REG - TheWorks.co.uk PLC - Preliminary results - 52 weeks ended 30 April 2023
30/08/2023 07:00
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RNS Number : 7342K TheWorks.co.uk PLC 30 August 2023
30 August 2023
TheWorks.co.uk plc
("The Works", the "Company" or the "Group")
Preliminary results for the 52 weeks ended 30 April 2023
Resilient performance delivered in FY23 against challenging backdrop.
Well-positioned to capitalise on opportunities from execution of strategy and
deliver growth in FY24.
The Works, the family-friendly value retailer of arts and crafts, stationery,
toys, and books announces its preliminary results for the 52 weeks ended 30
April 2023 (the "Period" or "FY23") and an update on current trading.
Financial highlights
· The Works delivered a resilient performance in FY23 against a challenging
backdrop, with revenue increasing by 5.8% to £280.1m (FY22: £264.6m).
· Store sales, which represent 88.8% of total sales, strengthened as the year
progressed, with an LFL sales increase of 7.5% ((1)). Online sales declined by
15.0%, resulting in overall LFL sales growth of 4.2%.
· Product gross margin declined by 170bps due to strategic change in sales mix
(increased weighting of front-list books) and higher freight costs.
· Business rates costs increased by £5.8m as COVID-19 reliefs ended.
· Pre IFRS 16 Adjusted EBITDA £9.0m in line with revised expectations (FY22:
£16.6m).
· Adjusted PBT of £10.1m ((2)(3)) (FY22 Restated: £16.5m).
· Strong financial position at end of FY23, with net bank balances of £10.2m
(FY22: £16.3m, including higher than usual creditor balances).
· The Board proposes a final dividend of 1.6 pence per share (FY22: 2.4 pence),
seeking to balance the objective of continuing to provide a reasonable level
of dividend for shareholders whilst maintaining cash reserves during a period
in which the Group is seeking to rebuild its profitability. The Board also
outlines its updated capital distribution policy.
· Trading during the first 17 weeks of FY24 (to Sunday 27 August 2023) has been
in line with expectations, with store LFL sales growing by 5.4% and online
sales declining by 18.4%, resulting in overall LFL sales growth of 3.1%.
FY23 FY22 (restated) ((4))
£m £m
Revenue 280.1 264.6
Revenue growth % 5.8% 46.5%
Product gross margin % 57.6% 59.3%
Pre-IFRS16 Adjusted EBITDA ((2)) 9.0 16.6
Adjusted PBT ((2)) 10.1 16.5
Profit before tax 5.0 14.2
Adjusted basic EPS (pence) ((2)) 16.5p 26.0p
Basic EPS (pence) 8.4p 22.3p
Dividend per share (total in respect of year) (pence) 1.6p 2.4p
Net bank cash 10.2 16.3
Business highlights
Following the recovery from the March 2022 cyber security incident, the
Company made good strategic progress in FY23, providing solid foundations from
which to build on in FY24:
· Continued to refine our customer proposition to more closely reflect our
purpose - to inspire customers to read, learn, create and play - making lives
more fulfilled. Rolled out evolved brand to stores and online to start
changing legacy perceptions of The Works and more accurately reflect the
business today.
· Refreshed the product offering, launching new own brand products such as
"PlayWorks" toy range. Increased book market share by stocking more front-list
titles from best-selling authors such as Julia Donaldson and Colleen Hoover.
· Further enhanced the quality of the store estate with 14 new openings (which
are trading ahead of expectations), three relocations and 13 store closures.
Continued to optimise the existing estate with an investment of c.£1.4m in 34
refits, improving the customer experience by enhancing layouts, improving
signage and optimising space utilisation.
· Invested in operational improvements, the significant benefits of which are
expected to be fully realised in FY24 and beyond. This included restructuring
the distribution centre management team, implementing a new stock allocation
system, and introducing a new automated packing machine at our online
fulfilment provider, iForce.
· Launched a review of the business operating model to drive effectiveness and
efficiencies, improve processes and IT systems, particularly in relation to
the flow of stock through the business.
· Restructured management of the online operation to drive improved performance.
Increased focus on customer experience of the website and introduced new tools
to support analysis and provide insights into how best to improve performance.
· Placed 12(th) in "Best Big Companies to Work For", up from 13(th) in each of
the past two years and maintained 2* accreditation for 'outstanding' workplace
engagement.
Trading update for the 17 weeks ended 27 August 2023
Trading during the first 17 weeks of FY24 has been in line with our
expectations, with store LFL sales growing by 5.4% and online sales declining
by 18.4%, resulting in total LFL sales growth of 3.1%. Store sales are being
driven by growth across all product categories, continuing the trend of
positive store LFL growth seen throughout FY23. The Board is comfortable with
the compiled estimate of the market's forecast for FY24, an Adjusted EBITDA of
approximately £10.0m ((5)).
Board change
As announced alongside our FY23 results today, Steve Alldridge has advised the
Board of his intention to step down from his role as CFO by the end of 2023.
In line with our succession plans, we are delighted that Rosie Fordham, our
current Head of Finance, will be appointed as CFO when Steve steps down.
Gavin Peck, Chief Executive Officer of The Works, commented:
"The Works delivered a resilient performance in FY23, despite facing some
sizeable challenges. Revenue growth was driven by our strong portfolio of
stores, bolstered by the sector-wide shift of customers returning to shop
in-store post-COVID. Although inflationary pressures increased business costs
and dampened consumer confidence, we ended the year in line with our rebased
expectations. FY23 also showcased the enduring appeal of our value
proposition. I'd like to thank our colleagues who have demonstrated their
ongoing dedication to The Works and have continued to show customers how they
can read, learn, create and play more on a budget.
"In the first half our focus was on protecting and rebuilding the business,
but as the year progressed we were able to make more strategic progress. We
have developed our brand and customer proposition, ensured that our ranging is
aligned with customer demand and improved our store estate. We've also taken
steps to enhance our online proposition and drive significant operational
improvements across the business, the benefits of which we expect to be fully
realised from FY24 onwards.
"Looking ahead, the macroeconomic environment remains uncertain. However, we
are now well positioned to capitalise on strategic opportunities and given the
momentum gained in the latter half of FY23 we expect to grow sales and profit
in FY24. Reflecting confidence in the Group's prospects, the Board proposes a
final dividend of 1.6 pence per share in respect of FY23."
Preliminary results presentation
A presentation for sell-side analysts will be held today at 9.30am via video
conference call. A copy of the presentation will shortly be made available on
the Company's website (www.corporate.theworks.co.uk/investors
(http://corporate.theworks.co.uk/investors) ).
Enquiries:
TheWorks.co.uk plc
Gavin Peck, CEO via Sanctuary Counsel
Steve Alldridge, CFO
Sanctuary Counsel
Ben Ullmann 0207 340 0395 theworks@sanctuarycounsel.com (mailto:theworks@sanctuarycounsel.com)
Rachel Miller
Kitty Ryder
Footnotes:
(1) LFL sales growth has been calculated with reference to the FY22 comparative
sales figures. LFL sales growth is the growth in gross sales from stores which
have been trading for a full financial year prior to the current year and have
been trading throughout the current financial period being reported on, and
from the Company's online store, calculated on a calendar week basis. In FY22,
two year comparatives were used because the use of a normal one year LFL
comparative was prevented by the various disruptions to store trading brought
about by COVID restrictions in the FY21 comparative period.
(2) Adjusted profit figures exclude Adjusting items. See notes 3 (Alternative
performance measures) and 4 (Adjusting items) of the condensed financial
statements included in this RNS.
(3) The FY23 Adjusted PBT is greater than the pre IFRS 16 Adjusted EBITDA because
of the effect of IFRS 16. We would normally expect the Adjusted PBT to be less
than the pre IFRS 16 Adjusted EBITDA. Please refer to page 14 of this report
and note 3 of the condensed financial statements for further information.
(4) The FY23 results were delayed due to additional work being undertaken,
principally in relation to asset impairment charges and related impacts on
IFRS 16 calculations. As well as affecting the FY23 result, this also entailed
the restatement of comparative figures for prior periods. These issues did not
relate to the underlying performance of the business (for example, as
represented by the EBITDA) and had no direct cash impact. Information
regarding the restatements is included in note 11 of the condensed financial
statements (Property, plant and equipment).
(5) The Group's compiled estimate of the market's Adjusted PBT forecast for FY24
is approximately £2.8m.
Notes for editors:
The Works is one of the UK's leading family-friendly 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 525 stores in the UK & Ireland, as well
as 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 30 April 2023 or 1 May
2022, but is derived from those accounts. Statutory accounts for FY22 have
been delivered to the Registrar of Companies and those for FY23 will be
delivered in due course. The auditor has reported on those accounts: their
reports were (i) unqualified, (ii) included a reference to a material
uncertainty that may cast significant doubt on the Group's and the parent
company's ability to continue as a going concern as referred to in note 1(b)
to the financial statements, and (iii) did not contain a statement under
section 498 (2) or (3) of the Companies Act 2006. The audit of the statutory
accounts for the Period 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
Last year I wrote about the positive effect that the Group's new purpose - to
inspire reading, learning, creativity and play - making lives more fulfilled -
was having on the business soon after it was introduced. This year we embedded
the purpose further across the business, informing the implementation of our
"better, not just bigger" strategy, inspiring the creation of our ESG plan and
providing clarity about the future direction of the business.
The purpose has also helped to guide colleagues as they served customers and
reinforced the incredible culture at The Works, one of the enduring strengths
and unique attributes of the business. And whilst the economic environment has
been extremely challenging, colleagues at The Works have responded
thoughtfully to this backdrop, using it as an opportunity to inspire customers
to enjoy reading, learning, creativity and play on a budget, whilst also
supporting local communities and our charitable causes. I am proud to chair
such a creative and purpose-led business and would like to thank everyone at
The Works for their efforts.
Performance
I have long been impressed by the resilience of The Works, its ability to
adapt to unforeseen circumstances and manage challenging trading conditions.
In FY23 these traits were seen again as The Works delivered a resilient
performance, with revenue increasing by 5.8% to £280.1m. This growth was
delivered despite the business still recovering from a cyber security incident
late in the previous financial year and an uncertain macroeconomic backdrop.
Thanks to Gavin's steady leadership and the action taken to protect the
business, the resonance of our value customer proposition and the patience and
flexibility of our colleagues, we ended the year on a more positive sales
trajectory. Going into FY24, we can now confidently say that The Works is a
more operationally robust business, with greatly strengthened cyber security,
and remains financially strong.
The inflationary environment did impact our profit performance, particularly
in the first half of the year given rising freight, energy and other business
costs. However, as a result of these cost pressures easing and an improvement
in store sales growth in the second half, we ended the year in line with our
revised profit expectations. Although this is not where we expected to be at
the start of the year, it is a creditable performance given the challenges the
business faced and we ended the year in a financially secure position.
Strategy
The Works announced its "better, not just bigger" strategy in July 2021,
committing to a greater focus on the customer and to strengthening the
fundamentals of the business. This strategy not only made The Works more
resilient during the COVID-19 pandemic and challenging economic environment
that followed, it has also aligned business decisions more closely with our
purpose, and ultimately the customer.
Strategic progress was slower in the first half of FY23 as the business was
primarily focused on recovering from the cyber security incident and the
external environment saw retailers facing great uncertainty. However, more
progress was made in the second half of the year and the foundations have now
been laid for significant improvements in the year ahead.
The evolved brand has been rolled out across the business and we are now
building on this to demonstrate to customers why The Works is the best value
destination for reading, learning, creativity and play. This will attract more
customers to shop with us and through our relaunched 'Together' loyalty scheme
we now have an opportunity to engage more with our growing and loyal customer
community. Our active portfolio management continues. Our 14 new stores and 3
relocated stores opened during the year are performing ahead of expectations
and, along with our 34 store refits undertaken in the year, continue to
improve the overall quality of our store estate.
Our online performance has been disappointing, partly reflecting a
normalisation of store / online sales mix post-COVID. Following a review of
our website and online operations we now have the right resource and plans in
place to improve the customer experience and profitability of this channel.
During the year we implemented a number of structural changes to enable
improvements in our stock allocation and distribution processes, which will
help drive significant operational efficiencies across the business.
Together, these initiatives create a real opportunity for further strategic
progress and a step-change in sales growth and improved profitability over the
medium-term. We are excited by this potential and remain confident that our
"better, not just bigger" strategy is the right direction for the business.
Environmental, Social and Governance (ESG)
The Board has continued to oversee development of the Group's Environmental,
Social and Governance plan and to monitor progress. Whilst we have put more
structure around the ESG strategy in FY23 and made progress in key areas, the
Board recognises that there is still much more to be done.
Progress on ESG was mostly made in the second half of the year, namely the new
initiatives to support colleague engagement, wellbeing and career development,
as well as the creation of new climate targets and an improved system of
monitoring our environmental impact.
We have now set a target to be net-zero by 2045, with an ambition to do so by
2040 (in line with the British Retail Consortium), and we are now fully
compliant with the TCFD disclosure recommendations, including the reporting of
Scope 3 emissions. We still have a long way to go to reduce our environmental
impact but now have both the strategy in place and the mechanisms to track
progress, which will guide our decision making in the years ahead.
Although I believe that The Works is already a diverse, inclusive and
supportive business, Diversity & Inclusion (D&I) is an area that I
feel very strongly about and there is scope for us to do more. This year we
conducted a full review of D&I at The Works and undertook a survey to
understand colleague perceptions and experiences. Based on these insights we
have now developed a strategy through which we can make significant progress
to improve our diversity and inclusion in the years ahead. This will inspire
colleagues to be even more supportive and embracing of differences, encourage
new talent to join The Works and strengthen our special, collaborative and
supportive company culture.
CFO Succession
As announced alongside our FY23 results, Steve Alldridge has advised the Board
of his intention to step down from his role as CFO by the end of 2023. In line
with our succession plans, we are delighted that Rosie Fordham our current
Head of Finance, will be appointed as CFO when Steve steps down.
Dividend and outlook
Despite delivering a resilient performance in FY23 and ending the year in a
strong financial position, the Board hopes that FY23's EBITDA was a low point
and that it will increase progressively in future. Some good strategic
progress was made despite challenging trading conditions, and the underlying
appeal and relevance of The Works' proposition continues to resonate with
customers.
During the period in which the business works to rebuild its levels of profit,
a compromise is sought, between maintaining a reasonable dividend for
shareholders, whilst ensuring that the Group continues to maintain its cash
reserves. Taking this into consideration, along with the Company's resilient
FY23 performance, and its confidence in the Group's prospects, the Board
proposes a final dividend of 1.6 pence per share in respect of FY23 and
outlines its policy in relation to capital distributions, which is included at
the end of the financial review.
The Board believes that the business is well positioned to take full advantage
of the opportunities ahead, make further strategic progress and grow sales
profitably, and we remain confident in the Group's future prospects.
Carolyn Bradley
Chair
30 August 2023
CEO Review
Introduction
The Works delivered a resilient performance in FY23, with sales growth driven
by our fantastic network of stores and team of talented colleagues. The
economic backdrop was challenging, characterised by high inflation and
dampened consumer confidence. This, combined with the residual impact of the
cyber security incident at the start of the year, meant that the end result
was lower than we had anticipated heading into the year. However, by
continuing to focus on our purpose and offering exceptional value for our
customers, we have enabled them to continue reading, learning, creating and
playing - demonstrating that our value proposition has enduring relevance.
Over the past few years we have dealt with a host of external challenges, such
as the COVID-19 lockdowns and global supply chain disruption, as well as
internal ones like the cyber security incident. This has meant that our focus
has been primarily on protecting and rebuilding the business and supporting
our dedicated colleagues. Having established a clearer runway, our strategic
progress accelerated in the second half of FY23 and we expect to make even
more significant improvements in FY24. We remain confident in our ability to
become an even "better, not just bigger" business, driving a step-change in
sales and profitability over the medium term.
Trading performance and financial results
The Works has always been a business that demonstrates its resilience when
confronted with difficult trading conditions and the same can be said for
FY23. The Group delivered a 5.8% increase in revenue to £280.1m and LFL sales
growth of 4.2%, with store LFL sales increasing 7.5% and online sales
declining by 15.0%. Outlined below are the main factors that contributed to
this performance:
· The first quarter was particularly challenging given the residual impact of
the cyber security incident, which occurred in March 2022. The action taken to
protect the business and rebuild our systems slowed down sales in May and June
2022. However, as a result of this one-off event we have now accelerated the
implementation of IT upgrades and have even more robust defences in place.
Momentum built following our recovery with an improving store LFL sales
performance in the second half of the year.
· Russia's invasion of Ukraine and political turmoil in the UK resulted in
rising inflation and declining consumer confidence over the course of the
year. Families have seen incomes and discretionary spending impacted. For
value retailers like The Works we believe that sales have been impacted by
cost-constrained consumers reigning in their spending, but that this has been
balanced, to an extent, by shoppers seeking out the best value. This was
particularly the case at Christmas, resulting in strong store trading during
peak season and into the new calendar year.
· Retailers have witnessed a shift in consumer behaviour post-COVID, with
shoppers increasingly returning to shop in-store and less so online. Stores
have always been the lifeblood of the business and it has therefore resulted
in a net gain for The Works given that stores represent c.90% of sales.
Profitability was constrained, particularly in the first half of FY23 given
the lower than anticipated sales growth, high energy and freight costs and the
absence of COVID-related business rates support, which had provided a boost in
FY22. We revised our profit expectations for the year in August 2022 and have
achieved a result in line with our rebased expectations, delivering a
Pre-IFRS16 Adjusted EBITDA of £9.0m and Adjusted profit before tax of
£10.1m. The statutory Profit before tax was £5.0m, after impairment charges
of £5.1m. We believe this level of EBITDA is the low point that we will build
from in the years ahead, supported by greater strategic progress that we are
now set up to deliver.
Strategy
Our "better, not just bigger" strategy was announced in July 2021 to build on
the existing strengths of the business - our loyal customer base, strong
culture and fantastic store network. The strategy aims to provide The Works
with a clearer purpose and a more focussed brand identity and customer
proposition that will help to drive a step-change in sales growth, as well as
enabling us to improve the operations of the business, making The Works a more
customer-focussed and efficient retailer.
Since launching the strategy we have made decent progress in some areas, but
the reality of the internal and external challenges noted above has meant more
of our attention than we anticipated has been focused on protecting the
business and not on growth. Strategic progress has been slower than we would
have liked, however the business is now well-placed to deliver progress in
FY24 and beyond, which we expect will drive the step change growth in sales
and profitability that we want to achieve over the medium term.
Below is a summary of the strategic progress made in FY23 and the plans we
have to accelerate this in the year ahead.
Develop our brand and increase our customer engagement: We are working hard to
ensure that our customer proposition and brand are consistent with our
purpose, which will help to change legacy perceptions of The Works as a 'pile
it high, sell it cheap' discounter, encourage new customers to shop with us
and increase the spend of existing customers.
In FY23 we rolled out our evolved brand to our stores and website to ensure
that the visual representation of The Works accurately reflects our purpose
and the modern, fun and engaging business that The Works is today. We have
completed the first phase of this work and will now begin to more actively
communicate this to customers by developing and executing a marketing strategy
to bring our purpose and evolved brand to life, particularly through our
social channels.
We began to refresh our product offering to be better aligned with our
purpose, whilst maintaining our commitment to low prices. This included the
launch of new own brand ranges such as our children's toys "PlayWorks" brand
and a significantly extended range of front-list books, including titles by
authors such as Colleen Hoover and Julia Donaldson, which helped to increase
our book market share in terms of value by 0.7% and volume by 1.3% (to 3.9%
and 10.3% respectively). There remains an opportunity to further increase
market share in all categories and in the year ahead we will conduct an
extensive refresh of our core art, craft and stationery ranges and launch new
kids pocket money toys ranges.
We relaunched our "Together" loyalty scheme this year and re-engaged store
colleagues to promote sign-ups. We welcomed over 700,000 new members in FY23,
with over 1.7m active members of the scheme at the end of the year. Our
loyalty customers typically spend 30% more than non-loyalty customers and shop
more regularly. We will now focus on improving the insight we obtain from the
loyalty scheme data through new software that will shortly be available, to
support more effective CRM and loyalty activity.
Enhance our online proposition: Our customers and store colleagues want the
experience of using our shopping channels to be more consistent and
integrated, with the website acting as a shop window for our stores (and vice
versa); however, to-date the website has operated too independently. This,
combined with the fact that strategic progress in this area has been slower
than planned, means that as online sales have declined and costs have risen,
the website is not currently profitable.
We restructured the management of the online operation at the beginning of the
calendar year to facilitate an increased rate of progress. We have also
recently undertaken a series of website usability studies to inform areas of
opportunity to improve the site, as well as introducing new tools to support
performance analysis and provide insights into how best to improve the
customer experience. To improve online profitability, we increased delivery
charges to be more in line with peers, scaled back some online promotions and
reduced fixed costs by reducing the space utilised at our third-party
fulfilment centre.
Plans are in place to enhance the online customer experience and to trial
using the new EPOS solution to enable customers to order products from our
website whilst in our stores, providing more convenient access to online range
extensions. We also expect online sales and profitability to improve as we
derive benefit from the new analytical tools introduced in late FY23. There is
much more work to be done to improve this channel which we hope will return to
sales growth and profitability, in due course.
Optimise our store estate: We believe that a major strength of The Works is
our large network of stores in communities across the UK and Ireland, which
have been and always will be the main driver of sales.
This year we continued to optimise our store estate with 14 new store openings
in great locations and are pleased that these new stores are trading ahead of
expectations. We closed 13 stores and relocated a further three, trading from
526 stores at the end of the period. We also invested c.£1.4m in 34 store
refits and continued to improve the store experience for customers by
enhancing layouts, optimising the space utilisation across categories, and
introducing clearer navigation and signage, supported by the evolved brand.
Sales densities in our stores remain relatively low and we believe there is a
significant opportunity to increase this through winning new customers, better
ranging and customer experience, space optimisation and improved product
availability, all supported by a new labour structure put in place at the
start of FY24. Whilst the priority in the short to medium term is to improve
the existing store estate to realise its potential, in due course we will also
consider whether to reintroduce a measured roll out programme, as we believe
there is scope for the brand to trade successfully from at least 600 stores in
the UK.
Drive operational improvements: Improving the operating effectiveness of the
business is pivotal to our success. Although we will always maintain a lean
operation, some areas of the business were previously inadequately resourced.
This year we continued to invest ahead of time to ensure that we're capable of
realising the sales potential we believe The Works can reach.
In FY23 we restructured the distribution centre management team. The new team
made an immediate impact, reviewing the operation and proposing a series of
improvements in the way we pick and fulfil store deliveries for implementation
in FY24. We expect to see significant cost savings and improved product
availability in-store as a result of these changes.
We implemented a new stock allocation system, Slimstock, to improve the
quality of stock allocation decisions, which should improve store stock
availability and therefore sales. At the start of the current calendar year we
also significantly strengthened our merchandise planning function, and have
been delighted to welcome some excellent new colleagues from respected
retailers, which will drive a step change in our capability in this area.
Allowing time for the new stock allocation system's algorithms to "learn" The
Works' data and for our new merchandising team to get fully up to speed with
it, we expect to see further benefits in FY24 and beyond.
Towards the end of FY23 we successfully launched the pilot of our new EPOS
software in stores. Plans are in place to roll this new software out across
the store estate by the end of FY24.
A new automated packing machine and robotics were introduced to the online
fulfilment operation during the year (operated by a third-party provider,
iForce). We continue to work with iForce to further improve the fulfilment
cost per order and reduce our consumption of packaging.
Late in the financial year, we launched a planned review of the business
operating model. The first phase of this project entails documenting our
current ways of operating, confirming the desired future ways of working and
mapping the plan to migrate to the improved model. There will be significant
changes to processes and IT systems over the next two to three years, which
will fundamentally improve the way our business buys, moves and allocates
stock, driving cost efficiencies and improved product availability for our
customers.
Colleagues
In an unpredictable and challenging year, our colleagues have remained
steadfast in their dedication to helping customers to read, learn, create and
play. We have worked hard to build and maintain our unique culture,
underpinned by our values and a team of committed and enthusiastic colleagues.
I am proud that 10% of colleagues were promoted in the year and was delighted
that we moved up one place to 12(th) in the "Best Big Companies to Work For"
national list, from 13(th) in each of the past two years. We also maintained
our 2* accreditation for 'outstanding' workplace engagement (3* being the
highest possible accreditation).
To continue to support the engagement, development and wellbeing of our
colleagues, we launched 'MyWorks', a communications and engagement platform to
keep colleagues informed about company news and benefits, and to enable access
to resources on physical mental and financial wellbeing. We also introduced
the 'Can Do Academy', a system to support colleagues' learning and
development, and in response to the challenges created by the cost-of-living
crisis we launched Wagestream, an app that offers a range of financial
wellbeing tools.
Looking ahead to FY24, we will continue to invest in our colleagues, including
launching a new Reward and Recognition programme to positively reinforce our
values, celebrate success and provide financial incentives linked to our
purpose and values.
Environmental, Social and Governance (ESG)
This time last year we were at the fledgling stages of the environmental part
of our ESG journey and I am pleased that we have made significant further
progress since then. The business is now fully aligned around our mission of
"Doing Business Better", which is about making positive and sustainable
changes.
A key development was the appointment of a Sustainability Manager in January
2023. The business has also adopted a more structured and rigorous approach to
the environment, for example, to set longer-term ambitions to reduce the
impact of our products, packaging and waste. We are also continuing to work
with a specialist third-party ESG consultancy and during the year we set
carbon reduction targets for Scope 1, 2 and 3 emissions and developed roadmaps
to achieve them. Our Scope 1 and Scope 2 targets, together with our ambition
to achieve net zero by 2040, fully align with the British Retail Consortium's
climate action roadmap and we became fully compliant with the Task Force on
Climate-related Financial Disclosures (TCFD) in FY23.
We are committed to creating an inclusive environment at The Works where
everyone feels they belong and where different experiences, cultures and
perspectives are embraced. We completed a review of our existing Diversity and
Inclusion (D&I) policies and practices and have now developed a D&I
strategy. Implementation of this will increase our collective understanding of
D&I, improve training, enhance practical awareness and accountability at
all levels and ensure that barriers to inclusion are removed.
"Giving back" is part of our psyche and I am hugely grateful to our colleagues
and customers for their generosity in supporting our charity initiatives. We
are pleased to be developing a new charity partnership with the National
Literacy Trust this year, which is closely aligned to our purpose of inspiring
people to read, learn, create and play.
Outlook
I am proud of the way everyone at The Works navigated a challenging year. We
expect FY23 to be the low point in The Works' profitability post-COVID given
that cost headwinds have now eased, the financial performance improved
throughout the second half of the year and we have started to make more
meaningful strategic progress, the benefits of which are expected to be
realised in FY24 and beyond.
The macroeconomic outlook remains uncertain and we have entered the new
financial year with a degree of caution, however, I am encouraged by the
enduring appeal of The Works' value proposition and excited by the
opportunities presented in the year ahead, which the business is now better
equipped to capitalise on. The Board and I are comfortable with the Company
compiled estimate of the market's forecast, an EBITDA of £10m for FY24, and
remain confident in our ability to deliver profitable growth in the medium
term.
Gavin Peck
Chief Executive Officer
30 August 2023
Financial review
The FY23 accounting period relates to the 52 weeks ended 30 April 2023 (also
referred to as the Period) and the comparative FY22 accounting period relates
to the 52 weeks ended 1 May 2022.
The Group refers to alternative performance measures (APMs) as it believes
these provide management and other stakeholders with additional information
which may be helpful. These measures are used by management in running the
business, and include pre IFRS 16 Adjusted EBITDA ("EBITDA") and like for like
("LFL") sales. Accordingly, reference is made to these measures in this
report.
The Group made a profit before tax of £5.0m (restated FY22: £14.2m). This
result includes a £5.1m impairment charge, most of which relates to the
notional right of use asset created as a result of following the requirements
of the IFRS 16 accounting standard. As in previous periods, impairments have
been treated as Adjusting items. The Adjusted profit before tax excluding
impairment charges was £10.1m (restated FY22: £16.5m).
The Pre IFRS16 Adjusted EBITDA for the Period was £9.0m (FY22: £16.6m). The
FY23 Adjusted PBT is greater than the EBITDA because of the effect of IFRS 16.
We would normally expect the Adjusted PBT to be less than the EBITDA. Please
refer to page 14 of this report and note 3 of the condensed financial
statements for further information.
The FY23 results have been published later than originally intended. The delay
was due to significant additional work being undertaken, principally in
relation to asset impairment charges and related impacts on IFRS 16
calculations. As well as affecting the FY23 result, this also entailed the
restatement of comparative figures for prior periods. Whilst the delay has
been frustrating, we highlight that the issues in question have not affected
the Board's assessment of the underlying performance of the business (for
example, as represented by the EBITDA) and had no direct cash impact.
Information regarding the restatements is included in note 11 of the condensed
financial statements.
Overview
The result for FY23 was in line with the revised forecast we referred to in
August 2022. During the Period:
· Revenue increased by £15.5m, driven by 7.5% growth in store LFL
sales and sales from new stores exceeding sales forgone from closed stores
(through optimisation of the store estate). Online sales declined by 15%.
· The product gross margin percentage declined due to the planned
increase in the mix of sales of lower margin books, and increased costs of
stock, principally freight. These negative effects were partly offset by
supplier rebates which were collected (£0.6m of which related to periods
prior to FY23).
· Costs increased due to:
o The cessation of COVID-19 business rates relief.
o The increase in the National Living Wage by 6.6% in April 2022.
o Electricity price inflation.
· There was a net increase in EBITDA of approximately £0.6m due to
the opening and closure of stores during the year. Although the number of
stores trading had only increased by one at the year end, we benefitted from
being able to time the openings and closures such that we had a net six more
stores trading during the peak Christmas period. In addition, the average
sales levels from the new stores were greater than for the stores which were
closed.
· The Group experienced a cyber security incident in March 2022. We
believe the residual effects of this adversely affected FY23's result due to
the Group taking a measured and cautious approach to reinstating systems
whilst simultaneously accelerating the implementation of strengthened IT
security. Due to the impossibility of accurately estimating the financial
effect, it has been absorbed within the EBITDA result and not identified
separately as an Adjusting item.
EBITDA bridge between FY22 and FY23 £m
FY22 EBITDA 16.6
LFL stores and online
Increased gross margin due to increase in sales in LFL stores/decline online 5.9
Lower gross product margin % (including impact of higher freight costs) (4.5)
Cessation of COVID-19 business rates relief (LFL stores) (5.6)
Increased payroll costs due to National Living Wage inflation (2.5)
Energy price inflation (1.0)
Other (0.3)
(8.0)
Non - LFL Stores
Profit Impact; including timing benefit of trading more stores through peak 0.6
Cessation of COVID-19 business rates relief (0.2)
FY23 EBITDA 9.0
We noted in the FY22 Annual Report that the net cash balance on 1 May 2022 was
higher than normal as it included the benefit of increased creditor balances.
These mostly related to the continuing effect of events connected with
COVID-19 (such as rent deferrals) and, as expected, unwound finally during
FY23. Therefore, although the FY23 net cash balance of £10.2m is lower than
the prior year's £16.3m, it represents a more typical Period-end level, and
has grown progressively compared with the £0.8m net cash balance at the end
of FY21 and £7.1m of net debt at the end of FY20.
It has been reassuring, particularly during the periods of heightened
uncertainty in recent years, to have the benefit of a large (£30.0m at the
Period end) revolving credit bank facility, however, there is a cost
associated with maintaining such a facility. Our forecasts indicate that even
under a sensitised downside scenario, it is unlikely that we would ever use
the entire facility. With this in mind, we have recently reduced the size of
the facility to £20.0m, which will save approximately £0.15m in annual
facility maintenance fees and, at the same time, extended the term of the
facility so that it terminates at the end of November 2026 rather than
November 2025.
The Board will be recommending to shareholders at the AGM a final dividend of
1.6 pence per share in respect of FY23. Updated information regarding the
Group's policy on dividends and capital distributions is included at the end
of this report.
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 5.8% to £280.1 million (FY22: £264.6 million).
Total gross sales ((1)) increased by 6.1% compared to FY22. Two thirds of the
total sales increase was from LFL sales ((2)) which grew by 4.2%, with
positive growth in stores but a decline in online sales. The remaining sales
growth was from the continued optimisation of the store estate (see table and
narrative on the following page).
The quarterly LFL sales summary in the table below and the narrative which
follows shows how store LFLs strengthened progressively during FY23 but that
we were unable to achieve positive sales growth online, due to a combination
of internal and external factors.
LFL sales growth Stores Online Total
Q1 1.6% (28.6%) (2.4%)
Q2 5.1% (8.9%) 3.0%
H1 3.6% (16.9%) 0.6%
Q3 9.9% (14.2%) 5.9%
Q4 12.0% (11.7%) 9.4%
H2 10.7% (13.5%) 7.1%
Full year 7.5% (15.0%) 4.2%
(Definitions of gross sales and LFL are included in the footnotes on the
following page).
· Q1 highlights
o Sales in Q1 FY23 were constrained, particularly online, a significant
cause of which was the residual impact of the March 2022 cyber security
incident.
o We also annualised against strong FY22 comparatives, which were the result
of pent up demand following the end of the final COVID-19 lockdown in April
2021. The strong demand in early FY22 was also driven by a larger than usual
post lockdown sale, which included stock that would normally have been sold in
January/February 2021, and strong sales of "fidget frenzy" toys.
· Q2 highlights
o The Works had a good summer 2022. The newly refreshed outdoor play range
performed well and the 'Back to School' season sales were very good.
o The LFL sales growth rate softened slightly in the latter part of Q2 due
to losing a full trading day for the additional bank holiday in late
September, as well as the comparatives in September and October 2021 being
strong, when we believe Christmas shopping was brought forward due to
consumers' concern about possible further lockdowns affecting Christmas
shopping in 2021.
· Q3 highlights
o In contrast, Q3 comparatives with the prior year weakened due to concerns
in late 2021 about the potential effects of the emerging Omicron COVID-19
variant, supply chain disruption, and the FY22 January sale being low key.
o Sales strengthened sharply just before Christmas, suggesting that
consumers shopped much later than in 2021. We delivered strong store sales
over Christmas, which continued in the January sale.
o Online sales were disappointing, impacted by reduced consumer confidence
in fulfilment (due to postal strikes in late 2022) as well as the
normalisation of shopping behaviour away from online, as seen across the
retail industry.
· Q4 highlights
o Trading was steady following the January sale, with store sales continuing
to grow positively, and online sales continuing to be in decline. The rate of
overall sales growth increased slightly during this quarter as the prior year
comparatives weakened due to the aftermath of the March 2022 cyber security
incident.
The table below shows the reconciliation of LFL sales used for year-on-year
comparisons, with statutory revenue.
FY23 FY22 Variance Variance
£m £m £m %
Total LFL sales for Period(2) 297.0 285.0 12.0 4.2%
Sales from new/closed stores (optimisation of store estate) 19.6 13.4 6.3 46.9%
Total Gross Sales(1) 316.6 298.4 18.3 6.1%
VAT (35.1) (33.5) (1.7) 5.0%
Loyalty scheme costs - points redeemed by customers (1.4) (0.3) (1.1) 404.6%
Revenue (per statutory accounts) 280.1 264.6 15.5 5.8%
Loyalty points as % sales (0.5%) (0.1%)
VAT as % of sales (11.1%) (11.2%)
((1) ) "Total gross 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.
((2) ) LFL sales growth has been calculated with reference to the
FY22 comparative sales figures. In FY22's Annual Report, two year comparatives
were used because the use of a normal one year LFL comparative was prevented
by the various disruptions to store trading brought about by COVID-19
restrictions in the FY21 comparative period.
( )
The year on year increase in the cost of loyalty points shown in the table
above is larger than normal because the FY22 comparative was unusually low (as
reported last year) due to the write back of expired points previously issued
and accounted for. The underlying cost of loyalty points redeemed by customers
during the year increased in the way we expected, both as a result of the year
on year increase in sales, and due to the additional focus placed by the
business on signing up new members and encouraging existing members to
re-engage with the loyalty scheme.
Store numbers
Store numbers FY23 FY22
Stores at beginning of period 525 527
Opened in the period 14 5
Closed in the period (13) (7)
Relocated (excluded from opened/closed above, NIL net effect on store numbers) 3 6
Stores at end of period 526 525
The number of stores trading increased by one during the period, from 525 to
526. Despite this small change between the beginning and end of year numbers,
the additional sales from new/closed stores in the table above shows a notable
increase compared with the prior year. This was principally because we
benefitted from being able to time the openings and closures such that a net
six more stores were trading during the peak Christmas period, and secondarily
because the new stores individually also generated more sales than the stores
that were closed. The new stores are trading with sales levels at or above
their financial appraisal targets.
Product gross margin and gross profit
FY23 FY22 (Restated) Variance Variance
£m % of revenue £m % of revenue £m %
Revenue 280.1 264.6 15.5 5.8
Less: Cost of goods sold 118.8 107.7 11.1 10.3
Product gross margin 161.3 57.6 157.0 59.3 4.4 (1.7)
Other costs included in statutory cost of sales
Store payroll 46.8 16.7 43.6 16.5 (3.3) (7.5)
Store property and establishment costs 51.8 18.5 43.7 16.5 (8.1) (18.5)
Store PoS & transaction fees 2.3 0.8 2.1 0.8 (0.2) (10.1)
Store depreciation 3.7 1.3 3.4 1.3 (0.2) (6.7)
Online variable costs 18.4 6.6 18.7 7.1 0.3 1.5
Adjusting items (impairment charges) 5.1 1.8 2.3 0.9 (2.8) (100.0)
IFRS16 impact (10.7) (3.8) (9.6) (3.6) 1.1 11.2
Total non-product related cost of sales 117.4 41.9 104.2 39.4 (13.2) (12.7)
Gross profit per financial statements 43.9 15.7 52.8 19.9 (8.9) (16.8)
The product gross margin rate decreased by 170bps to 57.6% (FY22: 59.3%). The
most significant factors in the year on year movement were:
· An increase in the sales mix of front-list, lower margin books
(as has been described previously) which reduced the margin percentage by
approximately 100bps. We believe this generated incremental cash margin due to
selling higher volumes of items which were higher priced.
· Higher freight costs, which remained high on a spot basis during
H1 before falling significantly in H2. The interval between incurring the
freight cost and selling the goods is such that the higher rates continued to
affect FY23's margin for some time after the spot rates had fallen. This
timing factor makes it difficult to estimate the precise impact on the margin
rate, our best estimate of which is approximately 100bps.
· There was a small year on year margin rate increase due to other
factors including stock provision movements, supplier rebates/retrospective
discounts and pricing changes. Towards the end of FY23, prices of some lines
were increased to reflect the rise in inflation generally experienced during
the year, to ensure that the business achieves an acceptable balance between
offering value to customers and a reasonable margin.
Store payroll costs increased by £3.3m.
· The annual rise in the National Living Wage (NLW) accounted for
£2.1m or 64% of the year on year increase, including the additional cost of
maintaining sensible differentials between pay grades for colleagues paid more
than the NLW, in light of the increased base wage level.
· The optimisation of the store estate, entailing the opening of 14
stores, the closure of 13, and the relocation of 3 stores, created an
additional £0.7m of store payroll costs. This increase appears
disproportionately high given that only one more store had been added by the
year end, however, the timing of the openings and closures which benefitted
the sales line (i.e. having more stores trading during the Christmas peak)
also incurred corresponding additional costs.
Store property and establishment costs increased by £8.1m.
· The largest component of the increase was £5.8m of business
rates charges. These costs had been comparatively lower in FY22 due to COVID
relief, but payments resumed in full during FY23.
· Electricity costs increased by £1.0m due to inflation.
· Despite a year on year reduction in like for like rents, total
rent charges increased by £1.0m
o The ongoing process of renegotiating and renewing expiring leases resulted
in a reduction of £0.6m in rents in the LFL store estate, including the
release of accruals established in some situations where the effective date of
the decrease was backdated to a prior period, due to the protracted nature of
the rent negotiations (in these situations, we continue to accrue for the
higher rent level until the reduction is confirmed in writing).
o The timing of opening and closing stores referred to above, plus the full
year cost of stores opened part way through FY22, resulted in additional rent
costs of £0.7m (i.e. effectively a "volume" related increase).
o During COVID-19 rent negotiations with landlords (for example, where we
were seeking rent concessions in respect of enforced store closures),
concessions were sometimes informally agreed via a credit note, to be
formalised subsequently. A provision is maintained for credit notes relating
to amounts that have not been recovered after 2 years (although we still
pursue and expect to recover most of the amount provided for), and this
provision increased by £0.5m during FY23.
o Turnover rents increased by £0.4m due to sales increases in the 129
stores where the rent is based wholly or partially on a percentage of
turnover. Turnover rent mechanisms typically look back to earlier periods to
calculate the applicable rent and, in FY22, the look back periods often
included periods during FY21 when stores were closed due to COVID-19
restrictions. There have also been sales increases in some stores (overall
store LFL sales growth was 4.2%) which have triggered the payment of, or
increased, turnover rents.
· Service charges increased by £0.3m due to the new/closed store
timing effect described above, and service charge inflation.
Online variable costs decreased by £0.3m.
· The decrease was due to the year on year decrease in sales, and
the consequential reduction in marketing, fulfilment, transaction and other
variable costs which were £1.3m lower than in FY22.
· These savings were partially offset by higher costs at the iForce
fulfilment facility (third party operated) and higher packaging costs. The
efficiency of the operation has been reviewed with iForce, and changes have
been implemented for FY24 which are expected to reduce the fulfilment cost per
unit, including a reduction in the space allocated in the facility.
Adjusting items and prior year adjustment
· Adjusting items were £5.1m in FY23 (restated FY22: £2.3m), and
comprised impairment charges. The prior period comparatives have been restated
to reflect the allocation of central overheads to individual stores, which
resulted in a higher impairment charge being required in respect of FY22 and
prior periods. This is described in note 11 of the condensed financial
statements.
· 70% or £3.6m of the £5.1m FY23 impairment charge relates to the
notional "right of use" asset which arises through the operation of IFRS 16.
· Consistent with the approach the Group has taken previously,
impairment charges (and reversals) are treated as Adjusting items. As well as
being consistent, this is appropriate due to the size of the total impairment
charge, which is more reflective of the broader UK macro-economic environment
impacting many retail businesses than of the underlying performance of
individual stores.
IFRS 16 impact
· IFRS 16 has had the effect of significantly increasing the
Adjusted profit before tax in FY23, by £7.0m compared with the non IFRS 16
figure (see note 3 of the condensed financial statements). This £7.0m broadly
comprises £10.7m included within cost of sales per the table above and £0.4m
included within administrative costs, less £4.1m of IFRS 16 interest charges.
· Due to the restatement of impairment charges in relation to prior
periods, there is a significantly greater IFRS 16 impact than reported in
previous years, particularly on Adjusted profit. The additional impairment
charges reduced the net book value of the IFRS 16 "right of use" asset, as a
result of which, the IFRS 16 depreciation charges were reduced. Meanwhile, the
actual rents paid were unaffected, resulting in a greater disparity between
the rents and the IFRS 16 P&L charges. Please refer to note 3 of the
condensed financial statements for a detailed analysis of the impact of IFRS
16 on the profit before tax.
Distribution costs to stores
FY23 FY22
£m % of revenue £m % of revenue Variance £m Variance
%
Adjusted distribution costs 10.2 3.6 9.0 3.4 (1.2) (12.9)
Depreciation 0.1 - 0.1 - - 3.1
Distribution costs per statutory accounts 10.3 3.7 9.1 3.4 (1.2) (12.7)
The costs of picking stock and delivering it to stores increased by £1.2m
compared with FY22.
· Distribution labour costs increased by £0.5m, due to wage rate
inflation from the increase in the NLW, and an increase in the volume of items
picked. Approximately half of the cost increase was due to inflation, and the
remainder to the increase in volumes.
· The costs of delivering pallets from the DC to stores increased
by £0.4m. Higher volumes accounted for £0.15m with the remainder due to
inflation passed on by the pallet delivery company to which we outsource this
task.
· Storage costs of £0.15m were incurred to accommodate additional
stock prior to the Christmas sales peak. This was a precaution taken to
mitigate against the risk of a repetition of the disruption experienced in the
prior year.
Administration costs
Administration costs (before depreciation and IFRS 16) decreased by £0.3m
compared with FY22. The largest change was a £2.3m decrease in bonus costs,
as no bonus will be paid in respect of FY23.
Head office salary and related costs (NI, pension etc.) increased by £1.3m
due to the planned growth in headcount as well as wage rate inflation. Average
salary rates for head office staff (including management) increased by 3.0%, a
significantly lower rate than the 6.6% increase in the National Living Wage.
There was a net increase of £0.7m in other administration costs, due
principally to IT software licence and maintenance costs, higher audit fees,
and stock taking costs.
FY23 FY22
£m % of revenue £m % of revenue Variance £m Variance
%
Pre-IFRS 16, Adjusted administration costs 22.9 8.2 23.2 8.8 0.3 1.4
Depreciation 1.8 0.6 1.3 0.5 (0.5) (34.7)
IFRS 16 impact (0.4) (0.2) (0.4) (0.1) 0.1 13.8
Administration costs per statutory accounts 24.2 8.6 24.1 9.1 (0.1) (0.3)
Net financing expense
Net financing costs in the period were £4.4m (FY22: £5.2m), mostly relating
to IFRS 16 notional interest.
Gross cash interest payable was £0.3m, in relation to facility availability
charges (FY22: £0.4m). £0.2m of interest was received in FY23 (FY22: £Nil).
FY23 FY22
£m £m
Bank interest receivable (0.2) -
Bank interest payable (including non-utilisation costs) 0.3 0.4
Other interest payable (amortisation of facility set-up costs) 0.2 0.3
IFRS 16 notional interest on lease liabilities 4.1 4.5
Net financing expense 4.4 5.2
Tax
FY23 FY22
£m (Restated)
£m
Current tax (credit)/expense (0.4) 1.3
Deferred tax expense/(credit) 0.1 (1.0)
Total tax expense (0.3) 0.3
The impairment charges noted above, by reducing the taxable profits of prior
periods, created available brought forward tax losses, which significantly
reduced the effective tax rate and overall tax charge for FY23. As a result,
there was a net tax credit of £0.3m (restated FY22: £0.3m expense)
consisting of a £0.4m current tax credit and a £0.1m deferred tax charge.
The £0.3m overall tax credit equated to an effective tax rate of (5.3%)
(restated FY22: 1.9%).
The average headline corporation tax rate for FY23 was 19.5%, as the rate
changed from 19% to 25% 11 months into the financial year (FY22: 19.0%).
Deferred tax has been calculated at a rate of 25.0% in both periods.
Earnings per share
The Adjusted basic EPS for the year was 16.5 pence (restated FY22: 26.0
pence).
The Adjusted diluted EPS was 16.4 pence (restated FY22: 25.6 pence).
The difference between the Adjusted basic and Adjusted diluted EPS figures is
due to the exclusion from the diluted EPS calculation of outstanding
potentially dilutive share options.
Capital expenditure
FY23 FY22 Variance
£m £m £m
New stores and relocations (net of landlord contributions to investment) 1.1 0.5 0.6
Store refits, maintenance and lease renewal costs 3.0 0.9 2.1
IT hardware and software 2.4 1.4 1.0
Other 0.2 0.2 0.0
Total capital expenditure 6.7 3.0 3.7
Capital expenditure in the Period was £6.7m (FY22: £3.0m).
· New stores and relocations - the net investment in new stores and
relocations increased by £0.6m compared with FY22. 14 new stores were opened
and 3 stores relocated to new units (FY22: 5 new stores, 6 relocations). In
FY23, approximately 50% of the capital costs of opening the stores was funded
by landlord contributions, a lower proportion than in FY22 when most of the
investment was landlord funded.
· Store refits, maintenance and lease renewal costs - 34 stores
were refitted in FY23 at a cost of £1.4m (FY23: 16 refits costing £0.4m).
Maintenance capex was £1.2m (FY22: £0.4m) and lease renewal costs were
£0.4m (FY22: £0.2m).
· IT hardware and software - the largest item of expenditure was
the cost of configuring and testing the new store EPOS software prior to its
implementation in stores during FY24.
FY24 capex is expected to be approximately £7.0m.
Inventory
Stock levels were £33.4m at the end of FY23 (FY22: 29.4m).
FY23 FY22 Variance Variance Provisions as % of gross stock
£m £m £m % FY23 % FY22 %
Gross stock 31.3 29.8 (1.5) (5.0)
Unrecognised shrinkage provision (0.4) (1.9) (1.5) (78.9) 1.3 6.4
Obsolescence provision (0.6) (1.3) (0.7) (53.8) 1.9 4.4
Total provisions (1.0) (3.3) (2.3) (69.7) 3.2 10.7
Net stock on hand 30.2 26.6 (3.6) (13.5)
Stock in transit 3.2 2.8 (0.4) (14.3)
Stock per balance sheet 33.4 29.4 (4.0) (13.6)
Gross stock, £31.3m, increased by 5% compared with FY22. This is a lower
percentage increase than the corresponding year on year increase in the cost
of sales (10%) and is due to an increase in the average cost per unit of stock
(due to mix as well as an increase in overall cost prices), as the number of
units in stock at the Period end declined year on year.
Stock provisions decreased significantly, due to both volume and rate effects.
· The provision for unrecognised shrinkage decreased due to the
introduction of full "4-wall" stock counts in all stores between Christmas and
the year end. As a result, the time elapsed between the date of the most
recent store stock count and the year end, which is one of the key variables
affecting the calculation, was significantly less than in the prior year,
resulting in a lower provision. The other key variable, the underlying weekly
rate of store stock loss, was not materially different to the rate in FY22.
· There was a further reduction in the stock obsolescence provision
(it was £1.8m at the end of FY21), due to continued improvements in the
management of terminal and slow moving stocks.
Cash flow
The table shows a summarised non IFRS 16 presentation cash flow. The net cash
outflow for the year was £6.1m (FY22: inflow of £15.5m).
FY23 FY22 Variance
£m £m £m
Cash flow pre-working capital movements 6.7 19.1 (12.4)
Net movement in working capital (2.8) 7.3 (10.1)
Net Cash effect of Investing Activities (6.5) (2.9) (3.6)
Tax paid (1.5) (0.2) (1.3)
Interest and financing costs (0.7) (0.2) (0.5)
Dividends (1.5) - (1.5)
Purchase of treasury shares (0.5) - (0.5)
Cash flow before loan movements (6.7) 23.1 (29.8)
Drawdown/(repayment) of bank borrowings (4.0) (7.5) 3.5
Drawdown/(repayment) of RCF 4.0 4.0
Exchange rate movements 0.6 (0.1) 0.7
Net increase in cash and cash equivalents (6.1) 15.5 (21.6)
Opening net cash balance excluding IAS 17 leases 16.3 0.8
Closing net cash balance excluding IAS 17 leases 10.2 16.3
As noted at the end of FY22, the cash balance at that time included favourable
working capital timing differences which have unwound in FY23 and resulted in
a negative movement in working capital during the Period. In most years, there
would be expected to be a broadly neutral or slightly positive movement in
working capital. The other main year on year variable which affected the
cashflow was the reduction in profit level compared with FY22.
Bank facilities and financial position
The Group ended the Period in a strong financial position, with net positive
bank balances of £10.2m (FY22: £16.3m). At the Period end the Group had
liquidity availability of £40.0m, including its undrawn £30.0m bank
facility.
Since the Period end, the Group has implemented a reduction in the size of the
facility, which was undrawn throughout most of FY23, to £20.0m, and
simultaneously extended its term such that it now expires on 30 November 2026
rather than 30 November 2025. The reduction in the facility will save
approximately £0.15m in annual cash interest costs, and the smaller facility
continues to provide liquidity availability significantly in excess of the
actual anticipated requirement.
Basis of preparation of the financial statements
The Directors believe that it is appropriate to prepare the financial
statements on a going concern basis. We note for completeness that, despite
the Directors' confidence in the Group's financial position and prospects,
note 1 (b) of the financial statements includes reference to a "material
uncertainty " in relation to the adoption of the going concern basis of
preparation of the financial statements. The reasons for this are explained
in the note.
Capital distributions and FY23 final dividend recommendation
Following a strong performance in FY22, the Group paid a final dividend of 2.4
pence per share in respect of that year, in November 2022. The FY22 Annual
Report stated that future payment levels will be reviewed based on conditions
at the time, with the Group confirming its intention to resume a progressive
dividend policy in due course once conditions stabilise.
The business has an ongoing capex requirement (including discretionary capex)
approximately in line with its non-IFRS 16 depreciation charge and generates
strong cashflows. However, in setting the capital distribution policy, the
Board is mindful of the principal risks that the Group faces, as outlined in
the FY23 Annual Report. At present two of these risks, in relation to
macro-economic conditions and the execution of the Group's strategy, are at
increased levels. In these circumstances, we will operate with a capital
structure and capital distribution approach that ensures the business remains
financially resilient, whilst making appropriate returns to shareholders.
Our objective is to ensure that, under normal circumstances, ordinary
dividends (in pence per share) are 2.5x covered by Adjusted EPS. We do not
believe that normal circumstances apply in the context of setting the FY23
dividend, as outlined below.
FY23 dividend
As noted previously in the report, the Board hopes that FY23's EBITDA was a
low point and that it will increase progressively in future. During the period
in which the business works to rebuild its levels of profit, a compromise is
sought, between maintaining a reasonable dividend for shareholders, whilst
ensuring that the Group continues to maintain its cash reserves.
We believe that in FY23, the effects of
· impairment charges (including the effect of prior year
adjustments on earlier periods);
· IFRS 16, and
· an unusually low tax charge,
have resulted in an Adjusted EPS which is inconsistent with our perception of
the underlying profitability as represented by the Adjusted pre IFRS 16
EBITDA. Using EBITDA as an alternative reference point for illustration, if
the FY23 dividend was set by pro rating using the ratio of the FY23 EBITDA
(£9.0m) to the FY22 EBITDA (£16.6m), it would be 1.3 pence per share.
Taking into account the foregoing and, in seeking to achieve a reasonable
compromise between returns to shareholders and prudence, the Board will
propose at the forthcoming AGM a final dividend for FY23 of 1.6 pence per
share (amounting to a £1.0m total payment).
Although this is a smaller dividend than was paid in relation to FY22, we
believe that it is in keeping with FY23's performance (for example, the EBITDA
did not meet the threshold for payment of executive bonuses). However, it does
not reflect a reduction in the Board's belief in the future prospects of the
business, in which it remains confident.
Indicative outlook for FY24 dividend
As previously noted, the Company compiled estimate of the market's forecast
for FY24 is an EBITDA of approximately £10.0m. If the actual result for FY24
transpires to be in line with this forecast, it is anticipated that the total
dividend for FY24 would grow approximately in proportion with the EBITDA.
Assuming that the effects of non-cash accounting variables such as IFRS 16,
and tax, are more neutral in FY24, we would expect that the resulting cover
from this approach would be more in line with the 2.5x objective outlined
above.
Other forms of distribution
It is anticipated that distributions will be made solely via ordinary
dividends for the foreseeable future.
In the event that performance improves at a faster rate than anticipated, and
that this is sustained, or that for some other reason the Group accumulates
cash reserves which it deems surplus to requirements for operation and
investment purposes, and for which it can envisage no requirement to maintain
on the balance sheet, other forms of distribution will be considered, such as
share buy backs.
Decisions as to the quantum and frequency of such alternative distributions
would be made at the time, in light of the specific circumstances.
Share buybacks for the purposes of share schemes
To avoid dilution of existing shareholder interests, the Board's intention is
for the Group to purchase shares in the market for re-issue under employee
share schemes.
Steve Alldridge
Chief Financial Officer
30 August 2023
Consolidated income statement
For the period ended 30 April 2023
52 weeks to 30 April 2023 52 weeks to 1 May 2022
(Restated - Note 11)
Note Result before Adjusting Total Result before Adjusting Total
Adjusting items items £000 Adjusting items items £000
£000 £000 £000 £000
Revenue 280,102 - 280,102 264,630 - 264,630
Cost of sales 4 (231,150) (5,052) (236,202) (209,598) (2,262) (211,860)
Gross profit 48,952 (5,052) 43,900 55,032 (2,262) 52,770
Other operating income/(expense) 2 8 - 8 (111) - (111)
Distribution expenses (10,284) - (10,284) (9,128) - (9,128)
Administrative expenses (24,197) - (24,197) (24,116) (24,116)
Operating profit 5 14,479 (5,052) 9,427 21,677 (2,262) 19,415
Finance income 227 - 227 16 16
Finance expenses (4,648) - (4,648) (5,192) - (5,192)
Net financing expense (4,421) - (4,421) (5,176) - (5,176)
Profit before tax 10,058 (5,052) 5,006 16,501 (2,262) 14,239
Taxation 7 265 - 265 (276) - (276)
Profit for the period 10,323 (5,052) 5,271 16,225 (2,262) 13,963
Profit before tax and IFRS 16 3 3,025 (1,488) 1,537 10,980 (2,191) 8,789
Basic earnings per share (pence) 9 16.5 8.4 26.0 22.3
Diluted earnings per share (pence) 9 16.4 8.4 25.6 22.0
Profit for the period is attributable to equity holders of the Parent.
Consolidated statement of comprehensive income
For the period ended 30 April 2023
FY23 FY22
£000 (Restated -
Note 11)
£000
Profit for the year 5,271 13,963
Items that may be recycled subsequently into profit and loss
Cash flow hedges - changes in fair value (2,862) 4,181
Cash flow hedges - reclassified to profit and loss (62) (321)
Cost of hedging - changes in fair value (162) (83)
Cost of hedging - reclassified to profit and loss 91 94
Tax relating to components of other comprehensive income 262 -
Other comprehensive (expense)/income for the period, net of income tax (2,733) 3,871
Total comprehensive income for the period attributable to equity shareholders 2,538 17,834
of the Parent
Consolidated statement of financial position
As at 30 April 2023
Note FY23 FY22
£000 (Restated -
Note 11)
£000
Non-current assets
Intangible assets 10 916 1,617
Property, plant and equipment 11 11,733 9,896
Right-of-use assets 11, 12 67,463 76,621
Deferred tax assets 13 4,854 4,708
84,966 92,842
Current assets
Inventories 14 33,441 29,387
Trade and other receivables 15 7,507 8,427
Derivative financial asset - 2,393
Current tax asset 1,149 -
Cash and cash equivalents 16 10,196 16,280
52,293 56,487
Total assets 137,259 149,329
Current liabilities
Lease liabilities 12, 17 23,449 25,434
Trade and other payables 18 34,479 35,958
Provisions 19 565 204
Derivative financial liability 1,048 -
Current tax liability - 740
59,541 62,336
Non-current liabilities
Lease liabilities 12, 17 74,766 85,702
Provisions 19 1,298 913
76,064 86,615
Total liabilities 135,605 148,951
Net assets 1,654 378
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 2,780 2,252
Hedging reserve (331) 2,227
Retained earnings (29,688) (32,994)
Total equity 1,654 378
These financial statements were approved by the Board of Directors on 30
August 2023 and were signed on its behalf by:
Steve Alldridge
Chief Financial Officer
Company registered number: 11325534
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
Reported balance at 2 May 2021 625 28,322 (54) 1,601 (1,203) (20,463) 8,828
Cumulative adjustment to opening balance (Note 11) - - - - - (26,494) (26,494)
Restated balance at 2 May 2021 625 28,322 (54) 1,601 (1,203) (46,957) (17,666)
Total comprehensive income for the period
Profit for the period (Restated - Note 11) - - - - - 13,963 13,963
Other comprehensive income - - - - 3,871 - 3,871
Total comprehensive income for the period - - - - 3,871 13,963 17,834
Hedging gains and losses and costs of hedging transferred to the cost of - - - - (441) - (441)
inventory (Note 25)
Transactions with owners of the Company
Share-based payment charges - - - 651 - - 651
Total transactions with owners - - - 651 - - 651
Balance at 1 May 2022 (Restated - Note 11) 625 28,322 (54) 2,252 2,227 (32,994) 378
Total comprehensive income/(expense) for the period
Profit for the period - - - - - 5,271 5,271
Other comprehensive expense - - - - (2,733) - (2,733)
Total comprehensive income/(expense) for the period - - - - (2,733) 5,271 2,538
Hedging gains and losses and costs of hedging transferred to the cost of - - - - 175 - 175
inventory (Note 25)
Transactions with owners of the Company
Share-based payment charges - - - 528 - - 528
Dividend - - - - - (1,492) (1,492)
Own shares purchased by employee benefit trust - - - - - (473) (473)
Total transactions with owners - - - 528 - (1,965) (1,437)
Balance at 30 April 2023 625 28,322 (54) 2,780 (331) (29,688) 1,654
1 Hedging reserve includes £170k (FY22: £175k) 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 30 April 2023
FY23 FY22
£000 (Restated -
Note 11)
£000
Profit for the year (including Adjusting items) 5,271 13,963
Adjustments for:
Depreciation of property, plant and equipment 4,458 4,040
Impairment of property, plant and equipment 944 1,389
Reversal of impairment of property, plant and equipment (574) (573)
Depreciation of right-of-use assets 14,840 15,094
Impairment of right-of-use assets 6,126 6,165
Reversal of impairment of right-of-use assets (2,562) (6,094)
Amortisation of intangible assets 878 567
Impairment of intangible assets 1,118 1,375
Derivative exchange (gain)/loss (721) 289
Financial income (227) (16)
Financial expense 518 692
Interest on lease liabilities 4,130 4,500
Loss on disposal of property, plant and equipment 149 179
Profit on disposal of right-of-use asset and lease liability (1,105) (441)
Loss on disposal of intangible assets 14 -
Share-based payment charges 528 651
Taxation (265) 276
Operating cash flows before changes in working capital 33,520 42,056
Decrease/(increase) in trade and other receivables 1,033 (1,514)
Increase in inventories (3,129) (892)
(Decrease)/increase in trade and other payables (1,443) 9,336
Increase in provisions 746 399
Cash flows from operating activities 30,727 49,385
Corporation tax paid (1,508) (222)
Net cash inflow from operating activities 29,219 49,163
Cash flows from investing activities
Acquisition of property, plant and equipment (7,296) (2,818)
Capital contributions received from landlords 1,928 882
Acquisition of intangible assets (1,309) (1,015)
Interest received 227 16
Net cash outflow from investing activities (6,450) (2,935)
Cash flows from financing activities
Payment of lease liabilities (capital) (22,672) (25,969)
Payment of lease liabilities (interest) (4,130) (4,500)
Payment of RCF fees (336) -
Other interest paid (321) (157)
RCF drawdown 4,000 -
Repayment of bank borrowings (4,000) (7,500)
Dividend paid (1,492) -
Purchase of treasury shares (473) -
Net cash outflow from financing activities (29,424) (38,126)
Net (decrease)/increase in cash and cash equivalents (6,655) 8,102
Exchange rate movements 571 (137)
Cash and cash equivalents at beginning of year 16,280 8,315
Cash and cash equivalents at end of year 10,196 16,280
Notes to the condensed consolidated financial statements
(Forming part of the financial statements)
1. Accounting policies
Where accounting policies are particular to an individual note, narrative
regarding the policy is included with the relevant note; for example, the
accounting policy in relation to inventory is detailed in Note 17
(Inventories).
(a) General information
TheWorks.co.uk plc is a leading UK multi-channel value retailer of arts and
crafts, stationery, toys, games 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
online.
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 30 April 2023
(FY23 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 Group 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 fixed asset impairment; these are described in Note 1(f).
(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 in the Strategic report on pages • to • . The financial
statements have been prepared on a going concern basis, which the Directors
consider appropriate having made this assessment.
The Group has prepared cash flow forecasts for a period of at least twelve
months from the date of approval of these financial statements (the going
concern assessment period), based on the Board's forecast for FY24 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 mirrors the Group's 3
year plan and therefore represents their 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.
These factors are described below.
External environment
The risks which are considered the most significant to this evaluation relate
to the economy and the market, specifically their effect on the strength of
trading conditions, and the Group's ability to successfully execute its
strategy. The risk of weaker consumer demand is considered to be the greater
of these risks, due to the continued high level of inflation and its potential
effect on economic growth and consumer spending.
An emerging risk has been noted in relation to the possible effects of climate
change, but this is not expected to have a material financial impact on the
Group during the forecast period.
Financial position and bank facilities
At the end of FY23 the Group held net cash at bank of £10.2m (FY22: net cash
at bank of £16.3m).
After the Period end, the Group extended the tenor of its bank facility by one
year and it now expires on 30 November 2026. At the same time, following a
review of the historic utilisation of the facility, the Group's anticipated
future cash requirements, and the costs of maintaining the facility, the Group
requested that HSBC reduce the size of the facility from £30m to £20m.
The facility includes two financial covenants which are tested quarterly:
1. the "Leverage Ratio" or level of net debt to LTM (last twelve
months') EBITDA must not exceed 2.5 times during the life of the facility.
2. the "Fixed Charge Cover" or ratio of LTM EBITDA prior to deducting
rent and interest, to LTM rent and interest. This covenant increases in steps
to reflect the expectation of progressively improving financial performance
during the life of the facility, as follows: until October 2023, the ratio
must be at least 1.20 times; for the following 12 months the ratio must be at
least 1.25 times, and thereafter at least 1.30 times.
The Group expects to be able to operate and have sufficient headroom within
these covenants during the forecast period.
Potential impact of risks on financial scenarios
It is considered unlikely that all the risks described in the Strategic report
would manifest themselves to adversely affect the business at the same time.
The Base Case scenario/the Group's 3 year financial plan, implicitly already
takes into account the risks described, and assumes that they manifest
themselves in a way or to an extent that might be considered "neutral".
The Downside Case scenario assumes that there are more severely negative
effects than in the Base Case. In particular, the Downside Case assumptions
are that macroeconomic conditions are significantly worse, resulting in
reduced consumer spending and lower sales. It should be noted that the Base
Case already takes into account the current subdued consumer market
conditions. The Downside Case assumes that conditions become worse still from
the second half of the FY24 financial year.
Base Case scenario
The Base Case scenario assumptions reflect the following factors:
• Store sales (which represent over 85% of total sales) during
the first part of FY24 are above the Base Case requirement but online sales
are below it. The Group is implementing plans to improve its online
profitability in the medium term; in the short term, costs relating to the
online business are being tightly controlled to ensure that they reflect the
reduced sales level.
• The Base Case gross margin percentage reflects the expected
full year effect in FY24 of targeted price increases applied since the
beginning of 2023 and also significantly lower ocean container freight costs.
These favourable factors are partially offset by a less favourable hedged FX
rate than in FY23.
• Anticipated further inflationary effects, in particular the
increase in the National Living Wage. In respect of other costs, notably
property occupancy costs, it is not expected that there will be further
significant inflationary effects during FY24 and FY25, following the
significant increases (for example in electricity costs) already experienced
during FY23.
• Capital expenditure levels are in line with the Group's
strategic plan. A significant proportion of the Group's capital expenditure is
discretionary, particularly over a short-term time period. As a result, if
required, it can therefore be reduced substantially, for example, in the event
the Group needing to preserve cash.
• The anticipated costs of the Group's net zero climate change
commitments have been incorporated within the Base Case model. As set out in
the climate related disclosures on pages [36 to 42], the impact on the
Group's financial performance and position is not expected to be material in
the short term.
• The plan makes provision for dividend payments.
Under the Base Case scenario, the Group expects to make routine operational
use of its bank facility each year as stock levels are increased in
September-October, prior to peak sales occurring. This is consistent with the
normal pattern experienced prior to COVID-19.
The output of the Base Case model scenario indicates that the Group has
sufficient financial resources to continue to operate as a going concern and
for the financial statements to be prepared on this basis.
Measures to maintain or increase liquidity in circumstances such as are
described below
If necessary, mitigating actions can and would be taken in response to a
significant downturn in trading such as is described below, which would
increase liquidity.
These 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 are additional measures that
would be available 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
macroeconomic conditions compared to the Base Case:
· Store LFL sales are assumed to be 5% lower than in the Base Case
from October 2023 until January 2025.
· In this scenario online sales are assumed to be lower than in the
Base Case during FY24 despite the Group's attempts to increase them, but show
recovery in FY25.
· The product gross margin assumptions are the same as in the Base
Case other than in January 2024 when it is lower, to allow for the clearance
of stock which is assumed would have accumulated due to the inability to
reduce stock purchases immediately in response to the lower sales level.
Expected FX requirements are hedged until mid FY25, and freight rates are
hedged until the end of 2023. Beyond that time, it is not anticipated that
there will be any interruption to global freight systems as was experienced as
a result of the COVID pandemic, which were a consequence of unique
circumstances. Other gross margin inputs are relatively controllable,
including via the setting of selling prices to reflect any systematic changes
in the cost price of goods bought for resale.
· Volume related costs in the Downside Case are lowered where they
logically alter in a direct relationship with sales levels, for example,
forecast online fulfilment and marketing costs. The model also reflects
certain steps which could be taken to mitigate the effect of lower sales,
depending on management's assessment of the situation at the time. These
include adjustments to stock purchases, reducing capital expenditure,
reductions in labour usage, a reduction in discounts allowed as part of the
Group's loyalty scheme and the suspension of dividend payments.
· The combined financial effect of the modified assumptions in this
scenario compared with the Base Case, during FY24 and FY25, including
implementing some of the mitigating activities available, would result in:
o a reduction in store net sales of approximately £34m.
o a reduction in online net sales of approximately £1m.
o a reduction to EBITDA of approximately £9m.
Under this scenario the Group will draw on its bank facility prior to
Christmas 2023 but, as a result of the mitigating actions that would be taken
in H2 FY24 in response to a downturn in sales, particularly in reducing the
value of stock bought for resale, it would not make subsequent use of the bank
facility.
The bank facility financial covenants are complied with during the
pre-Christmas 2023 period when the facility is being used, but the forecast
indicates that the Fixed Charge covenant will not be complied with throughout
FY25, although at this time, the facility is not expected to be in use under
this scenario.
On the basis of this Downside Case scenario with the "severe but plausible"
set of assumptions as described, the business would continue to have adequate
resources to continue in operation.
However, the cash headroom at the quarterly covenant testing points in FY25
falling within the going concern period is limited, and there are reasonably
plausible scenarios in which this headroom could be eroded and create a
borrowing requirement. For example, if sales decreased by a further 1% during
the going concern period compared with the Downside Case, a small borrowing
requirement could arise. The Group has a strong relationship with its bank,
HSBC, and has a recent track record of working collaboratively with the bank
to resolve potential covenant issues, for example, a waiver was agreed by HSBC
in 2021 as noted in the Group's FY21 annual report. Despite this strong
relationship with the bank and the recent evidence of successfully managing
comparable situations, if a borrowing requirement arose when the financial
covenants are not complied with, there is a risk that the Group would not be
able to utilise its borrowing facilities if required.
The Directors believe that, should such a situation arise in practice, it
would have time before a potential breach to mitigate further, and potentially
to make arrangements with the bank, as has occurred previously, to adjust the
covenant levels to prevent a breach. Furthermore, the Group has successfully
managed through challenging conditions during the recent COVID pandemic, and
the Directors believe it unlikely that comparably challenging conditions will
be experienced during the forecast period, despite the concerns regarding the
current macroeconomic conditions. Nevertheless, despite the Directors'
confidence in relation to these matters, there is no certainty as to whether
the mitigating actions would provide the level of liquidity required in the
time available to implement them, nor whether the bank would make adjustments
to the financial covenants.
Going concern and basis of preparation conclusion
Based on all of the above considerations the Directors believe that it remains
appropriate to prepare the financial statements on a going concern basis.
However, these circumstances indicate the existence of a material uncertainty
related to events or conditions that may cast significant doubt on the Group's
and the Company's ability to continue as a going concern and, therefore, that
the Group and Company may be unable to realise their assets and discharge
their liabilities in the normal course of business. The financial statements
do not include any adjustments that would result from the basis of preparation
being inappropriate.
(ii) New accounting standards
The Group has applied the following new standards and interpretations for the
first time for the annual reporting period commencing 2 May 2022:
• Annual Improvements to IFRS 2018-2020 (Amendments to IFRS 1,
IFRS 9, IFRS 16 and IAS 41)
• Onerous Contracts - Cost of Fulfilling a Contract (Amendments
to IAS 37)
• Property, Plant and Equipment - Proceeds before Intended Use
(Amendments to IAS 16)
• References to the Conceptual Framework (Amendments to IFRS 3)
• COVID-19 Related Rent Concessions beyond 30 June 2021
(Amendments to 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:
• Insurance Contracts (IFRS 17)
• Initial Application of IFRS 17 and IFRS 9 - Comparative
Information (Amendments to IFRS 17)
• Extension to the Temporary Exemption from Applying IFRS 9
(Amendments to IFRS 4)
• Disclosure of Accounting Policies (Amendments to IAS 1)
• Deferred Tax Related to Assets and Liabilities Arising from a
Single Transaction (Amendments to IAS 12)
• Definition of Accounting Estimates (Amendments to IAS 8)
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's accounting policies. Where a significant risk of
materially different outcomes exists, this will represent a key source of
estimation uncertainty.
Estimates and judgements 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)(i)
Impairment of intangible assets, property, plant and equipment and 10, 11
right-of-use assets
2. Other operating income/(expense)
Accounting policy
The business was classified as a 'non-essential retailer' during the COVID-19
pandemic and was therefore required to close its shops during periods of
lockdown in the FY20 and FY21 financial years. 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.
The £119k charge noted in the prior period is to correct an immaterial
overstatement of the Coronavirus Job Retention Scheme (CJRS) income reported
in respect of FY21.
The COVID-19 business rates relief received during the year was £227k (FY22:
£5,828k), which is included within cost of sales.
FY23 FY22
£000 £000
COVID-19 furlough scheme grants receivable - (119)
Rent receivable 8 8
8 (111)
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
The FY23 like-for-like (LFL) sales increase has been calculated with reference
to the FY22 comparative sales figures. In FY22's Annual Report, two-year
comparatives were used because the use of a normal one-year LFL comparative
was prevented by the various disruptions to store trading brought about by
COVID-19 restrictions in the FY21 comparative period. Furthermore, for the
last five weeks of FY22, it was necessary to calculate the LFL percentages
with reference to the corresponding weeks in FY19, because the equivalent
weeks during FY20 were also affected by enforced store closures. Similar
comparison periods were also used for the total sales growth figures.
LFL sales are defined by the Group as the year-on-year growth in gross sales
from stores which have been trading for a full financial year prior to the
current year and have been trading throughout the current financial period
being reported on, and from the Company's online store, calculated on a
calendar week basis. The measure is used widely in the retail industry as an
indicator of sales performance. LFL sales are calculated on a gross basis to
ensure that fluctuations in the VAT rates of products sold are excluded from
the like-for-like sales growth percentage figure.
A reconciliation of IFRS revenue to sales on an LFL basis is set out below:
FY23 FY22
£000 £000
Total LFL sales 297,009 285,012
Non-LFL store sales 19,621 13,359
Total gross sales 316,630 298,371
VAT (35,144) (33,467)
Loyalty points (1,384) (274)
Revenue per consolidated income statement 280,102 264,630
Pre-IFRS 16 Adjusted EBITDA ('EBITDA') and Adjusted profit after tax
EBITDA is defined by the Group as pre-IFRS 16 earnings before interest, tax,
depreciation, amortisation and profit/loss on the disposal of fixed assets,
after adding back or deducting Adjusting items. See Note 6 for a description
of Adjusting items. Pre-IFRS 16 EBITDA is used for the bank facility LTM
EBITDA covenant calculations.
The table on the following page provides a reconciliation of pre-IFRS 16
EBITDA to profit/(loss) after tax and the impact of IFRS 16:
FY23 FY22
£000 (Restated -
Note 11)
£000
Pre-IFRS 16 Adjusted EBITDA1 9,000 16,562
Income statement rental charges not recognised under IFRS 16 24,865 24,434
Foreign exchange difference on euro leases (152) 120
Post-IFRS 16 Adjusted EBITDA1 33,713 41,116
Profit on disposal of right-of-use assets and lease liability recognised under 1,105 441
IFRS 16
Loss on disposal of property, plant and equipment (149) (179)
Loss on disposal of intangible assets (14) -
Depreciation of property, plant and equipment (4,458) (4,040)
Depreciation of right-of-use assets (14,840) (15,094)
Amortisation (878) (567)
Finance expenses (4,648) (5,192)
Finance income 227 16
Tax credit/(charge) 265 (276)
Adjusted profit after tax 10,323 16,225
Adjusting items (including impairment charges and reversals) (5,052) (2,262)
Tax charge - -
Profit after tax 5,271 13,963
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.
FY23 FY22 (Restated - Note 11)
Adjusted Adjusting items Total Adjusted Adjusting items Total
£000 £000 £000 £000 £000 £000
Profit/(loss) before tax and IFRS 16 adjustments 3,025 (1,488) 1,537 10,980 (2,191) 8,789
Remove rental charges not recognised under IFRS 16 24,737 - 24,737 24,308 - 24,308
Remove hire costs from hire of equipment 128 - 128 126 - 126
Remove depreciation charged on the existing assets 151 - 151 89 - 89
Remove interest charged on the existing liability 34 - 34 31 - 31
Depreciation charge on right-of-use assets (14,840) - (14,840) (15,094) - (15,094)
Interest cost on lease liability (4,130) - (4,130) (4,500) - (4,500)
Loss on disposal of right-of-use assets (297) - (297) (1,899) - (1,899)
Profit on disposal of lease liability 1,402 - 1,402 2,340 - 2,340
Foreign exchange difference on euro leases (152) - (152) 120 - 120
Additional impairment charge under IAS 36 - (3,564) (3,564) - (71) (71)
Net impact on profit/(loss) 7,033 (3,564) 3,469 5,521 (71) 5,450
Profit/(loss) before tax 10,058 (5,052) 5,006 16,501 (2,262) 14,239
Adjusted profit metrics
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
6.
4. Adjusting items
Adjusting items are unusual in nature or incidence and sufficiently material
in size that in the judgement of the Directors merit disclosure separately on
the face of the financial statements to ensure 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 users of the
accounts. 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 FY23, the items classified as 'Adjusting', as shown below, were
related to transactions that had been treated as Adjusting in prior periods.
FY23 FY22
£000 (Restated -
Note 11)
£000
Cost of sales
Impairment charges1 8,188 8,929
Impairment reversals1 (3,136) (6,667)
Total cost of sales 5,052 2,262
Total Adjusting items 5,052 2,262
1 These relate to fixed asset impairment charges and reversals of
prior year impairment charges.
5. Operating profit
Operating profit before Adjusting items is stated after charging/(crediting)
the following items:
FY23 FY22
£000 (Restated -
Note 11)
£000
Loss on disposal of property, plant and equipment 149 179
Loss on disposal of intangible assets 14 -
Profit on disposal of right-of-use assets and lease liability (1,105) (441)
Depreciation 19,298 19,134
Amortisation 878 567
Operating lease payments:
- Hire of plant and machinery1 371 389
- Other operating leases1 2,136 1,549
Net foreign exchange loss/(gain) 392 (128)
Cost of inventories recognised as an expense 119,085 106,954
Staff costs 62,235 60,031
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.
Auditor's remuneration:
FY23 FY22
£000 £000
Fees payable to the Group's auditor for the audit of the Group's annual 500 450
accounts
Amounts payable in respect of other services to the Company and its
subsidiaries
Audit of the accounts of subsidiaries 40 40
Audit related assurance services (provision of turnover certificates required 1 1
under certain leases)
Total services 541 491
6. Staff numbers and costs
The average number of people employed by the Group (including Directors)
during the year, analysed by category, was as follows:
Number of employees
FY23 FY22
Store support centre colleagues 243 216
Store colleagues 3,564 3,468
Warehouse and distribution colleagues 147 140
3,954 3,824
The corresponding aggregate payroll costs were as follows:
FY23 FY22
£000 £000
Wages and salaries 57,189 55,600
Social security costs 4,156 3,654
Contributions to defined contribution pension schemes 890 777
Total employee costs 62,235 60,031
Agency labour costs 2,035 1,505
Total staff costs 64,270 61,536
7. 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
FY23 FY22
£000 (Restated(1))
£000
Current tax expense
Current year 230 1,288
Adjustments for prior years (611) 3
Current tax (credit)/expense (381) 1,291
Deferred tax credit
Origination and reversal of temporary differences (212) (111)
Increase in tax rate (172) (1,120)
Adjustments for prior years 500 216
Deferred tax credit 116 (1,015)
Total tax expense (265) 276
(1) The FY22 corporation tax charge has been restated to reflect the tax
impact of the restatements documented in Note 11.
The UK corporation tax rate for FY23 was 19.5% on average with the UK
corporation tax rate changing from 19.0% to 25.0% 11 months into the financial
year (FY22: 19.0%). Taxation for other jurisdictions is calculated at the
rates prevailing in the respective jurisdictions.
An increase in the UK corporation rate from 19.0% to 25.0% (effective 1 April
2023) was substantively enacted on 24 May 2021. As the deferred tax assets and
liabilities should be recognised based on the corporation tax rate applicable
when they are anticipated to unwind, the assets and liabilities on UK
operations have been recognised at a rate of 25.0% (FY22: 25.0%). Assets and
liabilities arising on foreign operations have been recognised at the
applicable overseas tax rates.
Reconciliation of effective tax rate
FY23 FY22
£000 (Restated - see above)
£000
Profit for the year 5,006 14,239
Tax using the UK corporation tax rate of 19.5% (FY22: 19.0%) 976 2,705
Non-deductible expenses 147 182
Effect of tax rates in foreign jurisdictions (13) (40)
Tax (over)/under provided in prior periods (111) 219
Utilisation of unrecognised tax losses brought forward (1,211) (1,756)
Deferred tax not recognised (18) 86
Losses carries forwards 137 -
Change in tax rate (172) (1,120)
Total tax (credit)/expense (265) 276
The Group's total income tax credit in respect of the period was £265k (FY22:
expense of £276k). The effective tax rate on the total profit before tax was
(5.3)% (FY22: 1.9% on the profit before tax) whilst the effective tax rate on
the total profit before Adjusted items was (2.6)% (FY22: 1.7% on the profit
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.
The current year tax credit recognised above relates to an adjustment to the
prior year corporation tax creditor recognised; this was higher than the
corporation tax payable when the FY22 corporation tax computations were
finalised due to the inclusion of the super deduction in the final year-end
tax computations.
8. 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.
Pence per share FY23 FY22
£000 £000
Final dividend for the year ended 1 May 2022 2.4p 1,492 -
Total dividend paid to shareholders during the year 1,492 -
Dividend equivalents totalling £603k (FY22: £375k) were accrued in the year
in relation to share-based long-term incentive schemes.
The Board has recommended the payment of a 1.6 pence per share final dividend
in respect of FY23 (FY22: 2.4 pence).
9. 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 6 for further details) to
reflect the Group's underlying profit for the year.
FY23 FY22
Number Number
Number of shares in issue 62,500,000 62,500,000
Number of dilutive share options 621,130 940,673
Number of shares for diluted earnings per share 63,121,130 63,440,673
£000 £000
(Restated -
Note 11)
Total profit for the financial period 5,271 13,963
Adjusting items 5,052 2,262
Adjusted profit for Adjusted earnings per share 10,323 16,225
Pence Pence
(Restated -
Note 11)
Basic earnings per share 8.4 22.3
Diluted earnings per share 8.4 22.0
Adjusted basic earnings per share 16.5 26.0
Adjusted diluted earnings per share 16.4 25.6
10. 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. Goodwill was fully impaired in FY20.
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 (such as
consultancy), as well as internal payroll related costs for employees who are
directly working on 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 and treated as an Adjusting item.
Goodwill Software Total
£000 £000 £000
Cost
Balance at 1 May 2022 16,180 9,058 25,238
Additions - 1,309 1,309
Disposals - (1,057) (1,057)
Balance at 30 April 2023 16,180 9,310 25,490
Amortisation and impairment
Balance at 1 May 2022 16,180 7,441 23,621
Amortisation charge for the year - 878 878
Impairment charges - 1,118 1,118
Disposals(1) - (1,043) (1,043)
Balance at 30 April 2023 16,180 8,394 24,574
Net book value
At 1 May 2022 - 1,617 1,617
At 30 April 2023 - 916 916
1. During FY23 the Group reviewed assets on the fixed asset register
with a nil net book value. Following this review intangible assets with a cost
and accumulated depreciation of £1,043k were deemed to no longer be in use by
the Group and have therefore been disposed of.
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 (Restated(2)) 16,180 5,499 21,679
Amortisation charge for the year (Restated(2)) - 567 567
Impairment charge (Restated(2)) - 1,375 1,375
Balance at 1 May 2022 (Restated(2)) 16,180 7,441 23,621
Net book value
At 3 May 2021 (Restated(2)) - 2,544 2,544
At 1 May 2022 (Restated(2)) - 1,617 1,617
2. These balances have been restated to reflect the impact of the
prior period restatements in Note 11.
Goodwill impairment testing
Goodwill of £16.2m was impaired to £Nil in FY20; therefore, no further
impairment testing is necessary in relation to this.
Impairment of other intangible assets
Please refer to Note 11 for details of impairment of tangible and intangible
assets.
11. 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 sale proceeds and the carrying
amount of the asset and is recognised in profit or loss.
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 15.
Impairment of tangible and intangible assets
The carrying amounts of the Group's tangible and intangible assets with a
measurable 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), as well as the Company's
website.
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 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.
The carrying value represents each CGU's specific assets, as well as the IFRS
16 right-of-use asset, plus an allocation of corporate assets where these
assets can be allocated on a reasonable and consistent basis.
Where the carrying value exceeds the recoverable amount an 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.
Measuring recoverable amounts
The Group estimates the recoverable amount of each CGU based on the greater of
its fair value less disposal cost and its value in use (VIU), derived from a
discounted cash flow model which excludes IFRS 16 lease payments. In assessing
the fair value less disposal cost the ability to sublease each store has been
considered and it is concluded that this is not applicable for the majority of
the store estate. Where it is deemed reasonable to assume the ability to
sublet the potential cash inflows generated are insignificant, therefore the
VIU calculation is used for all stores. A proportion of 'click and collect'
sales are included in store cash flows to reflect the contribution stores make
to fulfilling such orders. The key assumptions applied by management in the
VIU calculations are those regarding the growth rates of sales and gross
margins, medium-term growth rates, central overhead allocation and the
discount rate used to discount the assumed cash flows to present value.
Projected cash flows for each store are limited to the useful life of each
store as determined by its current lease term unless a lease has already
expired or is due to expire within 12 months of 30 April 2023 where the
intention is to remain in the store and renew the lease. For these leases, an
average lease term is used for cash flow projections.
Projected cash flows for the website are limited to 60 months as this is in
line with the average useful economic life of the assets assigned to the web
CGU.
Impairment triggers
Due to the challenging macroeconomic environment and the existence of a
material brought forwards impairment charge, all CGUs other than stores which
have been open for less than 12 months have been assessed for impairment.
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 historic data from 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 company risk-free rate, equity risk premium, Group
size premium, a forecasting risk premium and a risk adjustment (beta). The
discount rate is compared to the published discount rates of comparable
businesses and relevant industry data prior to being adopted. The FY23 pre-tax
discount rate has been calculated on a post-IFRS 16 basis. FY22's originally
reported impairment was calculated on a pre-IFRS 16 basis discounted using a
pre-IFRS 16 WACC of 17.9%; however, when the prior year restatements
documented below were calculated, the cash flows were produced on a post-IFRS
16 basis and discounted using a post IFRS 16 WACC to ensure consistency of
approach.
FY23 FY22
(Restated)
Pre-tax discount rate 12.78% 11.48%
Medium-term growth rate 1.0% 2.0%
While the online CGU is in a different stage of establishment to that of the
store CGUs, the same pre-tax discount rate has been used in the impairment
assessment. Given that the website is not performing in line with
expectations, all assets relating to the web CGU are fully impaired, as such
an increase in the pre-tax discount rate used for the web assessment would not
increase the impairment charge recognised.
Cash flow forecasts are derived from the most recent Board-approved corporate
plans that form the Base Case on which the VIU calculations are based. These
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);
• central costs are reviewed to identify amounts which are
necessarily incurred to generate the CGU cash flows. As a result of the
analysis performed at the end of FY23, 87% (FY22: 91%) of central costs have
been allocated by category using appropriate volumetrics.
Cash flows beyond the corporate plan period (2027 and beyond) have been
determined using the medium-term growth rate; this is based on management's
future expectations, reflecting, amongst other things, current market
conditions and expected future trends and has been based on historical data
from both external and internal sources. Immediately quantifiable impacts of
climate change and costs expected to be incurred in connection with our net
zero commitments, are included within the cash flows. The useful economic
lives of store assets are short in the context of climate change scenario
models therefore no medium to long-term effects have been considered.
Impairment charge
During FY23, an impairment charge of £7,572k was recognised against 209
stores with a recoverable amount of £24,055k, and an impairment charge of
£616k was recognised against the website (FY22 restated: an impairment charge
of £7,540k was recognised against 200 stores with a recoverable amount of
£26,528k, and an impairment charge of £1,389k was recognised against the
website). An impairment reversal of £3,136k has been recognised in FY23
relating to 100 stores with a recoverable amount of £18,090k as at 30 April
2023 (FY22 restated: an impairment reversal of £6,667k was recognised
relating to 108 stores with a recoverable amount of £24,950k).
A net impairment charge of £5,052k (FY22 restated: £2,262k) has therefore
been shown on the face of the consolidated income statement. In line with the
previously adopted treatment, impairment charges and reversals have been shown
as Adjusting items.
Sensitivity analysis
Whilst the Directors believe the assumptions adopted are realistic, reasonably
possible changes in key assumptions could still occur, which could cause the
recoverable amount of certain stores to be lower or higher than the carrying
amount. The impact on the net impairment charge recognised from reasonably
possible changes in assumption are detailed below:
- a reduction in sales of 5% from the Base Case plan to reflect a
potential Downside Scenario would result in an increase in the net impairment
charge of £8,981k. An increase in sales of 5% from the Base Case plan would
decrease the net impairment charge by £5,827k;
- a reduction in gross margin of 2% would result in an increase in the
net impairment charge of £2,320k. An increase in gross margin of 2% would
decrease the net impairment charge by £2,063k;
- a 200-basis point increase in the pre-tax discount rate would result
in an increase in the net impairment charge of £1,412k, while a 200 basis
point decrease in the pre-tax discount rate would result in a decrease in the
net impairment charge of £1,387k;
- a 100 basis point decrease in the medium-term growth rate would
result in an increase in the net impairment charge of £493k, while a 100
basis point increase in the medium-term growth rate would result in an
increase in the net impairment charge of £481k;
- increasing the percentage of central costs allocated across CGUs
from 87% to 97% would result in an increase in the net impairment charge of
£2,234k. Decreasing the percentage of central costs allocated across CGUs
from 87% to 77% would result in a decrease in the net impairment charge of
£2,000k.
Whilst the Directors consider their assumptions to be realistic, should actual
results 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 - Leasehold improvements Plant and Fixtures and Total
property plant and £000 equipment fittings £000
£000 equipment £000 £000
£000
Cost
Balance at 1 May 2022 (Restated(2)) 151,091 2,421 10,729 3,818 27,259 195,318
Additions 9,530 13 933 1,109 4,772 16,357
Disposals(1) (6,570) - (4,254) (1,271) (12,836) (24,931)
Balance at 30 April 2023 154,051 2,434 7,408 3,656 19,195 186,744
Depreciation and impairment
Balance at 1 May 2022 (Restated(2)) 75,483 1,408 8,686 3,507 19,717 108,801
Depreciation charge for the year 14,483 357 1,315 307 2,836 19,298
Impairment charge 6,126 - 9 388 547 7,070
Impairment reversals (2,562) - (172) - (402) (3,136)
Disposals (6,273) - (4,190) (1,230) (12,792) (24,485)
At 30 April 2023 87,257 1,765 5,648 2,972 9,906 107,548
Net book value
At 1 May 2022 (Restated(2)) 75,608 1,013 2,043 311 7,542 86,517
At 30 April 2023 66,794 669 1,760 684 9,289 79,196
1. During FY23 the Group reviewed assets on the fixed asset register
with a nil net book value. Following this review, fixed assets with a cost and
accumulated depreciation of £17,502k were deemed to no longer be in use by
the Group and have therefore been disposed of. The totals disposed of by
category were as follows: £3,995k leasehold improvements, £1,172k plant and
equipment, £12,375k fixtures and fittings.
2. These balances have been restated to reflect the impact of the
prior period restatements discussed below.
RoUA - RoUA - Leasehold improvements Plant and Fixtures and Total
property plant and £000 equipment fittings £000
£000 equipment £000 £000
£000
Cost
Balance at 3 May 2021 (Restated(2)) 154,319 1,913 10,410 3,376 26,167 196,185
Additions (Restated(2)) 2,540 508 548 476 1,499 5,571
Disposals (5,768) - (229) (34) (407) (6,438)
Balance at 1 May 2022 (Restated(2)) 151,091 2,421 10,729 3,818 27,259 195,318
Depreciation and impairment
Balance at 3 May 2021 (Restated(2)) 64,619 976 7,712 2,784 17,049 93,140
Depreciation charge for the year (Restated(2)) 14,662 432 1,268 341 2,431 19,134
Impairment charge (Restated(2)) 6,165 - 134 411 844 7,554
Impairment reversals (Restated(2)) (6,094) - (252) (8) (313) (6,667)
Disposals (3,869) - (176) (21) (294) (4,360)
Balance at 1 May 2022 75,483 1,408 8,686 3,507 19,717 108,801
Net book value
At 3 May 2021 (Restated(2)) 89,700 937 2,698 592 9,118 103,045
At 1 May 2022 (Restated(2)) 75,608 1,013 2,043 311 7,542 86,517
2 These balances have been restated to reflect the impact of the
prior period restatements discussed below.
Prior Period Restatements
Leasehold assets useful economic lives
In prior years, leasehold assets were being depreciated over a life longer
than the life of the lease they relate to. To correct this, leasehold
improvements depreciation has been restated. The FY21 closing accumulated
depreciation has been increased by £1,768k with a corresponding decrease in
closing FY21 reserves.
The FY22 in year depreciation charge has increased by £537k, reducing
adjusted profit before tax and closing property, plant and equipment net book
value. In the consolidated cash flow statement, the FY22 adjustment has
increased the 'depreciation of property, plant and equipment' by £537k,
however there is no overall impact on net cash flows from operating, financing
and investing activities or on 'net increase in cash and cash equivalents'.
Lease incentives received and initial direct costs incurred at the inception
of a lease
In prior years, landlord capital contributions, and capitalised legal fees
incurred upon negotiation of lease agreements were recorded within leasehold
improvements rather than included within the initial measurement of the IFRS
16 right-of-use asset. Therefore, the costs and accumulated depreciation
amounts relating to these assets have been reclassified from 'leasehold
improvements' into 'RoUA property', resulting in a £344k reduction in the
right-of-use asset NBV at 3 May 2021, and a £743k reduction at 1 May 2022,
with a corresponding increase in the NBV of leasehold assets. This adjustment
has no impact on the consolidated income statement or consolidated cash flow
statement.
Central cost allocation within fixed asset impairment assessment
In prior years, when assessing the impairment of right-of-use assets,
property, plant and equipment and intangible assets, central costs were not
allocated to each cash generating unit (CGU). During the current year, the
directors have reconsidered the allocation of central costs and based on the
existence of a consistent store estate and cost base, concluded that certain
costs can be allocated to individual CGUs on a reasonable and consistent
basis. The directors additionally considered whether a consistent allocation
was appropriate in earlier periods and concluded that an allocation became
appropriate following the change in strategy to "Better not just Bigger", the
implementation of which occurred following the appointment of Gavin Peck as
CEO in January 2020 over a protracted period as a result of COVID-19, that
ultimately resulted in a more consistent store estate and cost base. The
directors have applied judgement to conclude that the effect of the revised
allocation of central costs in 2023 should be reflected by restating the
impairment opening balances at 2 May 2021 and 1 May 2022.
The FY21 closing impairment balance relating to right-of-use assets has
increased by £26,681k, the closing impairment balance relating to property,
plant and equipment has increased by £5,638k, and the closing impairment
balance relating to intangible assets has increased by £281k. The adjustment
to closing FY21 reserves is therefore £32,600k.
The FY22 reassessment resulted in a £173k higher net impairment charge
relating to right-of-use assets, a £479k higher net impairment charge
relating to property, plant and equipment, and a £1,375k higher net
impairment charge relating to intangible assets. Therefore, the reduction in
total profit before tax relating to FY22 impairment charges is £2,027k. These
adjustments have resulted in the restatement of a number of reconciling items
in the consolidated cash flow statement relating to impairment charges,
reversal of impairment charges, and profit / loss on disposal of fixed assets,
however they have no overall impact on net cash flows from operating,
financing and investing activities or on 'net increase in cash and cash
equivalents'.
Depreciation reduction due to impairment restatement
As a result of the impairment adjustment detailed above the net book value of
fixed assets was lower at the start of the FY21 and FY22, resulting in the
depreciation charge in FY21 and FY22 being overstated. The FY21 closing
accumulated depreciation has been reduced by £5,120k relating to right-of-use
assets, £1,946k relating to property, plant and equipment and £362k relating
to intangible assets, with a corresponding increase in closing FY21 reserves.
The FY22 in year depreciation charge has decreased by £4,748k relating to
right-of-use assets, £1,658k relating to property, plant and equipment, and
£239k relating to intangible assets, increasing adjusted profit before tax by
£6,645k. These adjustments decrease the 'depreciation of property, plant and
equipment', 'depreciation of right-of-use assets' and 'amortisation of
intangible assets' balances in the consolidated cash flow statement, however
there is no overall impact on 'net increase in cash and cash equivalents'.
Corporation tax restatement
The above adjustments have resulted in restatements to the corporation tax
charges, current tax assets / liabilities and the deferred tax asset. Please
refer to notes 10 and 16 for restated taxation disclosures.
The following tables summarise the impact of the above restatements on the
Group's consolidated financial statements including the impact of current and
deferred corporation tax.
Summarised consolidated income statement
Adjustments
Per FY22 financial statements Leasehold asset useful economic life reduction Landlord contributions and legal fees incorporation within RoUA Impairment charge increase Depreciation charge Taxation impact FY22 restated balance
reduction of restatements
Income statement
Revenue 264,630 - - - - - 264,630
Cost of sales (216,053) (425) - (2,027) 6,645 - (211,860)
Gross profit 48,577 (425) - (2,027) 6,645 - 52,770
Other operating income (111) - - - - - (111)
Distribution expenses (9,128) - - - - - (9,128)
Administrative expenses (24,004) (112) - - - - (24,116)
Operating profit 15,334 (537) - (2,027) 6,645 - 19,415
Net financing expense (5,176) - - - - - (5,176)
Profit before tax 10,158 (537) - (2,027) 6,645 - 14,239
Taxation (1,436) - - - - 1,160 (276)
Profit after tax 8,722 (537) - (2,027) 6,645 1,160 13,963
Summarised consolidated statement of financial position
Adjustments
Per FY22 financial statements Leasehold asset useful economic life reduction Landlord contributions and legal fees incorporation within RoUA Impairment charge increase Depreciation charge Taxation impact FY22 restated balance
reduction of restatements
Non-current assets
Intangible assets 2,672 - - (1,657) 602 - 1,617
Property, plant and equipment 13,970 (2,304) 743 (6,117) 3,604 - 9,896
Right-of-use assets 94,351 - (743) (26,853) 9,866 - 76,621
Deferred tax assets 3,477 - - - - 1,231 4,708
114,470 (2,304) - (34,627) 14,072 1,231 92,842
Current assets 56,487 - - - - - 56,487
Total assets 170,957 (2,304) - (34,627) 14,072 1,231 149,329
Liabilities
Tax liability (1,115) - - - - 375 (740)
Other liabilities (148,211) - - - - - (148,211)
Total liabilities (149,326) - - - - 375 (148,951)
Net assets 21,631 (2,304) - (34,627) 14,072 1,606 378
Equity attributable to equity holders of the Parent
Retained earnings (11,741) (2,304) - (34,627) 14,072 1,606 (32,994)
Other reserves 33,372 - - - - - 33,372
Total equity 21,631 (2,304) - (34,627) 14,072 1,606 378
Adjustments
Per FY21 financial statements Leasehold asset useful economic life reduction Landlord contributions and legal fees incorporation within RoUA Impairment charge increase Depreciation charge Taxation impact FY21 restated balance
reduction of restatements
Non-current assets
Intangible assets 2,463 - - (281) 362 - 2,544
Property, plant and equipment 17,524 (1,768) 344 (5,638) 1,946 - 12,408
Right-of-use assets 112,542 - (344) (26,681) 5,120 - 90,637
Deferred tax assets 2,852 - - - - 842 3,694
135,381 (1,768) - (32,600) 7,428 842 109,283
Current assets
Tax asset 704 - - - - (396) 308
Other current assets 44,360 - - - - - 44,360
45,064 - - - - (396) 44,668
Total assets 180,445 (1,768) - (32,600) 7,428 446 153,951
Total liabilities (171,617) - - - - - (171,617)
Net assets 8,828 (1,768) - (32,600) 7,428 446 (17,666)
Equity attributable to equity holders of the Parent
Retained earnings (20,463) (1,768) - (32,600) 7,428 446 (46,957)
Other reserves 29,291 - - - - - 29,291
Total equity 8,828 (1,768) - (32,600) 7,428 446 (17,666)
Summarised 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
Reported balance at 1 May 2022 625 28,322 (54) 2,252 2,227 (11,741) 21,631
Cumulative adjustment - - - - - (21,253) (21,253)
Restated balance at 1 May 2022 625 28,322 (54) 2,252 2,227 (32,994) 378
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
Reported balance at 2 May 2021 625 28,322 (54) 1,601 (1,203) (20,463) 8,828
Cumulative adjustment - - - - - (26,494) (26,494)
Restated balance at 2 May 2021 625 28,322 (54) 1,601 (1,203) (46,957) (17,666)
12. 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 12 months or less;
(ii) leases where the underlying asset has a low value; and
(iii) concession leases where the landlord has substantial substitution
rights.
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 incremental borrowing
rate as the rate implicit in the lease cannot be readily determined.
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.
Determining the lease term
Termination options are included in a number of property leases across the
Group. These terms are used to maximise operational flexibility. At the
commencement date of property leases, the Group determines the lease term to
be the full term of the lease, assuming that any option to break or extend the
lease is unlikely to be exercised. Leases will be revalued if it becomes
likely that a break clause is to be exercised. In determining the likelihood
of the exercise of a break option, management considers all facts and
circumstances that create an economic incentive to exercise the termination
option. For property leases, the following factors are the most relevant:
• the profitability of the leased store and future plans for the
business; and
• 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 is 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 statement of financial position
Right-of-use assets
FY23 FY22
£000 (Restated -
Note 11)
£000
Land and buildings 66,794 75,608
Plant and equipment 669 1,013
Total right-of-use assets 67,463 76,621
Additions to the right-of-use assets during FY23 were £9,543k (FY22:
£3,048k).
Lease liabilities
Lease liabilities included in the statement of financial position as at the
financial year end:
FY23 FY22
£000 £000
Current 23,449 25,434
Non-current 74,766 85,702
98,215 111,136
Maturity analysis - contractual undiscounted cash flows:
FY23 FY22
£000 £000
Less than one year 27,163 31,592
One to two years 22,926 27,283
Two to three years 18,039 23,655
Three to four years 12,944 18,977
Four to five years 9,185 13,102
More than five years 21,718 21,862
Total undiscounted lease liabilities 111,975 136,471
Amounts recognised in the statement of profit and loss
FY23 FY22
£000 (Restated -
Note 11)
£000
Depreciation charge on right-of-use assets (RoUA) 14,840 15,094
Interest cost on lease liability 4,130 4,500
Profit on disposal of RoUA / lease liability (1,105) (441)
Foreign exchange difference on euro leases (152) 120
Additional impairment charge under IAS 36 3,564 71
Operating lease rentals - hire of plant, equipment and motor vehicles
- Low-value leases 371 389
Total plant, equipment and motor vehicle operating lease rentals 371 389
Operating lease rentals - store leases
- Stores with variable lease rentals 877 454
- Concession leases (the landlord has substantial substitution rights) 977 943
- Low-value leases 13 (11)
- Lease is expiring within 12 months or has rolling break clauses 53 87
- Lease has expired 397 484
- Variable lease payments as a result of COVID-19 concessions (181) (408)
Total store operating lease rentals 2,136 1,549
Depreciation of right-of-use asset by class:
FY23 FY22
£000 (Restated -
Note 11)
£000
Land and buildings 14,483 14,662
Plant and equipment 357 432
Total right-of-use asset depreciation 14,840 15,094
13. Deferred tax assets
Recognised deferred tax assets
Deferred tax assets are attributable to the following:
Assets Liabilities
FY23 FY22 FY23 FY22
£000 (Restated(1)) £000 (Restated(1))
£000 £000
Property, plant and equipment 2,876 2,868 - -
Leases 1,362 1,645 - -
Temporary timing differences 354 195 - -
Financial assets/liabilities 262 - - -
Tax assets 4,854 4,708 - -
Movement in deferred tax during the year
Fixed assets Leases Temporary Financial Total
£000 £000 timing assets/ £000
differences liabilities
£000 £000
At 1 May 2022 (Restated(1)) 2,868 1,645 195 - 4,708
Adjustment in respect of prior years (499) - - (598) (1,097)
Deferred tax (charge)/credit to profit and loss 507 (283) 159 - 383
Deferred tax credit in equity profit and loss - - 860 860
At 30 April 2023 2,876 1,362 354 262 4,854
(1) The FY22 deferred tax asset has been restated to reflect the tax impact of
the restatements documented in Note 11.
Movement in deferred tax during the prior year
Fixed assets Leases Temporary Financial Total
£000 £000 timing assets/ £000
differences liabilities
£000 £000
At 1 May 2022 (Restated(1)) 1,574 1,420 372 328 3,694
Adjustment in respect of prior years - - (216) - (216)
Deferred tax (charge)/credit to profit and loss (Restated(1)) 1,294 225 39 (328) 1,230
Deferred tax credit in equity profit and loss - - - - -
At 1 May 2022 (Restated(1)) 2,868 1,645 195 - 4,708
(1) The FY22 deferred tax asset has been restated to reflect the tax impact of
the restatements documented in Note 11.
Tax losses carried forward for which no deferred tax asset has been recognised
total £9,273k (FY22: £14,288k) with an expiry date of April 2024.
14. 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
FY23 FY22
£000 £000
Gross stock value 31,278 29,817
Less: stock provisions for shrinkage and obsolescence (1,037) (3,252)
Goods for resale net of provisions 30,241 26,565
Stock in transit 3,200 2,822
Inventory 33,441 29,387
The cost of inventories recognised as an expense during the period was
£119.1m (FY22: £107.7m).
Stock provisions
The Group makes provisions in relation to stock quantities, due to potential
stock losses not yet reflected in the accounting records, commonly referred to
as unrecognised 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.
Shrinkage provision
During the prior financial year, the Group 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) had been performed in 71 stores during the last
6 weeks of the financial year, with an additional 53 four wall counts
performed in the month following the financial year end.
During FY23, full four wall counts were performed in 524 stores during the
last 13 weeks of the financial year. Through these counts, the Group
established that its accounting records reflected 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 the stock counts, which
occurred nearer to the end of the financial year than the counts undertaken in
FY22, as a result of which, the provision required for unrecognised shrinkage
materially decreased compared with the value at the end of FY22, by £1.4m to
£0.4m.
The unrecognised shrinkage provision was £0.4m at the Period end (FY22:
£1.9m), representing 1.9% of gross store stock (FY22: 8.6%). The provision
relates to store stock with a value of £20.9m (FY22: £22.2m). This
represents management's best estimate of the likely level of stock losses
experienced.
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 FY23, 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 £0.7m
to £0.6m.
The Group has considered the impact of customer preferences and ESG
considerations on potential stock obsolescence, and these factors are not
deemed to have a material impact on the level of provision required.
15. Trade and other receivables
FY23 FY22
£000 £000
Current
Trade receivables 2,864 2,606
Other receivables 359 1,793
Prepayments 4,284 4,028
Trade and other receivables 7,507 8,427
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 (FY22: £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.
16. Cash and cash equivalents
FY23 FY22
£000 £000
Cash and cash equivalents per balance sheet 10,196 16,280
Net cash and cash equivalents 10,196 16,280
The Group's cash and cash equivalents are denominated in the following
currencies:
FY23 FY22
£000 £000
Sterling 8,208 12,198
Euro 1,949 3,102
US dollar 39 980
Net cash and cash equivalents 10,196 16,280
At 30 April 2023, the Group held net cash (excluding lease liabilities) of
£10.2m (FY22: net cash (excluding lease liabilities) of £16.3m). This
comprised cash of £10.2m (FY22: cash of £16.3m).
For the year ended 30 April 2023, the Group's bank facilities comprise an RCF
of £30.0m expiring 30 November 2025. Since the Period end, the facility was
extended by a year and reduced in size by £10.0m.
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.
None of the Group's cash and cash equivalents (FY22: £Nil) is held by the
trustee of the Group's employee benefit trust in relation to the share schemes
for employees.
17. 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 30 April 2023, all borrowings were denominated in sterling (FY22:
sterling).
FY23 FY22
£000 £000
Non-current liabilities
Lease liabilities 74,766 85,702
Non-current liabilities 74,766 85,702
Current liabilities
Lease liabilities 23,449 25,434
Current liabilities 23,449 25,434
Reconciliation of borrowings to cash flows arising from financing activities
FY23 FY22
£000 £000
Borrowings at start of year (excluding overdrafts) 111,136 143,009
Changes from financing cash flows
Payment of lease liabilities (capital) (22,672) (25,969)
Payment of lease liabilities (interest) (4,130) (4,500)
Proceeds from loans and borrowings(1) 4,000 -
Repayment of bank borrowings(1) (4,000) (7,500)
Total changes from financing cash flows (26,802) (37,969)
Other changes
Lease liability additions 10,991 3,634
Disposal of lease liabilities (1,402) (2,340)
The effect of changes in foreign exchange rates 152 (120)
Interest expense 4,140 4,922
Total other changes 13,881 6,096
Borrowings at end of year (excluding overdrafts) 98,215 111,136
1 £4.0m was drawn under the Group's RCF from 29 September 2022
until 31 October 2022.
Net debt reconciliation
FY23 FY22
£000 £000
Net debt (excluding unamortised debt costs)
Cash and cash equivalents (10,196) (16,280)
Net bank cash (10,196) (16,280)
Non-IFRS 16 lease liabilities 268 485
Non-IFRS 16 net cash (9,928) (15,795)
IFRS 16 lease liabilities 97,946 110,651
Net debt including IFRS 16 lease liabilities 88,018 94,856
18. Trade and other payables
FY23 FY22
£000 £000
Current
Trade payables 22,960 20,091
Other tax and social security 2,610 2,792
Accrued expenses 8,909 13,075
Trade and other payables 34,479 35,958
Trade payables and accruals principally comprise amounts outstanding for trade
purchases and operating costs. The Group has financial risk management
policies in place to ensure that all payables are paid within 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 £484k (FY22: £453k) of deferred income in relation
to the customer loyalty scheme. The decrease in the balance from FY22 is due
to a decrease in the bonus accrual held at year end.
The Group has net US dollar denominated trade and other payables of £6.6m
(FY22: £4.9m).
19. Provisions and contingent liabilities
Accounting policy
Provisions are recognised when the Group has a present obligation as a result
of a past event, and it is probable that the Group will be required to settle
that obligation. Provisions are the best estimate of the expenditure required
to settle the obligation at the end of the reporting period and are discounted
to present value where the effect is material.
HMRC VAT Property Total
£000 £000 £000
Balance as at 3 May 2021 - 718 718
Provisions made during the year - 399 399
Balance as at 1 May 2022 - 1,117 1,117
Provisions made during the year 514 450 964
Provisions used during the year - (218) (218)
Balance as at 30 April 2023 514 1,349 1,863
Maturity analysis of cash flows:
HMRC VAT Property Total
£000 £000 £000
Due in less than one year 514 51 565
Due between one and five years - 760 760
Due in more than five years - 538 538
514 1,349 1,863
Property provision
In accordance with IAS 37 Provisions, the Group recognises provisions for the
cost of reinstating certain Group properties at the end of their lease term,
based on the conditions set out in the terms of the individual leases. The
timing of the outflows will match the ends of the relevant leases, which range
from 1 to 10 years for stores and 13.2 years for the head office. The average
remaining term of the store estate is 4.8 years.
HMRC VAT provision
HMRC initiated a VAT review in August 2022 in respect of FY19 to FY22 and have
reviewed 4 years of sales data. In the initial output of their review, HMRC
have identified a number of areas where they disagree with the VAT treatment
applied by the business.
Management accepts that there is a possibility that the VAT rate charged is
incorrect for some SKUs under review, predominantly activity sets that include
books and activity resources, and that the rate may be concluded to be mixed
or standard rate. HMRCs view is that these rates are not zero, and therefore
we believe it appropriate to recognise a provision for a potential liability
for £514k on the basis that 50% of the SKUs under review are concluded to be
standard rated, and the 50% mixed rated.
20. 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:
FY23 FY22
£000 £000
Key management remuneration - including social security costs 3,132 2,077
Pension contributions 184 134
Long-Term Incentive Plan - including social security costs 313 621
Total transactions with key management personnel 3,629 2,832
Further details on the compensation of key management personnel who are
Directors are provided in the Group's Directors' remuneration report.
21. 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%
Principal risks and uncertainties
Risk management framework
The Board is 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 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. Senior
management determines the potential risks that could affect their areas of
responsibility and the likelihood and impact. This information is used to
create the Group's primary risk register and capture 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 conducts a robust assessment of 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 November 2022. This review included discussions with members of the
Operations Board 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 2023, March 2023 and July 2023.
A climate risk workshop, facilitated by INESG, the Group's specialist
third-party ESG consultancy, was held in August 2022. Members of the
Operations Board participated in the workshop which covered: an introduction
to climate change and climate scenarios; risk classification; transition and
physical risks identified; and how to approach climate change as a material
risk to the business. Using the outputs from the workshop the Group's first
climate risk register was developed and subsequently reviewed and approved by
the Board in January 2023.
The principal risks and uncertainties facing the Group as at the date of its
FY23 Annual Report are set out in order of priority the following pages,
together with details of how these are currently mitigated.
During the year the main changes to the principal risks were as follows:
• Removal of COVID-19 risk: Given the significantly reduced impact of
risks associated with COVID-19 this risk is no longer considered to be a
principal risk.
• Renaming of 'Market' risk: The 'Market' risk has been renamed 'Design
and execution of strategy', and has been altered to reflect the importance of
the Group's strategy and the direct correlation between successful strategic
execution and market performance. This risk has also been assessed as having a
high priority and ranked accordingly.
During the year a geopolitical emerging risk was identified. Approximately two
thirds of the Group's stock is sourced from China and if drastic economic
sanctions were to be imposed on China this could have a material impact on the
Group's ability to obtain stock. Moving the product mix away from goods
sourced from China could mitigate this risk; however, a significant lead time
would be required to do this. Currently the probability of this risk
crystallizing is considered to be very low. Accordingly, this emerging risk
will be maintained on our secondary risk register and we will continue to
monitor it.
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 • Take account of expected impact in the strategic planning process,
budgets and forecasts.
A deterioration in macro-economic conditions or a reduction in consumer
confidence could impact customer spending and reduce the Group's revenue and • Control costs while making carefully considered investments in
profitability. certain areas to support growth.
Change from prior year • Increase direct sourcing to improve gross margin. While this
initiative was delayed by COVID-19 in China, momentum should increase in FY24.
Increased risk level. Inflation remains high and the cost-of-living challenge
looks likely to persist for some time. Although we have not yet observed any • Operate stores on flexible short-term leases to benefit from
quantifiable effect on our business, this could impact consumer spending and, reductions in rents through the rolling renegotiation of leases.
as a result, the Group's sales. The current economic environment, including
the following issues, is also causing costs to be higher which could impact • Store estate can be adapted relatively quickly in the event of
profitability: material local changes in demand.
Raw materials and energy costs. Our energy rates are hedged in the short term,
but at higher rates than those which prevailed historically.
Continued increases in National Living and Minimum Wages - affects the
business because most of the Group's colleagues are paid the National Minimum
or Living Wage.
Geopolitical issues, including the Russian invasion of Ukraine, which has had
direct inflationary effects.
FX rates. The pound is now stronger compared with the dollar than during
certain points in FY23. There is reduced risk in FY24 due to the Group's
hedging policies, although we remain indirectly exposed to FX rates, through
indirect sourcing which represents approximately 60% of purchases for resale.
Freight rates, which have significantly affected our costs in recent years,
are now at pre-COVID levels, and are not expected to represent a threat for
the foreseeable future.
2. Design and execution of strategy (previously 'Market' risk) • Increased strategic focus on developing the brand and increasing
customer engagement to further differentiate the Group from competitors.
The Group generates its revenue from the sale of books, toys and games, arts
and crafts and stationery. • Emerging trends monitored by a recently strengthened trading team that
has a track record of responding to changing consumer tastes.
Although it has a track record of understanding customers' needs for these
products, the market is competitive. Customers' tastes and shopping habits can • Monitor competitors' propositions and discuss key developments at
change quickly. Failure to effectively predict or respond to changes could weekly trading meetings and at Board level on a regular basis.
affect the Group's sales and financial performance.
• Monitor and review customer feedback.
Failure to effectively execute the 'better, not just bigger' strategy (e.g.
due to insufficient capacity or inadequate capability) would have an adverse • Use sales data and online feedback channels to inform purchasing and
impact on the Group's ability to grow, particularly if the envisaged sales marketing decisions.
growth drivers fail to increase sales. Furthermore achieving increased sales
growth could be more challenging if consumer confidence is impacted by • Flexible lease terms allow the Group to adapt its store portfolio
deteriorating economic conditions. (which continues to be highly relevant to customers) to suit evolving shopping
habits.
Change from prior year
• Ongoing investment in the Group's online capability ensures
Increased risk level. The Board believes that the previous risk rating needs complementary digital and store propositions, as customers increasingly engage
to increase to reflect the significant impact this risk could have on the with both channels.
profitability of the Group and therefore increased the risk rating.
• Significant investments have been made to date and further investment
is planned in FY24 to drive operational improvements.
3. Supply chain • Strengthened buying and supply chain teams and further investment is
ongoing in FY24.
The Group uses third parties, including many in Asia, for the supply of
products. Risks include the potential for supplier failures, risks associated • Ongoing review of supplier base and diversification and change
with manufacturing and importing goods from overseas, potential disruption at implemented as appropriate to provide flexibility and reduce reliance on
various stages of the supply chain and suppliers failing to act or operate individual suppliers.
ethically.
• Independent monitoring of suppliers undertaken by third-party auditors
Failure to execute the restructuring of the supply chain team successfully to with local country knowledge and an understanding of social and ethical
implement necessary changes to the stock process could prevent the right stock requirements.
getting to the right stores at the right time and materially impact sales
growth. • In-house product quality assurance team undertakes product testing as
part of a product surveillance test programme.
Supply chain disruption due to COVID-19 restrictions potentially being
maintained in certain parts of the world, particularly China, could cause • Implement policies that reinforce the Group's values and its
disruption to stock availability and cost inflation. Any significant increase commitment to conduct business fairly, ethically and with respect to human
in geopolitical tensions between the West and China could affect the ability rights which suppliers are required to adhere to.
to purchase stock.
• Proactive management of supply chain to ensure stock levels are
Due to the Group's low level of exposure to sales outside the UK risks appropriate.
connected with Brexit are low.
• Continue to review freight costs (including measures to mitigate them)
Change from prior year and monitor alternative sourcing arrangements where practicable.
Unchanged level of risk.
4. IT systems and cyber security • Modern two-factor authentication for access, combined with up-to-date
end point detection capabilities (to monitor devices and assess
The Group relies on key IT systems. Failure to develop and maintain these, or unexpected/risky activity) and network segmentation, lowers the probability of
any prolonged system performance problems or lack of service, could affect the malicious entry and speed of movement of malware across the business.
Group's ability to trade and/or could lead to significant fines and
reputational damage. • 24/7/365 Security Operations Centre, established in FY23, monitors and
responds to any unusual activities in systems or networks.
Reliable systems and data integrity are key to the execution of the strategy.
Ensuring systems and processes are fit for purpose will enable the delivery of • Enhanced working from home capabilities established in response to the
improvements to the proposition. pandemic have reduced the level of dependence on a single-site head office.
Change from prior year • Regular IT investment strategy review undertaken by the Operations
Board, including security and infrastructure investment programmes.
Reduced risk. The Group experienced a cyber security incident at the end of
March 2022. Actions taken in response to the incident have significantly • Further strengthened in-house IT capabilities during FY23.
reduced the risk of the business suffering major loss or disruption in the
event of subsequent attacks.
5. Brand and reputation • Communicate to colleagues our clarified purpose and values.
The Group's brand is vital to its success. Failure to protect the brand, in • Provide intellectual property guidance and education to design and
particular product quality and safety, could result in the Group's reputation, sourcing teams.
sales and future prospects being adversely affected.
• Monitor customer product reviews and take appropriate action to remove
Diversity and inclusion issues have become more prominent in customer products from sale and take other actions as appropriate where quality issues
preferences; failure to stock a diverse range of products and ensure are identified.
inclusivity could create reputational damage.
• In-house product quality assurance team works with suppliers to ensure
Change from prior year product quality, safety and ethical production.
Unchanged level of risk. Developing our brand and increasing customer • Conduct third-party technical and ethical audits.
engagement is a strategic aim. In autumn 2022 we launched an updated brand to
ensure that the visual representation and tone of voice of The Works aligns • Monitor the Group's ESG responsibilities and implement processes to
with its purpose and reflects the more modern, fun and engaging business we ensure the Group operates in a responsible way.
are today.
• Recruiting a D&I manger to lead our D&I strategy including
reviewing our product range to ensure inclusivity.
• Operate brand tracking that provides feedback from customers and
highlights potential brand damaging issues.
6. Seasonality of sales • Continue to develop the year-round appeal of the proposition.
The Group generally makes substantially all of its profit in the second half • Hold weekly trading meetings to ensure that immediate action is taken
of the financial year during the peak Christmas trading period. Interruptions to maximise sales based on current and expected trading conditions.
to supply, adverse weather or a significant downturn in consumer confidence or
a failure to successfully execute strategy in this period could have a • Plan rigorously for product proposition, supply chain and retail
significant impact on the short-term profitability of the Group. operations to ensure the success of the peak Christmas trading period.
Change from prior year
Unchanged level of risk.
7. People • Discuss and review succession plans at Nomination Committee meetings.
The Group's success is strongly influenced by the quality of the Board, senior • Establish development programmes to support future leaders.
management team and staff generally. A lack of effective succession planning
and development of key colleagues could harm future prospects. • Operate the 'Can Do Academy' to facilitate training and development.
Change from prior year • Launched a new employee communications and engagement platform
MyWorks.
Unchanged level of risk.
• Well-managed search and recruitment processes, together with appealing
proposition and welcoming culture, enables recruitment of high-calibre
executives.
• Implement a Remuneration Policy designed to ensure management
incentives support the Group's long-term success for the benefit of all
stakeholders, including a Long-Term Incentive Plan for Executive Directors and
restricted share awards for Operations Board members.
8. Environmental (including climate change) • An ESG steering group meets quarterly and reports to the Board and the
Operations Board on a regular basis.
There is an increased focus on sustainable business from consumers and
regulators. In our business this applies to products and packaging in • Implementing initiatives to reduce our impact on the environment.
particular. Failure to respond to these demands could affect the Group's
reputation, sales and financial performance. • Retain specialist third-party ESG consultancy, Inspired Energy, to
assist in the further development of the Group's environmental strategy and
Supply chain disruptions due to more extreme weather events created as a ensure compliance with TCFD requirements.
result of global warming could damage operations, in particular the flow of
stock which could adversely impact sales. • Appointed a Sustainability Manager in January 2023 to lead the
development and implementation of our environmental strategy.
There are increased reporting and disclosure requirements relating to climate
change and environmental impact including new taxes, regulation and compliance • Working with third-party logistics providers to explore and invest in
risks as noted in risk 9 below. energy efficient solutions within the supply chain.
Change from prior year • Developed a climate risk register.
Increased level of risk. Reporting and disclosure requirements are continuing
to increase and achievement of the Group's longer-term environmental ambitions
are dependent on effective implementation of the Group's sustainability
strategy and suppliers taking steps to reduce their environmental footprint.
9. Regulation/compliance • Oversight of regulatory compliance by Group CFO and Company Secretary
with support from external advisers.
The Group is exposed to an increasing number of legal and regulatory
compliance requirements including the Bribery Act, the Modern Slavery Act, the • Implement policies and procedures in relation to both mandatory
General Data Protection Regulation (GDPR) and the Listing Rules. Failure to requirements and measures the Group has adopted voluntarily (e.g. anti-bribery
comply with these laws and regulations could lead to financial claims, and corruption, adherence to National Living Wage requirements).
penalties, awards of damages, fines or reputational damage which could
significantly impact the financial performance of the business. • Operate a Whistleblowing Policy and procedure which enable colleagues
to confidentially report any concerns or inappropriate behaviour.
There are extensive and increasingly onerous laws and regulations (including
reporting and disclosure requirements) surrounding climate change and • Operate a GDPR Policy which is overseen by a suitably experienced data
environmental reporting. Failure to comply with these could result in supervisor and monitored by members of a GDPR governance monitoring group who
financial penalties, legal consequences and/or reputational damage. meet regularly and report key issues to the senior management team.
Change from prior year • Retain experienced advisers where necessary to cover gaps in expertise
in the in-house team.
Unchanged level of risk.
10. Liquidity • Financial forecasts and covenant headroom monitored and reported to the
Board and the bank monthly.
Insufficient liquidity available and/or insufficient headroom in banking
facilities. Potential for breach of banking covenants if financial performance • Strategy focuses on driving like-for-like sales and improving
is significantly worse than forecast. efficiency, rather than previous store rollout plan, which is a less capital
intensive strategy.
Availability of credit insurance to suppliers may be reduced or removed
resulting in an increased cash requirement. • The Group's bank facility at year end FY23 comprised a committed RCF of
£30m with an expiry date of 30 November 2025. Since the Period end, the Group
Change from prior year has implemented a reduction in the size of the facility, which was undrawn
throughout most of FY23, to £20.0m, and simultaneously extended its term such
Unchanged level of risk. that it now expires on 30 November 2026.
• Careful management of banking relationship increases the likelihood of a
supportive response in the event that it should be needed.
11. Business continuity • IT recovery plans fully tested in the response to the March 2022 cyber
security incident.
Significant disruption to the operation, in particular internal IT systems,
Support Centre or Distribution Centre, could severely impact the Group's • Implemented new cloud back-ups which improve the flexibility of any
ability to supply stores or fulfil online sales resulting in financial or disaster recovery plan response.
reputational damage.
• Enhanced business continuity plan in place including system recovery.
Change from prior year
• Subscribe to a cloud-based technology recovery centre to improve speed
Unchanged level of risk. and execution of a recovery.
• Undertake disaster recovery dry run exercises. Emergency generator
installed at the Group's Support Centre to insulate the business from the
impact of power cuts.
• Maintain appropriate business interruption insurance cover.
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