11 October 2016

 

 

 

CONTINUED PROGRESS WITH DIGITAL TRANSFORMATION CURRENT TRADING ON TRACK

 

N Brown Group Plc, the leading multi-channel, specialist fit fashion retailer today announces results for the first half to 27 August 2016.

 

Financial highlights:

·    Total group revenue +1.0% to £429.4m (H1 FY16: £425.3m)

·    Product revenue +0.6% and Financial Services revenue +1.9%

·    Product gross margin 55.9% and Financial Services gross margin 55.0%

·    Adjusted* profit before tax £31.6m (H1 FY16: £39.4m), ahead of consensus expectations

·    Statutory profit before tax £21.1m (H1 FY16: £23.8m)

·    Exceptional cost of £9m related to financial services customer redress, compared to the £5m-£8m previously announced

·    Adjusted* earnings per share from continuing operations 8.95p (H1 FY16: 11.16p)

·    Statutory earnings per share 5.98p (H1 FY16: 6.70p)

·    Proposed interim dividend flat year on year at 5.67p

·    Net debt £286.7m (H1 FY16: £239.8m)

·    All H1 FY16 figures have been restated for IAS 39, as previously announced

 

*Defined as excluding exceptionals and unrealised FX movement and therefore represents the underlying trading performance.

 

Operational highlights:

·    Good progress with digital transformation:

o Online penetration 68%, +5ppts yoy

o Online revenue up 7.5% yoy; online revenue of Power Brands +10%

o Online penetration of new customers up 7ppts to 76%

o 70% of all traffic from mobile devices

o Launched innovation incubator JDWorks, partnering with 7 digital start-ups

·    Good Power Brands performance

o Power Brands active customers +14.7% (excluding Fifty Plus)

o JD Williams product revenue, which includes the Fifty Plus brand, +0.3% to

£75.8m. JD Williams brand itself +11%

o Simply Be product revenue +6.2% to £53.3m

o Jacamo product revenue +3.3% to £31.4m

·    USA revenue +24.5% (+14.7% constant currency) to £7.7m; operating loss £0.5m (H1 FY16 £0.9m loss)

·    Financial Services strong performance, with revenue +1.9% and a further improvement in the quality of the debt book

·    Full FCA authorisation granted

·    As previously announced, rollout timetable for remaining Fit 4 the Future programme extended. The additional cost will be incorporated within FY18 capex of c.£40m (previous guidance for FY18 capex: £30m-£40m). Overall benefits from the programme remain unchanged.

 

Angela Spindler, Chief Executive, said:

 

"I am pleased with the progress we made during the half, as we continue to change to a digital business model, with an emphasis on agility and innovation. Spring Summer was challenging for the entire retail sector, and we were not immune to this, but we demonstrated our flexibility as we improved revenue performance through the season whilst controlling our costs well.

 

"Our Power Brands continue to outperform the wider business, and I am particularly encouraged by the 11% revenue growth of the JD Williams brand. Our digital KPIs remain very strong, with 68% online penetration and 7.5% growth in online revenues.

 

"In recent weeks we have reached two significant milestones: our full FCA authorisation and the launch of our new USA website. The learnings from the USA launch have led us to extend the remaining rollout timetable for our Fit 4 the Future systems project. We remain very positive about the capabilities the programme will bring. We also have new initiatives underway which will further improve our customer reach and add momentum to our transformation.

 

"The Autumn Winter season has started in line with our plans. Our improving agility is enabling us to trade the business in a volatile environment. At this stage we are comfortable with current market expectations for the full year."

 

Meeting for analysts and investors:

Management is hosting a presentation for analysts and investors at 9.15am. Please contact Nbrown@mhpc.com for further information. A live webcast of the presentation will be available at: www.nbrown.co.uk.

 

For further information:

N Brown Group
Bethany Hocking, Director of Investor Relations	On the day: 07887 536153
Website: www.nbrown.co.uk	Thereafter: 0161 238 1845
MHP Communications
John Olsen / Simon Hockridge / Gina Bell	0203 128 8100
	NBrown@mhpc.com

 

About N Brown Group:

N Brown Group plc is a leading multi-channel, specialist fit, fashion retailer offering customers an extensive range of products in clothing, footwear and homewares.

 

The Group has 140 years of experience in home shopping and is focused on its core mantra of 'Fashion that Fits'. The Group is transforming from being direct mail-led to digital-first, and two-thirds of revenues now come online. Its portfolio of trusted retail brands - including its three Power Brands; JD Williams, Simply Be and Jacamo - all serve a specific niche consumer group which have historically been poorly served on the high street. Other brands include Fashion World, Marisota, House of Bath, Figleaves and High & Mighty.

 

N Brown is headquartered in Manchester where it designs, sources and creates its product offer, and employs over 2,600 people across the UK.

 

Next reporting date

The next reporting date is our Q3 trading statement on 19th January 2017.

 

Overview

The first half has seen encouraging progress in our transformation to a digital retail model.

 

Group revenue was up 1.0% to £429.4m, with Product up 0.6% and Financial Services up 1.9%. This represents a solid result in a challenging period for the sector. Our three Power Brands all delivered healthy growth, and we continue to make strong progress in our digital KPIs.

 

Product gross margin was 55.9%, down 190bps year on year, primarily due to the promotional stance we took in a volatile season. Financial Services gross margin was down 130bps, against a strong comparative last year. Operating costs were tightly managed. Depreciation and Amortisation increased by 11.5% due to the continued investment in the business.

 

Trading profit before tax was 19.8% lower at £31.6m, but ahead of market expectations. Exceptional costs of £10.2m largely relate to financial services customer redress as previously announced.

 

The Board recognises the importance of the dividend to shareholders, and accordingly, is holding the interim dividend flat on last year, at 5.67p, as we continue with our strategic transformation.

 

Since the period end two important milestones have been achieved. We were granted full unconditional FCA authorisation for our Financial Services model; and our USA website went live, the biggest deliverable to date from our Fit 4 the Future systems transformation programme. The learnings from this USA launch have led us to extend the rollout timetable for the overall programme, however we are confident in the programme and the business benefits it delivers.

 

We have started the Autumn Winter season on plan. At this stage we are comfortable with current market expectations for the full year.

 

First half review

 

KPI performance

 

	H1 FY17	H1 FY16	% change
CUSTOMERS
Active customer accounts	4.21m	4.27m	-1.5%
Power Brand active customer accounts	2.1m	2.2m	-2.6%
Power Brand customers exc Fifty Plus	1.8m	1.6m	+14.7%
% Growth of our most loyal customers*	-0.4%	+1.0%	-140bps
Customer satisfaction rating**	84.6%	85.8%	-120bps
PRODUCT
Ladieswear market share, size 16+	4.3%	4.3%	-
Menswear market share, chest 44"+	1.3%	1.1%	+20bps
Group returns rate (rolling 12 months)	27.0%	27.8%	-80bps

 

DIGITAL
Online penetration	68%	63%	+5ppts
Online penetration of new customers	76%	69%	+7ppts
Conversion rate	5.7%	5.7%	-
% of traffic from mobile devices	70%	64%	+6ppts
FINANCIAL SERVICES
Arrears rate (>28 days)	9.8%	10.0%	-30bps
Provision rate (H1 FY16 restated)	12.7%	15.5%	-280bps
New credit recruits (Rollers)***	120k	150k	-19%

 

* Defined as customers who have ordered in each of the last four seasons

**UK Institute of Customer Service survey (UKICS)

***Last six months, rounded figures. Rollers are those customers who roll a credit balance. Market shares are calculated using internal and Kantar data, 24 weeks ending 31st July

 

Customers

 

Our active customer file declined by 1.5% to 4.21m, a solid result given the weak sector backdrop and ongoing headwind from our Fifty Plus and Traditional titles. Power Brand active customers, excluding Fifty Plus, increased by 14.7%, a very pleasing result. If we include Fifty Plus, Power Brands active customers declined by 2.6%. This is due to a decline in Fifty Plus customers as we reduced marketing spend ahead of its migration into JD Williams.

 

Our most loyal customers saw a 0.4% decline this half, in line with that reported six months ago, as the headwind from the decline of our Traditional segment continues to have an impact. As previously communicated, we expect to see an improvement in our Traditional business from Autumn onwards, and therefore expect this KPI to stabilise.

 

The 84.6% customer satisfaction score from the Institute of Customer Service, whilst slightly down from the previous figure, continues to place us significantly ahead of the wider sector average, which stands at 82.0%.

 

Product

 

Market share in Ladieswear (16+) was flat at 4.3% in a relatively weak ladieswear season. Within this we gained share in younger Ladieswear, driven by Simply Be. Menswear (44"+) market share increased by 20bps to 1.3%.

 

Our product offer continues to improve. We now have a team of 15 in-house designers who cover all product categories. This Autumn marks the first season with full influence from the team.

 

We continue to expand our offering of third-party brands, many of which are extended to larger sizes on an exclusive basis. New brands introduced in the last six months include Wolf and Whistle, Vero Moda, Religion, Helene Berman, Not Your Daughters Jeans, Timberland, Ann Summers and Gossard.

 

The lead time for our product also continues to improve significantly, in part due to sourcing from Europe and, increasingly, the UK. Our fastest lead time for a new product has improved from 10 weeks two years ago to three weeks today. For repeat purchases, our fastest lead time is now seven days compared to seven weeks just two years ago. This agility gives us the ability to respond quickly to market trends, weather patterns and emerging styles.

 

We again saw an improvement in our returns rate, of 80bps to 27.0%. This was driven by underlying improvements in our product offering, product mix, and an increase in cash customers, who naturally have a lower returns rate.

 

Digital

 

We are first and foremost an online retailer, and this is the most profitable channel for us. During the half online revenue increased by 7.5%, with online Power Brand revenue up by 10%. Online active customers were up 8% year-on-year.

 

Online penetration (the proportion of sales which were generated online) was 68% during the half, up 5ppts on last year. Online penetration of new customers, a leading indicator for the group, was 76%, up 7ppts. Mobile devices (smartphones and tablets) account for 70% of online traffic, up 6ppts. Within this, smartphone sessions increased by 42% and this is the leading device type for traffic by a significant margin.

 

Our conversion rate was 5.7%, flat on last year, and remains significantly above the industry average. This performance is very pleasing given the naturally lower conversion rate on mobile devices. We significantly improved the conversion rate for all three device types (PC, smartphone and tablet) during the half, and continue to focus on this area to further drive customer experience and revenue.

 

Our innovation incubator, JDWorks, launched during the summer. The programme sees us partner with seven digital start-up companies for a ten week period, to accelerate our adoption of new ideas and technologies. These technologies include artificial intelligence, big data analytics, digitalised personal shopping and 3D virtual fitting.

 

Financial Services

 

Financial Services performed well during the half and remains an important business enabler. Financial Services revenue was up 1.9% to £128.5m (H1 FY16 restated £126.1m).

 

Credit arrears (>28 days) were 9.8% during the first half, down 30bps year-on-year, driven by a continued improvement in the quality of the debt book. The credit provision rate was 12.7%, down 280bps versus last year. This benefitted from the sale of a small quantum of high risk payment arrangement debt, which we were able to sell for a slightly better rate than book value. Assuming no further debt sales, we expect both the credit provision and arrears rate to remain broadly flat through the remainder of the year.

 

We continue to focus on growing two key customer bases - those who use their account (internally termed our 'rollers') and cash customers, who pay immediately on a credit or debit card. Currently half of new customers opt to open a credit account, and half are cash customers, in line with the trend reported at the full year results. Cash customers generate attractive returns, and are important in terms of driving our growth, broadening our appeal and enabling us to gain economies of scale.

 

New credit customer recruits who roll a balance declined by 19% to 120k, although this should be viewed against a strong 15% increase in the prior period. This was in line with our expectations prior to our more flexible credit systems going live. Ahead of our new credit systems going live, however, we have the opportunity to test the impact of a lower interest rate for appropriate new recruits. This trial will be in place through peak trading.

 

On 21st September we received our full FCA authorisation, having previously operated under a temporary licence since the FCA took over industry regulation in April 2014. This marks a significant milestone for our business. The authorisation was granted unconditionally.

 

As also announced on the 21st September, we have identified an error in our calculation of financial services customer complaint redress. We have notified the FCA accordingly and we are undertaking a detailed review. We currently anticipate that this will result in an exceptional cash cost of £9m, above the previously communicated range of £5m-£8m. More detail is contained within note 14.

 

Performance by brand

 

Product revenue, £m	H1 FY17	H1 FY16	Change
JD Williams	75.8	75.6	+0.3%
Simply Be	53.3	50.2	+6.2%
Jacamo	31.4	30.4	+3.3%
Power Brands	160.5	156.2	+2.7%
Secondary Brands	75.2	74.9	+0.4%
Traditional Segment	65.2	68.1	-4.2%
Product total	300.9	299.2	+0.6%
Financial Services	128.5	126.1	+1.9%

 

Revenue from our Power Brands accounted for 53% of Group product revenue, up 110bps versus last year.

 

JD Williams

JD Williams' product revenue was £75.8m, up 0.3% yoy. Within this, JD Williams brand was up 11% and Fifty Plus was down 18%, as we reduced marketing investment in this title ahead of  its migration  into JD Williams. Trialling has  commenced,  however given  the  size  of the customer file the migration will take place over two seasons. We expect the headwind to unwind as we go through this process. Our key priority will be optimising the customer experience to secure future growth potential.

 

There is good momentum in the JD Williams brand, with:

·    20% growth in active customers

·    42% increase in brand awareness

·    Online penetration up 7ppts to 56%

·    New customer online penetration at 78%

·    Online sessions up 46% year-on-year

 

Last month we introduced "The Cut", a collection of our best priced, current season clothes, to further reinforce our value for money credentials. Sales of these lines have significantly exceeded expectations, with sales up 75%.

 

We believe that JD Williams' "Life begins at Fifty" proposition has real relevance with today's customers. As part of our continuous customer engagement programme we recently launched "The New F Word", a short film featuring nine inspirational women, all of whom have proved that 50 is an age to be celebrated. We premiered the film during London Fashion Week to great acclaim.

 

Simply Be product revenue was £53.3m, up 6.2% yoy. In line with the wider sector, spend per customer in Spring Summer was down year on year, however we are very encouraged by the double-digit increase in active customers during the half. Simply Be is now 91% online, and 98% if looking at purely new customer orders.

 

Our fast fashion sub-range Simply Be Unique continues to perform strongly, with revenues here near-doubling during the period. Our new Shape and Sculpt denim range, launched in July, has also resonated well with customers and sales to date have exceeded expectations. The jeans are made from premium multidirectional stretch denim, which has shape retaining properties, contain Tencel for a luxuriously soft feel and have a hidden tummy control panel for a slimmer silhouette.

 

We continue to drive customer engagement, with our recent protest about the lack of size inclusivity at London Fashion week a great example of this.

 

We are also pleased to announce that we will be launching a Simply Be shopping app ahead of peak trading this year.

 

Jacamo product revenue was £31.4m, up 3.3%. Sportswear was particularly strong, driven in part by expanded ranges in this category. Our collaboration with Jonnie Peacock last season was well received, and we launched our Autumn campaign with rugby player Dan Biggar. Social engagement is increasingly important for this brand, with #FlintoffVsSavage in June a particular highlight this half.

 

Jacamo is now a truly digital brand, with approaching 100% online penetration and very little paper marketing materials produced.

 

As part of a wider opportunity to access new customers through selling our brands on partner websites, we will be trialling a capsule collection of Jacamo on ASOS from January.

 

Secondary brands

During the first half Secondary brand revenue was £75.2m, up 0.4% year-on-year.

 

Fashion World, High and Mighty, and Marisota, each target specific customer niches. These brands have established customers and our strategy is to drive loyalty. The best performing secondary brand in the half was Fashion World, which has the highest credit usage across our brands. High and Mighty is transitioning from a predominantly stores to online model. Marisota is increasingly used as a product brand which focuses on fit solutions.

 

Figleaves went live with a new Demandware web platform in September, which will allow us to be more effective in driving future customer recruitment to this brand.

 

Traditional segment

Revenue from our Traditional segment was down by 4.2% to £65.2m, in line with our expectations and an improvement from the 5.5% decline we reported in FY16. This segment is not a significant growth driver for our business, however it remains relevant to our overall portfolio. We have loyal customers, years of experience and continue to generate a good financial return from this segment.

 

Our revised publications have seen significant uplifts in response rates, including a bespoke publication that has been specifically put together for the new traditional customer called Classic Detail. Amongst a number of improvements, our new mailing materials feature more age appropriate models, copy text that resonates with the traditional audience and strong value messaging throughout the publication. All this is backed up by bespoke email campaigns. We have also reinvested back into the product choice, particularly jersey and nightwear, and have seen significant increases in sales as a result.

 

We are pleased to report that the actions we have taken to improve performance are starting to have a positive impact as we enter the new Autumn Winter season.

 

Fit 4 the Future

 

To date, we have landed Cybersource and PowerCurve, which are key parts of our Credit transformation; Phase 1 of our new Merchandise systems; the Simply Be Euro foundation site and our new USA website.

 

Global Multi-channel and Credit Transformation releases

 

We replatformed our USA website to Hybris, and this went live in late September. Whilst very pleased with the new site, we recognised through the process of implementation and testing that we required more time to deliver the high functioning customer experience that we require for our brands.

 

As a consequence, as previously announced, we have extended the rollout for the remaining programme. This new programme has been developed with a focus on:

-     Minimising the risks to ongoing trading

-     Adjusting the programme to prioritise the releases based on their benefits case. This has enabled us to minimise the impact of delay.

-     Phasing the programme to allow us to significantly reduce the run rate costs

 

The new timetable will see us launch our first UK site with an integrated credit proposition in Q1 FY18; this was previously planned for launch prior to FY17 peak trading. The planned timing of the Simply Be release has moved from Q1 to Q3 FY18. As this will represent the point in the project where the majority of the online customer functionality has landed, we will then be able to significantly step down the Fit 4 the Future programme. Site rollout will then be moved into normal business activity, thus significantly reducing our run rate costs. We plan to finish the rollout by summer 2018.

 

Planning transformation release

 

The timetable for our Planning transformation systems is ahead of that previously communicated. Following phase one going live in May we are now in the process of implementing phase two, our item-level forecasting tools. This will therefore benefit both the January sale period and Spring/Summer 2017, a season earlier than initially planned.

 

Programme costs and benefits

 

FY18 capex will be c.£40m, in line with previous guidance of £30m-£40m. The additional programme costs will be incorporated in this capex spend.

 

Our expectation of £45m of benefits remains unchanged. The phasing of these is also unchanged, and start to flow from FY18, with the full benefits from FY20 onwards. As previously disclosed, we will be reinvesting some of these benefits into the ongoing growth of the business.

 

International

 

USA

Whilst a small part of our overall business, the USA continues to represent a significant growth opportunity. USA revenue was £7.7m in the half, up 24.5% year on year and 14.7% in constant currency terms. The USA operating loss was reduced to £0.5m, from a loss of £0.9m last year.

 

The majority of our USA revenues are generated by the Simply Be brand, which continues to resonate strongly with customers. In March we launched the JD Williams brand in the USA and performance to date has been very encouraging.

 

In September we launched our new international web platform in the USA. This gives us much improved personalisation tools and a more agile site from an operations perspective. We have reduced our marketing programme during the post-launch hypercare period, which will impact performance through peak. We will add multi-currency, payment types and global ship-anywhere capability, in early 2017.

 

Ireland

Ireland revenues of £7.2m were up by 12.4% year-on-year, or 3.8% in constant currency terms. We are pleased with this performance, which was largely driven by the ongoing improvements to our product offering.

 

Stores

Store performance in the half was disappointing, with LFL revenue down 9% as we, like the wider industry, were impacted by weak footfall, particularly at the start of the season. We have taken actions, both in terms of driving revenue and reducing costs, and performance is improving. During the half we also took advantage of a number of lease expiries and reduced our High and Mighty store portfolio. Overall, revenue from our store estate was £11.5m (H1 FY16: £14.2m) and the operating loss was £0.9m (H1 FY16: £0.2m loss). We are pleased with the more recent momentum in our stores performance.

 

FY17 Guidance

The key changes to our guidance are as follows:

 

·    Capex will be at the top end of our previous guidance range of £38m-£40m

·    Net debt is now guided to be between £280m and £300m

·    Exceptional costs of c.£12m for FY17, with c.£2m expected in H2 linked to our ongoing tax disputes with HMRC

·    FY17 will be a 53-week year, this will result in a PBT benefit of c.£2m All other full year guidance remains unchanged:

·      Product gross margin -50bps to -150bps

·      Financial Services gross margin +50bps to -50bps

·      Group operating costs up 2% to 4% (excluding Depreciation & Amortisation)

·      Depreciation & Amortisation £29m-£30m

·      Net interest £8m-£9m

·      Tax rate c.20%

 

Current trading and outlook

 

The Autumn Winter season has started in line with our plans. We have adopted a more assertive stance on pricing, including "The Cut" marketing campaign, which is working well as we approach peak. Our increasingly agile trading capability is allowing us to trade through a backdrop which remains volatile. At this stage we are comfortable with current market expectations for the full year.

 

FINANCIAL RESULTS

 

IAS 39 restatement

Last year we restated our debtor impairment provision as a result of a review of the application of IAS39. The following financial results and commentary is all on this restated basis.

 

Revenue performance

 

Total continuing Group revenue was +1.0% to £429.4m. Product revenue increased by 0.6% to £300.9m. Financial Services revenue increased by 1.9% to £128.5m (H1 FY16 restated:

£126.1m).

 

Revenue performance by quarter was as follows:

 

% yoy growth	Q1 (13wks)	Q2 (13wks)
Product	-1.6%	+2.7%
Financial Services	+3.4%	+0.7%
Continuing Revenue	-0.2%	+2.1%

 

Revenue by category was as follows:

 

£m	H1 FY17	H1 FY16	Change
Ladieswear	134.3	134.6	-0.3%
Menswear	42.4	40.6	+4.5%
Footwear	30.8	33.2	-7.2%
Home & Gift	93.4	90.8	+2.9%
Product total	300.9	299.2	+0.6%

 

 

Ladieswear revenue performance reflected a generally weak sector backdrop, together with the drag from the decline of our Traditional segment. We are pleased with our Menswear revenue performance, driven by Jacamo. The year on year decline of Footwear revenue, whilst disappointing, is against a very strong comparative last year.

 

Home and Gift revenue was up 2.9%. Our strategy in Home remains unchanged - we aim to recruit new customers to our Fashion offering, but then see customers also buying Homewares. Within Homewares we focus on our "Famous Five" categories, which have higher gross margins (these are Furniture, Gifting, Home Textiles, Kitchen and Home Décor, and Outdoor Living and Christmas). Famous Five categories were up by 8% yoy, with Furniture again particularly strong.

 

  Gross margin

Product

Product COGS were £132.8m, compared to £126.3m in the first half of FY16. Product gross margin was 55.9%, down 190bps yoy, ahead of the guidance range for the full year. This was primarily a result of increased promotions against a challenging sector backdrop, together with our ongoing inventory clearance exercise, as communicated at our full year results. These factors were partially offset by an improved bought in margin and favourable product mix.

 

Financial Services

Our gross bad debt charge was £55.1m (H1 FY16: £51.4m). This bad debt charge, together with a small number of other financial services costs, resulted in a Financial Services gross margin of 55.0%, down 130bps yoy. The decline in margin should be viewed against the 230bps increase in the first half of last year. We continue to take steps to improve the underlying quality of our debtor book.

 

Operating performance

 

£m	H1 FY17	H1 FY16	Change
Product revenue	300.9	299.2	+0.6%
Financial Services revenue	128.5	126.1	+1.9%
Group Revenue	429.4	425.3	+1.0%
Product gross margin	55.9%	57.8%	-190bps
Financial Services gross margin	55.0%	56.3%	-130bps
Group Gross Profit	238.8	243.9	-2.3%
Group Gross Margin %	55.6%	57.3%	-170bps
Warehouse & fulfilment	(38.2)	(38.4)	-0.5%
Marketing & production	(87.5)	(86.0)	+1.7%
Admin & payroll	(64.0)	(64.1)	-0.2%
Depreciation & amortization	(13.6)	(12.2)	+11.5%
Adjusted* Operating Profit	35.5	43.2	-17.8%
Adjusted* Operating Margin	8.3%	10.2%

*Operating profit before exceptionals, continuing basis

 

Warehouse and fulfilment costs declined by 0.5% to £38.2m, driven by continued efficiencies.

 

The 1.7% increase in marketing and production costs is skewed by the outsourcing of our creative production function last year, which resulted in some costs being transferred from payroll into this cost category; this accounted for approximately £1m of the increase.

 

Admin and payroll costs continue to be managed well, broadly flat at £64.0m. Depreciation and amortisation increased by 11.5% as a result of the investments we are making.

 

Overall, operating profit before exceptional items was £35.5m.

 

Net finance costs

Net finance costs were £3.9m, broadly in line with £3.8m last year, as an improvement in borrowing rates was offset by an increase in debt levels.

 

FX sensitivity

The EU referendum decision and subsequent moves in global exchange rates represent a challenge for the entire retail sector. We have now almost entirely hedged our dollar purchases for FY17; this has resulted in a smaller headwind than the previous guidance of

£3m, with these savings reinvested into our promotional activity to drive revenues.

 

For FY18, we have, to date, hedged 50% of our net dollar purchases at a blended rate of

$/£1.30. At a rate of $/£1.25, and before any mitigation, this would result in a c.£7m PBT headwind. Every 5 cents move from this rate, taking into account our current hedged position, results in a PBT sensitivity of c.£1.5m. Importantly, a number of mitigating activities are underway, including fabric and production planning, markdown optimisation and our ongoing work on supplier consolidation.

 

Exceptional items

Exceptional costs totalled £10.2m. The split of these costs is shown below.

 

£m	H1 FY17
External costs related to taxation matters	1.2
Financial Services customer redress	9.0
Total exceptional costs	10.2

 

The Financial Services customer redress exceptional cost of £9.0m is discussed in note 14. Remaining exceptional costs, of £1.2m relating to ongoing tax disputes with HMRC were in line with previous guidance.

 

Taxation

The effective rate of corporation tax for the first half is 20% (FY16: 20%). The tax charge for the period was £4.2m (H1 FY16: £4.7m) which meant that profit from continuing operations was £16.9m (H1 FY16: £19.1m).

 

Earnings per share

Adjusted earnings per share from continuing operations were 8.95p (H1 FY16: 11.16p). Earnings per share from continuing operations were 5.98p (H1 FY16: 6.77p).

 

Dividends

The Board recognises the importance of the dividend to shareholders and accordingly, is holding the interim dividend flat on last year, at 5.67p, as we continue with our strategic transformation.

 

Capital expenditure

Capital expenditure for the first half was £19.3m (FY16: £31.9m). The majority of this investment was on our systems transformation programme Fit 4 the Future.

 

Balance Sheet and Cash Flow

Inventory levels at the period end were up 11.2% to £99.0m (H1 FY16: £89.0m). We continue to dispose of a small amount of aged stock, as communicated at the FY16 results.

 

Gross trade receivables declined by 0.8% to £601.8m (H1 FY16: £606.8m). The provision declined from £94.2m to £76.4m, largely driven by the sale of some high risk payment arrangement debt at a slightly better rate than book value, along with ongoing progress in reducing overall debtor risk. The majority of the balance of debtors written off in the half relate to this debt sale. Outside of this, the risk profile of our debt book continues to improve.

 

The group's defined benefit pension scheme has a surplus of £0.5m (H1 FY16: £2.2m surplus).

 

Net cash generated from operations was £59.2m compared to £73.9m last year. After funding capital expenditure, finance costs, taxation and dividends, net debt increased from £239.8m to £286.7m, in line with our expectations.  Gearing levels increased from 53% to 62%.