operations.
A profit on disposal of £0.6m, representing the difference between the
proceeds received net of costs of disposal, and the assets disposed of has
been recorded within exceptional items.
Kleeneze's results for the period from 29 March 2014 to 24 March 2015 and for
the period ended 28 March 2014 have been presented to show the discontinued
operation separately from continuing operations and are summarised below:
Period ended 24.3.15 2014
£000 £000
Revenue 36,557 46,504
Expenses* (55,826) (48,898)
Loss before tax (19,269) (2,394)
Tax credit 140 (738)
Loss for the year (19,129) (3,132)
*including exceptional charges of £19,768,000 (2014: £3,700,000) and a profit
on disposal (net of release of deferred tax liabilities of £2,404,000) of
£641,000.
The major classes of assets and liabilities of Kleeneze at disposal on 24
March 2015 and at 28 March 2014 were as follows:
24.3.15 2014
£000 £000
Assets
Intangible assets - 19,045
Property, plant and equipment 414 556
Inventory 4,371 7,199
Trade and other receivables 2,793 3,196
Cash 1,316 7,493
8,894 37,489
Liabilities
Deferred tax liability (2,404) (2,404)
Trade and other payables (4,097) (10,405)
(6,501) (12,809)
Net assets of disposal group 2,393 24,680
The net cash flows from/(used in) Kleeneze Limited were as follows:
Period ended 24.3.15 2014
£000 £000
Operating cash flows 2,115 (1,209)
Investing cash flows* 3,433 2,080
Financing cash flow (10,005) (17,500)
Net cash outflow (4,457) (16,629)
*includes proceeds (net of cash of cash held in subsidiary) of £1,720,000.
Nottingham Rehab Limited ('NRS')
The Group completed the disposal of its Healthcare Division through the sale
of NRS on 19 April 2013 which is also disclosed as discontinued in the income
statement for the period ended 28 March 2014.
The gross consideration payable upon completion was £24.0 million, comprised
of a cash payment of £22.6 million to Findel plc and a payment of £1.4 million
into an escrow account to satisfy the estimated value of NRS' debt to the
Findel Group Pension Fund. This valuation was completed in August 2013 and a
further £0.1m was paid to Findel plc (being the excess over the value of NRS's
debt to the Findel Group Pension Fund).
There were few synergies between NRS and the rest of the Group, and
consequently the Board believed that Findel's cash resources were better
employed in developing the remainder of the Group and that NRS' interests were
best served under a new owner.
The excess of proceeds over the value of assets disposed of was £261,000. This
was offset by a pension settlement cost of £500,000, relating to the buyout of
members of the Findel Education section of the Findel Group Pension Fund that
were employed by NRS, which took place as a result of the sale of the
business, and resulted in a loss on disposal of £239,000 being recognised in
the consolidated income statement for the period ended 28 March 2014.
NRS' results for the period from 30 March 2013 to 19 April 2013 were presented
to show the discontinued operation separately from continuing operations and
are summarised as follows:
Period to 19.4.13
£000
Revenue 5,940
Expenses* (6,134)
Profit before tax (194)
Tax expense -
Profit for the year (194)
*including loss on disposal of £239,000.
The major classes of assets and liabilities of NRS at disposal on 19 April
2013 were as follows:
19.4.13
£000
Assets
Goodwill 2,308
Intangible assets 1,395
Property, plant and equipment 1,069
Deferred tax asset 1,544
Inventory 6,653
Trade and other receivables 11,514
Cash 6,057
30,540
Liabilities
Trade and other payables 8,512
8,512
Net assets of disposal group 22,028
The net cash flows from/(used in) NRS were as follows:
19.4.13
£000
Operating cash flows (1)
Investing cash flows* 15,461
Financing cash flow -
Net cash inflow 15,460
*represents proceeds (net of cash of cash held in subsidiary).
5 Tax expense
2015 2014
£000 £000
Current tax expense:
Current period (UK tax) 2,957 1,726
Current period (overseas tax) 18 19
Adjustments in respect of prior periods (UK tax) (265) (1,208)
2,710 537
Deferred tax expense:
Origination and reversal of timing differences 1,217 (476)
Adjustments in respect of prior periods 486 -
Effect of tax rate change on opening balance - 1,796
1,703 1,320
Tax expense from continuing operations 4,413 1,857
Tax expense from continuing operations excludes tax income in respect of the
Group's discontinued operation as follows:
2015 2014
£000 £000
Current tax (income)/charge (140) 1,812
Deferred tax (income) (2,404)* (1,074)
(2,544) 738
*Relates to the release of deferred tax liabilities on disposal and is
recorded within the profit on disposal of £641,000 recorded within exceptional
items relating to discontinued operation.
6 Earnings per share
Earnings per share figures for the period ended 28 March 2014 have been
restated to present Kleeneze as a discontinued operation.
From continuing operations (Loss)/profit attributable to ordinary shareholders
2015 2014
£000 £000
Net profit attributable to equity holders for the purposes of basic earnings per share (6,132) 3,792
Other exceptional items (net of tax) (26,620) (12,495)
Exceptional finance costs (net of tax) (136) (472)
Net profit attributable to equity holders for the purpose of adjusted earnings per share 20,624 16,759
Weighted average number of shares
Ordinary shares in issue at start of the period 85,942,534 85,942,534
Effect of shares issued during the period 359,890 -
Effect of own shares held (1,130,487) (1,135,110)
Weighted average number of shares - basic 85,171,937 84,807,424
Effect of outstanding share options 5,425,216 7,609,609
Effect of convertible shares 8,343,935 8,343,935
Weighted average number of shares - diluted 98,941,088 100,760,968
Earnings per share
Earnings per share - basic (7.20)p 4.47p
Earnings per share - adjusted* basic 24.21p 19.76p
Earnings per share - diluted (7.20)p 3.76p
Earnings per share - adjusted* diluted 20.84p 16.63p
* Adjusted to remove the impact of exceptional items.
From discontinued operations Loss attributable to ordinary shareholders
2015 2014
£000 £000
Net loss attributable to equity holders for the purposes of basic earnings per share (19,129) (3,326)
Other exceptional items (net of tax) (18,975) (3,202)
Exceptional finance costs (net of tax) - -
Net loss attributable to equity holders for the purpose of adjusted earnings per share (154) (124)
Weighted average number of shares
Ordinary shares in issue at start of the period 85,942,534 85,942,534
Effect of shares issued during the period 359,890 -
Effect of own shares held (1,130,487) (1,135,110)
Weighted average number of shares - basic 85,171,937 84,807,424
Effect of outstanding share options 5,425,216 7,609,609
Effect of convertible shares 8,343,935 8,343,935
Weighted average number of shares - diluted 98,941,088 100,760,968
Earnings per share
Loss per share - basic (22.46)p (3.92)p
Loss per share - adjusted* basic (0.18)p (0.15)p
Loss per share - diluted (22.46)p (3.29)p
Loss per share - adjusted* diluted (0.16)p (0.13)p
* Adjusted to remove the impact of exceptional items.
Total attributable to ordinary shareholders (Loss)/earnings attributable to ordinary shareholders
2015 2014
£000 £000
Net profit/(loss) attributable to equity holders for the purposes of basic earnings per share (25,261) 466
Other exceptional items (net of tax) (45,595) (15,697)
Exceptional finance costs (net of tax) (136) (472)
Net profit attributable to equity holders for the purpose of adjusted earnings per share 20,470 16,635
Weighted average number of shares
Ordinary shares in issue at start of the period 85,942,534 85,942,534
Effect of shares issued during the period 359,890 -
Effect of own shares held (1,130,487) (1,135,110)
Weighted average number of shares - basic 85,171,937 84,807,424
Effect of outstanding share options 5,425,216 7,609,609
Effect of convertible shares 8,343,935 8,343,935
Weighted average number of shares - diluted 98,941,088 100,760,968
Earnings per share
(Loss)/earnings per share - basic (29.66)p 0.55p
Earnings per share - adjusted* basic 24.03p 19.61p
(Loss)/earnings - diluted (29.66)p 0.47p
Earnings per share - adjusted* diluted 20.68p 16.50p
* Adjusted to remove the impact of exceptional items.
The earnings per share attributable to convertible ordinary shareholders is
£nil.
7 Goodwill and other intangible assets
(a) Goodwill
Cost £000
At 29 March 2013 44,991
At 28 March 2014 44,991
At 27 March 2015 44,991
Impairment
At 29 March 2013 (8,400)
At 28 March 2014 (8,400)
Impairment (19,900)
At 27 March 2015 (28,300)
Carrying amount
Net book value at 27 March 2015 16,691
Net book value at 28 March 2014 36,591
Goodwill acquired in a business combination is allocated, at acquisition, to
the cash generating units (CGUs) that are expected to benefit from that
business combination. After recognition of impairment losses, the carrying
amount of goodwill has been allocated as follows:
2015 2014
£000 £000
Express Gifts 320 320
Findel Education 16,371 36,271
16,691 36,591
The amount of goodwill that is tax deductible is £2,367,000 (2014:
£2,367,000).
(b) Other intangible assets
Software and IT Customer
development costs Brand names relationships Total
£000 £000 £000 £000
Cost
At 29 March 2013 15,474 50,175 20,490 86,139
Additions 2,263 - - 2,263
At 28 March 2014 17,737 50,175 20,490 88,402
Additions 1,854 - - 1,854
Disposals - (22,845) - (22,845)
At 27 March 2015 19,591 27,330 20,490 67,411
Accumulated amortisation and impairment
At 29 March 2013 10,513 - 11,325 21,838
Amortisation for the period 1,918 - 930 2,848
Impairment loss - 9,970 - 9,970
At 28 March 2014 12,431 9,970 12,255 34,656
Amortisation for the period 2,099 - 930 3,029
Impairment loss - 19,045 - 19,045
Disposals - (22,845) - (22,845)
At 27 March 2015 14,530 6,170 13,185 33,885
Carrying amount
Net book value at 27 March 2015 5,061 21,160 7,305 33,526
Net book value at 28 March 2014 5,306 40,205 8,235 53,746
Brand names, which arise from the acquisition of businesses, are deemed to
have an indefinite life, and therefore are subject to annual impairment tests,
on the basis that they are expected to be maintained indefinitely and are
expected to continue to drive value for the Group.
The amortisation period for customer relationships, which arose from the
acquisition of businesses, is between 2 and 20 years. Management do not
consider that any customer relationships are individually material.
Brand names acquired in a business combination are allocated, at acquisition,
to the cash generating units (CGUs) that are expected to benefit from that
business combination. After recognition of impairment losses, the carrying
amount of brand names has been allocated as follows:
2015 2014
£000 £000
Continuing operations
Express Gifts 1,058 1,058
Findel Education 20,102 20,102
Discontinued operation
Kleeneze - 19,045
21,160 40,205
(c) Impairment testing
The Group tests goodwill and indefinite lived brand names for impairment
annually, or more frequently if there are indicators of impairment.
Continuing operations
The recoverable amounts of the Express Gifts, Findel Education and Kitbag CGUs
are determined from value in use calculations.
Significant judgements, assumptions and estimates
In determining the value in use of CGUs it is necessary to make a series of
assumptions to estimate the present value of future cash flows. In each case,
these key assumptions have been made by management reflecting past experience,
current trends, and where applicable, are consistent with relevant external
sources of information. The key assumptions are as follows:
Operating Cash flows
Management has prepared cash flow forecasts for a three year period derived
from the approved budget for financial year 2015/16. These forecasts include
assumptions around sales prices and volumes, specific customer relationships
and operating costs and working capital movements.
Risk adjusted discount rates
The pre-tax rates used to discount the forecast cash flows are between 12.2%
and 25.3% (2014: 12.5% and 18.1%). These discount rates are derived from the
Group's weighted average cost of capital as adjusted for the specific risks
related to each CGU.
Long term growth rate
To forecast beyond the detailed cash flows into perpetuity, a long term
average growth rate of 2.5% (2014: 2.5%) has been used. This is not greater
than the published International Monetary Fund average growth rate in gross
domestic product for the next five year period in the territories where the
CGUs operate.
Results
The estimated recoverable amount of the Express Gifts CGU exceeds its carrying
value by approximately £19,500,000 (2014: £23,200,000) and as such no
impairment was necessary.
The recoverable amount of the Kitbag CGU is approximately equal to the
carrying value of its residual tangible asset base and consequently, the
£6,170,000 impairment of indefinite lived brand names recorded in the prior
period remains appropriate and no further impairment is required.
The carrying amount of the Findel Education CGU was determined to be higher
than the recoverable amount and an impairment loss of £19,900,000 was
recognised. The impairment loss was fully allocated to goodwill and is
included in exceptional items. Following the impairment loss recognised, the
recoverable amount is equal to the carrying amount. Therefore, any adverse
movement in a key assumption would lead to a further impairment. Sensitivity
analysis is included below.
Sensitivity analysis
The results of the Group's impairment tests are dependent upon estimates and
judgements made by management, particularly in relation to the key assumptions
described above. A reasonably possible change in key assumptions could result
in further impairment losses being necessary in the Findel Education and
Kitbag CGUs. Sensitivity analysis to potential changes in operating cash flows
and risk adjusted discount rates has therefore been reviewed.
The table below shows the risk adjusted discount rate and forecast operating
cash flow assumptions used in the calculation of value in use for the Findel
Education and Kitbag CGUs and the impact of changes in these key assumptions
on the level of impairment loss required:
CGU Findel Education Kitbag
Impairment recognised in the period (£000) (19,900) -
Assumptions used in the calculation of value in use
Pre-tax discount rate 16.5% 25.3%
Total pre-discounted forecast operating cash flow (£000) 85,249 17,183
Additional impairment required as a result of changes to key assumptions
1% increase in pre-tax discount rate (5,027) (359)
5% decrease in total pre-discounted forecast operating cash flow (2,771) (207)
Based on the results of the impairment test for the Express Gifts CGU,
management are satisfied that there is sufficient headroom such that a
reasonably possible change in assumption would not lead to an impairment.
Consequently, no sensitivity analysis has been disclosed.
Discontinued operation
Kleeneze CGU
As part of the interim financial reporting process for the period ended 26
September 2014, management recorded an impairment of £19,045,000 in respect of
indefinite lived brands allocated to the Kleeneze CGU, on the basis of a value
in use calculation that showed that the carrying value of the CGU exceeded its
recoverable amount.
The disposal of Kleeneze Limited was completed on 24 March 2015 for gross
proceeds of £3.4m less costs of disposal of £0.4m. A profit on disposal of
£0.6m, representing the difference between the net proceeds received and the
assets disposed of has been recorded within exceptional items and consequently
it is concluded that the impairment recorded at 26 September 2014 was
appropriate.
8 Related parties
During the period, a company under the common control of one of the Group's
major shareholders, Toscafund Asset Management LLP ("Toscafund"), acquired one
of the buildings leased by the Company from a third party owner. The operating
lease rentals paid to the associate of Toscafund in the current period in
respect of this property were £194,000. £97,000 was accrued at the balance
sheet date.
Transactions between the Company and its subsidiaries, which are related
parties of the Company, have been eliminated on consolidation and are not
discussed in this note. All transactions and outstanding balances between the
group companies are priced on an arms-length basis and are to be settled in
the ordinary course of business.
Compensation of key management personnel
The remuneration of the directors including consultancy contracts and
share-based payments, who are the key management of the Group is summarised
below.
2015 2014
£000 £000
Short-term employee benefits 1,447 2,188
Company pension contributions 207 206
1,654 2,394
Share-based payments 243 915
1,897 3,309
By order of the board
D A Sugden T J Kowalski
Chairman Finance Director
17 June 2015 17 June 2015
Principal risks and uncertainties
There are a number of risks and uncertainties that could impact the
performance of the group over and above the treasury risks considered above.
There are inherent risks in relation to the group's employees, customers,
suppliers and the legal and regulatory frameworks in which it is conducted.
Group and divisional management, through the budgeting, forecasting and
monthly review of actual results, review business risks and seek to mitigate
these risks as far as possible. The risks set out below relate to five key
areas of review by the group being those specific to the group's divisions,
regulatory, economic, operational and financial risks.
Risks specific to the group's divisions
The business of the Express Gifts and Kitbag divisions are seasonal, and is
more heavily weighted towards the second half of the financial year. In
addition the Express Gifts division is reliant on credit scoring techniques in
the recruitment of new customers.
In the Education Supplies division, the September and March "Back-to-School"
periods account for much of the market's annual sales and profits. The group
is focused on delivering a high quality of service and being well prepared for
managing peak demand in all of its businesses.
Regulatory risks
The financial services activities of the Express Gifts division became subject
to regulation from the Financial Conduct Authority (FCA) with effect from 1
April 2014. In addition to its existing permission as an insurance
intermediary, the business currently has an Interim Permission to undertake
consumer credit activities. The withdrawal or material variation of this
permission or a failure to have it converted into a Full Permission in due
course could have a material adverse effect on the group. In addition, any
changes in legislation, regulation or FCA policy (for example restrictions on
interest rates or account fees) could have a material adverse effect on the
group. Finally, it is also required to conduct its business in a manner that
mitigates against the risk of its customers receiving a poor outcome from its
financial services activities. Failure to manage this risk may lead to
customers seeking appropriate levels of redress. The group monitors
compliance with applicable financial services and consumer credit regulations
by taking advice from third party professionals, where appropriate.
Economic risks
The group is affected by the impact of the economy on consumer spending or the
ability of its customers to service their debts. The impact of the sustained
reductions in government spending on education may adversely impact the
performance of the Education Supplies division and may in turn have a material
adverse effect on the group's business.
Interruptions in the availability or flow of stock from third-party product
suppliers, or issues arising from the sale of faulty or defective goods
leading to product recalls could have an adverse effect on the group's
business. To mitigate this risk, the group purchases products from a wide
variety of domestic and international third party product suppliers and
engages in appropriate quality assurance processes.
Deteriorating markets and reputational risks could result in the impairment of
goodwill, intangible assets (including brands) and property, plant and
equipment, which may adversely affect the group's financial position. This
includes the potential use of social media by third parties to comment upon
the group's businesses. The group focuses on maintaining the highest quality
of service to mitigate against any impairment in the value of its businesses.
Operational risk
The group may fail to keep up with advances in internet technology.
Furthermore information technology systems failure or disruption could impact
the group's day-to-day operations. The group relies heavily on its information
technology systems to record and process transactions and manage its
operations as well as to enable its customers to purchase products online and
over the phone. The group has seen significant growth in the proportion of its
home shopping sales which are derived from the internet, and these now
represent over 54% of the total sales of the Express Gifts division. The group
is focused on investing appropriately in its information technology systems
and progressively developing its e-commerce capabilities. This in turn
increases the group's exposure to fraud and cyber-attack that could, for
example, deny the group access to its systems for a period of time, or result
in a loss of confidential customer data. Enhancements to these systems and
controls have been made to mitigate against these risks and the group now
carries insurance cover against a prolonged loss of service.
The group is dependent on third parties for outsourcing functions. The group
carries out extensive reviews of any potential outsourcing partner. Loss of,
or disruption to, the group's distribution centres and administrative sites
would have a material adverse effect on the group's business. The group has
established disaster recovery procedures designed to minimise the impact of
any such disruption. The group also carries insurance cover against the
potential loss of key facilities.
Financial risk
The group is reliant on the continued provision of credit facilities, and the
ability to refinance them as they fall due, to support its operations as it
seeks to reduce its net borrowings to a more appropriate level. The current
facility agreements which mature in December 2016 include various financial
covenants which, if not complied with, would enable the lenders to seek
immediate repayment of amounts outstanding under the outstanding credit
facilities. The group has recently agreed relaxations to the terms of these
facilities which mitigates this risk significantly.
This information is provided by RNS
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