REG - TheWorks.co.uk PLC - Preliminary results - 52 weeks ended 1 May 2022
23/09/2022 07:00
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RNS Number : 3768A TheWorks.co.uk PLC 23 September 2022
23 September 2022
TheWorks.co.uk plc
("The Works", the "Company" or the "Group")
Preliminary results for the 52 weeks ended 1 May 2022
The Works delivered a strong financial performance in FY22 and made good
strategic progress. There is confidence in the Group's prospects despite the
more challenging trading conditions expected in the near term.
The Works, the multi-channel value retailer of arts and crafts, stationery,
toys, and books announces its preliminary results for the 52 weeks ended 1 May
2022 (the "Period" or "FY22") and an update on current trading.
Financial highlights
· Strong underlying sales driven by solid progress against the
Group's strategic objectives, careful management of supply chain, and
increased consumer demand post COVID-19.
o Total revenue £264.6m, up 46.5% compared with FY21.
o Two-year LFL sales((1)) up 10.5%, with positive growth online and in
stores.
o Two-year total gross sales up 12.7% ((1)(2)).
· The sales performance and the improvements made throughout the
year to operations and proposition, helped to offset the impact of external
headwinds,((3)) resulting in an increased profit.
o Pre IFRS 16 Adjusted EBITDA increased to £16.6m (FY21: £4.3m).
o Profit before tax of £10.2m compared with a loss of £2.8m in FY21.
· Further strengthened the balance sheet, ending the period with
net cash of £16.3m excluding lease liabilities (FY21: net cash £0.8m). Bank
facilities successfully refinanced post year end ((4)).
· Reflecting the strong performance and its confidence in the
Group's prospects, the Board proposes a final dividend of 2.4 pence per share
in respect of FY22.
· Trading since the Group's update on 8 August 2022 has remained
resilient however the outlook for FY23 is unchanged, reflecting the Board's
desire to remain cautious in light of the uncertain economic conditions.
FY22 FY21
£m £m
Revenue 264.6 180.7
Revenue growth/(decline) 46.5% (19.7%)
Pre-IFRS16 Adjusted ((5)) EBITDA 16.6 4.3
PBT 10.2 (2.8)
Adjusted ((5)) PBT 10.1 (3.6)
Basic EPS (pence) 14.0 (3.7)
Adjusted ((5)) basic EPS (pence) 13.9 (4.9)
Net bank cash 16.3 0.8
Business highlights
We continued to make progress on our strategy of being "better, not just
bigger", including:
· Defined the Group's new purpose and brand positioning, inspiring reading,
learning, creativity and play - making lives more fulfilled. This provides a
common goal to show everybody at The Works that they have a role to play in
delivering our "better, not just bigger strategy".
· Created a more appealing, more customer-focused product proposition, aligned
to our purpose. This included overhauling our book strategy to stock more
front-list titles, capitalising on the 'BookTok' trend and increasing ranges
of popular branded products in our kids and board games ranges.
· Catered for increasingly 'time poor' customers, who seek greater product
availability and faster delivery times, by improving our online fulfilment
capacity and delivery options.
· Improved the quality of the store estate by opening five new stores, closing
seven and relocating six. We undertook 16 store refits as part of our strategy
to refresh the store estate, as well as enhancing the in-store experience for
customers through better space planning, ranging and merchandising.
· Further strengthened our senior leadership team with the appointment of a new
Commercial Director and new 'Heads of' in our Buying, Brand Marketing, Digital
Marketing and Profit Protection functions.
· Maintained our high levels of colleague engagement and 13(th) place on the
'Best Big Companies to work for' ranking.
Trading update and FY23 outlook
When we updated on Q1 trading on 8 August 2022 we noted that store sales had
been resilient and online sales more challenging, although significantly
higher than pre-COVID levels. The more positive pattern of trading that had
developed by the end of Q1 has continued for the subsequent 7 weeks ended
Sunday 18 September 2022, with our refreshed outdoor play range performing
well, a very good 'Back to School' season and a gradual improvement in our
online performance. This resulted in store LFL sales up 7.9% and online sales
down by 10.1% (but 40% higher than pre-COVID levels), resulting in a total LFL
sales increase of 5.7% during the seven week period. For the year to date (20
weeks ended 18 September 2022) the store LFL is up 4.0%, online sales down by
21.7%, the overall LFL up by 0.8% and total sales were up by 2.3%.
We are encouraged by the strength of recent trading which reinforces our
confidence in the resilience of the business and that the ongoing improvements
we are making to our proposition are resonating well with customers. Despite
the positive recent trading, we remain cautious with regard to how consumer
spending might be affected during the remainder of this financial year, by
factors such as higher inflation, and therefore the Board's expectations
regarding the FY23 result are unchanged ((6)).
Gavin Peck, Chief Executive Officer of The Works, commented:
"We delivered a strong performance in FY22, with good growth in sales and
profits ahead of pre-COVID levels. This was achieved despite some significant
external operational challenges and reflects the ongoing appeal of our
proposition, the effective execution of our strategy, a strengthened
management team and the collective efforts of our amazing colleagues. We
closed the year in a much stronger financial position and will be pleased to
recommend to shareholders the payment of a dividend.
"Since our last update in August, our online performance has gradually
improved and we continue to be encouraged by store sales, which comprise the
significant majority of our revenue and have delivered positive LFL sales
growth since June. This has all been supported by the ongoing evolution of our
proposition, including a strong performance of our improved 'Back to School'
range. We have also had significant growth in our books category, driven by
our increased representation of front-list authors including Julia Donaldson
and Richard Osman. We are well-placed operationally for Christmas and are
gearing up to deliver for our customers, maintaining our commitment to provide
them with the products they love at fantastic value.
"The Works is a resilient business with a proven track record of delivering
robust results during times of economic hardship, however, given current
conditions, we maintain our cautious view of the year ahead. We remain
confident in our ability to continue making good strategic progress and to
deliver growth in the medium-term."
Preliminary results presentation
A presentation for analysts will be held today at 9.30 a.m. via video
conference call. A copy of the presentation will shortly be made available on
the Company's website (https://corporate.theworks.co.uk/
(https://corporate.theworks.co.uk/) ).
Enquiries:
TheWorks.co.uk plc
Gavin Peck, CEO via Sanctuary Counsel
Steve Alldridge, CFO
Sanctuary Counsel
Ben Ullmann +44 (0)20 7340 0395
Rachel Miller theworks@sanctuarycounsel.com (mailto:theworks@sanctuarycounsel.com)
Footnotes:
(1) The like for like (LFL) sales increase has been calculated with reference to
the FY20 comparative sales figures, or two-year LFL, because the extended
periods of enforced store closures during FY21 prevent that period from
forming the basis of meaningful comparisons. For the last 5 weeks of the
Period, the LFL percentages were calculated with reference to the
corresponding weeks in FY19, because the equivalent weeks during FY20 were
also affected by the first period of lockdown. Similar comparison periods are
also used for the total gross sales growth figures quoted.
(2) "Total sales" referred to in this statement include VAT and are stated prior
to deducting the cost of loyalty points which are adjusted out of the sales
figure in the calculation of statutory revenue. A reconciliation between the
sales figures and the statutory revenue is included in the Financial Report
section of this document.
The 52 week comparison periods used for the 2 year LFL and total sales growth
calculations uses a literal mapping of calendar weeks between FY22 and the
corresponding 52 weeks two/three years prior. Due to the inclusion of a 53rd
week in FY21, the FY20/FY19 accounting periods are one week offset from the
FY22 52 week period.
(3) Primarily, uncertainty over the impact of the Omicron variant and the ongoing
supply chain challenges faced by the sector.
(4) Bank facilities increased to £30.0m (committed revolving credit facility) and
maturity date extended to 30 November 2025.
(5) Adjusted profit figures exclude Adjusting items. See Notes 3 and 4 of the
attached condensed financial statements.
(6) For reference, the Company compiled estimate of the market's expectation for
the FY23 Adjusted EBITDA result is approximately £9.0m.
Notes for editors:
The Works is one of the UK's leading multi-channel value retailers of arts and
crafts, stationery, toys, and books, offering customers a differentiated
proposition as a value alternative to full price specialist retailers. The
Group operates a network of over 500 stores in the UK & Ireland and an
online store.
Cautionary statement
The financial information set out in this statement does not constitute the
Company's statutory accounts for the periods ended 1 May 2022 or 2 May 2021,
but is derived from those accounts. Statutory accounts for FY21 have been
delivered to the Registrar of Companies and those for FY22 will be delivered
in due course. The auditor has reported on those accounts: their reports were
(i) unqualified and (ii) did not contain a statement under section 498 (2) or
(3) of the Companies Act 2006. The audit of the statutory accounts for the
Period is now complete. Whilst the financial information included in this
announcement has been computed in accordance with International Financial
Reporting Standards ("IFRS") this announcement does not itself contain
sufficient information to comply with IFRS.
This announcement may contain forward-looking statements with respect to the
financial condition, results of operations, and business of the Group. 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, the Group has no
obligation to update the forward-looking statements or to correct any
inaccuracies therein.
Chair's statement
Introduction
I have greatly enjoyed my first year as Chair of The Works and feel very proud
to be part of a business that seeks to enrich the lives of its customers and
their families, friends and communities. I have spent a lot of my time getting
to know the business, meeting the teams and celebrating too, having joined
during The Works' 40(th) anniversary year.
I have been impressed by the resilience of the business and its ability to
adapt to challenging external conditions, whilst also delivering good
strategic and financial progress. Over the course of the last year I have also
seen The Works become an increasingly modern and efficient business that is
being run, for the long-term and in a more professional and structured way by
Gavin Peck and his strengthened leadership team. I have seen time and time
again exactly why its customers have such a strong affinity to the brand, how
it is managing to maintain its position as one of the leading retailers in the
value sector and how it has sustained a well-earned reputation for being an
incredibly supportive workplace for colleagues.
A standout feature of The Works is its truly unique culture. It is one of the
greatest strengths of the business and has developed as a result of strong
leadership, a positive work environment and a shared passion for delighting
customers. Clarifying the Group's purpose - To inspire reading, learning,
creativity and play - making lives more fulfilled. - has already had a
positive effect on colleagues across the business by helping them to
understand the role they can play in inspiring our customers and supporting
our communities. Given the current external environment, our purpose has never
been more relevant. It is vital that we help our customers to be resourceful,
inspire them to get creative and help them see that having fun doesn't need to
be costly or excessively consumptive.
This has all been spearheaded by a strengthened leadership team, led by Gavin,
and supported by a team of passionate and committed colleagues. On behalf of
the Board, I would like to thank colleagues for all they have done, and
continue to do, for our business and stakeholders, and for constantly going
above and beyond to care for one other.
Performance
All retailers have faced difficult external conditions over the past year,
particularly the increased costs and disruption caused by the global supply
chain challenges post COVID-19. The Works was also subject to a cyber security
incident in March which required swift and extensive action to be taken to
protect the business and minimise the impact on trading. Each of these factors
in isolation would be enough to test any retailer, let alone both in one year.
However, despite the adverse impacts from these events, due to the groundwork
that Gavin and colleagues laid before the pandemic, an improved customer
proposition and effective execution of our strategy, the business was able to
deliver a strong trading performance in FY22, which was well ahead of
pre-pandemic levels. Revenue increased to £264.6m (FY21: £180.7m), profit
before tax increased to £10.2m (FY21: loss before tax of £2.8m) and the
business delivered another record Christmas, demonstrating its resilience in
very challenging circumstances.
Strategy
The last year has also demonstrated that the refocused 'better, not just
bigger' strategy, which is already delivering tangible results, is the right
strategic direction for the business. If we continue making progress against
each of our four strategic pillars the Board and I are confident that we will
see more new customers choose The Works as their primary destination for
products to read, learn, create and play and that we will earn increased
loyalty from existing customers. We will also be very well positioned to
deliver sustainable sales and profit growth in the medium-term and to create
value for all our stakeholders.
Environmental, Social and Governance (ESG)
The Works has been increasingly focused on its ESG agenda in recent years and
has developed three pillars to provide greater clarity and structure, as well
as a steering group to drive progress in these areas (more information is
included in the Group's FY22 Annual Report). The business has now laid the
foundations for a more ambitious and systematic approach to ESG and made some
good early progress, but more work needs to be done. In particular, we need to
develop a detailed programme of activities and agree metrics to measure
progress and targets to reduce our environmental impact. We must also
implement the necessary changes to ensure that our reporting is consistent
with the recommendations of the Task Force on Climate-related Financial
Disclosures. The Works' governance structure is effective and the business has
a good track record in protecting its people and supporting its communities,
however there are plenty of opportunities to enhance these areas further, for
example by promoting greater diversity and inclusion across the business. Our
colleagues have shown a desire to engage more in our ESG strategy and already
play a role in supporting their local communities, fundraising for our charity
partners and protecting the environment, for example through recycling and
donating old stock to schools and charities. They are by nature enthusiastic,
crafty and resourceful, so will play an important part in driving progress
against our ESG pillars.
Dividend
As part of some prudent measures to strengthen the balance sheet and manage
the cost base and cash flows during the COVID-19 pandemic, dividends were
suspended in FY20 and FY21. Reflecting the Group's strong performance in FY22,
and its future potential, the Board will propose the payment of a final
dividend of 2.4 pence per share in respect of FY22, subject to shareholder
approval at our AGM on 27 October 2022, and will look to maintain the cadence
of twice yearly dividend payments thereafter. Whilst the consumer market
remains especially volatile, we will review future payment levels based on
prevailing conditions, but intend to pursue a progressive dividend policy in
due course once conditions stabilise.
Outlook
Our success this year reflects the ongoing appeal of our proposition and the
resilience of our business and was achieved despite some significant external
challenges. In the current economic environment, characterised by ongoing
inflationary pressure and subdued consumer sentiment, our value proposition is
more relevant than ever. We are confident that the Group will continue to make
good strategic progress in the year ahead and will deliver growth in the
medium-term, albeit that the Adjusted EBITDA result for FY23 will be lower
than in FY22.
Carolyn Bradley
Chair
23 September 2022
Chief Executive's Review
Introduction
Our financial year started shortly after we emerged from a lengthy period of
COVID-19 lockdowns, with stores having just re-opened. Our customers were
delighted to be able to shop with us in store again, and it was a real boost
to see colleagues back doing the job they love and the retail sector starting
to recover from a period beset by disruptions. I am pleased to report that
despite the significant challenges arising from global supply chain disruption
and a cyber security incident towards the end of the financial year, we
delivered a strong financial performance and made good strategic progress in
FY22. This was due to our colleagues, who were ready to serve our customers on
their return and continued to show incredible resilience, team spirit and
passion for the work they do. On behalf of the leadership team, I would like
to thank them for all their ongoing support. This year has demonstrated the
resilience of the business; I am proud of all that we have achieved and remain
confident about the future prospects for The Works.
Our purpose
The Works' proposition, which resonated particularly well with customers
during the pandemic, really strengthened over the course of FY22. To underpin
the evolution of our brand, we felt the time was right to redefine our
purpose. This purpose is "to inspire reading, learning, creativity and play -
making lives more fulfilled". This will help focus our colleagues on a common
goal and show everybody at The Works that they have a role to play as part of
our strategy to make our business better, not just bigger. Having now
succinctly articulated why we exist the next step is to fully embed this
purpose across the business. We believe it will have a truly transformational
effect on our performance over the next three years.
Trading performance and financial results
The Works delivered a strong trading performance in FY22, well ahead of
pre-COVID levels, demonstrating the strong execution of our strategy. Our
first half performance was ahead of our expectations and in H2 FY22 we
delivered a record Christmas despite uncertainty over the impact of the
Omicron variant and the supply chain challenges faced by the sector. Trading
in the second half remained positive, although, as expected, the rate of
growth began to slow in the latter months of the period, primarily reflecting
the impact of an increasingly challenging consumer environment, and also a
cyber security incident towards the end of FY22. Overall, total gross sales
((1)) for the period were £298.4m, an increase of 44.7% compared with FY21
and 12.7% compared with FY20 ((1)). Two-year LFL sales increased by 10.5%,
with growth online and in stores.
This positive trading performance was driven by our 'better, not just bigger'
strategy (see below). This included a greater focus on products that inspire
and delight our customers such as front-list books, branded products and
extended online product ranges, which engaged existing customers and attracted
new ones to shop with us, both in store and online. Our flexible business
model also enabled us to capitalise on trends like the 'summer of
staycations', Fidget Frenzy and BookTok, which boosted sales of the most
in-demand products during the year.
Retail is a sector in which challenges arise constantly but two notable ones
arose during the year, which we would not expect to recur and are therefore
worth highlighting:
1. Supply chain disruption and ongoing uncertainty surrounding possible COVID-19
related restrictions saw some Christmas trade brought forward into September
and October. Our proactive management of the supply chain ensured that we had
adequate stock overall, despite some of it arriving later than planned, which
meant that, although the sales pattern pre-Christmas was different than in
previous years, and sub-optimal compared to our plans, we were still able to
deliver a record Christmas performance.
2. We also experienced a cyber-security incident at the end of March 2022, which
for a short time impacted our till systems, replenishment deliveries to stores
and delayed the fulfilment of online orders. We took swift action to protect
the business, which dealt with the immediate threat and enabled us to continue
trading online and from more than 95% of our stores. Although the initial
impact on trading was minimal, our operational recovery, which also included
making significant improvements to security arrangements, took longer than
expected, and resulted in a residual impact on sales into the early part of
FY23.
Profit performance improved significantly, with FY22 EBITDA increasing to
£16.6m (FY21: £4.3m). Our improved sales performance and the operational and
proposition improvements we have made throughout the year helped to offset the
cost impact of the external headwinds highlighted above, which were also
partially offset by £5.8m of COVID-19 business rates relief. On a statutory
basis, profit before tax increased to £10.2m (FY21: loss before tax of
£2.8m).
((1)) See footnotes (1) and (2) in the Financial review which describe the
basis for calculating 2-year sales comparisons.
Strategy
At the FY21 preliminary results we announced an evolution of our strategy, to
be a 'better, not just bigger' version of ourselves. Since then we have made
good strategic progress, both behind the scenes to improve our operations and
efficiency, as well as more visible changes to sharpen the proposition,
improve our stores, our product ranges and how we interact with our customers.
We have also strengthened the management team and senior leadership across the
business to support the successful execution of our strategy.
Each change made, when considered in isolation, will have a relatively limited
impact on our future performance but collectively the changes we have made
across the entire business will, we believe, be truly game changing for The
Works. These improvements have already helped to drive top and bottom-line
growth in FY22 and we believe that if we continue to make good progress
against this strategy it will significantly increase sales and will generate
much more sustainable returns in the long-term.
Outlined below is an overview of each of the four pillars of our strategy,
progress made against them during FY22, and our priorities for the year ahead.
Develop our brand and increase our customer engagement
In line with our purpose, we are improving our customer proposition to help
build deeper relationships with our existing customers, drive increased brand
loyalty and inspire and attract new customers.
In FY22 we:
· Clarified our purpose to better reflect what we do every day. Articulating why
we exist has helped give all colleagues the same 'north star' and is ensuring
that everything we do is focused on The Works' customers.
· Evolved our brand to create a new, more modern look and began to focus our
communications on inspiring customers.
· Recruited a new Commercial Director to drive forward our customer proposition
and further strengthen the commercial function.
· Recruited a new Head of Brand to improve our brand marketing and customer
communications, engagement and loyalty.
· Made significant progress in improving our offer by taking a more strategic
and customer-focused approach to range selection. Our great value proposition
is already well recognised and as a result of the action we have taken this
year we are now becoming customers' go-to destination for reading, learning,
creativity and play. We have achieved this by:
o Overhauling our book strategy, stocking many more front-list titles such as
David Walliams' Gangsta Granny Strikes Again and Richard Osman's The Man Who
Died Twice. This is helping to increase our market share in the book category,
improve our credibility as a bookseller and also drive sales of great value
back-list titles which can still represent significant sales opportunities.
o Capitalising on the BookTok trend. Our flexible business model and
strengthened relationships with publishers enable us to respond to trending
books highlighted on TikTok and provide customers with the most in-demand
books at great value.
o Increasing our ranges of popular branded products in our Kids Zone, such as
Peppa Pig, Paw Patrol and Cocomelon, and board games including Scrabble,
Articulate and Elf Monopoly.
In FY23 we will focus on:
· Developing our marketing strategy, deploying our evolved brand and refreshed
look to inspire and engage with customers more effectively.
· Ensuring our products and ranges align with our purpose - to inspire reading,
learning, creativity and play - making lives more fulfilled.
· Further developing our product offering, including extending our range of
Children's books (including front-list authors such as Julia Donaldson being
introduced) and refreshing our own-brand Art, Craft and Stationery ranges.
· Using data and insight more effectively so that we develop a better
understanding of our customers and their preferences.
· Relaunching our Together loyalty programme, which has enormous untapped
potential, given the relatively low levels of penetration of the scheme (c13%
of transactions in FY22).
Enhance our online proposition
We strive to become customers' go-to destination for reading, learning,
creativity and play. We believe that our online channel will be an important
part of achieving this ambition given the role it can play in providing
inspiring content and convenient shopping. We invested in a new web platform
in July 2020 which provided the foundation for us to subsequently invest
significantly in our online fulfilment capacity and in shortening delivery
times. Our online capability is now more efficient and better able to meet
increasing customer demand.
In FY22 we:
· Improved our fulfilment capacity and delivery capabilities for increasingly
'time poor' customers, who seek greater product availability and faster
delivery times. We extended our next day delivery cut-off from 8pm to 11pm and
reduced our standard delivery window from three to five days to a guaranteed
three days.
· Further enhanced our complementary online ranges, focusing particularly on
expanding online ranges of larger items in our Out2Play range, which performed
well during the 'summer of staycations' in 2021, as well as offering a greater
selection of front-list books, branded toys and games.
· Started to optimise our new platform. For example, we have improved the
navigation across key product and category pages to help customers find
product matches and introduced browse attributes to reduce clicks required to
purchase.
· Recruited a Head of Digital Marketing to develop and implement campaigns
across new channels, improve efficiency, help attract more people to our
website and improve our CRM.
In FY23 we will focus on:
· Further enhancing the online customer experience, including undertaking a
usability study to better understand the customer journey and key friction
points. Alongside the outputs of this review we will improve the merchandising
of products on the site and navigation through the site, supported by better
analytics and the introduction of new tooling, including multi-variate
testing.
· Launching more targeted online range extensions, building on improvements made
in our front-list book, and branded toys and games offers in store.
· Introducing 'Parcelshop' as an alternative delivery option, adding c.11k
additional pick-up points, improving convenience for our customers.
· Engaging and retaining more customers through our digital marketing, including
building a team to strengthen our in-house capabilities.
· Improving the customer experience between stores and online by making it
possible for customers to order from the website when shopping in store and
performing an end-to-end review of our click and collect journey.
Optimise our store estate
We already have a strong footprint across the UK and Ireland, with stores
conveniently located on high streets, in shopping centres, in retail parks and
concessions within garden centres. The broad appeal of our proposition and
low-cost model of our stores, which tend to be smaller than those of our
competitors, allows us to operate in such locations which often do not suit
more specialist retailers. As a result, in these locations, there is often
very little direct high street competition.
Our main priority is to optimise our stores to create an environment that
inspires our customers, reflects the communities we serve and encourages more
shoppers to consider The Works as their primary destination for the products
we offer.
In FY22 we:
· Further improved the quality of the store estate, opening five new stores,
closing seven and relocating six. Our opening in Bluewater, one of the UK's
most high-profile shopping centres, was a particular highlight and the store
is trading successfully. As of 1 May 2022 we traded from 525 stores.
· Undertook 16 store refits as part of our strategy to refresh the store estate
and bring all stores up to an 'ideal' standard over the next three years.
These refits will improve customer experience by modernising the store
shopping environment and improving the store layout, whilst also making the
stores easier to run operationally.
· Enhanced the in-store experience through better space planning, ranging and
merchandising. We also improved customer experience and made our stores easier
to shop, for example through better navigation and ensuring that all stock is
at an easily accessible height.
In FY23 we will focus on:
· Continuing to grow our brand awareness with selective new store openings,
focused on the top locations that we are not yet represented in.
· Optimising our existing stores through relocations and refits, with 40 stores
expected to benefit from this activity.
· Further improving our use of space in store to enhance the customer experience
and drive improved sales densities, supported by the introduction of new space
and merchandising software.
· Increasing our focus on offering excellent customer service in-store, through
improved training and continuing to simplify the way we operate our stores to
reduce other tasks.
Drive operational improvements
Improving our ways of working to become a more productive and modern retailer
is a core part of our "better, not just bigger" strategy. We want to ensure we
operate efficiently and in a cost-effective way, as well as providing better
product choice and availability for our customers. The progress we have made
means that 'behind the scenes' we are already operating more effectively,
which we believe will help to generate more sustainable returns in the future.
In FY22 we:
· Invested in our supply chain team and systems, making improvements in our
end-to-end stock management processes, including successfully piloting a new
stock allocation system that will significantly improve on-shelf availability
and drive improved stock turn.
· Renewed our e-commerce logistics contract with iForce. The renewed contract
includes additional investment to fund the introduction of automated picking
robots and an automated packing machine. This is expected to drive
productivity, help to offset the National Living Wage cost headwind in our
online fulfilment operation, whilst also reducing our waste packaging.
· Launched a trial to deliver directly to 29 stores (rather than via a third
party network), which was subsequently expanded to cover 60 stores,
significantly reducing the lead time from picking to delivery and helping to
improve on-shelf availability. This will be rolled out to more stores in FY23
although most stores will continue to receive deliveries via a third party
network.
· Established a Profit Protection function with an initial focus on reducing
store stock loss (e.g. through identifying and reducing high levels of theft).
· Selected a new electronic point of sale (EPOS) solution for stores and began
development of this new system ahead of deployment later in FY23. This system
replaces the existing outdated system and provides a platform for introducing
additional functionality, for example self-service checkout and ordering from
our website whilst in store.
· Accelerated the implementation of our existing plans to strengthen IT security
measures following the cyber-security incident in March 2022.
In FY23 we will focus on:
· Rolling out our new stock allocation system across our entire store estate.
· Extending our scheme to deliver directly to stores.
· Deploying the new EPOS solution across the store estate, including the
functionality to order online whilst in-store.
· Reducing store stock loss through the execution of our profit protection
plans, including driving a colleague awareness programme, better utilising
data to identify stores with high stock losses and targeting increased
activity on these higher risk stores.
· Adopting a continuous improvement approach in relation to all operational
processes across the business.
Colleagues
In a challenging and competitive retail environment, our colleagues are
fundamental to the delivery of great customer service. Many retail businesses
make this claim, but we believe that The Works is unique and fortunate to have
a team of colleagues who truly believe in our purpose and are passionate about
the job they do. Attracting, retaining, developing, and engaging good people
are key to our success and I was very pleased that we have maintained our
position on the Best Big Companies to Work for National List, ranking 13(th)
place.
During the year we have strengthened the leadership team through the creation
of a number of new roles. Nina Findley, our new Commercial Director, joined
the Operational Board in June 2021. Nina has over 20 years' buying experience
in highly relevant markets, having spent her early career with Woolworths and
Superdrug and more recently holding a variety of senior roles at Homebase.
During the period we also strengthened our senior leadership team with the
appointment of new 'Heads of' in our Brand Marketing, Digital Marketing,
Buying and Profit Protection functions.
We remain focused on further enhancing the engagement and development of our
colleagues with further exciting initiatives planned for FY23, including
introducing a new Communication and Rewards platform ('MyWorks') and a new
learning and development system (our 'Can Do Academy').
Environmental, Social and Governance (ESG)
Having reviewed our approach last year and, as a first step, formed a new ESG
steering group, we are increasing our focus on ESG issues and defining our ESG
commitments. Working to reduce our impact on the planet and supporting our
people and communities is not only the right thing to do, it is a key issue
for our stakeholders and will also ensure that we stay relevant as customer
demand for more sustainable products continues to grow.
We are currently developing our sustainability strategy to ensure that it
addresses environmental issues whilst supporting our growth. We are also
engaged in a programme of work to ensure our compliance with the
recommendations of the Task Force on Climate-related Financial Disclosures. We
have also signed up to the British Retail Consortium's Diversity and Inclusion
charter and are gathering baseline data and insight to help further develop
our D&I strategy and ensuring its effectiveness.
The Works has always been a business that gives back and I am very proud of
the fundraising efforts of our colleagues and grateful for the generosity of
our customers. Our commercial and fundraising partnership with Cancer Research
UK continues and last year we were delighted to enter into a nationwide
partnership with MIND, SAMH and Inspire - three leading charities that do
incredible work to support people's mental health.
Outlook
Overall, we are pleased with the performance delivered in FY22. However, we
are not immune from the current inflationary pressures, which have increased
business costs and we anticipate may weigh on consumer spending levels over a
much more sustained period than initially expected. In this environment, our
value proposition is more relevant than ever, and we are confident that the
Group will continue to make good strategic progress in the year ahead and will
deliver growth in the medium-term, albeit the Adjusted EBITDA result for FY23
will be lower than in FY22.
Gavin Peck
Chief Executive Officer
23 September 2022
Financial review
The FY22 accounting period relates to the 52 weeks ended 1 May 2022 (also
referred to as the Period) and the comparative FY21 accounting period relates
to the 53 weeks ended 2 May 2021.
As is described in the financial statements, the Group tracks a number of
alternative performance measures (APMs), as it believes that these provide
management and other stakeholders with additional helpful information. APMs
used in this report include EBITDA, Adjusted EBITDA and like for like ("LFL")
sales.
The Group made a profit before tax of £10.2m (FY21: loss before tax of
£2.8m). Adjusting items in FY22 were insignificant and the adjusted profit
before tax was £10.1m (FY21: adjusted loss before tax of £3.6m). The
adjusting items related to net impairment reversals.
The pre IFRS 16 Adjusted EBITDA was £16.6m (FY21: £4.3m).
Overview
The Group delivered a strong performance in FY22, the first year under the
leadership of the new management team that was relatively unaffected by
COVID-19 disruption. FY22's performance was characterised by the following
factors:
· Strong underlying sales throughout the year driven by solid
progress against the Group's strategic objectives beginning to leverage the
inherent strength of the proposition.
· Significant disruption to global freight operations in the autumn
of 2021 resulted in much higher freight costs and a less than ideal flow of
stock into the business, despite which, the Group achieved a record Christmas
trading period.
· A cyber security incident occurred at the end of March 2022.
Operations in the last month of the financial year (and the beginning of FY23)
were intentionally restricted to allow the deployment of strengthened system
security measures alongside a carefully staged system recovery plan.
· As the effects of COVID-19 reduced, the level of Government
financial support reduced correspondingly, although the Group received £5.8m
of business rates relief during FY22.
· The effects of inflation began to have an impact, particularly in
the form of higher freight costs and an increase in the National Living Wage.
EBITDA bridge between FY21 and FY22 £m
FY21 adjusted EBITDA (pre IFRS 16) 4.3
Increased gross margin due to year-on-year increase in sales 51.9
Lower gross product margin % (including impact of freight costs) (6.6)
Government furlough relief received in FY21 (nil in FY22) (15.4)
Lower level of COVID-19 business rates relief received in FY22 (8.3)
COVID-19 business grants received in FY21 (nil in FY22) (1.8)
Resumption of normal operating costs and inflation (7.5)
FY22 adjusted EBITDA (pre IFRS 16) 16.6
The strong financial performance resulted in another year of healthy cash
generation, even allowing for favourable working capital timing differences
which slightly flattered the comparison; the closing net cash balance was
£16.3m, which compares well with the £0.8m balance at the end of FY21 (and,
for reference, £7.1m of net debt at the end of FY20).
Despite the healthy cash position and our confidence in the inherent ability
of the Group to generate strong positive cash flow, with the increasingly
bleak tone of external predictions about the near-term economic outlook, we
considered it prudent to buttress the Group's financial position by
refinancing the Group's bank facilities. This was formally completed shortly
after the year end and increases the size of the facility to £30.0m and
extends the expiration date to the end of November 2025.
As a further indication of the Board's confidence in the prospects of The
Works, dividends will be reinstated, assuming that shareholders at the AGM
approve the Board's recommendation of a 2.4 pence per share dividend in
respect of FY22.
Due to rounding, numbers presented throughout this document may not add up
precisely to the totals provided and percentages may not precisely reflect the
absolute figures.
Revenue analysis
Total revenue increased by 46. 5% to £264.6 million (FY21: £180.7
million).
The enforced closure of stores during certain periods in FY21 prevents
meaningful comparisons of FY22's sales performance with that year, so FY20 is
used as a comparison period for trading performance. Total gross sales ((1))
in FY22 increased by 12.7% compared to FY20 and two-year LFL sales ((2))
increased by 10.5%, with positive growth continuing both online and in stores.
2 year LFL sales growth Stores Online Total
Q1 5.7% 96.8% 13.4%
Q2 8.6% 71.0% 15.5%
H1 7.3% 80.6% 14.5%
Q3 (0.3%) 70.0% 7.9%
Q4 3.2% 42.5% 6.8%
H2 0.9% 62.1% 7.5%
Full year 3.7% 69.7% 10.5%
· Q1 highlights
o Pent up demand following the recent re-opening of stores (in April 2021)
was supported by a sale which was larger than usual as it included stock we
were unable to sell in January/February 2021 when we would normally have held
a post-Christmas sale.
o During summer 2021, "fidget frenzy" stock became very popular at the end
of Q1, which then combined with a strong back to school performance in August
to create a positive start to Q2.
· Q2 highlights
o Sales during September and October were stronger than expected, likely to
have been helped by Christmas demand beginning early. We hypothesise that
customers sought to minimise risks of not being able to shop before Christmas
and/or of stocks being scarce due to widely reported issues with supplies due
to the global freight/supply chain challenges.
· Q3 highlights
o Record Christmas despite the overall stock mix and its distribution to
stores not being as well executed as we had planned due to the supply chain
disruption, for example, Christmas accessories did not arrive until early in
December. The Omicron COVID-19 variant may have reduced sales from consumers
who were being more cautious about going out.
o The January sale event was smaller than planned because terminal stock
levels were low and we had not bought stock specifically for the sale period.
· Q4 highlights
o Developments to the product proposition, with front list books and branded
toys and games being highlights, sold well as we emerged from the January
sale.
o A cyber security incident at the end of March caused limited
immediate/direct interruption to trading, but the cautious approach taken to
the recovery affected sales in April (and into the beginning of FY23).
The table below shows the reconciliation of LFL sales used for year-on-year
comparisons, with statutory revenue.
FY22 FY21 Variance Variance
£m £m £m %
Total LFL sales for Period (one year LFL) 261.1 191.0 70.1 36.7%
Sales from new/closed stores 37.3 15.2 22.1 145.8%
Total Gross Sales 298.4 206.2 92.2 44.7%
VAT (33.5) (24.3) (9.2) 38.0%
Loyalty points redeemed (0.3) (1.2) 0.9 (77.0)%
Revenue (per statutory accounts) 264.6 180.7 83.9 46.4%
(1) "Total sales" include VAT and are stated prior to deducting the cost of
loyalty points which are adjusted out of the sales figure in the calculation
of statutory revenue. The 52-week comparison periods used for the LFL and
total sales growth calculations use a literal mapping of calendar weeks
between FY22 and the corresponding 52 weeks two/three years prior. Due to the
inclusion of a 53(rd) week in FY21, the FY20/FY19 statutory accounting periods
are one week offset from the 52-week period used in the LFL and total sales
comparisons.
(2) LFL sales increase has been calculated with reference to the FY20 comparative
sales figures, or two-year LFL, because the extended periods of enforced store
closures during FY21 prevent that period from forming the basis of meaningful
comparisons. For the last 5 weeks of the Period, the LFL percentages are
calculated using the corresponding weeks in FY19, because the equivalent weeks
during FY20 were also affected by the first period of enforced store closures.
Similar comparison periods are also used for the total sales growth figures
quoted.
The number of stores trading reduced by two during the period, from 527 to
525. Despite this small change in the net number of stores at the year end,
the sales from new/closed stores in the previous table shows a significant
increase compared with the prior year due to the relative timing of store
openings/closures as well as the effect of the periods of enforced store
closures in FY21. The one-year LFL percentage growth is relatively low by
comparison, because a significant one-year LFL decline in online sales
partially offset a high store LFL (also due to the periods of closure in
FY21).
Most of the capital cost of opening the new stores continued to be funded via
capital contributions from landlords, reducing the impact on the Group's
cashflow. The new stores are trading successfully with sales levels above
their financial appraisal targets.
Store numbers FY22 FY21
Stores at beginning of period 527 534
Opened in the period 5 4
Closed in the period (7) (11)
Relocated (excluded from opened/closed above, NIL net effect on store numbers) 6 2
Stores at end of period 525 527
The cost of loyalty points redeemed during the year increased as expected, in
line with the sales increase, but the reported cost reduced due to the write
back of points previously issued and accounted for, which have subsequently
expired, and can no longer be redeemed.
We have noted that books sold well during FY22, increasing their participation
of total sales. As they are zero rated for VAT, this benefited the effective
VAT rate which was 11.2% compared with 11.8% in FY21.
Gross profit
FY22 FY21 (Restated *)
£m % of revenue £m % of revenue Variance Variance
£m %
Revenue 264.6 180.7 84.0 46.5
Less: Cost of goods sold 107.7 69.0 38.7 56.1
Product gross margin 157.0 59.3 111.7 61.8 45.3 40.5
Other costs included in statutory cost of sales
Store payroll 43.6 16.5 37.7 20.8 5.9 15.7
Store property and establishment costs 43.7 16.5 36.7 20.3 7.0 19.1
Store PoS & transaction fees 2.1 0.8 1.4 0.8 0.7 47.7
Store depreciation 5.0 1.9 5.2 2.9 (0.2) (4.0)
Online variable costs 18.7 7.1 24.5 13.6 (5.8) (23.8)
IFRS16 impact (4.7) (1.8) (4.2) (2.3) (0.5) 11.1
Adjusting items - - (1.0) (0.5) 0.9 (97.0)
Total non-product related cost of sales 108.4 41.0 100.4 55.6 8.0 8.0
Gross profit per financial statements 48.6 18.4 11.3 6.3 37.2 328.8
(*) See Note 5 of condensed financial statements
The product gross margin decreased by 250bps to 59.3% (FY21: 61.8%).
· The gross margin was affected by much higher freight costs than
normal, particularly in H2 FY22 (these have remained high into FY23 but we
expect them to abate in FY24, offsetting the adverse effect of a weaker
pound).
· The FY21 comparative included unusually low discounting,
particularly online, when the stores were closed due to restrictions.
· The product mix included a greater proportion of front-list books
and branded games and toys, which sell at a lower percentage margin, although
contribute positively to the cash margin.
Store payroll costs increased due to the National Living Wage increase, which
was partially mitigated by operational efficiencies and reduced tasking in the
stores. Also, in FY21, when colleagues were furloughed, only 80 % of the
normal wage rate was paid.
Store property and establishment costs increased due to a year-on-year
reduction in the value of COVID-19 business rates relief received (£5.8m was
received in FY22) and higher energy costs, which were partially offset by
further rent savings (energy costs have also increased significantly in FY23,
although this is factored into our forecast).
The increase in store point of sale (PoS) and transaction fees, which are
volume related costs, was broadly in line with the increase in sales.
Although on a two year LFL basis, online sales grew by 69.7%, on a one year
LFL basis, compared to the exceptionally high sales levels in FY21 when stores
were closed, online sales declined, with a corresponding decrease in volume
related costs including marketing and fulfilment costs.
Other operating income/expense
The other operating expense was £0.1m (FY21: other operating income of
£17.1m). In FY21 the income related to the Government Coronavirus Job
Retention Scheme and the COVID-19 Retail, Hospitality and Leisure Grant Fund
(the COVID-19 rates relief received is netted off rates costs within the cost
of sales, as described in the previous section).
FY22 FY21
Other operating income £m % of revenue £m % of revenue Variance Variance
£m %
Coronavirus Job Retention Scheme grants (0.1) - 15.3 8.5 (15.4) (100.7)
COVID 19 retail business grant - - 1.8 1.0 (1.8) (100.0)
(0.1) - 17.1 9.4 (17.2) (100.7)
Distribution costs
FY22 FY21 (Restated *)
£m % of revenue £m % of revenue Variance Variance
£m %
Adjusted distribution costs 9.0 3.4 6.4 3.5 2.7 42.5
Depreciation 0.1 - 0.1 0.1 - (16.0)
IFRS 16 impact - - - - - (91.0)
Distribution costs per statutory accounts 9.1 3.4 6.4 3.6 2.7 41.8
(*) See Note 5 of condensed financial statements
Retail distribution costs were higher during the period as the stores were
trading throughout, in contrast to the prior year, and therefore volume driven
labour and pallet delivery costs increased. In addition, the increase in the
National Living Wage rate increased staff costs although some of the
inflationary increase was mitigated by operating/efficiency improvements.
Administration costs
FY22 FY21 (Restated *)
£m % of revenue £m % of revenue Variance Variance
£m %
Pre-IFRS 16, Adjusted administration costs 23.2 8.8 17.8 9.9 5.4 30.1
Depreciation 1.2 0.5 1.7 0.9 (0.5) (28.2)
IFRS 16 impact (0.4) (0.1) (0.4) (0.2) 0.0 (6.9)
Adjusting items - - 0.2 0.1 (0.2) (100.0)
Administration costs per statutory accounts 24.0 9.1 19.3 10.7 4.7 24.5
(*) See Note 5 of condensed financial statements
The increase in administrative costs reflects investments made to strengthen
the senior leadership team and key functions including supply chain and IT,
and an accrual for FY22 bonus (there was no bonus cost in respect of FY21).
There were also higher software maintenance/licence costs and the cost of
resuming normal activities such as travel which were suppressed for periods
during FY21.
IFRS 16 Leases
The Group continues to include information to enable stakeholders to see the
effect of IFRS 16. The net impact of IFRS 16 was to increase the profit before
tax in FY22 by £0.9m (FY21: £0.7m increase).
FY22 FY21
(Restated *)
£m £m
Profit/(loss) before tax before IFRS 16 9.3 (3.5)
Profit/(loss) before tax post IFRS 16 10.2 (2.8)
Net impact on profit/(loss) 0.9 0.7
(*) See Note 5 of condensed financial statements
Net financing expense
Net financing costs in the period were £5.2m (FY21: £5.5m), mostly relating
to notional IFRS 16 lease interest.
Actual interest payable was £0.7m, in relation to the Group's bank facilities
(FY21: £0.6m), and comprised facility availability charges and the
amortisation of the initial costs of establishing the bank facility in August
2020 (the cost of the new facility will be amortised from FY23).
FY22 FY21
£m £m
Bank interest payable (including non-utilisation costs) 0.4 0.3
Other interest payable (amortisation of facility set-up costs) 0.3 0.3
IFRS 16 notional interest on lease liabilities 4.5 4.9
Total finance expense 5.2 5.5
Tax
FY22 FY21
£m £m
Current tax expense 2.1 0.0
Deferred tax credit (0.6) (0.5)
Total tax expense/credit 1.4 (0.5)
The UK corporation tax rate for FY22 and FY21 was 19.0%. The UK corporation
rate is due to increase from 19% to 25% on 1 April 2023, although we
understand that this decision is now under review.
Deferred tax assets and liabilities are recognised based on the corporation
tax rate applicable when they are anticipated to unwind. Therefore, the
deferred tax assets and liabilities have been largely recognised at a rate of
25.0% (FY21: 19.0%), which creates a deferred tax credit that reduced the
Group's effective tax rate for FY22.
The total tax expense was £1.4m (FY21: credit of £0.5m). The effective tax
rate was 14.1% (FY21: 17.9% on the loss before tax).
Earnings per share
The basic EPS for the year was 14.0 pence (FY21: loss per share of 3.7 pence)
and the diluted EPS was 13.7 pence (FY21: diluted loss per share of 3.7
pence).
Capital expenditure
FY22 FY21 Variance
£m £m £m
New stores and relocations 0.5 0.6 (0.1)
Store refits and maintenance 0.9 0.7 0.2
IT hardware and software 1.2 0.6 0.6
Online development expenditure 0.2 0.5 (0.3)
Other 0.2 0.1 0.1
Total capital expenditure 3.0 2.4 0.6
Capital expenditure in the Period was £3.0m (FY21: £2.4m) and comprised
· The cost of opening five new stores and relocating six others to
new sites. Most of the new store capex was funded by landlord contributions.
· Store maintenance including 16 refits.
· Increased IT development expenditure, reflecting the
implementation of the Group's strategy to improve its systems.
FY23 capex is expected to be approximately £7.5m.
Inventory
Stock levels were £29.4m at the end of FY22 (FY21: 29.1m), an increase of
1.0%.
FY22 FY21 Variance Variance Provisions as % of gross stock
£m £m £m % FY22 % FY21 %
Gross stock 29.8 31.0 (1.2) (3.9%)
Shrinkage provision (1.9) (2.6) 0.7 (26.9%) 6.4% 8.4%
Obsolescence provision (1.3) (1.8) 0.5 (27.8%) 4.4% 5.8%
Total provisions (3.2) (4.4) 1.2 (27.3%) 10.7% 14.2%
Net stock on hand 26.6 26.7 0.1 0.4%
Stock in transit 2.8 2.5 0.3 13.9%
Stock per balance sheet 29.4 29.1 0.3 1.0%
Stock levels at the end of FY22 were as planned and were not affected as they
had been at the previous two year ends by issues related to COVID-19. The
level of stock provisions has reduced significantly since the end of FY21:
· The provision for unrecognised stock loss (shrinkage) is lower
as, unlike in FY21, it was possible during FY22 to complete store stock counts
which enabled stock adjustments to be made during the year to recognise
losses, requiring a lower unrecognised loss provision at the Period end.
· The obsolescence provision is lower because a significant
quantity of terminal stock was sold or written off during FY22 which resulted
in a lower level requiring a provision at the end of the year.
Cash flow
The table shows a summarised non IFRS 16 presentation cash flow; the financial
statements include a statutory consolidated cash flow statement. The net cash
inflow for the year was £15.5m (FY21: £7.9m).
FY22 FY21 Variance
£m £m £m
Cash flow pre-working capital 19.3 14.8 4.5
Net movement in working capital 7.4 (1.2) 8.6
Capex (3.0) (2.4) (0.6)
Tax paid (0.2) 0.0 (0.2)
Interest and financing costs (0.3) (0.9) 0.6
Dividends 0.0 0.0 0.0
Cash flow before loan movements 23.2 10.3 12.9
Drawdown/(repayment) of CLBILS loan (7.5) 7.5 (15.0)
Drawdown/(repayment) of RCF 0.0 (10.0) 10.0
Exchange rate movements (0.1) 0.2 (0.3)
Net increase in cash and cash equivalents 15.5 7.9 7.7
Opening net cash balance excluding IAS 17 leases 0.8 (7.1)
Closing net cash balance excluding IAS 17 leases 16.3 0.8
· The cash flow pre working capital shown in the table deducts IFRS
16 notional lease and interest payments from the statutory operating cash flow
before changes in working capital, and adds back the £7.5m CLBILS loan
repayment.
· The tax paid in FY22 was lower than we would expect to pay in
relation to normal years, due to previous low levels of taxable profits.
· During the year the Group repaid its £7.5m CLBILS term loan.
The year end cash balance was higher than expected as it included favourable
working capital timing differences, most of which have unwound in FY23. The
cash position provides the Group with a high degree of available liquidity and
comfortably allows for the payment of the final dividend the Board will
recommend at the AGM.
Bank facilities and financial position
The financial position of the Group continued to improve during the period, at
the end of which, there were no borrowings.
At the period end, the Group held net cash (excluding lease liabilities) of
£16.3m (FY21: £0.8m) resulting in headroom of approximately £35.0m within
its previous bank facility limit.
The Group's bank facilities were renewed shortly after the period end and now
comprise a larger revolving credit facility ('RCF') of £30.0m which expires
on 30 November 2025. The facility includes standard financial covenants in
relation to leverage and fixed charge cover.
Dividend
In light of the strong performance in FY22, the robust balance sheet, and its
confidence in the future prospects of the business despite the short-term
concerns as regards the external economic environment, the Board will be
recommending a 2.4 pence per share dividend in respect of FY22, which will be
subject to shareholder approval at our AGM on 27 October 2022. If approved by
shareholders, the dividend will be paid on 24 November 2022 to shareholders on
the register on the record date of 4 November 2022.
We hope to maintain the cadence of twice yearly dividend payments thereafter;
whilst the consumer market remains especially volatile, we will review future
payment levels based on conditions at the time, but intend to resume a
progressive dividend policy in due course once conditions stabilise.
Steve Alldridge
Chief Financial Officer
23 September 2022
Consolidated income statement
For the period ended 1 May 2022
52 weeks to 1 May 2022 53 weeks to 2 May 2021
(Restated - Note 3, Note 5)
Note Result before Adjusting Total Result before Adjusting Total
Adjusting items items £000 Adjusting items items £000
£000 £000 £000 £000
Revenue 264,630 - 264,630 180,680 - 180,680
Cost of sales (216,082) 29 (216,053) (170,342) 975 (169,367)
Gross profit 48,548 29 48,577 10,338 975 11,313
Other operating income 2 (111) - (111) 17,081 - 17,081
Distribution expenses (9,128) - (9,128) (6,440) - (6,440)
Administrative expenses (24,004) - (24,004) (19,088) (199) (19,287)
Operating profit 5 15,305 29 15,334 1,891 776 2,667
Finance income 16 - 16 18 - 18
Finance expenses (5,192) - (5,192) (5,486) - (5,486)
Net financing expense (5,176) - (5,176) (5,468) - (5,468)
Profit/(loss) before tax 10,129 29 10,158 (3,577) 776 (2,801)
Taxation 6 (1,436) - (1,436) 502 - 502
Profit/(loss) for the period 8,693 29 8,722 (3,075) 776 (2,299)
Profit/(loss) before tax and IFRS 16 3 9,525 (241) 9,284 (3,395) (94) (3,489)
Basic earnings per share (pence) 8 13.9 14.0 (4.9) (3.7)
Diluted earnings per share (pence) 8 13.7 13.7 (4.9) (3.7)
Profit for the Period is attributable to equity holders of the Parent.
Consolidated statement of comprehensive income
For the period ended 1 May 2022
FY22 FY21
£000 £000
Profit/(loss) for the year 8,722 (2,299)
Items that may be recycled subsequently into profit and loss
Cash flow hedges - changes in fair value 4,181 (2,865)
Cash flow hedges - reclassified to profit and loss (321) 252
Cost of hedging reserve - changes in fair value (83) (90)
Cost of hedging reserve - reclassified to profit and loss 94 (160)
Tax relating to components of other comprehensive income - 536
Other comprehensive income/(expense) for the period, net of income tax 3,871 (2,327)
Total comprehensive income/(expense) for the period 12,593 (4,626)
Consolidated statement of financial position
As at 1 May 2022
Note FY22 FY21
£000 (Restated -
Note 10)
£000
Non-current assets
Intangible assets 9 2,672 2,463
Property, plant and equipment 10 13,970 17,524
Right-of-use assets 10, 11 94,351 112,542
Deferred tax assets 12 3,477 2,852
114,470 135,381
Current assets
Inventories 13 29,387 29,132
Trade and other receivables 14 8,427 6,913
Derivative financial asset 2,393 -
Current tax asset - 704
Cash and cash equivalents 15 16,280 8,315
56,487 45,064
Total assets 170,957 180,445
Current liabilities
Interest-bearing loans and borrowings 16 - 7,095
Lease liabilities 11, 16 25,434 31,552
Trade and other payables 17 35,958 26,188
Provisions 204 718
Derivative financial liability - 1,649
Current tax liability 1,115 -
62,711 67,202
Non-current liabilities
Lease liabilities 11, 16 85,702 104,362
Provisions 913 -
Derivative financial liability - 53
86,615 104,415
Total liabilities 149,326 171,617
Net assets 21,631 8,828
Equity attributable to equity holders of the Parent
Share capital 625 625
Share premium 28,322 28,322
Merger reserve (54) (54)
Share-based payment reserve 2,252 1,601
Hedging reserve 2,227 (1,203)
Retained earnings (11,741) (20,463)
Total equity 21,631 8,828
Consolidated statement of changes in equity
Attributable to equity holders of the Company
Share Share Merger Share-based Hedging Retained Total
capital premium reserve payment reserve( 1) earnings equity
£000 £000 £000 reserve £000 £000 £000
£000
Balance at 26 April 2020 625 28,322 (54) 1,506 1,171 (18,164) 13,406
Total comprehensive income for the period
Loss for the period - - - - - (2,299) (2,299)
Other comprehensive income/(expense) - - - 14 (2,341) - (2,327)
Total comprehensive income/(expense) for the period - - - 14 (2,341) (2,299) (4,626)
Hedging gains and losses and costs of hedging transferred to the cost of - - - - (33) - (33)
inventory
Transactions with owners of the Company
Share-based payment charges - - - 81 - - 81
Total transactions with owners - - - 81 - - 81
Balance at 2 May 2021 625 28,322 (54) 1,601 (1,203) (20,463) 8,828
Total comprehensive income for the period
Profit for the period - - - - - 8,722 8,722
Other comprehensive income - - - - 3,871 - 3,871
Total comprehensive income for the period - - - - 3,871 8,722 12,593
Hedging gains and losses and costs of hedging transferred to the cost of - - - - (441) - (441)
inventory
Transactions with owners of the Company
Share-based payment charges - - - 651 - - 651
Total transactions with owners - - - 651 - - 651
Balance at 1 May 2022 625 28,322 (54) 2,252 2,227 (11,741) 21,631
1. Hedging reserve includes £175,956 (FY21: £155,124) in relation to
changes in forward points which are recognised in other comprehensive income
and accumulated as a cost of hedging within the hedging reserve.
Consolidated cash flow statement
For the period ended 1 May 2022
FY22 FY21
£000 (Restated -
Note 10)
£000
Profit/(loss) for the year (including Adjusting items) 8,722 (2,299)
Adjustments for:
Depreciation of property, plant and equipment 5,005 5,187
Impairment of property, plant and equipment 416 957
Reversal of impairment of property, plant and equipment (175) (1,000)
Depreciation of right-of-use assets 20,029 23,311
Impairment of right-of-use assets 710 4
Reversal of impairment of right-of-use assets (980) (874)
Amortisation of intangible assets 806 947
Derivative exchange gain 289 (444)
Financial income (16) (18)
Financial expense 692 617
Interest on lease liabilities 4,500 4,869
Loss on disposal of property, plant and equipment 244 262
Loss on disposal of right-of-use assets 2,066 373
Profit on disposal of lease liability (2,340) (464)
Loss on disposal of intangible assets - 311
Share-based payment charges 651 81
Taxation 1,436 (502)
Operating cash flows before changes in working capital 42,055 31,318
(Increase)/decrease in trade and other receivables (1,514) 1,217
Increase in inventories (892) (2,284)
Increase in trade and other payables 9,336 167
Increase/(decrease) in provisions 399 (261)
Cash flows from operating activities 49,384 30,157
Corporation tax paid (222) (30)
Net cash inflow from operating activities 49,162 30,127
Cash flows from investing activities
Acquisition of property, plant and equipment (1,936) (1,869)
Acquisition of intangible assets (1,015) (526)
Interest received 16 18
Net cash outflow from investing activities (2,935) (2,377)
Cash flows from financing activities
Payment of lease liabilities (capital) (25,969) (14,327)
Payment of lease liabilities (interest) (4,500) (4,869)
Payment of RCF fees - (619)
Other interest paid (157) (279)
Repayment of bank borrowings (7,500) (10,000)
Issue of bank loan - 7,500
Net cash outflow from financing activities (38,126) (22,594)
Net increase in cash and cash equivalents 8,101 5,156
Exchange rate movements (136) 218
Cash and cash equivalents at beginning of year 8,315 2,941
Cash and cash equivalents at end of year 16,280 8,315
Notes
(Forming part of the condensed financial statements)
1. Accounting policies
Where accounting policies are particular to an individual note, narrative
regarding the policy is included with the relevant note.
(a) General information
TheWorks.co.uk plc is one of the UK's leading multi-channel value retailers of
arts and crafts, stationery, toys and books, offering customers a
differentiated proposition as a value alternative to full price specialist
retailers. The Group operates a network of over 500 stores in the UK &
Ireland and an online store.
TheWorks.co.uk plc (the 'Company') is a UK-based public limited company
(11325534) with its registered office at Boldmere House, Faraday Avenue, Hams
Hall Distribution Park, Coleshill, Birmingham B46 1AL.
These consolidated financial statements for the 52 weeks ended 1 May 2022
(FY22 or the 'Period') comprise the results of the Company and its
subsidiaries (together referred to as the 'Group'), and are presented in
pounds sterling. All values are rounded to the nearest thousand (£000),
except when otherwise indicated.
(b) Basis of preparation
The financial statements have been prepared in accordance with UK-adopted
international accounting standards.
The preparation of the financial statements requires management to make
judgements, estimates and assumptions that affect the application of policies,
and the reported amounts of assets and liabilities, income and expenses. The
estimates and associated assumptions are based on historical experience,
future budgets and forecasts, and various other factors that are believed to
be reasonable under the circumstances, the results of which form the basis of
making the judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
The estimates and assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognised in the period in which the estimate is
revised if the revision affects only that period, or in the period of the
revision and future periods if the revision affects both current and future
periods. The Group's significant judgements and estimates relate to going
concern and the inventory shrinkage provision; these are described in Note
1(b) and 13, respectively.
(i) Going concern
The financial statements have been prepared on a going concern basis, which
the Directors consider appropriate for the reasons set out below.
The Directors have assessed the prospects of the Group, taking into account
its current position and the potential impact of the principal risks
documented at the end of this report.
The Group has prepared cash flow forecasts for a period of at least twelve
months from the date of approval of these financial statements, based on the
Board's forecast for FY23 and its 3 Year Plan, referred to as the 'Base Case'
scenario. In addition, a 'severe but plausible' 'Downside Case' sensitivity
has been prepared to support the Board's conclusion regarding going concern,
by stress testing the Base Case to indicate the financial headroom resulting
from applying more pessimistic assumptions.
In assessing the basis of preparation the Directors have considered:
• the external environment;
• the Group's financial position including the quantum and
expectations regarding availability of bank facilities;
• the potential impact on financial performance of the risks
described in the Strategic report;
• the output of the Base Case scenario, which represents the Group's
estimate of the most likely financial performance over the forecast period;
• measures to maintain or increase liquidity in the event of a
significant downturn in trading;
• the resilience of the Group to these risks having a more severe
impact, evaluated via the Downside Case which shows the impact on the Group's
cash flows, bank facility headroom and covenants; and
• the response to situations in which consumer market conditions are
even more severe than the Downside Case.
These factors are described below.
External environment
The risks which were most prominent in the Board's consideration of going
concern are those relating to the economy and the market, with the nature of
these risks having altered significantly since last year's Annual Report.
COVID-19 was the dominant factor in making this judgement in relation to the
financial statements for FY20 and FY21, but the Board's assessment is that
there is now only a residual risk associated with this. Instead, the risk of
weaker consumer demand is now considered to be the greatest risk, due to the
factors that have been widely reported externally in recent months, including
a much higher level of inflation and concerns about its effect on household
budgets and consumer spending on discretionary items.
The potential adverse impact on trading in the event of a further weakening of
consumer demand due to general economic or market weakness is considered to be
of a smaller magnitude than the impact of the full national lockdowns which
were experienced during periods of the COVID-19 pandemic.
Risks relating to Brexit are not considered significant for the Group and
therefore are not expected to have any bearing on the basis of preparation of
the financial statements.
Financial position and bank facilities
The cash and borrowings of the Group at the period end are shown in the
financial statement Notes 19 (Cash and cash equivalents) and 20 (Borrowings).
In addition, Note 25 (Financial instruments) describes the Group's objectives,
policies and processes for managing its capital; its financial risk management
objectives; details of its financial instruments and hedging activities; and
its exposure to credit risk and liquidity risk.
At 1 May 2022 the Group held net cash (excluding lease liabilities) of £16.3m
(FY21: net cash (excluding lease liabilities) of £0.8m).
The Group's bank facilities were renewed in June 2022, and now comprise a
larger revolving credit facility (RCF), increased to £30.0m which terminates
at the end of November 2025. The facility includes two financial covenants
which are structured in a way that is typical for a retail business of this
size. The covenants are tested quarterly:
1. the level of net debt to LTM (last twelve months' rolling) EBITDA
(maximum ratio 2.5x).
2. the "Fixed Charge Cover" or ratio of LTM EBITDA prior to deducting
rent and interest, to LTM rent and interest (minimum ratio 1.20x until 31
October 2023, 1.25x until 31 October 2024 and 1.30x thereafter).
The bank facility is larger than the Group expects to use, and has been sized
in this way to provide the Board and stakeholders with additional assurance as
to the availability of liquidity, given the current heightened levels of
uncertainty as regards the economy and external environment, and to provide
such assurance beyond the going concern period.
Potential impact of risks on Base Case and Downside Case scenarios
The 'Principal risks and uncertainties' are set out at the end of this report
and represent the main risks that the Board considers could threaten the
Group's business model, future performance, solvency or liquidity.
It is considered unlikely that all the risks would manifest themselves to
adversely affect the business at the same time. The Directors have estimated
what the most likely combination of risks might be that could materialise
within the going concern assessment period and how the business might be
affected; this combination of risks is reflected in the Base Case assumptions.
As noted above, the most prominent risk in the near term is considered to be
the risk of lower consumer spending due to a weakened economy, which could
affect sales, costs and liquidity.
During FY22 the Group experienced a cyber security incident. This had a
limited immediate/direct impact on trading towards the end of FY22 and there
was a residual effect on trading during early FY23 as the Group took the
decision to implement a very cautious and low risk approach to reinstating its
systems, whilst simultaneously introducing significantly strengthened cyber
security measures. As a result of these measures the Board considers that the
risk of a material impact from any future cyber security attack is lessened.
The Downside Case scenario takes into consideration the same risks as the Base
Case but assumes that their effects are more severe, especially the level of
disruption that could be experienced if consumer spending weakens
significantly from its already reduced level, during the coming peak trading
season.
Base Case scenario
The Base Case scenario assumptions are aligned with the Group's internal
forecast:
• during FY22 sales were adversely impacted during the peak trading
season by significant disruptions to the flow of stock into the business due
to problems in the ocean freight system and store sales were also affected by
the Omicron COVID-19 variant. The Base Case assumes that sales are not
affected by these factors during the going concern period;
• online sales levels during the early part of FY23 have been lower
than expected. The Base Case assumes that online sales improve from their
recent levels but not to the level initially expected, despite the fact that
the Group plans to implement measures to improve online sales;
• the gross margin assumptions include provision for the
continuation for a longer period than initially expected of higher than normal
ocean container freight costs, until the end of FY23. Thereafter it is assumed
that any reduction in freight rates will, broadly, be offset by a less
favourable currency exchange rate than the hedged rate during FY23;
• the Base Case provides for known or expected inflationary
increases including those associated with significantly higher electricity
prices which are assumed to double and not to reduce during the going concern
period, and wage rates including further increases in the National Living
Wage;
• capital expenditure levels are in line with the Group's strategic
plan, which would enable a reduction in capital expenditure in the event of a
Downside scenario occurring;
• the plan allows for the resumption of dividend payments.
Under the Base Case scenario, the Group's forecasts show that it will not draw
on its bank facility at any point. Whilst it may not be relevant given it is
not envisaged that the facility would be used under the Base Case scenario,
nevertheless the Base Case indicates that the financial covenants are complied
with at all times.
The output of the Base Case model scenario therefore indicates that the Group
would have sufficient financial resources to continue to meet its liabilities
as they fall due over the going concern period.
Measures to maintain or increase liquidity in the event of a significant
downturn in trading
During the COVID-19 pandemic the Group demonstrated that it was capable of
taking measures to maintain or improve liquidity, and subsequently, during
FY22, the Group has continued to generate positive cashflow.
If deemed necessary, mitigating actions would be taken in response to a
significant downturn in trading, which would increase liquidity. These may
include, for example, delaying and reducing stock purchases, stock
liquidation, reductions in capital expenditure, the review of payment terms
and the review of dividend levels. Some of these potential mitigations have
been built into the Downside Case model, and some have been noted as
additional measures that may be taken in practice in the event of that
scenario, or worse, actually occurring.
Severe but plausible Downside Case scenario
The Downside Case makes the following assumptions to reflect more adverse
conditions compared to the Base Case:
• store LFL sales are assumed to be 5% lower than the Base Case
during the peak period prior to Christmas 2022, to allow for the possibility
that consumer spending is adversely affected for the reasons described above.
Recent store sales levels have been slightly above the Base Case level;
• online sales are assumed to be lower than in the Base Case,
reflecting the possibility that the recent performance is due to external
factors beyond our control, such as a shift in consumer shopping patterns away
from online sales, and/or the failure by the Group to successfully implement
some or all of its plans to improve the online sales performance;
• the gross margin assumptions are consistent with the Base Case,
which the Board believes already takes a sufficiently cautious view of
expected freight rates, even allowing for a severe but plausible Downside
scenario;
• volume related costs in the Downside Case are lowered where they
move directly with sales levels, for example, online fulfilment and marketing
costs are assumed to reduce to correspond with the lower online sales. The
model also reflects certain steps which could be taken to mitigate the effect
of lower sales levels, depending on management's assessment of the situation
at the time. These include adjustments to stock purchases, reducing capital
expenditure, reductions in headcount or labour usage, a reduction in discounts
allowed as part of the Group's loyalty scheme and suspending the payment of
dividends.
Under the Downside Case scenario, due to the mitigations built into the model,
the Group's forecasts show that it will not draw on its bank facility at any
point during the going concern period. Again, whilst it may not be relevant if
the facility is not actually required, nevertheless the Downside Case also
indicates that the financial covenants are complied with at all times.
Having considered the output of the Downside Case and the additional
mitigating steps available, the Board's conclusion is that the business would
continue to have adequate resources to continue in operation under this severe
but plausible set of assumptions.
Consideration of more severe scenarios
Given the current rate of inflation and its potential impact on consumer
confidence and spending, the Board believes that the Works value proposition
positions it well to benefit from any tendency consumers may have to trade
down in pursuit of better value. However, the Board also recognises that more
severe downside scenarios than those modelled might arise.
Accordingly, it has considered a range of more severe possibilities than are
reflected in the Downside Case, including a 10% reduction in sales between
January 2023 and April 2024 on the basis that consumers may prioritise
Christmas, but cut back on spending thereafter if their disposable incomes
reduce for a sustained period. In these circumstances, in addition to the
measures included in the Downside Case, further mitigating measures would be
required and are available which when implemented, would generate additional
profit and/or cash and provide further liquidity headroom and/or further
headroom in relation to the financial covenants. Such measures could include
further reductions in capital expenditure and further reductions in
discretionary expenditure in areas such as travel, training and professional
fees.
Conclusion regarding basis of preparation
The current economic environment, characterised by higher inflation than has
been experienced for a number of years, and a high level of uncertainty about
how long the situation will persist and whether it will become worse before it
improves, creates a higher than normal level of uncertainty with regard to the
strength of consumer spending. However, the Board's assessment is that,
despite this, the overall level of risk is not as high as was represented by
COVID-19, which resulted in a complete inability to operate the majority of
the Group's business for significant periods of time. The resilience
demonstrated by the business during those periods, in very challenging
conditions, provides additional assurance about the Group's ability to
continue as a going concern in the event of an extended economic downturn due
to high inflation etc.
Consequently, the Directors are confident that the Group will have sufficient
funds to continue to meet its liabilities as they fall due for at least twelve
months from the date of approval of the financial statements and have
therefore prepared the financial statements on a going concern basis.
(ii) New accounting standards
The Group has applied the following new standards and interpretations for the
first time for the annual reporting period commencing 3 May 2021:
• COVID-19 Related Rent Concessions (Amendments to IFRS 16)
• Interest Rate Benchmark Reform; Phase 2 (Amendments to IFRS 9, IAS
39, IFRS 7, IFRS 4 and IFRS 16)
The adoption of the standards and interpretations listed above has not led to
any changes to the Group's accounting policies or had any other material
impact on the financial position or performance of the Group.
As at the date of approval of these financial statements, the following
standards and interpretations, which have not been applied in these financial
statements, were in issue, but not yet effective:
• IFRS 17 - Insurance Contracts
• Property, Plant and Equipment - Proceeds Before Intended Use
(Amendments to IAS 16)
• Reference to the Conceptual Framework (Amendments to IFRS 3)
• Onerous Contracts - Cost of Fulfilling a Contract (Amendments to
IAS 37)
• Annual Improvements to IFRS Standards 2018-2020
• Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS
Practice Statement 2)
• Definition of Accounting Estimates (Amendments to IAS 8)
• Deferred Tax Related to Assets and Liabilities Arising From a
Single Transaction (Amendments to IAS 12)
• Classification of Liabilities as Current or Non-Current
(Amendments to IAS 1 Presentation of Financial Statements)
The adoption of the standards and interpretations listed above is not expected
to have a material impact on the financial position or performance of the
Group.
(c) Key sources of estimation uncertainty
The preparation of consolidated financial statements requires the Group to
make estimates and judgements that affect the application of policies
and reported amounts.
Critical judgements represent key decisions made by management in the
application of the Group accounting policies.
Where a significant risk of materially different outcomes exists due to
management assumptions or sources of estimation uncertainty, this will
represent a key source of estimation uncertainty.
Estimates and judgements are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates.
Key sources of estimation uncertainty which are material to the financial
statements are described in the context of the matters to which they relate,
in the following notes:
Description Note
Going concern 1(b)
Inventory - shrinkage provision 13
2. Other operating income
Accounting policy
The business was classified as a 'non-essential retailer' and was therefore
required to close its shops during periods of lockdown in the prior financial
year. Accordingly, the Group made full use of the support schemes available
from the Government, to partially mitigate the loss of profit caused by the
various periods of closure of the retail stores. Support was received through
three mechanisms, described below, and as summarised in the table:
1. the Coronavirus Job Retention Scheme (CJRS), the Government's support
measure relating to employment. This provided grants to cover wages of
furloughed colleagues with payments available of up to 80% of colleagues'
wages, up to a maximum of £2,500 per month plus National Insurance and
auto-enrolled pension contributions, to the extent these could be claimed;
2. business rates relief; and
3. local business support grants.
Amounts received relating to the CJRS scheme and local business support grants
must be classified as a government grant and accounted for in accordance with
IAS 20 Government Grants. Such grants are recognised in the income statement
in the period in which the associated costs for which the grants are intended
to compensate are incurred. The grant income is reported as 'other operating
income' in the income statement. The £119k charge noted below is a correction
of an immaterial overstatement of the CJRS income reported in respect of the
prior period.
The total business rates relief received during the year was £5,828k (FY21:
£14,165k).
FY22 FY21
£000 £000
COVID-19 furlough scheme grants receivable (119) 15,309
COVID-19 business grants receivable - 1,765
Rent receivable 8 7
(111) 17,081
3. Alternative performance measures (APMs)
Accounting policy
The Group tracks a number of APMs in managing its business, which are not
defined or specified under the requirements of IFRS because they exclude
amounts that are included in, or include amounts that are excluded from, the
most directly comparable measure calculated and presented in accordance with
IFRS, or are calculated using financial measures that are not calculated in
accordance with IFRS.
The Group believes that these APMs, which are not considered to be a
substitute for or superior to IFRS measures, provide stakeholders with
additional helpful information on the performance of the business. They are
consistent with how the business performance is planned and reported
internally, and are also consistent with how these measures have been reported
historically. Some of the APMs are also used for the purpose of setting
remuneration targets.
The APMs should be viewed as supplemental to, but not as a substitute for,
measures presented in the consolidated financial statements prepared in
accordance with IFRS. The Group believes that the APMs are useful indicators
of its performance but they may not be comparable with similarly titled
measures reported by other companies due to the possibility of differences in
the way they are calculated.
Like-for-like (LFL) sales
LFL sales are normally defined by the Group as the year-on-year growth in
gross sales from stores which have been opened for a full 63 weeks (but
excluding sales from stores closed for all or part of the relevant period or
prior year comparable period), and from the Company's online store, calculated
on a calendar week basis. The LFL sales increase has been calculated with
reference to the FY20 comparative sales figures, or two-year LFL, because the
extended periods of enforced store closures during FY21 prevent that period
from forming the basis of meaningful comparisons. For the last 5 weeks of the
Period, it has been necessary to calculate the LFL percentages with reference
to the corresponding weeks in FY19, because the equivalent weeks during FY20
were also affected by the first period of enforced store closures. Similar
comparison periods are also used for the total sales growth figures quoted.
The measure is used widely in the retail industry as an indicator of sales
performance.
A reconciliation of IFRS revenue to sales on a LFL basis is set out below:
FY22 FY21
£000 £000
LFL store sales when stores were open 219,308 128,901
Online sales 41,747 62,084
Total LFL 261,055 190,985
Non-LFL store sales 37,360 15,176
Total gross sales 298,415 206,161
VAT (33,511) (24,290)
Loyalty points (274) (1,191)
Revenue per consolidated income statement 264,630 180,680
Memo: total store gross sales (LFL plus non-LFL) 256,668 144,077
EBITDA, Adjusted EBITDA and Adjusted profit after tax
EBITDA is defined by the Group as earnings before interest, tax, depreciation,
amortisation and profit/loss on the disposal of fixed assets. Adjusted EBITDA
is calculated by adding back or deducting Adjusting items to EBITDA. See Note
4 for a description of Adjusting items.
The Group also reports another measure of Adjusted EBITDA, which removes the
impact of IFRS 16, to provide a measure that is consistent with internal
reporting and is as used by the Group in its investment appraisals. The table
provides a reconciliation of Adjusted EBITDA to profit/(loss) after tax and
the impact of IFRS 16:
FY22 FY21
£000 £000
Non-IFRS 16 Adjusted EBITDA1 16,562 4,285
IAS 17 income statement charges not recognised under IFRS 16 24,433 27,454
Foreign exchange difference on euro leases 120 59
Post-IFRS 16 Adjusted EBITDA1 41,115 31,798
Loss on disposal of right-of-use assets recognised under IFRS 16 (2,066) (353)
Profit on disposal of lease liability recognised under IFRS 16 2,340 464
Loss on disposals of property, plant and equipment (244) (262)
Loss on disposals of intangible assets - (311)
Depreciation of property, plant and equipment (5,005) (5,187)
Depreciation of right-of-use assets (20,029) (23,311)
Amortisation (806) (947)
Finance expenses (5,192) (5,486)
Finance income 16 18
Tax (charge)/credit (1,436) 502
Adjusted profit/(loss) after tax 8,693 (3,075)
Adjusting items (including impairment charges and reversals) 29 776
Tax charge - -
Profit/(loss) after tax 8,722 (2,299)
1. Also adjusted for profit and loss on disposal of right-of-use
assets and liabilities, property, plant and equipment and intangible assets.
Profit before tax and IFRS 16
The table provides a reconciliation of profit/(loss) before tax and IFRS 16
adjustments to profit/(loss) before tax.
FY22 FY21 (Restated(1))
Adjusted Adjusting items Total Adjusted Adjusting items Total
£000 £000 £000 £000 £000 £000
Profit/(loss) before tax before IFRS 16 adjustments 9,525 (241) 9,284 (3,395) (94) (3,489)
Remove IAS 17 rental charge 24,306 - 24,306 27,331 - 27,331
Remove hire costs from hire of equipment 126 - 126 124 - 124
Remove depreciation charged on the existing assets 276 - 276 329 - 329
Remove interest charged on the existing liability 31 - 31 44 - 44
Depreciation charge on right-of-use assets (20,029) - (20,029) (23,311) - (23,311)
Interest cost on lease liability (4,500) - (4,500) (4,869) - (4,869)
Loss on disposal of right-of-use assets (2,066) - (2,066) (353) - (353)
Profit on disposal of lease liability 2,340 - 2,340 464 - 464
Foreign exchange difference on euro leases 120 - 120 59 - 59
Additional impairment charge under IAS 36 - 270 270 - 870 870
Net impact on profit/(loss) 604 270 874 (182) 870 688
Profit/(loss) before tax 10,129 29 10,158 (3,577) 776 (2,801)
1 In the prior year financial statements, the allocation of fixed
asset impairment charges between the right-of-use asset and property, plant
and equipment categories was incorrect. The prior year balances have therefore
been restated, resulting in an increase in the right-of-use asset balance of
£801k, and a decrease in the property, plant and equipment balances of
£801k. As such, this has increased the prior year loss before tax before IFRS
16 adjustments by £801k.
Adjusted profit metrics
Key profit measures including operating profit, profit before tax, profit for
the period and earnings per share are calculated on an adjusted basis by
adding back or deducting Adjusting items. These adjusted metrics are included
within the consolidated income statement and consolidated statement of other
comprehensive income, with further details of Adjusting items included in Note
4.
4. Adjusting items
Adjusting items are those items of income and expenditure that, by reference
to the Group, are material in size and unusual in nature or incidence and that
in the judgement of the Directors should be disclosed separately on the face
of the financial statements to ensure both that the reader has a proper
understanding of the Group's financial performance and that there is
comparability of financial performance between periods.
The Directors believe that the Adjusted profit and earnings per share measures
included in this report provide additional useful information to shareholders.
These measures are consistent with how business performance is measured
internally. The profit before tax and Adjusting items measure is not a
recognised profit measure under IFRS and may not be directly comparable with
adjusted profit measures used by other companies.
If a transaction or related series of transactions has been treated as an
Adjusting item in one accounting period, the same treatment will be applied
consistently year-on-year.
In relation to FY22, the items classified as 'Adjusting', as shown below,
related to impairments and impairment reversals.
FY22 FY21
£000 £000
Cost of sales
Impairment charges1 1,126 961
Impairment reversals1 (1,155) (1,873)
HMRC duty provision2 - (63)
Total cost of sales (29) (975)
Administrative expenses
Salary and other costs3 - 322
Packaging waste costs provision release4 - (123)
Total administrative expenses - 199
Total Adjusting items (29) (776)
1. These relate to fixed asset impairment charges and reversals of prior
year impairment charges.
2. This related to a provision recognised regarding a HMRC review of the
Group's duty rates.
3. Salary and other costs related to payments to past Directors, and
other associated costs.
4. This related to the release of a provision recognised regarding
packaging waste cost penalties from FY18.
5. Operating profit
Operating profit (before Adjusting items) is stated after charging/(crediting)
the following items:
FY22 FY21
£000 £000
Loss on disposal of property, plant and equipment 244 262
Loss on disposal of intangible assets - 310
Loss on disposal of right-of-use assets 2,066 353
Profit on disposal of lease liability (2,340) (464)
Depreciation 25,034 28,498
Amortisation 806 947
Adjusting items (see Note 4) (29) (776)
Operating lease payments:
- Hire of plant and machinery1 389 392
- Other operating leases1 1,549 439
Net foreign exchange losses (128) 135
Cost of inventories recognised as an expense 106,954 69,364
Staff costs 60,031 49,989
1. These balances relate to non-IFRS 16 operating lease rentals during
the year; please refer to Note 15 for further details of these balances.
Expenses reclassification
Certain online costs relating to fulfilment and website maintenance previously
treated as distribution or administrative expenses have been reclassified to
cost of sales in the FY22 accounts as this more accurately reflects their
nature. The prior year balances have been reclassified to maintain
consistency; the effect on gross profit, distribution expenses and
administrative expenses is summarised in the table below:
Per FY21 financial statements FY21 restated balance
£000 Adjustment £000
£000
Cost of sales (159,758) (9,609) (169,367)
Gross profit 20,922 (9,609) 11,313
Other operating income 17,081 - 17,081
Distribution expenses (15,075) 8,635 (6,440)
Administrative expenses (20,261) 974 (19,287)
Operating profit 2,667 - 2,667
6. Taxation
Accounting policy
The tax expense represents the sum of the tax currently payable and deferred
tax.
Current tax
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the income statement because it
excludes items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or deductible.
The Group's liability for current tax is calculated using tax rates that have
been enacted or substantively enacted by the balance sheet date.
Deferred tax
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method.
Deferred tax liabilities are generally recognised for all taxable temporary
differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which deductible
temporary differences can be utilised. Such assets and liabilities are not
recognised if the temporary difference arises from the initial recognition of
goodwill or from the initial recognition (other than in a business
combination) of other assets and liabilities in a transaction that affects
neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates, and interests in joint
ventures, except where the Group is able to control the reversal of the
temporary difference and it is probable that the temporary difference will not
reverse in the foreseeable future. Deferred tax assets arising from deductible
temporary differences associated with such investments and interests are only
recognised to the extent that it is probable that there will be sufficient
taxable profits against which to utilise the benefits of the temporary
differences and they are expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised based on tax
laws and rates that have been enacted or substantively enacted at the balance
sheet date. Deferred tax is charged or credited in the income statement,
except when it relates to items charged or credited in other comprehensive
income, in which case the deferred tax is also dealt with in other
comprehensive income.
The measurement of deferred tax liabilities and assets reflects the tax
consequences that would follow from the manner in which the Group expects,
at the end of the reporting period, to recover or settle the carrying amount
of its assets and liabilities.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax
liabilities and when they relate to income taxes levied by the same taxation
authority and the Group intends to settle its current tax assets and
liabilities on a net basis.
Current tax and deferred tax for the year
Current and deferred tax are recognised in profit or loss, except when they
relate to items that are recognised in other comprehensive income or directly
in equity, in which case the current and deferred tax are also recognised in
other comprehensive income or directly in equity, respectively. Where current
tax or deferred tax arises from the initial accounting for a business
combination, the tax effect is included in the accounting for the business
combination.
Recognised in consolidated income statement
FY22 FY21
£000 £000
Current tax expense
Current year 2,059 -
Adjustments for prior years 3 22
Current tax expense 2,062 22
Deferred tax credit
Origination and reversal of temporary differences (17) (423)
Increase in tax rate (825) -
Adjustments for prior years 216 (101)
Deferred tax credit (626) (524)
Total tax expense/(credit) 1,436 (502)
The UK corporation tax rate for FY22 and FY21 was 19.0%. Tax for other
jurisdictions is calculated at the rates prevailing in the respective
jurisdictions.
Deferred tax assets and liabilities are recognised based on the corporation
tax rate applicable when they are anticipated to unwind. An increase in the UK
corporation rate from 19% to 25% (effective 1 April 2023) was substantively
enacted on 24 May 2021 (although this is now under review). The deferred tax
liability as at 1 May 2022 was therefore calculated using a 25% rate.
Assets and liabilities arising on foreign operations have been recognised at
the applicable overseas tax rates.
Reconciliation of effective tax rate
FY22 FY21
£000 £000
Profit/(loss) for the year 10,158 (2,801)
Tax using the UK corporation tax rate of 19% 1,930 (532)
Non-deductible expenses 182 105
Effect of tax rates in foreign jurisdictions (40) 4
Tax under/(over) provided in prior periods 219 (79)
Utilisation of unrecognised tax losses brought forward (116) -
Deferred tax not recognised 86 -
Change in tax rate (825) -
Total tax expense/(credit) 1,436 (502)
The Group's total income tax expense in respect of the period was £1,436k
(FY21: credit of £502k). The effective tax rate on the total profit before
tax was 14.1% (FY21: 17.9% on the loss before tax) whilst the effective tax
rate on the total profit before Adjusted items was 14.2% (FY21: 14.0% on the
loss before Adjusted items). The difference between the total effective tax
rate and the Adjusted tax rate relates to fixed asset impairment charges and
reversals within Adjusting items being non-deductible for tax purposes.
7. Dividends
Accounting policy
At the balance sheet date, dividends are only recognised as a liability if
they are appropriately authorised and are no longer at the discretion of the
Company. Unpaid dividends that do not meet these criteria are disclosed in the
notes to the financial statements.
No dividends were paid to shareholders during FY21 or FY22.
Dividend equivalents totalling £175k (FY21: £74k) were accrued in the year
in relation to share-based long-term incentive schemes.
The Board has recommended the payment of a 2.4 pence per share final dividend
in respect of FY22 (FY21: £Nil).
8. Earnings per share
Basic earnings per share is calculated by dividing the profit or loss 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 shares that may be issued
in connection with employee share incentive awards.
The Group has chosen to present an Adjusted earnings per share measure, with
profit adjusted for Adjusting items (see Note 4 for further details)
to reflect the Group's underlying profit for the year.
FY22 FY21
Number Number
Number of shares in issue 62,500,000 62,500,000
Number of dilutive share options 940,673 -
Number of shares for diluted earnings per share 63,440,673 62,500,000
£000 £000
Profit/(loss) for the financial period 8,722 (2,299)
Adjusting items (29) (776)
Total Adjusted profit/(loss) for Adjusted earnings per share 8,693 (3,075)
pence pence
Basic earnings per share 14.0 (3.7)
Diluted earnings per share 13.7 (3.7)
Adjusted basic earnings per share 13.9 (4.9)
Adjusted diluted earnings per share 13.7 (4.9)
9. Intangible assets
Accounting policy
Goodwill
Goodwill arising on consolidation represents any excess of the consideration
paid and the amount of any non-controlling interest in the acquiree over the
fair value of the identifiable assets and liabilities (including intangible
assets) of the acquired entity at the date of the acquisition. Goodwill is
recognised as an asset and assessed for impairment annually or as triggering
events occur. Any impairment in value is recognised within the income
statement.
Software
Where computer software is not an integral part of a related item of computer
hardware, the software is treated as an intangible asset. Capitalised software
costs include external direct costs of goods and services, as well as internal
payroll related costs for employees who are directly associated with the
project. Internal payroll related costs are capitalised if the recognition
criteria of IAS 38 Intangible Assets are met or are expensed as incurred
otherwise.
Capitalised software development costs are amortised on a straight-line basis
over their expected economic lives, normally between three and seven years.
Computer software under development is held at cost less any recognised
impairment loss. Any impairment in value is recognised within the income
statement.
Goodwill Software Total
£000 £000 £000
Cost
Balance at 3 May 2021 16,180 8,043 24,223
Additions - 1,015 1,015
Balance at 1 May 2022 16,180 9,058 25,238
Amortisation and impairment
Balance at 3 May 2021 16,180 5,580 21,760
Amortisation charge for the year - 806 806
Balance at 1 May 2022 16,180 6,386 22,566
Net book value
At 3 May 2021 - 2,463 2,463
At 1 May 2022 - 2,672 2,672
Goodwill Software Total
£000 £000 £000
Cost
Balance at 27 April 2020 16,180 8,415 24,595
Additions - 526 526
Disposals - (898) (898)
Balance at 2 May 2021 16,180 8,043 24,223
Amortisation and impairment
Balance at 27 April 2020 16,180 5,221 21,401
Amortisation charge for the year - 947 947
Disposals - (588) (588)
Balance at 2 May 2021 16,180 5,580 21,760
Net book value
At 27 April 2020 - 3,194 3,194
At 2 May 2021 - 2,463 2,463
Goodwill impairment testing
Goodwill of £16.2m was impaired to £Nil in FY20, therefore, no further
impairment testing is necessary in relation to this.
10. Property, plant and equipment
Accounting policy
Items of property, plant and equipment are stated at their cost of acquisition
or production, less accumulated depreciation and accumulated impairment
losses.
Depreciation is charged on a straight-line basis over the estimated useful
lives as follows:
• Leasehold property improvements: over the life of the lease.
• Fixtures and fittings: 15% per annum straight line or depreciated
on a straight-line basis over the remaining life of the lease, whichever is
shorter.
• Computer equipment: 25 to 50% per annum straight line.
The assets' residual values and useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date, with the effect of any changes in
estimate accounted for on a prospective basis. An asset's carrying amount is
written down immediately to its recoverable amount if the asset's carrying
amount is greater than its estimated recoverable amount.
An item of property, plant and equipment is derecognised upon disposal or when
no future economic benefits are expected to arise from the continued use of
the asset. The gain or loss arising on the disposal or scrappage of an asset
is determined as the difference between the sales proceeds and the carrying
amount of the asset and is recognised in profit or loss.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or
production of qualifying assets, which are assets that necessarily take a
substantial period of time to get ready for their intended use or sale, are
added to the cost of those assets, until such time as the assets are
substantially ready for their intended use or sale. All other borrowing costs
are recognised in the profit or loss in the period in which they are incurred.
IFRS 16
IFRS 16 creates the concept of right-of-use assets. The accounting policy and
description of the accounting treatment in respect of IFRS 16 is included
within Note 11.
Impairment of tangible and intangible assets
The carrying amounts of the Group's tangible and intangible assets with a
definite useful life are reviewed at each balance sheet date to determine
whether there is any indication of impairment to their value. If such an
indication exists, the asset's recoverable amount is estimated and compared to
its carrying value. Where the asset does not generate cash flows that are
independent from other assets, the Group estimates the recoverable amount of
the CGU to which the asset belongs. The Directors consider an individual
retail store to be a cash generating unit (CGU).
The recoverable amount of an asset is the greater of its fair value less
disposal cost and its value in use (the present value of the future cash flows
that the asset is expected to generate). In determining value in use, the
present value of future cash flows is discounted using a pre-tax discount rate
that reflects current market assessments of the time value of money in
relation to the period of the investment and the risks specific to the asset
concerned. Where the carrying value exceeds the recoverable amount a provision
for the impairment loss is established with a charge being made to the income
statement. When the reasons for a write down no longer exist, the write down
is reversed in the income statement up to the net book value that the relevant
asset would have had if it had not been written down and if it had been
depreciated. For intangible assets that have an indefinite useful life
the recoverable amount is estimated at each annual balance sheet date.
Measuring recoverable amounts
The key assumptions for the value in use calculations are those regarding the
growth rates of sales and gross margins, operating costs, long-term growth
rates, maintenance capital expenditure and the pre-tax discount rate used to
discount the assumed cash flows to present value.
Impairment triggers
In FY21, due to COVID-19 and its impact on the UK economy and the Group, an
impairment review was performed on all stores. As at 1 May 2022 only stores
with an indicator of impairment have been included within the impairment
assessment, including 38 stores with a budgeted loss at EBITDA level and an
additional 30 stores which have historically been loss making and management
is considering the closure or relocation of the store at the lease break date.
An additional 50 stores with a prior year impairment charge have also been
included in the FY22 assessment.
Key assumptions
The key financial assumptions used in the estimation of the recoverable amount
are set out below. The values assigned to the key assumptions represent
management's assessment of current market conditions and future trends and
have been based on historical data from both external and internal sources.
Management determined the values assigned to these financial assumptions as
follows:
The pre-tax discount rate is derived from the Group's weighted average cost of
capital, which has been estimated using the capital asset pricing model, the
inputs of which include a country risk-free rate, equity risk premium, Group
size premium, a forecasting risk premium and a risk adjustment (beta). The
post-tax WACC is subsequently adjusted to reflect the specific amount and
timing of the future tax cash flows.
FY22 FY21
Pre-tax discount rate 17.9% 16.8%
Long-term growth rate 2.0% 2.0%
Cash flow forecasts are derived from the most recent Board-approved corporate
plans that form the Base Case on which the value in use calculations are
based, and which are described in Note 1(b)(i) (Going concern).
The assumptions used in the estimation of future cash flows are:
• rates of growth in sales and gross margins, which have been
determined on the basis of the factors described in Note 1(b)(i) (Going
concern);
• operating cost estimates reflect expected changes in the variables
that underpin them and, in particular, expected increases in the National
Living Wage; and
• maintenance capital expenditure includes estimates of ongoing
capital expenditure required to maintain the store network, but excludes any
significant growth capital initiatives not committed.
Cash flows beyond the corporate plan period (2026 and beyond) have been
determined using the long-term growth rate; this is based on management's
future expectations, reflecting, amongst other things current market
conditions and future trends and has been based on historical data from both
external and internal sources. Severe weather has been considered when
modelling forecasts and it is not deemed to have a material affect on the
projected numbers in the impairment review.
Impairment charge
As at the end of FY21, an impairment charge of £2,588k was recorded against
right-of-use assets, property, plant and equipment relating to 80 stores.
Evidence is available from internal reporting that indicates that the economic
performance of 48 of these stores has improved and is expected to continue to
do so. As a result, an impairment reversal of £1,155k has been recognised
relating to these stores. Conversely, during FY22 an impairment charge of
£1,126k was recognised against 39 stores, reflecting the underperformance of
these stores for a variety of reasons. A net reversal of £29k has therefore
been shown as an Adjusting item on the face of the consolidated income
statement.
Sensitivity analysis
Whilst the Directors believe the assumptions adopted are realistic, reasonably
possible changes in key assumptions could occur which would cause the
recoverable amount of certain stores to be lower or higher than the carrying
amount. The Directors consider that the only key assumption, that could
reasonably be different and cause a material change in the impairment charge,
is sales growth. A reduction in sales of 5% from the Base Case plan to reflect
a potential downside scenario would result in an increase in the impairment
charge of £422k relating to a total of 41 stores, and a decrease in the
impairment reversal of £212k relating to 46 stores. An increase in sales of
5% from the Base Case plan would increase the impairment reversal by £189k
relating to 53 stores and decrease the impairment charge by £321k to relating
to 33 stores.
Reasonably possible changes to other key assumptions, including a 200 basis
point increase in the pre-tax discount rate across all stores, or a 200 basis
point reduction in the long-term growth rate would not result in a significant
change to the impairment charges or reversals, either individually or in
combination.
Whilst the Directors consider their assumptions to be realistic, should actual
results, including the rates of growth in sales, be different from
expectations, then it is possible that the value of property, plant and
equipment included in the balance sheet could become materially different to
the estimates used.
RoUA - RoUA - Land and Plant and Fixtures and Total
property plant and buildings equipment fittings £000
£000 equipment £000 £000 £000
£000
Cost
Balance at 3 May 2021 154,047 1,913 10,682 3,376 26,167 196,185
Additions 3,126 508 (38) 476 1,498 5,570
Disposals (5,768) - (229) (34) (407) (6,438)
Balance at 1 May 2022 151,405 2,421 10,415 3,818 27,258 195,317
Depreciation and impairment
Balance at 3 May 2021 42,442 976 5,555 2,762 14,384 66,119
Depreciation charge for the year 19,597 432 808 640 3,557 25,034
Impairment charge 710 - 155 15 246 1,126
Impairment reversals (980) - (54) (8) (113) (1,155)
Disposals (3,702) - (147) (21) (258) (4,128)
Balance at 1 May 2022 58,067 1,408 6,317 3,388 17,816 86,996
Net book value
At 3 May 2021 111,605 937 5,127 614 11,783 130,066
At 1 May 2022 93,338 1,013 4,098 430 9,442 108,321
RoUA - RoUA - Land and Plant and Fixtures and Total
property plant and buildings equipment fittings £000
£000 equipment £000 £000 £000
£000
Cost
Balance at 27 April 2020 140,992 1,724 10,591 2,539 25,738 181,584
Additions 18,404 189 151 859 859 20,462
Disposals (Restated(1)) (5,349) - (60) (22) (430) (5,861)
Balance at 2 May 2021 (Restated(1)) 154,047 1,913 10,682 3,376 26,167 196,185
Depreciation and impairment
Balance at 27 April 2020 25,494 459 4,586 2,185 11,036 43,760
Depreciation charge for the year 22,794 517 975 594 3,618 28,498
Impairment charge (Restated(2)) 4 - 150 49 758 961
Impairment reversals (874) - (149) (49) (802) (1,874)
Disposals (Restated(1)) (4,976) - (7) (17) (226) (5,226)
Balance at 2 May 2021 (Restated(1)) 42,442 976 5,555 2,762 14,384 66,119
Net book value
At 27 April 2020 115,498 1,265 6,005 354 14,702 137,824
At 2 May 2021 (Restated(2)) 111,605 937 5,127 614 11,783 130,066
1. In the prior year financial statements leases which had expired and
had a nil net book value were not captured within the IFRS 16 disposals
assessment. The carried forwards property right-of-use asset cost and
depreciation figures were incorrectly grossed up by £4,725k; as such these
prior year balances have been adjusted. Note that this adjustment has no
impact on the FY21 closing net book value of the right-of-use assets or
property, plant and equipment.
2. In the prior year financial statements, the allocation of fixed asset
impairment charges between the right-of-use asset and property, plant and
equipment categories was incorrect. The prior year balances have therefore
been restated, resulting in an increase in the right-of-use asset balance of
£801k, and a decrease in the property plant and equipment balances of £801k:
Per FY21 financial statements Adjustment FY21 restated balance
£000 £000 £000
Right-of-use assets 111,741 801 112,542
Property, plant and equipment 18,325 (801) 17,524
11. IFRS 16
Accounting policy
IFRS 16 establishes principles for the recognition, measurement, presentation
and disclosure of leases.
IFRS 16 requires the use of a single definition of leases, which recognises a
right-of-use asset (RoUA) and a lease liability for all leases, with
exceptions only permitted for short-term and low-value leases. Accordingly,
the impact of IFRS 16 is to require recognition of a lease liability and a
corresponding RoUA in relation to leases previously classified as operating
leases, which were hitherto accounted for via a single charge to the profit
and loss account.
The most significant impact is that the Group's retail store operating leases
are recognised on the balance sheet as right-of-use assets representing the
economic benefits of the Group's right to use the underlying leased assets,
together with the associated future lease liabilities.
Under IFRS 16, the Group recognises right-of-use assets and lease liabilities
at the lease commencement date.
Identifying an IFRS 16 lease
At the inception of a contract, the Group assesses whether it is, or contains,
a lease. A contract is, or contains, a lease if it conveys the right to
control the use of an asset for a period of time, in exchange for
consideration. Control is conveyed where the Group has both the right to
direct the asset's use and to obtain substantially all the economic benefits
from that use. For each lease or lease component, the Group follows the lease
accounting model as per IFRS 16, unless the permitted recognition exceptions
can be used.
Recognition exceptions
The Group leases many assets, including properties, IT equipment and warehouse
equipment.
The Group has elected to account for lease payments as an expense on a
straight-line basis over the lease term or another systematic basis for the
following types of leases:
(i) leases with a term of twelve months or less; and
(ii) leases where the underlying asset has a low value.
For leases where the Group has taken the short-term lease recognition
exemption and there are any changes to the lease term or the lease is
modified, the Group accounts for the lease as a new lease.
For leases where the Group has taken a recognition exemption as detailed
above, rentals payable under these leases are charged to income on a
straight-line basis over the term of the relevant lease except, where another
more systematic basis is more representative of the time pattern in which
economic benefits from the lease asset are consumed.
Lessee accounting under IFRS 16
Upon lease commencement the Group recognises a right-of-use asset and a lease
liability.
Initial measurement
The right-of-use asset is initially measured at cost, which comprises the
initial amount of the lease liability adjusted for any lease payments made at
or before the commencement date, plus any initial direct costs incurred and an
estimate of costs to dismantle and remove the underlying asset, or to restore
the underlying asset or the site on which it is located at the end of the
lease, less any lease incentives received.
The lease liability is initially measured at the present value of the lease
payments payable over the lease term, discounted at the rate implicit in the
lease if that can be readily determined. If that rate cannot be readily
determined, the Group uses the incremental borrowing rate.
Variable lease payments that depend on an index or a rate are included in the
initial measurement of the lease liability and are initially measured using
the index or rate as at the commencement date. Amounts expected to be payable
by the Group under residual value guarantees are also included. Variable lease
payments that are not included in the measurement of the lease liability are
recognised in profit or loss in the period in which the event or condition
that triggers payment occurs, unless the costs are included in the carrying
amount of another asset under another accounting standard.
The Group has applied judgement to determine the lease term for some lease
contracts that include renewal options. The assessment of whether the Group is
reasonably certain to exercise such options impacts the lease term, which
significantly affects the value of lease liabilities and right-of-use assets
recognised.
The payments related to leases are presented under cash flows from financing
activities and cash flows from operating activities in the cash flow
statement.
Subsequent measurement
After lease commencement, the Group values right-of-use assets using a cost
model. Under the cost model a right-of-use asset is measured at cost less
accumulated depreciation and accumulated impairment.
The lease liability is subsequently increased by the interest cost on the
lease liability and decreased by lease payments made. It is re-measured to
reflect changes in: the lease term (using a revised discount rate); the
assessment of a purchase option (using a revised discount rate); the amounts
expected to be payable under residual value guarantees (using an unchanged
discount rate); and future lease payments resulting from a change in an index
or a rate used to determine those payments (using an unchanged discount rate).
The re-measurements are matched by adjustments to the right-of-use asset.
Lease modifications may also prompt re-measurement of the lease liability
unless they are determined to be separate leases.
Depreciation of right-of-use assets
The right-of-use asset is subsequently depreciated using the straight-line
method, from the commencement date to the earlier of either the end of the
useful life of the right-of-use asset or the end of the lease term. The
estimated useful lives of right-of-use assets are determined on the same basis
as those of property, plant and equipment. In addition, the right-of-use asset
is reduced by impairment losses, if any, and adjusted for certain
re-measurements of the lease liability.
Extension and termination options
Extension and termination options are included in a number of property leases
across the Group. These terms are used to maximise operational flexibility.
The Group has applied judgement to determine the lease term for some lease
contracts in which it is a lessee that includes renewal options and break
clauses. The assessment of whether the Group is reasonably certain to exercise
such options impacts the lease term, and therefore the amount of lease
liabilities and right-of-use assets recognised.
Judgements in determining the lease term
In determining the lease term, management considers all facts and
circumstances that create an economic incentive to exercise an extension
option, or not to exercise a termination option. Extension options (or
periods after termination options) are only included in the lease term if the
lease is reasonably certain to be extended (or not terminated).
For property leases the following factors are the most relevant:
• The profitability of the leased store and future plans for the
business.
• If there are any significant penalties to terminate (or not
extend), the Group is typically reasonably certain to extend.
COVID-19 concessions
The Group elected to account for qualifying COVID-19 related rent concessions
as variable lease payments, recognising the concession in the period in which
the event or condition that triggers the payments occurs. Rent concessions are
qualifying if the following conditions are met:
(i) the concession was a direct consequence of the COVID-19 pandemic;
(ii) the change in lease payments resulted in revised consideration for the
lease that is substantially the same as, or less than, the consideration
for the lease immediately preceding the change;
(iii) the reduction in lease payments only affects payments due on or before
30 June 2022; and
(iv) there is no substantive change to other terms and conditions of the
lease.
The Group has applied this practical expedient consistently to all lease
contracts with similar characteristics and in similar circumstances.
Amounts recognised in the balance sheet
Right-of-use assets
FY22 FY21
£000 (Restated - Note 10)
£000
Land and buildings 93,338 111,605
Plant and equipment 1,013 937
Total right-of-use assets 94,351 112,542
Additions to the right-of-use assets during FY22 were £3,634k (FY21:
£18,593k).
Lease liabilities
Lease liabilities included in the statement of financial position as at the
financial year end:
FY22 FY21
£000 £000
Current 25,434 31,552
Non-current 85,702 104,362
111,136 135,914
Maturity analysis - contractual undiscounted cash flows:
FY22 FY21
£000 £000
Less than one year 31,592 35,978
Two to five years 83,017 86,601
More than five years 21,862 30,158
Total undiscounted lease liabilities 136,471 152,737
Amounts recognised in the statement of profit and loss:
FY22 FY21
£000 (Restated - Note 10)
£000
Depreciation charge on right-of-use assets (RoUA) 20,029 23,311
Interest cost on lease liability 4,500 4,869
Loss on disposal of RoUA 2,066 353
Profit on disposal of lease liability (2,340) (464)
Foreign exchange difference on euro leases 120 59
Additional impairment charge under IAS 36 (270) (870)
Operating lease rentals - hire of plant and equipment
- Low-value leases 389 392
Total plant and equipment operating lease rentals 389 392
Operating lease rentals - store leases
- Stores with variable lease rentals 454 20
- Concession leases (the landlord has substantial substitution rights) 943 1,310
- Low-value leases (11) (23)
- Lease is expiring within 12 months or has rolling break clauses 87 98
- Lease has expired 484 149
- Variable lease payments as a result of COVID-19 concessions (408) (1,115)
Total store operating lease rentals 1,549 439
Depreciation of right-of-use asset by class:
FY22 FY21
£000 £000
Land and buildings 19,597 22,794
Plant and equipment 432 517
Total right-of-use asset depreciation 20,029 23,311
Other lease rental commitments:
Non-cancellable operating lease rentals for leases excluded from the IFRS 16
assessment are as follows:
FY22 FY21
Motor vehicle Concession Total Motor vehicle Concession Total
leases store leases leases store leases
£000 £000 £000 £000 £000 £000
Less than one year 386 589 975 247 326 573
Between one and five years 200 729 929 230 51 281
More than five years - - - - - -
Total operating lease commitments 586 1,318 1,904 477 377 854
12. Deferred tax assets
Recognised deferred tax assets
Deferred tax assets are attributable to the following:
Assets Liabilities
FY22 FY21 FY22 FY21
£000 £000 £000 £000
Property, plant and equipment 1,637 732 - -
Leases 1,645 1,420
Temporary timing differences 195 372 - -
Financial assets/liabilities - 328 - -
Tax assets 3,477 2,852 - -
Movement in deferred tax during the year
Fixed assets Leases Temporary Financial Total
£000 £000 timing assets/ £000
differences liabilities
£000 £000
At 3 May 2021 732 1,420 372 328 2,852
Adjustment in respect of prior years - - (216) - (216)
Deferred tax credit/(charge) to profit and loss 905 225 39 (328) 841
Deferred tax credit/(charge) in equity profit and loss - - - - -
At 1 May 2022 1,637 1,645 195 - 3,477
13. Inventories
Accounting policy
Inventories comprise stocks of finished goods for resale and are valued on a
weighted average cost basis and carried at the lower of cost and net
realisable value. 'Cost' includes all direct expenditure and other
attributable costs incurred in bringing inventories to their present location
and condition.
The process of purchasing inventories may include the use of cash flow hedges
to manage foreign exchange risk. Where hedge accounting applies,
an adjustment is applied such that the cost of stock reflects the hedged
exchange rate.
Inventory summary
FY22 FY21
£000 £000
Gross stock value 29,817 31,045
Less: stock provisions for shrinkage and obsolescence (3,252) (4,391)
Goods for resale net of provisions 26,565 26,654
Stock in transit 2,822 2,478
Inventory 29,387 29,132
The cost of inventories recognised as an expense during the period was
£107.7m (FY21: £69.0m).
Stock provisions
The Group makes provisions in relation to stock quantities, due to stock
losses not yet reflected in the accounting records, commonly referred
to as shrinkage and, in relation to stock value, where the net realisable
value of an item is expected to be lower than its cost, due to obsolescence.
The calculation of stock provisions entails the use of estimates and
judgements combined with mechanistic calculations and extrapolations. The
shrinkage provision represents a key source of estimation uncertainty.
Shrinkage provision
As at the end of FY21 the unrecognised shrinkage provision was £2.6m, which
was significantly higher than the amount usually required in a normal,
non-COVID-19 impacted year. This was due to the closure of stores for extended
periods of FY21, which significantly interrupted the stock counting process
and the corresponding routine process of correcting the stock file.
During the course of FY22, the Group has carried out 'tactical' (perpetual
inventory basis) stock counts in its retail stores on a regular basis, such
that at the end of the financial year a significant proportion of stock in
stores had been counted and stock file adjustments made to correct errors
indicated by the counts. In addition, full four wall counts (i.e. a controlled
count of all stock in a store) were performed in 71 stores during the last 6
weeks of the financial year, and an additional 53 four wall counts were
performed in the month following the financial year end. Through these
processes, the Group establishes that its accounting records are maintained to
reflect the actual quantities of stock in stores. This process also provides
the Group with an indication of the typical percentage of stock loss, which is
used to calculate, by extrapolation, unrecognised shrinkage at the balance
sheet date.
The stock records were updated to reflect the results of stock counts during
the financial year, as a result of which the provision required for
unrecognised shrinkage materially decreased compared with the value at the end
of FY21, by £0.7m, to £1.9m.
The percentages used in calculating the unrecognised shrinkage provision were
based on data obtained from the full 4-wall counts performed towards the end
of the financial year and during the first month of FY23. The shrinkage
provision was £1.9m at the period end (FY21: £2.6m), representing 8.6% of
gross store stock (FY21: 12.3%). The provision relates to store stock with a
value of £22.2m (FY21: £21.2m). This represents management's best estimate
of the likely level of stock losses experienced, but the actual level of stock
loss will only be established once all products in all locations have been
counted. A 20% increase / (decrease) in the shrinkage percentage used would
result in an increase / (decrease) to the shrinkage provision of £334k to
£2.3m / (£1.6m). This represents a reasonably possible range of estimation
uncertainty with regard to the unrecognised shrinkage provision
The shrinkage provision has been estimated based on the results the four wall
counts which may not be representative of the store population as a whole.
Due to the level of the provisions, combined with the risk that the sample on
which it is based may not be representative of the populations as a whole, the
calculation of the stock shrinkage provision is considered a key source of
estimation uncertainty for the FY22 financial statements.
Obsolescence provision
Generally, the Group's inventory does not comprise a large proportion of stock
with a 'shelf life'. Stock lines which are slow selling because they have been
less successful than planned or which have sold successfully and become
fragmented as they reach the natural end of their planned selling period, are
usually discounted and sold during 'sale' events, for example the January
sale. This stock is referred to as terminal stock.
During the prior financial year, the closures of the stores due to the
COVID-19 pandemic interrupted the orderly process of selling through terminal
stock, particularly during the UK-wide lockdown implemented between January
and April 2021, which coincided with the period when the January sale would
normally have taken place. As a result, at the end of FY21, the Group carried
a higher than normal level of terminal stock and the obsolescence provision
was higher than normal, at £1.8m.
During FY22 a high degree of focus has been placed on clearing terminal stock
and at the period end the Group held significantly less terminal stock than
the prior year. Consequently, the obsolescence provision has reduced by £0.5m
to £1.3m.
14. Trade and other receivables
FY22 FY21
£000 £000
Current
Trade receivables 2,606 2,214
Other receivables 1,793 423
Prepayments 4,028 3,362
Accrued income - 914
Trade and other receivables 8,427 6,913
Trade receivables are attributable to sales which are paid for by credit card
and are classified as finance assets at amortised cost; they are all current.
No credit is provided to customers. The value and nature of trade receivables
is such that no material credit losses occur; therefore no loss allowance has
been recorded at the period end (FY21: £Nil).
Other receivables relate to stock on water deposits paid, and other accounts
payable debit balances. Prepayments relate to prepaid property costs and other
expenses.
The accrued income balance in the prior year relates to the COVID-19 furlough
scheme Government grants receivable as detailed in Note 2.
15. Cash and cash equivalents
FY22 FY21
£000 £000
Cash and cash equivalents per balance sheet 16,280 8,315
Net cash and cash equivalents 16,280 8,315
The Group's cash and cash equivalents are denominated in the following
currencies:
FY22 FY21
£000 £000
Sterling 12,198 3,385
Euro 3,102 1,138
US dollar 980 3,792
Net cash and cash equivalents 16,280 8,315
At 1 May 2022 the Group held net cash (excluding lease liabilities) of £16.3m
(FY21: net cash (excluding lease liabilities) of £0.8m). This comprised cash
of £16.3m (FY21: cash of £8.3m and a draw down of £7.5m against a term
loan).
For the year ended 1 May 2022 the Group's bank facilities comprised a
revolving credit facility (RCF) of £22.5m, with an expiry date of 30
September 2022. The RCF limit reduced to £20.0m in January 2022 and remained
at this level until its expiry. From 10 June 2022 the Group's bank facilities
comprised an RCF of £30m expiring 30 November 2025.
The facility includes financial covenants in relation to the level of net debt
to LTM EBITDA and "Fixed Charge Cover" or ratio of LTM EBITDA prior to
deducting rent and interest, to LTM rent and interest.
16. Borrowings
Accounting policy
Interest-bearing bank loans and overdrafts, loan notes and other loans are
recognised in the balance sheet at amortised cost. Finance charges associated
with arranging non-equity funding are recognised in the income statement over
the life of the facility. All other borrowing costs are recognised in the
income statement in accordance with the effective interest rate method. A
summary of the Group's objectives, policies, procedures and strategies with
regard to financial instruments and capital management can be found in Note
25. At 1 May 2022 all borrowings were denominated in sterling (FY21:
sterling).
FY22 FY21
£000 £000
Non-current liabilities
Lease liabilities 85,702 104,362
Non-current liabilities 85,702 104,362
Current liabilities
Secured bank loans - 7,500
Lease liabilities 25,434 31,552
Unamortised debt issue costs - (405)
Current liabilities 25,434 38,647
Reconciliation of borrowings to cash flows arising from financing activities:
FY22 FY21
£000 £000
Borrowings at start of year (excluding overdrafts) 143,009 142,129
Changes from financing cash flows
Payment of lease liabilities (capital) (25,969) (14,327)
Payment of lease liabilities (interest) (4,500) (4,869)
Proceeds from loans and borrowings - 7,500
Repayment of bank borrowings (7,500) (10,000)
Payment of RCF fees - (619)
Total changes from financing cash flows (37,969) (22,315)
Other changes
Lease liability additions 3,634 18,593
Disposal of lease liabilities (2,340) (464)
The effect of changes in foreign exchange rates (120) (59)
Interest expense 4,922 5,125
Total other changes 6,096 23,195
Borrowings at end of year (excluding overdrafts) 111,136 143,009
Net debt reconciliation
FY22 FY21
£000 £000
Net debt (excluding unamortised debt costs)
RCF - 7,500
Cash and cash equivalents (16,280) (8,315)
Net bank cash (16,280) (815)
Non-IFRS 16 lease liabilities 485 766
Non-IFRS 16 net cash (15,795) (49)
IFRS 16 lease liabilities 110,651 135,148
Net debt including IFRS 16 lease liabilities 94,856 135,099
17. Trade and other payables
FY22 FY21
£000 £000
Current
Trade payables 20,091 15,309
Other tax and social security 2,792 194
Accrued expenses 13,075 10,685
Trade and other payables 35,958 26,188
Trade payables and accruals principally comprise amounts outstanding for trade
purchases and ongoing costs. The Group has financial risk management policies
in place to ensure that all payables are paid within the pre-agreed credit
terms.
The Directors consider that the carrying amount of trade payables approximates
to their fair value.
Accrued expenses comprise various accrued property costs, payroll costs and
other expenses, including £453k (FY21: £677k) of deferred income in relation
to the Group's customer loyalty scheme. The increase in the balance from FY21
is due to an increase in the bonus accrual.
The Group has net US dollar denominated trade and other payables of £4.9m
(FY21: £2.9m).
18. Related party transactions
Identity of related parties with which the Group has transacted
Balances and transactions between the Company and its subsidiaries, which are
related parties, have been eliminated on consolidation and are not disclosed
in this note. Transactions between the Group and its associates are disclosed
below.
Transactions with key management personnel
The compensation of key management personnel (including the Directors) is as
follows:
FY22 FY21
£000 £000
Key management remuneration - including social security costs 2,077 1,965
Pension contributions 134 124
Long Term Incentive Plan - including social security costs 621 29
Total transactions with key management personnel 2,832 2,118
Further details of the compensation of key management personnel who are
Directors are provided in the Group's Directors' remuneration report which is
included in the FY22 Annual Report.
19. Subsidiary undertakings
The results of all subsidiary undertakings are included in the consolidated
financial statements. The principal place of business and the registered
office addresses for the subsidiaries are the same as for the Company.
Company Active/ Direct/ Registered Class of Ownership
dormant indirect control number shares held
The Works Investments Limited Active Direct 09073458 Ordinary 100%
The Works Stores Limited Active Indirect 06557400 Ordinary 100%
The Works Online Limited Dormant Indirect 08040244 Ordinary 100%
20. Post balance sheet events
On 10 June 2022, the Group renewed its bank facility, increasing the size of
the committed facility to £30.0m and extended the expiry date to the end of
November 2025, providing significant additional liquidity headroom.
Principal risks and uncertainties
Our risk management framework
The Board is ultimately responsible for ensuring that appropriate risk
management processes and controls are in place. The Board has delegated
responsibility for overseeing risk management processes and controls to the
Audit and Risk Committee. Day-to-day risk management is the responsibility of
the senior management team.
Risks are identified and assessed using a bottom-up review process across all
areas of the business. Senior management determine the potential risks that
could affect their areas of responsibility and their likelihood of occurrence
and impact. This information is used to create a primary risk register which
collates the principal risks, which are subsequently considered by the Audit
Committee and the Board.
Risk appetite
The Board determines the Group's risk appetite. Where a conflict exists
between risk management and strategic ambitions, the Board seeks to achieve a
balance which facilitates the long-term success of the Group.
Principal and emerging risks and changes in principal risks
The Board assesses the principal risks facing the Group and emerging risks,
including those that could threaten the operation of its business, future
performance, or solvency. The Board formally reviews the Group's principal
risks at least twice a year.
A detailed operational risk review was undertaken by the Head of Finance
during October and November 2021. This review included discussions with each
Operational Board member covering current, principal and emerging risks
affecting their respective areas of responsibility and broader corporate
risks. Following this review, the Group's primary risk register and its
principal risks and mitigation plans were updated, and considered by the Audit
Committee and the Board in January 2022 and July 2022.
The principal risks and uncertainties facing the Group are set out in the
table on the following pages, together with details of how these are currently
mitigated.
During the year the main changes to our principal risks were as follows:
· Removal of store expansion risk: store expansion activity and
specifically new store openings no longer represent a risk. The Group's
strategy is now focused on optimising its store estate and new store openings
are a less significant strategic priority.
· Addition of environmental (including climate change) risk:
Following the risk review described above this risk is now considered to be a
principal risk.
· Reduced likelihood and impact of risks associated with
COVID-19.
· As a result of experiencing a cyber-security incident in March
2022 we have significantly increased our cyber-security capabilities. As a
result, the risks of a similar event in the future causing significant damage
or disruption, have reduced. We continue to monitor our systems diligently and
implement appropriate mitigation measures.
The Group may be exposed to other risks and uncertainties not presently known
to management, or currently deemed less material, that may subsequently have
an adverse effect on the business. Further, the exposure to each risk will
evolve as mitigating actions are taken or as new risks emerge or the nature of
risks change.
Risk, profile change and link to strategy Mitigation
1. Economy · The Group's proposition as an alternative to full price
specialist retailers positions it well for customers looking to trade down in
A deterioration in economic conditions or a reduction in consumer confidence times of economic uncertainty.
could impact customer spending and have an adverse effect on the Group's
revenue and profitability. · Monitor sales on a daily basis and ongoing review of pricing and
margins.
Change from prior year
· Review sales trends data at weekly trading meetings attended by
Increased risk level. COVID-19 trading restrictions were lifted at the start experienced senior management and, if required, agree and implement mitigating
of FY22, and the risks connected with the pandemic are now lower. However this actions to drive sales and/or reduce costs. Take account of expected impact in
risk is currently heightened due to: the Group's strategic planning process, budgets and forecasts.
· Supply chain costs described below. · Continue to focus on cost control across the business while
making carefully considered investments in certain areas to support the
· Raw materials and energy costs. Group's growth strategy.
· Increases in National Living and Minimum Wages given most of the · Increasing the use of direct sourcing as part of a three-year
Group's colleagues are paid the National Minimum or Living Wage. plan to improve the margin on key products purchased. This has been delayed by
the ongoing effects of COVID-19 in China, the Group's key supply source.
· The war in Ukraine.
· FX hedging policy in place to smooth the short-term effects of
· FX rates. exposure to foreign exchange rate fluctuations (substantially all FY23 USD
requirements hedged) and continue to hedge energy costs as appropriate.
Link to strategy
· Operate store estate on flexible short-term property leases to
· Develop our brand and increase customer engagement. ensure the Group benefits from reductions in rental costs through the rolling
renegotiation of its leases and can flex its store estate relatively quickly
· Enhance our online proposition. in the event of material local changes in demand.
· Optimise our store estate.
· Drive operational improvements.
2. Market · Focus on development of our brand and increasing customer
engagement is designed to further differentiate the Group from competitors.
The Group generates its revenue from the sale of books, toys, arts and crafts
and stationery products. · Emerging trends monitored by a recently strengthened trading team
that has a proven track record of responding to changing consumer tastes.
Although it has a track record of understanding customers' needs within these
categories, the market is competitive. Customers' tastes and shopping habits · Closely monitor competitors' propositions and discuss key
can change quickly. Failure to effectively predict or respond to changes could developments at weekly trading meetings and at Board level on a regular basis.
affect the Group's sales and financial performance.
· Monitor and review customer feedback.
Change from prior year
· Use sales data and online feedback channels to inform purchasing
Same risk level. and marketing decisions.
Link to strategy · Flexible lease terms allow the Group to adapt its store portfolio
(which continues to be highly relevant to customers) to react to changes in
· Develop our brand and increase customer engagement. local market conditions.
· Enhance our online proposition. · Ongoing investment in the Group's online capability will ensure
that it remains relevant as customers shopping behaviours increasingly involve
· Optimise our store estate. online engagement prior to store purchases as well as those made directly via
the website.
3. IT systems and cyber security · Systems and data are key to the execution of the strategy.
Ensuring systems and processes are fit for purpose will deliver efficiency and
The Group relies on its IT systems for many aspects of its operation. Failure capability improvements.
to develop and maintain these systems, or any prolonged system performance
problems or cyber-attack, could affect the Group's ability to trade and/or · Significantly enhanced IT security across all operations
could lead to significant fines and reputational damage. including upgraded malware detection and response capability to detect, defend
and isolate any attack, introduced extensive network segmentation to limit the
Change from prior year progress of any attack and established a new Security Operations Centre to
monitor and respond to any unusual activities in our systems or networks.
The Group experienced a cyber-security incident at the end of March 2022,
which temporarily affected till systems, replenishment deliveries to stores · Refreshed mandatory training for colleagues to raise
and delayed the fulfilment of online orders. Action was taken swiftly to
protect the business, which reduced the immediate threat and enabled trade to · awareness of cyber-security issues.
continue online and in the majority of stores. As part of the operational
recovery plan we have embedded significantly increased security capabilities · Enhanced working from home capabilities established in response
across the business, which has taken more time than merely reinstating the to the pandemic have reduced the level of dependence on a single site head
previous arrangements after scanning for residual security issues. While office.
this lengthened process has created a degree of short term operational
difficulty, it has resulted in a significant reduction in the risk of the · Regular IT investment strategy review undertaken by the Operating
business suffering major loss or disruption in the event of a future Board including security and infrastructure investment programmes.
cyber-security incident.
· Further strengthened in-house IT capabilities during FY22.
Link to strategy
· Diligent monitoring of systems on an ongoing basis.
· Develop our brand and increase customer engagement.
· Enhance our online proposition.
4. Supply chain · Buying and supply chain teams strengthened progressively since
mid-2020.
The Group uses third parties, including many in Asia, for the supply of
products. This creates a number of potential areas of risk, including the · Ongoing review of supplier base and diversification and change
potential for supplier failures, risks associated with manufacturing and implemented as appropriate to provide flexibility and reduce reliance on
importing goods from overseas, potential disruption at various stages of the individual suppliers.
supply chain and suppliers failing to act or operate ethically.
· Independent monitoring of suppliers undertaken by third-party
Supply chain disruption has been heightened due to COVID-19 resulting in auditors with local country knowledge and an understanding of social and
uneven demand and supply patterns. During FY22, the main supply chain impact ethical requirements.
was a very significant increase in ocean freight rates and difficulty
importing stock due to problems in the ocean freight system. · Developed a series of product technical requirements that provide
guidance for our buyers and suppliers during product
Due to the Group's low level of exposure to sales outside the U.K., risks
connected with Brexit are low albeit there still remains a higher level of · sourcing, development and manufacture.
complexity than previously in exporting goods to the Group's ten stores in
Ireland. · In-house product quality assurance team undertakes product
testing as part of a product surveillance test programme.
Change from prior year
· Implement policies that reinforce the Group's values and its
Unchanged level of risk. commitment to conduct business fairly, ethically and with respect to human
rights which suppliers are required to adhere to).
Link to strategy
· Proactive management of supply chain to ensure stock levels are
· Develop our brand and increase customer engagement. appropriate.
· Enhance our online proposition. · Continue to review freight costs (including measures to mitigate
such costs) and monitor alternative sourcing arrangements where practicable.
5. Brand and reputation · Developing our brand and increasing customer engagement is a
strategic aim. During the year we evolved and modernised our brand which will
Protecting and enhancing the reputation of the Group's key brand asset - be rolled out across the business during Autumn 2022.
'TheWorks.co.uk' - is vital to the Group's success. Failure to protect the
brand, in particular product quality and safety, could result in the Group's · In conjunction with our brand evolution, communicate to
reputation, sales and future prospects being adversely affected. colleagues our clarified purpose and values.
Change from prior year · Provide intellectual property guidance and education to design
and sourcing teams.
Same risk level.
· Monitor customer product reviews and take appropriate action to
Link to strategy remove products from sale and take other actions as appropriate where quality
issues are identified.
Develop our brand and increase customer engagement.
· In-house product quality assurance team works with suppliers to
ensure product quality, safety and ethical production.
· Conduct third-party technical and ethical audits.
· Monitor the Group's ESG responsibilities including the processes
in place to ensure the Group operates in a responsible way.
6. Regulation and compliance · Oversight of regulatory compliance by Group CFO and Company
Secretary with support from external advisers.
The Group is exposed to a growing number of legal and regulatory compliance
requirements including the Bribery Act, the Modern Slavery Act, the General · Implement policies and procedures in relation to mandatory
Data Protection Regulation (GDPR) and the Listing Rules. Failure to comply requirements and measures the Group has adopted voluntarily.
with these laws and regulations could lead to financial claims, penalties,
awards of damages, fines or reputational damage which, in some cases, could be · Operate a Whistleblowing Policy and procedure which enables
material and could significantly impact the financial performance of the colleagues to confidentially report any concerns or inappropriate behaviour.
business.
· Operate a GDPR Policy which is overseen by a data supervisor and
There are significant laws and regulations (including reporting and disclosure monitored by members of a GDPR governance monitoring group who meet regularly
requirements) surrounding Climate Change and environmental reporting, Failure and report key issues to the senior management team.
to comply with these could result in financial penalties, legal consequences
and/or reputational damage. · Retain experienced advisers where necessary to cover gaps in
expertise in the in-house team.
Change from prior year
· Entered into a partnership with Salford Trading Standards, one of
Higher risk level. Regulatory requirements relating to climate change and ten local trading standards authorities, to access greater consensus on
environmental reporting have increased, which increase this risk level. The regulatory interpretations and new legislation, particularly following Brexit.
Group is now subject to the TCFD disclosure requirements.
Link to strategy
Develop our brand and increase customer engagement.
7. Seasonality of sales · Continue to focus on reducing seasonality, where possible, by
growing the year-round appeal of the proposition.
The Group historically makes all of its profit in the second half of the
financial year, with the peak Christmas trading period contributing · Hold weekly trading meetings to ensure that immediate action is
substantially all of this. Interruptions to supply, adverse weather or a taken to maximise sales based on current and expected trading conditions.
significant downturn in consumer confidence in this period could have a
significant impact on the short-term profitability of the Group. · Enhanced online fulfilment operation to increase capacity during
the peak season.
Change from prior year
Same risk level.
Link to strategy
Develop our brand and increase customer engagement.
Enhance our online proposition.
8. People · Continue to develop succession plans which are discussed at
Nomination Committee meetings.
The Group's success is dependent on the quality of the Board and senior
management team. A lack of effective succession planning and development of · Establishing development programmes to support future leaders.
key colleagues could harm future prospects.
· Well-managed search and recruitment processes, together with
Change from prior year appealing proposition and welcoming culture, enables recruitment of high
calibre executives.
Reduced risk level compared to the previous year following recent appointments
to the Operational Board and senior management team. · Implement a remuneration policy designed to ensure management
incentives support the Group's long-term success for the benefit of all
Link to strategy stakeholders, including a long- term incentive plan for Executive Directors
and restricted share awards for Operational Board members.
· Develop our brand and increase customer engagement.
· Enhance our online proposition.
· Optimise our store estate.
· Drive operational improvements.
9. Business continuity · Business continuity plan in place including system recovery.
Following the cyber-security incident referred to above, this plan has been
Significant disruption to the operation, in particular internal IT systems, enhanced in a number of areas including the implementation of new cloud based
Support Centre or Distribution Centre, could severely impact the Group's back-ups which improve the flexibility of any disaster recovery plan response.
ability to supply stores or fulfil online sales resulting in financial or Further enhancements are planned in the coming year including subscription to
reputational damage. a cloud-based technology recovery centre to improve system recovery speed and
execution.
Change from prior year
· Undertake disaster recovery dry run exercises. The scope of these
Reduced risk as described above due to the implementation of additional exercises has been updated and a number of dry runs will take place in FY23.
security measures following cyber-security incident.
· Emergency generator installed at the Group's Support Centre to
Link to strategy insulate the business from the impact of power cuts.
· Develop our brand and increase customer engagement. · Maintain appropriate business interruption insurance cover.
· Enhance our online proposition.
· Optimise our store estate.
· Drive operational improvements.
10. Environmental (including climate change) · Initiatives to reduce our impact on the environment are being
implemented, for example, reducing waste packaging in products sold and in
There is an increased focus on sustainable business from consumers and parcel delivery packaging for online sales, and reducing our use of single use
regulators. In our business this applies to products and packaging in plastic.
particular. Failure to respond to these demands could affect the Group's
reputation, sales and financial performance. · Engaged a specialist ESG consultancy to assist in the development
of the Group's environmental strategy and ensure compliance with TCFD
Supply chain disruptions as a result of extreme weather events could damage requirements.
operations, in particular the flow of stock which could adversely impact
sales. · Recruiting a Sustainability Manager to lead and implement our
environmental strategy.
There are increased reporting and disclosure requirements relating to climate
change and environmental impact including new taxes. Regulations and · Working with our third-party logistics providers to explore and
compliance risk above. invest in energy efficient solutions within the supply chain process.
Change from prior year
New risk this year
Link to strategy
· Develop our brand and increase customer engagement.
· Drive operational improvements.
11. Liquidity · Financial forecasts and covenant headroom monitored and reported
to the Board monthly.
Insufficient liquidity available and/or insufficient headroom in banking
facilities. Potential for breach of banking covenants if financial performance · Strategy focuses on driving LFL sales and improving efficiency,
deteriorates significantly compared with plans. Availability of credit rather than previous store rollout plan, which is a lower risk, less capital
insurance to suppliers may be reduced or removed resulting in an increased intensive strategy.
cash requirement.
· The bank facilities have been increased to £30m and extended to
Change from prior year 30 November 2025.
Strengthened balance sheet and less capital intensive strategy reduce this
risk to a lower level than the previous year. A new revolving credit facility
has also recently been secured and increased to £30m.
Link to strategy
· Develop our brand and increase customer engagement.
· Enhance our online proposition.
· Optimise our store estate.
· Drive operational improvements.
12. COVID-19 · Continue to prioritise and promote the health and wellbeing of
colleagues, customers and the wider community.
The risks relating to COVID-19 appear to have reduced significantly since last
year. The residual risks are: · Focus on maximising the potential of the business in the broadest
sense to increase its resilience.
The potential for medium-term adverse economic impact following the cessation
of Government support schemes. · The Group is now better able to flex its online fulfilment
capacity to meet demand in the event of any future restrictions being imposed
Further supply chain disruption due to restrictions potentially being on retail store trading.
maintained in certain parts of the world, particularly China, which could
cause disruption to stock availability and cost inflation. · Successful navigation through the pandemic demonstrated the
relevance of the Group's proposition to customers and its ability to react to
Change from prior year such an event.
The risk is deemed to be lower than that reported at the prior year end,
following the successful roll out of the vaccination programme and the removal
of government restrictions.
Link to strategy
· Develop our brand and increase customer engagement.
· Enhance our online proposition.
· Optimise our store estate.
· Drive operational improvements.
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. END FR DLLFLLKLEBBZRecent news on Works co uk
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AnnouncementREG - TheWorks.co.uk PLC - Director/PDMR Shareholding
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Announcement